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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One) | |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
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For the fiscal year ended December 31, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to . |
Commission file number 0-16244
VEECO INSTRUMENTS INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of Incorporation or Organization) |
| 11-2989601
(I.R.S. Employer Identification No.) |
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Terminal Drive
Plainview, New York
(Address of Principal Executive Offices) |
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11803
(Zip Code)
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Registrant's
Registrant’s telephone number, including area codecode:
(516) 677-0200
Website:www.veeco.com
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
(Title of each class) | | (Name of each exchange on which registered) |
Common Stock, par value $0.01 per share | | The NASDAQ Stock Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrantregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ýx No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)files). Yes ýx No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K. ox
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large“large accelerated filer," "accelerated” “accelerated filer,"” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ýx | | Accelerated filer o¨ |
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Non-accelerated filer o
(Do (Do not check if a
smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ýx No
The aggregate market value of the votingcommon stock held by non-affiliates of the Registrant,registrant as of June 27, 2014 (the last business day of the registrant’s most recently completed second quarter) was $1,454,417,866 based on the closing price of $36.83 on the common stockNASDAQ Stock Market on July 1, 2011 as reported on that date.
The Nasdaq National Market, was $2,057,494,571. Sharesnumber of shares of each of the registrant’s classes of common stock held by each officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Aton February 21, 2012, the Registrant had 38,767,203 outstanding17, 2015 was 40,361,759 shares of common stock.stock, par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
Certain portions of the Registrant'sdefinitive Proxy Statement forto be used in connection with the Registrant’s 2015 Annual Meeting of Stockholders to be held on May 4, 2012 are incorporated by reference into Part III of this Annual Report on Form 10-K.
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SAFE HARBOR STATEMENT
This Annual Report on Form 10-K (the "Report"(“Form 10-K”) contains certain forward-looking statements withininformation relating to Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the meaning“Company,” “Registrant,” “we,” “our,” or “us,” unless the context indicates otherwise) that is based on the beliefs of, and assumptions made by, our management as well as information currently available to management. When used in this Form 10-K, the Private Securities Litigation Reform Act of 1995.words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions relating to the future are intended to identify forward-looking information. Discussions containing such forward-looking statements may be found in Part I. Items 1, 3, 7 and 7A hereof, as well as within this ReportForm 10-K generally. In addition, when used in this Report, the words "believes," "anticipates," "expects," "estimates," "plans," "intends"This forward-looking information reflects our current views with respect to future events and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. These risks and uncertainties include, without limitation, the following:
•Our operating results have been, and may continue to be, adversely affected by unfavorable market conditions;
•Market adoption of LED technology for general lighting could be slower than anticipated;
•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 adapt to fluctuating order volumes;
•The further reduction or elimination of foreign government subsidies and economic incentives may adversely affect the future order rate for our MOCVD equipment;
•Our operating results have been, and may continue to be, adversely affected by tightening credit markets;
•Our backlog is subject to customer cancellation or modificationcertain risks, uncertainties, 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;
•The 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;
•The cyclicality of the industries we serve directly affects our business;
•We rely on a limited number of suppliers,assumptions, some of whomwhich are our sole source for particular components;
���Our sales to HB LEDdescribed under the caption “Risk Factors” in Part I, Item 1A and data storage manufacturers are highly dependent on these 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;
•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;
•The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly;
•We operate in industries characterized by rapid technological change;
•We face significant competition;
•We depend on a limited number of customers, located primarily in a limited number of regions, that operate in highly concentrated industries;
•Our sales cycle is long and unpredictable;
•Our inability to attract, retain, and motivate key employees could have a material adverse effect on our business;
•The price of our common shares may be volatile and could decline significantly;
•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;
•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;
•Changes in accounting pronouncements or taxation rules or practices may adversely affect our financial results.
•We are subject to 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; and
•The matters set forthelsewhere in this Report generally, includingForm 10-K. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from the risk factors set forthforward-looking information described in "Item 1A. Risk Factors."
Consequently, such forward-looking statements should be regarded solelythis Form 10-K as the Company's current plans, estimates, and beliefs. The Company doesbelieved, anticipated, expected, estimated, targeted, planned or similarly identified. We do not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.
PART I.
Item 1. Business
The Company
Veeco Instruments Inc. (together with its consolidated subsidiaries, "Veeco," the "Company" or "we") creates Process Equipment solutions
We create process equipment that enableenables 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), power electronics, wireless devices, hard disk drives, and hard-disk drives, as well as for emerging applications such as concentrator photovoltaics, power semiconductors, wireless components, microelectromechanical systems (MEMS), and other next-generation devices.semiconductors. We may also license our technology to our customers or partners.
Veeco focuses on developing
We develop highly differentiated, "best-in-class" Process Equipment products“best-in-class” equipment for critical performance steps.steps in thin film processing. Our products feature leading technology, low cost-of-ownership, and high throughput, offering a time-to-market advantage for our customers around the globe.throughput. Core competencies in advanced thin film technologies, over 150300 patents, and decades of specialized process know-how helps us to stay at the forefront of these demandingrapidly advancing industries.
Veeco's LED & Solar segmentdesigns and manufactures metal organic chemical vapor deposition ("MOCVD") and molecular beam epitaxy ("MBE") systems and components sold to manufacturers of LEDs, wireless devices, power semiconductors, and concentrator photovoltaics, as well as to R&D applications. In 2011 we discontinued the sale of our products related to Copper, Indium, Gallium, Selenide ("CIGS") solar systems technology.
Veeco's Data Storage segmentdesigns and manufactures the critical technologies used to create thin film magnetic heads ("TFMHs") that read and write data on hard disk drives. These technologies include ion beam etch (IBE), ion beam deposition (IBD), diamond-like carbon (DLC), physical vapor deposition (PVD), chemical vapor deposition (CVD), and slicing, dicing and lapping systems. While these technologies are primarily sold to hard drive customers, they also have applications in optical coatings and other markets.
Veeco's approximately 900 employees support our customers through product and process development, training, manufacturing, and sales and service sites in the U.S., Korea, Taiwan, China, Singapore, Japan, Europe and other locations.
Veeco Instruments wasWe were organized as a Delaware corporation in 1989.
Our Growth StrategyBusiness Overview and Industry Trends
Veeco's growth strategy consists of:
•We are focused on:
·Providing differentiated Process Equipment technology solutionsprocess equipment to address customers'customers’ next generation product development roadmaps;
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•- Investing to win through focused research and development spending in
end markets that we believe provide significant growth opportunities or are at an inflection point in Process Equipment requirements. Examples includeprocess equipment requirements, including LED and power semiconductor devices, MEMS, and the concentrator photovoltaic market;or that represent next-generation technologies, such as organic light-emitting diodes (“OLED”);
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•- Leveraging our
world-class sales channel and local process applications support to build strong strategic relationships with technology leaders in all key regions;leaders;
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•- Expanding our portfolio of service products that improve the performance of our systems, including spare parts, upgrades, and consumables to drive
additional growth, reduce our customers’ cost of ownership, and improve customer satisfaction.satisfaction;
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•- Combining outsourced and internal manufacturing strategies to
appropriately flex manufacturing capacity through industry investment cycles;
•- and
·Pursuing partnerships and strategic mergers and acquisitions to expand our product portfolio of Process Equipment technologies and accelerate our growth.
Business Overview
Our systems, including our deposition and Industry Trends
General Introduction: Our deposition, etch and other technologiestools, are applicable toused in the creation of a broad range of microelectronic components, including LEDs, solar cells,power semiconductors, thin film magnetic heads (“TFMH”s), and compound semiconductor devices such as wireless components and power electronics.devices. Our customers who manufacture these devices continue to invest in new technology equipment in orderour systems to advancedevelop their next generation products and deliver more efficient, and cost effective, technologyand advanced technological solutions. We operate in a cyclical business environment, and we are highly influenced by our customers’ buying patterns that are themselves dependent upon industry trends. While our products are sold to multiple markets, the following discussion focuses on the trends that most influence our business.
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Following the global recession in 2008-2009, Veeco experienced a rapid improvement in business conditions in late 2009 and 2010. The combination of an improvement in capital spending by our global customers as well as our focus on high-growth end markets, particularly LED, and successful new product introductions enabled the Company to benefit from growth and market share gains in 2010 and 2011. Veeco's revenues increased over 200% in 2010 and 5% in 2011.
Metal Organic Chemical Vapor Deposition Systems
The following is a review of our two business segments and the multi-year technology trends that impact each.
