The cyclicalityTable of the industries we serve directly affects our business;Contents
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·The price of our common shares may be volatile and could decline significantly;
·Our inability to attract, retain, and motivate key employees could have a material adverse effect on our business;
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•- We are subject to foreign currency exchange risks;
· •- The enforcement and protection of our intellectual property rights may be expensive and could divert our limited resources;
· •- We may be subject to claims of intellectual property infringement by others;
· •- If we are subject to cyber-attacks we could incur substantial costs and, if such attacks are successful, could result in significant liabilities, reputational harm and disruption of our operations;
·Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses;
· •- We may be required to take additional impairment charges for goodwill and indefinite-lived intangible assets or definite-lived intangible and long-lived assets;
· •We may not receive the escrowed proceeds from the sale of our Metrology business;•- Changes in accounting pronouncements or taxation rules or practices may adversely affect our financial results;
· •We are subject to the internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act;•- We are subject to risks of non-compliance with environmental, health and safety regulations;
· •- We have significant operations in locations which could be materially and adversely impacted in the event of a natural disaster or other significant disruption;
· •- We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our Company by another company more difficult;
·New regulations related to conflict minerals will force us to incur additional expenses, may make our supply chain more complex, and may result in damage to our relationships with customers; and
· •- The matters set forth in this Report generally, including the risk factors set forth in
"Item“Part I. Item 1A. Risk Factors."
Consequently, such forward-looking statements should be regarded solely as the Company's current plans, estimates and beliefs.beliefs of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco”, the “Company”, “we”, “us”, and “our”, unless the context indicates otherwise). The Company does not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.
VEECO INSTRUMENTS INC.
The Company
Veeco Instruments Inc. (together with its consolidated subsidiaries, "Veeco,"“Veeco”, the "Company" or "we") designs, manufactures“Company”, “we”, “us”, and markets“our”, unless the context indicates otherwise) creates process equipment that enables technologies for a cleaner and more productive world. We design, manufacture and market thin film equipment aligned with global “megatrends” such as energy efficiency and mobility. Our equipment is primarily sold to make electronic devices including light emitting diodes ("LEDs")(“LED”s), solar panels,flexible organic LED (OLED) displays, hard-disk drives, solar cells, power semiconductors and other devices. wireless components.
We havedevelop highly differentiated, “best-in-class” process equipment for critical performance steps. Our products feature leading technology, positionslow cost-of-ownership and high throughput. Core competencies in our two segments: Light Emitting Diode ("LED") & Solaradvanced thin film technologies, over 300 patents, and Data Storage.decades of specialized process know-how helps us to stay at the forefront of these demanding industries.
In our
Our LED & Solar segment we design and manufactureincludes two related compound semiconductor technologies, metal organic chemical vapor deposition ("MOCVD"(“MOCVD”) systems,and molecular beam epitaxy ("MBE"(“MBE”) systems, Copper, Indium, Gallium, Selenide ("CIGS") deposition systems and thermal deposition sources that we sell to manufacturers of high brightness LEDs ("HB LED") and solar panels, as well as to research customers.newly acquired atomic layer deposition (“ALD”) technology. Our MOCVD and MBE systems and components enable the manufacture of LEDs used in consumer electronics, displays and lighting, power semiconductors, wireless components and solar cells. Our ALD technology is used by the manufacturers of OLED displays and has further applications in the semiconductor and solar markets.
In our
Our Data Storage segment we design designs and manufacturemanufactures systems used to create thin film magnetic heads (“TFMH”s) that read and write data on hard disk drives. These include ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, chemical vapor deposition, and slicing, dicing and slicinglapping systems. While our systems that are primarily usedsold to create thin filmhard drive customers, they also have applications in optical coatings, micro-electro-mechanical systems (“MEMS”) and magnetic heads ("TFMHs"sensors, and extreme ultraviolet (“EUV”) that read and write data on hard disk drives.lithography.
We
As of December 31, 2013, we had approximately 800 employees to support our customers through product and process development, training, manufacturing, and sales and service sites in the U.S., South Korea, Taiwan, China, Singapore, Japan, Europe and other locations.
Veeco Instruments Inc. was organized as a Delaware corporation in 1989.
Our Growth Strategy
Our growth strategy for growth and improved profitability focuses on the following key activities:consists of:
•Focusing our efforts on those technologies in which we have a leading market share, providing·Providing differentiatedtechnology solutionsprocess equipment to addresscustomers'customers’ next generation product development roadmaps;
·•Leveraging ourInvesting to win through focused research and development spendinginto endin markets that we believeoffer high-growthprovide significant growth opportunitiessuch asor are at an inflection point in process equipment requirements. Examples include LED, OLED, and power semiconductor devices;·Leveraging our
LED & Solar segment;•Improving our operational efficiency through better supply chain management, best cost manufacturingworld-class sales channel andother activitieslocal process applications support tolower costs and increase profitability, and;•Developingbuild strong strategic relationships withworldwidetechnologyleaders and offering these customers high-quality, differentiatedleaders;·Expanding our portfolio of service products that
support their costimprove the performance ofownership requirements as well as serviceour systems, including spare parts, upgrades andapplications support in orderconsumables to drive growth and improvetheir time-to-market on leading edge devices.
·Combining outsourced and internal manufacturing strategies to flex manufacturing capacity through industry investment cycles; and
·Pursuing partnerships and acquisitions to expand our product portfolio and accelerate our growth.
Business Overview and Industry Trends
General Introduction:Business Overview: Our thin film deposition, etch and other technologiessystems are applicable to the creation of a broad range of microelectronic components, including HB LEDs, solar cells, thin film magnetic headsOLEDs, TFMHs and compound semiconductor devices. Our customers who manufacture these devices continue to invest in new technology equipment in order to advance their next generation products and deliver more efficient and cost effective technology solutions. Our businesses tend to be cyclical, and are highly influenced by customer buying patterns that are dependent upon industry trends. While our products are sold to multiple end markets, we are focused herein on the trends that most influence our business.
LED Industry Trends: Following the global recession Veecoin 2008-2009, we experienced a rapid improvement in business conditions in late 2009 through mid-2011, particularly in our MOCVD business. Demand for our MOCVD equipment increased dramatically, primarily from customers in South Korea, China, and continuing into 2010. The combination of an improvementTaiwan, as LEDs became the standard illumination for TV backlighting. We experienced a strong increase in capital spending by our globaldemand for MOCVD from customers as well as our focus on high-growth end markets, particularly HB LED, and successful new product introduction enabled the Company to benefit from accelerated growth in 2010.
The following is a review of our two reportable segments and the multi-year technology trends that impact each.
LED & Solar Business Overview and Trends: We are a leading supplier of solutions used to create HB LEDs and solar cells. MOCVD and MBE technologies are used to grow compound semiconductor materials (such as GaAs (gallium arsenide), GaN (gallium nitride), As/P (arsenic phosphide) and InP (indium phosphide)) at the atomic scale. Epitaxy is the critical first step in compound semiconductor wafer fabrication and is considered to be the highest value added process, ultimately determining device functionality and performance.
We believe that the HB LED market, while cyclical, represents a high-growth opportunity for usChina due to government funding of LED fabrication facility expansions throughout the expanding applications for HB LEDs, such as backlighting forregion. Following this large screen flat panel TVs (LCD—liquid crystal displays), laptop computers, automotive applications, and general illumination. In 2009 and 2010investment, the LED industry experienced significant growthentered an overcapacity situation, evidenced by low tool utilization rates being reported by many key global customers. As a result, our MOCVD business declined significantly from the middle of 2011 through the end of 2013. While utilization rates of our equipment in many customer facilities improved in 2013 from prior trough levels in 2012, weak business conditions in MOCVD persist and continue to be difficult at the start of 2014. In the short term, it is difficult for us to predict when the supply/demand of MOCVD equipment will return to equilibrium and when order rates for our MOCVD products will meaningfully recover.
While consumer electronics (e.g. cell phones, laptops, LED-TVs) have been the dominant end markets for LED technology over the past decade, and for which most of the new MOCVD capacity was installed, these applications are expected to reach saturation in the next few years. Conversely, the general lighting market is in its infancy, and we believe that thousands of additional MOCVD tools will be required as LEDs penetrated laptopbecome widely adopted for this much larger market application.
As part of the shift toward more efficient energy use across the globe, we believe LED technology will play a key role in energy and television backlighting applications. Strategies Unlimited, ancost savings in lighting. We see this opportunity as both vast and long-term given that LED industry research organization, forecastedlighting is just now beginning to penetrate the global lighting market. LED adoption is happening initially in its June 2010 report that growth in these applications will continue, resulting in a compound annual growth rate ("CAGR") exceeding 80% from 2009 through 2014. LEDs are also starting to experience increasedoutdoor, commercial and industrial lighting where high usage and lower efficiency make incumbent lighting costly. Further adoption for generalacross all forms of lighting with Strategies Unlimited forecasting a CAGR of 45.4% during that same time period. Overall, the market for HB LEDs is expected to grow from $5.4occur in the coming years with rapidly declining LED costs, shortening payback periods versus conventional lighting technologies, and “ban-the-bulb” legislation now underway in more than 20 countries around the globe. In addition to the incandescent bulb phase-outs, many countries are implementing policies to accelerate adoption of LEDs. These include China’s “10 cities 10,000 lights” program, South Korea’s “20-60” plan targeting 60% penetration of lighting on a national level by 2020, and Japan’s “Basic Energy Plan” with specific goals for energy efficient lighting. In March 2013, LED industry forecasters at Digitimes Research projected that LED lighting will represent about 38.6% of the total lighting market, and will be worth approximately $44.2 billion in 2009 to $19.6 billion in 2014, for a CAGR of 29.5%.by 2015.
In order to gain market share and capitalize on this growth opportunity, we have accelerated our R&D investments to introduceintroduced several new generations of MOCVD tools, most recentlyincluding our TurboDisc® K-Series™ and MaxBright™MaxBright® MOCVD systems. By introducing new systems we are focused on delivering better uniformity and repeatability, which helpsprovide customers with significant cost of ownership advantages when compared with alternative equipment. These activities enabled us to overtake our customers to make HB LEDs of consistent quality, ultimately with the goal to deliver more, high quality LEDs at a lower manufacturing cost. We intend toprimary competitor in market share in 2012. To maintain our leadership position, we continue to invest heavily in MOCVD research and development to help drive down cost of LED manufacturing for our customers in order to accelerate lighting adoption.
Trends in other Markets Impacting our MOCVD Business: Power semiconductors are an emerging market opportunity for MOCVD equipment. While silicon-based transistors are the mainstream of power electronic devices today, gallium nitride (“GaN”)-on-Silicon based power electronics developed on MOCVD tools can potentially deliver more advanced MOCVD solutionshigher performance (i.e. higher efficiency and switching speed). Global industry leaders in power electronics are currently working on research and development programs to our customers. A relatedexplore this new technology. GaN-on-Silicon based power devices have potential for information technology and consumer devices (e.g. power supplies, inverters).
Another application for usMOCVD is in the solar market, since the samemarket. MOCVD tool that is critical to the LED manufacturing processequipment can also be used to manufacture high-efficiency triple junction solarphotovoltaic cells. The CompanyWe currently sellssell a small number of MOCVD systems each year for this concentrator solar (CPV) application and is also beginning to sell tools to an emerging growth market for power devices.
Veeco has also identified the thin film solar cell market as offering significant growth opportunities. The global energy dilemma has triggered a significant amount of new research and spending in solar technologies as an alternative energy solution, since it is non-polluting and has the potential to supply the world with high energy efficiency at low cost. While many of today's solar panels are based upon silicon technologies, thin film CIGSmake solar cells offer the potential for lower manufacturing costs,Concentrator Photovoltaic (CPV) and have the highest efficiency of the thin film technologies. According to an October 2010 report released by Greentech Media Research ("GTM"), CIGS module manufacturing costs are projected to be lower than those associated with silicon wafer-based modules. CIGS solar panels have broad-based end market applications for solar farms, commercial and residential rooftops, building integrated and building applied PV (BIPV/BAPV) and portable devices.Space Based applications.
Since PV manufacturers often build their own equipment, there is a market opportunity emerging for equipment suppliers
Trends Impacting our MBE Business: Our MBE systems, sources and components are used to manufacture critical epitaxial layers in applications such as Veeco.solar cells, fiber-optics, mobile phones, radar systems and displays. Our business is primarily influenced by long-term market trends in cell phone manufacturing. Each one of these complex cell phone devices contains an increasing number of power amplifiers or other compound semiconductor radio frequency components. Due to industry consolidation and resulting overcapacity, our sales of MBE production tools have been declining for about a year. In its October 2010 report, GTM forecasted that CIGS global module capacity will have a CAGR of 49% from 2010 to 2013, with capacity reaching 3.4GW in 2013. We plan to expandwe refocused our depositionbusiness and product line to create "best of breed" deposition systems that can deposit materials on flexible (stainless steel) or rigid (glass) substrates. Today Veeco supplies thermal evaporation components to over 50% of CIGS companies worldwide and has begun to penetrate CIGS customers with our deposition system solutions. We are shipping our FastFlex Web Coating Systems for the front and back contact and absorber layer CIGS deposition. These new systems are capable of processing up to 1m web widths that will enable PV manufacturers to continue lowering their cost of ownership. We intendportfolio to increase our market share in sales of MBE systems to scientific research organizations and development spendinguniversities.
Trends Impacting our ALD Business: On October 1, 2013, we completed the acquisition of Synos Technology, Inc.(“Synos”), which brought atomic layer deposition technology to us. We are working with the world leader in CIGSmobile OLED displays to develop ALD systems that effectively encapsulate the OLED materials and potentially enable flexible displays for mobile phones. According to industry forecasting firm IHS iSuppli, the flexible OLED display market is expected to grow from $21 million in 2013 to almost $12 billion by 2020. In addition, we also see numerous extended opportunities for ALD technology for both the rigidin OLED TV, lighting, semiconductor, solar and flexible substrate market since we believe it offers a significant growth opportunity over the next several years.other adjacent markets.
Data Storage Business Overview and Trends: Worldwide storage demand continues to increase, driven by proliferation of laptop and netbook PC's, intelligent internet storage, e-mail, external storage devices, and new consumer applications (e.g. digital video recorders) now reaching higher volume.increase. While much has been written about the competition hard disk drives ("HDDs"(“HDDs”) face significant competition from flash memory, we believe that HDDs will continue to provide the best value for mass storage and will remain at the forefront of large capacity storage applications. In fact, the use of disk drives in many types of consumer applications has resulted in growth in the number of hard drive units shipped, which is expected to continue. According to data storage research firm TrendFocus' February 2011TrendFocus’ August 2013 report, consumer electronic applicationsshipments of HDDsTFMHs, the HDD component that our equipment makes, are forecasted to grow at a CAGRcompound annual growth rate of 9.4%4.2% from 20102013 to 2015.2017.
While technologytechnological change continues in data storage, the industry has gone through a period of maturation, including vertical integration and consolidation. Veeco is focused on remaining a valued equipment supplier to the data storage industry and is well-aligned to the industry's technology requirements and demand for lower cost of ownership tools. Veeco has restructured and refocused its Data Storage business around core technologies where we have a leadership position and utilize a flexible manufacturing strategy. A recovery in capital spending by our key Data Storagedata storage customers in 2010, combined with the successful introduction of several new deposition tools to advance areal density, technologies, enabled Veecous to report revenue growth in both 2010 and 2011. Natural disasters in Japan (tsunami) and Thailand (floods) caused major disruptions to the HDD supply chain in 2011. The floods in Thailand resulted in an unexpected increase in equipment orders for us in the fourth quarter of 2011 as customers rebuilt lost capacity. This led to record levels of Data Storage revenue in the first half of 2012. However, this significant equipment investment, combined with industry consolidation and a strong growthslowdown in hard drive unit demand in mid-2012 due to weak global economic conditions, caused our hard drive customers to freeze capacity additions. So, for the full year of 2012, our Data Storage revenue was flat and orders were well below recent historical averages. Industry overcapacity and weak order rates continued into 2013 and it is unclear when hard drive manufacturers will need to make significant investments in 2010. Going forward, Veeco'snew equipment capacity.
Throughout industry cycles, we continue to invest in developing systems to support advanced technologies such as heat assisted magnetic recording (“HAMR”). HAMR is a technology that magnetically records data on high-stability media using laser thermal assistance to first heat the material. HAMR takes advantage of high-stability magnetic compounds that can store single bits in a much smaller area than in current hard drive technology.
Our Data Storage systems are also sold for applications in MEMS magnetic sensors, optical coatings and EUV photomasks. We have put in place new product development, team has begunmarketing and sales strategies to identify non-hard drive marketgrow the non-data storage applications (such as LED) for our key Data Storage technologies.
Our Products
We have two business segments, LED & Solar and Data Storage. Net sales for these business segments are illustrated in the following table:table (dollars in thousands):
| | Year ended December 31, | ||||||||||
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| | 2010 | 2009 | 2008 | ||||||||
| | (Dollars in millions) | ||||||||||
LED & Solar | $ | 797.9 | $ | 205.2 | $ | 165.8 | |||||
% of net sales | 85.5 | % | 72.7 | % | 52.7 | % | |||||
Data Storage | $ | 135.3 | $ | 77.2 | $ | 149.1 | |||||
% of net sales | 14.5 | % | 27.3 | % | 47.3 | % | |||||
Total net sales | $ | 933.2 | $ | 282.4 | $ | 314.9 | |||||
See Note 11 to
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Segment Analysis |
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LED & Solar |
| $ | 249,742 |
| 75.3 | % | $ | 363,181 |
| 70.4 | % | $ | 827,797 |
| 84.5 | % |
Data Storage |
| 82,007 |
| 24.7 | % | 152,839 |
| 29.6 | % | 151,338 |
| 15.5 | % | |||
Total |
| $ | 331,749 |
| 100.0 | % | $ | 516,020 |
| 100.0 | % | $ | 979,135 |
| 100.0 | % |
Please see our footnote Foreign Operations, Geographic Area and Product Segment Information in our Consolidated Financial Statements for additional information regarding our reportable segments and sales by geographic location.
LED & Solar
Metal Organic Chemical Vapor Deposition Systems:Systems (“MOCVD”): We are one of the world'sworld’s leading supplierssupplier of MOCVD technology. MOCVD production systems are used to make GaN-based devices (green(blue and blue HBgreen LEDs) and As/P-basedAsP-based devices (red, orange and yellow HB LEDs), which are used today in television and laptop backlighting, general illumination, large area signage, specialty illumination and many other applications. Our As/PAsP MOCVD Systemssystems also are used to make high-efficiency concentrator solartriple junction photo cells. In 2011, we introduced the industry’s first production-proven multi-chamber MOCVD system, the MaxBright, for high-volume production of LEDs. We sell MOCVD systems in either single or multi-chamber configurations. In 2012, we introduced the TurboDisc MaxBright M & MHP and K465i HP GaN MOCVD systems, the industry’s highest productivity, highest footprint efficiency platforms for LED manufacturing.
Molecular Beam Epitaxy Systems:Systems (“MBE”): MBE is the process of precisely depositing epitaxially aligned atomically thin crystal layers, or epilayers, of elemental materials onto a substrate in an ultra-high vacuum environment. For many compound semiconductors, MBE is the critical first step of the fabrication process, ultimately determining device functionality and performance. We provide MBE systems and components for the production of wireless devices (e.g. power amplifiers, high electron mobility transistors or hetero-junction bipolar transistors) and a broad
array of compound semiconductor materials research applications. In 2013, we introduced the GENxplor™, the industry’s first fully-integrated MBE components and systems for research and production applications and thermal evaporation sourcessystem for the CIGS solar industry.compound semiconductor R&D market. The GENxplor creates high quality epitaxial layers on substrates up to 3” in diameter and is ideal for cutting edge research on a wide variety of materials including gallium arsenide, nitrides, and oxides.
WebFast Array Scanning Atomic Layer Deposition Systems (“FAST-ALD”): FAST-ALD™ represents a paradigm shift in a technology long known for excellent deposition uniformity and Glass Coaters for Thin Film Solar Cells:pin-hole free films. While traditional ALD is slow, costly and limited to “chamber-sized” reactors, FAST-ALD can deposit materials below 100º Celsius and 10 times faster, making it capable of deposition on substrates with virtually no size limitation. Our patented linear reactor allows the chemical reaction to occur at the substrate’s surface. We are a manufacturerprimarily focused on applying this technology for the encapsulation of web deposition equipmentorganic light emitting diode (OLED) materials used to make CIGSenable flexible mobile devices and we are also exploring additional applications in solar, cells. We have expanded our product line to include "best of breed" solutions that perform the critical CIGS deposition steps on flexiblesemiconductor and rigid (glass) substrates. We believe that our FastFlex™ and FastLine™ systems offer high throughput and excellent performance for thin film solar cell production, contributing to a lower cost of ownership for our customers.other end markets.
Data Storage
Ion Beam Deposition ("IBD"(“IBD”) Systems: Our IBD systems and NEXUS® IBD systems utilize ion beam technology to deposit precise layers of thin films andfilms. The NEXUS systems may be included on our cluster system platform to allow either parallel or sequential etch/deposition processes. IBD systems deposit high purity thin film layers and provide maximum uniformity and repeatability. In addition to IBD systems, we provide a broad array of ion beam sources. These technologies are applicable in the hard drive industry as well as for optical coatings and other end markets.
Ion Beam Etch ("IBE"(“IBE”) Systems: Our NEXUS IBE systems etch precise, complex features for use primarily by data storage and telecommunications device manufacturers in the fabrication of discrete and integrated microelectronic devices.
Physical Vapor Deposition ("PVD"(“PVD”) Systems: Our NEXUS PVD systems offer manufacturers a highly flexible deposition platform for developing next-generation data storage applications.
Diamond-Like Carbon ("DLC"(“DLC”) Deposition Systems: Our DLC deposition systems deposit protective coatings on advanced TFMHs.
Chemical Vapor Deposition ("CVD"(“CVD”) Systems: Our NEXUS CVD systems introduced to the market in 2008, deposit conformal films for advanced TFMH applications.
Precision Lapping, Slicing, and Dicing Systems: Our Optium® products generally are used in "back-end"“back-end” applications in a data storage fabfabrication facility where TFMHs or "sliders"“sliders” are fabricated. This equipment includes lapping tools, which enable precise material removal within three nanometers, which is necessary for next generation TFMHs. We also manufacture instrumentstools that slice and dice wafers into rowbars and TFMHs.
Optical Coatings: Our SPECTOR offers manufacturers improvements in target material utilization, optical endpoint control and process time for cutting-edge optical interference coating applications.
Service and Sales
We sell our products and services worldwide primarily through various strategically located sales and service facilities in the U.S., Europe and Asia Pacific, and we believe that our customer service organization is a significant factor in our success. In 2010 and 2011, we significantly expanded our footprint in Asia to bring training, technology support and R&D closer to our customers through new sites in China, Taiwan and South Korea. We provide service and support on a warranty, service contract or an individual service-call basis. We offer enhanced warranty coverage and services, including preventative maintenance plans, on-call and on-site service plans and other comprehensive service arrangements, product and application training, consultation services, and a 24-hour hotline service for certain products. We believe that offering timely support creates stronger relationships with customers and provides us with a significant competitive advantage. Revenues from the sale of parts, service and support represented approximately 7%29%, 16%21% and 21%9% of our net sales for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively. Parts and consumables sales represented approximately 5%23%, 9%17% and 14%7% of our net sales for those years, respectively, and service and support sales were 2%6%, 7%4% and 7%2%, respectively.
Customers
We sell our products to many of the world'sworld’s major HB LED, solar and hard drive manufacturers as well as to customers in other industries, research centers, and universities. We rely on certain principal customers for a significant portion of our sales. Sales to LG InnotekHC SemiTek in our LED & Solar segment accounted for more than 10% of our total net sales in 2013, Western Digital in our Data Storage segment accounted for more than 10% of our total net sales in 2012, and Elec-Tech International Co. Ltd. and Seoul OptoDevice Co. Ltd.Sanan Optoelectronics in our LED & Solar segment each accounted for more than 10% of Veeco'sour total net sales in 2010, LG Innotek Co. Ltd. and Seagate Technology, Inc. each accounted more than 10% of Veeco's total net sales in 2009 and sales to Seagate Technology, Inc. accounted for 10% or more of Veeco's total net sales in 2008.2011. If any principal customer discontinues its relationship with us or suffers economic difficulties, our business, prospects, financial condition and operating results could be materially and adversely affected.
Research and Development and Marketing
Our marketing, research and development functions are organized by business unit. We believe that this organizational structure allows each business unit manager to more closely monitor the products for which they are responsible, resulting in more efficient marketing and research and development. Our research and development activities take place at our facilities in Plainview, New York; Poughkeepsie, New York; Camarillo, California; Ft. Collins, Colorado; Somerset, New Jersey; St. Paul, Minnesota; Fremont, California; and South Korea.
We believe that continued and timely development of new products and enhancements to existing products are necessary to maintain our competitive position. We work collaboratively with our customers to help ensure our technology and product roadmaps are aligned with customer requirements. Our research and development programs are organized by product line and new or improved products have been introduced into each of our product lines in each of the past three years.
Our research and development expenses were approximately $71.4$81.4 million, $43.5$95.2 million and $39.6$96.6 million, or approximately 8%25%, 15%18% and 13%10% of net sales for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively. These expenses consisted primarily of salaries, project materialmaterials and other product development and enhancement costs.
Suppliers
We currently outsource certain functions to third parties, including the manufacture of all or substantially all of our new MOCVD systems, data storage systems, solar depositionData Storage systems and ion sources. We primarily rely on several suppliers for the manufacturing of these systems. We plan to maintain internal manufacturing capability for these systems at least until such time as we have qualified one or more alternate suppliers to perform this manufacturing. The failure of our present suppliers to meet their contractual obligations under our supply arrangements and our inability to make alternative arrangements or resume the manufacture of these systems ourselves could have a material adverse effect on our revenues, profitability, cash flows and relationships with our customers.
In addition, certain of the components and sub-assemblies included in our products are obtained from a single source or a limited group of suppliers. Our inability to develop alternative sources, if necessary, could result in a prolonged interruption in supply or a significant increase in the price
Table of one or more components, which could adversely affect our operating results.
Product Development, Marketing and OperationsContents
Our principal activities, which consist of product development, integration, test operations and assembly, are organized by product and take place at our facilities in Plainview and Clifton Park, New York; Camarillo, California; Ft. Collins, Colorado; Somerset, New Jersey; St. Paul, Minnesota; and Lowell, Massachusetts.
Backlog
Our sales, marketing, manufacturing and research and development functions are organized by product families. We believe that this organizational structure allows each product family manager to more closely monitor the products for which he is responsible, resulting in more efficient sales, marketing, manufacturing and research and development. We emphasize customer responsiveness, customer service, high-quality products and an interactive management style. By implementing these
management philosophies, we believe that we have increased our competitiveness and are well-positioned for future growth.
Backlog
Our backlog increased to $555.0 million as of December 31, 2010 from $377.3 million as of December 31, 2009. During the year ended December 31, 2010, we experienced net backlog adjustments of approximately $10.7 million, consisting of $12.5 million for order adjustments ($10.2 million is related to our Solar and MBE businesses) offset by $1.8 million of adjustments related to foreign currency translation.
Our backlog consists of product orders for which we received a firm purchase order, a customer-confirmed shipment date within twelve months and a deposit, where required.
Our backlog decreased to $143.3 million as of December 31, 2013 from $150.2 million as of December 31, 2012. During the year ended December 31, 2013, we recorded backlog adjustments of approximately $6.8 million, consisting of a $5.6 million adjustment related to orders that no longer met our bookings criteria as well as an adjustment related to foreign currency translation of $1.2 million.
Competition
In each of the markets that we serve, we face substantial competition from established competitors, some of which have greater financial, engineering manufacturing and marketing resources than us, as well as from smaller competitors. In addition, many of our products face competition from alternative technologies, some of which are more established than those used in our products. Significant factors for customer selection of our tools include system performance, accuracy, repeatability, ease of use, reliability, cost of ownership and technical service and support. We believe that we are competitive based on the customer selection factors in each market we serve. None of our competitors compete with us across all of our product lines.
We compete with manufacturers such as Aixtron,
Some of our competitors include, but are not limited to: Aixtron; Canon Anelva Applied Materials, Centrotherm,DCA Instruments; Leybold Optics; Oerlikon Balzers; Oxford Instruments; Toyo Nippon Sanso, OerlikonSanso; and Riber.
Intellectual Property
Our success depends in part on our proprietary technology. Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that we will be able to protect our technology adequately or that competitors will not be able to develop similar technology independently.
We have patents and exclusive and non-exclusive licenses to patents owned by others covering certain of our products, which we believe provide us with a competitive advantage. We have a policy of seeking patents on inventions concerning new products and improvements as part of our ongoing research, development and manufacturing activities. We believe that there is no single patent or exclusive or non-exclusive license to patents owned by others that is critical to our operations, as the success of our business depends primarily on the technical expertise, innovation, customer satisfaction and experience of our employees.
We also rely upon trade secret protection for our confidential and propriety information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or that we can meaningfully protect our trade secrets. In addition, we cannot be certain that we will not be sued by third parties alleging that we have infringed their patents or other intellectual property rights. If any third party sues us, our business, results of operations or financial condition could be materially adversely affected.
Employees
As of December 31, 2010,2013, we had 900approximately 800 employees, of which there were 192approximately 160 in manufacturing and testing, 10990 in sales and marketing, 153160 in service 33 inand product support, 274260 in engineering, research and development and 139130 in information technology, general administration and finance. In addition,
we also had 123approximately 10 temporary employees, whichemployees/outside contractors in support of our variable cost strategy. The success of our future operations depends in large part on our ability to recruit and retain engineers, technicians and other highly-skilled professionals who are in considerable demand. We feel that we have adequate programs in place to attract, motivate and retain our employees. We plan to monitor industry practices to make sure that our compensation and employee benefits remain competitive. However, there can be no assurance that we will be successful in recruiting or retaining key personnel. We believe that our relations with our employees are good.
Available Information
We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (the "SEC"“SEC”). The public may obtain information by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site iswww.sec.gov. www.sec.gov.
Internet Address
We maintain a website where additional information concerning our business and various upcoming events can be found. The address of our website iswww.veeco.com. www.veeco.com. We provide a link on our website, under Investors—Financial—SEC Filings, through which investors can access our filings with the SEC, including our filed annual report on Form 10-K, filed quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. These filings are posted to our website as soon as reasonably practicable after we electronically file such material with the SEC.
Risk Factors That May Impact Future Results
In addition to the other information set forth herein, the following risk factors should be carefully considered by shareholders of and potential investors in the Company.
Our operating results have been, and may continue to be, adversely affected by unfavorable market conditions.
Market conditions relative to the segments in which we operate have deteriorated significantly in many of the countries and regions in which we do business, and may remain depressed for the foreseeable future. Our MOCVD order volumes decreased significantly in the latter part of 2011, remained depressed through 2012 and 2013, and may continue to remain at low levels. Foreign government incentives designed to encourage the development of the LED industry have been curtailed, and the demand for our MOCVD products has softened. We have experienced and may continue to experience customer rescheduling and, to a lesser extent, cancellations of orders for our products. Continuing adverse market conditions relative to our products would negatively impact our business, and could result in:
·further reduced demand for our products;
·further rescheduling and cancellations of orders for our products, resulting in negative backlog adjustments;
·increased price competition and lower margin for our products;
·increased competition from sellers of used equipment or lower-priced alternatives to our products;
·increased risk of excess and obsolete inventories;
·increased risk in the collectability of amounts due from our customers;
·increased risk in potential reserves for doubtful accounts and write-offs of accounts receivable;
·disruptions in our supply chain as we reduce our purchasing volumes and limit our contract manufacturing operations; and
·higher operating costs as a percentage of revenues.
If the markets in which we participate continue to experience a slow recovery or an additional down turn, this could have a further negative impact on our sales and revenue generation, margins and operating expenses, and the time it takes us to return to profitability.
Timing of market adoption of LED technology for general lighting is uncertain.
Our future business prospects depend largely on the market adoption of products that incorporate our technologies. Potential barriers to such adoption include higher initial costs and customer familiarity with, and substantial investment and know-how in, existing technologies. These barriers apply to the adoption of LED technology for general illumination applications, including residential, commercial and street lighting markets. While the use of LED technology for general lighting has grown in recent years, challenges remain and widespread adoption may not occur at currently projected rates. Furthermore, the adoption of, or changes in, government policies that discourage the use of traditional lighting technologies may impact LED adoption. These barriers also apply to the adoption of OLED products. While the use of OLED is expected to grow in the near future, it is difficult to predict the rate at which OLED will be adopted by the market. The market adoption of OLED products may not occur at our currently projected rates.
Our failure to successfully manage our outsourcing activities or failure of our outsourcing partners to perform as anticipated could adversely affect our results of operations and our ability to realize the benefits of the increased MOCVDadapt to fluctuating order volume.volumes.
To better align our costs with market conditions, increase the percentage of variable costs relative to total costs and to increase productivity and operational efficiency, we have outsourced certain functions to third parties, including the manufacture of all or substantially all of our new MOCVD systems, data storage systems, solar depositionData Storage systems and ion sources. In addition, to supplement our current staffing and our planned hiring to meet the increased MOCVD order volume, we rely heavily on our outsourcing partners and utilize technical staffing firms and contractors to assist with certain aspects of MOCVD system installation at customer sites. In order to meet the substantial increase in MOCVD system orders, weWe are relying heavily on our outsourcing partners.partners to perform their contracted functions and to allow us the flexibility to adapt to changing market conditions, including periods of significantly diminished order volumes. If our outsourcing partners do not perform as required, or if our outsourcing model does not allow us to realize the intended cost savings and flexibility, our results of operations (and those of our third party providers) may be adversely affected. Disputes and possibly litigation involving third party providers could result and we could suffer damage to our reputation. Dependence on contract manufacturing and outsourcing may also adversely affect our ability to satisfy the recent strong demand for our MOCVD equipment and to bring other new products to market. If our outsourcing partners do not perform successfully, our results of operations may be adversely affected and we could suffer damage to our reputation. Although we attempt to select reputable providers, it is possible that one or more of these providers could fail to perform as we expect. In addition, the expanded role of third party providers has required and will continue to require us to implement changes to our existing operations and adopt new procedures and processes for retaining and managing these providers in order to realize operational efficiencies, assure quality, and protect our intellectual property. If we do not effectively manage our outsourcing strategy or if third party providers do not perform as anticipated, we may not
realize the benefits of the increase in MOCVD order volume or gross margin or productivity improvements and we may experience operational difficulties, increased costs, manufacturing and/or installation interruptions or delays, inefficiencies in the structure and/or operation of our supply chain, loss of intellectual property rights, quality issues, increased product time-to-market and/or inefficient allocation of human resources, any or all of which could materially and adversely affect our business, financial condition and results of operations.
The further reduction or elimination of foreign government subsidies and economic incentives may adversely affect the future order rate for our MOCVD equipment.
The
We generate a significant portion of our revenue in China. In recent years, the Chinese government has provided various incentives to encourage development of the LED industry, including subsidizing a significant portion of the purchase cost of MOCVD equipment. These subsidies have enabled and encouraged certain customers in this region to purchase more of our MOCVD equipment than these customers might have purchased without these subsidies. These subsidies have now been curtailed and are expected to further decline over time and may end or be reduced at some point in the future. The further reduction or elimination of these incentives may result in a further reduction in future orders for our MOCVD equipment in this region which could materially and adversely affect our business, financial condition and results of operations.
A related risk is that many customers are using theuse or had planned to use Chinese government subsidies, in addition to other incentives from the Chinese government, to build new manufacturing facilities or to expand existing manufacturing facilities. Delays in the start-up of these facilities andor the cancellation of construction plans altogether, together with other related issues pertaining to customer readiness, could adversely impact the timing of our revenue recognition, could result in further order cancellations, and could have other negative effects on our financial condition and operating results.
Our operating results have been, and may continue to be, adversely affected by tightening credit markets.
As a global company with worldwide operations, we are subject to volatility and adverse consequences associated with worldwide economic downturns. As seen in recent years, in the event of a worldwide downturn, many of our customers may delay or delays could affectfurther reduce their purchases of our abilityproducts and services. If negative conditions in the global credit markets prevent our customers’ access to meet customer demand, while the failure to estimate customer demand accuratelycredit, product orders in these channels may decrease which could result in excess or obsolete inventory and/or liabilities tolower revenue. Likewise, if our suppliers forface challenges in obtaining credit, in selling their products no longer needed.
Our business depends onor otherwise in operating their businesses, they may become unable to continue to offer the materials we use to manufacture our ability to supply equipment, services and related products that meetproducts. With the rapidly changing technical and volume requirements of our customers, which depends in part on the timely delivery of parts, components and subassemblies (collectively, parts) from suppliers. Some key parts may be subject to long lead-times and/or obtainable only from a single supplier or limited group of suppliers, and some sourcing or subassembly is provided by suppliers located in countries other than the United States. We may experience significant interruptions of our manufacturing operations, delaysrecent downturn in our ability to deliver products or services, increased costs or customer order cancellations as a result of:
•the failure or inability of suppliers to timely deliver quality parts;•volatility in the availability and cost of materials;•difficulties or delays in obtaining required import or export approvals;•information technology or infrastructure failures;•natural disasters (such as earthquakes, floods or storms); or•other causes (such as regional economic downturns, pandemics, political instability, terrorism, or acts of war) could result in delayed deliveries, manufacturing inefficiencies, increased costs or order cancellations.
In addition, our need to rapidly increase our business and manufacturing capacity to meet unanticipated increases in demand may be limited by working capital constraints of our suppliersMOCVD segment, we have experienced, and may exacerbate any interruptionscontinue to experience, lower than anticipated order levels, cancellations of orders in our manufacturing operationsbacklog, rescheduling of customer deliveries, and supply chain and the associated effect on our working capital. Moreover, if actual demand for our products is different than expected,
we may purchase more/fewer parts than necessary or incur costs for canceling, postponing or expediting delivery of parts. The volatility of demand for capital equipment increases capital, technical and other risks for companies in the supply chain. Any orattendant pricing pressures, all of these factors could materially and adversely affect our business, financial condition and results of operations.
We rely on a limited number of suppliers, some of whom are our sole source for particular components.
We currently outsource certain functions to third parties, including the manufacture of all or substantially all of our new MOCVD systems, data storage systems, solar deposition systems and ion sources. We primarily rely on several suppliers for the manufacturing of these systems. We plan to maintain internal manufacturing capability for these systems at least until such time as we have qualified one or more alternate suppliers to perform this manufacturing. The failure of our present suppliers to meet their contractual obligations under our supply arrangements and our inability to make alternative arrangements or resume the manufacture of these systems ourselves could have a material adverse effect on our revenues, profitability, cash flows, and relationships with our customers.
In addition, certain of the components and sub-assemblies included in our products are obtained from a single source or a limited group of suppliers. Our inability to develop alternative sources, if necessary, could result in a prolonged interruption in supply or a significant increase in the price of one or more components, which could adversely affect our operatingresults of operations.
Furthermore, tightening macroeconomic measures and monetary policies adopted by China’s government aimed at preventing overheating of China’s economy and controlling China’s high level of inflation have limited, and may continue to limit, the availability of financing to our customers in this region. Limited financing, or delays in the timing of such financing, may result in delays and cancellations of shipments of our products (and associated revenues) conditioned on such financing.
In addition, we finance a portion of our sales through trade credit. In addition to ongoing credit evaluations of our customers’ financial condition, we seek to mitigate our credit risk by obtaining deposits and/or letters of credit on certain of our sales arrangements. We could suffer significant losses if a customer whose accounts receivable we have not secured fails or is otherwise unable to pay us. A significant loss in collections on our accounts receivable would have a negative impact on our financial results.
Our backlog is subject to customer cancellation or modification and such cancellation could result in decreased sales and increased provisions for excess and obsolete inventory and/or liabilities to our suppliers for products no longer needed.
Customer purchase orders are subject to cancellation or rescheduling by the customer, generallysometimes with limited or no penalties. Often, we have incurred expenses prior to such cancellation without adequate monetary compensation. During theWe adjust our backlog for such cancellations, contract modifications, and delivery delays that result in a delivery period in excess of one year, ended December 31, 2010, we experienced net backlog adjustments of approximately $10.7 million, consisting of $12.5 million for order adjustments ($10.2 million is related to our Solaramong other items. The current and MBE businesses), offset by $1.8 million of adjustments related to foreign currency translation. With our current high backlog, aforecasted downturn in one or more of our served marketsMOCVD reporting unit could result in a significant increasefurther increases in order cancellations and/or rescheduling.postponements.
We record a provision for excess and obsolete inventory based on historical and future usage trends and other factors including the consideration of the amount of backlog we have on hand at any particular point in time. If our backlog is canceled or modified, our estimates of future product demand may prove to be inaccurate, in which case we may have understated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory is overvalued, we will be required to recognize such costs in our financial statements at the time of such determination. In addition, we place orders with our suppliers based on our customers'customers’ orders to us. If our customers cancel their orders with us, we may not be able to cancel our orders with our suppliers and may be required to take a charge for these cancelled commitments to our suppliers. Any such charges could be material to our results of operations and financial condition.
Our failure to estimate customer demand accurately could result in excess or obsolete inventory and/or liabilities to our suppliers for products no longer needed, while manufacturing interruptions or delays could affect our ability to meet customer demand.
Our business depends on our ability to accurately forecast and supply equipment, services and related products that meet the rapidly changing technical and volume requirements of our customers, which depends in part on the timely delivery of parts, components and subassemblies (collectively, parts) from suppliers. The current uncertain worldwide economic conditions and market instabilities make it increasingly difficult for us (and our customers and our suppliers) to accurately forecast future product demand. If actual demand for our products is different than expected, we may purchase more/fewer parts than necessary or incur costs for canceling, postponing or expediting delivery of parts. If we overestimate the demand for our products, excess inventory could result which could be subject to heavy price discounting, which could become
obsolete, and which could subject us to liabilities to our suppliers for products no longer needed. In addition, the volatility of demand for capital equipment increases capital, technical and other risks for companies in the supply chain.
Furthermore, some key parts may be subject to long lead-times and/or obtainable only from a single supplier or limited group of suppliers, and some sourcing or subassembly is provided by suppliers located in countries other than the United States. We may experience significant interruptions of our manufacturing operations, delays in our ability to deliver products or services, increased costs or customer order cancellations as a result of:
·the failure or inability of suppliers to timely deliver quality parts;
·volatility in the availability and cost of materials;
·difficulties or delays in obtaining required import or export approvals;
·information technology or infrastructure failures;
·natural disasters (such as earthquakes, tsunamis, floods or storms); or
·other causes (such as regional economic downturns, pandemics, political instability, terrorism, or acts of war) could result in delayed deliveries, manufacturing inefficiencies, increased costs or order cancellations.
In addition, in the event of an unanticipated increase in demand for our products, our need to rapidly increase our business and manufacturing capacity may be limited by working capital constraints of our suppliers and may exacerbate any interruptions in our manufacturing operations and supply chain and the associated effect on our working capital. Any or all of these factors could materially and adversely affect our business, financial condition and results of operations.
The cyclicality of the industries we serve directly affects our business.
Our business depends in large part upon the capital expenditures of manufacturers in the LED markets, data storage markets, and other device markets. We are subject to the business cycles of these industries, the timing, length, and volatility of which are difficult to predict. These industries have historically been highly cyclical and have experienced significant economic downturns in the last decade. As a capital equipment provider, our revenues depend in large part on the spending patterns of these customers, who often delay expenditures or cancel or reschedule orders in reaction to variations in their businesses or general economic conditions. In downturns, we must be able to quickly and effectively align our costs with prevailing market conditions, as well as motivate and retain key employees. However, because a portion of our costs are fixed, our ability to reduce expenses quickly in response to revenue shortfalls may be limited. Downturns in one or more of these industries, including the current MOCVD and Data Storage downturn, have had and will likely have a material adverse effect on our business, financial condition and operating results. Alternatively, during periods of rapid growth, we must be able to acquire and/or develop sufficient manufacturing capacity to meet customer demand, and attract, hire, assimilate and retain a sufficient number of qualified people. We cannot give assurances that our net sales and operating results will not be adversely affected if our customers experience economic downturns or slowdowns in their businesses.
We rely on a limited number of suppliers, some of whom are our sole source for particular components.
We currently outsource certain functions to third parties, including the manufacture of all or substantially all of our new MOCVD systems, Data Storage systems and ion sources. We primarily rely on several suppliers for the manufacturing of these systems. We plan to maintain some level of internal manufacturing capability for these systems. The failure of our present suppliers to meet their contractual obligations under our supply arrangements and our inability to make alternative arrangements or resume the manufacture of these systems ourselves could have a material adverse effect on our revenues, profitability, cash flows, and relationships with our customers.
In addition, certain of the components and sub-assemblies included in our products are obtained from a single source or a limited group of suppliers. Our inability to develop alternative sources, if necessary, could result in a prolonged interruption in supply or a significant increase in the price of one or more components, which could adversely affect our operating results.
Our sales to HB LED and data storage manufacturers are highly dependent on these manufacturers'manufacturers’ sales for consumer electronics applications, which can experience significant volatility due to seasonal and other factors, which could materially adversely impact our future results of operations.
The demand for HB LEDs and hard disk drives is highly dependent on sales of consumer electronics, such as flat-panel televisions and computer monitors, computers, tablets, digital video recorders, camcorders, MP3/4 players, smartphones, cell phones and cell phones. Our sales to HB LED manufacturers are also highly dependent on end market adoption of LED technology into general illumination applications, including
residential, commercial and street lighting markets.other mobile devices. Manufacturers of HB LEDs and hard disk drives are among our largest customers and have accounted for a substantial portion of our revenues for the past several years. Factors that could influence the levels of spending on consumer electronic products include consumer confidence, access to credit, volatility in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs and other macroeconomic factors affecting consumer spending behavior. These and other economic factors have had and could continue to have a material adverse effect on the demand for our customers'customers’ products and, in turn, on our customers'customers’ demand for our products and services and on our financial condition and results of operations. Furthermore, if manufacturers of HB LEDs have in the past overestimated their potential market share growth. If this growth is currently overestimated or is overestimated in the future, we may experience further cancellations of orders in backlog, postponementrescheduling of customer deliveries, obsolete inventory and/or liabilities to our suppliers for products no longer needed.
In addition, the demand for some of our customers'customers’ products can be even more volatile and unpredictable due to the possibility of competing technologies, such as flash memory as an alternative to hard disk drives. Should flash memory become cost competitive it may result in a rapid shift in demand from the hard disk drives made by our customers to alternative storage technologies. Unpredictable fluctuations in demand for our customers'customers’ products or rapid shifts in demand from our customers'customers’ products to alternative technologies could materially adversely impact our future results of operations.
Negative worldwide economic conditions could result in a decrease in our net sales and an increase in our operating costs, which could adversely affect our business and operating results.
As a global company with worldwide operations, we are subject to volatility and adverse consequences associated with worldwide economic downturns. In the event of a worldwide downturn, many of our customers may delay or further reduce their purchases of our products and services. If negative conditions in the global credit markets prevent our customers' access to credit, product orders in these channels may decrease which could result in lower revenue. Likewise, if our suppliers face challenges in obtaining credit, in selling their products or otherwise in operating their businesses, they may become unable to continue to offer the materials we use to manufacture our products. Our results of operations would be further adversely affected if we were to experience lower than anticipated order levels, cancellations of orders in backlog, postponement of customer deliveries, or pricing pressure as a result of a prolonged slowdown.
In addition, negative worldwide economic conditions and market instability make it increasingly difficult for us, our customers and our suppliers to accurately forecast future product demand, which could result in obsolete inventory and/or liabilities to our suppliers for products no longer needed.
Furthermore, we finance a portion of our sales through trade credit. In addition to ongoing credit evaluations of our customers' financial condition, we seek to mitigate our credit risk by obtaining deposits and/or letters of credit on certain of our sales arrangements. We could suffer significant losses if a customer whose accounts receivable we have not secured fails or is otherwise unable to pay us. A significant loss in collections on our accounts receivable would have a negative impact on our financial results.
We are exposed to the risks of operating a global business, including the need to obtain export licenses for certain of our shipments and political risks in the countries we operate.
Approximately 83%, 84%, and 90% of our 2010 net sales 79% of our 2009 net salesfor the years ended 2013, 2012 and 58% of our 2008 net sales2011, respectively were generated from sales outside of the United States. We expect sales from non-U.S. markets to continue to represent a significant, and possibly increasing, portion of our sales in the future. Our
non-U.S. sales and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including:
•·difficulties in managing a global enterprise, including staffing, managing distributors and representatives, and repatriation of
earnings,earnings;
·•- regional economic downturns, varying foreign government support, and unstable political
environments,environments;
· •- political and social attitudes, laws, rules, regulations and policies within countries that favor domestic companies over non-domestic companies, including government-supported efforts to promote the development and growth of local
competitors,competitors;
· •- longer sales cycles and difficulty in collecting accounts
receivable,receivable;
· •- multiple, conflicting, and changing governmental laws and regulations, including import/export controls and other trade
barriers,barriers;
· •the needreliance on various information systems and information technology toprovide sufficient levelsconduct our business, which may be vulnerable to cyber-attacks by third parties or breached due to employee error, misuse or other causes that could result in business disruptions, loss oftechnical support in different locations,or damage to intellectual property, transaction errors, processing inefficiencies, or other adverse consequences should our security practices and procedures prove ineffective, and
·•- different customs and ways of doing business.
Many
These challenges, many of which are present inassociated with sales into China, which accounted for approximately 30% of our total 2010 revenues. These conditions in China and other foreign economies may continue and recur again in the future, which could have a material adverse effect on our business. In addition, political instability, terrorism, acts of war or epidemics in regions where we operate may adversely affect or disrupt our business and results of operations.
Furthermore, products which are either manufactured in the United States or based on U.S. technology are subject to the United States Export Administration Regulations ("EAR"(“EAR”) when exported to and re-exported from international jurisdictions, in addition to the local jurisdiction'sjurisdiction’s export regulations applicable to individual shipments. Currently, our MOCVD deposition systems and certain of our other products are controlled for export under the EAR. Licenses or proper license exceptions may be required for the shipment of our products to certain countries. For example, shipment of our MOCVD systems to China and certain other countries generally requires a U.S. export license. Obtaining an export license requires cooperation from the customer and customer-facility readiness, and can add time to the order fulfillment process. While we have generally been very successful in obtaining export licenses in a timely manner, there can be no assurance that this will continue or that an export license can be obtained in each instance where it is required. If an export license is required but cannot be obtained, then we will not be permitted to export the product to the customer. The administrative processing, potential delay and risk of ultimately not obtaining an export license pose a particular disadvantage to us relative to our non-U.S. competitors who are not required to comply with U.S. export controls. Non-compliance with the EAR or other applicable export regulations could result in a wide range of penalties including the denial of export privileges, fines, criminal penalties, and the seizure of commodities. In the event that any export regulatory body determines that any of our shipments violate applicable export regulations, we could be fined significant sums and/or our export capabilities could be restricted, which could have a material adverse impact on our business.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and any determination that we violated these or similar laws could have a material adverse effect on our business.
We are exposed to risks associated with our entrance into the emerging solar industry.
An increasing strategic focus for Veeco is to supply equipmentsubject to the solar industry.Foreign Corrupt Practices Act (“FCPA”) and other laws that prohibit improper payments or offers of payments to foreign government officials, as defined by the statute, for the purpose of obtaining or retaining business. In addition, many of our customers have policies limiting or prohibiting us from providing certain types or amounts of entertainment, meals or gifts to their employees. It is our policy to implement safeguards to discourage these practices by our employees and representatives. However, our safeguards may prove to be ineffective and our employees, consultants, sales agents or distributors may engage in conduct for which we may be held responsible. Violations of the other risk factors described herein,FCPA or similar laws or similar customer policies may result in severe criminal or civil sanctions or the solar industry is characterized by other specific risks, including:
•changes in demand for solar photovoltaic ("PV") products arising from, among other things, the costloss of supplier privileges to a customer andperformance of solar PV technology comparedwe may be subject to otherenergy sources, such as oil, coal, wind, hydroelectric and nuclear;•the adequacy of or changes in government energy policies, including the availability and amount of government subsidies or incentives for solar power;•whether thin film solar technologies, in particular Copper Indium Gallium Selenide ("CIGS") technology, will be broadly adopted as a viable solar technology over various other intensely competitive alternatives; and•customers' and end-users' access to affordable financial capital.
If we do not successfully manage the risks resulting from these and other changes occurring in the solar industry, its business, financial condition and results of operationsliabilities, which could be materially and adversely affected.
In addition, solar is a relatively new market for us and poses the following additional challenges:
•the need to attract, motivate and retain employees with skills and expertise in this new area;•new and more diverse customers and suppliers, including some with limited operating histories, uncertain and/or limited funding and/or evolving business models;•different customer service requirements;•new and/or different competitors with potentially more financial or other resources and industry experience; and•third parties' intellectual property rights and our ability to secure necessary intellectual property rights with respect to our emerging technologies.