LED & Solar Business Overview and Trends:We are athe world’s leading supplier of equipment solutions used to create high brightness LEDs and solar cells.metal organic chemical vapor deposition (“MOCVD”) systems. MOCVD and MBE technologiesproduction systems are used to grow compound semiconductor materials (such asmake gallium nitride (“GaN”) –based devices (blue and green LEDs) and Arsenic Phosphide (“AsP”) –based devices (red, orange, and yellow LEDs), which are used in television and laptop backlighting, general illumination, large area signage, specialty illumination, and many other applications. Our AsP MOCVD systems are also used to make high-efficiency triple junction photovoltaic solar cells. In 2014 we introduced two new MOCVD platforms: the TurboDisc® EPIK700™ GaN (gallium nitride), GaAs (gallium arsenide), AlInGaP (aluminum indium gallium phosphide)MOCVD System (“EPIK700”) and InP (indium phosphide)) at the atomic scale. Epitaxy isPropel™ PowerGaN™ MOCVD System (“Propel”). The EPIK700 MOCVD system combines the critical first step in compound semiconductor wafer fabricationindustry’s highest productivity and is consideredbest-in-class yields with low cost of operation, further enabling lower manufacturing costs for LEDs for general lighting applications. The Propel MOCVD system incorporates single-wafer reactor technology for outstanding film uniformity, yield, and device performance. We believe the Propel MOCVD system’s new 200mm technology enables the development of highly-efficient GaN-based power electronic devices that have the potential to beaccelerate the highest value added process, ultimately determining device functionalityindustry’s transition from research and performance.development to high volume production.
We believe that the LED market, while cyclical, represents a multi-year secular growth opportunity for us due to the expanding applications for LEDs, such as general illumination, backlighting for large screen flat panel TVs, mobile phones, tablet and laptop computers and automotive applications. According to Strategies Unlimited, a leading market research firm, 2010 revenues for high brightness LEDs for all applications grew by 108% to $11.2 billion, and despite a slowdown in overall TV demand in 2011, grew by another 10% in 2011 to $12.3 billion.
Industry Trends Impacting MOCVD
The demand for MOCVD tools to grow GaN based materials (the thin films that convert energy to light) to make LEDs for these applications grew dramatically beginning in mid-2009, with merchant industry shipments of MOCVD reactors growing from approximately 230 reactors in 2009, to approximately 800 reactors in 2010 and over 700 in 2011 (Source: Veeco and competitor financial results). Established LED industry leaders in Taiwan, U.S., Europe, Korea and Japan, as well as emerging players in China spurred by government incentives and economic development funding, all invested heavily in MOCVD equipment to ramp LED capacity. However, the industry is currently experiencing an overcapacity situation, evidenced by low tool utilization rates being reported by many key global customers. As a result, new orders for Veeco's MOCVD systems declined sharply in both the third and fourth quarters of 2011. In the short term, it is difficult for us to predict when the supply/demand of LEDs will return to equilibrium and what the demand for our MOCVD products will be. According to the Semiconductor Equipment and Materials Industry's (SEMI) January 2012 Opto/LED Fab Watch report, worldwide MOCVD purchases will decline by 40% in 2012 compared to 2011.
While consumer electronics 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 over the next few years as LEDs become widely adopted for this much larger market application. Industry research group
IMS forecasts that LEDs for solid state lighting will represent $13.3 billion in revenue from 2013 through 2015, and that lighting will become the largest end market for LEDs during this time frame. As a comparison, LEDs for the TV backlighting market represented $4.3 billion in revenue from 2009-2011.
As part of the shift toward more efficient energy use across the globe, we believe LED technology will play a key role as both anin energy and cost savings lever in the area of lighting. We see this opportunity as both vast and long term in nature given that LED lighting is just now beginning to penetrate the global lighting market which accounts for close to 20% of world-wide electricity consumption. LED adoption is happening initially in outdoor, commercial, and industrial lighting where high usage and lower efficiency make incumbent lighting costly. LEDs still represent a small segment of the overall lighting market. According to a 2014 report from IHS Research, LEDs (unit lamps) will grow from today’s 5% global market penetration to 23% by 2019. Further adoption of LEDs across all forms of lighting is expected to occur in the coming years, with rapidly declining LED costs, shortening payback periods versus conventional lighting technologies, and "ban-the-bulb"“ban-the-bulb” legislation now underway in more than 20 countries around the globe. Similar to Moore's Law in semiconductors, technology advancements in the LED industry have followed a consistent cadence known as Haitz's Law, which states that luminous flux for LEDs will increase 20X each decade, while over the same period costs will fall by 10x. This implies a 25-35% increase in efficacy in each generation of new LEDs. In addition to the incandescent bulb phase-outs, many countries have begun to implementimplemented policies to accelerate adoption of LEDs. These include China's "10 cities 10,000 lights" program, South Korea's "20-60" plan targeting 60% penetrationIn the same report, IHS Research stated that unit shipments of LED chips used for lighting on a national level by 2020,applications reached 108 billion during 2014 and Japan's "Basic Energy Plan" with specific goals for energy efficient lighting.are forecasted to grow at an over 20% compounded annual growth rate, reaching nearly 300 billion units shipped in 2019.
Future
Our MOCVD technology is at the core of our customers’ process tools that are required to make LEDs. We have experienced periods of rapid growth as LEDs were adopted for TV backlighting and LED producers, particularly in China, made significant investments in the industry. Following this investment wave, there was an oversupply of MOCVD equipment and capital spending will continue to drive cost reductionour business went into a deep and prolonged decline. However, as the LED industry grows and LED adoption into the lighting market increases, our MOCVD business benefits, and we saw a meaningful improvement in 2014, driven by renewed equipment investments by global LED technology through larger wafers, automation and dedicated equipment specifically designed to improve manufacturing yield and throughput for lighting class LED product.industry leaders. We expect further growth in our MOCVD products over the next few years. In order to maximize this opportunity we have accelerated our R&D investments overhelp drive down the past few years to introduce several generationscost of MOCVD tools, most recently our TurboDisc® K-Series™ and MaxBright® MOCVD systems. By introducing new systems, we are focused on delivering better uniformity and repeatability, which helpsLED manufacturing for our customers to make LEDs of consistent quality, ultimately with the goal to deliver more, high quality LEDs at a lower manufacturing cost. Despite the forecasted decline in the MOCVDand maintain our market in 2012,leadership position, we intend to continuekeep introducing new products with significant cost of ownership advantages when compared to invest heavily in research and development in order to deliver more advancedalternative equipment.
In other industry trends that impact MOCVD, solutions to our customers and accelerate lighting industry adoption of LEDs. In addition to new systems sales, we are increasing our focus on supporting our customers with tool upgrades to improve their performance as well as selling additional after-market services, such as training, process applications support, warranties, spare parts and consumables.
A related MOCVD application for us is in the solar market, since the same MOCVD toolseeing that is critical to the LED manufacturing process can also be used to manufacture high-efficiency triple junction solar cells, otherwise known as Concentrator Photovoltaic (CPV). Arsenide phosphide (As/P) MOCVD is the technology of choice to build the critical compound semiconductor layers for the CPV device. Veeco currently sells a small number of MOCVD systems each year for this new application. CPV Solar ispower semiconductors are an emerging as a new technology niche with proof-of-concept scale installations (1MW or less), and in 2012 and 2013 multiple pilot production utility-scale projects are being developed around the world. According to solar market research firm GTM's 2011 report, new CPV installations will grow from under 5MW in 2010 to more than 1,000MW globally by 2015.
Another new market opportunity for our MOCVD tools is the power semiconductor market. Silicon-basedequipment. While silicon-based transistors are the mainstream forms of power electronic devices today. However, GaN-basedtoday, GaN-on-Silicon based power electronics developed on MOCVD tools can potentially deliver higher performance (higher(i.e., smaller form factors, higher efficiency, and better switching speed) than silicon.. Global industry leaders in power electronics are currently working on research and development programs many in partnership with Veeco, to explore this new technology opportunity. Examplestechnology. Based on a June 2014 Yole Research report, GaN–based power electronics adoption is expected to reach 4% of the wide array potential applicationsPower Device market in 2020, valued at approximately $566 million. This represents a compounded annual growth rate of 94% from 2014. The main driver of this growth is the adoption of GaN–based devices used for GaN-based power devices include those in information technology andhybrid electric vehicles, consumer devices (power supplies,
inverters), automotive (hybrid automobiles) and industrial applications (power distribution, rail transportationelectronics, solar and wind turbines). Additionally, Veeco is actively engaged with customers around the globe that are developing GaN-on-Silicon (GaN-on-Si) based technologies to potentially lower LED manufacturing costs by depositing thin film materials on silicon rather than sapphire substrates.power, and power supplies.
Veeco's MBE systems, sources and components are used to manufacture critical epilayers in varied end applications such as solar cells, fiber-optics, mobile phones, satellites, radar systems and displays. Our business continues to be influenced by long-term market trends associated with the increasing demand for gallium arsenide (GaAs) devices to support the rapid adoption of smart phones within the larger mobile phone handset market. Each one of these complex devices contains an increasing number of power amplifiers or other compound semiconductor radio frequency (RF) components. Advanced RF solutions for leading edge smart phones and tablet computers are required to support increasing data transfer volumes and long term evolution (LTE) based wireless communications.
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 consumer applications (e.g. digital video recorders) reaching higher volume. While much has been written about the competition hard disk drives ("HDDs") face 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. According to data storage research firm TrendFocus' August 2011 report, HDDs are forecasted to grow at a CAGR of 8.1% from 2011 to 2015.
While technology change continues in data storage, the industry has gone through a period of maturation, including vertical integration and consolidation. A recovery in capital spending by our key data storage customers in 2010, combined with the successful introduction of several new deposition tools to advance areal density, enabled Veeco 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. Despite these disruptions the floods in Thailand resulted in an unexpected increase in orders in the fourth quarter of 2011.
Throughout these cycles, Veeco continues 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. Veeco's Data Storage business is centered around core technologies where we have a leadership position. We utilize a flexible manufacturing strategy which helps mitigate the impact of industry cycles. In addition, Veeco's product development team has begun to identify non-hard drive market applications (such as LED and MEMS) for our key Data Storage technologies including mechanical process tools, etch and deposition 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:
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| | Year ended December 31, | |
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| | 2011 | | 2010 | | 2009 | |
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| | (Dollars in millions)
| |
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LED & Solar | | $ | 827.8 | | $ | 795.6 | | $ | 205.0 | |
% of net sales | | | 84.5 | % | | 85.5 | % | | 72.6 | % |
Data Storage | | $ | 151.3 | | $ | 135.3 | | $ | 77.3 | |
% of net sales | | | 15.5 | % | | 14.5 | % | | 27.4 | % |
Total net sales | | $ | 979.1 | | $ | 930.9 | | $ | 282.3 | |
See Note 11 to our Consolidated Financial Statements for additional information regarding our reportable segments and sales by geographic location.
LED & Solar
Metal Organic Chemical Vapor Deposition Systems (MOCVD): We are one of the world's leading suppliers of MOCVD technology. MOCVD production systems are used to make GaN-based devices (green and blue LEDs) and As/P-based devices (red, orange and yellow LEDs), which are used today in television and laptop backlighting, general illumination, large area signage, specialty illumination and many other applications. Our As/P MOCVD Systems also are used to make high-efficiency concentrator photovoltaics. In 2011 Veeco introduced the industry's first production-proven multi-chamber MOCVD system, the MaxBright® for high-volume production of LEDs.
Molecular Beam Epitaxy Systems (MBE): MBE
Molecular Beam Epitaxy (“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. Our MBE systems, sources, and components are used to manufacture critical epitaxial layers in applications such as solar cells, fiber-optics, mobile phones, radar systems, and displays. 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 (power(e.g., power amplifiers, high electron mobility transistors, or hetero-junction bipolar transistors (pHEMTS and HBTs))transistors) and a broad array of research applications for new compound semiconductor materials. In 2013, we introduced the GENxplor™ R&D MBE System, the industry’s first fully-integrated MBE system for the compound semiconductor research and development market. The GENxplor MBE system 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 research applications.including gallium arsenide, nitrides, and oxides.
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Industry Trends Impacting MBE
In 2013, we refocused our product portfolio to increase our market share in sales of MBE systems to scientific research organizations and universities. As a result, we won the majority of research orders in 2014. Variability in our MBE product portfolio is primarily influenced by funding of semiconductor research and development and manufacturing of compound semiconductor devices with MBE systems, such as laser diodes and rf devices for cell phones. Due to industry consolidation and resulting overcapacity, our sales of MBE production tools have been declining for the last two years.
Data StorageFast Array Scanning Atomic Layer Deposition Systems
Atomic Layer Deposition (“ALD”) is a thin film deposition method in which a film is grown on a substrate by exposing its surface to alternate gaseous species. We believe that Fast Array Scanning ALD (“FAST-ALD™”) represents a paradigm shift in a technology long known for excellent deposition uniformity and 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, and we are currently investigating applications for this technology in the OLED and semiconductor markets. In December 2014, we successfully demonstrated our FAST-ALD technology for flexible OLED encapsulation, but at the same time the incumbent deposition technology has progressed to satisfy current market requirements. As a result, we decided to refocus our ALD research and development efforts on ALD applications within the semiconductor and other markets. We continue to monitor the flexible OLED market opportunity.
Precision Surface Processing Systems
In December 2014, we acquired Solid State Equipment LLC, a leading innovator in single wafer wet etch, clean, and surface preparation equipment targeting high growth segments in advanced packaging, micro-electro-mechanical systems (“MEMS”), and compound semiconductor, for $145.5 million, net of cash acquired, and we have rebranded the business Precision Surface Processing (“PSP”). PSP’s two core platforms are the WaferEtch™ and the WaferStorm™. The flagship of the WaferEtch platform, the TSV REVEALER™, is specifically configured to address the requirements of TSV reveal, which is the process where the backside of a wafer is thinned to reveal the copper interconnects. TSV reveal has become a target area in the manufacture of 2.5D and 3D-IC packaging for process control and cost reduction. The WaferStorm platform is based on PSP’s unique soak and spray technology, which provides improved performance at a lower cost of ownership than conventional wet bench-only or spray-only approaches.
Industry Trends Impacting Surface Processing
Demand for higher performance, increased functionality, smaller form factor, and lower power consumption in mobile devices, consumer electronics, and high performance computing is expected to accelerate advanced packaging technology adoption. Key drivers for this inflection are applications in 3D stacked memory, 3D system-on-chip, and MEMS. Increasing shipments in smartphones and wearable electronics with more sophisticated sensing functions further drive growth in the MEMS market. Third party research firms including Yole Développement estimate that wafer-level packaging, GaN lighting LEDs, GaN power devices, and MEMS are expected to grow at double digit compound annual growth rates for the next three to five years.
Ion Beam Deposition Systems
Our NEXUS® Ion Beam Deposition ("IBD"(“IBD”) Systems: Our 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/depositiondeposition/etch 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. Our SPECTOR® systems offer manufacturers improvements in target material utilization, optical endpoint control, and process time for cutting-edge optical interference coating applications.
Ion Beam Etch ("IBE") Systems:Systems
Our NEXUS IBEIon Beam Etch (“IBE”) systems utilize a charged particle beam consisting of ions to etch precise, complex features for use primarily by data storage and telecommunications device manufacturers in the fabrication of discrete and integrated microelectronic devices.
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Other Data Storage Products
We make a broad array of deposition systems including Physical Vapor Deposition, ("PVD") Systems: Our NEXUS PVD systems offer manufacturers a highly flexible deposition platform for developing next-generation data storage applications.
Diamond-LikeDiamond Like Carbon ("DLC") Deposition, Systems: Our DLC deposition systems deposit protective coatings on advanced TFMHs.
and Chemical Vapor Deposition ("CVD") Systems:Systems. In addition, our Optium Our NEXUS CVD systems 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 facilities 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 tools that slice and dice wafers into rowbarsrow bars and TFMHs.
ServiceIndustry Trends Impacting Our Ion Beam and SalesOther Systems
While hard disk drives (“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. This is especially true for data center applications where large volumes of data storage are required to serve an increasingly mobile population. According to data storage research firm TrendFocus’ February 2014 report, shipments of TFMHs, the HDD component that our equipment makes, are forecasted to grow at a compound annual growth rate of 11% from 2014 to 2018. The HDD manufacturing industry continues to slowly absorb the excess manufacturing capacity that existed after significant consolidation of the industry in 2011. While we have started to see signs of capacity constraints in some process areas and have experienced an increase in orders for our equipment at the end of 2014, low growth is expected to continue. Future demand for our data storage systems is unclear and orders are expected to fluctuate from quarter to quarter.
Throughout industry cycles, we continue to invest in developing systems to support advanced technologies such as two dimensional magnetic recording (“TDMR”) and heat assisted magnetic recording (“HAMR”). These technologies increase the density of data that can be stored on a disk and require technological advances in the TFMH design, manufacturing methods, and equipment.
Our ion beam and other data storage systems are also sold for applications in MEMS magnetic sensors, rf filters, optical coatings, and extreme ultraviolet (“EUV”) photomasks. We have put in place new product development, marketing, and sales strategies to grow the non-data storage applications of our technologies. We expect growth to be driven by mobility trends (mobile phone chips and MEMS), and growth in our optical coatings business comes from higher throughput product offerings. Recent progress in EUV production readiness incrementally improves our outlook for this market.
Sales and Service
We sell our products and services worldwide primarily through various strategically located sales and service facilities in the U.S.,United States, Europe, and Asia Pacific, and we believe that our customer service organization is a significant factor in our success. We provide service and support on a warranty, service contract, orand 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. RevenuesRevenue from the salesales of parts, upgrades, service, and support represented approximately 10%25%, 8%29%, and 16%21% of our net sales for the years ended December 31, 2011, 20102014, 2013, and 2009,2012, respectively. PartsPart sales represented approximately 6%21%, 5%23%, and 9%17% of our net sales for those years, respectively, and service and support sales were 4%, 3%6%, and 7%4%, respectively.