If we do not successfully manage the risks resulting from its entry into the solar market,negatively affect our business, operating results and financial condition and results of operations could be materially and adversely affected.condition.
The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly.
We derive a substantial portion of our net sales in any fiscal period from the sale of a relatively small number of high-priced systems. As a result, the timing of recognition of revenue for a single transaction could have a material effect on our sales and operating results for a particular fiscal period. As is typical in our industry, orders, shipments, and customer acceptances often occur during the last few weeks of a quarter. As a result, delay of only a week or two will determine which period revenue is reported in and can often shift the related booking or sale into the next quarter, which could adversely affectcause volatility in our reported resultsrevenue for the prior quarter.a given reporting period. Our quarterly results have fluctuated significantly in the past, and we expect this trend to continue. If our orders, shipments, net sales or operating results in a particular quarter do not meet expectations, our stock price may be adversely affected.
We operate in industries characterized by rapid technological change.
All of our businesses are subject to rapid technological change. Our ability to remain competitive depends on our ability to enhance existing products and develop and manufacture new products in a timely and cost effective manner and to accurately predict technology transitions. Because new product development commitments must be made well in advance of sales, we must anticipate the future demand for products in selecting which development programs to fund and pursue. Our financial results for 2011the current year and in the future will depend to a great extent on the successful introduction of several new products, many of which require achieving increasingly stringent technical specifications. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or new technologies or in enhancing existing products.
We face significant competition.
We face significant competition throughout the world in each of our reportable segments, which may increase as certain markets in which we operate continue to expand. Some of our competitors have greater financial, engineering, manufacturing, and marketing resources than us. In addition, we face competition from smaller emerging equipment companies whose strategy is to provide a portion of the products and services we offer, usingwith a focused approach on innovative technology to sell products intofor specialized markets. New product introductions or enhancements by our competitors could cause a decline in sales or loss of market acceptance of our existing products. Increased competitive pressure could also lead to intensified price competition resulting in lower margins. Our failure to compete successfully with these other companies would seriously harm our business.
We depend on a limited number of customers, thatlocated primarily in a limited number of regions, which operate in highly concentrated industries.
Our customer base is and has been highly concentrated. Orders from a relatively limited number of customers have accounted for, and likely will continue to account for, a substantial portion of our net sales, which may lead customers to demand pricing and other terms less favorable to us. Based on net sales, our five largest customers accounted for 52%42%, 52%34%, and 43%41% of our total net sales for the years ended 2013, 2012 and 2011, respectively. Customer consolidation activity involving some of our largest customers could result in 2010, 2009 and 2008, respectively.an even greater concentration of our sales in the future.
If a principal customer discontinues its relationship with us or suffers economic setbacks, our business, financial condition, and operating results could be materially and adversely affected. Our ability to increase sales in the future will depend in part upon our ability to obtain orders from new customers. We cannot be certain that we will be able to do so. In addition, because a relatively small number of large manufacturers, many of whom are our customers, dominate the industries in which they operate, it may be especially difficult for us to replace these customers if we lose their business. A substantial portion of orders in our backlog are orders from our principal customers.
In addition, a substantial investment is required by customers to install and integrate capital equipment into a production line. As a result, once a manufacturer has selected a particular vendor'svendor’s capital equipment, we believe that the manufacturer generally relies upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, if a customer selects a competitor'scompetitor’s product over ours for technical superiority or other reasons, we could experience difficulty selling to that customer for a significant period of time.
Furthermore, we do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide any assurance of future sales and we are exposed to competitive price pressure on each new order we attempt to obtain. Our failure to obtain new sales orders from new or existing customers would have a negative impact on our results of operations.
The cyclicality
Our customer base is also highly concentrated in terms of geography, and the industries we serve directly affectsmajority of our business.
Our business dependssales are to customers located in large parta limited number of countries. In 2013, 62% of our total net sales were to customers located in China, Taiwan and South Korea. Dependence upon the capital expendituressales emanating from a limited number of manufacturers in the HB LED, solarregions increases our risk of exposure to local difficulties and data storage markets. We are subject to the business cycles of these industries, the timing, length, and volatility of which are difficult to predict. These industries have historically been highly cyclical and have experienced significantchallenges, such as those associated with regional economic downturns, inpolitical instability, fluctuating currency exchange rates, natural disasters, social unrest, pandemics, terrorism or acts of war. In addition, we may encounter challenges associated with political and social attitudes, laws, rules, regulations and policies within these countries that favor domestic companies over non-domestic companies, including customer- or government-supported efforts to promote the last decade. As a capital equipment provider, our revenues depend in large part on the spending patternsdevelopment and growth of these customers, who often delay expenditures or cancel or reschedule orders in reaction to variations in their businesses or general economic conditions. In downturns, we must be able to quickly and effectively align our costs with prevailing market conditions, as well as motivate and retain key employees. However, because a proportion of our costs are fixed, our ability to reduce expenses quickly in response to revenue shortfalls may be limited. A downturn in one or more of these industries could have a material adverse effect on our business, financial condition and operating results. During periods of rapid growth, we must be able to acquire and/or develop sufficient manufacturing capacity to meetlocal competitors. Our reliance upon customer demand and attract, hire, assimilate and retainarising primarily from a sufficientlimited number of qualified people. We cannot give assurances thatcountries could materially adversely impact our net sales and operatingfuture results will not be adversely affected if our customers experience economic downturns or slowdowns in their businesses.of operations.
Our sales cycle is long and unpredictable.
Historically, we have experienced long and unpredictable sales cycles (the period between our initial contact with a potential customer and the time when we recognize revenue from that customer). Our sales cycle can range up to twelve months or longer. The timing of an order often depends on the capital expenditure budget cycle of our customers, which is completely out of our control. In addition, the time it takes us to build a product to customer specifications (the "build cycle") typically ranges
from one to six months or longer, followed in certain cases by a periodmonths. When coupled with the fluctuating amount of customertime required for shipment, installation and final acceptance, during which the customer evaluates the performance of the system and may potentially reject the system. As a result of the build cycle and evaluation periods, the period between a customer's initial purchase decision and revenue recognition on an orderour sales cycles often variesvary widely, and variations in length of this period can cause further fluctuations in our operating results. As a result of our lengthy sales cycle, we may incur significant research and development expenses and selling and general and administrative expenses before we generate the related revenues for these products. We may never generate the anticipated revenues if a customer cancels or changes plans. Variations in the length of our sales cycle could also cause our net sales and, therefore, our cash flow and net income to fluctuate widely from period to period.
We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act and any delays or difficulty in satisfying these requirements or negative reports concerning our internal controls could adversely affect our future results of operations and our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report by management on the effectiveness of our internal control over financial reporting. Ongoing compliance with this requirement is complex, costly, time-consuming and is subject to significant judgment. If our internal controls are ineffective or if our management does not timely assess the adequacy of such internal controls, our ability to file timely and accurate periodic reports may be impeded. Any delays in filing may cause us to face the following risks and concerns, among others:
·concern on the part of our customers, partners, investors, and employees about our financial condition and filing delay status, including the potential loss of business opportunities;
·significant time and expense required to complete delayed filings, and the distraction of our senior management team and board of directors as we work to complete delayed filings;
·investigations by the SEC and other regulatory authorities of the Company and of members of our management;
·limitations on our ability to raise capital and make acquisitions;
·suspension or termination of our stock listing on the NASDAQ stock exchange, and the removal of our stock as a component of certain stock market indices; and
·general reputational harm.
Any or all of the foregoing could result in the commencement of stockholder lawsuits against the Company. Any such litigation, as well as any proceedings that could arise as a result of a filing delay and the circumstances which gave rise to it, may be time consuming and expensive, may divert management attention from the conduct of our business, could have a material adverse effect on our business, financial condition, and results of operations, and may expose us to costly indemnification obligations to current or former officers, directors, or other personnel, regardless of the outcome of such matters, which may not be adequately covered by insurance.
The price of our common shares may be volatile and could decline significantly.
The stock market in general and the market for technology stocks in particular, has experienced volatility that has often been unrelated to the operating performance of companies. If these market or industry-based fluctuations continue, the trading price of our common shares could decline significantly independent of our actual operating performance, and shareholders could lose all or a substantial part of their investment. The market price of our common shares could fluctuate significantly in response to several factors, including among others:
·general stock market conditions and uncertainty, such as those occasioned by a global liquidity crisis, negative financial news, and a failure of large financial institutions;
·receipt of substantial orders or cancellations for our products;
· issues associated with the performance and reliability of our products;
·actual or anticipated variations in our results of operations;
·announcements of financial developments or technological innovations;
·our failure to meet the performance estimates of investment research analysts;
· �� changes in recommendations and/or financial estimates by investment research analysts;
·strategic transactions, such as acquisitions, divestitures or spin-offs; and
·the occurrence of major catastrophic events.
Significant price and value fluctuations have occurred with respect to the publicly traded securities of the Company and technology companies generally. The price of our common shares is likely to be volatile in the future. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. If similar litigation were pursued against us, it could result in substantial costs and a diversion of management’s attention and resources, which could materially and adversely affect our results of operations, financial condition and liquidity.
Our inability to attract, retain, and motivate key employees could have a material adverse effect on our business.
Our success depends upon our ability to attract, retain, and motivate key employees, including those in executive, managerial, engineering and marketing positions, as well as highly skilled and qualified technical personnel and personnel to implement and monitor our financial and managerial controls and reporting systems. Attracting, retaining, and motivating such qualified personnel may be difficult due to challenging industry conditions, competition for such personnel by other technology companies, consolidations and relocations of operations and workforce reductions. While we have entered into Employment Agreements with certain key personnel, our inability to attract, retain, and motivate key personnel could have a material adverse effect on our business, financial condition or operating results.
The price of our common shares may be volatile and could decline significantly.
The stock market in general and the market for technology stocks in particular, has experienced volatility that has often been unrelated to the operating performance of companies. If these market or industry-based fluctuations continue, the trading price of our common shares could decline significantly
independent of our actual operating performance, and shareholders could lose all or a substantial part of their investment. The market price of our common shares could fluctuate significantly in response to several factors, including among others:
•general stock market conditions and uncertainty, such as those occasioned by the global liquidity crisis, negative financial news, and the failure of several large financial institutions;•receipt of substantial orders or cancellations for our products;•actual or anticipated variations in our results of operations;•announcements of financial developments or technological innovations;•our failure to meet the performance estimates of investment research analysts;•changes in recommendations and/or financial estimates by investment research analysts;•strategic transactions, such as acquisitions, divestitures or spin-offs; and•the occurrence of major catastrophic events.
Significant price and value fluctuations have occurred with respect to the publicly traded securities of the Company and technology companies generally. The price of our common shares is likely to be volatile in the future. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. If similar litigation were pursued against us, it could result in substantial costs and a diversion of management's attention and resources, which could materially and adversely affect our results of operations, financial condition and liquidity.
We are subject to foreign currency exchange risks.
We are exposed to foreign currency exchange rate risks that are inherent in our anticipated sales, sales commitments and assets and liabilities that are denominated in currencies other than the United States dollar. Although we attempt to mitigate our exposure to fluctuations in currency exchange rates, these hedging activities may not always be available or adequate to eliminate, or even mitigate, the impact of our exchange rate exposure. Failure to sufficiently hedge or otherwise manage foreign currency risks properly could materially and adversely affect our revenues and gross margins.
The enforcement and protection of our intellectual property rights may be expensive and could divert our limited resources.
Our success depends in part upon the protection of our intellectual property rights. We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary information, technologies and processes. We own various United States and international patents and have additional pending patent applications relating to certain of our products and technologies. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that pending or future applications will actually result in issued patents or that issued patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage. In addition, our intellectual property rights may be circumvented, invalidated or rendered obsolete by the rapid pace of technological change. Policing unauthorized use of our products and technologies is difficult and time consuming. Furthermore, the laws of other countries may less effectively protect our proprietary rights than U.S. laws. Our outsourcing strategy requires that we share certain portions of our technology with our outsourcing partners, which poses additional risks of infringement and trade secret misappropriation. Infringement of our rights by a third party, possibly for purposes of developing and selling competing products, could result in uncompensated lost market and revenue opportunities. Similar exposure could result in the event that former employees seek to compete with us, through their unauthorized use of our intellectual property and proprietary information. We cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our proprietary information and technologies, particularly in foreign countries where the laws may not protect our proprietary intellectual property rights as fully or as readily as United States laws.
Further, we cannot be certain that the laws and policies of any country, including the United States, with respect to intellectual property enforcement or licensing will not be changed in a way detrimental to the sale or use of our products or technology.
We may need to litigate to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others. As a result of any such litigation, we could lose our ability to enforce one or more patents or incur substantial unexpected operating costs. Any action we take to enforce our intellectual property rights could be costly and could absorb significant management time and attention, which, in turn, could negatively impact our operating results. In addition, failure to protect our trademark rights could impair our brand identity.
We may be subject to claims of intellectual property infringement by others.
From time to time we have received communications from other parties asserting the existence of patent or other rights which they believe cover certain of our products. We also periodically receive notice from customers who believe that we are required to indemnify them for damages they may incur related to infringement claims made against these customers by third parties. Our customary practice is to evaluate such assertions and to consider the available alternatives, including whether to seek a license, if appropriate. However, we cannot ensure that licenses can be obtained or, if obtained, will be on acceptable terms or that costly litigation or other administrative proceedings will not occur. If we are not able to resolve a claim, negotiate a settlement of the matter, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend our position, our business, financial condition, and results of operations could be materially and adversely affected.
If we are subject to cyber-attacks we could incur substantial costs and, if such attacks are successful, could result in significant liabilities, reputational harm and disruption of our operations.
We manage, store and transmit various proprietary information and sensitive data relating to our operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or those of third parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or our products, or that otherwise exploit any security vulnerabilities.
The costs to address the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential customers that may impede our sales, manufacturing, distribution, or other critical functions. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive data about us or our customers or other third parties, could expose us, our customers, or other third parties to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise harm our business.
Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.
We have considered numerous acquisition opportunities and completed several significant acquisitions in the past. We may consider acquisitions of, or investments in, other businesses in the future. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:
•·difficulties and increased costs in integrating the personnel, operations, technologies and products of acquired companies;
·•- diversion of
management'smanagement’s attention while evaluating, pursuing, and integrating the business to be acquired;
· •- potential loss of key employees of acquired companies, especially if a relocation or change in responsibilities is involved;
· •- difficulties in managing geographically dispersed operations in a cost-effective manner;
· •- lack of synergy or inability to realize expected synergies;
·unknown, underestimated and/or undisclosed commitments or liabilities;
·
·
Our inability to effectively manage these risks could materially and adversely affect our business, financial condition, and operating results. We are subject to many of these risks in connection with our recent acquisition of Synos.
In addition, if we issue equity securities to pay for an acquisition, the ownership percentage of our then-existing shareholders would be reduced and the value of the shares held by these shareholders could be diluted, which could adversely affect the price of our stock and convertible subordinated
notes.stock. If we use cash to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or other purposes, including making payments on the convertible subordinated notes. There can be no assurance that financing for future acquisitions will be available on favorable terms or at all.purposes.
We may be required to take additional impairment charges for goodwill and indefinite-lived intangible assets or definite-lived intangible and long-lived assets.
We are required to assess goodwill and indefinite-lived intangible assets annually for impairment, or on an interim basis whenever certain events occur or circumstances change, such as an adverse change in business climate or a decline in the overall industry, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We are also required to test our definite-lived intangible and long-lived assets, including acquired intangible assets and property, plant and equipment, for recoverability and impairment whenever there are indicators of impairment, such as an adverse change in business climate.
At December 31, 2010, we had $52.0 million of goodwill and $59.2 million of intangible and long-lived assets, including $42.3 million of property, plant and equipment.
As part of our long-term strategy, we may pursue future acquisitions of other companies or assets which could potentially increase our goodwill and intangible and long-lived assets. Adverse changes in business conditions could materially impact our estimates of future operations and result in additional impairment charges to these assets. If our goodwill or intangible and long-lived assets were to become further impaired, our results of operations could be materially and adversely affected.
We may not receive the escrowed proceeds from the sale of our Metrology business.
In connection with the sale of our Metrology business to Bruker Corporation ("Bruker") on October 7, 2010, we agreed to indemnify Bruker, subject to certain limitations, for certain losses arising out of breaches of the representations, warranties and covenants that we made in the Stock Purchase Agreement and in certain related documents. To secure these indemnification obligations, we agreed to deposit into escrow $22.9 million of the consideration paid to us by Bruker, such funds to remain in escrow for twelve months following the closing. In the event of any qualifying indemnification claims, and after following the procedures set forth in the escrow agreement, all or a portion of the escrowed amount may be released and returned to Bruker to satisfy such claims. This would result in a reduction in the purchase price received for the sale of our Metrology business, which could result in a material adverse effect on our financial condition.
Changes in accounting pronouncements or taxation rules or practices may adversely affect our financial results.
Changes in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies" below. New accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practices have occurred and may occur in the future. New rules, changes to existing rules, if any, or the questioning of current practices may adversely affect our reported financial results or change the way we conduct our business.
We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report of management on the effectiveness of our internal control over financial reporting. Ongoing compliance with this requirement is complex, costly and time-consuming. Although our assessment, testing, and evaluation resulted in our conclusion that, as of December 31, 2010, our
internal controls over financial reporting were effective, we cannot predict the outcome of our testing in future periods. If our internal controls are ineffective in future periods, or if our management does not timely assess the adequacy of such internal controls, we could be subject to regulatory sanctions, the public's perception of our Company may decline and our financial results or the market price of our shares could be adversely affected.
We are subject to risks of non-compliance with environmental, health and safety regulations.
We are subject to environmental, health and safety regulations in connection with our business operations, including but not limited to regulations related to the research, development, manufacture, and use of our products. Failure or inability to comply with existing or future environmental and safety regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of research, development, manufacture, or use of certain of our products, each of which could have a material adverse effect on our business, financial condition, and results of operations.operation. In addition, some of our operations involve the storage, handling and use of hazardous materials that may pose a risk of fire, explosion, or environmental release. Such events could result from acts of terrorism, natural disasters or operational failures and may result in injury or loss of life to our employees and others, local environmental contamination and property damage. These events might cause a temporary shutdown of an affected facility, or portion thereof, and we could be subject to penalties or claims as a result. Each of these events could have a material adverse effect on our business, financial condition, and results of operation.
We have significant operations in locations which could be materially and adversely impacted in the event of a natural disaster or other significant disruption.
Our operations in the U.S., the Asia-Pacific region and in other areas could be subject to natural disasters or other significant disruptions, including earthquakes, tsunamis, fires, hurricanes, floods, water shortages, other extreme weather conditions, medical epidemics, acts of terrorism, power shortages and blackouts, telecommunications failures, and other natural and manmade disasters or disruptions. In the event of such a natural disaster or other disruption, we could experience disruptions or interruptions to our operations or the operations of our suppliers, distributors, resellers or customers; destruction of facilities; and/or loss of life, all of which could materially increase our costs and expenses and materially and adversely affect our business, revenue and financial condition.
We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our Company by another company more difficult.
We have adopted, and may in the future adopt, certain measures that may have the effect of delaying, deferring or preventing a takeover or other change in control of our Company, thatany of which a holder of our common stock might not consider in itsthe holder’s best interest. These measures include:
•"·“blankcheck"check” preferred stock;
·•- classified board of directors;
•shareholder rights plan or "poison pill;"and
·•- certain certificate of incorporation and bylaws provisions.
Our board of directors has the authority to issue up to 500,000 shares of preferred stock and to fix the rights (including voting rights), preferences and privileges of these shares ("(“blank check"check” preferred). Such preferred stock may have rights, including economic rights, senior to our common stock. As a result, the issuance of the preferred stock could have a material adverse effect on the price of our common stock and could make it more difficult for a third party to acquire a majority of our outstanding common stock.
Our board of directors is divided into three classes with each class serving a staggered three-year term. The existence of a classified board will make it more difficult for our shareholders to change the composition (and therefore the policies) of our board of directors in a relatively short period of time.
We have adopted a shareholder rights plan, under which we have granted to our shareholders rights to purchase shares of junior participating preferred stock. This plan or "poison pill" could discourage a takeover that is not approved by our board of directors but which a shareholder might consider in its best interest, thereby adversely affecting our stock price.
We have adopted certain certificate of incorporation and bylaws provisions which may have anti-takeover effects. These include: (a) requiring certain actions to be taken at a meeting of shareholders rather than by written consent, (b) requiring a super-majority of shareholders to approve certain amendments to our bylaws, (c) limiting the maximum number of directors, and (d) providing that directors may be removed only for "cause."“cause.” These measures and those described above may have the effect of delaying, deferring or preventing a takeover or other change in control of Veeco that a holder of our common stock might consider in its best interest.
In addition, we are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a Delaware corporation from engaging in any business combination, including mergers and asset sales, with an interested stockholder (generally, a 15% or greater stockholder) for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The operation of Section 203 may have anti-takeover effects, which could delay, defer or prevent a takeover attempt that a holder of our common stock might consider in its best interest.
New regulations related to conflict minerals will force us to incur additional expenses, and may make our supply chain more complex, and may result in damage to our relationships with customers.
On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted new requirements for companies that manufacture products that contain certain minerals and metals, known as conflict minerals. These rules require public companies to perform diligence and to report annually to the SEC whether such minerals originate from the Democratic Republic of Congo and adjoining countries. The implementation of
these new requirements could adversely affect the sourcing, availability and pricing of minerals we use in the manufacture of our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals used in our products. Given the complexity of our supply chain, we may not be able to ascertain the origins of these minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. We may also face difficulties in satisfying customers who may require that our products be certified as conflict mineral free, which could harm our relationships with these customers and lead to a loss of revenue. These new requirements could limit the pool of suppliers that can provide conflict-free minerals, and we may be unable to obtain conflict-free minerals at competitive prices, which could increase our costs and adversely affect our manufacturing operations and our profitability.
Item 1B. Unresolved Staff Comments
None.
Our corporate headquarters and our principal product development and marketing, manufacturing, research and development training, and sales and servicetraining facilities, as well as the approximate size and the segments which utilize such facilities, are:
Approximate | ||||||||||||||
Owned Facilities Location |
| Mortgaged | Use | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Plainview, NY | 80,000 | No | Data Storage and Corporate Headquarters | |||||||||||
Somerset, NJ | 80,000 | No | LED & Solar | |||||||||||
Somerset, NJ | 38,000 | No | LED & Solar | |||||||||||
St. Paul, MN(1) | 111,000 | Yes | LED & Solar | |||||||||||
| 56,000 | No | Sales Office, Customer Training Center and R&D Center | |||||||||||
Hyeongok-ri, South Korea | 18,000 | No | Sales Office and Clean Room | |||||||||||
|
| Approximate |
| Lease |
|
|
Leased Facilities Location |
| Size (sq. ft.) |
| Expires |
| Use |
Camarillo, CA |
| 23,000 |
| 2015 |
| Data Storage |
Fort Collins, CO |
| 26,000 |
| 2018 |
| Data Storage |
Peabody, MA |
| 30,000 |
| 2014 |
| Held for Sublease |
Somerset, NJ |
| 14,000 |
| 2014 |
| LED & Solar |
Poughkeepsie, NY |
| 9,000 |
| 2015 |
| LED & Solar |
Kingston, NY |
| 44,000 |
| 2018 |
| LED & Solar |
Fremont, CA |
| 17,000 |
| 2015 |
| LED & Solar |
Shanghai, China (2) |
| 18,700 |
| 2014 |
| Customer Training Center |
Hsinchu City, Taiwan |
| 13,500 |
| 2015 |
| Sales Office, Process Development, and Customer Training Center |
Leased Facilities Location | Approximate Size (sq. ft.) | Lease Expires | Use | |||||
|---|---|---|---|---|---|---|---|---|
Camarillo, CA(3) | 26,000 | 2012 | Data Storage and partially held for sublease | |||||
Fort Collins, CO | 26,000 | 2011 | Data Storage | |||||
Clifton Park, NY | 18,000 | 2014 | LED & Solar | |||||
Clifton Park, NY | 8,000 | 2011 | LED & Solar | |||||
Lowell, MA | 28,000 | 2012 | LED & Solar | |||||
Somerset, NJ | 14,500 | 2011 | LED & Solar | |||||
Somerset, NJ | 9,500 | 2012 | LED & Solar | |||||
Shanghai, China | 17,400 | 2012 | Customer Training Center | |||||
Woodbury, NY(4) | 32,000 | 2011 | Former Corporate Headquarters | |||||
- (1)
- Our LED & Solar segment utilizes approximately 95,000 square feet of this facility. The balance is available for expansion.
(2)
We vacated this facility during the fourth quarter of 2010 in conjunction with the sale of our Metrology segment to Bruker. We are currently leasing this office to Bruker in accordance with a transition services agreement which will expire on October 6, 2011.
(3)We vacated this facility during the second quarter of 2009 in conjunction with the outsourcing of manufacturing for certain Data Storage product lines.We havereoccupied a portionthe option to renew this lease for two consecutive two year terms and also have the option to purchase this facility.
The St. Paul, Minnesota facility is subject to a mortgage which, atas of December 31, 2010,2013, had an outstanding balance of $2.9$2.1 million. We also lease small offices in Santa Clara, California Chelmsford, Massachusetts and Edina, Minnesota for sales and service. Our foreign sales and service subsidiaries lease office space in England, France, Germany, Japan, South Korea, Malaysia, Singapore, Thailand, ChinaPhilippines and Taiwan.China. We believe our facilities are adequate to meet our current needs.
Environmental
We may, under certain circumstances, be obligated to pay up to $250,000 in connection with the implementation of a comprehensive plan of environmental remediation at our Plainview, New York facility. We have been indemnified by the former owner for any liabilities we may incur in excess of $250,000 with respect to any such remediation. No comprehensive plan has been required to date. Even without consideration of such indemnification, we do not believe that any material loss or expense is probable in connection with any remediation plan that may be proposed.
We are aware that petroleum hydrocarbon contamination has been detected in the soil at the site of a facility formerly leased by us in Santa Barbara, California. We have been indemnified for any liabilities we may incur which arise from environmental contamination at the site. Even without consideration of such indemnification, we do not believe that any material loss or expense is probable in connection with any such liabilities.
The former owner of the land and building in Santa Barbara, California in which our former Metrology operations were located (which business was sold to Bruker Corporation (“Bruker”) on October 7, 2010), has disclosed that there are hazardous substances present in the ground under the building. Management believes that the comprehensive indemnification clause that was part of the purchase contract relating to the purchase of such land provides adequate protection against any environmental issues that may arise. We have provided Bruker with similar indemnification as part of the sale.
Non-Environmental
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, seeks unspecified damages and asserts claims that he suffered burns and other injuries while he was cleaning a molecular beam epitaxy system alleged to have been manufactured by Veeco. The lawsuit alleges, 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. Veeco believes this lawsuit is without merit and intends to defend vigorously against the claims. Veeco is unable to predict the outcome of this action or to reasonably estimate the possible loss or range of loss, if any, arising from the claims asserted therein. The Company believes that, in the event of any recovery by the plaintiff from Veeco, such recovery would be fully covered by Veeco’s insurance.
We are involved in various other legal proceedings arising in the normal course of our business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 4. (Removed and Reserved).
Mine Safety Disclosures
Not Applicable.
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on The NASDAQ National Market under the symbol "VECO."“VECO.” The 20102013 and 20092012 high and low closing bid prices by quarter are as follows:
| | 2010 | 2009 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | High | Low | High | Low | |||||||||
First Quarter | $ | 43.72 | $ | 30.42 | $ | 7.16 | $ | 3.96 | |||||
Second Quarter | 51.61 | 31.79 | 12.99 | 6.19 | |||||||||
Third Quarter | 45.52 | 31.02 | 23.49 | 11.36 | |||||||||
Fourth Quarter | 49.97 | 33.71 | 34.35 | 21.90 | |||||||||
|
| 2013 |
| 2012 |
| ||||||||
|
| High |
| Low |
| High |
| Low |
| ||||
First Quarter |
| $ | 38.41 |
| $ | 28.71 |
| $ | 33.40 |
| $ | 21.46 |
|
Second Quarter |
| 42.60 |
| 32.23 |
| 36.97 |
| 26.54 |
| ||||
Third Quarter |
| 36.41 |
| 33.16 |
| 38.11 |
| 30.00 |
| ||||
Fourth Quarter |
| 38.15 |
| 28.44 |
| 31.52 |
| 26.89 |
| ||||
On February 22, 2011,18, 2014, the closing bid price for our common stock on theThe NASDAQ National Market was $47.04$41.13 and we had 144120 shareholders of record.
As of December 31, 2010 we had convertible notes of $105.6 million. The notes accrue interest at 4.125% per annum and mature on April 15, 2012. The notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, since we have the ability and the intent to settle the principal amount of the notes in cash. Under the terms of the notes, we may pay the principal amount of converted notes in cash or in shares of common stock. We intend to pay such amounts in cash. Holders may convert the notes at any time during the period beginning on January 15, 2012 through the close of business on the second day prior to April 15, 2012 and earlier upon the occurrence of certain events including our common stock trading at prices equal to or above 130% of the conversion price for at least 20 trading days during the final 30 trading days of the immediately preceding fiscal quarter. At the end of the fourth quarter of 2010, our common stock was trading at prices equal to or above 130% of the conversion price for the specified period and, as a result, the convertible notes are convertible during the first quarter of 2011. Accordingly, the balance of the convertible notes at December 31, 2010 has been classified as current in our Consolidated Balance Sheet. On February 14, 2011, at the option of the holder, $7.5 million of notes were tendered for conversion at a price of $45.95 per share in a net share settlement. As a result, we paid the principal amount of $7.5 million in cash and issued 111,318 shares of our common stock. Accordingly, in the first quarter of 2011 we will take a charge for the related unamortized debt discount totaling $0.3 million. We pay interest on these notes on April 15 and October 15 of each year.
We have not paid dividends on our common stock. The Board of Directors will determine future dividend policy based on our consolidated results of operations, financial condition, capital requirements and other circumstances.
Stock Performance Graph
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Veeco Instruments Inc., The S&P Smallcap 600 Index,The PHLX Semiconductor Index And RDG MidCap Technology Index
*$100 invested on 12/31/05 in stock or index, including reinvestment of dividends.Fiscal year ending December 31.
Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
ASSUMES $100 INVESTED ON DEC. 31 2005
, 2008
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DEC. 31
|
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
|
Veeco Instruments Inc. |
| 100.00 |
| 521.14 |
| 677.60 |
| 328.08 |
| 465.14 |
| 519.09 |
|
S&P Smallcap 600 |
| 100.00 |
| 125.57 |
| 158.60 |
| 160.22 |
| 186.37 |
| 263.37 |
|
PHLX Semiconductor |
| 100.00 |
| 159.68 |
| 183.23 |
| 186.05 |
| 204.93 |
| 268.55 |
|
RDG MidCap Technology |
| 100.00 |
| 166.67 |
| 214.78 |
| 179.75 |
| 177.47 |
| 239.71 |
|
| | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Veeco Instruments Inc. | 100.00 | 108.08 | 96.36 | 36.58 | 190.65 | 247.89 | |||||||||||||
S&P Smallcap 600 | 100.00 | 115.12 | 114.78 | 79.11 | 99.34 | 125.47 | |||||||||||||
PHLX Semiconductor | 100.00 | 94.47 | 102.99 | 56.15 | 91.67 | 103.11 | |||||||||||||
RDG MidCap Technology | 100.00 | 111.34 | 110.83 | 56.91 | 90.56 | 114.02 | |||||||||||||
Treasury StockTable of Contents
The following table contains the Company's stock repurchases of equity securities in the fourth quarter of 2010:
Period | Total Number of Shares Repurchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Program(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal month of October 2010 (September 27, 2010—October 24, 2010)(2) | 189,218 | 34.33 | 1,118,600 | 161,901,746 | |||||||||
(1)On August 24, 2010, we announced that our Board of Directors had authorized the repurchase of up to $200 million of our common stock until August 26, 2011. The program does not obligate the Company to acquire any particular amount of common stock and may be modified or suspended at any time at the Company's discretion.(2)We had no repurchases in the fiscal months of November and December 2010.
Item 6. Selected Consolidated Financial Data
The financial data set forth below should be read in conjunction with "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and with our Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.
|
| Year ended December 31, |
| |||||||||||||
|
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| 2009 |
| |||||
|
| (in thousands, except per share data) |
| |||||||||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net sales |
| $ | 331,749 |
| $ | 516,020 |
| $ | 979,135 |
| $ | 930,892 |
| $ | 282,262 |
|
Operating income (loss) |
| (71,812 | ) | 37,212 |
| 276,259 |
| 303,253 |
| 7,631 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations net of income taxes |
| (42,263 | ) | 26,529 |
| 190,502 |
| 277,176 |
| (1,777 | ) | |||||
Income (loss) from discontinued operations net of income taxes |
| — |
| 4,399 |
| (62,515 | ) | 84,584 |
| (13,855 | ) | |||||
Net income (loss) attributable to noncontrolling interest |
| — |
| — |
| — |
| — |
| (65 | ) | |||||
Net income (loss) attributable to Veeco |
| $ | (42,263 | ) | $ | 30,928 |
| $ | 127,987 |
| $ | 361,760 |
| $ | (15,567 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) per common share attributable to Veeco: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic: |
|
|
|
|
|
|
|
|
|
|
| |||||
Continuing operations |
| $ | (1.09 | ) | $ | 0.69 |
| $ | 4.80 |
| $ | 7.02 |
| $ | (0.05 | ) |
Discontinued operations |
| — |
| 0.11 |
| (1.57 | ) | 2.14 |
| (0.43 | ) | |||||
Income (loss) |
| $ | (1.09 | ) | $ | 0.80 |
| $ | 3.23 |
| $ | 9.16 |
| $ | (0.48 | ) |
Diluted : |
|
|
|
|
|
|
|
|
|
|
| |||||
Continuing operations |
| $ | (1.09 | ) | $ | 0.68 |
| $ | 4.63 |
| $ | 6.52 |
| $ | (0.05 | ) |
Discontinued operations |
| — |
| 0.11 |
| (1.52 | ) | 1.99 |
| (0.43 | ) | |||||
Income (loss) |
| $ | (1.09 | ) | $ | 0.79 |
| $ | 3.11 |
| $ | 8.51 |
| $ | (0.48 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| 38,807 |
| 38,477 |
| 39,658 |
| 39,499 |
| 32,628 |
| |||||
Diluted |
| 38,807 |
| 39,051 |
| 41,155 |
| 42,514 |
| 32,628 |
| |||||
|
| December 31, |
| |||||||||||||
|
| 2013 |
| 2012 |
| 2011 |
| 2010 |
| 2009 |
| |||||
|
| (in thousands) |
| |||||||||||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 210,799 |
| $ | 384,557 |
| $ | 217,922 |
| $ | 245,132 |
| $ | 148,500 |
|
Short-term investments |
| 281,538 |
| 192,234 |
| 273,591 |
| 394,180 |
| 135,000 |
| |||||
Restricted cash |
| 2,738 |
| 2,017 |
| 577 |
| 76,115 |
| — |
| |||||
Working capital |
| 485,452 |
| 632,197 |
| 587,076 |
| 640,139 |
| 317,317 |
| |||||
Goodwill |
| 91,348 |
| 55,828 |
| 55,828 |
| 52,003 |
| 52,003 |
| |||||
Total assets |
| 947,969 |
| 937,304 |
| 936,063 |
| 1,148,034 |
| 605,372 |
| |||||
Long-term debt (including current installments) |
| 2,137 |
| 2,406 |
| 2,654 |
| 104,021 |
| 101,176 |
| |||||
Total equity |
| 780,230 |
| 811,212 |
| 760,520 |
| 762,512 |
| 359,059 |
| |||||
| | Year ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2010(1) | 2009(2) | 2008(3) | 2007(4) | 2006(5) | |||||||||||||
| | (In thousands, except per share data) | |||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||
Net sales | $ | 933,231 | $ | 282,412 | $ | 314,935 | $ | 252,031 | $ | 268,880 | ||||||||
Operating income (loss) from continuing operations | 277,575 | (4,732 | ) | (46,140 | ) | (18,245 | ) | (5,767 | ) | |||||||||
Income (loss) from continuing operations, net of income taxes | 260,531 | (14,229 | ) | (50,833 | ) | (23,655 | ) | (4,620 | ) | |||||||||
Income (loss) from discontinued operations, net of income taxes | 101,229 | (1,403 | ) | (24,588 | ) | 3,817 | 18,179 | |||||||||||
Net loss attributable to noncontrolling interest | — | (65 | ) | (230 | ) | (628 | ) | (1,358 | ) | |||||||||
Net income (loss) attributable to Veeco | $ | 361,760 | $ | (15,567 | ) | $ | (75,191 | ) | $ | (19,210 | ) | $ | 14,917 | |||||
Income (loss) per common share attributable to Veeco: | ||||||||||||||||||
Basic: | ||||||||||||||||||
Continuing operations | $ | 6.60 | $ | (0.44 | ) | $ | (1.62 | ) | $ | (0.74 | ) | $ | (0.11 | ) | ||||
Discontinued operations | 2.56 | (0.04 | ) | (0.78 | ) | 0.12 | 0.60 | |||||||||||
Income (loss) | $ | 9.16 | $ | (0.48 | ) | $ | (2.40 | ) | $ | (0.62 | ) | $ | 0.49 | |||||
Diluted : | ||||||||||||||||||
Continuing operations | $ | 6.13 | $ | (0.44 | ) | $ | (1.62 | ) | $ | (0.74 | ) | $ | (0.11 | ) | ||||
Discontinued operations | 2.38 | (0.04 | ) | (0.78 | ) | 0.12 | 0.60 | |||||||||||
Income (loss) | $ | 8.51 | $ | (0.48 | ) | $ | (2.40 | ) | $ | (0.62 | ) | $ | 0.49 | |||||
Weighted average shares outstanding: | �� | |||||||||||||||||
Basic | 39,499 | 32,628 | 31,347 | 31,020 | 30,492 | |||||||||||||
Diluted | 42,514 | 32,628 | 31,347 | 31,020 | 30,492 | |||||||||||||
| | December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||
| | (In thousands) | |||||||||||||||
Balance Sheet Data: | ||||||||||||||||
Cash and cash equivalents | $ | 245,132 | $ | 148,500 | $ | 102,521 | $ | 116,875 | $ | 146,880 | ||||||
Short-term investments | 394,180 | 135,000 | — | — | — | |||||||||||
Restricted cash | 76,115 | — | — | — | — | |||||||||||
Working capital | 640,139 | 317,317 | 168,528 | 112,089 | 172,447 | |||||||||||
Goodwill | 52,003 | 52,003 | 51,741 | 71,544 | 71,544 | |||||||||||
Total assets | 1,148,034 | 605,372 | 429,541 | 529,334 | 589,600 | |||||||||||
Long-term debt (including current installments) | 104,021 | 101,176 | 98,526 | 132,118 | 203,774 | |||||||||||
Total equity | 762,512 | 359,059 | 225,026 | 288,144 | 281,751 | |||||||||||
(1)On August 15, 2010, we signed a definitive agreement to sell our Metrology business to Bruker comprising our entire Metrology reporting segment for $229.4 million. Accordingly, Metrology's
operating results are accounted for as discontinued operations in determining the consolidated results of operations. The sales transaction closed on October 7, 2010, except for assets located in China due to local restrictions. Total proceeds, which included a working capital adjustment of $1 million, totaled $230.4 million of which $7.2 million relates to the assets in China. As part of our agreement with Bruker, $22.9 million of proceeds is held in escrow and is restricted from use for one year from the closing date of the transaction to secure certain specified losses arising out of breaches of representations, warranties and covenants we made in the stock purchase agreement and related documents. As part of the sale we incurred transaction costs, which consisted of investment bank fees and legal fees, totaling $5.2 million. The Company recognized a pre-tax gain on disposal of $156.3 million and a pre-tax deferred gain of $5.4 million related to the assets in China.
In addition, operating income and income from continuing operations includes a restructuring credit of $0.2 million.
(2)Operating loss and net loss from continuing operations include restructuring expenses of $4.8 million, as well as an asset impairment charge of $0.3 million for property, plant and equipment no longer being utilized in our Data Storage segment and a $1.5 million inventory write-off associated with Data Storage legacy products.(3)Operating loss and net loss from continuing operations include a $51.4 million asset impairment charge of which $30.4 million was related to goodwill and $21.0 million was related to other long-lived assets, a restructuring charge of $9.4 million consisting of lease-related commitments, the mutually agreed-upon termination of the employment agreement with our former CEO and personnel severance costs and $1.5 million in cost of sales related to the required purchase accounting adjustment to write up inventory to fair value in connection with the purchase of Mill Lane Engineering. Net loss from continuing operations also reflects a net gain from the early extinguishment of debt in the amount of $3.8 million.(4)Operating loss and net loss from continuing operations include restructuring expenses of $4.8 million, as well as charges of $1.1 million and $4.8 million associated with the write-off of property and equipment and inventory, respectively, related to product lines discontinued as part of management's cost reduction plan. Net loss from continuing operations also reflects a net gain from the early extinguishment of debt in the amount of $0.7 million.(5)Operating income and net loss from continuing operations are net of a write-off of $1.2 million of in-process research and development projects related to the Fluens acquisition. Net loss from continuing operations also reflects a net gain from the early extinguishment of debt in the amount of $0.3 million.
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco”, the “Company”, “we”, “us”, and “our”, unless the context indicates otherwise) creates process equipment that enables technologies for a cleaner and more productive world. We design, manufacture and market equipment primarily sold to make equipment to developLEDs and manufacture light emitting diodes ("LEDs"), solar panels, hard-disk drives, as well as for concentrator photovoltaics, power semiconductors, wireless components, and other devices. We havemicro-electro-mechanical systems (“MEMS”).
Veeco develops highly differentiated, “best-in-class” process equipment for critical performance steps. Our products feature leading technology, positionslow cost-of-ownership and high throughput. Core competencies in our two segments: LED & Solaradvanced thin film technologies, over 300 patents, and Data Storage.decades of specialized process know-how helps us to stay at the forefront of these demanding industries.
In our
Veeco’s LED & Solar segment we designdesigns and manufacturemanufactures metal organic chemical vapor deposition ("MOCVD"(“MOCVD”) systems,and molecular beam epitaxy ("MBE"(“MBE”) systems Copper, Indium, Gallium, Selenide ("CIGS") deposition systems and thermal deposition sources which we sellcomponents sold to manufacturers of high brightness LEDs, ("HB LED")wireless components, power semiconductors, and solar panels,concentrator photovoltaics, as well as to scientific research customers.for R&D applications. Our ALD technology is used by the manufacturers of OLED displays and has further applications in the semiconductor and solar markets.
In our
Veeco’s Data Storage segment we design designs and manufacturemanufactures systems used to create thin film magnetic heads (“TFMH”s) that read and write data on hard disk drives. These include ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, chemical vapor deposition, and slicing, dicing and slicinglapping systems. While our systems are primarily usedsold to create thin filmhard drive customers, they also have applications in optical coatings, MEMS and magnetic heads ("TFMHs"sensors, and extreme ultraviolet (“EUV”) that read and write data on hard disk drives.lithography.
We
As of December 31, 2013, Veeco had approximately 800 employees to support our customers through product and process development, training, manufacturing, and sales and service sites in the U.S., South Korea, Taiwan, China, Singapore, Japan, Europe and other locations.
Veeco Instruments Inc. was organized as a Delaware corporation in 1989.
Summary of Results for 20102013
In 2010, Veeco reported the best year in its history in terms of revenue and profitability.
Selected financial highlights include:
•·Revenue
increased 231%decreased 35.7% to$933.2$331.7 million in20102013 from$282.4$516.0 million in2009.2012. LED & Solar revenuesincreased 289%decreased 31.2% to$797.9$249.7 million from$205.2$363.2 million in2009.2012. Data Storage revenuesincreased 75%decreased 46.3% to$135.3$82.0 million from$77.2$152.8 million in2009;2012;
·•- Orders were
up 108%down 15.4%, to$1,121.6$331.6 million in20102013, compared to$538.3$391.9 million in2009;2012;
· •- Our gross margin
increaseddecreased, to48% for 2010 from 39%31.1%, in2009.2013 compared to 41.7% in 2012. Gross margins in LED & Solarincreaseddecreased from 40.9% in 2012 to47% from 40% in 2009, and28.0%. Data Storage gross marginsincreasedalso decreased from 43.7% to49% from 37% in 2009.40.4%.
· •- Our selling, general and administrative expenses increased to
$91.8$85.5 million, from$62.2$73.1 million in2009.2012. Selling, general and administrative expenses were10%25.8% of net sales in2010,2013, comparedwith 22% of net salesto 14.2% in2009;2012;
· •- Our research and development expenses
increaseddecreased to$71.4$81.4 million from$43.5$95.2 million in2009.2012. Research and development expenses were8%24.5% of net sales in2010,2013, comparedwith 15%to 18.4% in2009;2012;
· •- Net income (loss) from continuing operations
attributable to Veecoin20102013 was$260.5$(42.3) million compared($14.2)to $26.5 million in2009;2012;
· •NetDiluted net income (loss) from continuing operationsattributable to Veecoper share in 2013 was$6.13$(1.09) compared to($0.44)$0.68 in2009;2012.
Outlook
As we begin 2014, it is unclear when business conditions may improve for Veeco.
We are seeing some positive signs in our MOCVD business. LED customer facility utilization rates are stable and
Our new ALD business was acquired as a “pre-revenue” business and thus decreased our earnings in 2013. The timing of production ALD orders from stock option exercises, $23.3 million of excess tax benefits relatingour key customer could have a significant impact on our expected revenue growth and potential return to stock option exercises, and cash provided by operations of $194.2 million, partially offset by treasury stock repurchases of $38.1 million and restricted stock tax withholdings of $4.6 million and cash used in investing activities of $121.6 million, which is net of $225.2 million in net proceedsprofitability.
While Data Storage orders increased 8.4% from the sale ofprior year period and low growth is expected in hard drives, our Metrology segment.
Business Highlights of 2010
Veeco's 2010 results were at record levels, with revenue of $933 million and net income from continuing operations of $261 million. These results were achieved through a combination of world-class products, a focus on high-growth market opportunities, operational excellence, our flexible manufacturing strategy, and a deep commitment to satisfying our global customers.
•Veeco increased growth and profitability in our LED & Solar segment, which is also referred to as our "green" equipment business. In LED we penetrated newcustomerssignificantly increased our market share, increased R&D investment, launched a next-generation MOCVD system and ramped ourhave excess manufacturing capacityutilizing a scalable, outsourced model. In Solar we continued to improve the process development of our CIGS product line.•Veeco's Data Storage business delivered record levels of profitability over the last 5 years as a result of a turnaround in business conditions combined with our flexible manufacturing strategy.
Outlook
With starting backlog of $555 million, and anticipating strong first half 2011 bookings, we currently forecast that Veeco's 2011 revenues will be greater than $1 billion. We are optimistic about the future and believe that we are well positioned from athey have only been making select technology product and operational standpoint to grow our LED & Solar and Data Storage businesses in 2011 and beyond.
As we look toward the future, we believe that the HB LED industry will continue its multi-year MOCVD tool investment cycle as HB LEDs increase their penetration in backlighting applications and general illumination. We are also seeing strong interest in our thermal deposition solutionspurchases. Future demand for the manufacturing of CIGS solar cells, and believe that Veeco is well positioned to increase our business in this market. In addition, overall business conditions in our Data Storage segment appearproducts is unclear.
Our priorities for 2014 include taking the steps we believe are necessary to be continuingtransition us back to profitable growth. We are focused on four areas to improve our financial performance: 1) developing and with a strong starting-year backlog, we are forecasting revenue growthlaunching new products that enable cost effective LED lighting, flexible OLED encapsulation and other emerging technologies; 2) executing manufacturing cost reduction programs; 3) driving process improvement initiatives to make us more efficient; and 4) improving product differentiation and customer value to stem margin erosion. We currently anticipate that our losses will continue in this business in 2011.the near term.
Our outlook discussion above constitutes "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our expectations regarding future results are subject to risks and uncertainties. Our actual results may differ materially from those anticipated.
You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made.