Customers
We sell our products to many of the world's major HBworld’s LED solar andmanufacturers, semiconductor manufacturers, 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 Elec-Tech InternationalHC SemiTek and Seoul Viosys Co. Ltd. and Sanan Optoelectronics each accounted for more than 10% of Veeco'sour total net sales in 2011, LG Innotek Co. Ltd., Seoul OptoDevice Co. Ltd. and Sanan Optoelectronics each2014, sales to HC SemiTek accounted for more than 10% of Veeco'sour total net sales in 20102013, and LG Innotek Co. Ltd. and Seagate Technology, Inc. eachsales to Western Digital accounted for more than 10% of Veeco'sour total net sales in 2009.2012. 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 and research and development functions are organized by business unit. We believe that this organizational structure allows each business unit manager to more closely monitorfocused on the products for which he is responsible, resulting in more efficient marketing and research and development. Our research and development activities are organized by business unit and take place at our facilities in Plainview, New York; Camarillo, California; Ft. Collins, Colorado; Somerset, New Jersey; St. Paul, Minnesota; and Korea.
We believe that continued and timely developmentcreation of new products and enhancements to existing products, both of which 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 business unitactivities take place at our facilities in Fremont, California; St. Paul, Minnesota; Somerset, New Jersey; Plainview, New York; Poughkeepsie, New York; Horsham, Pennsylvania; and new or improved products have been introduced into eachHyeongok-ri, South Korea.
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Table of our product lines in each of the past three years.Contents
Our research and development expenses were approximately $96.6$81.2 million, $56.9$81.4 million, and $37.8$95.2 million, or approximately 10%21%, 6%25%, and 13%18% of net sales for the years ended December 31, 2011, 20102014, 2013, and 2009,2012, respectively. These expenses consisted primarily of salaries, project materials, 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 Storageion beam and other data storage systems, and ion sources. We primarily rely on several suppliers for the manufacturing of these systems. 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.
Backlog
Our backlog decreased to $332.9 million as of December 31, 2011 from $535.4 million as of December 31, 2010. During the year ended December 31, 2011, we experienced net backlog adjustments of approximately $41.4 million. The adjustments consisted of $38.1 million of order cancellations and $3.3 million related to other order adjustments. During the year ended December 31, 2011, we had a net positive adjustment related to foreign currency translation of $0.1 million.
Our backlog consists of orders for which we received a firm purchase order, a customer-confirmed shipment date within twelve months, and a deposit where required.
Our backlog increased to $286.7 million as of December 31, 2014 from $143.3 million as of December 31, 2013. During 2014, we recorded backlog adjustments of approximately $1.6 million relating to orders that no longer met our bookings criteria. As of December 31, 2014, $23.4 million of the backlog was from our acquisition of PSP.
Competition
In each of the markets that we serve, we face substantial competition from established competitors, some of which have greater financial, engineering, 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: Applied Materials,Materials; LAM Research; Riber; Aixtron; Taiyo Nippon Sanso; Canon Anelva Corporation,Anelva; DCA Instruments,Instruments; Leybold Optics,Optics; Oerlikon Balzers,Balzers; and Oxford Instruments, Toyo Nippon Sanso and Riber.Instruments.
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 over 300 patents in the United States and other countries and have additional applications pending for new inventions.
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, 2011,2014, we had 917approximately 800 employees, of which there were 195147 in manufacturing and testing, 11889 in sales and marketing, 187153 in service and product support, 288239 in engineering, research and development, and 129158 in information technology, general administration, and finance. In addition, we also had 4613 temporary employees/outside contractors, which support our variable cost strategy.contractors. The success of our future operations depends in large part on our ability to recruit and retain engineers,
technicians, and other highly-skilled highly skilled
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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 employee relations with our employees are good.
Financial Information About Segments and Geographic Areas
Refer to Note 19, “Segment Reporting and Geographic Information,” in the Notes to the Consolidated Financial Statements for financial data pertaining to our segment and geographic operations.
Available Information
We file annual, quarterly and current reports, information statements and other information
Our corporate website address is www.veeco.com. All filings we make 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.
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. We provide a link on our website, under Investors—Financial—SEC Filings, through which investors can access our filings with the SEC,, including our annual reportAnnual Report on Form 10-K, quarterly reportsour Quarterly Reports on Form 10-Q, current reportsour Current Reports on Form 8-K, our proxy statements and allany amendments thereto filed or furnished pursuant to those reports. These filingsSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are posted toavailable for free in the Investor Relations section of our website as soon as reasonably practicable after we electronically file such materialthey are filed with or furnished to the SEC. Our SEC filings are available to be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained for free on the SEC’s website at www.sec.gov. The reference to our website address does not constitute inclusion or incorporation by reference of the information contained on our website in this Form 10-K or other filings with the SEC.SEC, and the information contained on our website is not part of this document.
Item 1A. Risk Factors
Risk Factors That May Impact Future Results
In addition to
Current and potential stockholders should consider carefully the other information set forth herein, the following risk factors should be carefully considered by shareholdersdescribed below. Any of and potential investors in the Company.
Ourthese factors, many of which are beyond our control, could materially adversely affect our business, financial condition, operating results, have been,cash flow, and may continue to be, adversely affected by unfavorable market conditions.stock price.
Market
Unfavorable market conditions relative tomay adversely affect our operating results.
Conditions of the segmentsmarkets in which we operate are volatile and, in the past, have deteriorated significantly in many of the countries and regions in which we do business and may remainbecome depressed for the foreseeable future. Our MOCVD order volumes decreased significantlyagain in the latter part of 2011 and are expected to remain depressed during 2012 and possibly beyond.future. Foreign government incentives designed to encourage the development of the LED industry have been curtailed,unpredictable, and the availability of the incentives can impact the demand for our MOCVD products has softened.products. We have experienced and may continue to experience customer rescheduling and, to a lesser extent, cancellations of orders for our products. Actual market conditions and ordering volumes in 2012 and beyond may be worse than currently forecasted. Continuing adverseAdverse 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;
·
•Increasedincreased price competition and lower margin for our products;
·
•Increasedincreased competition from sellers of used equipment or lower-priced alternatives to our products;
·
•Increasedincreased risk of excess and obsolete inventories;
·
•Increasedincreased risk in the collectability of amounts due from our customers;
•Increased·increased risk in potential reserves for doubtful accounts and write-offs of accounts receivable;
·
•Disruptionsdisruptions in our supply chain as we reduce our purchasing volumes and limit our contract manufacturing operations; and
·
•Higherhigher operating costs as a percentage of revenues.
If the markets in which we participate fail to experience a protractedrecovery or experience a further downturn, and/or a slow recovery period, this could negativelyhave a further negative impact on our sales and revenue generation, margins and operating expenses, and consequently have a material adverse effect on our business, financial condition and resultsprofitability.
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Market adoption of LED technology for general lighting could be slower than anticipated.Contents
Our
A reduction or elimination of foreign government subsidies and economic incentives may adversely affect the future business prospects depend largely on the adoptionorder rate for our MOCVD equipment.
We generate a significant portion of LED technology for general illumination applications, including residential, commercial and street lighting markets. Potential barriers to adoption include higher initial costs and customer familiarity with, and substantial investment and know-howour revenue in existing lighting technologies. While the use of LED technology for general lighting has grown inChina. In recent years, challenges remainthe 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 widespread adoptionencouraged certain customers in this region to purchase more of our MOCVD equipment than these customers might have purchased without these subsidies. The availability of these subsidies has varied over time and may not occurend at currently projected rates. The adoptionsome point in the future. A reduction or elimination of or changesthese incentives may result in government policies that discourage the use of traditional lighting technologies may impact LED adoption rates and,a reduction in turn, the demandfuture orders for our products. Furthermore, if new technologies evolve as a viable alternative to LED devices, our current products and technology could be placed at a competitive disadvantage or become obsolete altogether. DelaysMOCVD equipment in the adoption of LED technology for general lighting purposesthis region, which could materially and adversely affect our business, financial condition, and results of operations.
A related risk is that many customers use 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 or 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 order cancellations, and could have other negative effects on our business, financial condition, and results of operation.
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 revenue depends 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 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 operate in industries characterized by rapid technological change.
Each of the industries in which we operate 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 the 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 depend on a limited number of customers, located primarily in a limited number of regions, which operate in highly concentrated industries.
Our customer base continues to be 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. Our five largest customers accounted for 46% of our total net sales in 2014. Customer consolidation activity involving some of our largest customers could result in 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
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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’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’s product over ours, 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.
Our customer base is also highly concentrated in terms of geography, and the majority of our sales are to customers located in a limited number of countries. In 2014, 62% of our total net sales were to customers located in China, Taiwan and South Korea. Dependence upon sales emanating from a limited number of regions increases our risk of exposure to local difficulties and challenges, such as those associated with regional economic downturns, political 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 development and growth of local competitors. Our reliance upon customer demand arising primarily from a limited number of countries could materially adversely impact our future results of operations.
We face significant competition.
We face significant competition throughout the world, 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, with a focused approach on innovative technology for specialized markets. New product introductions or enhancements by us or our competitors could cause a decline in sales or loss of market acceptance of our existing or prior generation 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.
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 cause volatility in our revenue for 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.
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 exceed twelve months. 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 typically ranges from three to six months. When coupled with the fluctuating amount of time required for shipment, installation, and final acceptance, our sales cycles often vary 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, general, and administrative expenses before we generate 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 sales and, therefore, our cash flow and results of operation to fluctuate widely from period to period.
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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, sometimes with limited or no penalties. Often, we have incurred expenses prior to such cancellation without adequate monetary compensation. We adjust our backlog for such cancellations, contract modifications, and delivery delays that result in a delivery period in excess of one year, among other items. A downturn in MOCVD could result in increases in order cancellations and/or 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’ 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. Uncertain worldwide economic conditions and market instabilities make it 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. Similarly, we may be harmed in the event that our competitors overestimate the demand for their products and engage in heavy price discounting practices as a result. 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) that 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.
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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 adapt to fluctuating order 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 Storageion beam and other data storage systems, and ion sources. We are relying heavily on our outsourcing 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 bring new products to market. 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 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 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.
Approximately 66% and 29% of our revenues were generated in China for the years ended December 31, 2011 and December 31, 2010, respectively. 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 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 use 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 or 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 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. With the recent downturn in our MOCVD segment, we have experienced, and may continue to experience, lower than anticipated order levels, cancellations of orders in backlog, rescheduling of customer deliveries, and attendant pricing pressures, all of which could adversely affect our results 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, sometimes with limited or no penalties. Often, we have incurred expenses prior to such cancellation without adequate monetary compensation. During the year ended December 31, 2011, we experienced net backlog adjustments of approximately $41.4 million. The adjustment consisted of $38.1 million of order cancellations and $3.3 million related to other order adjustments, partially offset by $0.1 million of adjustments related to foreign currency translation. The current and forecasted downturn in our MOCVD segment could result in further increases in order cancellations and/or 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' 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.
The 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 HB LED 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 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 proportion 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 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 Storageion beam and other 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.customers and/or our business, financial condition, and results of operation.
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.business, financial condition, and results of operation.
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, and results of operation.
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’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;
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·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;
·increased amortization expense relating to intangible assets; and
·other adverse effects on our business, including the potential impairment and write-down of amounts capitalized as intangible assets and goodwill as part of the acquisition, as a result of technological advancements or worse-than-expected performance by the acquired company.
Our inability to effectively manage these risks could materially and adversely affect our business, financial condition, and results of operation. We are subject to many of these risks in connection with our recent acquisitions of Synos Technology, Inc. and Solid State Equipment LLC. Refer to Note 5, “Business Combinations,” in the Notes to the Consolidated Financial Statements for information on these recent acquisitions.
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. 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.
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.
Our sales to HB LED, and data storage and other 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, and other Company products is highly dependent on sales of consumer electronics, such as flat-panel televisions and computer monitors, computers, tablets, digital video recorders, camcorders, MP3\MP3/4 players, smartphones, cell phones, and 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, 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, rescheduling 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.
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. 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 from obtaining credit, product orders in these channels may decrease, which could result in lower revenue. In addition, we may
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experience cancellations of orders in backlog, rescheduling of customer deliveries, and attendant pricing pressures. 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 which could impair our 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 condition and results of operation.
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 90%
In 2014, approximately 89% of our 2011 net sales, 90% of our 2010 net sales and 79% of our 2009 net sales 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,outside the United States, many of which are outside our control, including:
•·difficulties in managing a global enterprise, including staffing, managing distributors and representatives, and repatriation of earnings,repatriating cash in a tax efficient manner;
·
•- 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;
·
•- reliance on various information systems and information technology to conduct our business, which may be vulnerable to
cyber attackscyber-attacks by third parties or breached due to employee error, misuse or other causes that could result in business disruptions, loss of 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.
These challenges, many of which are associated with sales into China,the Asia-Pacific region, 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.operation.
Furthermore, products which are either manufactured in the United States or based on U.S. technology are subject to the United StatesU.S. 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
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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.
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 can often shift the related booking or sale into the next quarter, which could adversely affect our reported results for the prior quarter. 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 subjectexposed to rapid technological change. Our ability to remain competitive depends on our ability to enhance existing productsliabilities under the Foreign Corrupt Practices Act 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 2012 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 certainany determination that we will be successful in selecting, developing, manufacturing and marketing new productsviolated these 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, with a focused approach on innovative technology for 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, located primarily in a limited number of regions, that 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 41%, 55% and 52% of our total net sales in 2011, 2010 and 2009, respectively. Recent customer consolidation activity involving some of our largest customers, particularly in our Data Storage segment, may result in 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'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'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.
Our customer base is also highly concentrated in terms of geography, and the majority of our sales are to customers located in a limited number of countries. In 2011, 75% of our total net sales were to customers located in China, Taiwan and Korea alone. Dependence upon sales emanating from a limited number of regions increases our risk of exposure to local difficulties and challenges, such as those associated with regional economic downturns, political 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,similar 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 development and growth of local competitors. Our reliance upon customer demand arising primarily from a limited number of countries could materially adversely impact our future results 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, followed in certain cases by a period of customer 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 order often varies 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.
Our inability to attract, retain, and motivate key employees could have a material adverse effect on our business.
Our success depends upon
We are subject to the 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 FCPA or similar laws or similar customer policies may result in severe criminal or civil sanctions or the loss of supplier privileges to a customer, and we may be subject to other liabilities, which could negatively affect our business, financial condition, and results of operation.
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 attract, retain,file timely and motivate keyaccurate 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 thosethe 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 Market 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 executive, managerial, engineering and marketing positions,the commencement of stockholder lawsuits against the Company. Any such litigation, as well as highly skilledany proceedings that could arise as a result of a filing delay and qualified technical personnel and personnelthe circumstances which gave rise to implement and monitor our financial and managerial controls and reporting systems. Attracting, retaining, and motivating such qualified personnelit, may be difficult due to challenging industry conditions, competition for such personnel by other technology companies, consolidationstime consuming and relocationsexpensive, may divert management attention from the conduct of operations and workforce reductions. While we have entered into Employment Agreements with certain key personnel, our inability to attract, retain, and motivate key personnelbusiness, 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 operatingformer officers, directors, or other personnel, regardless of the outcome of such matters, which may not be adequately covered by insurance.
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. 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 our current or past practices may adversely affect our reported financial results or change the way we conduct our business.
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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 below its carrying amount. We are also required to test our definite-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.
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 financial condition and results of operation could be materially and adversely affected.
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'smanagement’s attention and resources, which could materially and adversely affect our financial condition, results of operations, financial conditionoperation, 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, 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 StatesU.S. 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
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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 StatesU.S. 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 operationsoperation could be materially and adversely affected.
Our acquisition strategy subjects usWe are subject to risks associated with evaluating and pursuing these opportunities and integrating these businesses.foreign currency exchange risks.
We have considered numerous acquisition opportunitiesare exposed to foreign currency exchange rate risks that are inherent in our anticipated sales, sales commitments, 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'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;
•increased amortization expense relating to intangible assets; and
•the potential impairment and write-down of amounts capitalized as intangible assets and goodwill as partliabilities that are denominated in currencies other than the U.S. dollar. Although we attempt to mitigate our exposure to fluctuations in currency exchange rates, hedging activities may not always be available or adequate to eliminate, or even mitigate, the impact of the acquisition, as a result of technological advancementsour exchange rate exposure. Failure to sufficiently hedge or worse-than-expected performance by the acquired company.
Our inability to effectivelyotherwise manage theseforeign currency risks properly could materially and adversely affect our business, financial condition, results of operation, and operating results.liquidity.
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.
If we use cashare subject to pay for an acquisition, the paymentcyber-attacks we could significantly reduce the cash that would be availableincur substantial costs and, if such attacks are successful, significant liabilities, reputational harm, and disruption to fund our operations or other purposes.operations.
We manage, store, and transmit various proprietary information and sensitive data relating to our operations. We may be requiredsubject to take additional impairment chargesbreaches of the information technology systems we use for goodwillthese purposes. Experienced computer programmers and indefinite-lived intangible assetshackers may be able to penetrate our network security and misappropriate or definite-lived intangiblecompromise our confidential information (and/or third party confidential information), create system disruptions, or cause shutdowns. Computer programmers and long-lived assets.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.