Results of Operations
Years Ended December 31, 20102013 and 20092012
The following table shows our Consolidated Statements of Operations, percentages of sales and comparisons between 20102013 and 20092012 (dollars in 000s)thousands):
|
| Year ended |
| Dollar and |
| |||||||||||
|
| December 31, |
| Percentage Change |
| |||||||||||
|
| 2013 |
| 2012 |
| Year to Year |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net sales |
| $ | 331,749 |
| 100.0 | % | $ | 516,020 |
| 100.0 | % | $ | (184,271 | ) | (35.7 | )% |
Cost of sales |
| 228,607 |
| 68.9 | % | 300,887 |
| 58.3 | % | (72,280 | ) | (24.0 | )% | |||
Gross profit |
| 103,142 |
| 31.1 | % | 215,133 |
| 41.7 | % | (111,991 | ) | (52.1 | )% | |||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Selling, general and administrative |
| 85,486 |
| 25.8 | % | 73,110 |
| 14.2 | % | 12,376 |
| 16.9 | % | |||
Research and development |
| 81,424 |
| 24.5 | % | 95,153 |
| 18.4 | % | (13,729 | ) | (14.4 | )% | |||
Amortization |
| 5,527 |
| 1.7 | % | 4,908 |
| 1.0 | % | 619 |
| 12.6 | % | |||
Restructuring |
| 1,485 |
| 0.4 | % | 3,813 |
| 0.7 | % | (2,328 | ) | (61.1 | )% | |||
Asset impairment |
| 1,220 |
| 0.4 | % | 1,335 |
| 0.3 | % | (115 | ) | (8.6 | )% | |||
Total operating expenses |
| 175,142 |
| 52.8 | % | 178,319 |
| 34.6 | % | (3,177 | ) | (1.8 | )% | |||
Other, net |
| (1,017 | ) | (0.3 | )% | (398 | ) | (0.1 | )% | (619 | ) | 155.5 | % | |||
Changes in contingent consideration |
| 829 |
| 0.2 | % | — |
| 0.0 | % | 829 |
| * |
| |||
Operating income (loss) |
| (71,812 | ) | (21.6 | )% | 37,212 |
| 7.2 | % | (109,024 | ) | * |
| |||
Interest income (expense), net |
| 602 |
| 0.2 | % | 974 |
| 0.2 | % | (372 | ) | (38.2 | )% | |||
Income (loss) from continuing operations before income taxes |
| (71,210 | ) | (21.5 | )% | 38,186 |
| 7.4 | % | (109,396 | ) | * |
| |||
Income tax provision (benefit) |
| (28,947 | ) | (8.7 | )% | 11,657 |
| 2.3 | % | (40,604 | ) | * |
| |||
Income (loss) from continuing operations |
| (42,263 | ) | (12.7 | )% | 26,529 |
| 5.1 | % | (68,792 | ) | * |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Income (loss) from discontinued operations before income taxes |
| — |
| 0.0 | % | 6,269 |
| 1.2 | % | (6,269 | ) | * |
| |||
Income tax provision (benefit) |
| — |
| 0.0 | % | 1,870 |
| 0.4 | % | (1,870 | ) | * |
| |||
Income (loss) from discontinued operations |
| — |
| 0.0 | % | 4,399 |
| 0.9 | % | (4,399 | ) | * |
| |||
Net income (loss) |
| $ | (42,263 | ) | (12.7 | )% | $ | 30,928 |
| 6.0 | % | $ | (73,191 | ) | * |
|
| | Year ended December 31, | Dollar and Percentage Change Year to Year | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | ||||||||||||||||||
Net sales | $ | 933,231 | 100.0 | % | $ | 282,412 | 100.0 | % | $ | 650,819 | 230.5 | % | ||||||||
Cost of sales | 489,406 | 52.4 | 171,177 | 60.6 | 318,229 | 185.9 | ||||||||||||||
Gross profit | 443,825 | 47.6 | 111,235 | 39.4 | 332,590 | 299.0 | ||||||||||||||
Operating expenses (income): | ||||||||||||||||||||
Selling, general and administrative | 91,777 | 9.8 | 62,151 | 22.0 | 29,626 | 47.7 | ||||||||||||||
Research and development | 71,390 | 7.6 | 43,483 | 15.4 | 27,907 | 64.2 | ||||||||||||||
Amortization | 4,876 | 0.5 | 5,168 | 1.8 | (292 | ) | (5.7 | ) | ||||||||||||
Restructuring | (179 | ) | — | 4,837 | 1.7 | (5,016 | ) | * | ||||||||||||
Asset impairment | — | — | 304 | 0.1 | (304 | ) | (100.0 | ) | ||||||||||||
Other, net | (1,614 | ) | (0.2 | ) | 24 | 0.0 | (1,638 | ) | * | |||||||||||
Total operating expenses | 166,250 | 17.8 | 115,967 | 41.1 | 50,283 | 43.4 | ||||||||||||||
Operating income (loss) | 277,575 | 29.7 | (4,732 | ) | (1.7 | ) | 282,307 | * | ||||||||||||
Interest expense, net | 6,572 | 0.7 | 6,850 | 2.4 | (278 | ) | (4.1 | ) | ||||||||||||
Income (loss) from continuing operations before income taxes | 271,003 | 29.0 | (11,582 | ) | (4.1 | ) | 282,585 | * | ||||||||||||
Income tax provision | 10,472 | 1.1 | 2,647 | 0.9 | 7,825 | 295.6 | ||||||||||||||
Income (loss) from continuing operations | 260,531 | 27.9 | (14,229 | ) | (5.0 | ) | 274,760 | * | ||||||||||||
Discontinued operations: | ||||||||||||||||||||
Income (loss) from discontinued operations, before income taxes (includes gain on disposal of $156,290 in 2010) | 155,455 | 16.7 | (2,703 | ) | (1.0 | ) | 158,158 | * | ||||||||||||
Income tax provision (benefit) | 54,226 | 5.8 | (1,300 | ) | (0.5 | ) | 55,526 | * | ||||||||||||
Income (loss) from discontinued operations | 101,229 | 10.8 | (1,403 | ) | (0.5 | ) | 102,632 | * | ||||||||||||
Net income (loss) | 361,760 | 38.8 | (15,632 | ) | (5.5 | ) | 377,392 | * | ||||||||||||
Net loss attributable to noncontrolling interest | — | — | (65 | ) | 0.1 | 65 | (100.0 | ) | ||||||||||||
Net income (loss) attributable to Veeco | $ | 361,760 | 38.8 | % | $ | (15,567 | ) | (5.5 | )% | $ | 377,327 | * | ||||||||
*
- Not Meaningful
Table of Contents Net Sales and Orders
Net sales of $933.2 million for the year ended December 31, 2010, were up 230.5% compared to 2009. Sales
The following is an analysis of sales and orders by segment and by region (dollars in 000s)thousands):
|
| For the year ended |
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| December 31, |
| Dollar and Percentage |
| |||||||||||
|
|
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| Percent |
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|
| Percent |
| Change |
| |||||
|
| 2013 |
| of total |
| 2012 |
| of total |
| Year to Year |
| |||||
Segment Analysis |
|
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|
| |||
LED & Solar |
| $ | 249,742 |
| 75.3 | % | $ | 363,181 |
| 70.4 | % | $ | (113,439 | ) | (31.2 | )% |
Data Storage |
| 82,007 |
| 24.7 | % | 152,839 |
| 29.6 | % | (70,832 | ) | (46.3 | )% | |||
Total |
| $ | 331,749 |
| 100.0 | % | $ | 516,020 |
| 100.0 | % | $ | (184,271 | ) | (35.7 | )% |
Regional Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Asia Pacific |
| $ | 252,199 |
| 76.0 | % | $ | 390,995 |
| 75.8 | % | $ | (138,796 | ) | (35.5 | )% |
Americas (1) |
| 57,609 |
| 17.4 | % | 83,317 |
| 16.1 | % | (25,708 | ) | (30.9 | )% | |||
Europe, Middle East and Africa |
| 21,941 |
| 6.6 | % | 41,708 |
| 8.1 | % | (19,767 | ) | (47.4 | )% | |||
Total |
| $ | 331,749 |
| 100.0 | % | $ | 516,020 |
| 100.0 | % | $ | (184,271 | ) | (35.7 | )% |
| | Sales | Orders | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | Dollar and Percentage Change | Year ended December 31, | Dollar and Percentage Change | Book to Bill Ratio | ||||||||||||||||||||||||||||
| | 2010 | 2009 | Year to Year | 2010 | 2009 | Year to Year | 2010 | 2009 | |||||||||||||||||||||||||
Segment Analysis | |||||||||||||||||||||||||||||||||
LED & Solar | $ | 797,904 | $ | 205,153 | $ | 592,751 | 288.9 | % | $ | 968,232 | $ | 440,784 | $ | 527,448 | 119.7 | % | 1.21 | 2.15 | |||||||||||||||
Data Storage | 135,327 | 77,259 | 58,068 | 75.2 | 153,406 | 97,497 | 55,909 | 57.3 | 1.13 | 1.26 | |||||||||||||||||||||||
Total | $ | 933,231 | $ | 282,412 | $ | 650,819 | 230.5 | % | $ | 1,121,638 | $ | 538,281 | $ | 583,357 | 108.4 | % | 1.20 | 1.91 | |||||||||||||||
Regional Analysis | |||||||||||||||||||||||||||||||||
Americas | $ | 94,985 | $ | 60,730 | $ | 34,255 | 56.4 | % | $ | 107,128 | $ | 78,196 | $ | 28,932 | 37.0 | % | 1.13 | 1.29 | |||||||||||||||
Europe, Middle East and Africa ("EMEA") | 92,112 | 50,088 | 42,024 | 83.9 | 83,784 | 47,186 | 36,598 | 77.6 | 0.91 | 0.94 | |||||||||||||||||||||||
Korea | 301,026 | 99,132 | 201,894 | 203.7 | 207,337 | 236,114 | (28,777 | ) | (12.2 | ) | 0.69 | 2.38 | |||||||||||||||||||||
China | 266,813 | 31,114 | 235,699 | 757.5 | 537,740 | 90,724 | 447,016 | 492.7 | 2.02 | 2.92 | |||||||||||||||||||||||
Taiwan | 101,130 | 13,882 | 87,248 | 628.5 | 112,016 | 34,642 | 77,374 | 223.4 | 1.11 | 2.50 | |||||||||||||||||||||||
Other Asia Pacific | 77,165 | 27,466 | 49,699 | 180.9 | 73,633 | 51,419 | 22,214 | 43.2 | 0.95 | 1.87 | |||||||||||||||||||||||
Asia Pacific | 746,134 | 171,594 | 574,540 | 334.8 | 930,726 | 412,899 | 517,827 | 125.4 | 1.25 | 2.41 | |||||||||||||||||||||||
Total | $ | 933,231 | $ | 282,412 | $ | 650,819 | 230.5 | % | $ | 1,121,638 | $ | 538,281 | $ | 583,357 | 108.4 | % | 1.20 | 1.91 | |||||||||||||||
By segment, (1)Less than 1% of sales included within the Americas caption above have been derived from other regions outside the United States.
LED & Solar segment sales increased 288.9%decreased in 20102013 primarily due to increases in shipments of our newest systems as compared to 2009 (334 system shipments in 2010 versus 72 system shipments in 2009 in ourlower MOCVD business)sales as a result of an increase in demand for HB LED backlighting applicationscontinued industry manufacturing overcapacity and general illumination.our customer’s hesitancy to make new investments. Data Storage sales also increased 75.2%, primarily as a result of an increasedecreased in capital spending by data storage customers for capacity2013 due to customer fabrication facility overcapacity and technology buys. LED & Solar sales represented 85.5% of total sales for the year ended December 31, 2010, up from 72.6% in the prior year.weak hard drive demand. Our Data Storage sales accounted for 14.5%in 2012 were favorably impacted by the replacement of net sales, down from 27.4%equipment at one of our customer’s sites that was damaged by the floods in the prior year.Thailand. By region, net sales increased by 334.8%decreased in Asia Pacific (“APAC”), primarily due to a significant decrease in MOCVD sales to HB LED customers. In addition,in China resulting from industry manufacturing overcapacity. Net sales in the Americas and EMEAEurope, Middle East and Africa (“EMEA”) also increased 56.4% and 83.9%, respectively.decreased, due to reduced end-market demand resulting from the weak global economy. We believe that there will continue to be year-to-year variations in the geographic distribution of sales.
Orders decreased 15.4% to $331.6 million from $391.9 million in 2010 increased 108.4% compared to 2009,the prior year, primarily attributable to a 119.7%22.1% decrease in LED & Solar orders, principally driven by a decline in MOCVD orders due to industry manufacturing overcapacity. Since hitting a peak in the second quarter of 2011, our orders have slowed dramatically. While Data Storage orders increased 8.4% from the prior year period and low growth is expected in hard drives, our customers have excess manufacturing capacity and they have only been making select technology purchases. We continue to experience weak overall market conditions due to overcapacity in all of our businesses.
Our book-to-bill ratio for 2013, which is calculated by dividing orders recorded in a given time period by revenue recognized in the same time period, was 1 to 1 compared to 0.76 to 1 in 2012. Our backlog as of December 31, 2013 was $143.3 million, compared to $150.2 million as of December 31, 2012. During the year ended December 31, 2013, we recorded backlog adjustments of approximately $6.8 million, consisting of a $5.6 million adjustment related to orders that no longer met our bookings criteria as well as an adjustment related to foreign currency translation of $1.2 million. For certain sales arrangements we require a deposit for a portion of the sales price before shipment. As of December 31, 2013 and 2012, we had customer deposits of $27.5 million and $32.7 million, respectively.
Gross Profit
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| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2013 |
| 2012 |
| Year to Year |
| |||||
Gross profit - LED & Solar |
| $ | 69,998 |
| $ | 148,383 |
| $ | (78,385 | ) | (52.8 | )% |
Gross margin |
| 28.0 | % | 40.9 | % |
|
|
|
| |||
Gross profit - Data Storage |
| $ | 33,144 |
| $ | 66,750 |
| $ | (33,606 | ) | (50.3 | )% |
Gross margin |
| 40.4 | % | 43.7 | % |
|
|
|
| |||
Gross profit - Total Veeco |
| $ | 103,142 |
| $ | 215,133 |
| $ | (111,991 | ) | (52.1 | )% |
Gross margin |
| 31.1 | % | 41.7 | % |
|
|
|
| |||
LED & Solar gross margins decreased primarily due to lower average selling prices, reduced volume and fewer final acceptances partially offset by cost reductions associated with reduced volumes and reduced expenses in 2013 for slow moving inventory items. Data Storage gross margins decreased primarily due to a significant reduction in volume.
Operating Expenses
|
| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2013 |
| 2012 |
| Year to Year |
| |||||
Selling, general and administrative |
| $ | 85,486 |
| $ | 73,110 |
| $ | 12,376 |
| 16.9 | % |
Percentage of sales |
| 25.8 | % | 14.2 | % |
|
|
|
| |||
Selling, general and administrative expenses increased primarily from professional fees associated with our review of our revenue accounting that began in 2012 and completed in October 2013, partially offset by a reduction in bonus and profit sharing expense and increased cost control measures put into place in response to weak market conditions, which resulted in lower personnel-related costs and discretionary expenses. The addition of our ALD business in the fourth quarter of 2013 has also contributed to an increase in our selling, general and administrative expenses.
|
| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2013 |
| 2012 |
| Year to Year |
| |||||
Research and development |
| $ | 81,424 |
| $ | 95,153 |
| $ | (13,729 | ) | (14.4 | )% |
Percentage of sales |
| 24.5 | % | 18.4 | % |
|
|
|
| |||
Research and development expense decreased as we sharpened our focus on product development in areas of anticipated high-growth. We selectively funded certain product development activities which resulted in reduced spending for project materials and professional consultants as well as lower personnel and personnel-related costs.
|
| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2013 |
| 2012 |
| Year to Year |
| |||||
Amortization |
| $ | 5,527 |
| $ | 4,908 |
| $ | 619 |
| 12.6 | % |
Percentage of sales |
| 1.7 | % | 1.0 | % |
|
|
|
| |||
Amortization expense increased primarily due to additional amortization associated with intangible assets acquired as part of our acquisition of Synos during the fourth quarter of 2013, partially offset by certain intangible assets becoming fully amortized.
|
| Year ended |
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|
| December 31, |
| Dollar and Percentage Change |
| ||||||||
(dollars in thousands) |
| 2013 |
| 2012 |
| Year to Year |
| ||||||
Restructuring |
| $ | 1,485 |
| $ | 3,813 |
| $ | (2,328 | ) | (61.1 | )% | |
Percentage of sales |
| 0.4 | % | 0.7 | % |
|
|
|
| ||||
During 2013, we recorded $1.5 million in personnel severance and related costs principally resulting from the transition from a direct sales presence to a distributor in one of our international sales offices and the consolidation of certain sales, business and administrative functions. During 2012, we took measures to improve profitability, including a reduction in discretionary expenses, realignment of our senior management team and consolidation of certain sales, business and administrative functions. As a result of these actions, we recorded a restructuring charge in 2012 consisting of $3.0 million in personnel severance and related costs, $0.4 million in equity compensation and related costs and $0.4 million in other severance costs resulting from a headcount reduction of 52 employees.
|
| Year ended |
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|
| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2013 |
| 2012 |
| Year to Year |
| |||||
Asset impairment |
| $ | 1,220 |
| $ | 1,335 |
| $ | (115 | ) | (8.6 | )% |
Percentage of sales |
| 0.4 | % | 0.3 | % |
|
|
|
| |||
During 2013, we recorded asset impairment charges in LED & Solar of $0.9 million related to certain lab tools carried in property, plant and equipment which we are holding for sale and $0.3 million related to another asset carried in Other assets. During 2012, we recorded an asset impairment charge related to a license agreement in our Data Storage segment.
Income Taxes
|
| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2013 |
| 2012 |
| Year to Year |
| |||||
Income tax provision (benefit) |
| $ | (28,947 | ) | $ | 11,657 |
| $ | (40,604 | ) | * |
|
Effective tax rate |
| 40.7 | % | 30.5 | % |
|
|
|
| |||
* Not Meaningful
The 2013 net benefit for income taxes included a $3.5 million provision relating to our foreign operations and $32.4 million benefit relating to our domestic operations. The 2012 provision for income taxes included $8.3 million relating to our foreign operations and $3.4 million relating to our domestic operations. Our 2013 effective tax rate is higher than the statutory rate as a result of the jurisdictional mix of earnings in our foreign locations, an income tax benefit related to the generation of current year research and development tax credits and legislation enacted in the first quarter of 2013 which extended the Federal Research and Development Credit for both the 2012 and 2013 tax years.
During the fourth quarter of 2012, we determined that we may not meet the criteria required to receive a certain incentive tax rate pursuant to a negotiated tax holiday in one foreign jurisdiction. Although we are continuing to negotiate the criteria for the incentive, for financial reporting purposes we have recorded additional tax provisions of $0.9 million and $4.0 million in 2013 and 2012, respectively, totaling $4.9 million, which represents the cumulative effect of calculating the tax provision using the incentive tax rate as compared to the foreign country’s statutory rate. If we successfully renegotiate the incentive criteria, this additional tax provision could be reversed as a future benefit in the period in which the negotiations are finalized.
During 2012, we recorded an income tax expense of $1.9 million related to discontinued operations, with no comparable amount in 2013. In addition, we recorded a current tax benefit of $2.1 million related to equity-based compensation in 2012 for which no current tax benefit was recorded in 2013.
Discontinued Operations
|
| Year ended |
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|
| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2013 |
| 2012 |
| Year to Year |
| |||||
Income (loss) from discontinued operations before income taxes |
| $ | — |
| $ | 6,269 |
| $ | (6,269 | ) | * |
|
Income tax provision (benefit) |
| — |
| 1,870 |
| (1,870 | ) | * |
| |||
Income (loss) from discontinued operations |
| $ | — |
| $ | 4,399 |
| $ | (4,399 | ) | * |
|
* Not Meaningful
Discontinued operations represent the results of the operations of our disposed Metrology segment, which was sold to Bruker on October 7, 2010, and our CIGS solar systems business, which was discontinued on September 27, 2011. The 2012 results included a $1.4 million gain ($1.1 million net of taxes) on the sale of the assets of discontinued segment held for sale and a $5.4 million gain ($4.1 million net of taxes) associated with the closing of the sale to Bruker.
Years Ended December 31, 2012 and 2011
The following table shows our Consolidated Statements of Operations, percentages of sales and comparisons between 2012 and 2011 (dollars in thousands):
|
| Year ended |
| Dollar and |
| |||||||||||
|
| December 31, |
| Percentage Change |
| |||||||||||
|
| 2012 |
| 2011 |
| Year to Year |
| |||||||||
Net sales |
| $ | 516,020 |
| 100.0 | % | $ | 979,135 |
| 100.0 | % | $ | (463,115 | ) | (47.3 | )% |
Cost of sales |
| 300,887 |
| 58.3 | % | 504,801 |
| 51.6 | % | (203,914 | ) | (40.4 | )% | |||
Gross profit |
| 215,133 |
| 41.7 | % | 474,334 |
| 48.4 | % | (259,201 | ) | (54.6 | )% | |||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Selling, general and administrative |
| 73,110 |
| 14.2 | % | 95,134 |
| 9.7 | % | (22,024 | ) | (23.2 | )% | |||
Research and development |
| 95,153 |
| 18.4 | % | 96,596 |
| 9.9 | % | (1,443 | ) | (1.5 | )% | |||
Amortization |
| 4,908 |
| 1.0 | % | 4,734 |
| 0.5 | % | 174 |
| 3.7 | % | |||
Restructuring |
| 3,813 |
| 0.7 | % | 1,288 |
| 0.1 | % | 2,525 |
| 196.0 | % | |||
Asset impairment |
| 1,335 |
| 0.3 | % | 584 |
| 0.1 | % | 751 |
| 128.6 | % | |||
Total operating expenses |
| 178,319 |
| 34.6 | % | 198,336 |
| 20.3 | % | (20,017 | ) | (10.1 | )% | |||
Other, net |
| (398 | ) | (0.1 | )% | (261 | ) | (0.0 | )% | (137 | ) | 52.5 | % | |||
Operating income (loss) |
| 37,212 |
| 7.2 | % | 276,259 |
| 28.2 | % | (239,047 | ) | (86.5 | )% | |||
Interest income (expense), net |
| 974 |
| 0.2 | % | (824 | ) | (0.1 | )% | 1,798 |
| * |
| |||
Loss on extinguishment of debt |
| — |
| 0.0 | % | (3,349 | ) | (0.3 | )% | 3,349 |
| * |
| |||
Income (loss) from continuing operations before income taxes |
| 38,186 |
| 7.4 | % | 272,086 |
| 27.8 | % | (233,900 | ) | (86.0 | )% | |||
Income tax provision (benefit) |
| 11,657 |
| 2.3 | % | 81,584 |
| 8.3 | % | (69,927 | ) | (85.7 | )% | |||
Income (loss) from continuing operations |
| 26,529 |
| 5.1 | % | 190,502 |
| 19.5 | % | (163,973 | ) | (86.1 | )% | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Income (loss) from discontinued operations before income taxes |
| 6,269 |
| 1.2 | % | (91,885 | ) | (9.4 | )% | 98,154 |
| * |
| |||
Income tax provision (benefit) |
| 1,870 |
| 0.4 | % | (29,370 | ) | (3.0 | )% | 31,240 |
| * |
| |||
Income (loss) from discontinued operations |
| 4,399 |
| 0.9 | % | (62,515 | ) | (6.4 | )% | 66,914 |
| * |
| |||
Net income (loss) |
| $ | 30,928 |
| 6.0 | % | $ | 127,987 |
| 13.1 | % | $ | (97,059 | ) | (75.8 | )% |
* Not Meaningful
Net Sales
The following is an analysis of sales by segment and by region (dollars in thousands):
|
| For the year ended |
|
|
|
|
| |||||||||
|
| December 31, |
| Dollar and Percentage |
| |||||||||||
|
|
|
| Percent of |
|
|
| Percent of |
| Change |
| |||||
|
| 2012 |
| total |
| 2011 |
| total |
| Year to Year |
| |||||
Segment Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
LED & Solar |
| $ | 363,181 |
| 70.4 | % | $ | 827,797 |
| 84.5 | % | $ | (464,616 | ) | (56.1 | )% |
Data Storage |
| 152,839 |
| 29.6 | % | 151,338 |
| 15.5 | % | 1,501 |
| 1.0 | % | |||
Total |
| $ | 516,020 |
| 100.0 | % | $ | 979,135 |
| 100.0 | % | $ | (463,115 | ) | (47.3 | )% |
Regional Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Asia Pacific |
| $ | 390,995 |
| 75.8 | % | $ | 820,883 |
| 83.8 | % | $ | (429,888 | ) | (52.4 | )% |
Americas (1) |
| 83,317 |
| 16.1 | % | 100,635 |
| 10.3 | % | (17,318 | ) | (17.2 | )% | |||
Europe, Middle East and Africa |
| 41,708 |
| 8.1 | % | 57,617 |
| 5.9 | % | (15,909 | ) | (27.6 | )% | |||
Total |
| $ | 516,020 |
| 100.0 | % | $ | 979,135 |
| 100.0 | % | $ | (463,115 | ) | (47.3 | )% |
(1)Less than 1%, of sales included within the United States caption above has been derived from other regions within the Americas.
By segment, LED & Solar sales decreased from the prior year primarily due to a 62.0% decrease in MOCVD reactor shipments as a result of industry overcapacity following over two years of strong customer investments. Data Storage sales increased slightly from the prior year, primarily due to an increase in shipments to replace equipment destroyed by flooding in customer facilities in Thailand offset by reduced demand due to our customers’ hesitancy to add manufacturing capacity during weak global economic conditions. By region, net sales decreased in APAC, primarily due to lower MOCVD sales to LED customers. Sales in the Americas and EMEA also decreased due to reduced end market demand resulting from the weak global economy. We believe that there will continue to be year-to-year variations in the geographic distribution of sales.
Orders in 2012 decreased 52.1% compared to 2011, primarily attributable to a 53.1% decrease in LED & Solar orders that were principally driven by HB LED manufacturers increasing production for television and laptop backlighting applications.a decline in MOCVD bookings due to industry overcapacity. After hitting a peak in the second quarter of 2011, our bookings slowed dramatically in the second half of 2011, which continued throughout 2012. Data Storage orders increased 57.3%decreased 48.1% as strong prior year orders from hard drive customers recovering from the continued increaseflood in our customer's capital spending for capacity and technology buys.Thailand resulted in those customers being over-invested in capacity. In addition, the industry appears to have frozen further investments as end-user hard drive demand has slowed.
Our book-to-bill ratio for 2010,2012, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.200.76 to 1 compared to 1.910.84 to 1 in 2009.2011. Our backlog as of December 31, 20102012 was $555.0$150.2 million, compared to $377.3$332.9 million as of December 31, 2009.2011. During the year ended December 31, 2010,2012, we experiencedrecorded net backlog adjustments of approximately $10.7$58.5 million. The adjustments consisted of $42.0 million consistingrelated to orders that no longer met our booking criteria, primarily due to contracts being extended past a twelve month delivery time frame, and $15.4 million of $12.5 million fororder cancellations and order adjustments ($10.2 million is related to our Solar and MBE businesses), offset by $1.8 million of adjustments related to foreign currency translation.$1.1 million. For certain sales arrangements we require a deposit for a portion of the sales price before shipment. As of December 31, 20102012 and 20092011, we had customer deposits and advanced billings of $129.2$32.7 million and $59.8$57.1 million, respectively.
Gross ProfitTable of Contents
Gross profit was $443.8Profit
|
| Year ended |
|
|
|
|
| |||||
|
| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2012 |
| 2011 |
| Year to Year |
| |||||
Gross profit - LED & Solar |
| $ | 148,383 |
| $ | 397,614 |
| $ | (249,231 | ) | (62.7 | )% |
Gross margin |
| 40.9 | % | 48.0 | % |
|
|
|
| |||
Gross profit - Data Storage |
| $ | 66,750 |
| $ | 76,720 |
| $ | (9,970 | ) | (13.0 | )% |
Gross margin |
| 43.7 | % | 50.7 | % |
|
|
|
| |||
Gross profit - Total Veeco |
| $ | 215,133 |
| $ | 474,334 |
| $ | (259,201 | ) | (54.6 | )% |
Gross margin |
| 41.7 | % | 48.4 | % |
|
|
|
| |||
Total Veeco gross margins decreased primarily due to the weak business environment. As a result, we recorded a total expense for slow moving items in 2012 of approximately $9.6 million, or 47.6% for 2010 compared to $111.2 million or 39.4% in 2009. which negatively impacted our gross margins.
LED & Solar gross margins increased to 47.4% from 40.4% in the prior year, primarily due to increases in volume (262 additional system shipments and 185 additional final acceptances received compared to prior year in our MOCVD business) and higher average selling prices coupled with lower manufacturing costs. Data Storage gross margins increased to 48.5% from 36.6% in the prior year due to increased sales volume and a favorable product mix. During 2009, Data Storage gross margins were also negatively impacted by a charge to cost of sales of $1.5 million for the write off of inventory associated with discontinued legacy product lines.
Operating Expenses
Selling, general and administrative expenses increased by $29.6 million or 47.7%, from the prior year primarily to support the business ramp in our LED & Solar segment. Selling, general and administrative expenses were 9.8% of net sales in 2010, compared with 22.0% of net sales in the prior year.
Research and development expense increased $27.9 million or 64.2%decreased from the prior year, primarily due to a significant decrease in sales volumes, lower average selling prices and fewer final acceptances partially offset by lower plant and service spending associated with reduced volumes and cost reductions in response to lower business levels. Data Storage gross margins decreased from the prior year, primarily due to a sales mix of lower margin products. We anticipate a continuing weak business environment resulting in persistent selling price pressure in our MOCVD business.
Operating Expenses
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| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2012 |
| 2011 |
| Year to Year |
| |||||
Selling, general and administrative |
| $ | 73,110 |
| $ | 95,134 |
| $ | (22,024 | ) | (23.2 | )% |
Percentage of sales |
| 14.2 | % | 9.7 | % |
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| |||
Selling, general and administrative expenses decreased primarily due to lower commissions and bonus and profit sharing expenses from the reduced level of business in each of our segments. In addition our cost control measures put into place throughout the year resulting in lower personnel-related costs, travel and entertainment expense, professional consulting fees and other discretionary expenses.
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| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2012 |
| 2011 |
| Year to Year |
| |||||
Research and development |
| $ | 95,153 |
| $ | 96,596 |
| $ | (1,443 | ) | (1.5 | )% |
Percentage of sales |
| 18.4 | % | 9.9 | % |
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We continued productto invest, at approximately the prior year levels, in the development of products in areas of high-growth for end market opportunities in our LED & Solar segment. As a percentage of net sales, research and development expense decreased to 7.6% from 15.4% in the prior year.
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| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2012 |
| 2011 |
| Year to Year |
| |||||
Amortization |
| $ | 4,908 |
| $ | 4,734 |
| $ | 174 |
| 3.7 | % |
Percentage of sales |
| 1.0 | % | 0.5 | % |
|
|
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| |||
Amortization expense decreased $0.3 million or 5.7%increased from the prior year. This decrease is mainlyyear, primarily due to additional amortization associated with intangible assets acquired as part of our acquisition of a privately held company during the second quarter of 2011, partially offset by certain intangibles beingintangible assets becoming fully amortized at the end of 2009.amortized.
Restructuring credit
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| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2012 |
| 2011 |
| Year to Year |
| |||||
Restructuring |
| $ | 3,813 |
| $ | 1,288 |
| $ | 2,525 |
| 196.0 | % |
Percentage of sales |
| 0.7 | % | 0.1 | % |
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During 2012, we took measures to improve profitability, including a reduction in discretionary expenses, realignment of our senior management team and consolidation of certain sales, business and administrative functions. As a result of these actions, we recorded a restructuring charge consisting of $3.0 million for the year ended December 31, 2010, was attributablein personnel severance and related costs, $0.4 million in equity compensation and related costs and $0.4 million in other severance costs resulting from a headcount reduction of 52 employees. During 2011, we recorded $1.3 million in personnel severance and related costs related to a changecompanywide reorganization resulting in estimatea headcount reduction of 65 employees. These reductions in workforce included executives, management, administration, sales and service personnel and manufacturing employees companywide.
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| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2012 |
| 2011 |
| Year to Year |
| |||||
Asset impairment |
| $ | 1,335 |
| $ | 584 |
| $ | 751 |
| 128.6 | % |
Percentage of sales |
| 0.3 | % | 0.1 | % |
|
|
|
| |||
During 2012, we recorded an asset impairment charge related to a license agreement in our Data Storage segment. Restructuring expense of $4.8 million for the year ended December 31, 2009, consisted primarily of personnel severance costs of $3.4 million associated with the reduction of approximately 164 employees in our workforce. Additionally,During 2011, we took a $1.4 million charge during the second quarter of 2009 for costs associated with vacating a leased facility in Camarillo, California and the related relocation of 27 employees.
During 2009, the Company recorded a $0.3 millionan asset impairment charge. The charge was for property, plant and equipment no longer being utilizedrelated to the discontinuance of a certain product line in our Data StorageLED & Solar segment.
Interest Expense,Income (Expense), Net
|
| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2012 |
| 2011 |
| Year to Year |
| |||||
Interest income (expense), net |
| $ | 974 |
| $ | (824 | ) | $ | 1,798 |
| * |
|
Percentage of sales |
| 0.2 | % | (0.1 | )% |
|
|
|
| |||
* Not Meaningful
Interest income, net
for 2012 was comprised of $2.5 million in cash interest income, partially offset by $0.2 million in cash interest expense and $1.3 million in non-cash interest expense relating to net amortization of our short-term investments. Interest expense, net for 20102011 was $6.6 million, comprised of $4.7$1.4 million in cash interest and $3.5expense, $1.9 million in non-cash interest primarilyexpense relating to net amortization of our short-term investments and $1.3 million in non-cash interest expense relating to our convertible debt, which was retired during the first half of 2011 creating a loss on extinguishment of approximately $3.3 million. Interest expense in 2011 was partially offset by $1.6$3.8 million in interest income earned on our cash and short-term investment balances. Interest expense, net for 2009 was $6.9 million, comprised of $4.9 million in cash interest and $2.8 million in non-cash interest, partially offset by $0.8 million in interest income. The non-cash interest expense is related to accounting rules that requires a portion of convertible debt to be allocated to equity in 2010 and 20092011 and accretion of debt discounts and amortization of debt premiums related to our short-term investments in 2010.2012 and 2011.
Income Taxes
|
| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2012 |
| 2011 |
| Year to Year |
| |||||
Income tax provision (benefit) |
| $ | 11,657 |
| $ | 81,584 |
| $ | (69,927 | ) | (85.7 | )% |
Effective tax rate |
| 30.5 | % | 30.0 | % |
|
|
|
| |||
The income tax provision attributable to continuing operations for the year ended December 31, 2010 was $10.5 million compared to $2.6 million or 22.9% of income before taxes in the prior year. The 20102012 provision for income taxes included $8.0$8.3 million relating to our foreign operations and $2.5$3.4 million relating to our domestic operations. The 20092011 provision for income taxes included $1.6$9.6 million relating to our foreign operations and $1.0$72.0 million relating to our domestic operations. Our 2012 effective tax rate is lower than the statutory rate as a result of the utilizationjurisdictional mix of earnings in our foreign locations and other favorable tax benefits including the Domestic Production Activities Deduction and an adjustment for the Research and Development Credit related to the filing of our domestic net
operating loss and2011 Federal income tax credit carry forwards. It is anticipatedreturn.
During the fourth quarter of 2012, we determined that our effectivewe may not meet the criteria required to receive a certain incentive tax rate pursuant to a negotiated tax holiday in one foreign jurisdiction. Although we are continuing to negotiate the criteria for 2011 will approach the U.S.incentive, for financial reporting purposes we have recorded an additional tax provision of $4.0 million which represents the cumulative effect of calculating the tax provision using the incentive tax rate as compared to the foreign country’s statutory raterate. As such amount is not expected to be paid within twelve months, we have recorded the $4.0 million as a long term taxes payable. If we successfully renegotiate the incentive criteria, this additional tax provision could be reversed as a future benefit in the period in which the successful negotiations are finalized.
During 2012, we recorded an income tax expense of $1.9 million related to discontinued operations compared to the $29.4 million income tax benefit from discontinued operations in the prior year which was reported in accordance with the intraperiod tax allocation provisions. In addition, we recorded a current tax benefit of $2.1 million related to equity-based compensation which was a credit to additional paid in capital compared to $10.4 million tax benefit recorded in the prior year.
Discontinued Operations
|
| Year ended |
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| December 31, |
| Dollar and Percentage Change |
| |||||||
(dollars in thousands) |
| 2012 |
| 2011 |
| Year to Year |
| |||||
Income (loss) from discontinued operations before income taxes |
| $ | 6,269 |
| $ | (91,885 | ) | $ | 98,154 |
| * |
|
Income tax provision (benefit) |
| 1,870 |
| (29,370 | ) | 31,240 |
| * |
| |||
Income (loss) from discontinued operations |
| $ | 4,399 |
| $ | (62,515 | ) | $ | 66,914 |
| * |
|
* Not Meaningful
Discontinued operations represent the results of the operations of our disposed Metrology segment, which was sold to Bruker on October 7, 2010, and our CIGS solar systems business, which was discontinued on September 27, 2011, reported as discontinued operations. The 20102012 results included a $1.4 million gain ($1.1 million net of taxes) on the sale of the assets of discontinued segment held for sale and a $5.4 million gain ($4.1 million net of taxes) associated with the closing of the China Assets with Bruker. The 2011 results reflect an operational loss before taxes of $0.8 million and a gain on disposal of $156.3 million before taxes.
Years Ended December 31, 2009 and 2008
The following table shows our Consolidated Statements of Operations, percentages of sales, and comparisons between 2009 and 2008 (dollars in 000s):
| | Year ended December 31, | Dollar and Percentage Change Year to Year | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2009 | 2008 | ||||||||||||||||||
Net sales | $ | 282,412 | 100.0 | % | $ | 314,935 | 100.0 | % | $ | (32,523 | ) | (10.3 | )% | |||||||
Cost of sales | 171,177 | 60.6 | 191,664 | 60.9 | (20,487 | ) | (10.7 | ) | ||||||||||||
Gross profit | 111,235 | 39.4 | 123,271 | 39.1 | (12,036 | ) | (9.8 | ) | ||||||||||||
Operating expenses (income): | ||||||||||||||||||||
Selling, general and administrative | 62,151 | 22.0 | 60,542 | 19.2 | 1,609 | 2.7 | ||||||||||||||
Research and development | 43,483 | 15.4 | 39,608 | 12.6 | 3,875 | 9.8 | ||||||||||||||
Amortization | 5,168 | 1.8 | 8,864 | 2.8 | (3,696 | ) | (41.7 | ) | ||||||||||||
Restructuring | 4,837 | 1.7 | 9,424 | 3.0 | (4,587 | ) | (48.7 | ) | ||||||||||||
Asset impairment | 304 | 0.1 | 51,387 | 16.3 | (51,083 | ) | (99.4 | ) | ||||||||||||
Other, net | 24 | — | (414 | ) | (0.1 | ) | 438 | * | ||||||||||||
Total operating expenses | 115,967 | 41.1 | 169,411 | 53.8 | (53,444 | ) | (31.5 | ) | ||||||||||||
Operating loss | (4,732 | ) | (1.7 | ) | (46,140 | ) | (14.7 | ) | 41,408 | (89.7 | ) | |||||||||
Interest expense, net | 6,850 | 2.4 | 6,729 | 2.1 | 121 | 1.8 | ||||||||||||||
Gain on extinguishment of debt | — | — | (3,758 | ) | (1.2 | ) | 3,758 | (100.0 | ) | |||||||||||
Loss from continuing operations before income taxes | (11,582 | ) | (4.1 | ) | (49,111 | ) | (15.6 | ) | 37,529 | (76.4 | ) | |||||||||
Income tax provision | 2,647 | 0.9 | 1,722 | 0.5 | 925 | 53.7 | ||||||||||||||
Loss from continuing operations | (14,229 | ) | (5.0 | ) | (50,833 | ) | (16.1 | ) | 36,604 | (72.0 | ) | |||||||||
Discontinued operations: | ||||||||||||||||||||
Loss from discontinued operations, before income taxes | (2,703 | ) | (1.0 | ) | (24,418 | ) | (7.8 | ) | 21,715 | (88.9 | ) | |||||||||
Income tax (benefit) provision | (1,300 | ) | (0.5 | ) | 170 | 0.1 | (1,470 | ) | * | |||||||||||
Loss from discontinued operations | (1,403 | ) | (0.5 | ) | (24,588 | ) | (7.8 | ) | 23,185 | (94.3 | ) | |||||||||
Net loss | (15,632 | ) | (5.5 | ) | (75,421 | ) | (23.9 | ) | 59,789 | (79.3 | ) | |||||||||
Net loss attributable to noncontrolling interest | (65 | ) | — | (230 | ) | (0.1 | ) | 165 | (71.7 | ) | ||||||||||
Net loss attributable to Veeco | $ | (15,567 | ) | (5.5 | )% | $ | (75,191 | ) | (23.9 | )% | $ | 59,624 | (79.3 | )% | ||||||
*Not Meaningful
Net Sales and Orders
Net sales of $282.4 million for the year ended December 31, 2009, were down 10.3% compared to 2008. The following is an analysis of sales and orders by segment and by region (dollars in 000s):
| | Sales | Orders | | | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | Dollar and Percentage Change | Year ended December 31, | Dollar and Percentage Change | Book to Bill Ratio | ||||||||||||||||||||||||||||
| | 2009 | 2008 | Year to Year | 2009 | 2008 | Year to Year | 2009 | 2008 | |||||||||||||||||||||||||
Segment Analysis | |||||||||||||||||||||||||||||||||
LED & Solar | $ | 205,153 | $ | 165,812 | $ | 39,341 | 23.7 | % | $ | 440,784 | $ | 160,162 | $ | 280,622 | 175.2 | % | 2.15 | 0.97 | |||||||||||||||
Data Storage | 77,259 | 149,123 | (71,864 | ) | (48.2 | ) | 97,497 | 138,653 | (41,156 | ) | (29.7 | ) | 1.26 | 0.93 | |||||||||||||||||||
Total | $ | 282,412 | $ | 314,935 | $ | (32,523 | ) | (10.3 | )% | $ | 538,281 | $ | 298,815 | $ | 239,466 | 80.1 | % | 1.91 | 0.95 | ||||||||||||||
Regional Analysis | |||||||||||||||||||||||||||||||||
Americas | $ | 60,730 | $ | 130,573 | $ | (69,843 | ) | (53.5 | )% | $ | 78,196 | $ | 108,172 | $ | (29,976 | ) | (27.7 | )% | 1.29 | 0.83 | |||||||||||||
EMEA | 50,088 | 57,567 | (7,479 | ) | (13.0 | ) | 47,186 | 51,731 | (4,545 | ) | (8.8 | ) | 0.94 | 0.90 | |||||||||||||||||||
Korea | 99,132 | 8,887 | 90,245 | 1,015.5 | 236,114 | 15,864 | 220,250 | 1,388.4 | 2.38 | 1.79 | |||||||||||||||||||||||
China | 31,114 | 19,575 | 11,539 | 58.9 | 90,724 | 32,202 | 58,522 | 181.7 | 2.92 | 1.65 | |||||||||||||||||||||||
Taiwan | 13,882 | 39,124 | (25,242 | ) | (64.5 | ) | 34,642 | 30,999 | 3,643 | 11.8 | 2.50 | 0.79 | |||||||||||||||||||||
Other Asia Pacific | 27,466 | 59,209 | (31,743 | ) | (53.6 | ) | 51,419 | 59,847 | (8,428 | ) | (14.1 | ) | 1.87 | 1.01 | |||||||||||||||||||
Asia Pacific | 171,594 | 126,795 | 44,799 | 35.3 | 412,899 | 138,912 | 273,987 | 197.2 | 2.41 | 1.10 | |||||||||||||||||||||||
Total | $ | 282,412 | $ | 314,935 | $ | (32,523 | ) | (10.3 | )% | $ | 538,281 | $ | 298,815 | $ | 239,466 | 80.1 | % | 1.91 | 0.95 | ||||||||||||||
By segment, LED & Solar sales increased 23.7% due to an increase in end user demand for HB LED backlighting applications, higher average selling prices and strong customer acceptance of Veeco's newest generation systems. Offsetting this increase, Data Storage sales were down 48.2%, primarily as a result of a slowdown in capital spending by data storage customers. LED & Solar sales represented 72.6% of total sales for the year ended December 31, 2009, up from 52.6% in the prior year. Data Storage sales accounted for 27.4% of net sales, down from 47.4% in the prior year. By region, net sales increased by 35.3% in Asia Pacific, primarily due to MOCVD sales to HB LED customers, while sales in the Americas and EMEA declined 53.5% and 13.0%, respectively.
Orders in 2009 increased 80.1% compared to 2008, primarily attributable to a 175.2% increase in LED & Solar orders that were principally driven by HB LED manufacturers increasing production for television and laptop backlighting applications and demand for CIGS deposition systems and components. Data Storage orders declined 29.7% from the continued slow down in our customers capital spending.
Our book-to-bill ratio for 2009 was 1.91 to 1 compared to 0.95 to 1 in 2008. Our backlog as of December 31, 2009 was $377.3 million, compared to $125.6 million as of December 31, 2008. During the year ended December 31, 2009, we experienced net backlog adjustments of approximately $4.1 million, consisting of $3.2 million for order cancellations, primarily in the first half of the year, and $0.9 million of adjustments related to foreign currency translation. For certain sales arrangements we require a deposit for a portion of the sales price before shipment. As of December 31, 2009 and 2008 we had deposits and advanced billings of $59.8 million and $16.1 million, respectively.
Gross Profit
Gross profit increased to $111.2 million or 39.4% in 2009 compared to $123.3 million or 39.1% in 2008. Despite the overall $32.5 million decrease in sales, gross margin remained flat, primarily due to the favorable impact of significant cost reductions from a reduced workforce, lower facilities costs associated with closing and consolidating facilities and the outsourcing of certain Data Storage product manufacturing to Asia. LED & Solar gross margins increased from 38.3% in the prior year to 40.4%,
primarily due to the impact of our lower fixed cost structure and a 23.7% increase in sales volume as well as favorable pricing and higher margins on new MOCVD products. Data Storage gross margins decreased from 40.2% in the prior year to 36.6% mainly due to decreased sales volume partially offset by reduced costs due to our expense reduction plans compared to the prior year. Data Storage gross margins were also negatively impacted by a charge to cost of sales of $1.5 million during 2009 for the write off of inventory associated with discontinued legacy product lines.
Operating Expenses
Selling, general and administrative expenses increased by $1.6 million or 2.7%, from the prior year primarily due to the ramp-up in our MOCVD business in the second half of 2009. Selling, general and administrative expenses were 22.0% of net sales in 2009, compared with 19.2% of net sales in the prior year.
Research and development expense increased $3.9 million or 9.8% from the prior year, primarily due to investments in areas that we believe are higher-growth end market opportunities, particularly in our LED & Solar segment. As a percentage of net sales, research and development expense increased to 15.4% from 12.6% in the prior year.
Amortization expense decreased $3.7 million or 41.7% from the prior year. This decrease is mainly due to certain intangibles in LED & Solar being fully amortized at the end of 2008 as well as the write-off of purchased technology in Data Storage in connection with the asset impairment charges recorded during the fourth quarter of 2008.
Restructuring expense of $4.8 million for the year ended December 31, 2009, consisted primarily of personnel severance costs of $3.4 million associated with the reduction of approximately 164 employees in our workforce. Additionally, we took a $1.4 million charge during 2009 for costs associated with vacating a leased facility in Camarillo, California, during the second quarter and the related relocation of 27 employees.
During the second quarter of 2009, the Company recorded a $0.3 million asset impairment charge. The charge was for property, plant and equipment no longer being utilized in our Data Storage reporting unit. During 2008, the Company recorded a $51.4 million asset impairment charge, of which $51.1 million was recorded during the fourth quarter and $0.3 million was recorded during the first quarter. The fourth quarter charge consisted of $30.4 million related to goodwill, $19.6the Metrology segment and an operational loss before taxes of $90.3 million related to intangible assets and $1.1 million in property, plant and equipment. The first quarter charge consisted of $0.3 million associated with property and equipment abandoned as part of the consolidation of our corporate headquarters into our Plainview facility.
Interest Expense, netCIGS solar systems business.
Interest expense, net for 2009 was $6.9 million, comprised of $4.9 million in cash interest and $2.8 million in non-cash interest relating to our convertible debt, partially offset by $0.8 million in interest income earned on our cash and short-term investment balances. Interest expense, net for 2008 was $6.7 million, comprised of $6.4 million in cash interest and $2.9 million in non-cash interest, partially offset by $2.6 million in interest income. The non-cash interest expense in both years is related to accounting rules that requires a portion of convertible debt to be allocated to equity. The decrease of $1.5 million in cash interest expense from the prior year was primarily due to the repayment of $25.3 million of our convertible notes in the fourth quarter of 2008. Interest income decreased by $1.7 million due principally to the lower interest rate yields on cash balances invested during 2009 compared to the prior year.
Gain on Extinguishment of Debt
During the fourth quarter of 2008, we made two repurchases of $12.2 million in aggregate principal amount of our convertible subordinated notes for $7.2 million in cash, of which $7.1 million related to principal and $0.1 million related to accrued interest, reducing the amount outstanding from $117.8 million to $105.6 million. As a result of these repurchases, we recorded a net gain from the extinguishment of debt of approximately $3.8 million. There were no repurchases during 2009.
Income Taxes
The income tax provision attributable to continuing operations for the year ended December 31, 2009 was $2.6 million compared to $1.7 million in the prior year. The 2009 provision for income taxes included $1.6 million relating to our foreign operations and $1.0 million relating to our domestic operations. Due to significant domestic net operating loss carry forwards, which are fully reserved by a valuation allowance, our domestic operations are not expected to incur significant federal income taxes until such time as the net operating losses are utilized.
Discontinued Operations
Discontinued operations represent the results of the operations of our disposed Metrology segment, which was sold to Bruker on October 7, 2010.
Liquidity and Capital Resources
Historically, our principal capital requirements have included the funding
As of acquisitions, capital expendituresDecember 31, 2013 and the repayment of debt. We traditionally have generated2012, we had cash from operations and debt and stock issuances. Our ability to generate sufficient cash flows from operations is dependent on the continued demand for our products and services.
Cash and cash equivalents asof $210.8 million and $384.6 million, respectively, of which $150.6 million and $128.0 million, respectively, were held outside the United States. Liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some of which arise from fluctuations related to global economics and markets. Cash balances are generated and held in many locations throughout the world. It is our current intent to permanently reinvest our funds from Singapore, China, Taiwan, South Korea, and Malaysia outside of the United States and our current plans do not demonstrate a need to repatriate them to fund our United States operations. As of December 31, 2010 was $245.1 million. This amount represents an increase2013, we had $115.0 million in cash held offshore on which we would have to pay significant United States income taxes to repatriate in the event that we need the funds for our operations in the United
Table of $96.6 million fromContents
States. Additionally, local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances. We currently do not expect such regulations and restrictions to impact our ability to make acquisitions, pay vendors, or conduct operations throughout the global organization. As of December 31, 2009. We2013 and 2012, in addition to our cash balances, we also had short-term investments in the United States of $281.5 million and $192.2 million, respectively, and restricted cash in Germany of $394.2$2.7 million and $76.1$2.0 million, respectively,respectively. We believe that our projected cash flow from operations combined with our cash and short term investments will be sufficient to meet our projected working capital and other cash flow requirements for the next twelve months, as of December 31, 2010. well as our contractual obligations.
A summary of the current year cash flow activity is as follows (in thousands):
| | Year ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
Net income (loss) | $ | 361,760 | $ | (15,632 | ) | ||
Net cash provided by operating activities | $ | 194,214 | $ | 59,038 | |||
Net cash used in investing activities | (121,621 | ) | (154,765 | ) | |||
Net cash provided by financing activities | 25,505 | 141,869 | |||||
Effect of exchange rates on cash and cash equivalents | (1,466 | ) | (163 | ) | |||
Net increase in cash and cash equivalents | 96,632 | 45,979 | |||||
Cash and cash equivalents at beginning of year | 148,500 | 102,521 | |||||
Cash and cash equivalents at end of year | $ | 245,132 | $ | 148,500 | |||
|
| Year ended December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Net income (loss) |
| $ | (42,263 | ) | $ | 30,928 |
|
Net cash provided by (used in) operating activities |
| 727 |
| 111,963 |
| ||
Net cash provided by (used in) investing activities |
| (168,056 | ) | 48,321 |
| ||
Net cash provided by (used in) financing activities |
| (5,766 | ) | 5,555 |
| ||
Effect of exchange rate changes on cash and cash equivalents |
| (663 | ) | 796 |
| ||
Net increase (decrease) in cash and cash equivalents |
| (173,758 | ) | 166,635 |
| ||
Cash and cash equivalents as of beginning of year |
| 384,557 |
| 217,922 |
| ||
Cash and cash equivalents as of end of year |
| $ | 210,799 |
| $ | 384,557 |
|
During 2013, we continued to generate cash from operations despite the $184.3 million decrease in revenues. Cash provided by operations during the year ended December 31, 2010 was $194.2declined primarily due to a $73.2 million compared to $59.0 million during the year ended December 31, 2009.reduction in net income, generating a net loss for 2013. The $194.2 million cash provided by operations in 2010net loss for 2013 included adjustments to the $361.8$22.5 million of net income for non-cash items, which reduced the cash provided by net income by $168.3 million. The adjustments consisted of $12.9noncash items. A $38.8 million of depreciationdecrease in accounts receivable and amortization, $9.6 million of non-cash equity-based compensation expense, $3.1 million of amortization of debt discount, $(25.1) million of deferred income taxes, $(23.3) million of excess tax benefits from stock option exercises, $(156.3) million of gain on disposal of our
Metrology segment and $10.0 million of discontinued operations. Net cash provided by operations was favorably impacted by a net $0.7 million of changes in operating assets and liabilities, which included an $83.2$7.5 million increase in accounts receivable,payable contributed most significantly to our cash provided from operations. This was partially offset by a $49.5$17.3 million reduction of accrued expenses, customer deposits and deferred revenue and a $12.6 million increase in inventories, dueincome taxes receivable, primarily resulting from a net operating loss carryback claim.
Net cash from investing activities in 2013 declined by $216.4 million compared to the significantprior year. The cash used in investing activities was primarily driven by our acquisition of Synos, which consumed $71.5 million and the $89.3 million increase in ordersshort-term investments. This was partially offset by a $15.8 million reduction in capital expenditures from the prior year.
Net cash from financing activities in 2013 declined by $11.3 million compared to the prior year. This change results primarily from a $5.0 million payment of a contingent consideration milestone made in accordance with the terms of our agreement to purchase Synos and a change of $6.3 million related to option and restricted stock activity, including tax impacts.
On October 1, 2013, we acquired Synos for an initial purchase price of $71.5 million. Synos develops atomic layer deposition technology. As a result of this purchase, we acquired $99.3 million of definite-lived intangibles, of which $78.2 million is related to core technology, and $35.5 million of goodwill. The financial results of this acquisition are included in our LED & Solar segment comparedas of the acquisition date. As of October 1, 2013, we had a contingent obligation to 2009, a $23.3pay up to an additional $115.0 million increase in supplier deposits and a $5.5 million increase in discontinued operations, partially offset by an $85.5 million increase in accrued expenses, principally resulting from customer deposits associated primarily with the significant increase in orders in our LED & Solar segment and a $78.9 million increase in income taxes payable. Cash provided by operations during the year ended December 31, 2009 was $59.0 million and included adjustments to the $15.6 million net loss for non-cash items, which primarily consisted of $13.9if certain conditions are met. The first $5.0 million of depreciationthe $115.0 million was earned and amortization, $7.5 million of non-cash stock-based compensation expense, $2.8 million of amortization of debt discount, a $1.5 million non-cash inventory write-off and $8.8 million of discontinued operations. Net cash provided by operationspaid in 2009 was favorably impacted by a net $40.1 million of changes in operating assets and liabilities.
Cash used in investing activities of $121.6 million during the year ended December 31, 2010, resulted primarily from $506.1 million of purchases of short-term investments, $10.7 million of capital expenditures, $76.1 million of transfers to restricted cash and $0.5 million of discontinued operations, partially offset by proceeds of $33.0 million from the sale of short-term investments, $225.2 million net proceeds from the disposal of our Metrology segment and $213.6 million from the maturity of CDAR's. Cash used in investing activities of $154.8 million for the year ended December 31, 2009, resulted primarily from $135.0 million of purchases of short-term investments, $7.5 million of capital expenditures, $0.9 million of discontinued operations, $9.8 million of earn-out payments to the former owners of businesses acquired and $2.4 million for certain acquisitions, partially offset by $0.8 million of proceeds from the sale of property, plant and equipment.
Cash provided by financing activities of $25.5 million during the year ended December 31, 2010, consisted primarily of $45.2 million of cash proceeds from stock option exercises and $23.3 million excess tax benefits from stock options exercises, partially offset by $4.6 million of restricted stock tax withholdings, $38.1 million of purchases of treasury stock and $0.2 million of repayments of long-term debt. Cash provided by financing activities of $141.9 million during the year ended December 31, 2009, consisted primarily of $130.1 million in cash proceeds from the issuance of common stock through a secondary public offering and $12.6 million from stock option exercises partially offset by $0.6 million of restricted stock tax withholdings and $0.2 million of repayments of long-term debt.