We are required
The costs to assess goodwilladdress the foregoing security problems and indefinite-lived intangible assets annually for impairment,security vulnerabilities before or on an interim basis whenever certain events occurafter a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or circumstances change, such as an adverse change in business climatecessation of service, and loss of existing or a decline in the overall industry,potential customers that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We are also required to testmay impede 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. During 2011 we discontinued our CIGS solar systems business. As a result we recorded a $2.1 million asset impairment charge, relating to indefinite-lived intangible assets and a $10.8 million goodwill impairment charge related to the write-off of these assets (see Note 3sales, manufacturing, distribution, or other critical functions. In addition, breaches of our Consolidated Financial Statements).
At December 31, 2011, we had $55.8 millionsecurity measures and the unapproved dissemination of goodwill and $114.3 millionproprietary 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 intangible and long-lived assets, including $86.1 millionloss or misuse of property, plant and equipment and $2.3 million of assets
held for sale. 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 andthis information, result in additional impairment charges to these assets. Iflitigation and potential liability for us, damage our goodwillreputation, or intangible and long-lived assets were to become further impaired, our results of operations could be materially and adversely affected.
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 conductotherwise harm our business.
We are subject to internal control evaluations and attestation requirements16
Table of Section 404 of the Sarbanes-Oxley Act.Contents
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, 2011, 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 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 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.
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. Two such occurrences in 2011 include the earthquake and tsunami in Japan and the severe flooding in Thailand. 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 to be in itsthe holder’s best interest. These measures include:
•"·“blank check"check” preferred stock;
·
•- classified board of directors; 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 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 Veecothe Company that a holder of our common stock might consider to be in itsthe holder’s 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 to be in itsthe holder’s best interest.
Despite the above measures, an activist shareholder could undertake action to implement governance, strategic, or other changes to the Company which a holder of our common stock might not consider to be in the holder’s best interest. Such activities could interfere with our ability to execute our strategic plans, be costly and time consuming, disrupt our operations, and divert the attention of management and our employees.
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, 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, or use of certain of our products, each of which could have a material adverse effect on our business, financial condition, and results of 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.
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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.
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.
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 United States, 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, financial condition, and results of operation.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters and our principal product development and marketing, manufacturing, research and development, manufacturing, and training facilities, as well as the approximate sizesales and the segments which utilize suchservice facilities are:
|
| Approximate |
|
|
| |
|
Owned Facilities Location | | | |
| Approximate Size
(sq. (sq. ft.)
| | |
| Mortgaged | | |
| Use |
|---|
Plainview, NY
| | | 80,000 | | No | | Data Storage, LED & Solar and Corporate Headquarters |
Somerset, NJPlainview, NY
| | 80,000 | 80,000 | No | No | | LEDCorporate Headquarters; R&D; Manufacturing; Sales & SolarService |
Somerset, NJ | | 80,000 | 38,000 | No | No | R&D; Manufacturing; Sales & Service |
Somerset, NJ | LED | 38,000 | | No | | R&D; Sales & SolarService |
St. Paul, MN(1)MN (1) | | 43,000 | 125,000 | Yes | Yes | | LEDR&D; Manufacturing; Sales & SolarService |
Tucson, AZ(2)St. Paul, MN (1)
| | 75,000 | 110,000 | Yes | No | | Former Metrology SiteAssets held for sale |
Yongin-city, South Korea | | 56,000 | | No | | Sales & Service |
Hyeongok-ri, South Korea | | 15,000 | | No | | R&D; Sales & Service |
| | | | | | | | |
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 | | | 2013 | | Data Storage |
Lowell, MA(4) | | | 28,000 | | | 2012 | | Vacated LED & Solar Facility |
Tewksbury, MA(4) | | | 88,900 | | | 2013 | | Vacated LED & Solar Facility |
Somerset, NJ | | | 14,000 | | | 2012 | | LED & Solar |
Kingston, NY | | | 36,500 | | | 2018 | | LED & Solar |
Shanghai, China(5) | | | 17,400 | | | 2012 | | Customer Training Center |
Hsinchu City, Taiwan | | | 13,500 | | | 2015 | | Sales Office & Customer Training Center |
- (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 duringconsolidated our business into one building, leaving the fourth quarter of 2010 in conjunction with the sale of our Metrology segment to Bruker. We are actively marketing this officeadjacent building held for sale. | | Approximate | | Lease | | |
Leased Facilities Location | | Size (sq. ft.) | | Expires | | Use |
Fort Collins, CO | | 26,000 | | 2018 | | Held for Sublease |
Malvern, PA | | 4,000 | | 2015 | | Held for Sublease |
Horsham, PA | | 48,900 | | 2024 | | R&D; Manufacturing; Sales & Service |
Somerset, NJ | | 14,000 | | 2015 | | Warehouse |
Poughkeepsie, NY | | 9,400 | | 2017 | | R&D and Manufacturing |
Kingston, NY | | 36,500 | | 2018 | | Manufacturing |
Fremont, CA | | 25,400 | | 2015 | | R&D; Manufacturing; Sales & Service |
Shanghai, China | | 9,900 | | 2017 | | Sales & Service |
Hsinchu City, Taiwan | | 13,000 | | 2015 | | Sales & Service |
18
(3)Table of Contents
We vacated this facility during the second quarter of 2009lease a small office in conjunction with the outsourcing of manufacturing for certain Data Storage product lines. We have reoccupied a portion of this space and are marketing the remaining space for sublease.
(4)We vacated these facilities during the third quarter of 2011 in conjunction with the discontinuance of our CIGS Solar systems business.
(5)We have the option to renew this lease for three consecutive two year terms and also have the option to purchase this facility. The St. Paul, Minnesota facility is subject to a mortgage which, at December 31, 2011, had an outstanding balance of $2.7 million. We also lease small offices in Santa Clara, California and Edina, Minnesota for sales and service. Our foreign sales and service subsidiaries lease office space in England, France,China, Germany, Japan,Malaysia, Philippines, Singapore, South Korea, Malaysia, Singapore, Thailand, Philippines and China. We believe ourUnited Kingdom. Our facilities are adequate to meet our current needs.
Item 3. Legal Proceedings
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. We believe this lawsuit is without merit and intend to defend vigorously against the claims. We are 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. We believe that, in the event of any recovery by the plaintiff from Veeco, such recovery would be fully covered by our 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. Mine Safety Disclosures—Disclosures
Not Applicable
Applicable.
PART II
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 NationalStock Market under the symbol "VECO."“VECO.” The 20112014 and 20102013 high and low closing bid prices by quarter are as follows:
| | | | | | | | | | | | | |
| | 2011 | | 2010 | |
|---|
| | High | | Low | | High | | Low | |
|---|
First Quarter | | $ | 52.70 | | $ | 42.82 | | $ | 43.72 | | $ | 30.42 | |
Second Quarter | | | 57.59 | | | 46.47 | | | 51.61 | | | 31.79 | |
Third Quarter | | | 47.21 | | | 24.40 | | | 45.52 | | | 31.02 | |
Fourth Quarter | | | 29.20 | | | 20.80 | | | 49.97 | | | 33.71 | |
| | 2014 | | 2013 | |
| | High | | Low | | High | | Low | |
First Quarter | | $ | 43.30 | | $ | 32.18 | | $ | 38.41 | | $ | 28.71 | |
Second Quarter | | 43.63 | | 30.75 | | 42.60 | | 32.23 | |
Third Quarter | | 37.26 | | 33.22 | | 36.41 | | 33.16 | |
Fourth Quarter | | 37.72 | | 30.61 | | 38.15 | | 28.44 | |
| | | | | | | | | | | | | |
On February 21, 2012,17, 2015, the closing bid price for our common stock on theThe NASDAQ NationalStock Market was $28.89$31.14 and we had 131106 shareholders of record.