As of December 31, 2010 we had notes of $105.6 million principal amount outstanding. The notes accrue interest at 4.125% per annum and mature on April 15, 2012. The notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, since we have the ability and the intent to settle the principal amount of the notes in cash. Under the terms of the notes, we may pay the principal amount of converted notes in cash or in shares of common stock. We intend to pay such amounts in cash.
The notes are initially convertible into 36.7277 shares of common stock per $1,000 principal amount of notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for our common stock on April 16, 2007). On or after April 20, 2011, we may redeem the notes, in whole or in part, for cash at 100% of the principal amount of the notes to be redeemed and the conversion premium in shares of our common stock plus accrued and unpaid interest to, but not including, the redemption date. Holders may convert the notes at any time during the period beginning on January 15, 2012 through the close of business on the second day prior to April 15, 2012 and earlier upon the occurrence of certain events including our common stock trading at prices equal to or above 130% of the conversion price for at least 20 trading days during the final 30 trading days of the immediately preceding fiscal quarter. At the end of the fourth quarter of 2010, our common stock was trading at prices equal2013. Up to or above 130%$35.0 million of the conversion price for the specified period and, as a result, the convertible notes are convertible during the first quarter of 2011. If the
convertible notes are converted, we have the ability and intent to pay the principal balance of notes tendered for conversion in cash. We will re-perform this test each quarter up to and including the fourth quarter of 2011. Accordingly, the balance of the convertible notes at December 31, 2010 has been classified as current in our Consolidated Balance Sheet. On February 14, 2011, at the option of the holder, $7.5 million of notes were tendered for conversion at a price of $45.95 per share in a net share settlement. As a result, we paid the principal amount of $7.5 million in cash and issued 111,318 shares of our common stock. Accordingly,remaining contingent obligation could be payable in the first quarter of 20112014, if the conditions related to earning the payments are met. The remaining $75.0 million contingent consideration could be payable in 2015 if the conditions related to earning the payments are met. As part of the purchase price allocation, we will takerecorded a charge forliability of $33.5 million related to the related unamortized debt discount totaling $0.3 million. We pay interest on these notes on April 15 and October 15fair value of each year. The notes are unsecured and are effectively subordinated to allthe contingent consideration.
As of December 31, 2010, we had $76.1 million of restricted cash consisting of $22.9 million that relates to the proceeds received from the sale of our Metrology segment. This cash is held in escrow and is restricted from use for one year from the closing date of the transaction to secure any losses arising out of breaches of representations, warranties and covenants we made in the stock purchase agreement and related documents. Additionally, we also had restricted cash consisting of $53.2 million which serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations. This cash is held in custody by the issuing bank, and is restricted as to withdrawal or use while the related bank guarantees are outstanding.
As of December 31, 2010,2013, our contractual cash obligations and commitments are as follows (in thousands)(in thousands):
|
| Payments due by period |
| |||||||||||||
|
|
|
| Less than |
|
|
|
|
| More than 5 |
| |||||
|
| Total |
| 1 year |
| 1-3 years |
| 3-5 years |
| years |
| |||||
Long-term debt (1) |
| $ | 2,137 |
| $ | 290 |
| $ | 654 |
| $ | 766 |
| $ | 427 |
|
Interest on debt (1) |
| 553 |
| 159 |
| 244 |
| 132 |
| 18 |
| |||||
Operating leases (2) |
| 8,082 |
| 3,076 |
| 3,418 |
| 1,588 |
| — |
| |||||
Letters of credit and bank guarantees (3) |
| 6,493 |
| 6,493 |
| — |
| — |
| — |
| |||||
Purchase commitments (4) |
| 60,290 |
| 60,290 |
| — |
| — |
| — |
| |||||
|
| $ | 77,555 |
| $ | 70,308 |
| $ | 4,316 |
| $ | 2,486 |
| $ | 445 |
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| | Payments due by period | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Cash Obligations and Commitments | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||
Long-term debt(1) | $ | 108,457 | $ | 105,803 | $ | 516 | $ | 604 | $ | 1,534 | ||||||
Interest on debt(1) | 6,976 | 4,575 | 1,833 | 298 | 270 | |||||||||||
Operating leases(2) | 9,464 | 3,915 | 4,083 | 1,236 | 230 | |||||||||||
Letters of credit and bank guarantees(3) | 136,315 | 136,315 | — | — | — | |||||||||||
Purchase commitments(4) | 200,296 | 200,296 | — | — | — | |||||||||||
| $ | 461,508 | $ | 450,904 | $ | 6,432 | $ | 2,138 | $ | 2,034 | |||||||
- (1)
- Long-term debt obligations consist of
repayment of our convertible subordinated notes and related interest, as well asmortgage and interest payments for our St. Paul, MN facility. (2)
- In accordance with relevant accounting guidance, we account for our office leases as operating leases with expiration dates ranging from
20102014 through2017.2018, excluding renewal options. There are future minimum annual rental payments required under the leases. Leasehold improvements made at the beginning of or during a lease are amortized over the shorter of the remaining lease term or the estimated useful lives of the assets. - This also includes other operating leases we hold, such as cars, apartments and office equipment. There are no material sublease payments receivable associated with the leases.
(3)
- Issued by a bank on our behalf as needed. We had letters of credit outstanding of
$0.2$0.6 million and bank guarantees outstanding of$135.8$5.9 million, of which,$83.2$2.7 millioncan be drawn against lines of credit in our foreign subsidiaries and $52.6 million thatis collateralized against cash that is restricted from use. - As of December 31, 2013, we had $40.4 million of unused lines of credit available. The line of credit is available to draw upon to cover performance bonds as required by our customers.
(4)
- Purchase commitments are primarily for inventory used in manufacturing our products. It has been our practice not to enter into purchase commitments extending beyond one year.
We have $9.4 million of offsetting supplier deposits against these purchase commitments as of December 31, 2013.
We believe that existing cash balances and short-term investments together with cash generated from operations will be sufficient to meet our projected working capital and other cash flow requirements for the next twelve months, as well as our contractual obligations, detailed in the above table. We believe we will be able to meet our obligation to repay the $105.6 million subordinated notes that mature on April 15, 2012 with available cash and short-term investments or, if necessary, through a combination of conversion of the notes outstanding, cash generated from operations and other means.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources other than operating leases, letters of credit and bank guarantees, and purchase commitments disclosed in the preceding "Contractual“Contractual Cash Obligations and Commitments"Commitments” table.
Application of Critical Accounting Policies
General: Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management continually monitors and evaluates its estimates and judgments, including those related to bad debts, inventories, intangible and other long-lived assets, income taxes, warranty obligations, restructuring costs, and contingent liabilities, including potential litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider certain accounting policies related to revenue recognition, short-term investments, the valuation of inventories, the impairment of goodwill and indefinite-lived intangible assets, the impairment of long-lived assets, accounting for acquisitions, fair value measurements, warranty costs, income taxes and equity-based compensation to be critical policies due to the estimation processes involved in each. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to discontinued operations.
Revenue Recognition: We recognize revenue basedwhen 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. A significant portion of our revenue is derived from contractual arrangements with customers that have multiple elements, such as systems, upgrades, components, spare parts, maintenance and service plans. For sales arrangements that contain multiple elements, we split the arrangement into separate units of accounting if the individually delivered elements have value to the customer on currenta standalone basis. We also evaluate whether multiple transactions with the same customer or related party should be considered part of a multiple element arrangement, whereby we assess, among other factors, 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 each other. When we have separate units of accounting, guidance provided by the Securities and Exchange Commission ("SEC") and the Financial Accounting Standards Board ("FASB"). Ourwe allocate revenue transactions include sales of products under multiple-element arrangements. Revenue under these arrangements is allocated to each element based upon its estimated fair market value.on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or our best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. We utilize BESP for the majority of the elements in our arrangements. The accounting guidance for selling price hierarchy did not include BESP for arrangements entered into prior to January 1, 2011, and as such we recognized revenue for those arrangements as described below.
We consider a broad array ofmany facts and circumstances when evaluating each of our sales arrangements in determining when to recognizedetermine the timing of revenue recognition, including specific terms of the purchase order, contractual obligations, to the customer, the complexity of the customer's post-delivery acceptance provisions, customercustomer’s creditworthiness and the installation process. Management also considers the party responsible for installation, whether there are process specification requirements which need to be demonstrated before final sign off and payment, whether Veeco can replicate the field testing conditions and procedures in our factory and our past experience with demonstrating and installing a particular system. Sales arrangements are reviewed on a case-by-case basis; however, the Company's revenue recognition protocol for established systems is as described below.
System revenue is generally recognized upon shipment or delivery provided title and risk of loss has passed to the customer, evidence of an arrangement exists, prices are contractually fixed or determinable, collectability is reasonably assured and there are no material uncertainties regarding customer acceptance. Revenue from installation services is recognized at the time acceptance is
received from the customer. If the arrangement does not meet all the above criteria, the entire amountnature of the customer’s post-delivery acceptance provisions. Our system sales arrangement is deferred until the criteria have been met or all elements have been delivered to the customer or been completed.
For those transactions on which we recognize systems revenue, either at the time of shipment or delivery, our sales and contractual arrangements, with customers do not contain provisions for right of return or forfeiture, refund or other purchase price concessions. In the rare instances where such provisions are included, the Company defers all revenue until customer acceptance is achieved. In cases where products are sold with a retention of 10% to 20%, which is typically payable by the customer when installation andincluding certain upgrades, generally include field acceptance provisions are completed,that may include functional or mechanical test procedures. For the customer has the right to withhold this payment until such provisions have been achieved. We defer the greatermajority of the retention amount or the fair value of the installation on systems that we recognize revenue at the time of shipment or delivery.
For new products, new applications of existing products or for products with substantive customer acceptance provisions where performance cannot be fully assessed prior to meeting agreed upon specifications at the customer site, revenue is deferred as deferred profit in the accompanying Consolidated Balance Sheets and fully recognized upon completion of installation and receipt of final customer acceptance.
Our systems are principally sold to manufacturers in the HB-LED, the data storage and solar industries. Salesour arrangements, for these systems generally include customer acceptance criteria based upon Veeco and/or customer specifications. Prior to shipment a customer source inspection of the system is performed in our facility or test data is sent to the customer documenting that the system is functioning withinto the agreed upon specifications. Suchspecifications prior to delivery. Historically, such source inspection or test data replicates the field acceptance testingprovisions that will be performed at the customer'scustomer’s site prior to final acceptance of the system. CustomerAs such, we objectively demonstrate that the criteria specified in the contractual acceptance provisions include reassemblyare achieved prior to delivery and, installationtherefore, we recognize revenue upon 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 we 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.
Our system sales arrangements, including certain upgrades, generally do not contain provisions for right of return or forfeiture, refund, or other purchase price concessions. In the rare instances where such provisions are included, we defer all revenue until such rights expire. In many cases our products are sold with a billing retention, typically 10% of the system atsales price (the “retention amount”), which is typically payable by the customer site, which includes performing functionalwhen field acceptance provisions are completed. The amount of revenue recognized upon delivery of a system or mechanical test procedures (i.e. hardware checks, leak testing, gas flow monitoring and quality control checksupgrade, 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 basic featuresarrangement consideration allocated to the delivered elements, if such sale is part of a multiple-element arrangement.
For transactions entered into prior to January 1, 2011, under the accounting rules for multiple-element arrangements in place at that time, we deferred the greater of the product.) Additionally, a material demonstration process may be performed to validateretention amount or the functionalityrelative fair value of the product. Upon meetingundelivered elements based on VSOE. When we could not establish VSOE or TPE for all undelivered elements of an arrangement, revenue on the agreed upon specificationsentire arrangement was deferred until the customer approves final acceptanceearlier of the product.point when we did have VSOE for all undelivered elements or the delivery of all elements of the arrangement.
Veeco
Our sales arrangements, including certain upgrades, generally is required to install these products and demonstrate compliance with acceptance tests at the customer's facility. Such installations typically are not considered complex and theinclude installation. The installation process is not deemed essential to the functionality of the equipment becausesince it is not complex; that is, it does not involverequire significant changes to the features or capabilities of the equipment or involve building complexelaborate interfaces or connections.connections subsequent to factory acceptance. We have a demonstrated history of consistently completing such installations in a timely consistent manner and can reliably estimate the costs of such. In such cases, the test environment at our facilities prior to shipment replicates the customer's environment. While there are others in the industry with sufficient knowledge about the installation process for our systems as a practical matter, mostactivities. Most customers engage the Companyus to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, we deem the installation of our systems to be inconsequential or perfunctory relative to the system as a whole, and as a result, do not consider such services to be a separate element of the arrangement. As such, we accrue the cost of the installation at the time of revenue recognition for the system.
In Japan, where our contractual terms with customers generally specify title and risk and rewards of loss and title transfersownership transfer upon customer acceptance, revenue is recognized and the customer is billed upon the receipt of written customer acceptance. During the fourth quarter of fiscal 2013, we began using a distributor for almost all of our product and service sales to customers in Japan. Title and risk and rewards of ownership of our system sales still transfer to our end-customers upon their acceptance. As such, there is no impact to our policy of recognizing revenue upon receipt of written acceptance from the end customer.
Revenue related to maintenance and service contracts is recognized ratably over the applicable contract term. Component and spare part revenue isare recognized at the time of shipment or delivery in accordance with the terms of the applicable sales arrangement.
Short-Term Investments: We determine the appropriate balance sheet classification of our investments at the time of purchase and evaluate the classification at each balance sheet date. As part of our cash management program, we maintain a portfolio of marketable securities which are classified as available-for-sale. These securities include FDIC insured corporate bonds, treasury bills, commercial
paperU.S. treasuries and CDARSgovernment agency securities with maturities of greater than three months when purchased in principal amounts that, when aggregated with interest to accrue over the term, will not exceed FDIC limits.months. Securities classified as available-for-sale are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss) and reported in equity. Net realized gains and losses are included in net income (loss) attributable to Veeco..
Inventory Valuation: Inventories are stated at the lower of cost (principally first-in, first-out method) or market. On a quarterly basis, management assesses the valuation and recoverability of all inventories, classified as materials (which include raw materials, spare parts and service inventory), work-in-process and finished goods.
Materials inventory is used primarily to support the installed tool base and spare parts sales and is reviewed for excess quantities or obsolescence by comparing on-hand balances to historical usage, and adjusted for current economic conditions and other qualitative factors. Historically, the variability of such estimates has been impacted by customer demand and tool utilization rates.
The work-in-process and finished goods inventory is principally used to support system sales and is reviewed for recoverability by considering whether on hand inventory would be utilized to fulfill the related backlog. As we typically receive deposits for our orders, the variability of this estimate is reduced as customers have a vested interest in the orders they place with us. Recoverability of such inventory is evaluated by monitoring customer demand, current sales trends and product gross margins. Management also considers qualitative factors such as future product demand based on market outlook, which is based principally upon production requirements resulting from customer purchase orders received with a customer-confirmed shipment date within the next twelve months. Historically, the variability of these estimates of future product demand has been impacted by backlog cancellations or modifications resulting from unanticipated changes in technology or customer demand.
Following identification of potential excess or obsolete inventory, management evaluates the need to record adjustments for impairment ofwrite down inventory on a quarterly basis. Our policy is to assess the valuation of all inventories, including raw materials, work-in-process, finished goods, and spare parts and other service inventory. Obsolete or slow-moving inventory, based upon historical usage, or inventory in excess of management's estimated usage for the next 12 month's requirements is written-downbalances to its estimated market value, if less than its cost. Inherent in the estimates of market value are management'smanagement’s estimates related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses, and ultimate realization of potential excess inventory. Unanticipated changes in demand for our products may require a write down of inventory that could materially affect our operating results.
Goodwill and Indefinite-Lived Intangible Asset Impairment: The Company does not amortize goodwill or intangible assets with indefinite useful lives, but instead testsGoodwill represents the balances in these asset accounts for impairment at least annually at the reporting unit level. Our policy is to perform this annual impairment test in the fourth quarter of each fiscal year or more frequently if impairment indicators arise. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, and a material decrease in the fair value of some or allexcess of the assets.
Pursuant to relevant accounting pronouncements we are required to determine if it is appropriate to use the operating segment as defined under accounting guidance as the reporting unit or one level below the operating segment, depending on whether certain criteria are met. We have identified two reporting units that are required to be reviewed for impairment. The reporting units are LED & Solar and Data Storage. In identifying the reporting units management considered the economic characteristics of operating segments including the products and services provided, production processes, types or classes of customer and product distribution.
We perform this impairment test by first comparing the fair value of our reporting units to their respective carrying amount. When determining the estimated fair value of a reporting unit, we utilize a discounted future cash flow approach since reported quoted market prices are not available for our reporting units. Developing the estimate of the discounted future cash flow requires significant judgment and projections of future financial performance. The key assumptions used in developing the discounted future cash flows are the projection of future revenues and expenses, working capital requirements, residual growth rates and the weighted average cost of capital. In developing our financial projections, we consider historical data, current internal estimates and market growth trends. Changes to any of these assumptions could materially changean acquisition over the fair value of the reporting unit. We reconcile the aggregate fair value of our reporting units to the Company's adjusted market capitalization as a supporting calculation. The adjusted market capitalization is calculated by multiplying the average share price of our 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.
If the carrying value of the reporting units exceed the fair value we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any.
Definite-Lived Intangible and Long-Lived Assets: Intangiblenet assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, software licenses and deferred financing costs. Purchased technology consists of the core proprietary manufacturing
technologies associated with the products and offerings obtained through acquisition and are initially recorded at fair value. Customer-related intangible assets, patents, trademarks and covenants not-to-compete are initially recorded at fair value and software licenses and deferred financing costs are initially recorded at cost. Intangible assets with definitive useful lives are amortized using the straight-line method over their estimated useful lives for periods ranging from 2 years to 17 years.
Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Long-lived assets, such as property, plant, and equipment and intangible assets with definite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flow expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Fair Value Measurements: Accounting guidance for our non-financial assets and non-financial liabilities requires that we disclose the type of inputs we use to value our assets and liabilities, based on three categories of inputs as defined in such. Level 1 inputs are quoted, unadjusted prices in active markets for identical assets or liabilities that the company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. These requirements apply to our long-lived assets, goodwill and intangible assets. We use Level 3 inputs to value all of such assets and the methodology we use to value such assets has not changed since December 31, 2009. The Company primarily applies the market approach for recurring fair value measurements.
Warranty Costs: We estimate the costs that may be incurred under the warranty we provide and record a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Our warranty obligation 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. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.
Income Taxes: As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. The carrying value of our deferred tax assets is adjusted by a partial valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net
deferred tax assets consist primarily of net operating loss and tax credit carry forwards, and timing differences between the book and tax treatment of inventory, acquired intangible assets and other asset valuations. Realization of these net deferred tax assets is dependent upon our ability to generate future taxable income.
We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under the relevant accounting guidance, factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.
Relevant accounting guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under such guidance, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Equity-based Compensation: Equity-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as expense over the employee requisite service period. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in the model are assumptions related to risk-free interest rate, dividend yield, expected stock-price volatility and option life.
The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The dividend yield assumption is based on the Company's historical and future expectation of dividend payouts. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which make them critical accounting estimates.
We use an expected stock-price volatility assumption that is a combination of both historical volatility, calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option and implied volatility, utilizing market data of actively traded options on our common stock, which are obtained from public data sources. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility and that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock.
The expected term, representing the period of time that options granted are expected to be outstanding, is estimated using a lattice-based model incorporating historical post vest exercise and employee termination behavior.
We estimate forfeitures using our historical experience, which is adjusted over the requisite service period based on the extent to which actual forfeitures differ or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change.
With regard to the weighted-average option life assumption, we consider the exercise behavior of past grants and model the pattern of aggregate exercises.
Recent Accounting Pronouncements
Business Combinations: In December 2010, the FASB issued amended guidance related to Business Combinations. The amendments affect any public entity that enters into business combinations that are material on an individual or aggregate basis. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company will assess the impact of these amendments on its consolidated financial statements if and when an acquisition occurs.
Intangibles—Goodwill and Other: In December 2010, the FASB issued amended guidance related to Intangibles—Goodwill and Other. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
Subsequent Events: The FASB has issued amended guidance for subsequent events. The amendment removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC's literature. All of the amendments were effective upon issuance (February 24, 2010). The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Fair Value Measurements: In January 2010, the FASB issued amended guidance for Fair Value Measurements and Disclosures. This update requires some new disclosures and clarifies existing disclosure requirements about fair value measurement. The FASB's objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, this update requires that a reporting entity disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, this update clarifies the requirements of existing disclosures. For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and a reporting entity should provide disclosures about the
valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This update was adopted on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
Revenue Recognition: In October 2009, the FASB issued amended guidance related to multiple-element arrangements which requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This update eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances. All entities must adopt the guidance no later than the beginning of their first fiscal year beginning on or after June 15, 2010. Entities may elect to adopt the guidance through either prospective application for revenue arrangements entered into or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
In October 2009, the FASB issued amended guidance that is expected to significantly affect how entities account for revenue arrangements that contain both hardware and software elements. As a result, many tangible products that rely on software will be accounted for under the revised multiple-element arrangements revenue recognition guidance, rather than the software revenue recognition guidance. The revised guidance must be adopted by all entities no later than fiscal years beginning on or after June 15, 2010. An entity must select the same transition method and same period for the adoption of both this guidance and the revisions to the multiple-element arrangements guidance noted above. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
The principal market risks (such as the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are:
•rates on debt,•rates on short-term and long-term investment portfolios, and•exchange rates, generating translation and transaction gains and losses.
Interest Rates
We centrally manage our debt and investment portfolios considering investment opportunities and risk, tax consequences and overall financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately $394.2 million at December 31, 2010. These securities are subject to interest rate risk and will decline in value if interest rates increase. Based on our investment portfolio at December 31, 2010, an immediate 100 basis point increase in interest rates may result in a significant decrease in the fair value of the portfolio. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the consolidated statement of operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary. Our debt portfolio consists of fixed rate and fixed maturity instruments therefore any changes in interest rates will not have an impact on net interest expense.
Foreign Operations
Operating in international markets involves exposure to movements in currency exchange rates, which are volatile at times. The economic impact of currency exchange rate movements on Veeco is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.
Our net sales to foreign customers represented approximately 90%, 79% and 59% of our total net sales in 2010, 2009 and 2008, respectively. We expect that net sales to foreign customers will continue to represent a large percentage of our total net sales. Our net sales denominated in foreign currencies represented approximately 2%, 6% and 5% of total net sales in 2010, 2009 and 2008, respectively. The aggregate foreign currency exchange gain (loss) included in determining consolidated results of operations was approximately $1.3 million, $(0.7) million and $(0.1) million in 2010, 2009 and 2008, respectively. Included in the aggregate foreign currency exchange gain (loss) were gains (losses) relating to forward contracts of $0.1 million, $0.2 million and ($0.4) million in 2010, 2009 and 2008, respectively. These amounts were recognized and included in other expense (income), net. As of December 31, 2010, approximately $0.3 million of gains related to forward contracts were included in prepaid expenses and other current assets and these amounts were subsequently received in January 2011. As of December 31, 2009, approximately $0.2 million of gains related to forward contracts were included in prepaid expenses and other current assets and these amounts were subsequently received in January 2010. Monthly forward contracts for a notional amount of $18.5 million for the month of January 2011 were entered into in December 2010. We are exposed to financial market risks, including changes in foreign currency exchange rates. To mitigate these risks, we use derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. We enter into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known currency exposures. The average notional amount of such contracts outstanding was approximately $6.2 million for the year ended December 31, 2010. The changes in currency exchange rates that have the largest impact on translating our international operating profit (loss) are the Japanese Yen, the British Pound and the Euro. We believe that based upon our hedging program, a 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of operations. We believe that this quantitative measure has inherent limitations because, as discussed in the first paragraph of this section, it does not take into account any governmental actions or changes in either customer purchasing patterns or our financing and operating strategies.
Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule filed as part of this Form 10-K.
Quarterly Results of Operations
The following table presents selected unaudited financial data for each quarter of fiscal 2010 and 2009. Consistent with prior years, we report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2010 interim quarter ends were March 28, June 27 and September 26. The 2009 interim quarter ends were March 29, June 28 and September 27. For ease of reference, we report these interim quarter ends as March 31, June 30 and September 30 in our interim condensed consolidated financial statements.
Although unaudited, this information has been prepared on a basis consistent with our audited Consolidated Financial Statements and, in the opinion of our management, reflects all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of this information in accordance with accounting principles generally accepted in the United States. Such quarterly results are not necessarily indicative of future results of operations and should be read in conjunction with our audited Consolidated Financial Statements and the notes thereto.
| | Fiscal 2010 | Fiscal 2009 | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Q1 | Q2 | Q3 | Q4 | Year | Q1 | Q2 | Q3 | Q4 | Year | ||||||||||||||||||||||
| | (in thousands, except per share data) | |||||||||||||||||||||||||||||||
Net sales | $ | 134,750 | $ | 221,389 | $ | 277,094 | $ | 299,998 | $ | 933,231 | $ | 39,107 | $ | 49,475 | $ | 74,688 | $ | 119,142 | $ | 282,412 | ||||||||||||
Gross profit | 56,740 | 98,801 | 135,482 | 152,802 | 443,825 | 10,909 | 16,248 | 30,547 | 53,531 | 111,235 | ||||||||||||||||||||||
Income (loss) from continuing operations, net of income taxes | 22,824 | 49,931 | 91,104 | 96,672 | 260,531 | (17,661 | ) | (12,577 | ) | 31 | 15,978 | (14,229 | ) | |||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | 3,220 | 2,462 | (4,941 | ) | 100,488 | 101,229 | (3,283 | ) | (2,126 | ) | 1,239 | 2,767 | (1,403 | ) | ||||||||||||||||||
Net loss attributable to noncontrolling interest | — | — | — | — | — | (42 | ) | (23 | ) | — | — | (65 | ) | |||||||||||||||||||
Net income (loss) attributable to Veeco | $ | 26,044 | $ | 52,393 | $ | 86,163 | $ | 197,160 | $ | 361,760 | $ | (20,902 | ) | $ | (14,680 | ) | $ | 1,270 | $ | 18,745 | $ | (15,567 | ) | |||||||||
Income (loss) per common share attributable to Veeco: | ||||||||||||||||||||||||||||||||
Basic: | ||||||||||||||||||||||||||||||||
Continuing operations | $ | 0.59 | $ | 1.26 | $ | 2.28 | $ | 2.45 | $ | 6.60 | $ | (0.56 | ) | $ | (0.40 | ) | $ | — | $ | 0.45 | $ | (0.44 | ) | |||||||||
Discontinued operations | 0.08 | 0.06 | (0.12 | ) | 2.55 | 2.56 | (0.10 | ) | (0.07 | ) | 0.04 | 0.08 | (0.04 | ) | ||||||||||||||||||
Income (loss) | $ | 0.67 | $ | 1.32 | $ | 2.16 | $ | 5.00 | $ | 9.16 | $ | (0.66 | ) | $ | (0.47 | ) | $ | 0.04 | $ | 0.53 | $ | (0.48 | ) | |||||||||
Diluted : | ||||||||||||||||||||||||||||||||
Continuing operations | $ | 0.54 | $ | 1.15 | $ | 2.16 | $ | 2.30 | $ | 6.13 | $ | (0.56 | ) | $ | (0.40 | ) | $ | — | $ | 0.42 | $ | (0.44 | ) | |||||||||
Discontinued operations | 0.08 | 0.05 | (0.12 | ) | 2.40 | 2.38 | (0.10 | ) | (0.07 | ) | 0.04 | 0.08 | (0.04 | ) | ||||||||||||||||||
Income (loss) | $ | 0.62 | $ | 1.20 | $ | 2.04 | $ | 4.70 | $ | 8.51 | $ | (0.66 | ) | $ | (0.47 | ) | $ | 0.04 | $ | 0.50 | $ | (0.48 | ) | |||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 38,784 | 39,761 | 39,946 | 39,453 | 39,499 | 31,515 | 31,497 | 31,608 | 35,623 | 32,628 | ||||||||||||||||||||||
Diluted | 42,269 | 43,506 | 42,258 | 41,972 | 42,514 | 31,515 | 31,497 | 32,375 | 37,742 | 32,628 | ||||||||||||||||||||||
On August 15, 2010, we signed a definitive agreement to sell our Metrology business to Bruker comprising our entire Metrology reporting segment for $229.4 million. Accordingly, Metrology's operating results are accounted for as discontinued operations in determining the consolidated results of operations. The sales transaction closed on October 7, 2010, except for assets located in China due to local restrictions. Total proceeds, which included a working capital adjustment of $1 million, totaled $230.4 million of which $7.2 million relates to the assets in China. As part of our agreement with Bruker, $22.9 million of proceeds is held in escrow and is restricted from use for one year from the closing date of the transaction to secure certain specified losses arising out of breaches of representations, warranties and covenants we made in the stock purchase agreement and related documents. As part of the sale we incurred transaction costs, which consisted of investment bank fees and legal fees, totaling $5.2 million. During the fourth quarter of 2010, we recognized a pre-tax gain on disposal of $156.3 million and a pre-tax deferred gain of $5.4 million related to the assets in China.
During the first quarter of 2010, we recognized a restructuring credit of $0.2 million associated with a change in estimate.
During the first quarter of 2009, we recognized a restructuring charge of $2.3 million, primarily for personnel severance. During the second quarter of 2009, we recognized an additional restructuring charge of approximately $1.7 million primarily for lease-related and personnel severance costs and an asset impairment charge of $0.3 million for property and equipment no longer being utilized in our Data Storage segment. During the third quarter of 2009, we recognized an additional restructuring charge of $0.8 million, primarily for personnel severance costs. During the fourth quarter of 2009, we recognized an additional restructuring charge of $0.1 million related to personnel severance costs.
A variety of factors influence the level of our net sales in a particular quarter including economic conditions in the HB LED, solar, data storage and semiconductor industries, the timing of significant orders, shipment delays, specific feature requests by customers, the introduction of new products by us and our competitors, production and quality problems, changes in material costs, disruption in sources of supply, seasonal patterns of capital spending by customers, and other factors, many of which are beyond our control. In addition, we derive a substantial portion of our revenues from the sale of products which have an average selling price in excess of $2,000,000. As a result, the timing of recognition of revenue from a single transaction could have a significant impact on our net sales and operating results in any given quarter.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the "Exchange Act")) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls, and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision of and with the participation of management, including the chief executive officer and chief financial officer, as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Subsequent to that evaluation there have been no significant changes in our disclosure controls or procedures or other factors that could significantly affect these controls or procedures after such evaluation.
Design and Evaluation of Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report of management's assessment of the design and effectiveness of its internal controls as part of this Annual Report on Form 10-K for the year ended December 31, 2010. Our independent registered public accounting firm also attested to, and reported on, the effectiveness of internal control over financial reporting. Management's report and the independent registered public accounting firm's attestation report are included in our Consolidated Financial Statements for the year ended December 31, 2010 under the caption entitled "Management's Report on Internal Control Over Financial Reporting" and "Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting."
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal controls or other factors during the fiscal year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
Portions of the information required by Part III of Form 10-K are incorporated by reference from Veeco's Proxy Statement to be filed with the SEC in connection with Veeco's 2011 Annual Meeting of Stockholders (the "Proxy Statement").
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by Item 10 of Form 10-K is incorporated by reference to our Proxy Statement under the headings "Corporate Governance," "Executive Officers" and "Section 16(a) Reporting Compliance."
We have adopted a Code of Ethics for Senior Officers (the "Code") which applies to our chief executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. A copy of the Code can be found on our website (www.veeco.com). We intend to disclose on our website the nature of any future amendments to and waivers of the Code that apply to the chief executive officer, principal financial officer, principal accounting officer or persons performing similar functions. We have also adopted a Code of Business Conduct which applies to all of our employees, including those listed above, as well as to our directors. A copy of the Code of Business Conduct can be found on our website (www.veeco.com). The website address above is intended to be an inactive, textual reference only. None of the material on this website is part of this report.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by reference to our Proxy Statement under the heading "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 of Form 10-K is incorporated by reference to our Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information."
The following table gives information about our common stock that may be issued under our equity compensation plans as of December 31, 2010. See Note 8 to the Consolidated Financial Statements included herein for information regarding the material features of these plans.
| | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) | Weighted average exercise price of outstanding options, warrants, and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders | 2,560,354 | $ | 19.62 | 2,623,776 | ||||||
Equity compensation plans not approved by security holders | 9,272 | (1) | $ | 43.19 | — | |||||
Total | 2,569,626 | 2,623,776 | ||||||||
(1)Stock options assumed in connection with the acquisition of Applied Epi, Inc. on September 17, 2001.
Item 13. Certain Relationships, Related Transactions and Director Independence
The information required by Item 13 of Form 10-K is incorporated by reference to our Proxy Statement under the headings "Independence of the Board of Directors" and "Certain Relationships and Related Transactions."
Item 14. Principal Accounting Fees and Services
The information required by Item 14 of Form 10-K is incorporated by reference to our Proxy Statement under the heading "Proposal 2—Ratification of the Appointment of Ernst & Young LLP."
Item 15. Exhibits and Financial Statement Schedules
(a)The Registrant's financial statements together with a separate table of contents are annexed hereto. The financial statement schedule is listed in the separate table of contents annexed hereto.(b)Exhibits
Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.
*Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a) (3) of Form 10-K.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 23, 2011.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on February 23, 2011.
Veeco Instruments Inc. and SubsidiariesIndex to Consolidated Financial Statementsand Financial Statement Schedule
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Management's Report on Internal ControlOver Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The Company's internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") inInternal Control-Integrated Framework.
Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2010.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2010 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears under the heading "Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting."
Veeco Instruments Inc.Plainview, NYFebruary 23, 2011
Report of Independent Registered Public Accounting Firmon Internal Control Over Financial Reporting
The Board of Directors and Shareholders of Veeco Instruments Inc.
We have audited Veeco Instruments Inc. and Subsidiaries (the "Company") internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2010 consolidated financial statements of the Company and our report dated February 23, 2011 expressed an unqualified opinion thereon.
New York, New YorkFebruary 23, 2011
Report of Independent Registered Public Accounting Firm on Financial Statements
To the Shareholders and Board of Directors of Veeco Instruments Inc.
We have audited the accompanying consolidated balance sheets of Veeco Instruments Inc. and Subsidiaries (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, equity, comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule in the accompanying Index. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2011, expressed an unqualified opinion thereon.
New York, New YorkFebruary 23, 2011
Veeco Instruments Inc. and SubsidiariesConsolidated Balance Sheets(Dollars in thousands)
| | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 245,132 | $ | 148,500 | ||||
Short-term investments | 394,180 | 135,000 | ||||||
Restricted cash | 76,115 | — | ||||||
Accounts receivable, less allowance for doubtful accounts of $512 in 2010 and $438 in 2009 | 150,528 | 67,546 | ||||||
Inventories | 108,487 | 55,807 | ||||||
Prepaid expenses and other current assets | 34,328 | 6,419 | ||||||
Assets of discontinued segment held for sale | — | 40,058 | ||||||
Deferred income taxes | 13,803 | 3,105 | ||||||
Total current assets | 1,022,573 | 456,435 | ||||||
Property, plant and equipment at cost, net | 42,320 | 44,707 | ||||||
Goodwill | 52,003 | 52,003 | ||||||
Deferred income taxes | 9,403 | — | ||||||
Intangible assets, net | 16,893 | 21,770 | ||||||
Other assets | 4,842 | 429 | ||||||
Assets of discontinued segment held for sale | — | 30,028 | ||||||
Total assets | $ | 1,148,034 | $ | 605,372 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 32,220 | $ | 24,910 | ||||
Accrued expenses and other current liabilities | 183,010 | 99,823 | ||||||
Deferred profit | 4,109 | 2,520 | ||||||
Income taxes payable | 56,369 | 829 | ||||||
Liabilities of discontinued segment held for sale | 5,359 | 10,824 | ||||||
Current portion of long-term debt | 101,367 | 212 | ||||||
Total current liabilities | 382,434 | 139,118 | ||||||
Deferred income taxes | — | 5,039 | ||||||
Long-term debt | 2,654 | 100,964 | ||||||
Other liabilities | 434 | 1,192 | ||||||
Equity: | ||||||||
Preferred stock, 500,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common stock; $.01 par value; authorized 120,000,000 shares; 40,337,950 and 39,003,114 shares issued and outstanding in 2010 and 2009, respectively | 409 | 382 | ||||||
Additional paid-in-capital | 656,969 | 575,860 | ||||||
Retained earnings (accumulated deficit) | 137,436 | (224,324 | ) | |||||
Accumulated other comprehensive income | 5,796 | 7,141 | ||||||
Less: treasury stock, at cost; 1,118,600 shares in 2010 | (38,098 | ) | — | |||||
Total equity | 762,512 | 359,059 | ||||||
Total liabilities and equity | $ | 1,148,034 | $ | 605,372 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Veeco Instruments Inc. and SubsidiariesConsolidated Statements of Operations(In thousands, except per share data)
| | Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||||||||
Net sales | $ | 933,231 | $ | 282,412 | $ | 314,935 | ||||||
Cost of sales | 489,406 | 171,177 | 191,664 | |||||||||
Gross profit | 443,825 | 111,235 | 123,271 | |||||||||
Operating expenses (income): | ||||||||||||
Selling, general and administrative | 91,777 | 62,151 | 60,542 | |||||||||
Research and development | 71,390 | 43,483 | 39,608 | |||||||||
Amortization | 4,876 | 5,168 | 8,864 | |||||||||
Restructuring | (179 | ) | 4,837 | 9,424 | ||||||||
Asset impairment | — | 304 | 51,387 | |||||||||
Other, net | (1,614 | ) | 24 | (414 | ) | |||||||
Total operating expenses | 166,250 | 115,967 | 169,411 | |||||||||
Operating income (loss) | 277,575 | (4,732 | ) | (46,140 | ) | |||||||
Interest expense | 8,201 | 7,732 | 9,317 | |||||||||
Interest income | (1,629 | ) | (882 | ) | (2,588 | ) | ||||||
Gain on extinguishment of debt | — | — | (3,758 | ) | ||||||||
Income (loss) from continuing operations before income taxes | 271,003 | (11,582 | ) | (49,111 | ) | |||||||
Income tax provision | 10,472 | 2,647 | 1,722 | |||||||||
Income (loss) from continuing operations | 260,531 | (14,229 | ) | (50,833 | ) | |||||||
Discontinued operations: | ||||||||||||
Income (loss) from discontinued operations, before income taxes (includes gain on disposal of $156,290 in 2010) | 155,455 | (2,703 | ) | (24,418 | ) | |||||||
Income tax provision (benefit) | 54,226 | (1,300 | ) | 170 | ||||||||
Income (loss) from discontinued operations | 101,229 | (1,403 | ) | (24,588 | ) | |||||||
Net income (loss) | 361,760 | (15,632 | ) | (75,421 | ) | |||||||
Net loss attributable to noncontrolling interest | — | (65 | ) | (230 | ) | |||||||
Net income (loss) attributable to Veeco | $ | 361,760 | $ | (15,567 | ) | $ | (75,191 | ) | ||||
Income (loss) per common share attributable to Veeco: | ||||||||||||
Basic: | ||||||||||||
Continuing operations | $ | 6.60 | $ | (0.44 | ) | $ | (1.62 | ) | ||||
Discontinued operations | 2.56 | (0.04 | ) | (0.78 | ) | |||||||
Income (loss) | $ | 9.16 | $ | (0.48 | ) | $ | (2.40 | ) | ||||
Diluted: | ||||||||||||
Continuing operations | $ | 6.13 | $ | (0.44 | ) | $ | (1.62 | ) | ||||
Discontinued operations | 2.38 | (0.04 | ) | (0.78 | ) | |||||||
Income (loss) | $ | 8.51 | $ | (0.48 | ) | $ | (2.40 | ) | ||||
Weighted average shares outstanding: | ||||||||||||
Basic | 39,499 | 32,628 | 31,347 | |||||||||
Diluted | 42,514 | 32,628 | 31,347 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Veeco Instruments Inc. and SubsidiariesConsolidated Statements of Comprehensive Income (Loss)(In thousands)
| | Year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | ||||||||
Net income (loss) | $ | 361,760 | $ | (15,632 | ) | $ | (75,421 | ) | |||
Other comprehensive income (loss), net of tax | |||||||||||
Foreign currency translation | (1,322 | ) | (58 | ) | 1,845 | ||||||
Unrealized gain on available-for-sale securities | 97 | — | — | ||||||||
Minimum pension liability | (120 | ) | 32 | 37 | |||||||
Comprehensive income (loss) | 360,415 | (15,658 | ) | (73,539 | ) | ||||||
Comprehensive loss attributable to noncontrolling interest | — | (65 | ) | (230 | ) | ||||||
Comprehensive income (loss) attributable to Veeco | $ | 360,415 | $ | (15,593 | ) | $ | (73,309 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
Veeco Instruments Inc. and SubsidiariesConsolidated Statements of Equity(Dollars in thousands)
| | | | | | | | Equity Attributable to | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Common Stock | | | Retained Earnings (Accumulated Deficit) | | |||||||||||||||||||||||
| | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | | Noncontrolling Interest | | ||||||||||||||||||||||
| | Shares | Amount | Veeco | Total | ||||||||||||||||||||||||
Balance at January 1, 2008 | 31,823,890 | $ | 312 | $ | — | $ | 416,113 | $ | (133,566 | ) | $ | 5,285 | $ | 288,144 | $ | 1,014 | $ | 289,158 | ||||||||||
Exercise of stock options | 67,080 | 1 | — | 680 | — | — | 681 | — | 681 | |||||||||||||||||||
Equity-based compensation expense-continuing operations | — | — | — | 9,668 | — | — | 9,668 | — | 9,668 | |||||||||||||||||||
Equity-based compensation expense-discontinued operations | — | — | — | 858 | — | — | 858 | — | 858 | |||||||||||||||||||
Issuance, vesting and cancellation of restricted stock | 296,629 | 3 | — | (1,019 | ) | — | — | (1,016 | ) | — | (1,016 | ) | ||||||||||||||||
Translation adjustments | — | — | — | — | — | 1,845 | 1,845 | — | 1,845 | |||||||||||||||||||
Defined benefit pension plan | — | — | — | — | — | 37 | 37 | — | 37 | |||||||||||||||||||
Net loss | — | — | — | — | (75,191 | ) | — | (75,191 | ) | (230 | ) | (75,421 | ) | |||||||||||||||
Balance at December 31, 2008 | 32,187,599 | 316 | — | 426,300 | (208,757 | ) | 7,167 | 225,026 | 784 | 225,810 | ||||||||||||||||||
Exercise of stock options | 755,229 | 8 | — | 12,578 | — | — | 12,586 | — | 12,586 | |||||||||||||||||||
Equity-based compensation expense-continuing operations | — | — | — | 7,547 | — | — | 7,547 | — | 7,547 | |||||||||||||||||||
Equity-based compensation expense-discontinued operations | — | — | — | 990 | — | — | 990 | — | 990 | |||||||||||||||||||
Issuance, vesting and cancellation of restricted stock | 310,286 | — | — | (607 | ) | — | — | (607 | ) | — | (607 | ) | ||||||||||||||||
Issuance of common stock | 5,750,000 | 58 | — | 130,028 | — | — | 130,086 | — | 130,086 | |||||||||||||||||||
Translation adjustments | — | — | — | — | — | (58 | ) | (58 | ) | — | (58 | ) | ||||||||||||||||
Defined benefit pension plan | — | — | — | — | — | 32 | 32 | — | 32 | |||||||||||||||||||
Purchase of remaining 80.1% of noncontrolling interest | — | — | — | (976 | ) | — | — | (976 | ) | (719 | ) | (1,695 | ) | |||||||||||||||
Net loss | — | — | — | — | (15,567 | ) | — | (15,567 | ) | (65 | ) | (15,632 | ) | |||||||||||||||
Balance at December 31, 2009 | 39,003,114 | 382 | — | 575,860 | (224,324 | ) | 7,141 | 359,059 | — | 359,059 | ||||||||||||||||||
Exercise of stock options | 2,499,591 | 25 | — | 45,139 | — | — | 45,164 | — | 45,164 | |||||||||||||||||||
Equity-based compensation expense-continuing operations | — | — | — | 9,648 | — | — | 9,648 | — | 9,648 | |||||||||||||||||||
Equity-based compensation expense-discontinued operations | — | — | — | 7,672 | — | — | 7,672 | — | 7,672 | |||||||||||||||||||
Issuance, vesting and cancellation of restricted stock | (46,155 | ) | 2 | — | (4,621 | ) | — | — | (4,619 | ) | — | (4,619 | ) | |||||||||||||||
Treasury stock | (1,118,600 | ) | — | (38,098 | ) | — | — | — | (38,098 | ) | — | (38,098 | ) | |||||||||||||||
Excess tax benefits from stock option exercises | — | — | — | 23,271 | — | — | 23,271 | — | 23,271 | |||||||||||||||||||
Translation adjustments | — | — | — | — | — | (1,322 | ) | (1,322 | ) | — | (1,322 | ) | ||||||||||||||||
Defined benefit pension plan | — | — | — | — | — | (120 | ) | (120 | ) | — | (120 | ) | ||||||||||||||||
Unrealized gain on short-term investments | — | — | — | — | — | 97 | 97 | — | 97 | |||||||||||||||||||
Net income | — | — | — | — | 361,760 | — | 361,760 | — | 361,760 | |||||||||||||||||||
Balance at December 31, 2010 | 40,337,950 | $ | 409 | $ | (38,098 | ) | $ | 656,969 | $ | 137,436 | $ | 5,796 | $ | 762,512 | $ | — | $ | 762,512 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Veeco Instruments Inc. and SubsidiariesConsolidated Statements of Cash Flows(In thousands)
| | Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||||||||
Operating activities | ||||||||||||
Net income (loss) | $ | 361,760 | $ | (15,632 | ) | $ | (75,421 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 12,854 | 13,865 | 17,685 | |||||||||
Amortization of debt discount | 3,058 | 2,846 | 2,917 | |||||||||
Non-cash equity-based compensation | 9,648 | 7,547 | 9,668 | |||||||||
Non-cash asset impairment | — | 304 | 51,387 | |||||||||
Non-cash inventory write-off | — | 1,526 | — | |||||||||
Non-cash restructuring | (179 | ) | — | (105 | ) | |||||||
Net gain on early extinguishment of debt | — | — | (3,758 | ) | ||||||||
Deferred income taxes | (25,141 | ) | (414 | ) | 1,569 | |||||||
Gain on disposal of segment (see Note 3) | (156,290 | ) | — | — | ||||||||
Excess tax benefits from stock option exercises | (23,271 | ) | — | — | ||||||||
Other, net | 1,034 | 44 | (87 | ) | ||||||||
Non-cash items from discontinued operations | 10,025 | 8,805 | 33,070 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (83,160 | ) | (28,379 | ) | 12,727 | |||||||
Inventories | (49,535 | ) | 10,322 | 3,683 | ||||||||
Supplier deposits | (23,296 | ) | 117 | (122 | ) | |||||||
Accounts payable | 7,299 | 3,067 | (6,110 | ) | ||||||||
Accrued expenses, deferred profit and other current liabilities | 85,500 | 51,582 | (4,453 | ) | ||||||||
Income taxes payable | 78,894 | 1,482 | (2,931 | ) | ||||||||
Other, net | (9,491 | ) | (2,904 | ) | 2,287 | |||||||
Discontinued operations | (5,495 | ) | 4,860 | 1,188 | ||||||||
Net cash provided by operating activities | 194,214 | 59,038 | 43,194 | |||||||||
Investing activities | ||||||||||||
Capital expenditures | (10,724 | ) | (7,460 | ) | (11,126 | ) | ||||||
Payments for net assets of businesses acquired | — | (2,413 | ) | (10,981 | ) | |||||||
Payments of earn-outs for businesses acquired | — | (9,839 | ) | — | ||||||||
Transfers to restricted cash | (76,115 | ) | — | — | ||||||||
Proceeds from the maturity of CDARS | 213,641 | — | — | |||||||||
Proceeds from sales of short-term investments | 32,971 | — | — | |||||||||
Payments for purchases of short-term investments | (506,103 | ) | (135,000 | ) | — | |||||||
Proceeds from the sale of property, plant and equipment | 13 | 834 | 103 | |||||||||
Proceeds from disposal of segment, net of transaction fees (see Note 3) | 225,188 | — | — | |||||||||
Discontinued operations | (492 | ) | (887 | ) | (1,680 | ) | ||||||
Net cash used in investing activities | (121,621 | ) | (154,765 | ) | (23,684 | ) | ||||||
Financing activities | ||||||||||||
Proceeds from stock option exercises | 45,164 | 12,586 | 681 | |||||||||
Proceeds from issuance of common stock | — | 130,086 | — | |||||||||
Restricted stock tax withholdings | (4,619 | ) | (607 | ) | (1,019 | ) | ||||||
Excess tax benefits from stock option exercises | 23,271 | — | — | |||||||||
Purchases of treasury stock | (38,098 | ) | — | — | ||||||||
Repayments of long-term debt | (213 | ) | (196 | ) | (32,659 | ) | ||||||
Net cash provided by (used in) financing activities | 25,505 | 141,869 | (32,997 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (1,466 | ) | (163 | ) | (867 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | 96,632 | 45,979 | (14,354 | ) | ||||||||
Cash and cash equivalents at beginning of year | 148,500 | 102,521 | 116,875 | |||||||||
Cash and cash equivalents at end of year | $ | 245,132 | $ | 148,500 | $ | 102,521 | ||||||
Supplemental disclosure of cash flow information | ||||||||||||
Interest paid | $ | 4,727 | $ | 4,935 | $ | 6,530 | ||||||
Income taxes paid | 9,925 | 1,808 | 3,215 | |||||||||
Non-cash investing and financing activities | ||||||||||||
Accrual of payment for net assets of businesses acquired | $ | — | $ | 1,000 | $ | — | ||||||
Accrual of contingent earn-out payment to former shareholders of acquired company | — | — | 9,644 | |||||||||
Transfers from property, plant and equipment to inventory | 3,913 | 1,159 | 404 | |||||||||
Transfers from inventory to property, plant and equipment | 850 | 23 | 385 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Veeco Instruments Inc. and SubsidiariesNotes to Consolidated Financial StatementsDecember 31, 2010
1. Description of Business and Significant Accounting Policies
Business
Veeco Instruments Inc. (together with its consolidated subsidiaries, "Veeco," the "Company" or "we") designs, manufactures and markets equipment to develop and manufacture light emitting diodes ("LEDs"), solar panels, hard-disk drives and other devices. We have leading technology positions in our two segments: Light Emitting Diode ("LED") & Solar and Data Storage.
In our LED & Solar segment, we design and manufacture metal organic chemical vapor deposition ("MOCVD") systems, molecular beam epitaxy ("MBE") systems, Copper, Indium, Gallium, Selenide ("CIGS") deposition systems and thermal deposition sources that we sell to manufacturers of high brightness LEDs ("HB LED") and solar panels, as well as to scientific research customers.
In our Data Storage segment, we design and manufacture ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, chemical vapor deposition, and dicing and slicing systems that we primarily used to create thin film magnetic heads ("TFMHs") that read and write data on hard disk drives.
We support our customers through product development, manufacturing, sales and service sites in the U.S., Korea, Taiwan, China, Singapore, Japan, Europe and other locations.
Basis of Presentation
We report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2010 interim quarter ends were March 28, June 27 and September 26. The 2009 interim quarter ends were March 29, June 28 and September 27. For ease of reference, we report these interim quarter ends as March 31, June 30 and September 30 in our interim condensed consolidated financial statements.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include allowance for doubtful accounts, inventory obsolescence, purchase accounting allocations, recoverability and useful lives of property, plant and equipment and identifiable intangible assets, recoverability of goodwill, recoverability of deferred tax assets, liabilities for product warranty, accruals for contingencies and equity-based payments, including forfeitures and liabilities for tax uncertainties. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Veeco and its subsidiaries. Intercompany items and transactions have been eliminated in consolidation.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
Revenue Recognition
We recognize revenue based on current accounting guidance provided by the Securities and Exchange Commission ("SEC") and the Financial Accounting Standards Board ("FASB"). Our revenue transactions include sales of products under multiple-element arrangements. Revenue under these arrangements is allocated to each element based upon its estimated fair market value.
We consider a broad array of facts and circumstances when evaluating each of our sales arrangements in determining when to recognize revenue, including specific terms of the purchase order, contractual obligations to the customer, the complexity of the customer's post-delivery acceptance provisions, customer creditworthiness and the installation process. Management also considers the party responsible for installation, whether there are process specification requirements which need to be demonstrated before final sign off and payment, whether Veeco can replicate the field testing conditions and procedures in our factory and our past experience with demonstrating and installing a particular system. Sales arrangements are reviewed on a case-by-case basis; however, the Company's revenue recognition protocol for established systems is as described below.
System revenue is generally recognized upon shipment or delivery provided title and risk of loss has passed to the customer, evidence of an arrangement exists, prices are contractually fixed or determinable, collectability is reasonably assured and there are no material uncertainties regarding customer acceptance. Revenue from installation services is recognized at the time acceptance is received from the customer. If the arrangement does not meet all the above criteria, the entire amount of the sales arrangement is deferred until the criteria have been met or all elements have been delivered to the customer or been completed.
For those transactions on which we recognize systems revenue, either at the time of shipment or delivery, our sales and contractual arrangements with customers do not contain provisions for right of return or forfeiture, refund or other purchase price concessions. In the rare instances where such provisions are included, the Company defers all revenue until customer acceptance is achieved. In cases where products are sold with a retention of 10% to 20%, which is typically payable by the customer when installation and field acceptance provisions are completed, the customer has the right to withhold this payment until such provisions have been achieved. We defer the greater of the retention amount or the fair value of the installation on systems that we recognize revenue at the time of shipment or delivery.
For new products, new applications of existing products or for products with substantive customer acceptance provisions where performance cannot be fully assessed prior to meeting agreed upon specifications at the customer site, revenue is deferred as deferred profit in the accompanying Consolidated Balance Sheets and fully recognized upon completion of installation and receipt of final customer acceptance.
Our systems are principally sold to manufacturers in the HB-LED, the data storage and solar industries. Sales arrangements for these systems generally include customer acceptance criteria based upon Veeco and/or customer specifications. Prior to shipment a customer source inspection of the system is performed in our facility or test data is sent to the customer documenting that the system is functioning within agreed upon specifications. Such source inspection or test data replicates the acceptance testing that will be performed at the customer's site prior to final acceptance of the system. Customer acceptance provisions include reassembly and installation of the system at the customer site, which includes performing functional or mechanical test procedures (i.e. hardware checks, leak testing,
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
gas flow monitoring and quality control checks of the basic features of the product.) Additionally, a material demonstration process may be performed to validate the functionality of the product. Upon meeting the agreed upon specifications the customer approves final acceptance of the product.
Veeco generally is required to install these products and demonstrate compliance with acceptance tests at the customer's facility. Such installations typically are not considered complex and the installation process is not deemed essential to the functionality of the equipment because it does not involve significant changes to the features or capabilities of the equipment or involve building complex interfaces or connections. We have a demonstrated history of completing such installations in a timely, consistent manner and can reliably estimate the costs of such. In such cases, the test environment at our facilities prior to shipment replicates the customer's environment. While there are others in the industry with sufficient knowledge about the installation process for our systems as a practical matter, most customers engage the Company to perform the installation services.
In Japan, where our contractual terms with customers generally specify risk of loss and title transfers upon customer acceptance, revenue is recognized and the customer is billed upon receipt of written customer acceptance.
Revenue related to maintenance and service contracts is recognized ratably over the applicable contract term. Component and spare part revenue is recognized at the time of shipment or delivery in accordance with the terms of the applicable sales arrangement.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with maturities of three months or less when purchased. Such items may include cash in operating bank accounts, liquid money market accounts, treasury bills, commercial paper, Federal Deposit Insurance Corporation ("FDIC") insured corporate bonds and certificates of deposit placed through an account registry service ("CDARS") with maturities of three months or less when purchased. CDARS, commercial paper and treasury bills classified as cash equivalents are carried at cost, which approximates fair market value.
Short-Term Investments
We determine the appropriate balance sheet classification of our investments at the time of purchase and evaluate the classification at each balance sheet date. As part of our cash management program, we maintain a portfolio of marketable securities which are classified as available-for-sale. These securities include FDIC insured corporate bonds, treasury bills, commercial paper and CDARS with maturities of greater than three months when purchased in principal amounts that, when aggregated with interest to accrue over the term, will not exceed FDIC limits. Securities classified as available-for-sale are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss) and reported in equity. Net realized gains and losses are included in net income (loss) attributable to Veeco.
Concentration of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of accounts receivable, short-term investments and cash and cash equivalents. We perform ongoing credit evaluations of our customers and, where appropriate, require that letters of credit be provided on certain foreign sales arrangements. We maintain allowances for potential credit losses and make
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
investments with strong, higher credit quality issuers and continuously monitor the amount of credit exposure to any one issuer.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-out method) or market. Management evaluates the need to record adjustments for impairment of inventory on a quarterly basis. Our policy is to assess the valuation of all inventories, including raw materials, work in process, finished goods, and spare parts and other service inventory. Obsolete or slow-moving inventory, based upon historical usage or inventory in excess of management's estimated usage for the next 12 months' requirements is written down to its estimated market value, if less than its cost. Inherent in the estimates of market value are management's estimates related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses and ultimate realization of excess inventory.
Goodwill and Indefinite-Lived Intangibles
acquired. We account for goodwill and intangible assets with indefinite useful lives in accordance with relevant accounting guidance related to goodwill and other intangible assets, which states that goodwill and intangible assets with indefinite useful lives should not be amortized, but instead tested for impairment at least annually at the reporting unit level. Our policy is to perform this annual impairment test in the fourth quarter, using a measurement date of October 1st, of each fiscal year or more frequently if impairment indicators arise. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets.
Pursuant
The guidance provides an option for an entity to first assess qualitative factors to determine whether the aforementioned guidanceexistence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
If we determine the two-step impairment test is necessary, we are required to determine if it is appropriate to use the operating segment, as defined under guidance for segment reporting, as the reporting unit, or one level below the operating segment, depending on whether certain criteria are met. We have identified twofive reporting units that are required to be reviewed for impairment. The five reporting units are aggregated into two segments: the VIBE and Mechanical reporting units which are reported in our Data Storage segment; and the MOCVD, MBE and ALD reporting units which are reported in our LED & Solar.Solar segment. In identifying the reporting units management considered the economic characteristics of operating segments including the products and services provided, production processes, types or classes of customer and product distribution.
We perform this impairment test by first comparing the fair value of our reporting units to their respective carrying amount. When determining the estimated fair value of a reporting unit, we utilize a discounted future cash flow approach since reported quoted market prices are not available for our reporting units. Developing the estimate of the discounted future cash flow requires significant judgment and projections of future financial performance. The key assumptions used in developing the discounted future cash flows are the projection of future revenues and expenses, working capital requirements, residual growth rates and the weighted average cost of capital. In developing our financial projections, we consider historical data, current internal estimates and market growth trends. Changes to any of these assumptions could materially change the fair value of the reporting unit. We reconcile the aggregate fair value of our reporting units to our adjusted market capitalization as a supporting calculation. The adjusted market capitalization is calculated by multiplying the average share price of our 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.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
If the carrying value of the reporting units exceed the fair value we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any.
Definite-Lived Intangible and Long-Lived AssetsAssets:
Intangible Definite-lived intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, software licenses and deferred financing costs. Purchased technology consists of the core proprietary manufacturing technologies associated with the products and offerings obtained through acquisition and are initially recorded at fair value. Customer-related intangible assets, patents, trademarks, and covenants not-to-compete and software licenses that are obtained in an acquisition are initially recorded at fair value andvalue. Other software licenses and deferred financing costs are initially recorded at cost. Intangible assets with definitive useful lives are amortized using the straight-line method over their estimated useful lives for periods ranging from 2 years to 17 years.
Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Long-lived assets, such as property, plant, and equipment and intangible assets with definite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flow expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Accounting for Acquisitions: Our growth strategy has included the acquisition of businesses. The purchase price of these acquisitions has been determined after due diligence of the acquired business, market research, strategic planning, and the forecasting of expected future results and synergies. Estimated future results and expected synergies are subject to judgment as we integrate each acquisition and attempt to leverage resources.
The accounting for the acquisitions we have made requires that the assets and liabilities acquired, as well as any contingent consideration that may be part of the agreement, be recorded at their respective fair values at the date of acquisition. This requires management to make significant estimates in determining the fair values, especially with respect to intangible assets, including estimates of expected cash flows, expected cost savings and the appropriate weighted average cost of capital. As a result of these significant judgments to be made we often obtain the assistance of independent valuation firms. We complete these assessments as soon as practical after the closing dates. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill
Fair Value Measurements: Accounting guidance requires that we disclose the type of inputs we use to value our assets and liabilities that are required to be measured at fair value, based on three categories of inputs as defined in such. Level 1 inputs are quoted, unadjusted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2 inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. These requirements apply to our long-lived assets, goodwill, cost method investment and intangible assets. We use Level 3 inputs to value all of such assets. We primarily apply the market approach for recurring fair value measurements.
Warranty Costs: Our warranties are typically valid for one year from the date of final acceptance. We estimate the costs that may be incurred under the warranty we provide and record a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Our warranty obligation 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. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.
Income Taxes: We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. The carrying value of our deferred tax assets is adjusted by a partial valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net deferred tax assets consist primarily of tax credit carry forwards and timing differences between the book and tax treatment of inventory, acquired intangible assets and other asset valuations. Realization of these net deferred tax assets is dependent upon our ability to generate future taxable income.
We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income and prudent and feasible tax planning strategies. Under the relevant accounting guidance, factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.
Relevant accounting guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under such guidance, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Equity-Based Compensation: We grant equity-based awards, such as stock options and restricted stock or restricted stock units, to certain key employees to create a clear and meaningful alignment between compensation and shareholder return and to enable the employees to develop and maintain a stock ownership position. While the majority of our equity awards feature time-based vesting, performance-based equity awards, which are awarded from time to time to certain key Company executives, vest as a function of performance, and may also be subject to the recipient’s continued employment which also acts as a significant retention incentive.
Equity-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as expense over the employee requisite service period. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in the model are assumptions related to risk-free interest rate, dividend yield, expected stock-price volatility and option life.
The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The dividend yield assumption is based on our historical and future expectation of dividend payouts. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on objective data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which make them critical accounting estimates.
We use an expected stock-price volatility assumption that is a combination of both historical volatility calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option and implied volatility, and utilization of market data of actively traded options on our common stock, which are obtained from public data sources. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility and that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock.
The expected option term, representing the period of time that options granted are expected to be outstanding, is estimated using a lattice-based model incorporating historical post vest exercise and employee termination behavior.
We estimate forfeitures using our historical experience, which is adjusted over the requisite service period based on the extent to which actual forfeitures differ or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change.
With regard to the weighted-average option life assumption, we consider the exercise behavior of past grants and model the pattern of aggregate exercises.
We settle the exercise of stock options with newly issued shares.
With respect to grants of performance based awards, we assess the probability that such performance criteria will be met in order to determine the compensation expense. Consequently, the compensation expense is recognized straight-line over the vesting period. If that assessment of the probability of the performance condition being met changes, we would recognize the impact of the change in estimate in the period of the change. As with the use of any estimate, and owing to the significant judgment used to derive those estimates, actual results may vary.
We have 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.
Recent Accounting Pronouncements
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists: In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists. ASU 2013-11 requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the potential impact of this adoption on our consolidated financial statements.
Presentation of Financial Statements: In April 2013, the FASB issued ASU No. 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.” The objective of ASU 2013-07 is to clarify when an entity should apply the liquidation basis of accounting. The update provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements, absent any indications that liquidation is imminent.
Parent’s Accounting for the Cumulative Translation Adjustment: In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This new standard is intended to resolve diversity in practice regarding the release into net income of a cumulative translation adjustment (“CTA”) upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We currently anticipate that its adoption could have an impact on our consolidated financial statements, in the event of derecognition of a foreign subsidiary in 2014 or subsequently. We cannot estimate the amount of CTA to be released into income from any potential derecognition.
Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date: In February 2013, the FASB issued Accounting Standards Update No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date”. ASU No. 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, ASU No. 2013-04 requires an entity to disclose the nature and amount of the obligation, as well as other information about the obligations. ASU No. 2013-04 is effective for interim and annual periods beginning after December 15, 2013 and is to be applied retrospectively. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
The principal market risks (such as the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are:
·rates on investment portfolios, and
·exchange rates, generating translation and transaction gains and losses.
Interest Rates
We centrally manage our investment portfolios considering investment opportunities and risk, tax consequences and overall financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately $281.5 million as of December 31, 2013. These securities are subject to interest rate risk and will decline in value if interest rates increase. Based on our investment portfolio as of December 31, 2013, an immediate 100 basis point increase in interest rates may result in a decrease in the fair value of the portfolio of approximately $2.0 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.
Foreign Operations
Operating in international markets involves exposure to movements in currency exchange rates, which are volatile at times. The economic impact of currency exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.
Our net sales to foreign customers represented approximately 83%, 84% and 90% of our total net sales in 2013, 2012 and 2011, respectively. We expect that net sales to foreign customers will continue to represent a large percentage of our total net sales. Our net sales denominated in foreign currencies represented approximately 4%, 4% and 3% of total net sales in 2013, 2012 and 2011, respectively.
We are exposed to financial market risks, including changes in foreign currency exchange rates. To mitigate these risks, we use derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. We enter into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known currency exposures. The foreign currency that has the largest impact on translating our international operating profit (loss) is the Japanese Yen. We believe that based upon our hedging program, a 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of operations. We believe that this quantitative measure has inherent limitations because it does not take into account any governmental actions or changes in either customer purchasing patterns or our financing and operating strategies.
|
| As of December 31, 2013 |
| ||||||||
|
|
|
| Fair |
| Maturity |
| Notional |
| ||
(in thousands) |
| Component of |
| Value |
| Dates |
| Amount |
| ||
Not Designated as Hedges under ASC 815 |
|
|
|
|
|
|
|
|
| ||
Foreign currency exchange forwards |
| Prepaid and other current assets |
| 1 |
| January 2014 |
| 4,700 |
| ||
Foreign currency collar |
| Prepaid and other current assets |
| 906 |
| October 2014 |
| 34,069 |
| ||
Total Derivative Instruments |
|
|
| $ | 907 |
|
|
| $ | 38,769 |
|
|
| As of December 31, 2012 |
| ||||||||
|
|
|
| Fair |
| Maturity |
| Notional |
| ||
(in thousands) |
| Component of |
| Value |
| Dates |
| Amount |
| ||
Not Designated as Hedges under ASC 815 |
|
|
|
|
|
|
|
|
| ||
Foreign currency exchange forwards |
| Prepaid and other current assets |
| 248 |
| January 2013 |
| 9,590 |
| ||
Total Derivative Instruments |
|
|
| $ | 248 |
|
|
| $ | 9,590 |
|
|
|
|
| Amount of realized net gain (loss) |
| |||||||
|
|
|
| and changes in the fair value of |
| |||||||
|
| Location of realized net gain |
| derivatives for the year ended |
| |||||||
|
| (loss) and changes in the fair |
| December 31, |
| |||||||
(in thousands) |
| value of derivatives |
| 2013 |
| 2012 |
| 2011 |
| |||
Foreign currency exchange forwards |
| Other, net |
| $ | 248 |
| $ | 333 |
| $ | 553 |
|
Foreign currency collar |
| Other, net |
| $ | 906 |
| $ | — |
| $ | — |
|
Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule filed as part of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013 (the “Evaluation”). Based upon the Evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) are effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Management evaluates the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2013, and concluded that it is effective.
We acquired Synos during the quarter ended December 31, 2013, which is included in our 2013 consolidated financial statements and constituted 14.6 percent and 17.0 percent of total and net assets, respectively, as of December 31, 2013 and 0.1 percent and 15.3 percent of our consolidated net sales and net loss, respectively, for the year ended December 31, 2013. We have excluded Synos from our annual assessment of and conclusion on the effectiveness of our internal control over financial reporting.
Our independent registered public accounting firm, Ernst & Young LLP, has audited the effectiveness of our internal control over financial reporting as of December 31, 2013, as stated in their report, which is included herein.
Changes in Internal Control Over Financial Reporting
We monitor and evaluate, on an ongoing basis, our disclosure controls and procedures in order to improve their overall effectiveness. In the course of these evaluations, we modify and refine our internal processes as conditions warrant. As required by Rule 13a-15(d), our management including the Chief Executive Officer and the Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We implemented a material change in internal control over financial reporting during the quarter ended December 31, 2013. The change related to the remediation of internal controls of revenue recognition and related costs. Specifically, we completed the implementation of redesigned processes and increased the level of review of work performed by our personnel and third-party professionals in the identification and calculation of revenue and cost of revenue. We have completed our testing of the additional control processes outlined above and conclude that our previously reported material weakness has been satisfactorily remediated as of December 31, 2013.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Veeco Instruments Inc.
We have audited Veeco Instruments Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Synos Technology, Inc. which is included in the 2013 consolidated financial statements of Veeco Instruments Inc. and constituted 14.6 percent and 17.0 percent of total and net assets, respectively, as of December 31, 2013 and 0.1 percent and 15.3 percent of net sales and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Synos Technology, Inc.
In our opinion, Veeco Instruments Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Veeco Instruments Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2013 and our report dated February 28, 2014 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP | |
New York, New York | |
February 28, 2014 |
None.
Portions of the information required by Part III of Form 10-K are incorporated by reference from Veeco’s Proxy Statement to be filed with the SEC in connection with Veeco’s 2014 Annual Meeting of Stockholders (the “Proxy Statement”).
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by Item 10 of Form 10-K is incorporated by reference to our Proxy Statement under the headings “Corporate Governance,” “Executive Officers” and “Section 16(a) Reporting Compliance.”
We have adopted a Code of Ethics for Senior Officers (the “Code”) which applies to our chief executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. A copy of the Code can be found on our website (www.veeco.com). We intend to disclose on our website the nature of any future amendments to and waivers of the Code that apply to the chief executive officer, principal financial officer, principal accounting officer or persons performing similar functions. We have also adopted a Code of Business Conduct which applies to all of our employees, including those listed above, as well as to our directors. A copy of the Code of Business Conduct can be found on our website (www.veeco.com). The website address above is intended to be an inactive, textual reference only. None of the material on this website is part of this report.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by reference to our Proxy Statement under the heading “Executive Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 of Form 10-K is incorporated by reference to our Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
The following table gives information about our common stock that may be issued under our equity compensation plans as of December 31, 2013. See our footnote Equity Compensation Plans and Equity in the notes to the Consolidated Financial Statements included herein for information regarding the material features of these plans.
|
| Number of |
|
|
| Number of securities |
| |
|
| securities to be |
| Weighted |
| remaining available |
| |
|
| issued upon |
| average exercise |
| for future issuance |
| |
|
| exercise of |
| price of |
| under equity |
| |
|
| outstanding |
| outstanding |
| compensation plans |
| |
|
| options, |
| options, |
| (excluding securities |
| |
|
| warrants, and |
| warrants, and |
| reflected in column |
| |
|
| rights |
| rights (1) |
| (a)) |
| |
|
| (a) |
| (b) |
| (c) |
| |
Equity compensation plans approved by security holders |
| 2,870,301 |
| $ | 28.17 |
| 2,775,167 |
|
Equity compensation plans not approved by security holders (2) |
| 210,800 |
| $ | 37.70 |
| — |
|
Total |
| 3,081,101 |
|
|
| 2,775,167 |
| |
(1)The calculation of the weighted average exercise price includes only stock options and does not include the outstanding restricted stock units which do not have an exercise price.
(2)In connection with our acquisition of Synos on October 1, 2013, equity awards were granted to Synos’ employees, pursuant to our 2013 Inducement Stock Incentive Plan, in order to create a retention incentive for those employees. Shares issued in connection with this
equity award may be granted under the Veeco Instruments, Inc. 2010 Stock Incentive Plan. There are no awards available for future grant under the Inducement Plan.
Item 13. Certain Relationships, Related Transactions and Director Independence
The information required by Item 13 of Form 10-K is incorporated by reference to our Proxy Statement under the headings “Independence of the Board of Directors” and “Certain Relationships and Related Transactions.”
Item 14. Principal Accounting Fees and Services
The information required by Item 14 of Form 10-K is incorporated by reference to our Proxy Statement under the heading “Proposal 3—Ratification of the Appointment of Ernst & Young LLP as Independent Registered Public Accounting Firm.”
Item 15. Exhibits and Financial Statements and Schedule
(a)The Registrant’s financial statements together with a separate table of contents are annexed hereto. The financial statement schedule is listed in the separate table of contents annexed hereto.
(b) Exhibits
Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.
Number | Exhibit | Incorporated by Reference to the Following | ||
2.1 | Agreement and Plan of Merger, dated September 18, 2013, by and among Veeco, Veeco Wyoming Inc., Synos Technology, Inc. certain stockholders of Synos Technology, Inc., and Shareholder Representative Services LLC | Filed herewith | ||
3.1 | Amended and Restated Certificate of Incorporation of Veeco dated December 1, 1994, as amended June 2, 1997 and July 25, 1997. | Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, Exhibit 3.1 | ||
3.2 | Amendment to Certificate of Incorporation of Veeco dated May 29, 1998. | Annual Report on Form 10-K for the year ended December 31, 2000, Exhibit 3.2 | ||
3.3 | Amendment to Certificate of Incorporation of Veeco dated May 5, 2000. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, Exhibit 3.1 | ||
3.4 | Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of Veeco. | Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, Exhibit 3.1 | ||
3.5 | Amendment to Certificate of Incorporation of Veeco dated May 16, 2002 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, Exhibit 3.1 | ||
3.6 | Amendment to Certificate of Incorporation of Veeco dated May 14, 2010 | Annual Report on Form 10-K for the year ended December 31, 2010, Exhibit 3.8 | ||
3.7 | Fourth Amended and Restated Bylaws of Veeco, effective October 23, 2008 | Current Report on Form 8-K filed October 27, 2008, Exhibit 3.1 | ||
3.8 | Amendment No. 1 to the Fourth Amended and Restated Bylaws of Veeco effective May 20, 2010 | Current Report on Form 8-K, filed May 26, 2010, Exhibit 3.1 | ||
3.9 | Amendment No. 2 to the Fourth Amended and Restated Bylaws of Veeco effective October 20, 2011 | Current Report on Form 8-K, filed October 24, 2011, Exhibit 3.1 | ||
10.1 | Loan Agreement dated as of December 15, 1999 between Applied Epi, Inc. and Jackson National Life Insurance Company. | Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Exhibit 10.2 | ||
10.2 | Amendment to Loan Documents effective as of September 17, 2001 between Applied Epi, Inc. and Jackson National Life Insurance Company (executed in June 2002). | Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, Exhibit 10.2 | ||
10.3 | Promissory Note dated as of December 15, 1999 issued by Applied Epi, Inc. to Jackson National Life Insurance Company. | Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Exhibit 10.3 | ||
10.4* | Form of Indemnification Agreement entered into between Veeco and each of its directors and executive officers. | Current Report on Form 8-K filed on October 23, 2006, Exhibit 10.1 |
Number | Exhibit | Incorporated by Reference to the Following | ||
10.5* | Veeco Amended and Restated 2000 Stock Incentive Plan, effective July 20, 2006. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.4 | ||
10.6* | Amendment No. 1 effective April 18, 2007 (ratified by the Board August 7, 2007) to Veeco Amended and Restated 2000 Stock Incentive Plan. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, Exhibit 10.1 | ||
10.7* | Amendment No. 2 dated January 22, 2009 to Veeco Amended and Restated 2000 Stock Incentive Plan. | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.41 | ||
10.8* | Form of Restricted Stock Agreement pursuant to the Veeco 2000 Stock Incentive Plan, effective November 2005 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, Exhibit 10.3 | ||
10.9* | Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2000 Stock Incentive Plan, effective June 2006 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, Exhibit 10.3 | ||
10.10* | Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 14, 2010 | Proxy Statement on Schedule 14A, filed November 4, 2013, Appendix A | ||
10.11* | Form of 2010 Stock Incentive Plan Stock Option Agreement (2012 rev.) | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.2 | ||
10.12* | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (2012 rev.) | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.3 | ||
10.13* | Form of 2010 Stock Incentive Plan Restricted Stock Unit Agreement (2012 rev.) | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.4 | ||
10.14* | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (Non-Employee Director) (2011 rev.) | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.5 | ||
10.15* | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (Performance Based) (2012 rev.) | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.6 | ||
10.16* | Veeco 2013 Inducement Stock Incentive Plan, effective September 26, 2013 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.1 | ||
10.17* | Form of 2013 Inducement Stock Incentive Plan Stock Option Agreement | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.2 | ||
10.18* | Form of 2013 Inducement Stock Incentive Plan Restricted Stock Unit Agreement | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.3 | ||
10.19* | Veeco Performance-Based Restricted Stock 2010 | Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 10.2 | ||
10.20* | Senior Executive Change in Control Policy effective as of September 12, 2008 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, Exhibit 10.3 | ||
10.21* | Amendment No. 1 dated December 23, 2008 (effective September 12, 2008) to Veeco Senior Executive Change in Control Policy | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.37 | ||
10.22* | Veeco Amended and Restated Senior Executive Change in Control Policy, effective as of January 1, 2014 | Filed herewith | ||
10.23* | Amendment effective December 31, 2008 to Employment Agreement between Veeco and John R. Peeler | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.38 | ||
10.24* | Second Amendment effective June 11, 2010 to Employment Agreement between Veeco and John R. Peeler | Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 10.1 |
Number | Exhibit | Incorporated by Reference to the Following | ||
10.25* | Third Amendment effective April 27, 2012 to Employment Agreement between Veeco and John R. Peeler | Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, Exhibit 10.2 | ||
10.26* | Employment Agreement dated December 17, 2009 (effective January 18, 2010) between Veeco and David D. Glass | Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, Exhibit 10.1 | ||
10.27* | Letter Agreement dated January 21, 2004 between Veeco and John P. Kiernan. | Annual Report on Form 10-K for the year ended December 31, 2003, Exhibit 10.38 | ||
10.28* | Amendment effective June 9, 2006 to Letter Agreement between Veeco and John P. Kiernan | Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.3 | ||
10.29* | Amendment effective December 31, 2008 to Letter Agreement between Veeco and John P. Kiernan | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.40 | ||
10.30* | Letter agreement effective as of June 19, 2009 between Veeco and John P. Kiernan | Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, Exhibit 10.2 | ||
10.31* | Letter agreement effective as of January 4, 2010 between Veeco and Peter Collingwood | Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, Exhibit 10.1 | ||
10.32* | Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller | Annual Report on Form 10-K for the year ended December 31, 2011, Exhibit 10.30 | ||
21.1 | Subsidiaries of the Registrant. | Filed herewith | ||
23.1 | Consent of Ernst & Young LLP. | Filed herewith | ||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934. | Filed herewith | ||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934. | Filed herewith | ||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 | Filed herewith | ||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 | Filed herewith | ||
101.INS | XBRL Instance | ** | ||
101.XSD | XBRL Schema | ** | ||
101.PRE | XBRL Presentation | ** | ||
101.CAL | XBRL Calculation | ** | ||
101.DEF | XBRL Definition | ** | ||
101.LAB | XBRL Label | ** |
* Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a) (3) of Form 10-K.
** Filed herewith electronically
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 28, 2014.
Veeco Instruments Inc. | ||
By: | /S/ JOHN R. PEELER | |
John R. Peeler | ||
Chairman and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on February 28, 2014.
Signature | Title | |
/s/ JOHN R. PEELER | Chairman and Chief Executive Officer | |
John R. Peeler | (principal executive officer) | |
/s/ DAVID D. GLASS | Executive Vice President and Chief Financial Officer | |
David D. Glass | (principal financial officer) | |
/s/ JOHN P. KIERNAN | Senior Vice President, Finance, Chief Accounting Officer, Corporate Controller and Treasurer | |
John P. Kiernan | (principal accounting officer) | |
/s/ EDWARD H. BRAUN | Director | |
Edward H. Braun | ||
/s/ RICHARD A. D’AMORE | Director | |
Richard A. D’Amore | ||
/s/ GORDON HUNTER | Director | |
Gordon Hunter | ||
/s/ KEITH D. JACKSON | Director | |
Keith D. Jackson | ||
/s/ ROGER D. MCDANIEL | Director | |
Roger D. McDaniel | ||
/s/ PETER J. SIMONE | Director | |
Peter J. Simone |
Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.
Number | Exhibit | Incorporated by Reference to the Following | ||
2.1 | Agreement and Plan of Merger, dated September 18, 2013, by and among Veeco, Veeco Wyoming Inc., Synos Technology, Inc. certain stockholders of Synos Technology, Inc., and Shareholder Representative Services LLC | Filed herewith | ||
3.1 | Amended and Restated Certificate of Incorporation of Veeco dated December 1, 1994, as amended June 2, 1997 and July 25, 1997. | Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, Exhibit 3.1 | ||
3.2 | Amendment to Certificate of Incorporation of Veeco dated May 29, 1998. | Annual Report on Form 10-K for the year ended December 31, 2000, Exhibit 3.2 | ||
3.3 | Amendment to Certificate of Incorporation of Veeco dated May 5, 2000. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, Exhibit 3.1 | ||
3.4 | Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of Veeco. | Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, Exhibit 3.1 | ||
3.5 | Amendment to Certificate of Incorporation of Veeco dated May 16, 2002 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, Exhibit 3.1 | ||
3.6 | Amendment to Certificate of Incorporation of Veeco dated May 14, 2010 | Annual Report on Form 10-K for the year ended December 31, 2010, Exhibit 3.8 | ||
3.7 | Fourth Amended and Restated Bylaws of Veeco, effective October 23, 2008 | Current Report on Form 8-K filed October 27, 2008, Exhibit 3.1 | ||
3.8 | Amendment No. 1 to the Fourth Amended and Restated Bylaws of Veeco effective May 20, 2010 | Current Report on Form 8-K, filed May 26, 2010, Exhibit 3.1 | ||
3.9 | Amendment No. 2 to the Fourth Amended and Restated Bylaws of Veeco effective October 20, 2011 | Current Report on Form 8-K, filed October 24, 2011, Exhibit 3.1 | ||
10.1 | Loan Agreement dated as of December 15, 1999 between Applied Epi, Inc. and Jackson National Life Insurance Company. | Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Exhibit 10.2 | ||
10.2 | Amendment to Loan Documents effective as of September 17, 2001 between Applied Epi, Inc. and Jackson National Life Insurance Company (executed in June 2002). | Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, Exhibit 10.2 | ||
10.3 | Promissory Note dated as of December 15, 1999 issued by Applied Epi, Inc. to Jackson National Life Insurance Company. | Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Exhibit 10.3 | ||
10.4* | Form of Indemnification Agreement entered into between Veeco and each of its directors and executive officers. | Current Report on Form 8-K filed on October 23, 2006, Exhibit 10.1 | ||
10.5* | Veeco Amended and Restated 2000 Stock Incentive Plan, effective July 20, 2006. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.4 | ||
10.6* | Amendment No. 1 effective April 18, 2007 (ratified by the Board August 7, 2007) to Veeco Amended and Restated 2000 Stock Incentive Plan. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, Exhibit 10.1 | ||
10.7* | Amendment No. 2 dated January 22, 2009 to Veeco Amended and Restated 2000 Stock Incentive Plan. | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.41 |
Number | Exhibit | Incorporated by Reference to the Following | ||
10.8* | Form of Restricted Stock Agreement pursuant to the Veeco 2000 Stock Incentive Plan, effective November 2005 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, Exhibit 10.3 | ||
10.9* | Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2000 Stock Incentive Plan, effective June 2006 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, Exhibit 10.3 | ||
10.10* | Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 14, 2010 | Proxy Statement on Schedule 14A, filed November 4, 2013, Appendix A | ||
10.11* | Form of 2010 Stock Incentive Plan Stock Option Agreement (2012 rev.) | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.2 | ||
10.12* | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (2012 rev.) | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.3 | ||
10.13* | Form of 2010 Stock Incentive Plan Restricted Stock Unit Agreement (2012 rev.) | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.4 | ||
10.14* | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (Non-Employee Director) (2011 rev.) | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.5 | ||
10.15* | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (Performance Based) (2012 rev.) | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.6 | ||
10.16* | Veeco 2013 Inducement Stock Incentive Plan, effective September 26, 2013 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.1 | ||
10.17* | Form of 2013 Inducement Stock Incentive Plan Stock Option Agreement | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.2 | ||
10.18* | Form of 2013 Inducement Stock Incentive Plan Restricted Stock Unit Agreement | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.3 | ||
10.19* | Veeco Performance-Based Restricted Stock 2010 | Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 10.2 | ||
10.20* | Senior Executive Change in Control Policy effective as of September 12, 2008 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, Exhibit 10.3 | ||
10.21* | Amendment No. 1 dated December 23, 2008 (effective September 12, 2008) to Veeco Senior Executive Change in Control Policy | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.37 | ||
10.22* | Veeco Amended and Restated Senior Executive Change in Control Policy, effective as of January 1, 2014 | Filed herewith | ||
10.23* | Amendment effective December 31, 2008 to Employment Agreement between Veeco and John R. Peeler | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.38 | ||
10.24* | Second Amendment effective June 11, 2010 to Employment Agreement between Veeco and John R. Peeler | Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 10.1 | ||
10.25* | Third Amendment effective April 27, 2012 to Employment Agreement between Veeco and John R. Peeler | Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, Exhibit 10.2 | ||
10.26* | Employment Agreement dated December 17, 2009 (effective January 18, 2010) between Veeco and David D. Glass | Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, Exhibit 10.1 | ||
10.27* | Letter Agreement dated January 21, 2004 between Veeco and John P. Kiernan. | Annual Report on Form 10-K for the year ended December 31, 2003, Exhibit 10.38 |
Number | Exhibit | Incorporated by Reference to the Following | ||
10.28* | Amendment effective June 9, 2006 to Letter Agreement between Veeco and John P. Kiernan | Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.3 | ||
10.29* | Amendment effective December 31, 2008 to Letter Agreement between Veeco and John P. Kiernan | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.40 | ||
10.30* | Letter agreement effective as of June 19, 2009 between Veeco and John P. Kiernan | Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, Exhibit 10.2 | ||
10.31* | Letter agreement effective as of January 4, 2010 between Veeco and Peter Collingwood | Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, Exhibit 10.1 | ||
10.32* | Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller | Annual Report on Form 10-K for the year ended December 31, 2011, Exhibit 10.30 | ||
21.1 | Subsidiaries of the Registrant. | Filed herewith | ||
23.1 | Consent of Ernst & Young LLP. | Filed herewith | ||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934. | Filed herewith | ||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934. | Filed herewith | ||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 | Filed herewith | ||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 | Filed herewith | ||
101.INS | XBRL Instance | ** | ||
101.XSD | XBRL Schema | ** | ||
101.PRE | XBRL Presentation | ** | ||
101.CAL | XBRL Calculation | ** | ||
101.DEF | XBRL Definition | ** | ||
101.LAB | XBRL Label | ** |
* Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a) (3) of Form 10-K.
** Filed herewith electronically
Veeco Instruments Inc. and Subsidiaries
Index to Consolidated Financial Statements and Financial Statement Schedule
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Veeco Instruments Inc.
We have audited the accompanying consolidated balance sheets of Veeco Instruments Inc. (the “Company”) as of December 31, 2013 and 2012 and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Veeco Instruments Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Veeco Instruments Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 28, 2014 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP | |
New York, New York | |
February 28, 2014 |
Veeco Instruments Inc. and Subsidiaries
(in thousands, except share data)
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 210,799 |
| $ | 384,557 |
|
Short-term investments |
| 281,538 |
| 192,234 |
| ||
Restricted cash |
| 2,738 |
| 2,017 |
| ||
Accounts receivable, net |
| 23,823 |
| 63,169 |
| ||
Inventories |
| 59,726 |
| 59,807 |
| ||
Deferred cost of goods sold |
| 724 |
| 1,797 |
| ||
Prepaid expenses and other current assets |
| 22,579 |
| 30,358 |
| ||
Deferred income taxes |
| 11,716 |
| 10,545 |
| ||
Total current assets |
| 613,643 |
| 744,484 |
| ||
Property, plant and equipment at cost, net |
| 89,139 |
| 98,302 |
| ||
Goodwill |
| 91,348 |
| 55,828 |
| ||
Intangible assets, net |
| 114,716 |
| 20,974 |
| ||
Other assets |
| 38,726 |
| 16,781 |
| ||
Deferred income taxes |
| 397 |
| 935 |
| ||
Total assets |
| $ | 947,969 |
| $ | 937,304 |
|
Liabilities and equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 35,755 |
| $ | 26,087 |
|
Accrued expenses and other current liabilities |
| 51,084 |
| 41,401 |
| ||
Customer deposits and deferred revenue |
| 34,754 |
| 42,099 |
| ||
Income taxes payable |
| 6,149 |
| 2,292 |
| ||
Deferred income taxes |
| 159 |
| 140 |
| ||
Current portion of long-term debt |
| 290 |
| 268 |
| ||
Total current liabilities |
| 128,191 |
| 112,287 |
| ||
|
|
|
|
|
| ||
Deferred income taxes |
| 28,052 |
| 7,137 |
| ||
Long-term debt |
| 1,847 |
| 2,138 |
| ||
Other liabilities |
| 9,649 |
| 4,530 |
| ||
Total liabilities |
| 167,739 |
| 126,092 |
| ||
Equity: |
|
|
|
|
| ||
Preferred stock, 500,000 shares authorized; no shares issued and outstanding |
| — |
| — |
| ||
Common stock; $.01 par value; authorized 120,000,000 shares; 39,666,195 shares issued and outstanding in 2013; and 39,328,503 shares issued and outstanding in 2012 |
| 397 |
| 393 |
| ||
Additional paid-in capital |
| 721,352 |
| 708,723 |
| ||
Retained earnings |
| 53,860 |
| 96,123 |
| ||
Accumulated other comprehensive income |
| 4,621 |
| 5,973 |
| ||
Total equity |
| 780,230 |
| 811,212 |
| ||
Total liabilities and equity |
| $ | 947,969 |
| $ | 937,304 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
|
| For the year ended |
| |||||||
|
| December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Net sales |
| $ | 331,749 |
| $ | 516,020 |
| $ | 979,135 |
|
Cost of sales |
| 228,607 |
| 300,887 |
| 504,801 |
| |||
Gross profit |
| 103,142 |
| 215,133 |
| 474,334 |
| |||
Operating expenses: |
|
|
|
|
|
|
| |||
Selling, general and administrative |
| 85,486 |
| 73,110 |
| 95,134 |
| |||
Research and development |
| 81,424 |
| 95,153 |
| 96,596 |
| |||
Amortization |
| 5,527 |
| 4,908 |
| 4,734 |
| |||
Restructuring |
| 1,485 |
| 3,813 |
| 1,288 |
| |||
Asset impairment |
| 1,220 |
| 1,335 |
| 584 |
| |||
Total operating expenses |
| 175,142 |
| 178,319 |
| 198,336 |
| |||
Other, net |
| (1,017 | ) | (398 | ) | (261 | ) | |||
Changes in contingent consideration |
| 829 |
| — |
| — |
| |||
Operating income (loss) |
| (71,812 | ) | 37,212 |
| 276,259 |
| |||
Interest income |
| 1,200 |
| 2,476 |
| 3,776 |
| |||
Interest expense |
| (598 | ) | (1,502 | ) | (4,600 | ) | |||
Interest income (expense), net |
| 602 |
| 974 |
| (824 | ) | |||
Loss on extinguishment of debt |
| — |
| — |
| (3,349 | ) | |||
Income (loss) from continuing operations before income taxes |
| (71,210 | ) | 38,186 |
| 272,086 |
| |||
Income tax provision (benefit) |
| (28,947 | ) | 11,657 |
| 81,584 |
| |||
Income (loss) from continuing operations |
| (42,263 | ) | 26,529 |
| 190,502 |
| |||
|
|
|
|
|
|
|
| |||
Discontinued operations: |
|
|
|
|
|
|
| |||
Income (loss) from discontinued operations before income taxes |
| — |
| 6,269 |
| (91,885 | ) | |||
Income tax provision (benefit) |
| — |
| 1,870 |
| (29,370 | ) | |||
Income (loss) from discontinued operations |
| — |
| 4,399 |
| (62,515 | ) | |||
Net income (loss) |
| $ | (42,263 | ) | $ | 30,928 |
| $ | 127,987 |
|
|
|
|
|
|
|
|
| |||
Net Income (loss) per common share: |
|
|
|
|
|
|
| |||
Basic: |
|
|
|
|
|
|
| |||
Continuing operations |
| $ | (1.09 | ) | $ | 0.69 |
| $ | 4.80 |
|
Discontinued operations |
| — |
| 0.11 |
| (1.57 | ) | |||
Income (loss) |
| $ | (1.09 | ) | $ | 0.80 |
| $ | 3.23 |
|
Diluted : |
|
|
|
|
|
|
| |||
Continuing operations |
| $ | (1.09 | ) | $ | 0.68 |
| $ | 4.63 |
|
Discontinued operations |
| — |
| 0.11 |
| (1.52 | ) | |||
Income (loss) |
| $ | (1.09 | ) | $ | 0.79 |
| $ | 3.11 |
|
|
|
|
|
|
|
|
| |||
Weighted average shares outstanding: |
|
|
|
|
|
|
| |||
Basic |
| 38,807 |
| 38,477 |
| 39,658 |
| |||
Diluted |
| 38,807 |
| 39,051 |
| 41,155 |
| |||
The accompanying notes are an integral part of these consolidated financial statements.
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
|
| For the year ended |
| |||||||
|
| December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Net income (loss) |
| $ | (42,263 | ) | $ | 30,928 |
| $ | 127,987 |
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
| |||
Available-for-sale securities |
|
|
|
|
|
|
| |||
Unrealized gain (loss) on available-for-sale securities |
| 34 |
| (118 | ) | 393 |
| |||
Benefit (provision) for income taxes |
| 11 |
| 50 |
| (79 | ) | |||
Less: Reclassification adjustments for gains included in net income (loss) |
| (61 | ) | (24 | ) | (271 | ) | |||
Net unrealized gain (loss) on available-for-sale securities |
| (16 | ) | (92 | ) | 43 |
| |||
Minimum pension liability |
|
|
|
|
|
|
| |||
Minimum pension liability |
| 125 |
| (216 | ) | (73 | ) | |||
Benefit (provision) for income taxes |
| (86 | ) | 79 |
| 30 |
| |||
Net minimum pension liability |
| 39 |
| (137 | ) | (43 | ) | |||
Foreign currency translation |
|
|
|
|
|
|
| |||
Foreign currency translation |
| (1,322 | ) | (1,071 | ) | 1,228 |
| |||
Benefit (provision) for income taxes |
| (53 | ) | 683 |
| (434 | ) | |||
Net foreign currency translation |
| (1,375 | ) | (388 | ) | 794 |
| |||
Other comprehensive income (loss), net of tax |
| (1,352 | ) | (617 | ) | 794 |
| |||
Comprehensive income (loss) |
| $ | (43,615 | ) | $ | 30,311 |
| $ | 128,781 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| ||||||
|
|
|
|
|
|
|
| Additional |
|
|
| Other |
|
|
| ||||||
|
| Common Stock |
| Treasury |
| Paid-in |
| Retained |
| Comprehensive |
| Total |
| ||||||||
|
| Shares |
| Amount |
| Stock |
| Capital |
| Earnings |
| Income |
| Equity |
| ||||||
Balance as of January 1, 2011 |
| 40,337,950 |
| $ | 409 |
| $ | (38,098 | ) | $ | 656,969 |
| $ | 137,436 |
| $ | 5,796 |
| $ | 762,512 |
|
Exercise of stock options |
| 688,105 |
| 7 |
| — |
| 10,707 |
| — |
| — |
| 10,714 |
| ||||||
Equity-based compensation expense-continuing operations |
| — |
| — |
| — |
| 12,807 |
| — |
| — |
| 12,807 |
| ||||||
Equity-based compensation expense-discontinued operations |
| — |
| — |
| — |
| 689 |
| — |
| — |
| 689 |
| ||||||
Issuance, vesting and cancellation of restricted stock |
| 131,196 |
| 1 |
| — |
| (3,175 | ) | — |
| — |
| (3,174 | ) | ||||||
Treasury stock |
| (4,160,228 | ) | — |
| (162,077 | ) | — |
| — |
| — |
| (162,077 | ) | ||||||
Debt Conversion |
| 1,771,413 |
| 18 |
| — |
| (50 | ) | — |
| — |
| (32 | ) | ||||||
Excess tax benefits from stock option exercises |
| — |
| — |
| — |
| 10,406 |
| — |
| — |
| 10,406 |
| ||||||
Other comprehensive income (loss), net of tax |
| — |
| — |
| — |
| — |
| (106 | ) | 794 |
| 688 |
| ||||||
Net income (loss) |
| — |
| — |
| — |
| — |
| 127,987 |
| — |
| 127,987 |
| ||||||
Balance as of December 31, 2011 |
| 38,768,436 |
| 435 |
| (200,175 | ) | 688,353 |
| 265,317 |
| 6,590 |
| 760,520 |
| ||||||
Exercise of stock options |
| 351,436 |
| 4 |
| — |
| 5,405 |
| — |
| — |
| 5,409 |
| ||||||
Equity-based compensation expense-continuing operations |
| — |
| — |
| — |
| 14,268 |
| — |
| — |
| 14,268 |
| ||||||
Issuance, vesting and cancellation of restricted stock |
| 208,631 |
| 7 |
| — |
| (1,732 | ) | — |
| — |
| (1,725 | ) | ||||||
Treasury stock |
| — |
| (53 | ) | 200,175 |
| — |
| (200,122 | ) | — |
| — |
| ||||||
Prior period debt conversion adjustment |
| — |
| — |
| — |
| 310 |
| — |
| — |
| 310 |
| ||||||
Excess tax benefits from stock option exercises |
| — |
| — |
| — |
| 2,119 |
| — |
| — |
| 2,119 |
| ||||||
Other comprehensive income (loss), net of tax |
| — |
| — |
| — |
| — |
| — |
| (617 | ) | (617 | ) | ||||||
Net income (loss) |
| — |
| — |
| — |
| — |
| 30,928 |
| — |
| 30,928 |
| ||||||
Balance as of December 31, 2012 |
| 39,328,503 |
| 393 |
| — |
| 708,723 |
| 96,123 |
| 5,973 |
| 811,212 |
| ||||||
Exercise of stock options |
| 149,170 |
| 2 |
| — |
| 2,197 |
| — |
| — |
| 2,199 |
| ||||||
Equity-based compensation expense-continuing operations |
| — |
| — |
| — |
| 13,130 |
| — |
| — |
| 13,130 |
| ||||||
Issuance, vesting and cancellation of restricted stock |
| 188,522 |
| 2 |
| — |
| (2,698 | ) | — |
| — |
| (2,696 | ) | ||||||
Other comprehensive income (loss), net of tax |
| — |
| — |
| — |
| — |
| — |
| (1,352 | ) | (1,352 | ) | ||||||
Net income (loss) |
| — |
| — |
| — |
| — |
| (42,263 | ) | — |
| (42,263 | ) | ||||||
Balance as of December 31, 2013 |
| 39,666,195 |
| $ | 397 |
| $ | — |
| $ | 721,352 |
| $ | 53,860 |
| $ | 4,621 |
| $ | 780,230 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
| Year ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Cash Flows from Operating Activities |
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | (42,263 | ) | $ | 30,928 |
| $ | 127,987 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 18,425 |
| 16,192 |
| 12,892 |
| |||
Amortization of debt discount |
| — |
| — |
| 1,260 |
| |||
Non-cash equity-based compensation |
| 13,130 |
| 14,268 |
| 12,807 |
| |||
Non-cash asset impairment |
| 1,220 |
| 1,335 |
| 584 |
| |||
Loss on extinguishment of debt |
| — |
| — |
| 3,349 |
| |||
Deferred income taxes |
| (12,264 | ) | (340 | ) | 11,276 |
| |||
Gain on disposal of segment |
| — |
| (4,112 | ) | — |
| |||
Gain on sale of lab tools |
| (767 | ) | — |
| — |
| |||
Excess tax benefits from stock option exercises |
| — |
| (2,119 | ) | (10,406 | ) | |||
Change in contingent consideration |
| 829 |
| — |
| — |
| |||
Other, net |
| 1,971 |
| 262 |
| (31 | ) | |||
Non-cash items from discontinued operations |
| — |
| (706 | ) | 44,381 |
| |||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |||
Accounts receivable |
| 38,844 |
| 31,215 |
| 56,843 |
| |||
Inventories |
| 2,753 |
| 53,937 |
| (18,627 | ) | |||
Prepaid expenses and other current assets |
| 842 |
| 8,524 |
| (13,087 | ) | |||
Income taxes receivable |
| (12,604 | ) | 654 |
| (9,076 | ) | |||
Accounts payable |
| 7,542 |
| (12,106 | ) | 8,098 |
| |||
Accrued expenses, customer deposits, deferred revenue and other current liabilities |
| (17,329 | ) | (34,227 | ) | (72,723 | ) | |||
Income taxes payable |
| (130 | ) | 1,199 |
| (42,204 | ) | |||
Transfers to restricted cash |
| (721 | ) | (1,440 | ) | — |
| |||
Other, net |
| 1,249 |
| 10,431 |
| 2,119 |
| |||
Discontinued operations |
| — |
| (1,932 | ) | — |
| |||
Net cash provided by (used in) operating activities |
| 727 |
| 111,963 |
| 115,442 |
| |||
Cash Flows from Investing Activities |
|
|
|
|
|
|
| |||
Capital expenditures |
| (9,174 | ) | (24,994 | ) | (60,364 | ) | |||
Payments for net assets of businesses acquired |
| (71,488 | ) | — |
| (28,273 | ) | |||
Payment for purchase of cost method investment |
| (2,391 | ) | (10,341 | ) | — |
| |||
Transfers from (to) restricted cash related to discontinued operations |
| — |
| — |
| 75,540 |
| |||
Proceeds from short-term investments |
| 499,645 |
| 244,929 |
| 707,649 |
| |||
Payments for purchases of short-term investments |
| (589,099 | ) | (165,080 | ) | (588,453 | ) | |||
Proceeds from the sale of lab tools |
| 4,440 |
| — |
| — |
| |||
Other |
| 11 |
| 49 |
| 195 |
| |||
Proceeds from sale of assets from discontinued segment |
| — |
| 3,758 |
| — |
| |||
Net cash provided by (used in) investing activities |
| (168,056 | ) | 48,321 |
| 106,294 |
| |||
Cash Flows from Financing Activities |
|
|
|
|
|
|
| |||
Proceeds from stock option exercises |
| 2,199 |
| 5,409 |
| 10,714 |
| |||
Contingent consideration payments |
| (5,000 | ) | — |
| — |
| |||
Restricted stock tax withholdings |
| (2,696 | ) | (1,725 | ) | (3,173 | ) | |||
Excess tax benefits from stock option exercises |
| — |
| 2,119 |
| 10,406 |
| |||
Purchases of treasury stock |
| — |
| — |
| (162,077 | ) | |||
Repayments of long-term debt |
| (269 | ) | (248 | ) | (105,803 | ) | |||
Other |
| — |
| — |
| (2 | ) | |||
Net cash provided by (used in) financing activities |
| (5,766 | ) | 5,555 |
| (249,935 | ) | |||
Effect of exchange rate changes on cash and cash equivalents |
| (663 | ) | 796 |
| 989 |
| |||
Net increase (decrease) in cash and cash equivalents |
| (173,758 | ) | 166,635 |
| (27,210 | ) | |||
Cash and cash equivalents as of beginning of year |
| 384,557 |
| 217,922 |
| 245,132 |
| |||
Cash and cash equivalents as of end of year |
| $ | 210,799 |
| $ | 384,557 |
| $ | 217,922 |
|
|
|
|
|
|
|
|
| |||
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
| |||
Interest paid |
| $ | 357 |
| $ | 209 |
| $ | 1,393 |
|
Income taxes paid |
| 8,001 |
| 11,566 |
| 89,745 |
| |||
Non-cash investing and financing activities |
|
|
|
|
|
|
| |||
Accrual of fair value of contingent consideration |
| $ | 33,539 |
| $ | — |
| $ | — |
|
Merger consideration adjustment |
| 2,695 |
| — |
| — |
| |||
The accompanying notes are an integral part of these consolidated financial statements.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
1. Description of Business and Significant Accounting Policies
Business
Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company” or “we”) creates process equipment solutions that enable technologies for a cleaner and more productive world. We design, manufacture and market equipment primarily sold to make light emitting diodes (“LED”s) and hard-disk drives, as well as for emerging applications such as concentrator photovoltaics, power semiconductors, wireless components, micro-electromechanical systems (“MEMS”), and other next-generation devices.
Our LED & Solar segment designs and manufactures metal organic chemical vapor deposition (“MOCVD”) and molecular beam epitaxy (“MBE”) systems as well as newly acquired atomic layer deposition (“ALD”) technology. Our MOCVD and MBE systems are sold to manufacturers of LEDs, wireless devices, power semiconductors, and concentrator photovoltaics, as well as for R&D applications. Our ALD technology is used by the manufacturers of OLED displays and has further applications in the semiconductor and solar markets. In 2011 we discontinued the sale of our products related to Copper, Indium, Gallium, Selenide (“CIGS”) solar systems technology.
Our Data Storage segment designs and manufactures systems used to create thin film magnetic heads (“TFMH”s) that read and write data on hard disk drives. These include ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, chemical vapor deposition, and slicing, dicing and lapping systems. While our systems are primarily sold to hard drive customers, they also have applications in optical coatings, micro-electro mechanical systems (“MEMS”) and magnetic sensors, and extreme ultraviolet (“EUV”) lithography.