19
Table of Contents
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 the RDG MidCap Technology Index
*$100 invested on 12/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2012 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
ASSUMES $100 INVESTED ON DEC. 31 2006
, 2009
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DEC. 31
| | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 |
Veeco Instruments Inc. | | 100.00 | | 130.02 | | 62.95 | | 89.26 | | 99.61 | | 105.57 |
S&P Smallcap 600 | | 100.00 | | 126.31 | | 127.59 | | 148.42 | | 209.74 | | 221.81 |
PHLX Semiconductor | | 100.00 | | 115.11 | | 116.95 | | 129.28 | | 169.57 | | 215.25 |
RDG MidCap Technology | | 100.00 | | 124.68 | | 109.02 | | 109.89 | | 157.10 | | 162.20 |
20
| | | | | | | | | | | | | | | | | | | |
| | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | |
|---|
Veeco Instruments Inc. | | | 100.00 | | | 89.16 | | | 33.85 | | | 176.40 | | | 229.36 | | | 111.05 | |
S&P Smallcap 600 | | | 100.00 | | | 99.70 | | | 68.72 | | | 86.29 | | | 108.99 | | | 110.10 | |
PHLX Semiconductor | | | 100.00 | | | 107.88 | | | 60.06 | | | 97.21 | | | 109.11 | | | 107.58 | |
RDG MidCap Technology | | | 100.00 | | | 101.28 | | | 50.15 | | | 78.00 | | | 97.97 | | | 86.45 | |
Table of Contents
Item 6. Selected Consolidated Financial Data
The financial datainformation set forth below should be read in conjunction with "Management'sthe “Results of Operations” section included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations" and with our Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.Operations.”
| | Year ended December 31, | |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | |
| | (in thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | | | |
Net sales (1) | | $ | 392,873 | | $ | 331,749 | | $ | 516,020 | | $ | 979,135 | | $ | 930,892 | |
Operating income (loss) (1) | | $ | (79,209) | | $ | (71,812) | | $ | 37,212 | | $ | 276,259 | | $ | 303,253 | |
Income (loss) from continuing operations, net of tax (1) | | $ | (66,940) | | $ | (42,263) | | $ | 26,529 | | $ | 190,502 | | $ | 277,176 | |
Basic income per common share from continuing operations (1) | | $ | (1.70) | | $ | (1.09) | | $ | 0.69 | | $ | 4.80 | | $ | 7.02 | |
Diluted income per common share from continuing operations (1) | | $ | (1.70) | | $ | (1.09) | | $ | 0.68 | | $ | 4.63 | | $ | 6.52 | |
| | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
|---|
| | 2011(1) | | 2010(2) | | 2009(3) | | 2008(4) | | 2007(5) | |
|---|
| | (In thousands, except per share data)
| |
|---|
Statement of Operations Data: | | | | | | | | | | | | | | | | |
Net sales | | $ | 979,135 | | $ | 930,892 | | $ | 282,262 | | $ | 302,067 | | $ | 252,031 | |
Operating income (loss) from continuing operations | | | 276,259 | | | 303,253 | | | 7,631 | | | (44,055 | ) | | (18,245 | ) |
Income (loss) from continuing operations net of income taxes | | | 190,502 | | | 277,176 | | | (1,777 | ) | | (48,748 | ) | | (23,655 | ) |
(Loss) income from discontinued operations net of income taxes | | | (62,515 | ) | | 84,584 | | | (13,855 | ) | | (26,673 | ) | | 3,817 | |
Net loss attributable to noncontrolling interest | | | — | | | — | | | (65 | ) | | (230 | ) | | (628 | ) |
| | | | | | | | | | | | |
Net income (loss) attributable to Veeco | | $ | 127,987 | | $ | 361,760 | | $ | (15,567 | ) | $ | (75,191 | ) | $ | (19,210 | ) |
| | | | | | | | | | | | |
Income (loss) per common share attributable to Veeco: | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 4.80 | | $ | 7.02 | | $ | (0.05 | ) | $ | (1.55 | ) | $ | (0.74 | ) |
Discontinued operations | | | (1.57 | ) | | 2.14 | | | (0.43 | ) | | (0.85 | ) | | 0.12 | |
| | | | | | | | | | | | |
Income (loss) | | $ | 3.23 | | $ | 9.16 | | $ | (0.48 | ) | $ | (2.40 | ) | $ | (0.62 | ) |
| | | | | | | | | | | | |
Diluted : | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 4.63 | | $ | 6.52 | | $ | (0.05 | ) | $ | (1.55 | ) | $ | (0.74 | ) |
Discontinued operations | | | (1.52 | ) | | 1.99 | | | (0.43 | ) | | (0.85 | ) | | 0.12 | |
| | | | | | | | | | | | |
Income (loss) | | $ | 3.11 | | $ | 8.51 | | $ | (0.48 | ) | $ | (2.40 | ) | $ | (0.62 | ) |
| | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 39,658 | | | 39,499 | | | 32,628 | | | 31,347 | | | 31,020 | |
Diluted | | | 41,155 | | | 42,514 | | | 32,628 | | | 31,347 | | | 31,020 | |
| | | | | | | | | | | | | | | | |
| | December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | | 2008 | | 2007 | |
|---|
| | (In thousands)
| |
|---|
Balance Sheet Data: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 217,922 | | $ | 245,132 | | $ | 148,500 | | $ | 102,521 | | $ | 116,875 | |
Short-term investments | | | 273,591 | | | 394,180 | | | 135,000 | | | — | | | — | |
Restricted cash | | | 577 | | | 76,115 | | | — | | | — | | | — | |
Working capital | | | 587,076 | | | 640,139 | | | 317,317 | | | 168,528 | | | 112,089 | |
Goodwill | | | 55,828 | | | 52,003 | | | 52,003 | | | 51,741 | | | 71,544 | |
Total assets | | | 936,063 | | | 1,148,034 | | | 605,372 | | | 429,541 | | | 529,334 | |
Long-term debt (including current installments) | | | 2,654 | | | 104,021 | | | 101,176 | | | 98,526 | | | 132,118 | |
Total equity | | | 760,520 | | | 762,512 | | | 359,059 | | | 225,026 | | | 288,144 | |
- (1)
On July 28, 2011, we announced a plan to discontinue our CIGS solar systems business. The action was completed on September 27, 2011. Accordingly,Information presented excludes the results of operations for the CIGS solar
systems business have been recorded asour discontinued operations in the accompanying consolidated results of operations for all periods presented. During the year ended December 31, 2011, total discontinued operations 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.operations.
(2) | | December 31, | |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | |
| | (in thousands) | |
Balance Sheet Data: | | | | | | | | | | | |
Cash and cash equivalents | | $ | 270,811 | | $ | 210,799 | | $ | 384,557 | | $ | 217,922 | | $ | 245,132 | |
Short-term investments | | $ | 120,572 | | $ | 281,538 | | $ | 192,234 | | $ | 273,591 | | $ | 394,180 | |
Working capital | | $ | 387,254 | | $ | 485,452 | | $ | 632,197 | | $ | 587,076 | | $ | 640,139 | |
Total assets | | $ | 929,455 | | $ | 947,969 | | $ | 937,304 | | $ | 936,063 | | $ | 1,148,034 | |
Long-term debt (less current installments) | | $ | 1,533 | | $ | 1,847 | | $ | 2,138 | | $ | 2,406 | | $ | 2,654 | |
Total equity | | $ | 738,932 | | $ | 780,230 | | $ | 811,212 | | $ | 760,520 | | $ | 762,512 | |
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 was held in escrow and was 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. 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 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.
(3)Operating loss and net loss from continuing operations include restructuring expenses of $4.5 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.
(4)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. Net loss from continuing operations also reflects a net gain from the early extinguishment of debt in the amount of $3.8 million.
(5)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.
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Veeco Instruments Inc. (together
After a multiyear downturn in MOCVD, LED lighting adoption is accelerating and LED fabrication utilization rates are increasing at most of our key customers to levels that will require additional capacity purchases. Our customers are also reporting better market demand for products with its consolidated subsidiaries, "Veeco,"LED backlighting. As a result, our MOCVD bookings improved meaningfully in 2014 over 2013. And while quarterly MOCVD customer order patterns fluctuate, we expect multiyear growth for our MOCVD systems. We also continue to invest in our existing MOCVD products and new, innovative technologies to further reduce our customers’ cost of ownership and improve their manufacturing capability. But while we are seeing a general improvement in the "Company" or "we") creates Process Equipment solutionsMOCVD market, competitive pricing pressure, which had a negative effect on our gross margins in 2014 and 2013, is difficult to predict and may continue to depress our margins in the future.
In December 2014, we determined that enable technologiesthe incumbent deposition technology for flexible OLED display encapsulation had progressed to satisfy current market requirements and that we were unlikely to receive large orders for our Fast ALD products in the near future. As a cleanerresult, we plan to lower our spending rate on our ALD products, refocus our research and more productive world. We design, manufacture and market equipment primarily sold to make light emitting diodes ("LEDs") and hard-disk drives, as well as for emergingdevelopment efforts on ALD applications such as concentrator photovoltaics, power semiconductors, wireless components, microelectromechanical systems (MEMS),in semiconductor and other next-generation devices.markets, and continue to assess our flexible OLED market opportunity. The reduction in near-term forecasted orders and cash flows required us to assess our ALD reporting unit for impairment, and we recorded a non-cash impairment charge of $53.9 million related to goodwill and other long-lived assets for ALD. Also in 2014, we determined that certain performance milestones that would have triggered contingent payments to the original ALD shareholders were not going to be met and as a result we recorded a non-cash gain of $29.4 million.