Basis of Presentation
We report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2013 interim quarter ends were March 31, June 30 and September 29. The 2012 interim quarter ends were April 1, July 1 and September 30. The 2011 interim quarter ends were April 3, July 3 and October 2. For ease of reference, we report these interim quarter ends as March 31, June 30 and September 30 in our interim consolidated financial statements. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to discontinued operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include: the best estimate of selling price for our products and services; allowance for doubtful accounts; inventory obsolescence; recoverability and useful lives of property, plant and equipment and identifiable intangible assets; investment valuations; fair value of derivatives; recoverability of goodwill and long lived assets; recoverability of deferred tax assets; liabilities for product warranty; accounting for acquisitions; accruals for contingencies; equity-based payments, including forfeitures and performance based vesting; and liabilities for tax uncertainties. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Veeco and its subsidiaries. Intercompany items and transactions have been eliminated in consolidation.
Revenue Recognition
We recognize 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
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
excluding applicable taxes related to sales. A significant portion of our revenue is derived from contractual arrangements with customers that have multiple elements, such as systems, upgrades, components, spare parts, maintenance and service plans. For sales arrangements that contain multiple elements, we split the arrangement into separate units of accounting if the individually delivered elements have value to the customer on a standalone basis. We also evaluate whether multiple transactions with the same customer or related party should be considered part of a multiple element arrangement, whereby we assess, among other factors, 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 each other. When we have separate units of accounting, we allocate 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 our best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. We utilize BESP for the majority of the elements in our arrangements. The accounting guidance for selling price hierarchy did not include BESP for arrangements entered into prior to January 1, 2011, and as such we recognized revenue for those arrangements as described below.
We consider many facts when evaluating each of our sales arrangements to determine the timing of revenue recognition, including the contractual obligations, the customer’s creditworthiness and the nature of the customer’s post-delivery acceptance provisions. Our system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For the majority of our arrangements, a customer source inspection of the system is performed in our 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 will be performed at the customer’s site prior to final acceptance of the system. As such, we objectively demonstrate that the criteria specified in the contractual acceptance provisions are achieved prior to delivery and, therefore, we recognize revenue upon 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 we 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.
Our system sales arrangements, including certain upgrades, generally do not contain provisions for right of return or forfeiture, refund, or other purchase price concessions. In the rare instances where such provisions are included, we defer all revenue until such rights expire. In many cases our products are sold with a billing retention, typically 10% of the sales price (the “retention amount”), which is typically 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.
For transactions entered into prior to January 1, 2011, under the accounting rules for multiple-element arrangements in place at that time, we deferred the greater of the retention amount or the relative fair value of the undelivered elements based on VSOE. When we could not establish VSOE or TPE for all undelivered elements of an arrangement, revenue on the entire arrangement was deferred until the earlier of the point when we did have VSOE for all undelivered elements or the delivery of all elements of the arrangement.
Our sales arrangements, including certain upgrades, generally include installation. The installation process is not deemed essential to the functionality of the equipment since it is not complex; that is, it does not require significant changes to the features or capabilities of the equipment or involve building elaborate interfaces or connections subsequent to factory acceptance. We have a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage us to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, we deem the installation of our systems to be inconsequential or perfunctory relative to the system as a whole, and as a result, do not consider such services to be a separate element of the arrangement. As such, we accrue the cost of the installation at the time of revenue recognition for the system.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
In Japan, where our contractual terms with customers generally specify title and risk and rewards of ownership transfer upon customer acceptance, revenue is recognized and the customer is billed upon the receipt of written customer acceptance. During the fourth quarter of fiscal 2013, we began using a distributor for almost all of our product and service sales to customers in Japan. Title and risk and rewards of ownership of our system sales still transfer to our end-customers upon their acceptance. As such, there is no impact to our policy of recognizing revenue upon receipt of written acceptance from the end customer.
Revenue related to maintenance and service contracts is recognized ratably over the applicable contract term. Component and spare part revenue are recognized at the time of delivery in accordance with the terms of the applicable sales arrangement.
Cash and Cash Equivalents
Cash and cash equivalents include cash and certain highly liquid investments. Highly liquid investments with maturities of three months or less when purchased may be classified as cash equivalents. Such items may include liquid money market accounts, U.S. treasuries, government agency securities and corporate debt. The investments that are classified as cash equivalents are carried at cost, which approximates fair value.
Short-Term Investments
We determine the appropriate balance sheet classification of our investments at the time of purchase and evaluate the classification at each balance sheet date. As part of our cash management program, we maintain a portfolio of marketable securities which are classified as available-for-sale. These securities include U.S. treasuries and government agency securities with maturities of greater than three months when purchased. Securities classified as available-for-sale are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss) and reported in equity. Net realized gains and losses are included in net income (loss).
Accounts Receivable, Net
Accounts receivable are presented net of allowance for doubtful accounts of $2.4 million and $0.5 million as of December 31, 2013 and 2012, respectively. We evaluate the collectability of accounts receivable based on a combination of factors. In cases where we become aware of circumstances that may impair a customer’s ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the we reasonably believes will be collected. For all other customers, we recognize an allowance for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry conditions, the current business environment and its historical experience.
Concentration of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of accounts receivable, short-term investments and cash and cash equivalents. We perform ongoing credit evaluations of our customers and, where appropriate, require that letters of credit be provided on certain foreign sales arrangements. We maintain allowances for potential credit losses and make investments with strong, higher credit quality issuers and continuously monitor the amount of credit exposure to any one issuer.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-out method) or market. On a quarterly basis, management assesses the valuation and recoverability of all inventories, classified as materials (which include raw materials, spare parts and service inventory), work-in-process and finished goods.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Materials inventory is used primarily to support the installed tool base and spare parts sales and is reviewed for excess quantities or obsolescence by comparing on-hand balances to historical usage, and adjusted for current economic conditions and other qualitative factors. Historically, the variability of such estimates has been impacted by customer demand and tool utilization rates.
The work-in-process and finished goods inventory is principally used to support system sales and is reviewed for recoverability by considering whether on hand inventory would be utilized to fulfill the related backlog. As we typically receive deposits for our orders, the variability of this estimate is reduced as customers have a vested interest in the orders they place with us. Recoverability of such inventory is evaluated by monitoring customer demand, current sales trends and product gross margins. Management also considers qualitative factors such as future product demand based on market outlook, which is based principally upon production requirements resulting from customer purchase orders received with a customer-confirmed shipment date within the next twelve months. Historically, the variability of these estimates of future product demand has been impacted by backlog cancellations or modifications resulting from unanticipated changes in technology or customer demand.
Following identification of potential excess or obsolete inventory, management evaluates the need to write down inventory balances to its estimated market value, if less than its cost. Inherent in the estimates of market value are management’s estimates related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses, and ultimate realization of potential excess inventory. Unanticipated changes in demand for our products may require a write down of inventory that could materially affect our operating results.
Goodwill and Indefinite-Lived Intangibles
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. We account for goodwill and intangible assets with indefinite useful lives in accordance with relevant accounting guidance related to goodwill and other intangible assets, which states that goodwill and intangible assets with indefinite useful lives should not be amortized, but instead tested for impairment at least annually at the reporting unit level. Our policy is to perform this annual impairment test in the fourth quarter, using a measurement date of October 1st, of each fiscal year or more frequently if impairment indicators arise. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets.
The guidance provides an option for an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
If we determine the two-step impairment test is necessary, we are required to determine if it is appropriate to use the operating segment, as defined under guidance for segment reporting, as the reporting unit, or one level below the operating segment, depending on whether certain criteria are met. We have identified five reporting units that are required to be reviewed for impairment. The five reporting units are aggregated into two segments: the VIBE and Mechanical reporting units which are reported in our Data Storage segment; and the MOCVD, MBE and ALD reporting units which are reported in our LED & Solar segment. In identifying the reporting units management considered the economic characteristics of operating segments including the products and services provided, production processes, types or classes of customer and product distribution.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
If required, we perform this impairment test by first comparing the fair value of our reporting units to their respective carrying amount. When determining the estimated fair value of a reporting unit, we utilize a discounted future cash flow approach since reported quoted market prices are not available for our reporting units. Developing the estimate of the discounted future cash flow requires significant judgment and projections of future financial performance. The key assumptions used in developing the discounted future cash flows are the projection of future revenues and expenses, working capital requirements, residual growth rates and the weighted average cost of capital. In developing our financial projections, we consider historical data, current internal estimates and market growth trends. Changes to any of these assumptions could materially change the fair value of the reporting unit. We reconcile the aggregate fair value of our reporting units to our adjusted market capitalization as a supporting calculation. The adjusted market capitalization is calculated by multiplying the average share price of our 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.
If the carrying value of the reporting units exceed the fair value we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any.
Definite-Lived Intangible and Long-Lived Assets
Definite-lived intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, software licenses and deferred financing costs. Purchased technology consists of the core proprietary manufacturing technologies associated with the products and offerings obtained through acquisition and are initially recorded at fair value. Customer-related intangible assets, patents, trademarks, covenants not-to-compete and software licenses that are obtained in an acquisition are initially recorded at fair value. Other software licenses and deferred financing costs are initially recorded at cost. Intangible assets with definitive useful lives are amortized using the straight-line method over their estimated useful lives for periods up to 17 years.
Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Long-lived assets, such as property, plant, and equipment and intangible assets with definite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flow expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Accounting for Acquisitions
Our growth strategy has included the acquisition of businesses. The purchase price of these acquisitions has been determined after due diligence of the acquired business, market research, strategic planning, and the forecasting of expected future results and synergies. Estimated future results and expected synergies are subject to judgment as we integrate each acquisition and attempt to leverage resources.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
The accounting for the acquisitions we have made requires that the assets and liabilities acquired, as well as any contingent consideration that may be part of the agreement, be recorded at their respective fair values at the date of acquisition. This requires management to make significant estimates in determining the fair values, especially with respect to intangible assets, including estimates of expected cash flows, expected cost savings and the appropriate weighted average cost of capital. As a result of these significant judgments to be made we often obtain the assistance of independent valuation firms. We complete these assessments as soon as practical after the closing dates. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Please see our footnote Business Combinations in these Notes to Consolidated Financial Statements.
Cost Method of Accounting for Investments
Investee companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, the Company'sour share of the earnings or losses of such investee companies isare not included in the Consolidated Balance Sheet or StatementStatements of Operations. However, impairment charges are recognized in the Consolidated StatementStatements of Operations. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded.
Fair Value of Financial Instruments
We believe the carrying amounts of our 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 our debt, including current maturities, is estimated using a discounted cash flow analysis, based on the estimated current incremental borrowing rates for similar types of securitiessecurities.
Translation of Foreign Currencies
Certain of our international subsidiaries operate using local functional currencies. Foreign currency denominated assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and income and expense accounts and cash flow items are translated at average monthly exchange rates during the respective periods. Net exchange gains or basedlosses resulting from the translation of foreign financial statements and the effect of exchange rates on market valueintercompany transactions of a long-term investment nature are recorded as a separate component of equity in accumulated other comprehensive income. Any foreign currency gains or losses related to transactions are included in operating results.
Environmental Compliance and Remediation
Environmental compliance costs include ongoing maintenance, monitoring and similar costs. Such costs are expensed as incurred. Environmental remediation costs are accrued when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated.
Research and Development Costs
Research and development costs are charged to expense as incurred and include expenses for the development of new technology and the transition of technology into new products or services.
Warranty Costs
Our warranties are typically valid for one year from the date of final acceptance. We estimate the costs that may be incurred under the warranty that we provide for our publicly traded debt (see Note 7).products. We record a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Our warranty obligation 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. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)(continued)
December 31, 2013
Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. The carrying value of our deferred tax assets is adjusted by a partial valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net deferred tax assets consist primarily of tax credit carry forwards and timing differences between the book and tax treatment of inventory, acquired intangible assets and other asset valuations. Realization of these net deferred tax assets is dependent upon our ability to generate future taxable income.
We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under the relevant accounting guidance, factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.
Relevant accounting guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under such guidance, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Advertising Expense
The cost of advertising is expensed as of the first showing of each advertisement. We incurred $0.5 million, $0.8 million and $1.4 million in advertising expenses during 2013, 2012 and 2011, respectively.
Shipping and Handling Costs
Shipping and handling costs are costs that are incurred to move, package and prepare our products for shipment and then to move the products to the 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 our Consolidated Statements of Operations.
Equity-Based Compensation
We grant equity-based awards, such as stock options and restricted stock or restricted stock units, to certain key employees to create a clear and meaningful alignment between compensation and shareholder return and to enable the employees to develop and maintain a stock ownership position. While the majority of our equity awards feature time-based vesting, performance-based equity awards, which are awarded from time to time to certain of our key executives, vest as a function of performance, and may also be subject to the recipient’s continued employment which also acts as a significant retention incentive.
Equity-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as expense over the employee requisite service period. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in the model are assumptions related to risk-free interest rate, dividend yield, expected stock-price volatility and option life.
The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The dividend yield assumption is based on our historical and future expectation of dividend payouts. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on objective data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which results in more subjective accounting estimates.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
We use an expected stock-price volatility assumption that is a combination of both historical volatility calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option and implied volatility which utilizes market data of actively traded options on our common stock, which are obtained from public data sources. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility and that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock.
The expected option term, representing the period of time that options granted are expected to be outstanding, is estimated using a lattice-based model incorporating historical post vest exercise and employee termination behavior.
We estimate forfeitures using our historical experience, which is adjusted over the requisite service period based on the extent to which actual forfeitures differ or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change.
We settle the exercise of stock options with newly issued shares.
With respect to grants of performance based awards, we assess the probability that such performance criteria will be met in order to determine the compensation expense. Consequently, the compensation expense is recognized straight-line over the vesting period. If that assessment of the probability of the performance condition being met changes, we would recognize the impact of the change in estimate in the period of the change. As with the use of any estimate, and due to the significant judgment used to derive those estimates, actual results may vary.
We have 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.
Negotiable Letters of Credit
For certain transactions, we request that our customers provide us with a negotiable irrevocable letter of credit drawn on a reputable financial institution. These irrevocable letters of credit are typically issued to mature, on average, for 0 to 90 days post documentation requirements, but occasionally for longer. For a fee, one of our banks confirms the reputation of the issuing institution and, at our option, monetizes these letters of credit on a non-recourse basis soon after they become negotiable. Once we monetize the letter of credit with the confirming bank, we have no further obligations or interest in the letter of credit and they are not included in our consolidated balance sheets. The fees that we pay are included in selling, general and administrative expense and are not material.
Recent Accounting Pronouncements
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists: In July 2013, the FASB issued ASU No. 2013-11. ASU 2013-11 requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the potential impact of this adoption on our consolidated financial statements.
Presentation of Financial Statements: In April 2013, the FASB issued ASU No. 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.” The objective of ASU 2013-07 is to clarify when an entity should apply the liquidation basis of accounting. The update provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements, absent any indications that liquidation is imminent.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Parent’s Accounting for the Cumulative Translation Adjustment: In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This new standard is intended to resolve diversity in practice regarding the release into net income of a cumulative translation adjustment (“CTA”) upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We currently anticipate that its adoption could have an impact on our consolidated financial statements, in the event of derecognition of a foreign subsidiary in 2014 or subsequently. We cannot estimate the amount of CTA to be released into income from any potential derecognition.
Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date: In February 2013, the FASB issued Accounting Standards Update No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date”. ASU No. 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, ASU No. 2013-04 requires an entity to disclose the nature and amount of the obligation, as well as other information about the obligations. ASU No. 2013-04 is effective for interim and annual periods beginning after December 15, 2013 and is to be applied retrospectively. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
2. Income (Loss) Per Common Share
The following table sets forth basic and diluted net income (loss) per common share and the basic weighted average shares outstanding and diluted weighted average shares outstanding (in thousands, except per share data):
|
| Year ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Net income (loss) |
| $ | (42,263 | ) | $ | 30,928 |
| $ | 127,987 |
|
Net income (loss) per common share: |
|
|
|
|
|
|
| |||
Basic |
| $ | (1.09 | ) | $ | 0.80 |
| $ | 3.23 |
|
Diluted |
| $ | (1.09 | ) | $ | 0.79 |
| $ | 3.11 |
|
|
|
|
|
|
|
|
| |||
Basic weighted average shares outstanding |
| 38,807 |
| 38,477 |
| 39,658 |
| |||
Dilutive effect of stock options, restricted stock awards and units and convertible debt |
| — |
| 574 |
| 1,497 |
| |||
Diluted weighted average shares outstanding |
| 38,807 |
| 39,051 |
| 41,155 |
| |||
Basic income (loss) per common share is computed using the basic weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is computed using the basic weighted average number of common shares and common equivalent shares outstanding during the period. For the year ended December 31, 2013, the effect of approximately 0.6 million common equivalent shares were excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive due to the net loss sustained during the period. Potentially dilutive securities attributable to outstanding stock options and restricted stock of approximately 1.3 million, 1.3 million and 0.7 million common equivalent shares during the years ended December 31, 2013, 2012 and 2011 were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive.
During the second quarter of 2011 the entire outstanding principal balance of our convertible debt was converted, with the principal amount paid in cash and the conversion premium paid in shares. The convertible notes met the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, since we had settled the principal amount of the notes in cash. Using the treasury stock method, it was determined that the impact of the assumed conversion for the years ended December 31, 2011 had a dilutive effect of 0.6 million shares.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
3. Discontinued Operations
CIGS Solar Systems Business
On July 28, 2011, we announced a plan to discontinue our CIGS solar systems business. The results of operations for the CIGS solar systems business have been recorded as discontinued operations for all periods presented. During the year ended December 31, 2011, total discontinued operations related to the discontinued CIGS business include pre-tax charges totaling $69.8 million. These charges include an asset impairment charge totaling $6.2 million, a goodwill write-off of $10.8 million, an inventory write-off totaling $27.0 million, charges to settle contracts totaling $22.1 million, lease related charges totaling $1.4 million and personnel severance charges totaling $2.3 million.
Metrology
On August 15, 2010, we signed a definitive agreement to sell our Metrology business to Bruker. The results of operations for the Metrology business have been recorded as discontinued operations for all periods presented. The sale transaction closed on October 7, 2010, except for assets located in China due to local restrictions. Total proceeds, which included a working capital adjustment of $1 million, totaled $230.4 million of which $7.2 million relates to the assets in China. During 2010, we recognized a pre-tax gain on disposal of $156.3 million and a pre-tax deferred gain of $5.4 million related to the assets in China. We recognized into income the pre-tax deferred gain of $5.4 million during 2012 related to the completion of the sale of the assets in China to Bruker. We also recognized a $1.4 million gain ($1.1 million net of taxes) on the sale of assets of this discontinued segment that were previously held for sale and sold during 2012.
Summary information related to discontinued operations is as follows (in thousands):
|
| 2012 |
| 2011 |
| ||||||||||||||
|
| Solar |
|
|
|
|
| Solar |
|
|
|
|
| ||||||
|
| Systems |
| Metrology |
| Total |
| Systems |
| Metrology |
| Total |
| ||||||
Net sales |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Net income (loss) from discontinued operations |
| $ | (62 | ) | $ | 4,461 |
| $ | 4,399 |
| $ | (61,453 | ) | $ | (1,062 | ) | $ | (62,515 | ) |
4. Fair Value Measurements
We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy. The levels of fair value hierarchy are as follows:
·Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
·Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
·Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented below may include changes in fair value that were attributable to both observable (e.g. changes in market interest rates) and unobservable (e.g. changes in historical company data) inputs.
The major categories of assets and liabilities measured on a recurring basis, at fair value, as of December 31, 2013 and 2012 are as follows (in thousands):
|
| December 31, 2013 |
| ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
U.S. treasuries |
| $ | 130,977 |
| $ | — |
| $ | — |
| $ | 130,977 |
|
Corporate debt |
| — |
| 77,601 |
| — |
| 77,601 |
| ||||
Government agency securities |
| — |
| 61,013 |
| — |
| 61,013 |
| ||||
Commercial paper |
| — |
| 11,947 |
| — |
| 11,947 |
| ||||
Derivative instrument |
| — |
| 907 |
| — |
| 907 |
| ||||
Contingent consideration |
| — |
| — |
| (29,368 | ) | (29,368 | ) | ||||
|
| December 31, 2012 (1) |
| ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
U.S. treasuries |
| $ | 278,698 |
| $ | — |
| $ | — |
| $ | 278,698 |
|
Government agency securities |
| — |
| 123,054 |
| — |
| 123,054 |
| ||||
Derivative instrument |
| — |
| 248 |
| — |
| 248 |
| ||||
(1)December 31, 2012 table has been conformed to present year presentation.
Highly liquid investments with maturities of three months or less when purchased may be classified as cash equivalents. Such items may include liquid money market accounts, U.S. treasuries, government agency securities and corporate debt. The investments that are classified as cash equivalents are carried at cost, which approximates fair value. Accordingly, no gains or losses (realized/unrealized) have been incurred for cash equivalents. All investments classified as available-for-sale are recorded at fair value within short-term investments in the Consolidated Balance Sheets.
In determining the fair value of our investments and levels, through a third-party service provider, we use pricing information from pricing services that value securities based on quoted market prices in active markets and matrix pricing. Matrix pricing is a mathematical valuation technique that does not rely exclusively on quoted prices of specific investments, but on the investment’s relationship to other benchmarked quoted securities. We have a process in place for investment valuations to facilitate identification and resolution of potentially erroneous prices. We review the information provided by the third-party service provider to record the fair value of its portfolio.
Consistent with Level 1 measurement principles, U.S. treasuries are priced using active market prices of identical securities. Consistent with Level 2 measurement principles, corporate debt, government agency securities, commercial paper, and derivative instruments are priced with matrix pricing.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
A reconciliation of the amount in Level 3 is as follows (in thousands):
|
| Level 3 |
| |
Balance at December 31, 2012 |
| $ | — |
|
Addition of contingent consideration |
| (33,539 | ) | |
Payment on contingent consideration |
| 5,000 |
| |
Fair value adjustment of contingent consideration |
| (829 | ) | |
Balance at December 31, 2013 |
| $ | (29,368 | ) |
We estimated the fair value of the contingent consideration by applying various probabilities and discount factors to each of the various performance milestones as further discussed in note Business Combinations. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The discount rates used ranged from 3.6% to 13.0% for the purchase order related contingent payments and from 15.5% to 30.5% for the revenue and gross margin related contingent payments. These rates were determined based on the nature of the milestone, the risks and uncertainties involved and the time period until the milestone was measured.
We measure certain assets for fair value on a non-recurring basis when there are indications of impairment.
In 2013 and 2012 we measured certain assets consistent with Level 3 measurement principles using an income approach based on a discounted cash flow model in order to determine the amount of impairment, if any. In 2013, we evaluated certain tangible assets in our LED & Solar segment for impairment. As a result of the evaluation we adjusted the carrying value by $0.9 million related to tools that we had previously used in our laboratories held in Property, plant and equipment which we are holding for sale and by $0.3 million related to an asset held in Other assets with $1.2 million of adjustments recorded as impairment in 2013. In 2012, we evaluated an asset in our Data Storage segment for impairment. As a result of the evaluation we adjusted the carrying value of the asset carried in Other assets from $1.4 million to $0.1 million with the $1.3 million adjustment recorded as impairment in 2012.
5. Business Combinations
On April 4, 2011, we purchased a privately-held company which supplies certain components to one of our businesses for $28.3 million in cash. As a result of this purchase, we acquired $16.4 million of definite-lived intangibles, of which $13.6 million related to core technology, and $14.7 million of goodwill. The financial results of this acquisition are included in our LED & Solar segment as of the acquisition date. We determined that this acquisition does not constitute a material business combination and therefore we have not included pro forma financial information in this report.
On October 1, 2013 (“the Acquisition Date”), Veeco acquired 100% of the outstanding common shares and voting interest of Synos Technology, Inc. (“Synos”). The results of Synos’ operations have been included in the consolidated financial statements since that date. Synos is an early stage manufacturer of fast array scanning atomic layer deposition (“FAST-ALD”) tools for OLED and other applications. As a result of the acquisition, the Company has entered the FAST-ALD market which is complimentary to the Company’s MOCVD LED offerings.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
The Acquisition Date fair value of the consideration totaled $102.3 million, net of cash acquired, which consisted of the following (in thousands):
|
| Acquisition Date |
| |
|
| (October 1, 2013) |
| |
Cash (net of cash acquired) |
| $ | 71,488 |
|
Working capital adjustment |
| (2,695 | ) | |
Contingent consideration |
| 33,539 |
| |
Total |
| $ | 102,332 |
|
As part of Veeco’s acquisition of Synos, we may be obligated to pay to the selling shareholders of Synos certain contingent consideration. The aggregate fair value of the contingent consideration arrangement at the acquisition date was $33.5 million. The contingency arrangements are generally as follows:
·Up to $40.0 million based on defined milestones tied to the receipt of certain purchase orders from customers by certain dates through the first quarter of 2014. The Company determined the fair value of these contingent payments to be $24.3 million. Of this amount, $5.0 million was earned and paid in the fourth quarter of 2013. The second milestone pertaining to this contingency is to be measured by March 31, 2014 and could result in either no payment, a payment of $17.5 million or a payment of $35 million. The difference between the amount earned and the fair value recorded will be recorded in the statement of operations for the period ended March 31, 2014. The outcome is currently unknown.
·Up to $75.0 million based on defined milestones tied to meeting certain revenue and gross margin thresholds based on full year 2014 results. The Company has determined the fair value of these contingent payments to be $9.2 million. The fair value of this contingency will continued to be measured at each reporting period and changes in fair value will be recorded in the statement of operations.
We estimated the fair value of the contingent consideration by applying various probabilities and discount factors to each of the various performance milestones. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The discount rates used ranged from 3.6% to 13.0% for the purchase order related contingent payments and from 15.5% to 30.5% for the revenue and gross margin related contingent payments. These rates were determined based on the nature of the milestone, the risks and uncertainties involved and the time period until the milestone was measured. The determination of the various probabilities and discount factors are highly subjective and require significant judgment and are influenced by a number of factors, including the adoption of OLED technology and limited history. While the use of OLED is expected to grow in the near future, it is difficult to predict the rate at which OLED will be adopted by the market and thus would impact the sales of our equipment.
As of December 31, 2013, the first milestone was achieved and we paid the former shareholders of Synos $5.0 million. In addition, the recognized amount for the contingencies increased by $0.8 million as of December 31, 2013 as a result of changes in the fair value of contingent consideration.
The following table summarizes the estimated fair values of the assets acquired, net of the cash acquired, and liabilities assumed at the Acquisition Date. Veeco utilized third-party valuations of the tangible and intangible assets acquired as well as the contingent consideration. The amounts below are preliminary and are subject to change (in thousands):
|
| Acquisition Date |
| |
|
| (October 1, 2013) |
| |
Accounts receivable |
| $ | 1,523 |
|
Inventory |
| 386 |
| |
Other current assets |
| 512 |
| |
Property, plant, and equipment |
| 1,917 |
| |
Intangible assets |
| 99,270 |
| |
Total identifiable assets acquired |
| 103,608 |
| |
|
|
|
| |
Current liabilities |
| 4,370 |
| |
Estimated deferred tax liability, net |
| 32,426 |
| |
Total liabilities assumed |
| 36,796 |
| |
Net identifiable assets acquired |
| 66,812 |
| |
Goodwill |
| 35,520 |
| |
Net assets acquired |
| $ | 102,332 |
|
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
The $35.5 million of goodwill was assigned to the LED & Solar segment. None of the goodwill is expected to be deductible for income tax purposes. As of December 31, 2013, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Synos.
The classes of intangible assets acquired and the estimated weighted-average useful life of each class is presented in the table below (in thousands):
|
| Acquisition Date |
| |||
|
| (October 1, 2013) |
| |||
|
| Amount |
| Average useful life |
| |
Technology |
| $ | 73,160 |
| 14 years |
|
In-process research and development |
| 5,070 |
| To be determined |
| |
Customer relationship |
| 20,630 |
| 8 years |
| |
Trademark and trade name |
| 140 |
| 1 year |
| |
Non-compete agreement |
| 270 |
| 3 years |
| |
Intangible assets acquired |
| $ | 99,270 |
|
|
|
We 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.
Technology is being amortized on an accelerated basis consistent with the timing of the cash flows it is expected to generate. Pursuant to the accounting guidance, acquired in-process research and development is not amortized until such time as it is completed or abandoned. Upon completion, we will amortize the acquired amount over its useful life. As noted earlier, the fair value of the acquired assets is provisional pending the final valuations for these assets.
We recognized $1.0 million of acquisition related costs that were expensed in 2013. These costs are included in the Consolidated Statements of Operations in the line item entitled “Selling, general and administrative.”
The amounts of revenue and income (loss) from continuing operations before income taxes of Synos included in the Company’s consolidated statement of operations from the acquisition date (October 1, 2013) to the period ending December 31, 2013 are as follows (in thousands):
Revenue |
| $ | 409 |
|
Income (loss) from continuing operations before income taxes |
| $ | (6,480 | ) |
The following represents the pro forma Consolidated Statements of Operations as if Synos had been included in our consolidated results (in thousands):
|
| For the year ended December 31, |
| ||||
|
| (unaudited) |
| ||||
|
| 2013 |
| 2012 |
| ||
Revenue |
| $ | 346,319 |
| $ | 522,029 |
|
Income (loss) from continuing operations before income taxes |
| $ | (60,983 | ) | $ | 16,840 |
|
These amounts have been calculated after applying our accounting policies to material amounts and also adjusting the results of Synos to reflect the additional amortization that would have been expensed assuming the fair value adjustments to intangible assets had been applied on January 1, 2012.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
6. Balance Sheet Information
Short-Term Investments
Available-for-sale securities consist of the following (in thousands):
|
| December 31, 2013 |
| ||||||||||
|
|
|
| Gains in |
| Losses in |
|
|
| ||||
|
|
|
| Accumulated |
| Accumulated |
|
|
| ||||
|
|
|
| Other |
| Other |
|
|
| ||||
|
| Amortized |
| Comprehensive |
| Comprehensive |
| Estimated |
| ||||
|
| Cost |
| Income |
| Income |
| Fair Value |
| ||||
U.S. treasuries |
| $ | 130,956 |
| $ | 22 |
| $ | (1 | ) | $ | 130,977 |
|
Government agency securities |
| 61,004 |
| 9 |
| — |
| 61,013 |
| ||||
Corporate debt |
| 77,582 |
| 55 |
| (36 | ) | 77,601 |
| ||||
Commercial paper |
| 11,947 |
| — |
| — |
| 11,947 |
| ||||
Total available-for-sale securities |
| $ | 281,489 |
| $ | 86 |
| $ | (37 | ) | $ | 281,538 |
|
During the year ended December 31, 2013, sales and maturities of available-for-sale securities provided total proceeds of $499.6 million. The gross realized gains on these sales were $0.1 million for the year ended December 31, 2013. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification. The change in the net unrealized holding gain on available-for-sale securities was minimal for the year ended December 31, 2013, and has been included in accumulated other comprehensive income. The tax impact on the unrealized gains, which is excluded from the table above, was less than $0.1 million.
|
| December 31, 2012 |
| ||||||||||
|
|
|
| Gains in |
| Losses in |
|
|
| ||||
|
|
|
| Accumulated |
| Accumulated |
|
|
| ||||
|
|
|
| Other |
| Other |
|
|
| ||||
|
| Amortized |
| Comprehensive |
| Comprehensive |
| Estimated |
| ||||
|
| Cost |
| Income |
| Income |
| Fair Value |
| ||||
U.S. treasuries |
| $ | 184,102 |
| $ | 76 |
| $ | — |
| $ | 184,178 |
|
Government agency securities |
| 8,056 |
| — |
| — |
| 8,056 |
| ||||
Total available-for-sale securities |
| $ | 192,158 |
| $ | 76 |
| $ | — |
| $ | 192,234 |
|
During the year ended December 31, 2012, sales and maturities of available-for-sale securities provided total proceeds of $244.9 million. The gross realized gains on these sales were minimal for the year ended December 31, 2012. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification. The change in the net unrealized holding gain on available-for-sale securities amounted to $0.1 million for the year ended December 31, 2012, and has been included in accumulated other comprehensive income. The tax impact on the unrealized gains, which is excluded from the table above, was minimal.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Available-for-sale securities in a loss position at December 31, 2013 are as follows (in thousands):
|
| Less than 12 months |
| Total |
| ||||||||
|
|
|
| Gross |
|
|
| Gross |
| ||||
|
|
|
| Unrealized |
|
|
| Unrealized |
| ||||
|
| Fair value |
| Losses |
| Fair value |
| Losses |
| ||||
Corporate debt |
| $ | 37,654 |
| $ | (36 | ) | $ | 37,654 |
| $ | (36 | ) |
U.S. treasuries |
| 29,068 |
| (1 | ) | 29,068 |
| (1 | ) | ||||
Total |
| $ | 66,722 |
| $ | (37 | ) | $ | 66,722 |
| $ | (37 | ) |
As of December 31, 2013 we had $66.7 million in short-term investments that had an aggregate unrealized fair value loss of less than $0.1 million none of which had been in an unrealized loss position for 12 months or longer. As of December 31, 2012 we did not hold any short-term investments that were in a loss position.
Contractual maturities of available-for-sale securities as of December 31, 2013 are as follows (in thousands):
|
| Estimated |
| |
|
| Fair Value |
| |
Due in one year or less |
| $ | 196,015 |
|
Due in 1–2 years |
| 64,156 |
| |
Due in 2–3 years |
| 21,367 |
| |
Total investments in securities |
| $ | 281,538 |
|
Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Restricted Cash
As of December 31, 2013 and 2012, restricted cash consisted of $2.7 million and $2.0 million, respectively, which serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations. This cash is held in custody by the issuing bank, and is restricted as to withdrawal or use while the related bank guarantees are outstanding.
Accounts Receivable, Net
Accounts receivable are shown net of the allowance for doubtful accounts of $2.4 million and $0.5 million as of December 31, 2013 and 2012, respectively.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Inventories (in thousands)
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Materials |
| $ | 34,301 |
| $ | 36,523 |
|
Work in process |
| 12,900 |
| 13,363 |
| ||
Finished goods |
| 12,525 |
| 9,921 |
| ||
|
| $ | 59,726 |
| $ | 59,807 |
|
Property, Plant and Equipment (in thousands)
|
| December 31, |
| Estimated |
| ||||
|
| 2013 |
| 2012 |
| Useful Lives |
| ||
Land |
| $ | 12,535 |
| $ | 12,535 |
|
|
|
Building and improvements |
| 52,050 |
| 49,498 |
| 10-40 years |
| ||
Machinery and equipment |
| 110,228 |
| 110,150 |
| 3-10 years |
| ||
Leasehold improvements |
| 5,888 |
| 5,677 |
| 3-7 years |
| ||
Gross property, plant and equipment at cost |
| 180,701 |
| 177,860 |
|
|
| ||
Less: accumulated depreciation and amortization |
| 91,562 |
| 79,558 |
|
|
| ||
Net property, plant and equipment |
| $ | 89,139 |
| $ | 98,302 |
|
|
|
For the years ended December 31, 2013, 2012 and 2011, depreciation expense was $12.9 million, $11.3 million and $8.2 million, respectively.
As of December 31, 2013, we had $7.2 million of tools that we previously used in our laboratories carried in machinery and equipment which we are holding for sale. These tools are the same type of tools we sell to our customers in the ordinary course of our business. In addition, during the year ended December 31, 2013, we converted and sold $3.7 million of tools that we had previously used in our laboratories as Veeco Certified Equipment at an aggregate selling price of $7.4 million which is included in revenue. During 2013, we recorded asset impairment charges in LED & Solar of $0.9 million related to certain tools used in our laboratories carried in machinery and equipment which we are holding for sale.
Goodwill and Indefinite-Lived Intangible Assets
In accordance with the relevant accounting guidance related to goodwill and other intangible assets, we conducted our annual impairment test of goodwill and indefinite-lived intangible assets during the fourth quarters of 2013 and 2012, using October 1st as our measurement date as described in our footnote Description of Business and Significant Accounting Policies. Based upon the results of the qualitative assessment we determined that it was not more likely than not that goodwill or our indefinite-lived intangible assets were impaired. Therefore, we determined that no impairment of goodwill and indefinite-lived intangible asset existed as of October 1, 2013. In 2012, we determined not to perform the optional qualitative assessment and performed our step 1 assessment utilizing discounted future cash flows and a reconciliation to our market capitalization. Based on our assessment we determined that there was no impairment of our goodwill or our indefinite-lived assets as of October 1, 2012.
Changes in our goodwill are as follows (in thousands):
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Beginning balance |
| $ | 55,828 |
| $ | 55,828 |
|
Acquisition (see Business Combinations) |
| 35,520 |
| — |
| ||
Ending balance |
| $ | 91,348 |
| $ | 55,828 |
|
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Intangible Assets
As of December 31, 2013, we had $8.0 million of indefinite-lived intangible assets consisting of trademarks, tradenames and in-process research and development (“IPR&D”). Pursuant to acquisition guidance, IPR&D is carried as an indefinite lived intangible until abandonment or completion. As of December 31, 2012, we had $2.9 million of indefinite-lived intangible assets consisting of trademarks and tradenames. These intangibles are included in the accompanying Consolidated Balance Sheets in the caption intangible assets, net.
|
| December 31, 2013 |
| December 31, 2012 |
| ||||||||||||||
|
|
|
| Other |
| Total |
|
|
| Other |
| Total |
| ||||||
|
| Purchased |
| intangible |
| intangible |
| Purchased |
| intangible |
| intangible |
| ||||||
(in thousands) |
| technology |
| assets |
| assets |
| technology |
| assets |
| assets |
| ||||||
Gross intangible assets |
| $ | 187,478 |
| $ | 40,675 |
| $ | 228,153 |
| $ | 109,248 |
| $ | 19,635 |
| $ | 128,883 |
|
Less accumulated amortization |
| (97,524 | ) | (15,913 | ) | (113,437 | ) | (93,436 | ) | (14,473 | ) | (107,909 | ) | ||||||
Intangible assets, net |
| $ | 89,954 |
| $ | 24,762 |
| $ | 114,716 |
| $ | 15,812 |
| $ | 5,162 |
| $ | 20,974 |
|
The estimated aggregate amortization expense for intangible assets with definite useful lives for each of the next five fiscal years is as follows (in thousands):
2014 |
| $ | 11,569 |
|
2015 |
| 19,376 |
| |
2016 |
| 18,498 |
| |
2017 |
| 15,876 |
| |
2018 |
| 12,244 |
| |
Other Assets
|
| December 31, |
| ||||
(in thousands) |
| 2013 |
| 2012 |
| ||
Cost method investment |
| $ | 16,884 |
| $ | 14,494 |
|
Income taxes receivable |
| 21,128 |
| — |
| ||
Other |
| 714 |
| 2,287 |
| ||
|
| $ | 38,726 |
| $ | 16,781 |
|
Cost Method Investment
On September 28, 2010, we completed a $3 million investment in a rapidly developing organic light emitting diode (also known as OLED) equipment company (the “Investment”). We invested an additional $10.3 million and $1.2 million in the Investment during 2012 and 2011, respectively. In 2013, we invested an additional $2.4 million in the Investment in the form of bridge notes bearing 4% interest. The bridge notes are payable in equity at the time of a liquidity event or a qualifying equity investment round, otherwise they are payable in cash in June 2014. As of December 31, 2013, we have a 15.4% ownership of the preferred shares, and effectively hold a 11.0% ownership interest of the total company. Since we do not exert significant influence on the Investment, this investment is treated under the cost method in accordance with applicable accounting guidance. This investment is recorded in other assets in our Consolidated Balance Sheets as of December 31, 2013 and 2012.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Accrued Expenses and Other Current Liabilities
|
| December 31, |
| ||||
(in thousands) |
| 2013 |
| 2012 |
| ||
Payroll and related benefits |
| $ | 11,020 |
| $ | 14,581 |
|
Sales, use and other taxes |
| 5,402 |
| 6,480 |
| ||
Contingent consideration |
| 20,098 |
| — |
| ||
Warranty |
| 5,662 |
| 4,942 |
| ||
Restructuring liability |
| 533 |
| 1,875 |
| ||
Other |
| 8,369 |
| 13,523 |
| ||
|
| $ | 51,084 |
| $ | 41,401 |
|
Customer deposits and deferred revenue
As of December 31, 2013 and 2012, we had customer deposits of $27.5 million and $32.7 million, respectively recorded as a component of customer deposits and deferred revenue.
Accrued Warranty
Typically, we provide our customers a one year manufacturer’s warranty from the date of final acceptance on the products they purchase from us. We estimate the costs that may be incurred under the warranty we provide for our products and recognize a liability in the amount of such costs at the time the related revenue is recognized. Factors that affect our warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. Changes in our warranty liability during the year are as follows:
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Balance as of the beginning of year |
| $ | 4,942 |
| $ | 8,731 |
|
Warranties issued during the year |
| 5,291 |
| 3,563 |
| ||
Settlements made during the year |
| (5,580 | ) | (7,060 | ) | ||
Changes in estimate during the period |
| 1,009 |
| (292 | ) | ||
Balance as of the end of year |
| $ | 5,662 |
| $ | 4,942 |
|
Other Liabilities
|
| December 31, |
| ||||
(in thousands) |
| 2013 |
| 2012 |
| ||
Contingent consideration |
| $ | 9,270 |
| $ | — |
|
Income taxes payable |
| — |
| 3,986 |
| ||
Other |
| 379 |
| 544 |
| ||
|
| $ | 9,649 |
| $ | 4,530 |
|
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income are:
As of December 31, 2013 |
| Gross |
| Taxes |
| Net |
| |||
Translation adjustments |
| $ | 5,718 |
| $ | (392 | ) | $ | 5,326 |
|
Minimum pension liability |
| (1,160 | ) | 424 |
| (736 | ) | |||
Unrealized gain on available-for-sale securities |
| 49 |
| (18 | ) | 31 |
| |||
Accumulated other comprehensive income |
| $ | 4,607 |
| $ | 14 |
| $ | 4,621 |
|
As of December 31, 2012 |
| Gross |
| Taxes |
| Net |
| |||
Translation adjustments |
| $ | 7,040 |
| $ | (339 | ) | $ | 6,701 |
|
Minimum pension liability |
| (1,285 | ) | 510 |
| (775 | ) | |||
Unrealized gain on available-for-sale securities |
| 76 |
| (29 | ) | 47 |
| |||
Accumulated other comprehensive income |
| $ | 5,831 |
| $ | 142 |
| $ | 5,973 |
|
7. Debt
Long-Term Debt
Long-term debt as of December 31, 2013, consists of a mortgage note payable, which is secured by certain land and buildings with carrying amounts aggregating approximately $4.7 million and $4.8 million as of December 31, 2013 and December 31, 2012, respectively. The mortgage note payable ($2.1 million as of December 31, 2013 and $2.4 million as of December 31, 2012) bears interest at an annual rate of 7.91%, with the final payment due on January 1, 2020. We estimate the fair market value of this note as of December 31, 2013 and 2012 was approximately $2.3 million and $2.6 million, respectively.
Maturity of Long-Term Debt
Long-term debt matures as follows (in thousands):
2014 |
| $ | 290 |
|
2015 |
| 314 |
| |
2016 |
| 340 |
| |
2017 |
| 368 |
| |
2018 |
| 398 |
| |
Thereafter |
| 427 |
| |
|
| 2,137 |
| |
Less current portion |
| 290 |
| |
|
| $ | 1,847 |
|
Convertible Notes
In 2011, we retired our convertible notes which were initially convertible into 36.7277 shares of common stock per $1,000 principal amount of notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for Veeco’s common stock on April 16, 2007). We paid interest on these notes on April 15 and October 15 of each year. The notes were unsecured and were effectively subordinated to all of our senior and secured indebtedness and to all indebtedness and other liabilities of our subsidiaries.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
During the first quarter of 2011, at the option of the holders, $7.5 million of notes were tendered for conversion at a price of $45.95 per share in a net share settlement. We paid the principal amount of $7.5 million in cash and issued 111,318 shares of our common stock. We recorded a loss on extinguishment totaling $0.3 million related to these transactions.
During the second quarter of 2011, we issued a notice of redemption on the remaining outstanding principal balance of notes outstanding. As a result, at the option of the holders, the notes were tendered for conversion at a price of $50.59 per share, calculated as defined in the indenture relating to the notes, in a net share settlement. As a result, we paid the principal amount of $98.1 million in cash and issued 1,660,095 shares of our common stock. We recorded a loss on extinguishment totaling $3.0 million related to these transactions.
Certain accounting guidance requires a portion of convertible debt to be allocated to equity. This guidance requires issuers of convertible debt that can be settled in cash to separately account for (i.e. bifurcate) a portion of the debt associated with the conversion feature and reclassify this portion to equity. The liability portion, which represents the fair value of the debt without the conversion feature, is accreted to its face value over the life of the debt using the effective interest method by amortizing the discount between the face amount and the fair value. The amortization is recorded as interest expense. Our convertible notes were subject to this accounting guidance. This additional interest expense did not require the use of cash.
The components of interest expense recorded on the notes were as follows (in thousands):
|
| For the year ended |
| |
|
| December 31, |
| |
|
| 2011 |
| |
Contractual interest |
| $ | 2,025 |
|
Accretion of the discount on the notes |
| 1,260 |
| |
Total interest expense on the notes |
| $ | 3,285 |
|
Effective interest rate |
| 6.7 | % | |
8. Equity Compensation Plans and Equity
Stock Option and Restricted Stock Plans
We have several stock option and restricted stock plans. In connection with our acquisition of Synos Technology, Inc. on October 1, 2013, the Board of Directors granted equity awards to the Synos employees. Pursuant to Nasdaq Listing Rules, the equity awards were granted under our 2013 Inducement Stock Incentive Plan (the “Inducement Plan”), which the Board of Directors adopted to facilitate the granting of equity awards as an inducement to these employees to commence employment with us. We issued 124,500 stock options and 87,000 restricted stock units under this plan. The stock options will vest over a three year period and have a 10-year term and the restricted stock units will vest over a two or four year period. As of December 31, 2013, the Inducement Plan was effectively merged into the 2010 Stock Incentive Plan (as amended to date, the “2010 Plan”), and is therefore considered an inactive plan with no further shares available for future grant. As of December 31, 2013, there are 124,500 options outstanding under the Inducement Plan.
On April 1, 2010, our Board of Directors, and on May 14, 2010, our shareholders, approved the 2010 Plan. The 2010 Plan replaced the 2000 Stock Incentive Plan, as amended (the “2000 Plan”), as the Company’s active stock plan. Our employees, directors and consultants are eligible to receive awards under the 2010 Plan. The 2010 Plan permits the granting of a variety of awards, including both non-qualified and incentive stock options, share appreciation rights, restricted shares, restricted share units and dividend equivalent rights. We are authorized to issue up to 6,750,000 shares under the 2010 Plan, including an additional 3,250,000 shares (including up to 2,995,000 shares of Common Stock available for issuance under the 2010 Plan and up to 255,000 shares underlying awards granted under the Inducement Plan) that were approved by the shareholders on December 10, 2013. Option awards are generally granted with an exercise price equal to the closing price of our stock on the trading day prior to the date of grant; those option awards generally vest over a 3 year period and have a 7 or 10-year term. Restricted share awards generally vest over 1-5 years. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 2010 Plan. As of December 31, 2013, there are 1,746,092 options outstanding under the 2010 Plan.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
The 2000 Plan was approved by our Board of Directors and shareholders in May 2000. The 2000 Plan provides for the grant to officers and key employees of stock awards, either in the form of options to purchase shares of our common stock or restricted stock awards. Stock awards granted pursuant to the 2000 Plan expire after seven years and generally vest over a two-year to five-year period following the grant date. In addition, the 2000 Plan provides for automatic annual grants of restricted stock to each member of our Board of Directors who is not an employee. As of December 31, 2013, there are 727,552 options outstanding under the 2000 Plan.
Equity-Based Compensation Expense, Stock Option and Restricted Stock Activity
Equity-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period. We recorded equity compensation expense of $13.1 million, $14.3 million and $12.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. We did not capitalize any equity compensation in the years ended December 31, 2013, 2012 and 2011.
During the year ended December 31, 2011, we discontinued our CIGS solar systems business and as a result the equity-based compensation expense related to each CIGS solar systems business employee has been classified as discontinued operations in determining the consolidated results of operations for the years ended December 31, 2011. For the year ended December 31, 2011 discontinued operations included compensation expense of $0.7 million.
As of December 31, 2013, the total unrecognized compensation cost related to nonvested stock awards and option awards expected to vest is $33.2 million and $12.3 million, respectively, and the related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 3.1 years and 2.2 years for the nonvested stock awards and for option awards, respectively.
The fair value of each option granted during the years ended December 31, 2013, 2012 and 2011, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
| For the year ended December 31, |
| ||||
|
| 2013 |
| 2012 |
| 2011 |
|
Weighted-average expected stock-price volatility |
| 48 | % | 59 | % | 55 | % |
Weighted-average expected option life |
| 5 years |
| 5 years |
| 4 years |
|
Average risk-free interest rate |
| 1.27 | % | 0.70 | % | 1.40 | % |
Average dividend yield |
| 0 | % | 0 | % | 0 | % |
A summary of our restricted stock awards including restricted stock units as of December 31, 2013 is presented below:
|
|
|
| Weighted- |
| |
|
|
|
| Average |
| |
|
| Shares |
| Grant-Date |
| |
|
| (000’s) |
| Fair Value |
| |
Nonvested as of December 31, 2012 |
| 693 |
| $ | 36.11 |
|
Granted |
| 798 |
| 33.16 |
| |
Vested |
| (207 | ) | 32.44 |
| |
Forfeited (including cancelled awards) |
| (126 | ) | 34.33 |
| |
Nonvested as of December 31, 2013 |
| 1,158 |
| $ | 34.93 |
|
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
During the year ended December 31, 2013, we granted 797,583 shares of restricted common stock and restricted stock units to key employees, which generally vest over a four year period. Included in this grant were 16,165 shares of restricted common stock granted to the non-employee members of the Board of Directors, which vest over the lesser of one year or at the time of the next annual meeting. The vested shares include the impact of 71,342 shares of restricted stock which were cancelled in 2013 due to employees electing to receive fewer shares in lieu of paying withholding taxes. The total fair value of shares that vested during the years ended December 31, 2013, 2012 and 2011 was $7.9 million, $5.4 million and $9.7 million, respectively.
A summary of our stock option plans as of the year ended December 31, 2013 is presented below:
|
|
|
|
|
|
|
| Weighted- |
| ||
|
|
|
|
|
|
|
| Average |
| ||
|
|
|
| Weighted- |
|
|
| Remaining |
| ||
|
|
|
| Average |
| Aggregate |
| Contractual |
| ||
|
| Shares |
| Exercise |
| Intrinsic |
| Life |
| ||
|
| (000’s) |
| Price |
| Value (000’s) |
| (in years) |
| ||
Outstanding as of December 31, 2012 |
| 2,322 |
| $ | 28.63 |
|
|
|
|
| |
Granted |
| 539 |
| 32.68 |
|
|
|
|
| ||
Exercised |
| (149 | ) | 14.74 |
|
|
|
|
| ||
Forfeited (including cancelled options) |
| (114 | ) | 35.22 |
|
|
|
|
| ||
Outstanding as of December 31, 2013 |
| 2,598 |
| $ | 29.98 |
| $ | 14,277 |
| 6.5 |
|
Options exercisable as of December 31, 2013 |
| 1,567 |
| $ | 27.19 |
| $ | 13,208 |
| 4.7 |
|
The weighted-average grant date fair value of stock options granted for the years ended December 31, 2013, 2012 and 2011 was $13.47, $15.56 and $21.90 per option, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2013, 2012 and 2011 was $2.5 million, $6.8 million and $22.8 million, respectively.
The following table summarizes information about stock options outstanding as of December 31, 2013:
|
| Options Outstanding |
| Options Exercisable |
| ||||||||
|
| Number |
| Weighted-Average |
| Weighted- |
| Number |
| Weighted- |
| ||
|
| Outstanding at |
| Remaining |
| Average |
| Exercisable at |
| Average |
| ||
|
| December 31, |
| Contractual Life |
| Exercise |
| December 31, |
| Exercise |
| ||
Range of Exercise Prices |
| 2013 (000s) |
| (in years) |
| Price |
| 2013 (000s) |
| Price |
| ||
$8.82 - 16.37 |
| 432 |
| 2.4 |
| $ | 10.98 |
| 432 |
| $ | 10.98 |
|
17.48 - 26.69 |
| 296 |
| 2.2 |
| 19.85 |
| 278 |
| 19.55 |
| ||
28.60 - 42.96 |
| 1,601 |
| 8.2 |
| 33.43 |
| 674 |
| 34.27 |
| ||
44.09 - 51.70 |
| 269 |
| 7.4 |
| 51.02 |
| 183 |
| 50.96 |
| ||
|
| 2,598 |
| 6.5 |
| $ | 29.98 |
| 1,567 |
| $ | 27.19 |
|
Shares Reserved for Future Issuance
As of December 31, 2013, we have 5,856,268 shares reserved for future issuance upon exercise of stock options and grants of restricted stock.
Preferred Stock
Our Board of Directors has authority under our Certificate of Incorporation to issue shares of preferred stock with voting and economic rights to be determined by the Board of Directors.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Treasury Stock
On August 24, 2010, our Board of Directors authorized the repurchase of up to $200 million of our common stock. All funds for this repurchase program were exhausted as of August 19, 2011. Repurchases were made from time to time on the open market in accordance with applicable federal securities laws. During 2011, we purchased 4,160,228 shares for $162 million (including transaction costs) under the program at an average cost of $38.96 per share. During 2010, we purchased 1,118,600 shares for $38 million (including transaction costs) under the program at an average cost of $34.06 per share. This stock repurchase is included as treasury stock in the Consolidated Balance Sheet as of December 31, 2011. During the year ended December 31, 2012, we cancelled and retired the 5,278,828 shares of treasury stock we purchased under this repurchase program. As a result of this transaction, we recorded a reduction in treasury stock of $200.2 million and a corresponding reduction of $200.1 million and $0.1 million in retained earnings and common stock, respectively.
9. Income Taxes
Our income (loss) from continuing operations before income taxes in the accompanying Consolidated Statements of Operations consists of (in thousands):
|
| Year ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Domestic |
| $ | (84,942 | ) | $ | 5,811 |
| $ | 230,204 |
|
Foreign |
| 13,732 |
| 32,375 |
| 41,882 |
| |||
|
| $ | (71,210 | ) | $ | 38,186 |
| $ | 272,086 |
|
Significant components of the provision (benefit) for income taxes from continuing operations are presented below (in thousands):
|
| Year ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
| $ | (21,022 | ) | $ | 2,515 |
| $ | 59,921 |
|
Foreign |
| 3,921 |
| 7,576 |
| 10,714 |
| |||
State and local |
| 148 |
| (317 | ) | 805 |
| |||
Total current provision (benefit) for income taxes |
| (16,953 | ) | 9,774 |
| 71,440 |
| |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
| (11,589 | ) | (482 | ) | 10,454 |
| |||
Foreign |
| (462 | ) | 727 |
| (1,073 | ) | |||
State and local |
| 57 |
| 1,638 |
| 763 |
| |||
Total deferred provision (benefit) for income taxes |
| (11,994 | ) | 1,883 |
| 10,144 |
| |||
Total provision (benefit) for income taxes |
| $ | (28,947 | ) | $ | 11,657 |
| $ | 81,584 |
|
The following is a reconciliation of the income tax provision (benefit) computed using the Federal statutory rate to our actual income tax provision (in thousands):
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
|
| Year ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Income tax provision (benefit) at U.S. statutory rates |
| $ | (24,923 | ) | $ | 13,366 |
| $ | 95,231 |
|
State income tax expense (benefit), net of federal impact |
| (1,554 | ) | (89 | ) | 1,616 |
| |||
Nondeductible expenses |
| 195 |
| 622 |
| (749 | ) | |||
Domestic production activities deduction |
| 1,554 |
| (489 | ) | (4,581 | ) | |||
Nondeductible compensation |
| 11 |
| 205 |
| 841 |
| |||
Research and development tax credit |
| (3,151 | ) | (3,013 | ) | (4,675 | ) | |||
Net change in valuation allowance |
| 2,420 |
| 2,943 |
| 121 |
| |||
Change in accrual for unrecognized tax benefits |
| 577 |
| 533 |
| 824 |
| |||
Foreign tax rate differential |
| (4,275 | ) | (2,387 | ) | (5,225 | ) | |||
Other |
| 199 |
| (34 | ) | (1,819 | ) | |||
Total provision (benefit) for income taxes |
| $ | (28,947 | ) | $ | 11,657 |
| $ | 81,584 |
|
On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, and this legislation retroactively extended the research and development tax credit for 2 years, from January 1, 2012 through December 31, 2013. Income tax benefit for 2013 includes $1.9 million for the entire benefit of the research and development tax credit attributable to 2012.
During the fourth quarter of 2012, we determined that we may not meet the criteria required to receive a certain incentive tax rate pursuant to a negotiated tax holiday in one foreign jurisdiction. Although we are continuing to negotiate the criteria for the incentive, for financial reporting purposes we have recorded additional tax provisions of $0.9 million and $4.0 million in 2013 and 2012, respectively, totaling $4.9 million which represents the cumulative effect of calculating the tax provision using the incentive tax rate as compared to the foreign country’s statutory rate. If we successfully renegotiate the incentive criteria, this additional tax provision could be reversed as a future benefit in the period in which the successful negotiations are finalized.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
On October 1, 2013, we acquired 100% of Synos’s total outstanding stock. In connection with the acquisition, we recorded a $32.4 million deferred tax liability related to the difference between the financial reporting amount and the tax basis of the assets acquired.
During 2012, we recorded a current tax benefit of $2.1 million related to equity-based compensation which was a credit to additional paid in capital. We did not record any tax benefits related to equity-based compensation during 2013. We will credit $0.5 million to additional paid-in capital when the research and development credits are realized for financial reporting purposes.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Deferred tax assets: |
|
|
|
|
| ||
Inventory valuation |
| $ | 6,983 |
| $ | 6,386 |
|
Domestic net operating loss carry forwards |
| 5,585 |
| 1,144 |
| ||
Tax credit carry forwards |
| 12,566 |
| 4,145 |
| ||
Foreign net operating loss carry forwards |
| 821 |
| — |
| ||
Warranty and installation accruals |
| 3,002 |
| 2,174 |
| ||
Equity compensation |
| 10,638 |
| 9,114 |
| ||
Other accruals |
| 2,556 |
| 3,270 |
| ||
Other |
| 1,160 |
| 760 |
| ||
Total deferred tax assets |
| 43,311 |
| 26,993 |
| ||
Valuation allowance |
| (7,753 | ) | (4,708 | ) | ||
Net deferred tax assets |
| 35,558 |
| 22,285 |
| ||
|
|
|
|
|
| ||
Deferred tax liabilities: |
|
|
|
|
| ||
Purchased intangible assets |
| 45,208 |
| 9,973 |
| ||
Undistributed earnings |
| 1,737 |
| 1,095 |
| ||
Depreciation |
| 4,711 |
| 7,014 |
| ||
Total deferred tax liabilities |
| 51,656 |
| 18,082 |
| ||
Net deferred taxes |
| $ | (16,098 | ) | $ | 4,203 |
|
No provision has been made as of December 31, 2013 for United States or additional foreign withholding taxes on approximately $101.0 million of undistributed earnings of our foreign subsidiaries because it is the present intention of management to permanently reinvest the undistributed earnings of our foreign subsidiaries in China, South Korea, Malaysia, Singapore and Taiwan. As it is our intention to reinvest those earnings permanently, it is not practicable to estimate the amount of tax that might be payable if they were remitted. In the fourth quarter of 2013, we changed our assertion relating to Japan and such earnings will no longer be permanently reinvested based on the future liquidation of our Japanese entity. We have provided deferred income taxes and future withholding taxes on the earnings that we anticipate will be remitted.
As of December 31, 2013, we have credit carry forwards of approximately $12.6 million for financial reporting purposes, consisting primarily of foreign tax credits, which expire between 2022 and 2023, federal research and development credits which expire between 2031 and 2033, and various state tax credits which expire at various dates through 2028.
Our valuation allowance of approximately $7.8 million as of December 31, 2013 increased by approximately $3.0 million during the year then ended. The increase relates primarily to state and local deferred tax assets of $1.6 million and foreign tax attributes of $1.4 million for which we could not conclude were realizable on a more-likely-than-not basis.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
Beginning balance as of December 31 |
| $ | 5,818 |
| $ | 4,748 |
|
Additions for tax positions related to current year |
| 324 |
| 435 |
| ||
Reductions for tax positions related to current year |
| — |
| — |
| ||
Additions for tax positions related to prior years |
| 477 |
| 742 |
| ||
Reductions for tax positions related to prior years |
| (224 | ) | (59 | ) | ||
Reductions due to the lapse of the applicable statute of limitations |
| — |
| (48 | ) | ||
Settlements |
| (167 | ) | — |
| ||
Ending balance as of December 31 |
| $ | 6,228 |
| $ | 5,818 |
|
We do not anticipate that our uncertain tax position will change significantly within the next twelve months subject to the completion of our ongoing federal tax audit and any resultant settlement.
Of the amounts reflected in the table above as of December 31, 2013, the entire amount if recognized would reduce our effective tax rate. It is our policy to recognize interest and penalties related to income tax matters in income tax expense. The total accrual for interest and penalties related to unrecognized tax benefits was approximately $0.8 million and $0.5 million as of December 31, 2013 and 2012, respectively.
We or one of our subsidiaries file income tax returns in the United States federal jurisdiction and various state, local and foreign jurisdictions. All material federal income tax matters have been concluded for years through 2006 subject to subsequent utilization of net operating losses generated in such years. Our 2010 federal tax return is currently under examination. All material state and local income tax matters have been reviewed through 2008 with one state jurisdiction currently under examination for open tax years between 2007 and 2011. The majority of our foreign jurisdictions have been reviewed through 2009. Principally all of our foreign jurisdictions remain open with respect to the 2010 through 2013 tax years.
10. Commitments and Contingencies and Other Matters
Restructuring and Other Charges
During 2011 through 2013, in response to challenging business conditions, we initiated activities to reduce and contain spending, including reducing our workforce, consultants and discretionary expenses.
In conjunction with these activities, we recognized restructuring charges of approximately $1.5 million, $3.8 million and $1.3 million during the years ended December 31, 2013, 2012 and 2011, respectively. During the years ended December 31, 2012 and 2011, we also recorded inventory write-offs of $1.0 million related to a discontinued product line in our Data Storage segment and $0.8 million related to a discontinued product line in our LED & Solar segment, respectively. These inventory write-offs are included in cost of sales in the accompanying Consolidated Statements of Operations.
Restructuring expense for the years ended December 31, 2013, 2012 and 2011 are as follows (in thousands):
|
| Year ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Personnel severance and related costs |
| $ | 1,485 |
| $ | 3,040 |
| $ | 1,288 |
|
Equity compensation and related costs |
| — |
| 414 |
| — |
| |||
Lease-related and other |
| — |
| 359 |
| — |
| |||
|
| $ | 1,485 |
| $ | 3,813 |
| $ | 1,288 |
|
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Personnel Severance and Related Costs
During 2013, we recorded $1.5 million in personnel severance and related costs resulting from the restructuring of one of our international sales offices and the consolidation of certain sales, business and administrative functions. During 2012, we recorded $3.0 million in personnel severance and related costs resulting from a headcount reduction of 52 employees. During 2011, we recorded $1.3 million in personnel severance and related costs related to a companywide reorganization resulting in a headcount reduction of 65 employees. These reductions in workforce included executives, management, administration, sales and service personnel and manufacturing employees’ companywide.
Lease-Related and Other
During 2012, we recorded $0.4 million in other associated costs resulting from a headcount reduction of 52 employees. These charges primarily consist of job placement services, consulting and relocation expenses, as well as duplicate wages incurred during the transition period.
The following is a reconciliation of the liability for the 2013, 2012 and 2011 restructuring charges through December 31, 2013 (in thousands):
|
| LED & Solar |
| Data Storage |
| Unallocated |
| Total |
| ||||
Short-term liability |
|
|
|
|
|
|
|
|
| ||||
Balance as of January 1, 2011 |
| $ | — |
| $ | 178 |
| $ | 536 |
| $ | 714 |
|
|
|
|
|
|
|
|
|
|
| ||||
Personnel severance and related costs 2011 |
| 672 |
| 51 |
| 311 |
| 1,034 |
| ||||
Personnel severance and related costs 2012 |
| 874 |
| 1,684 |
| 135 |
| 2,693 |
| ||||
Personnel severance and related costs 2013 |
| 1,017 |
| 410 |
| 58 |
| 1,485 |
| ||||
Short-term/long-term reclassification 2011 |
| — |
| 58 |
| — |
| 58 |
| ||||
Cash payments 2011 |
| (138 | ) | (159 | ) | (553 | ) | (850 | ) | ||||
Cash payments 2012 |
| (960 | ) | (504 | ) | (310 | ) | (1,774 | ) | ||||
Cash payments 2013 |
| (1,282 | ) | (1,368 | ) | (177 | ) | (2,827 | ) | ||||
Balance as of December 31, 2013 |
| $ | 183 |
| $ | 350 |
| $ | — |
| $ | 533 |
|
|
|
|
|
|
|
|
|
|
| ||||
Long-term liability |
|
|
|
|
|
|
|
|
| ||||
Balance as of January 1, 2011 |
| $ | — |
| $ | 58 |
| $ | — |
| $ | 58 |
|
Short-term/long-term reclassification 2011 |
| — |
| (58 | ) | — |
| (58 | ) | ||||
Balance as of December 31, 2011 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Minimum Lease Commitments
Minimum lease commitments as of December 31, 2013 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows (in thousands):
2014 |
| $ | 3,076 |
|
2015 |
| 2,091 |
| |
2016 |
| 1,327 |
| |
2017 |
| 1,052 |
| |
2018 |
| 536 |
| |
|
| $ | 8,082 |
|
Rent amounted to $2.9 million, $3.5 million and $2.7 million in 2013, 2012 and 2011, respectively. In addition, we are obligated under such leases for certain other expenses, including real estate taxes and insurance.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Environmental Remediation
We are aware that petroleum hydrocarbon contamination has been detected in the soil at the site of a facility formerly leased by us in Santa Barbara, California. We have been indemnified for any liabilities we may incur which arise from environmental contamination at the site. Even without consideration of such indemnification, we do not believe that any material loss or expense is probable in connection with any such liabilities. The former owner of the land and building in Santa Barbara, California in which our former Metrology operations were located, which business (sold to Bruker on October 7, 2010), has disclosed that there are hazardous substances present in the ground under the building. Management believes that the comprehensive indemnification clause that was part of the purchase contract relating to the purchase of such land provides adequate protection against any environmental issues that may arise. We have provided Bruker indemnification as part of the sale.
Litigation
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, seeks unspecified damages and asserts claims that he suffered burns and other injuries while he was cleaning a molecular beam epitaxy system alleged to have been manufactured by Veeco. The lawsuit alleges, 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. Veeco believes this lawsuit is without merit and intends to defend vigorously against the claims. Veeco is unable to predict the outcome of this action or to reasonably estimate the possible loss or range of loss, if any, arising from the claims asserted therein. The Company believes that, in the event of any recovery by the plaintiff from Veeco, such recovery would be fully covered by Veeco’s insurance.
We are involved in various other legal proceedings arising in the normal course of our business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Concentrations of Credit Risk
Our business depends in large part upon the capital expenditures of our top ten customers, which accounted for 69% and 77% of total accounts receivable as of December 31, 2013 and 2012, respectively. Of such, LED & Solar and Data Storage customers accounted for approximately 30% and 39%, and 56% and 21%, respectively, of total accounts receivable as of December 31, 2013 and 2012.
Customers who accounted for more than 10% of our aggregate accounts receivable or net sales are as follows:
|
|
|
| Accounts Receivable |
| Net Sales for the year ended |
| ||||||
|
|
|
| December 31, |
| December 31, |
| ||||||
Customer |
| Segment |
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| 2011 |
|
Customer A |
| Data Storage |
| 23 | % | 16 | % | * |
| 14 | % | * |
|
Customer B |
| Data Storage |
| 11 | % | * |
| * |
| * |
| * |
|
Customer C |
| LED & Solar |
| 10 | % | 16 | % | 14 | % | * |
| * |
|
Customer D |
| LED & Solar |
| * |
| * |
| * |
| * |
| 11 | % |
Customer E |
| LED & Solar |
| * |
| * |
| * |
| * |
| 12 | % |
* Less than 10% of aggregate accounts receivable or net sales.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
We manufacture and sell our products to companies in different geographic locations. In certain instances, we require deposits for a portion of the sales price in advance of shipment. We perform periodic credit evaluations of our customers’ financial condition and, where appropriate, require that letters of credit be provided on certain foreign sales arrangements. Receivables generally are due within 30-90 days, other than receivables generated from customers in Japan where payment terms generally range from 60-150 days. Our net accounts receivable balance is concentrated in the following geographic locations (in thousands):
|
| December 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
China |
| $ | 4,845 |
| $ | 28,132 |
|
Singapore |
| 3,192 |
| 7,266 |
| ||
Taiwan |
| 553 |
| 6,390 |
| ||
Other |
| 6,162 |
| 3,853 |
| ||
Asia Pacific |
| 14,752 |
| 45,641 |
| ||
Americas |
| 7,526 |
| 13,917 |
| ||
Europe, Middle East and Africa |
| 1,545 |
| 3,611 |
| ||
|
| $ | 23,823 |
| $ | 63,169 |
|
Suppliers
We currently outsource certain functions to third parties, including the manufacture of all or substantially all of our new MOCVD systems, Data Storage systems and ion sources. We primarily rely on several suppliers for the manufacturing of these systems. We plan to maintain some level of internal manufacturing capability for these systems. The failure of our present suppliers to meet their contractual obligations under our supply arrangements and our inability to make alternative arrangements or resume the manufacture of these systems ourselves could have a material adverse effect on our revenues, profitability, cash flows and relationships with our customers.
In addition, certain of the components and sub-assemblies included in our products are obtained from a single source or a limited group of suppliers. Our inability to develop alternative sources, if necessary, could result in a prolonged interruption in supply or a significant increase in the price of one or more components, which could adversely affect our operating results.
Purchase Commitments
As of December 31, 2013, we had purchase commitments totaling $60.3 million all of which come due within one year. We have $9.4 million of offsetting supplier deposits against these purchase commitments as of December 31, 2013.
Lines of Credit and Guarantees
As of December 31, 2013, we had letter of credit and bank guarantees issued by a bank on our behalf as needed. We had letters of credit outstanding of $0.6 million and bank guarantees outstanding of $5.9 million, of which, $2.7 million is collateralized against cash that is restricted from use. As of December 31, 2013, we had $40.4 million of unused lines of credit available. The line of credit is available to draw upon to cover performance bonds as required by our customers.
11. Foreign Operations, Geographic Area and Product Segment Information
Net sales which are attributed to the geographic location in which the customer facility is located and long-lived tangible assets related to operations in the United States and other foreign countries as of and for the years ended December 31, 2013, 2012 and 2011 are as follows (in thousands):
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
|
| Net Sales to Unaffiliated |
|
|
|
|
|
|
| ||||||||||
|
| Customers |
| Long-Lived Tangible Assets |
| ||||||||||||||
|
| 2013 |
| 2012 |
| 2011 |
| 2013 |
| 2012 |
| 2011 |
| ||||||
Americas (1) |
| $ | 57,609 |
| $ | 83,317 |
| $ | 100,635 |
| $ | 66,002 |
| $ | 74,497 |
| $ | 67,788 |
|
Europe, Middle East and Africa (1) |
| 21,941 |
| 41,708 |
| 57,617 |
| 95 |
| 36 |
| 203 |
| ||||||
Asia Pacific (1) |
| 252,199 |
| 390,995 |
| 820,883 |
| 23,042 |
| 23,769 |
| 20,417 |
| ||||||
|
| $ | 331,749 |
| $ | 516,020 |
| $ | 979,135 |
| $ | 89,139 |
| $ | 98,302 |
| $ | 88,408 |
|
(1) For the year ended December 31, 2013, net sales to customers in China were 44.8% of total net sales. For the year ended December 31, 2012, net sales to customers in China and Taiwan were 42.0% and 11.4% of total net sales, respectively. For the year ended December 31, 2011, net sales to customers in China were 66.4% of total net sales. No other country in Europe, Middle East, and Africa (“EMEA”) and Asia Pacific (“APAC”) accounted for more than 10% of our net sales for the years presented. A minimal amount, less than 1%, of sales included within the Americas caption above have been derived from other regions outside of the United States.
We have five identified reporting units that we aggregate into two reportable segments: the VIBE and Mechanical reporting units which are reported in our Data Storage segment; and the MOCVD, MBE and ALD reporting units are reported in our LED & Solar segment. We manage the business, review operating results and assess performance, as well as allocate resources, based upon our reporting units that reflect the market focus of each business. The LED & Solar segment consists of metal organic chemical vapor deposition (“MOCVD”) systems, molecular beam epitaxy (“MBE”) systems, thermal deposition sources and other types of deposition systems as well as newly acquired atomic layer deposition (“ALD”) technology. These systems are primarily sold to customers in the LED, OLED and solar industries, as well as to scientific research customers. This segment has product development and marketing sites in Somerset, New Jersey, Poughkeepsie, New York, St. Paul, Minnesota, Fremont, California, and Korea. During 2011 we discontinued our CIGS solar systems business, located in Tewksbury, Massachusetts and Clifton Park, New York. The Data Storage segment consists of the ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, and dicing and slicing products sold primarily to customers in the data storage industry. This segment has product development and marketing sites in Plainview, New York, Ft. Collins, Colorado and Camarillo, California.
We evaluate the performance of our reportable segments based on income (loss) from operations before interest, income taxes, amortization and certain items (“segment profit (loss)”), which is the primary indicator used to plan and forecast future periods. The presentation of this financial measure facilitates meaningful comparison with prior periods, as management believes segment profit (loss) reports baseline performance and thus provides useful information. Certain items include restructuring expenses, asset impairment charges, inventory write-offs, equity-based compensation expense and other non-recurring items. The accounting policies of the reportable segments are the same as those described in the summary of critical accounting policies.
The following tables present certain data pertaining to our reportable product segments and a reconciliation of segment profit (loss) to income (loss) from continuing operations, before income taxes for the years ended December 31, 2013, 2012 and 2011, and goodwill and total assets as of December 31, 2013 and 2012 (in thousands):
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
|
|
|
| Data |
|
|
|
|
| ||||
|
| LED & Solar |
| Storage |
| Unallocated |
| Total |
| ||||
Year ended December 31, 2013 |
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 249,742 |
| $ | 82,007 |
| $ | — |
| $ | 331,749 |
|
Segment loss |
| $ | (26,362 | ) | $ | (671 | ) | $ | (22,588 | ) | $ | (49,621 | ) |
Interest income (expense), net |
| — |
| — |
| 602 |
| 602 |
| ||||
Amortization |
| (4,233 | ) | (1,294 | ) | — |
| (5,527 | ) | ||||
Equity-based compensation |
| (5,126 | ) | (1,703 | ) | (6,301 | ) | (13,130 | ) | ||||
Restructuring |
| (1,017 | ) | (410 | ) | (58 | ) | (1,485 | ) | ||||
Asset impairment charge |
| (1,174 | ) | (46 | ) | — |
| (1,220 | ) | ||||
Changes in contingent consideration |
| (829 | ) | — |
| — |
| (829 | ) | ||||
Income (loss) from continuing operations before income taxes |
| $ | (38,741 | ) | $ | (4,124 | ) | $ | (28,345 | ) | $ | (71,210 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Year ended December 31, 2012 |
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 363,181 |
| $ | 152,839 |
| $ | — |
| $ | 516,020 |
|
Segment profit (loss) |
| $ | 41,603 |
| $ | 25,414 |
| $ | (4,919 | ) | $ | 62,098 |
|
Interest income (expense), net |
| — |
| — |
| 974 |
| 974 |
| ||||
Amortization |
| (3,586 | ) | (1,322 | ) | — |
| (4,908 | ) | ||||
Equity-based compensation |
| (5,400 | ) | (1,920 | ) | (6,534 | ) | (13,854 | ) | ||||
Restructuring |
| (1,233 | ) | (2,521 | ) | (59 | ) | (3,813 | ) | ||||
Asset impairment charge |
| — |
| (1,335 | ) | — |
| (1,335 | ) | ||||
Other |
| — |
| (976 | ) | — |
| (976 | ) | ||||
Income (loss) from continuing operations before income taxes |
| $ | 31,384 |
| $ | 17,340 |
| $ | (10,538 | ) | $ | 38,186 |
|
|
|
|
|
|
|
|
|
|
| ||||
Year ended December 31, 2011 |
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 827,797 |
| $ | 151,338 |
| $ | — |
| $ | 979,135 |
|
Segment profit (loss) |
| $ | 267,059 |
| $ | 38,358 |
| $ | (8,987 | ) | $ | 296,430 |
|
Interest income (expense), net |
| — |
| — |
| (824 | ) | (824 | ) | ||||
Amortization |
| (3,227 | ) | (1,424 | ) | (83 | ) | (4,734 | ) | ||||
Equity-based compensation |
| (3,473 | ) | (1,458 | ) | (7,876 | ) | (12,807 | ) | ||||
Restructuring |
| (204 | ) | (12 | ) | (1,072 | ) | (1,288 | ) | ||||
Asset impairment charge |
| (584 | ) | — |
| — |
| (584 | ) | ||||
Other |
| (758 | ) | — |
| — |
| (758 | ) | ||||
Loss on extinguishment of debt |
| — |
| — |
| (3,349 | ) | (3,349 | ) | ||||
Income (loss) from continuing operations before income taxes |
| $ | 258,813 |
| $ | 35,464 |
| $ | (22,191 | ) | $ | 272,086 |
|
Unallocated assets are comprised principally of cash and cash equivalents and short-term investments as of December 31, 2013 and 2012.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
|
| LED & Solar |
| Data Storage |
| Unallocated |
| Total |
| ||||
As of December 31, 2013 |
|
|
|
|
|
|
|
|
| ||||
Goodwill |
| $ | 91,348 |
| $ | — |
| $ | — |
| $ | 91,348 |
|
Total assets |
| $ | 359,464 |
| $ | 37,910 |
| $ | 550,595 |
| $ | 947,969 |
|
|
|
|
|
|
|
|
|
|
| ||||
As of December 31, 2012 |
|
|
|
|
|
|
|
|
| ||||
Goodwill |
| $ | 55,828 |
| $ | — |
| $ | — |
| $ | 55,828 |
|
Total assets |
| $ | 276,352 |
| $ | 38,664 |
| $ | 622,288 |
| $ | 937,304 |
|
Other Segment Data (in thousands):
|
| Year ended December 31, |
| |||||||
|
| 2013 |
| 2012 |
| 2011 |
| |||
Depreciation and amortization expense: |
|
|
|
|
|
|
| |||
LED & Solar |
| $ | 14,365 |
| $ | 12,020 |
| $ | 8,320 |
|
Data Storage |
| 2,907 |
| 3,008 |
| 3,245 |
| |||
Unallocated |
| 1,153 |
| 1,164 |
| 1,327 |
| |||
Total depreciation and amortization expense |
| $ | 18,425 |
| $ | 16,192 |
| $ | 12,892 |
|
Expenditures for long-lived assets: |
|
|
|
|
|
|
| |||
LED & Solar |
| $ | 6,796 |
| $ | 20,279 |
| $ | 56,141 |
|
Data Storage |
| 1,271 |
| 3,341 |
| 2,703 |
| |||
Unallocated |
| 1,108 |
| 1,374 |
| 1,520 |
| |||
Total expenditures for long-lived assets |
| $ | 9,175 |
| $ | 24,994 |
| $ | 60,364 |
|
12. Derivative Financial Instruments
We use derivative financial instruments to minimize the impact of foreign exchange rate changes on earnings and cash flows. In the normal course of business, our operations are exposed to fluctuations in foreign exchange rates. In order to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known foreign currency exposures, we enter into monthly forward contracts. We do not use derivative financial instruments for trading or speculative purposes. Our forward contracts are not expected to subject us to material risks due to exchange rate movements because gains and losses on these contracts are intended to offset exchange gains and losses on the underlying assets and liabilities. The forward contracts are marked-to-market through earnings. We conduct our derivative transactions with highly rated financial institutions in an effort to mitigate any material creditcounterparty risk.
The aggregate foreign currency exchange gain (loss) included in determining consolidated results
|
| As of December 31, 2013 |
| ||||||||
|
|
|
| Fair |
| Maturity |
| Notional |
| ||
(in thousands) |
| Component of |
| Value |
| Dates |
| Amount |
| ||
Not Designated as Hedges under ASC 815 |
|
|
|
|
|
|
|
|
| ||
Foreign currency exchange forwards |
| Prepaid and other current assets |
| 1 |
| January 2014 |
| 4,700 |
| ||
Foreign currency collar |
| Prepaid and other current assets |
| 906 |
| October 2014 |
| 34,069 |
| ||
Total Derivative Instruments |
|
|
| $ | 907 |
|
|
| $ | 38,769 |
|
|
| As of December 31, 2012 |
| ||||||||
|
|
|
| Fair |
| Maturity |
| Notional |
| ||
(in thousands) |
| Component of |
| Value |
| Dates |
| Amount |
| ||
Not Designated as Hedges under ASC 815 |
|
|
|
|
|
|
|
|
| ||
Foreign currency exchange forwards |
| Prepaid and other current assets |
| 248 |
| January 2013 |
| 9,590 |
| ||
Total Derivative Instruments |
|
|
| $ | 248 |
|
|
| $ | 9,590 |
|
Table of operations was approximately $1.3 million, $(0.7) millionContents
Veeco Instruments Inc. and $(0.1) million in 2010, 2009 and 2008, respectively. IncludedSubsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
|
|
|
| Amount of realized net gain (loss) |
| |||||||
|
|
|
| and changes in the fair value of |
| |||||||
|
| Location of realized net gain |
| derivatives for the year ended |
| |||||||
|
| (loss) and changes in the fair |
| December 31, |
| |||||||
(in thousands) |
| value of derivatives |
| 2013 |
| 2012 |
| 2011 |
| |||
Foreign currency exchange forwards |
| Other, net |
| $ | 248 |
| $ | 333 |
| $ | 553 |
|
Foreign currency collar |
| Other, net |
| $ | 906 |
| $ | — |
| $ | — |
|
These contracts were valued using market quotes in the aggregate foreign currency exchange gain (loss) were gains (losses) relating to forward contracts of $0.1 million, $0.2 million and ($0.4) million in 2010, 2009 and 2008, respectively. These amounts were recognized and are included in other, net in the accompanying Consolidated Statements of Operations.secondary market for similar instruments (fair value Level 2, please see our footnote Fair Value Measurements).
As of December 31, 2010, approximately $0.3 million of gains related to forward contracts were included in prepaid expenses and other current assets and were subsequently received in January 2011. As of December 31, 2009, approximately $0.2 million of gains related to forward contracts were included in prepaid expenses and other current assets and were subsequently received in January 2010. Monthly forward contracts with a notional amount of $18.5 million, entered into in December 2010 for January 2011, will be settled in January 2011.
The weighted average notional amount of derivative contracts outstanding during the year ended December 31, 20102013 and 2012 was approximately $6.2 million.
Translation of Foreign Currencies$5.2 million and $3.5 million, respectively
Certain
13. Retirement Plans
We maintain a defined contribution benefit plan under Section 401(k) of the Internal Revenue Code. Almost all of our international subsidiaries operate primarily using local functional currencies. Foreign currency denominated assets and liabilitiesdomestic full-time employees are translated into U.S. dollars at exchange rateseligible to participate in effect atthis plan. Under the balance sheet date, and income and expense accounts and cash flow items are translated at average monthly exchange ratesplan during 2011, we provided matching contributions of fifty cents for every dollar employees contribute up to a maximum of $3,000. During 2012, we provided matching contributions of fifty cents for every dollar employees contribute, up to the respective periods. Net exchange gainslesser of 3% of the employee’s eligible compensation or losses resulting from$7,500. During 2013, we provided a matching contributions of fifty cents for every dollar employees contribute, up to the translationlesser of foreign financial statements and3% of the effectemployee’s eligible compensation or $7,650. Generally, the plan calls for vesting of exchange rates on intercompany transactionsCompany contributions over the initial five years of a long-term investment natureparticipant’s employment. We maintain a similar type of contribution plan at one of our foreign subsidiaries. Our contributions to these plans in 2013, 2012 and 2011 were $2.3 million, $2.5 million and $2.1 million, respectively.
We acquired a defined benefit plan on May 5, 2000 that had been frozen as of September 30, 1991. No further benefits since September 30, 1991 accrued to any participant. The benefit that participants are recordedentitled to receive as of their normal retirement date is their accrued benefit as of September 30, 1991. In connection with the freezing of the Plan as of September 30, 1991, all participants became fully vested in their benefit. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”). This plan has a separate componentplan year end of equitySeptember 30. There are 110 participants in accumulated other comprehensive income. Any foreign currency gains or losses related to transactionsthe plan as of September 30, 2013. The plan is funded in accordance with ERISA guidelines and has $1.6 million in contract assets as of September 30, 2013.
14. Selected Quarterly Financial Information (unaudited)
The following table presents selected unaudited financial data for each fiscal quarter of 2013 and 2012. Although unaudited, this information has been prepared on a basis consistent with our audited Consolidated Financial Statements and, in the opinion of our management, reflects all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of this information in accordance with accounting principles generally accepted in the United States. Such quarterly results are included in operating results.not necessarily indicative of future results of operations.
Environmental Compliance and RemediationF-41
Environmental compliance costs include ongoing maintenance, monitoring and similar costs. Such costs are expensed as incurred. Environmental remediation costs are accrued when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)(continued)
December 31, 20102013
Accumulated Other Comprehensive Income
Our accumulated other comprehensive income of $5.8 million and $7.1 million at December 31, 2010 and 2009, respectively, consists primarily of foreign currency translation adjustments.
|
| Fiscal 2013 (unaudited) |
| Fiscal 2012 (unaudited) |
| ||||||||||||||||||||
(in thousands, except per share data) |
| Q1 |
| Q2 |
| Q3 |
| Q4 |
| Q1 |
| Q2 |
| Q3 |
| Q4 |
| ||||||||
Net sales |
| $ | 61,781 |
| $ | 97,435 |
| $ | 99,324 |
| $ | 73,209 |
| $ | 139,909 |
| $ | 136,547 |
| $ | 132,715 |
| $ | 106,849 |
|
Gross profit |
| 22,552 |
| 34,640 |
| 30,308 |
| 15,642 |
| 65,268 |
| 61,254 |
| 49,884 |
| 38,727 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income (loss) from continuing operations, net of income taxes |
| (10,071 | ) | (4,081 | ) | (6,026 | ) | (22,085 | ) | 16,462 |
| 11,011 |
| 7,698 |
| (8,642 | ) | ||||||||
Income (loss) from discontinued operations, net of income taxes |
| — |
| — |
| — |
| — |
| (50 | ) | 807 |
| 4,055 |
| (413 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income (loss) |
| $ | (10,071 | ) | $ | (4,081 | ) | $ | (6,026 | ) | $ | (22,085 | ) | $ | 16,412 |
| $ | 11,818 |
| $ | 11,753 |
| $ | (9,055 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Continuing operations |
| $ | (0.26 | ) | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.57 | ) | $ | 0.43 |
| $ | 0.29 |
| $ | 0.20 |
| $ | (0.22 | ) |
Discontinued operations |
| — |
| — |
| — |
| — |
| — |
| 0.02 |
| 0.10 |
| (0.01 | ) | ||||||||
Income (loss) |
| $ | (0.26 | ) | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.57 | ) | $ | 0.43 |
| $ | 0.31 |
| $ | 0.30 |
| $ | (0.23 | ) |
Diluted : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Continuing operations |
| $ | (0.26 | ) | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.57 | ) | $ | 0.42 |
| $ | 0.28 |
| $ | 0.20 |
| $ | (0.22 | ) |
Discontinued operations |
| — |
| — |
| — |
| — |
| — |
| 0.02 |
| 0.10 |
| (0.01 | ) | ||||||||
Income (loss) |
| $ | (0.26 | ) | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.57 | ) | $ | 0.42 |
| $ | 0.30 |
| $ | 0.30 |
| $ | (0.23 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
| 38,716 |
| 38,764 |
| 38,841 |
| 38,904 |
| 38,261 |
| 38,370 |
| 38,577 |
| 38,698 |
| ||||||||
Diluted |
| 38,716 |
| 38,764 |
| 38,841 |
| 38,904 |
| 38,863 |
| 38,988 |
| 39,169 |
| 38,698 |
| ||||||||
Research and Development Costs
Research and development costs are charged to expense as incurred and include expenses for the development of new technology and the transition of technology into new products or services.
Warranty Costs
We estimate the costs that may be incurred under the warranty we provide for our products and record a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Our warranty obligation 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. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.
Income Taxes
As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. The carrying value of our deferred tax assets is adjusted by a partial valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net deferred tax assets consist primarily of net operating loss and tax credit carry forwards, and timing differences between the book and tax treatment of inventory, acquired intangible assets and other asset valuations. Realization of these net deferred tax assets is dependent upon our ability to generate future taxable income.
We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider aA variety of factors influence the level of our net sales in a particular quarter including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under the relevant accounting guidance, factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.
Relevant accounting guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recordedeconomic conditions in the financial statements. Under such guidance,LED, solar, data storage and semiconductor industries, the timing of significant orders, shipment delays, specific feature requests by customers, the introduction of new products by us and our competitors, production and quality problems, changes in material costs, disruption in sources of supply, seasonal patterns of capital spending by customers, interpretation and application of accounting principles, and other factors, many of which are beyond our control. In addition, we must recognizederive a substantial portion of our revenues from the tax benefitsale of products with a selling price of up to $8.0 million. As a result, the timing of recognition of revenue from an uncertain tax position only if it is more likely than not that a single transaction could have a significant impact on our net sales and operating results in any given quarter.
Synos Acquisition
On October 1, 2013 (“the tax position will be sustained on examination by the taxing authorities, based on the technical meritsAcquisition Date”), Veeco acquired 100% of the position.outstanding common shares and voting interest of Synos. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihoodresults of being realized upon ultimate resolution.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
Advertising Expense
The cost of advertising is expensed as of the first showing of each advertisement. We incurred $1.5 million, $0.7 million and $1.3 million in advertising expenses during 2010, 2009 and 2008, respectively.
Shipping and Handling Costs
Shipping and handling costs are costs that are incurred to move, package and prepare our products for shipment and then to move the products to the 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 our Consolidated Statements of Operations.
Equity-Based Compensation
Equity-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as expense over the employee requisite service period. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in the model are assumptions related to risk-free interest rate, dividend yield, expected stock-price volatility and expected option term.
The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The dividend yield assumption is based on our historical and future expectation of dividend payouts. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and expected option term assumptions require a level of judgment which make them critical accounting estimates.
We use an expected stock-price volatility assumption that is a combination of both historical volatility, calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option and implied volatility, utilizing market data of actively traded options on our common stock, which are obtained from public data sources. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility and that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock.
The expected option term, representing the period of time that options granted are expected to be outstanding, is estimated using a lattice-based model incorporating historical post vest exercise and employee termination behavior.
We estimate forfeitures using historical experience, which is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change.
With regard to the expected option term assumption, we consider the exercise behavior of past grants and model the pattern of aggregate exercises.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
Recent Accounting Pronouncements
Business Combinations: In December 2010, the FASB issued amended guidance related to Business Combinations. The amendments affect any public entity that enters into business combinations that are material on an individual or aggregate basis. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combinationSynos’ operations have been included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company will assess the impact of these amendments on its consolidated financial statements ifsince that date. Synos is an early stage manufacturer of fast array scanning atomic layer deposition (“FAST-ALD”) tools for OLED and when an acquisition occurs.
Intangibles—Goodwill and Other: In December 2010, the FASB issued amended guidance related to Intangibles—Goodwill and Other. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
Subsequent Events: The FASB has issued amended guidance for subsequent events. The amendment removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised asother applications. As a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity thatacquisition, the Company has entered the FAST-ALD market which is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC's literature. All of the amendments were effective upon issuance (February 24, 2010). The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Fair Value Measurements: In January 2010, the FASB issued amended guidance for Fair Value Measurements and Disclosures. This update requires some new disclosures and clarifies existing disclosure requirements about fair value measurement. The FASB's objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, this update requires that a reporting entity disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
separately information about purchases, sales, issuances, and settlements. In addition, this update clarifies the requirements of existing disclosures. For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This update was adopted on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
Revenue Recognition: In October 2009, the FASB issued amended guidance related to multiple-element arrangements which requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This update eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances. All entities must adopt the guidance no later than the beginning of their first fiscal year beginning on or after June 15, 2010. Entities may elect to adopt the guidance through either prospective application for revenue arrangements entered into or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
In October 2009, the FASB issued amended guidance that is expected to significantly affect how entities account for revenue arrangements that contain both hardware and software elements. As a result, many tangible products that rely on software will be accounted for under the revised multiple-element arrangements revenue recognition guidance, rather than the software revenue recognition guidance. The revised guidance must be adopted by all entities no later than fiscal years beginning on or after June 15, 2010. An entity must select the same transition method and same period for the adoption of both this guidance and the revisionscomplimentary to the multiple-element arrangements guidance noted above. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
2. Income (Loss) Per Common Share Attributable to Veeco
The following table sets forth basic and diluted net income (loss) per common share and the weighted average shares outstanding and diluted weighted average shares outstanding (in thousands, except per share data):
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||||||
Net income (loss) | $ | 361,760 | $ | (15,632 | ) | $ | (75,421 | ) | ||
Net loss attributable to noncontrolling interest | — | (65 | ) | (230 | ) | |||||
Net income (loss) attributable to Veeco | $ | 361,760 | $ | (15,567 | ) | $ | (75,191 | ) | ||
Income (loss) per common share attributable to Veeco: | ||||||||||
Basic | $ | 9.16 | $ | (0.48 | ) | $ | (2.40 | ) | ||
Diluted | $ | 8.51 | $ | (0.48 | ) | $ | (2.40 | ) | ||
Basic weighted average shares outstanding | 39,499 | 32,628 | 31,347 | |||||||
Dilutive effect of stock options, restricted stock awards and units and convertible debt | 3,015 | — | — | |||||||
Diluted weighted average shares outstanding | 42,514 | 32,628 | 31,347 | |||||||
Basic income (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period. The effect of approximately 761,000 and 170,000 common equivalent shares for the years ended December 31, 2009 and 2008, respectively, were excluded from the diluted weighted average shares outstanding due to the net losses sustained for these periods. No shares were excluded from the computation of diluted weighted average shares outstanding for the year ended December 31, 2010.Company’s MOCVD LED offerings.
At January 1, 2008 we had unsecured convertible subordinated notes of $25.2 million having a conversion price of $38.51 per share (the "Old Notes") which was due and subsequently paid in December 2008. For the year ended December 31, 2008, the assumed conversion of the Old Notes was 0.5 million common equivalent shares. Due to the net loss reported for the period, the convertible shares are anti-dilutive and, therefore, are not included in the diluted weighted average shares outstanding for the year ended December 31, 2008.
Metrology Divestiture
At January 1, 2008 we had new unsecured convertible subordinated notes of $117.8 million having a conversion price of $27.23 per share (the "New Notes") of which $12.2 million was repurchased in the fourth quarter of 2008. The New Notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, as long as we have the ability and the intent to settle the principal amount of the New Notes in cash. Under the terms of the New Notes, we may pay the principal amount of converted New Notes in cash or in shares of common stock. We have indicated that we intend to pay such amounts in cash. Using the treasury stock method, the impact of the assumed conversion of the New Notes had a dilutive affect of 1.2 million shares for the year ended December 31, 2010 and was anti-dilutive for the years ended December 31, 2009 and 2008, as the
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
average stock price was below the conversion price of $27.23 for the period. The effect of the assumed converted shares is dependent on the stock price at the time of the conversion. The maximum number of shares that can be issued upon conversion of the New Notes were 5.4 million common equivalent shares for the years ended December 31, 2010, 2009 and 2008 (see Note 7).
3. Discontinued Operations
On August 15, 2010, we signed a definitive agreement to sell our Metrology business to Bruker Corporation ("Bruker") comprising our entire Metrology reporting segment for $229.4 million. Accordingly, Metrology'sMetrology’s operating results are accounted for as discontinued operations in determining the consolidated results of operations and the related assets and liabilities are classified as held foroperations. The sale on our Consolidated Balance Sheet for all periods presented. The sales transaction closed on October 7, 2010, except for assets located in China due to local restrictions. Total proceeds, which included a working capital adjustment of $1 million, totaled $230.4 million of which $7.2 million relates to the assets in China. As part of our agreement with Bruker, $22.9
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
$22.9 million of proceeds iswas held in escrow and iswas restricted from use for one year fromfollowing the closing date of the transaction to secure certain specified losses arising out of breaches of representations, warranties and covenants we made in the stock purchase agreement and related documents. The restriction relating to the escrowed proceeds was released on October 6, 2011. As part of the sale we incurred transaction costs, which consisted of investment bankbanking fees and legal fees, totaling $5.2 million. The CompanyDuring the fourth quarter of 2010, we recognized a pre-tax gain on disposal of $156.3 million and a pre-tax deferred gain of $5.4 million related to the assets in China.
The following is a summary We recognized into income the pre-tax deferred gain of $5.4 million during the net assets sold asthird quarter of the closing date on October 7, 2010(in thousands):
| | October 7, 2010 | |||
|---|---|---|---|---|
Assets | ||||
Accounts receivable, net | $ | 21,866 | ||
Inventories | 26,431 | |||
Property, plant and equipment at cost, net | 13,408 | |||
Goodwill | 7,419 | |||
Other assets | 5,485 | |||
Assets of discontinued segment held for sale | $ | 74,609 | ||
Liabilities | ||||
Accounts payable | $ | 7,616 | ||
Accrued expenses and other current liabilities | 5,284 | |||
Liabilities of discontinued segment held for sale | $ | 12,900 | ||
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
Summary information related to discontinued operations is as follows (in thousands):
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||||||
Net sales | $ | 92,011 | $ | 97,737 | $ | 127,874 | ||||
Cost of sales | 47,822 | 57,410 | 74,551 | |||||||
Gross profit | 44,189 | 40,327 | 53,323 | |||||||
Total operating expenses | 45,024 | 43,030 | 77,741 | |||||||
Operating loss | $ | (835 | ) | $ | (2,703 | ) | $ | (24,418 | ) | |
Net income (loss) from discontinued operations, net of tax | $ | 101,229 | $ | (1,403 | ) | $ | 24,588 | |||
| | December 31, | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | | |||||||
Assets | ||||||||||
Cash | $ | — | $ | 89 | ||||||
Accounts receivable, net | — | 16,812 | ||||||||
Inventories | — | 21,757 | ||||||||
Property, plant and equipment at cost, net | — | 14,682 | ||||||||
Goodwill | — | 7,419 | ||||||||
Other assets | — | 9,327 | ||||||||
Assets of discontinued segment held for sale | $ | — | $ | 70,086 | ||||||
Liabilities | ||||||||||
Accounts payable | $ | — | $ | 4,202 | ||||||
Accrued expenses and other current liabilities | 5,359 | 6,622 | ||||||||
Liabilities of discontinued segment held for sale | $ | 5,359 | $ | 10,824 | ||||||
4. Fair Value Measurements
We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy. The levels of fair value hierarchy are as follows:
•Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.•Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.•Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset.
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.
The major categories of assets and liabilities measured on a recurring basis, at fair value, as of December 31, 2010 and 2009 are as follows (in millions):
| | December 31, 2010 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Level 1 | Level 2 | Level 3 | Total | ||||||||||
Treasury bills | $ | 136.2 | $ | 79.5 | $ | — | $ | 215.7 | ||||||
FDIC insured corporate bonds | 129.4 | — | — | 129.4 | ||||||||||
Commercial paper | 128.6 | 62.8 | — | 191.4 | ||||||||||
Money market instruments | — | 0.6 | — | 0.6 | ||||||||||
Derivative instrument | — | 0.3 | — | 0.3 | ||||||||||
Total | $ | 394.2 | $ | 143.2 | $ | — | $ | 537.4 | ||||||
| | December 31, 2009 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Level 1 | Level 2 | Level 3 | Total | ||||||||||
CDAR's | $ | — | $ | 180.0 | $ | — | $ | 180.0 | ||||||
Derivative instrument | — | 0.2 | — | 0.2 | ||||||||||
Total | $ | — | $ | 180.2 | $ | — | $ | 180.2 | ||||||
CDARS, commercial paper and treasury bills that are classified as cash equivalents are carried at cost, which approximates market value. Accordingly, no gains or losses (realized/unrealized) have been incurred for cash equivalents. All investments classified as available-for-sale contain quoted prices in active markets.
Derivative instruments include foreign currency forward contracts to hedge certain foreign currency transactions. Derivative instruments are valued using standard calculations/models that are primarily based on observable inputs, including foreign currency exchange rates, volatilities and interest rates.
The major categories of assets and liabilities measured on a nonrecurring basis, at fair value, as of December 31, 2010 and 2009 are as follows (in millions):
| | December 31, 2010 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Level 1 | Level 2 | Level 3 | Total | ||||||||||
Property, plant and equipment, net | $ | — | $ | — | $ | 42.3 | $ | 42.3 | ||||||
Goodwill | — | — | 52.0 | 52.0 | ||||||||||
Intangible assets, net | — | — | 16.9 | 16.9 | ||||||||||
Restructuring liability | — | — | (1.0 | ) | (1.0 | ) | ||||||||
Total | $ | — | $ | — | $ | 110.2 | $ | 110.2 | ||||||
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
| | December 31, 2009 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Level 1 | Level 2 | Level 3 | Total | ||||||||||
Property, plant and equipment, net | $ | — | $ | — | $ | 44.7 | $ | 44.7 | ||||||
Goodwill | — | — | 52.0 | 52.0 | ||||||||||
Intangible assets, net | — | — | 21.8 | 21.8 | ||||||||||
Asset retirement obligation | — | — | (0.2 | ) | (0.2 | ) | ||||||||
Restructuring liability | — | — | (2.4 | ) | (2.4 | ) | ||||||||
Total | $ | — | $ | — | $ | 115.9 | $ | 115.9 | ||||||
5. Business Combinations
Mill Lane Engineering Co., Inc.
On May 22, 2008, we acquired Mill Lane Engineering Co., Inc. ("Mill Lane"), a privately held manufacturer of web coating systems for flexible solar panels, for a purchase price of $11.0 million, net of cash acquired, plus potential future earn-out payments of up to $19.0 million (representing additional purchase price) contingent upon the future achievement of certain operating performance criteria. Fees2012 related to the acquisition were $0.7 million. Mill Lane is based in Lowell, Massachusetts and at the timecompletion of acquisition had approximately 20 employees. The financial results of Mill Lane are included in our LED & Solar segment (see Note 11) as of the acquisition date. We have determined that this acquisition does not constitute a material business combination and therefore are not including pro forma financial statements in this report.
As of December 31, 2008, we had accrued $9.6 million for our earn-out obligation due to the former owners of Mill Lane resulting from the achievement of certain operating performance criteria earned through the end of the fourth quarter of 2008. Payment of this earn-out obligation was made in the first quarter of 2009. As of December 31, 2010, no earn-out obligations remain under this purchase arrangement.
6. Balance Sheet Information
Short-term Investments
Available-for-sale securities consist of the following (in thousands):
| | December 31, 2010 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gains in Accumulated Other Comprehensive Income | Losses in Accumulated Other Comprehensive Income | Estimated Fair Value | ||||||||||
Commercial paper | $ | 128,527 | $ | 61 | $ | — | $ | 128,588 | ||||||
FDIC insured corporate bonds | 129,353 | 24 | — | 129,377 | ||||||||||
Treasury bills | 136,203 | 12 | — | 136,215 | ||||||||||
Total available-for-sale securities | $ | 394,083 | $ | 97 | $ | — | $ | 394,180 | ||||||
During the year ended December 31, 2010, available-for-sale securities were sold for total proceeds of $246.6 million. The gross realized gains on these sales were minimal for the year ended December 31, 2010. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification. The net unrealized holding gain on available-for-sale securities amounted to
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
$0.1 million for the year ended December 31, 2010, and has been included in accumulated other comprehensive income.
Contractual maturities of available-for-sale debt securities at December 31, 2010, are as follows (in thousands):
| | Estimated Fair Value | ||||
|---|---|---|---|---|---|
Due in one year or less | $ | 216,244 | |||
Due in 1-2 years | 177,936 | ||||
Total investments in debt securities | $ | 394,180 | |||
Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Restricted Cash
As of December 31, 2010, restricted cash consists of $22.9 million that relates to the proceeds received from the sale of our Metrology segment. This cash is heldthe assets in escrow and is restricted from use for one year from the closing date of the transaction (see Note 3). Additionally, restricted cash also consists of $53.2 million which serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations. This cash is held in custody by the issuing bank, and is restricted asChina to withdrawal or use while the related bank guarantees are outstanding.
Inventories
| | December 31, | | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | | ||||||
Raw materials | $ | 49,953 | $ | 34,214 | |||||
Work in process | 33,181 | 17,908 | |||||||
Finished goods | 25,353 | 3,685 | |||||||
| $ | 108,487 | $ | 55,807 | ||||||
Property, Plant and Equipment
| | December 31, | | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | Estimated Useful Lives | ||||||||
| | 2010 | 2009 | |||||||
Land | $ | 7,274 | $ | 7,274 | |||||
Buildings and improvements | 30,731 | 30,707 | 10-40 years | ||||||
Machinery and equipment | 73,173 | 71,358 | 3-10 years | ||||||
Leasehold improvements | 2,276 | 3,548 | 3-7 years | ||||||
Gross property, plant, and equipment at cost | 113,454 | 112,887 | |||||||
Less accumulated depreciation and amortization | 71,134 | 68,180 | |||||||
Net property, plant, and equipment at cost | $ | 42,320 | $ | 44,707 | |||||
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010Bruker.
For the years ended December 31, 2010, 2009 and 2008, depreciation expense was $8.0 million, $8.7 million and $8.8 million, respectively.
Goodwill and Indefinite-Lived Intangible AssetsOther Quarterly Items
In accordance with the relevant accounting guidance related to goodwill and other intangible assets, we conducted our annual impairment test of goodwill and indefinite-lived intangible assets during the fourth quarters of 2010 and 2009, using October 1st as our measurement date, and utilizing a discounted future cash flow approach as described in Note 1. This was consistent with the approach used in previous years. Based upon the results of such assessments, we determined that no goodwill and indefinite-lived intangible asset impairment existed in any of its reporting units, as of October 1, 2010 and 2009, respectively.
Changes in our goodwill are as follows (in thousands):
| | Year ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
Balance as of January 1 | $ | 52,003 | $ | 51,741 | |||
Acquisition | — | 262 | |||||
Balance as of December 31 | $ | 52,003 | $ | 52,003 | |||
As of December 31, 2010 and 2009, we had $2.9 million of indefinite-lived intangible assets consisting of trademarks and tradenames, which are included in the accompanying Consolidated Balance Sheets in the caption intangible assets, net.
Intangible Assets
| | December 31, 2010 | December 31, 2009 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Purchased technology | Other intangible assets | Total intangible assets | Purchased technology | Other intangible assets | Total intangible assets | |||||||||||||
Gross intangible assets | $ | 98,473 | $ | 22,734 | $ | 121,207 | $ | 98,473 | $ | 22,734 | $ | 121,207 | |||||||
Less accumulated amortization | (86,376 | ) | (17,938 | ) | (104,314 | ) | (83,352 | ) | (16,085 | ) | (99,437 | ) | |||||||
Intangible assets, net | $ | 12,097 | $ | 4,796 | $ | 16,893 | $ | 15,121 | $ | 6,649 | $ | 21,770 | |||||||
The estimated aggregate amortization expense for intangible assets with definite useful lives for each of the next five fiscal years is as follows (in thousands):
2011 | $ | 4,054 | ||
2012 | 3,154 | |||
2013 | 1,796 | |||
2014 | 1,433 | |||
2015 | 1,334 |
In accordance with the relevant accounting guidance related to the impairment or disposal of long-lived assets, we performed an analysis as of December 31, 2010 and 2009 of our definite-lived intangible and long-lived assets. No impairment existed in any of our reporting units.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
Accrued Expenses
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
Payroll and related benefits | $ | 27,374 | $ | 20,245 | |||
Sales, use, income and other taxes | 4,914 | 3,287 | |||||
Customer deposits and advanced billings | 129,225 | 59,758 | |||||
Warranty | 9,238 | 6,675 | |||||
Restructuring liability | 714 | 2,451 | |||||
Other | 11,545 | 7,407 | |||||
| $ | 183,010 | $ | 99,823 | ||||
Accrued Warranty
We estimate the costs that may be incurred under the warranty we provide for our products and recognize a liability in the amount of such costs at the time the related revenue is recognized. Factors that affect our warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. Changes in our warranty liability during the year are as follows:
| | Year ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
Balance as of the beginning of year | $ | 6,675 | $ | 5,533 | |||
Warranties issued during the year | 9,695 | 4,777 | |||||
Settlements made during the year | (7,132 | ) | (3,635 | ) | |||
Balance as of the end of year | $ | 9,238 | $ | 6,675 | |||
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
7. Debt
Long-term Debt
Long-term debt is summarized as follows (in thousands):
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
Convertible subordinated debt | $ | 101,138 | $ | 98,081 | |||
Mortgage notes payable | 2,883 | 3,095 | |||||
| 104,021 | 101,176 | ||||||
Less current portion | 101,367 | 212 | |||||
| $ | 2,654 | $ | 100,964 | ||||
Convertible Subordinated Debt
At January 1, 2008 we had new unsecured convertible subordinated notes of $117.8 million having a conversion price of $27.23 per share (the "Notes") of which $12.2 million was repurchased in the fourth quarter of 2008. The Notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, as long as we have the ability and the intent to settle the principal amount of the Notes in cash. Under the terms of the Notes, we may pay the principal amount of converted Notes in cash or in shares of common stock. We have indicated that we intend to pay such amounts in cash. Using the treasury stock method, the impact of the assumed conversion of the Notes had a dilutive affect of 1.2 million shares for the year ended December 31, 2010 and was anti-dilutive for the years ended December 31, 2009 and 2008, as the average stock price was below the conversion price of $27.23 for the period. The effect of the assumed converted shares is dependent on the stock price at the time of the conversion. The maximum number of shares that can be issued upon conversion of the Notes were 5.4 million common equivalent shares for the years ended December 31, 2010, 2009 and 2008.
The Notes are initially convertible into 36.7277 shares of common stock per $1,000 principal amount of Notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for our common stock on April 16, 2007). On or after April 20, 2011, we may redeem the Notes, in whole or in part, for cash at 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but not including, the redemption date. Holders may convert the Notes at any time during the period beginning on January 15, 2012 through the close of business on the second day prior to April 15, 2012 and earlier upon the occurrence of certain events including our common stock trading at prices equal to or above 130% of the conversion price for at least 20 trading days during the final 30 trading days of the immediately preceding fiscal quarter. At the end of the fourth quarter of 2010, our common stock was trading at prices equal to or above 130% of the conversion price for the specified period and, as a result, the Notes are convertible during the first quarter of 2011. If the Notes are converted, we have the ability and intent to pay the principal balance of notes tendered for conversion in cash. We will re-perform this test each quarter up to and including the fourth quarter of 2011. Accordingly, the balance of the convertible notes at December 31, 2010 has been classified as current in our Consolidated Balance Sheet. On February 14, 2011, at the option of the holder, $7.5 million of notes were tendered for conversion at a price of $45.95 per share
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
in a net share settlement. As a result, we paid the principal amount of $7.5 million in cash and issued 111,318 shares of our common stock. Accordingly, in the first quarter of 2011 we will take a charge for the related unamortized debt discount totaling $0.3 million. We pay interest on these notes on April 15 and October 15 of each year. The Notes are unsecured and are effectively subordinated to all of our senior and secured indebtedness and to all indebtedness and other liabilities of our subsidiaries.
During the fourth quarter of 2008,2013, we repurchased $12.2 million aggregaterecorded asset impairment charges in LED & Solar of the Notes for $7.2 million in cash, of which $7.1$0.9 million related to principalcertain tools previously used in our laboratories carried in property, plant and $0.1equipment which we are holding for sale and $0.3 million related to accrued interest, reducinganother asset carried in other assets. During the amount outstanding from $117.8fourth quarter of 2012, we recorded an asset impairment charge of $1.3 million related to $105.6 million. A gross gain of approximately $5.1 million was recorded on these repurchases offset by the write-off of approximately $0.1 million of unamortized deferred financing costs associated with the Notes, for a net gain of approximately $5.0 million. Such net gain was reducedparticular asset in our Data Storage segment.
During 2012, we took measures to $3.8 million upon the application of accounting guidance (see below), which required that the gain be calculated based on the fair value of the portion repurchased as of the repurchase date. The fair value approximated the carrying value net of the unamortized discount on the portion repurchased. The difference of approximately $1.2 million between the fair value and the amount paid was recorded asimprove profitability, including a reduction in the gain originally reported, which increased the accumulated deficit as of December 31, 2008 by that amount.
As of January 1, 2009, we implemented accounting guidance related to our convertible debt and have applied it retrospectively to all periods presented, as required. This guidance requires issuers of convertible debt that can be settled in cash to separately account for (i.e., bifurcate) a portion of the debt associated with the conversion feature and reclassify this portion to equity. The liability portion, which represents the fair value of the debt without the conversion feature, is accreted to its face value over the life of the debt using the effective interest method by amortizing the discount between the face amount and the fair value. The amortization is recorded as interest expense. The notes are subject to such accounting guidance since they may be settled in cash upon conversion. Thus, as a result of the adoption of this accounting guidance, we reclassified approximately $16.3 million from long-term debt to additional paid-in capital effective as of the date of issuance of the Notes. This reclassification created a $16.3 million discount on the debt that will be amortized over the remaining life of the Notes, which will be through April 15, 2012. The reclassification generated a $6.7 million deferred tax liability, which we offset with a corresponding decrease of the valuation allowance by the same amount. Prior periods are presented as if the new guidance was in effect as of the date of issuance. Thus, we have presented all financial data for prior periods in this report as if we had reclassified the $16.3 million and began amortizing the resultant debt discount in April 2007. The retrospective application of the new guidance described above to the results for the year ended December 31, 2008 increased the net loss attributable to Veeco from ($71.1) million to ($75.2) million and increased the loss per share attributable to Veeco from ($2.27) to ($2.40).
The total effect on equity as of the date of adoption on January 1, 2009 was a net increase of $10.3 million, comprised of an increase in additional paid-in capital of $16.3 million and an increase in the accumulated deficit of $6.0 million. The $6.0 million is comprised of $2.9 million and $1.9 million in amortization of the debt discount for 2008 and 2007, respectively, as well as the $1.2 million reduction in the gain that was recorded on the November 2008 repurchases.
For the years ended December 31, 2010, 2009 and 2008, we recorded approximately $3.1 million, $2.8 million and $2.9 million, respectively, additional interest expense in each period resulting from the amortization of the debt discount. This additional interest expense did not require the use of cash.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
The components of interest expense recorded on the Notes for the years ended December 31, 2010, 2009 and 2008 were as follows (in thousands):
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||||||
Contractual interest | $ | 4,355 | $ | 4,356 | $ | 4,801 | ||||
Amortization of the discount on the Notes | 3,057 | 2,846 | 2,917 | |||||||
Total interest expense on the Notes | $ | 7,412 | $ | 7,202 | $ | 7,718 | ||||
Effective interest rate | 7.0 | % | 6.8 | % | 6.7 | % | ||||
The carrying amounts of the liability and equity components of the Notes as of December 31, 2010 and 2009 were as follows (in thousands):
| | Year ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
Carrying amount of the equity component | $ | 16,318 | $ | 16,318 | |||
Principal balance of the liability component | $ | 105,574 | $ | 105,574 | |||
Less: unamortized discount | 4,436 | 7,493 | |||||
Net carrying value of the liability component | $ | 101,138 | $ | 98,081 | |||
At December 31, 2010 and 2009, $105.6 million of the Notes were outstanding with fair values of approximately $164.1 million and $144.6 million, respectively.
Mortgage Notes Payable
Long-term debt as of December 31, 2010, also includes a mortgage note payable, which is secured by certain land and buildings with carrying amounts aggregating approximately $5.1 million and $5.2 million as of December 31, 2010 and December 31, 2009, respectively. The mortgage note payable ($2.9 million as of December 31, 2010 and $3.1 million as of December 31, 2009) bears interest at an annual rate of 7.91%, with the final payment due on January 1, 2020. The fair market value of this note as of December 31, 2010 and 2009 was approximately $3.1 million and $3.3 million, respectively.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
Maturity of Long-term Debt
Long-term debt matures as follows (in thousands):
2011 | $ | 105,803 | ||
2012 | 248 | |||
2013 | 268 | |||
2014 | 290 | |||
2015 | 314 | |||
Thereafter | 1,534 | |||
| 108,457 | ||||
Less current portion | 105,803 | * | ||
| $ | 2,654 | |||
*Difference of $4,436 from $101,367 in the Consolidated Balance Sheet is due to the unamortized debt discount.
8. Equity Compensation Plans and Equity
Stock Option and Restricted Stock Plans
We have several stock option and restricted stock plans. On April 1, 2010, the Board of Directors of the Company, and on May 14, 2010, our shareholders, approved the 2010 Stock Incentive Plan (the "2010 Plan"). The 2010 Plan replaced the 2000 Stock Incentive Plan, as amended (the "2000 Plan"), as the Company's active stock plan. The Company's employees, directors and consultants are eligible to receive awards under the 2010 Plan. The 2010 Plan permits the granting of a variety of awards, including both non-qualified and incentive stock options, share appreciation rights, restricted shares, restricted share units and dividend equivalent rights. The Company is authorized to issue up to 3,500,000 shares under the 2010 Plan. Option awards are generally granted with an exercise price equal to the closing price of the Company's stock on the trading day prior to the date of grant; those option awards generally vest over a 3 year period and have a 7 or 10-year term. Restricted share awards generally vest over 4-5 years. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 2010 Plan. As of December 31, 2010, there are 625,531 options outstanding under this plan.
The 2000 Plan was approved by the Board of Directors and shareholders in May 2000. The 2000 Plan provides for the grant to officers and key employees of stock awards, either in the form of options to purchase sharesdiscretionary expenses, realignment of our common stock or restricted stock awards. Stock awards granted pursuant to the 2000 Plan expire after seven yearssenior management team and generally vest over a two-year to five-year period following the grant date. In addition, the 2000 Plan provides for automatic annual grantsconsolidation of restricted stock to each member of our Board of Directors who is not an employee. As of December 31, 2010, there are 1,933,623 options outstanding under this plan.
The Veeco Instruments Inc. Amendedcertain sales, business and Restated 1992 Employees' Stock Option Plan (the "1992 Plan") provided for the grant to officers and key employees of stock options to purchase shares of our common stock. Stock options granted pursuant to the 1992 Plan became exercisable over a three-year period following the grant date and expire after ten years. As of December 31, 2010, there are 1,200 stock options outstanding under this plan.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
In addition to the plans described above, we assumed certain stock option plans and agreements relating to the merger in September 2001 with Applied Epi, Inc. ("Applied Epi"). These stock option plans do not have options available for future grants. Options granted under these plans expire after ten years from the date of grant. Options granted under two of these plans vested over three years and options granted under one of these plans vested immediately. As of December 31, 2010, there are 9,272 options outstanding under the various Applied Epi plans.
Equity-Based Compensation, Stock Option and Restricted Stock Activity
Equity-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period. The following compensation expense was included as part of continuing operations in the Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 (in thousands):
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||||||
Equity-based compensation expense | $ | 9,648 | $ | 7,547 | $ | 9,668 | ||||
administrative functions. As a result of the sale of our Metrology segment to Bruker, equity-based compensation expense related to Metrology employees has been classified as discontinued operations in determining the consolidated results of operations for the years ended December 31, 2010, 2009 and 2008. For the year ended December 31, 2010, discontinued operations included compensation expense of $7.7 million that related to the acceleration of equity awards from employees that were terminated as a result of the sale of our Metrology segment to Bruker. For the year ended December 31, 2009, total equity-based compensation expense included a charge of $0.7 million for the acceleration of equity awards associated with the retirement of our former CFO. For the year ended December 31, 2008, total equity-based compensation expense included a charge of $3.0 million for the acceleration of equity awards associated with a mutually agreed-upon termination of the employment agreement with our former CEO (who currently remains as Chairman of the Board of Directors) following the successful completion of the CEO transition.
As of December 31, 2010, the total unrecognized compensation cost related to nonvested stock awards and option awards expected to vest is $9.0 million and $14.9 million, respectively, and the related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 2.6 years and 2.1 years for the nonvested stock awards and for option awards, respectively.
The fair value of each option granted during the years ended December 31, 2010, 2009 and 2008, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| | Year ended December 31, | |||||
|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||
Weighted-average expected stock-price volatility | 62% | 65% | 49% | |||
Weighted-average expected option life | 5 years | 4 years | 3 years | |||
Average risk-free interest rate | 1.92% | 1.79% | 3.14% | |||
Average dividend yield | 0% | 0% | 0% | |||
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
A summary of our restricted stock awards including restricted stock units as of December 31, 2010, is presented below:
| | Shares (000's) | Weighted- Average Grant-Date Fair Value | |||||
|---|---|---|---|---|---|---|---|
Nonvested at December 31, 2009 | 892 | $ | 12.97 | ||||
Granted | 186 | 34.97 | |||||
Vested(1) | (365 | ) | 12.78 | ||||
Forfeited (including cancelled awards)(2) | (97 | ) | 17.15 | ||||
Nonvested at December 31, 2010 | 616 | $ | 19.06 | ||||
(1)Includes the effect of approximately 43,383 shares whose vesting was accelerated as a result of the sale of our Metrology business.(2)Includes the effect of approximately 73,282 shares forfeited as a result of the sale of our Metrology business.
During the year ended December 31, 2010, we granted 130,665 shares of restricted common stock and 40,200 restricted stock units to key employees, which vest over three or four year periods. Included in this grant were 14,518 shares of restricted common stock granted to the non-employee members of the Board of Directors throughout the year in May, June and December 2010, which vest over the lesser of one year or at the time of the next annual meeting. The vested shares include the impact of 121,230 shares of restricted stock which were cancelled in 2010 due to employees electing to receive fewer shares in lieu of paying withholding taxes. The total grant date fair value of shares that vested during 2010 was $13.6 million.
A summary of our stock option plans as of and for the year ended December 31, 2010, is presented below:
| | Shares (000s) | Weighted- Average Exercise Price | Aggregate Intrinsic Value (000s) | Weighted- Average Remaining Contractual Life (in years) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2009 | 4,506 | $ | 16.35 | ||||||||||
Granted | 721 | 35.19 | |||||||||||
Exercised | (2,500 | ) | 18.07 | ||||||||||
Forfeited (including cancelled options) | (158 | ) | 20.47 | ||||||||||
Outstanding at December 31, 2010 | 2,569 | $ | 19.71 | $ | 59,807 | 5.9 | |||||||
Options exercisable at December 31, 2010 | 778 | $ | 16.36 | $ | 20,793 | 3.9 | |||||||
The weighted-average grant date fair value of stock options granted for the years ended December 31, 2010, 2009 and 2008 was $18.41, $5.35, and $5.26, respectively, per option. The total
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
intrinsic value of stock options exercised during the years ended December 31, 2010, 2009 and 2008 was $53.1 million, $7.3 million and $0.4 million, respectively.
The following table summarizes information about stock options outstanding at December 31, 2010:
| | Options Outstanding | Options Exercisable | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices | Number Outstanding at December 31, 2010 (000s) | Weighted- Average Remaining Contractual Life (in years) | Weighted- Average Exercise Price | Number Exercisable at December 31, 2010 (000s) | Weighted- Average Exercise Price | |||||||||||
$0.27-8.82 | 491 | 5.4 | $ | 8.79 | 122 | $ | 8.69 | |||||||||
9.69-15.08 | 656 | 5.3 | 12.51 | 173 | 12.72 | |||||||||||
15.29-23.55 | 713 | 3.8 | 18.46 | 457 | 18.83 | |||||||||||
23.81-36.00 | 594 | 9.0 | 33.71 | 18 | 24.97 | |||||||||||
39.85-54.35 | 115 | 9.3 | 42.91 | 8 | 54.35 | |||||||||||
| 2,569 | 5.9 | $ | 19.71 | 778 | $ | 16.36 | ||||||||||
Shares Reserved for Future Issuance
As of December 31, 2010, we have reserved the following shares for future issuance related to:
| |||||
| |||||
| |||||
Issuance of Common Stock
On October 28, 2009 the Company entered into an Underwriting Agreement (the "Underwriting Agreement") with Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. (the "Underwriters"), for the sale of 5,000,000 shares of our common stock. In addition, the Underwriters had an option, which they exercised in full, to purchase up to an additional 750,000 shares of our common stock on the same terms for 30 days from the date of the Underwriting Agreement, solely to cover over-allotments. On November 3, 2009, we completed this offering selling 5,750,000 shares for net proceeds totaling $130.1 million, net of transaction costs totaling $0.3 million.
Preferred Stock
Our Board of Directors has authority under our Certificate of Incorporation to issue shares of preferred stock with voting and economic rights to be determined by the Board of Directors.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
Treasury Stock
On August 24, 2010, our Board of Directors authorized the repurchase of up to $200 million of our common stock until August 26, 2011. Repurchases are expected to be made from time to time on the open market in accordance with applicable federal securities laws. The timing of repurchases and the exact number of shares of common stock to be purchased will depend upon market conditions, SEC regulations, and other factors. The repurchases will be funded using the Company's available cash balances and cash generated from operations. The program does not obligate the Company to acquire any particular amount of common stock and may be modified or suspended at any time at the Company's discretion. During 2010, we purchased 1,118,600 shares for $38.1 million (including transaction costs) under the program at an average cost of $34.06 per share. This stock repurchase is included as treasury stock in the Consolidated Balance Sheet.
9. Income Taxes
Our income (loss) from continuing operations before income taxes in the accompanying Consolidated Statements of Operations consists of (in thousands):
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||||||
Domestic | $ | 242,305 | $ | (15,789 | ) | $ | (59,777 | ) | ||
Foreign | 28,698 | 4,207 | 10,666 | |||||||
| $ | 271,003 | $ | (11,582 | ) | $ | (49,111 | ) | |||
Significant components of the provision for income taxes from continuing operations are presented below (in thousands):
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||||||
Current: | ||||||||||
Federal | $ | 34,097 | $ | (344 | ) | $ | (360 | ) | ||
Foreign | 7,720 | 1,879 | 1,019 | |||||||
State and local | 4,720 | 799 | 192 | |||||||
Total current provision for income taxes | 46,537 | 2,334 | 851 | |||||||
Deferred: | ||||||||||
Federal | (32,033 | ) | 1,015 | 437 | ||||||
Foreign | 239 | (273 | ) | 359 | ||||||
State and local | (4,271 | ) | (429 | ) | 75 | |||||
Total deferred (benefit) provision for income taxes | (36,065 | ) | 313 | 871 | ||||||
Total provision for income taxes | $ | 10,472 | $ | 2,647 | $ | 1,722 | ||||
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
The following is a reconciliation of the income tax provision (benefit) computed using the Federal statutory rate to our actual income tax provision (in thousands):
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||||||
Income tax provision (benefit) at U.S. statutory rates | $ | 94,851 | $ | (4,053 | ) | $ | (17,189 | ) | ||
State income tax expense (benefit) (net of federal impact) | 5,746 | 188 | (1,135 | ) | ||||||
Goodwill impairment | — | — | 7,985 | |||||||
Nondeductible expenses | 333 | 145 | 158 | |||||||
Noncontrolling interest | — | 28 | 495 | |||||||
Equity compensation | — | 1,678 | 2,519 | |||||||
Domestic production activities deduction | (5,779 | ) | — | — | ||||||
Nondeductible compensation | 2,840 | 826 | 1,473 | |||||||
Research and development tax credit | (1,823 | ) | (1,855 | ) | (1,031 | ) | ||||
Net change in valuation allowance | (83,079 | ) | 5,198 | 10,955 | ||||||
Change in accrual for unrecognized tax benefits | (1,076 | ) | (4,114 | ) | — | |||||
Foreign tax rate differential | (5,280 | ) | 5,450 | (1,419 | ) | |||||
Other | 3,739 | (844 | ) | (1,089 | ) | |||||
| $ | 10,472 | $ | 2,647 | $ | 1,722 | |||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
| | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | ||||||
Deferred tax assets: | ||||||||
Inventory valuation | $ | 8,999 | $ | 13,261 | ||||
Domestic net operating loss carry forwards | 1,219 | 39,312 | ||||||
Tax credit carry forwards | 9,961 | 24,216 | ||||||
Foreign net operating loss carry forwards | 147 | 834 | ||||||
Purchased intangible assets | — | 6,662 | ||||||
Warranty and installation accruals | 2,742 | 2,432 | ||||||
Equity compensation | 3,655 | 4,659 | ||||||
Other accruals | 2,063 | 1,654 | ||||||
Depreciation | 1,325 | 1,815 | ||||||
Other | 1,890 | 3,235 | ||||||
Total deferred tax assets | 32,001 | 98,080 | ||||||
Valuation allowance | (1,644 | ) | (84,723 | ) | ||||
Net deferred tax assets | 30,357 | 13,357 | ||||||
Deferred tax liabilities: | ||||||||
Purchased intangible assets | 4,854 | 8,439 | ||||||
DISC termination | — | 201 | ||||||
Convertible debt discount | 1,663 | 3,072 | ||||||
Undistributed earnings | 370 | 3,292 | ||||||
Other | 264 | 287 | ||||||
Total deferred tax liabilities | 7,151 | 15,291 | ||||||
Net deferred taxes | $ | 23,206 | $ | (1,934 | ) | |||
A provision has not been made at December 31, 2010 for U.S. or additional foreign withholding taxes on approximately $39.0 million of undistributed earnings of our foreign subsidiaries because it is the present intention of management to permanently reinvest the undistributed earnings of our foreign subsidiaries in China, Korea, Japan, Malaysia, Singapore, and Taiwan. As it is our intention to reinvest those earnings permanently, it is not practicable to estimate the amount of tax that might be payable if they were remitted. We have provided deferred income taxes and future withholding taxes on the earnings that we anticipate will be remitted.
We have approximately $9.2 million of foreign tax credit carry forwards which expire at various times between 2016 and 2019.
Based on current operating results, we reversed approximately $83.1 million of the valuation allowance as our net deferred tax assets became realizable on a more-likely-than-not basis. Our remaining valuation allowance of approximately $1.6 million relates primarily to state and local tax attributes for which we could not conclude were realizable on a more-likely-than-not basis.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
Beginning balance as of December 31 | $ | 1,357 | $ | 694 | |||
Additions for tax positions related to current year | 1,227 | 725 | |||||
Reductions for tax positions relating to current year | — | — | |||||
Additions for tax positions relating to prior years | 1,736 | — | |||||
Reductions for tax positions relating to prior years | (478 | ) | (62 | ) | |||
Reductions due to the lapse of the applicable statute of limitations | (17 | ) | — | ||||
Settlements | (165 | ) | — | ||||
Ending balance as of December 31 | $ | 3,660 | $ | 1,357 | |||
Of the amounts reflected in the table above at December 31, 2010, the entire amount if recognized would reduce our effective tax rate. It is our policy to recognize interest and penalties related to income tax matters in income tax expense. The total accrual for interest and penalties related to unrecognized tax benefits was approximately $0.3 million and $0.5 million as of December 31, 2010 and 2009, respectively.
We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. All material federal income tax matters have been concluded for years through 2006 subject to subsequent utilization of net operating losses generated in such years. All material state and local income tax matters have been concluded for years through 2006. The majority of our foreign jurisdictions have been reviewed through 2008 with only a few jurisdictions having open tax years between 2005 and 2008. None of our federal tax returns are currently under examination.
10. Commitments and Contingencies and Other Matters
Restructuring and Other Charges
During 2008 and 2009, we continued our multi-quarter plan to improve profitability and reduce and contain spending. We made progress against the initiatives that management set in 2007, continued our restructuring plan and executed activities with a focus on creating a more cost effective organization, with a greater percentage of variable costs. These activities included downsizing and consolidating some locations, reducing our workforce, consultants and discretionary expenses and realigning our sales organization and engineering groups.
In conjunction with these activities, we recognized restructuring (credits) charges of approximately $(0.2) million, $4.8 million and $9.4 million during the years ended December 31, 2010, 2009 and 2008, respectively, and an inventory write-off of $1.5 million, included in cost of sales in the accompanying Consolidated Statement of Operations, related to discontinued data storage products during the year
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
ended December 31, 2009. Restructuring expense for the years ended December 31, 2010, 2009 and 2008 are as follows (in thousands):
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | |||||||
Personnel severance and related costs | $ | — | $ | 3,467 | $ | 2,614 | ||||
Lease-related and other (credits) costs | (179 | ) | 1,370 | 3,873 | ||||||
Modification of stock awards | — | — | 3,018 | |||||||
| $ | (179 | ) | $ | 4,837 | $ | 9,505 | ||||
Less adjustment of 2007 restructuring liability | — | — | (81 | ) | ||||||
| $ | (179 | ) | $ | 4,837 | $ | 9,424 | ||||
Personnel Severance Costs
During 2009,actions, we recorded $3.5a $3.8 million restructuring charge consisting of $3.0 million in personnel severance and related costs, $0.4 million in equity compensation and related costs and $0.4 million in other severance costs resulting from a headcount reduction of 16452 employees. This reduction in workforce included executives, management, administration, sales and service personnel and manufacturing employees' companywide.
During 2008, weWe recorded a $3.7$2.0 million restructuring charge related to a mutually agreed-upon termination of the employment agreement with our former CEO (who currently remains as Chairman of the Board of Directors) following the successful completion of the CEO transition, which included a charge of $3.0 million for the acceleration of stock-based compensation expense and $0.7 million related to salary and other related compensation, as specifiedthese charges in the employment agreement. The modificationthird quarter of 2012 and $1.8 million of these charges in the stock awards wasfourth quarter of 2012 with the balance recorded as an increase to additional paid-in capital. In addition, we eliminated approximately 49 employees during 2008 resulting in personnel severance costs of approximately $1.9 million, primarily in connection with increased outsourcing in our LED & Solar and Data Storage segments and realignment of the sales and service organization. This reduction in workforce included executives, management, administration and manufacturing employees' companywide.
Lease-related and Other Costs
During 2010, we had a change in estimate relating to one of our leased Data Storage facilities. As a result, we incurred a restructuring credit of $0.2 million, consisting primarily of the remaining lease payment obligations and estimated property taxes for a portion of the facility we will occupy, offset by a reduction in expected sublease income. We made certain assumptions in determining the credit, which included a reduction in estimated sublease income and terms of the sublease as well as the estimated discount rate to be used in determining the fair value of the remaining liability. We developed these assumptions based on our understanding of the current real estate market as well as current market interest rates. The assumptions are based on management's best estimates, and will be adjusted periodically if new information is obtained.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
During 2009, we vacated our Data Storage facilities in Camarillo, CA. As a result, we incurred a $1.4 million restructuring charge, consisting primarily of the remaining lease payment obligations and estimated property taxes for the facility we vacated, offset by the estimated expected sublease income to be received. We made certain assumptions in determining the charge, which included estimated sublease income and terms of the sublease as well as the estimated discount rate to be used in determining the fair value of the liability. We developed these assumptions based on our understanding of the current real estate market as well as current market interest rates. The assumptions are based on management's best estimates, and will be adjusted periodically if new information is obtained.
During 2008, we recorded a $3.9 million restructuring charge for lease-related costs as part of the consolidation of our corporate headquarters into our Plainview, New York manufacturing facility during the first quarter of 2008. This charge primarily consisted2012.
As a result of the liabilitydelay in filing our Form 10-Q for September 30, 2012 (“Q3 10-Q”), we were required to evaluate the remaining lease paymentsimpact of events and property taxes relating tocircumstances occurring through the facility we vacated, offset by expected sublease income. We made certain assumptions in determining the charge, which included estimated sublease income and termsdate of the sublease as well as the estimated discount rate to be used in determining the fair valuefiling of the net cash flows. We developed these assumptions, based on our understandingQ3 10-Q. After considering declines in systems shipments and parts usage occurring though the date of the current real estate market as well as current market interest rates, which are adjusted periodically based upon new information, eventsfiling of the Q3 10-Q, we determined that an increase in our reserve for slow moving and changesobsolete inventory was warranted and resulted in us recording a total charge of $7.2 million to cost of sales in the real estate market.third quarter of 2012. The evaluation resulted in relatively lower provisions for inventory reserves over the first three quarters of 2013. We recorded a $1.8 million charge to cost of sales for inventory write downs in the fourth quarter of 2012 that related to a terminated program. The effect on the comparative statements above was to reduce gross profit for September 30, 2012 compared to all other periods presented.
Out of Period Adjustment
We identified net cumulative errors which overstated cumulative net income from continuing operations through December 31, 2011 by $0.6 million and net cumulative errors that understated net income from continuing operations in the six month period ended June 30, 2012 by $1.1 million. As a result, in the third quarter of 2012, we recorded adjustments to correct all prior periods resulting in an increase in income from continuing operations of $0.5 million.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
The following is a reconciliation of the liability for the 2010, 2009 and 2008 restructuring charge from inception through December 31, 2010 (in thousands):
| | LED & Solar | Data Storage | Unallocated Corporate | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Short-term liability | |||||||||||||
Lease-related and other costs 2008 | $ | — | $ | — | $ | 1,189 | $ | 1,189 | |||||
Personnel severance and related costs 2008 | 732 | 477 | 1,405 | 2,614 | |||||||||
Total charged to accrual 2008 | 732 | 477 | 2,594 | 3,803 | |||||||||
Lease-related and other costs 2009 | 190 | 803 | — | 993 | |||||||||
Personnel severance and related costs 2009 | 1,005 | 1,826 | 636 | 3,467 | |||||||||
Total charged to accrual 2009 | 1,195 | 2,629 | 636 | 4,460 | |||||||||
Lease-related and other (credits) costs 2010 | — | (87 | ) | — | (87 | ) | |||||||
Total (credited) charged to accrual 2010 | — | (87 | ) | — | (87 | ) | |||||||
Short-term/long-term reclassification 2008 | — | — | 892 | 892 | |||||||||
Short-term/long-term reclassification 2009 | — | 148 | 1,084 | 1,232 | |||||||||
Short-term/long-term reclassification 2010 | — | 123 | 536 | 659 | |||||||||
Cash payments 2008 | (72 | ) | (207 | ) | (1,627 | ) | (1,906 | ) | |||||
Cash payments 2009 | (1,502 | ) | (2,561 | ) | (1,982 | ) | (6,045 | ) | |||||
Cash payments 2010 | (353 | ) | (344 | ) | (1,597 | ) | (2,294 | ) | |||||
Balance as of December 31, 2010 | $ | — | $ | 178 | $ | 536 | $ | 714 | |||||
Long-term liability | |||||||||||||
Lease-related and other costs 2008 | $ | — | $ | — | $ | 2,684 | $ | 2,684 | |||||
Lease-related and other costs 2009 | — | 377 | — | 377 | |||||||||
Lease-related and other (credits) costs 2010 | — | (48 | ) | — | (48 | ) | |||||||
Short-term/long-term reclassification 2008 | — | — | (892 | ) | (892 | ) | |||||||
Short-term/long-term reclassification 2009 | — | (148 | ) | (1,084 | ) | (1,232 | ) | ||||||
Short-term/long-term reclassification 2010 | — | (123 | ) | (536 | ) | (659 | ) | ||||||
Other adjustments | — | — | (172 | ) | (172 | ) | |||||||
Balance as of December 31, 2010 | $ | — | $ | 58 | $ | — | $ | 58 | |||||
The long-term liability will be paid over the remaining life of the leases for the former corporate headquarters and a former Data Storage facility, which expire in June 2011 and May 2012, respectively. We currently do not anticipate or expect to incur additional restructuring charges during 2011.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
The following is a reconciliation of the liability for the 2007 restructuring charge from inception through December 31, 2010 (in thousands):
| | LED & Solar | Data Storage | Unallocated Corporate | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Beginning balance at January 1, 2008 | $ | 17 | $ | 2,063 | $ | 1,492 | $ | 3,572 | |||||
Reversal of accrual during 2008 | — | (81 | ) | — | (81 | ) | |||||||
Cash payments during 2008 | (17 | ) | (1,982 | ) | (1,247 | ) | (3,246 | ) | |||||
Cash payments during 2009 | — | — | (245 | ) | (245 | ) | |||||||
Balance as of December 31, 2010 | $ | — | $ | — | $ | — | $ | — | |||||
Asset Impairment Charges
During 2009, we recorded a $0.3 million asset impairment charge in the second quarter for property, plant and equipment no longer being utilized in our Data Storage reporting unit.
During 2008, we recorded a $51.4 million asset impairment charge, of which $51.1 million was recorded during the fourth quarter and $0.3 million was recorded during the first quarter. The fourth quarter charge consisted of $30.4 million related to goodwill, $19.6 million related to intangible assets ($5.0 million of indefinite-lived trademarks and $14.6 of other definite-lived intangibles) and $1.1 million in property, plant and equipment in Data Storage. The first quarter charge consisted of $0.3 million associated with property and equipment abandoned as part of the consolidation of our corporate headquarters into our Plainview facility.
Minimum Lease Commitments
Minimum lease commitments as of December 31, 2010 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows (in thousands):
2011 | $ | 3,915 | ||
2012 | 2,360 | |||
2013 | 1,723 | |||
2014 | 835 | |||
2015 | 401 | |||
Thereafter | 230 | |||
| $ | 9,464 | |||
Rent charged to operations amounted to $2.3 million, $2.0 million and $2.5 million in 2010, 2009 and 2008, respectively. In addition, we are obligated under such leases for certain other expenses, including real estate taxes and insurance.
Environmental Remediation
We may, under certain circumstances, be obligated to pay up to $250,000 in connection with the implementation of a comprehensive plan of environmental remediation at our Plainview, New York facility. We have been indemnified by the former owner for any liabilities we may incur in excess of
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
$250,000 with respect to any such remediation and have a liability recorded for this amount as of December 31, 2009. No comprehensive plan has been required to date. Even without consideration of such indemnification, we do not believe that any material loss or expense is probable in connection with any remediation plan that may be proposed.
We are aware that petroleum hydrocarbon contamination has been detected in the soil at the site of a facility formerly leased by us in Santa Barbara, California. We have been indemnified for any liabilities we may incur which arise from environmental contamination at the site. Even without consideration of such indemnification, we do not believe that any material loss or expense is probable in connection with any such liabilities.
The former owner of the land and building in Santa Barbara, California in which our former Metrology operations were located, which business (sold to Bruker on October 7, 2010), has disclosed that there are hazardous substances present in the ground under the building. Management believes that the comprehensive indemnification clause that was part of the purchase contract relating to the purchase of such land provides adequate protection against any environmental issues that may arise. We have provided Bruker indemnification as part of the sale.
Litigation
We are involved in various legal proceedings arising in the normal course of our business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Concentrations of Credit Risk
Our business depends in large part upon the capital expenditures of our top ten customers, which accounted for 80% and 88% of total accounts receivable at December 31, 2010 and 2009, respectively. Of such, HB LED and data storage customers accounted for approximately 62% and 18%, and 65% and 23%, respectively, of total accounts receivable at December 31, 2010 and 2009.
Customers who accounted for more than 10% of our aggregate accounts receivable or net sales are as follows:
| | Accounts Receivable December 31, | Net Sales For the Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2010 | 2009 | 2008 | |||||||||||
Customer A | 20 | % | 43 | % | 17 | % | 27 | % | * | |||||||
Customer B | 26 | % | * | * | * | * | ||||||||||
Customer C | * | * | 12 | % | * | * | ||||||||||
Customer D | * | 14 | % | * | 10 | % | 21 | % | ||||||||
*Less than 10% of aggregate accounts receivable or net sales.
Both of our operating segments sell to these major customers.
We manufacture and sell our products to companies in different geographic locations. In certain instances, we require deposits for a portion of the sales price in advance of shipment. We perform periodic credit evaluations of our customers' financial condition and, where appropriate, require that
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
letters of credit be provided on certain foreign sales arrangements. Receivables generally are due within 30-60 days, other than receivables generated from customers in Japan where payment terms generally range from 60-90 days. Our net accounts receivable balance is concentrated in the following geographic locations (in thousands):
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | |||||
Americas | $ | 13,600 | $ | 15,696 | |||
Europe, Middle East and Africa ("EMEA") | 17,321 | 10,367 | |||||
Asia Pacific(1) | 119,607 | 41,483 | |||||
| $ | 150,528 | $ | 67,546 | ||||
(1)As of December 31, 2010, accounts receivable in China and Singapore amounted to $66.5 million and $48.3 million, respectively. As of December 31, 2009, accounts receivable in Singapore amounted to $34.0 million. No other country accounted for more than 10% of our accounts receivable as of December 31 for the years presented.
Suppliers
We currently outsource, and plan to continue the outsourcing of, certain functions to third parties, including the manufacture of all or substantially all of our new MOCVD systems, data storage systems, solar deposition systems and ion sources. We primarily rely on several suppliers for the manufacturing of these systems. We plan to maintain internal manufacturing capability for these systems at least until such time as we have qualified one or more alternate suppliers to perform this manufacturing. The failure of our present suppliers to meet their contractual obligations under our supply arrangements and our inability to make alternative arrangements or resume the manufacture of these systems ourselves could have a material adverse effect on our revenues, profitability, cash flows and relationships with our customers.
In addition, certain of the components and sub-assemblies included in our products are obtained from a single source or a limited group of suppliers. Our inability to develop alternative sources, if necessary, could result in a prolonged interruption in supply or a significant increase in the price of one or more components, which could adversely affect our operating results.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
11. Foreign Operations, Geographic Area, and Product Segment Information
Net sales which are attributed to the geographic location in which the customer facility is located and long-lived assets related to operations in the United States and other foreign countries as of and for the years ended December 31, 2010, 2009 and 2008 are as follows (in thousands):
| | Net Sales to Unaffiliated Customers | Long-Lived Assets | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||
United States | $ | 94,753 | $ | 60,553 | $ | 130,088 | $ | 123,543 | $ | 117,350 | $ | 124,480 | ||||||||
Other | 232 | 177 | 485 | — | — | — | ||||||||||||||
Total Americas | 94,985 | 60,730 | 130,573 | 123,543 | 117,350 | 124,480 | ||||||||||||||
EMEA(1) | 92,112 | 50,088 | 57,567 | 274 | 315 | 413 | ||||||||||||||
Asia Pacific(1) | 746,134 | 171,594 | 126,795 | 974 | 815 | 706 | ||||||||||||||
Total Other Foreign Countries | 838,246 | 221,682 | 184,362 | 1,248 | 1,130 | 1,119 | ||||||||||||||
| $ | 933,231 | $ | 282,412 | $ | 314,935 | $ | 124,791 | $ | 118,480 | $ | 125,599 | |||||||||
(1)For the year ended December 31, 2010, net sales to customers in South Korea, China and Taiwan were 32.3%, 28.6% and 10.8% of total net sales, respectively. For the year ended December 31, 2009, net sales to customers in South Korea and China were 35.1% and 11.0% of total net sales, respectively. For the year ended December 31, 2008, net sales to customers in Germany and Taiwan were 10.3% and 12.4% of total net sales, respectively. No other country in EMEA and Asia Pacific accounted for more than 10% of our net sales for the years presented.
We manage the business, review operating results and assess performance, as well as allocate resources, based upon two separate reporting segments that reflect the market focus of each business. The Light Emitting Diode ("LED") & Solar segment consists of metal organic chemical vapor deposition ("MOCVD") systems, molecular beam epitaxy ("MBE") systems, thermal deposition sources, and other types of deposition systems used to deposit materials on flexible and glass substrates. These systems are primarily sold to customers in the high-brightness light emitting diode ("HB LED") and solar industries, as well as to scientific research customers. This segment has product development and marketing sites in Somerset, New Jersey, St. Paul, Minnesota, Lowell, Massachusetts and Clifton Park, New York. The Data Storage segment consists of the ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, and dicing and slicing products sold primarily to customers in the data storage industry. This segment has product development and marketing sites in Plainview, New York, Ft. Collins, Colorado and Camarillo, California.
We evaluate the performance of our reportable segments based on income (loss) from operations before interest, income taxes, amortization and certain items ("segment profit (loss)"), which is the primary indicator used to plan and forecast future periods. The presentation of this financial measure facilitates meaningful comparison with prior periods, as management believes segment profit (loss) reports baseline performance and thus provides useful information. Certain items include restructuring expenses, asset impairment charges, inventory write-offs, equity-based compensation expense and other non-recurring items. The accounting policies of the reportable segments are the same as those described in the summary of critical accounting policies.
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
The following tables present certain data pertaining to our reportable product segments and a reconciliation of segment profit (loss) to income (loss) from continuing operations, before income taxes for the years ended December 31, 2010, 2009 and 2008, and goodwill and total assets as of December 31, 2010 and 2009 (in thousands):
| | LED & Solar | Data Storage | Unallocated Corporate | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year ended December 31, 2010 | |||||||||||||
Net sales | $ | 797,904 | $ | 135,327 | $ | — | $ | 933,231 | |||||
Segment profit (loss) | $ | 276,060 | $ | 34,534 | $ | (18,674 | ) | $ | 291,920 | ||||
Interest expense, net | — | — | 6,572 | 6,572 | |||||||||
Amortization expense | 3,121 | 1,522 | 233 | 4,876 | |||||||||
Equity-based compensation expense | 2,643 | 1,140 | 5,865 | 9,648 | |||||||||
Restructuring credit | — | (179 | ) | — | (179 | ) | |||||||
Income (loss) from continuing operations, before income taxes | $ | 270,296 | $ | 32,051 | $ | (31,344 | ) | $ | 271,003 | ||||
Year ended December 31, 2009 | |||||||||||||
Net sales | $ | 205,153 | $ | 77,259 | $ | — | $ | 282,412 | |||||
Segment profit (loss) | $ | 27,826 | $ | (2,578 | ) | $ | (10,598 | ) | $ | 14,650 | |||
Interest expense, net | — | — | 6,850 | 6,850 | |||||||||
Amortization expense | 3,137 | 1,599 | 432 | 5,168 | |||||||||
Equity-based compensation expense | 1,358 | 1,020 | 5,169 | 7,547 | |||||||||
Restructuring expense | 1,196 | 3,006 | 635 | 4,837 | |||||||||
Asset impairment charge | — | 304 | — | 304 | |||||||||
Inventory write-offs | — | 1,526 | — | 1,526 | |||||||||
Income (loss) from continuing operations, before income taxes | $ | 22,135 | $ | (10,033 | ) | $ | (23,684 | ) | $ | (11,582 | ) | ||
Year ended December 31, 2008 | |||||||||||||
Net sales | $ | 165,812 | $ | 149,123 | $ | — | $ | 314,935 | |||||
Segment profit (loss) | $ | 23,913 | $ | 16,986 | $ | (9,221 | ) | $ | 31,678 | ||||
Interest expense, net | — | — | 6,729 | 6,729 | |||||||||
Amortization expense | 4,627 | 3,790 | 448 | 8,865 | |||||||||
Equity-based compensation expense | 495 | 990 | 5,165 | 6,650 | |||||||||
Restructuring expense | 732 | 396 | 8,296 | 9,424 | |||||||||
Asset impairment charges | — | 51,102 | 285 | 51,387 | |||||||||
Purchase accounting adjustment | 1,492 | — | — | 1,492 | |||||||||
Gain on extinguishment of debt | — | — | (3,758 | ) | (3,758 | ) | |||||||
Income (loss) from continuing operations, before income taxes | $ | 16,567 | $ | (39,292 | ) | $ | (26,386 | ) | $ | (49,111 | ) | ||
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2010
| | LED & Solar | Data Storage | Unallocated Corporate | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of December 31, 2010 | |||||||||||||
Goodwill | $ | 52,003 | $ | — | $ | — | $ | 52,003 | |||||
Total assets | $ | 323,096 | $ | 61,691 | $ | 763,247 | $ | 1,148,034 | |||||
As of December 31, 2009 | |||||||||||||
Goodwill | $ | 52,003 | $ | — | $ | — | $ | 52,003 | |||||
Total assets | $ | 178,420 | $ | 54,106 | $ | 372,846 | $ | 605,372 | |||||
Corporate total assets are comprised principally of cash and cash equivalents, short-term investments and restricted cash as of December 31, 2010 and 2009.
Other Segment Data (in thousands):
| | Year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2010 | 2009 | 2008 | ||||||||
Depreciation and amortization expense: | |||||||||||
LED & Solar | $ | 7,573 | $ | 7,392 | $ | 7,850 | |||||
Data Storage | 3,582 | 4,448 | 7,690 | ||||||||
Unallocated Corporate | 1,699 | 2,025 | 2,145 | ||||||||
Total depreciation and amortization expense | $ | 12,854 | $ | 13,865 | $ | 17,685 | |||||
Expenditures for long-lived assets: | |||||||||||
LED & Solar | $ | 8,086 | $ | 6,656 | $ | 5,605 | |||||
Data Storage | 572 | 192 | 4,256 | ||||||||
Unallocated Corporate | 2,066 | 612 | 1,265 | ||||||||
Total expenditures for long-lived assets | $ | 10,724 | $ | 7,460 | $ | 11,126 | |||||
12. Defined Contribution Benefit Plan
We maintain a defined contribution benefit plan under Section 401(k) of the Internal Revenue Code. Almost all of our domestic full-time employees are eligible to participate in this plan. Under the plan, we provide matching contributions of fifty cents for every dollar employees contribute up to a maximum of $3,000. Generally, the plan calls for vesting of Company contributions over the initial five years of a participant's employment. Beginning in 2007, we maintained a similar type of contribution plan at one of our foreign subsidiaries. Our contributions to these plans in 2010, 2009 and 2008 were $1.8 million, $1.0 million and $1.4 million, respectively.
13. Cost Method Investment
On September 28, 2010, Veeco completed an investment in a rapidly developing organic light emitting diode (OLED) equipment company. Veeco has invested in this company's Round B funding extension totaling $3 million, resulting in 7.8% ownership of the preferred shares, and 5.6% ownership of the company. Since we do not exhibit significant influence on such company, this investment is treated under the cost method in accordance with applicable accounting guidance. The fair value of this investment is not estimated because there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment, and we are exempt from estimating interim fair values because the investment does not meet the definition of a publicly traded company. This investment is recorded in other assets in our Consolidated Balance Sheet as of December 31, 2010.
Schedule II—Valuation and Qualifying Accounts ((in thousands)thousands)
COL. A |
| COL. B |
| COL. C |
| COL. D |
| COL. E |
| |||||||
|
|
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| Additions |
|
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|
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| |||||||
|
| Balance at |
| Charged to |
| Charged to |
|
|
| Balance at |
| |||||
|
| Beginning |
| Costs and |
| Other |
|
|
| End of |
| |||||
Description |
| of Period |
| Expenses |
| Accounts |
| Deductions |
| Period |
| |||||
Deducted from asset accounts: |
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|
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|
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| |||||
Year ended December 31, 2013 |
|
|
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|
|
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| |||||
Allowance for doubtful accounts |
| $ | 492 |
| $ | 1,946 |
| $ | — |
| $ | — |
| $ | 2,438 |
|
Valuation allowance in net deferred tax assets |
| 4,708 |
| 2,420 |
| 625 |
| — |
| 7,753 |
| |||||
|
| $ | 5,200 |
| $ | 4,366 |
| $ | 625 |
| $ | — |
| $ | 10,191 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Year ended December 31, 2012 |
|
|
|
|
|
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|
|
|
|
| |||||
Allowance for doubtful accounts |
| $ | 468 |
| $ | 198 |
| $ | — |
| $ | (174 | ) | $ | 492 |
|
Valuation allowance in net deferred tax assets |
| 1,765 |
| 2,943 |
| — |
| — |
| 4,708 |
| |||||
|
| $ | 2,233 |
| $ | 3,141 |
| $ | — |
| $ | (174 | ) | $ | 5,200 |
|
|
|
|
|
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|
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| |||||
Year ended December 31, 2011 |
|
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|
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|
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|
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|
|
| |||||
Allowance for doubtful accounts |
| $ | 512 |
| $ | — |
| $ | — |
| $ | (44 | ) | $ | 468 |
|
Valuation allowance in net deferred tax assets |
| 1,644 |
| — |
| — |
| 121 |
| 1,765 |
| |||||
|
| $ | 2,156 |
| $ | — |
| $ | — |
| $ | 77 |
| $ | 2,233 |
|
| COL. A | COL. B | COL. C | COL. D | COL. E | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Additions | | | ||||||||||||||
| Description | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | |||||||||||||
Deducted from asset accounts: | ||||||||||||||||||
Year ended December 31, 2010: | ||||||||||||||||||
Allowance for doubtful accounts | $ | 438 | $ | 40 | $ | 34 | $ | — | $ | 512 | ||||||||
Valuation allowance on net deferred tax assets | 84,723 | — | (2,663 | ) | (80,416 | ) | 1,644 | |||||||||||
| $ | 85,161 | $ | 40 | $ | (2,629 | ) | $ | (80,416 | ) | $ | 2,156 | |||||||
Deducted from asset accounts: | ||||||||||||||||||
Year ended December 31, 2009: | ||||||||||||||||||
Allowance for doubtful accounts | $ | 583 | $ | (52 | ) | $ | — | $ | (93 | ) | $ | 438 | ||||||
Valuation allowance on net deferred tax assets | 78,706 | 6,017 | — | — | 84,723 | |||||||||||||
| $ | 79,289 | $ | 5,965 | $ | — | $ | (93 | ) | $ | 85,161 | ||||||||
Deducted from asset accounts: | ||||||||||||||||||
Year ended December 31, 2008: | ||||||||||||||||||
Allowance for doubtful accounts | $ | 641 | $ | (67 | ) | $ | 9 | $ | — | $ | 583 | |||||||
Valuation allowance on net deferred tax assets | 67,360 | 14,150 | 317 | (3,121 | ) | 78,706 | ||||||||||||
| $ | 68,001 | $ | 14,083 | $ | 326 | $ | (3,121 | ) | $ | 79,289 | ||||||||
Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.
*Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a) (3) of Form 10-K.