Veeco focuses on developing highly differentiated, "best-in-class" Process Equipment products
In December 2014, we acquired PSP for critical performance steps. Our products feature leading technology, low cost-of-ownership$145.5 million, net of cash acquired, and entered the market for single wafer wet etch, clean, and surface preparation equipment targeting high throughput, offering a time-to-market advantage for our customers around the globe. Core competenciesgrowth segments in advanced thin film technologies, over 150 patentspackaging, MEMS, and decadescompound semiconductor. For the period from the acquisition date through December 31, 2014, we generated $7.9 million of specialized process know-how helps usnet sales
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Table of Contents
and incurred a loss from operations before tax of $3.0 million. The loss from operations was attributable to stay at the forefrontwrite-up of these demanding industries.
Veeco's LED & Solar segmentdesigns and manufactures metal organic chemical vapor deposition ("MOCVD") and molecular beam epitaxy ("MBE") systems and components soldexisting inventory on the date of acquisition to manufacturers of LEDs, wireless devices, power semiconductors, and concentrator photovoltaics, as well as to R&D applications. In 2011 we discontinuedfair value, which eliminated the gross margin on the sale of our products related to Copper, Indium, Gallium, Selenide ("CIGS") solar systems technology.those systems.
Veeco's Data Storage segmentdesigns and manufactures the critical technologies used to create thin film magnetic heads ("TFMHs") that read and write data on hard disk drives. These technologies include ion beam etch (IBE), ion beam deposition (IBD), diamond-like carbon (DLC), physical vapor deposition (PVD), chemical vapor deposition (CVD), and slicing, dicing and lapping systems. While these technologies
We are primarily sold to hard drive customers, they also have applications in optical coatings and other markets.
Veeco's approximately 900 employees support our customers through product and process development, training, manufacturing, and sales and service sites in the U.S., Korea, Taiwan, China, Singapore, Japan, Europe and other locations.
Summaryseeing some signs of Results for 2011
Selected financial highlights include:
•Revenue increased 5% to $979.1 million in 2011 from $930.9 million in 2010. LED & Solar revenues increased 4% to $827.8 million from $795.6 million in 2010. Data Storage revenues increased 12% to $151.3 million from $135.3 million in 2010;
•Orders were down 27%, to $817.9 million in 2011, compared to $1,121.6 million in 2010;
•Our gross margin increased slightly, to 48.4%, for 2011 compared to 48.3% for 2010. Gross margins in LED & Solar decreased from 48.3% in 2010 to 48.0%, while Data Storage gross margins increased from 48.4% to 50.7%.
•Our selling, general and administrative expenses increased to $95.1 million, up from $87.3 million in 2010, remaining at about 10% of net sales.
•Our research and development expenses increased to $96.6 million from $56.9 million in 2010. Research and development expenses were 10% of net sales in 2011, compared with 6% in 2010;
•Net income from continuing operations in 2011 was $190.5 million compared $277.2 million in 2010;
•Diluted net income from continuing operations per share was $4.63 compared to $6.52 in 2010.
Business Highlights of 2011
In 2011, Veeco achieved revenue of $979.1 million and net income from continuing operations of $190.5 million. During the first half of 2011 Veeco experienced strong levels of business driven by growth in LED, including new orders in excess of $300 million in second quarter of 2011. Businessimproved conditions began to deteriorate mid-year due to oversupply in the LED market and Veeco's bookings slowed dramatically in the third and fourth quarters of the year.
•Veeco's revenue increase in our LED & Solar segment was primarily dueHDD market as cloud related expansion continues to penetration of new customers, including strong adoption of our MOCVD technology by a rapidly expanding Chinese customer base, increased market share, and the introduction of the industry's first multi-chamber MOCVD System, the MaxBright.
•Veeco's Data Storage business delivered record revenue and profit levels as a result of strong technology alignment with our key customers, and our flexible manufacturing strategy.
Outlook
Veeco's first quarter 2012 revenue is currently forecasteddemand higher capacity drives. And although we have started to be between $115 million and $140 million. Earnings per share are currently forecasted to be between $0.04 and $0.25.
We don't see signs of near-term improvementcapacity constraints in some process areas and there was an increase in orders for some of our equipment at the end of 2014, low growth is expected to continue. Future demand for our systems sold in the LED environmentHDD industry is unclear and the current overcapacity situation could mean that MOCVD orders remain at these depressed levels for multiple quarters. In Data Storage, while overall market conditions are healthy, the continued consolidation of our customer base will likely mean that order patterns willexpected to fluctuate from quarter to quarter.
The LED industry is currently experiencing an overcapacity situation, evidenced by low tool utilization rates being reported by many key global customers. As a result, new orders for Veeco's MOCVD systems declined sharply in both the third and fourth quarters of 2011 and we do not see signs of a near-term improvement in MOCVD business conditions. In the short term, it is difficult for us to predict when the supply/demand of LEDs will return to equilibrium and what the demand for our MOCVD products will be. According to the Semiconductor Equipment and Materials Industry's (SEMI) January 2012 Opto/LED Fab Watch report, worldwide MOCVD purchases will decline by 40% in 2012 compared to 2011. While Veeco is currently expecting revenue growth in its Data Storage and MBE businesses in 2012, the Company has forecasted that total revenue will decline from 38-48% in 2012 to be in the range of $500-600 million as a result of the cyclical downturn in MOCVD equipment purchases.
Our outlook discussion above constitutes "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, 20112014 and 20102013
The following table showspresents revenue and expense line items reported in our Consolidated Statements of Income, percentagesOperations for fiscal 2014 and 2013 and the period-over-period dollar and percentage changes for those line items. Our results of sales and comparisons between 2011 and 2010 (dollars in 000s):operations are reported as one business segment.
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | Dollar and
Percentage
Change
Year to Year | |
|---|
| | 2011 | | 2010 | |
|---|
Net sales | | $ | 979,135 | | | 100.0 | % | $ | 930,892 | | | 100.0 | % | $ | 48,243 | | | 5.2 | % |
Cost of sales | | | 504,801 | | | 51.6 | | | 481,407 | | | 51.7 | | | 23,394 | | | 4.9 | |
| | | | | | | | | | | | | | |
Gross profit | | | 474,334 | | | 48.4 | | | 449,485 | | | 48.3 | | | 24,849 | | | 5.5 | |
Operating expenses (income): | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 95,134 | | | 9.7 | | | 87,250 | | | 9.4 | | | 7,884 | | | 9.0 | |
Research and development | | | 96,596 | | | 9.9 | | | 56,948 | | | 6.1 | | | 39,648 | | | 69.6 | |
Amortization | | | 4,734 | | | 0.5 | | | 3,703 | | | 0.4 | | | 1,031 | | | 27.8 | |
Restructuring | | | 1,288 | | | 0.1 | | | (179 | ) | | (0.0 | ) | | 1,467 | | | (819.6 | ) |
Asset impairment | | | 584 | | | 0.1 | | | — | | | — | | | 584 | | | * | |
Other, net | | | (261 | ) | | (0.0 | ) | | (1,490 | ) | | (0.2 | ) | | 1,229 | | | (82.5 | ) |
| | | | | | | | | | | | | | |
Total operating expenses | | | 198,075 | | | 20.2 | | | 146,232 | | | 15.7 | | | 51,843 | | | 35.5 | |
| | | | | | | | | | | | | | |
Operating income | | | 276,259 | | | 28.2 | | | 303,253 | | | 32.6 | | | (26,994 | ) | | (8.9 | ) |
Interest expense, net | | | 824 | | | 0.1 | | | 6,572 | | | 0.7 | | | (5,748 | ) | | (87.5 | ) |
Loss on extinguishment of debt | | | 3,349 | | | 0.3 | | | — | | | — | | | 3,349 | | | * | |
| | | | | | | | | | | | | | |
Income from continuing operations before income taxes | | | 272,086 | | | 27.8 | | | 296,681 | | | 31.9 | | | (24,595 | ) | | (8.3 | ) |
Income tax provision | | | 81,584 | | | 8.3 | | | 19,505 | | | 2.1 | | | 62,079 | | | 318.3 | |
| | | | | | | | | | | | | | |
Income from continuing operations | | | 190,502 | | | 19.5 | | | 277,176 | | | 29.8 | | | (86,674 | ) | | (31.3 | ) |
| | | | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | | | | | | | |
(Loss) income from discontinued operations before income taxes | | | (91,885 | ) | | (9.4 | ) | | 129,776 | | | 13.9 | | | (221,661 | ) | | * | |
Income tax (benefit) provision | | | (29,370 | ) | | (3.0 | ) | | 45,192 | | | 4.9 | | | (74,562 | ) | | * | |
| | | | | | | | | | | | | | |
(Loss) income from discontinued operations | | | (62,515 | ) | | (6.4 | ) | | 84,584 | | | 9.1 | | | (147,099 | ) | | * | |
| | | | | | | | | | | | | | |
Net income | | $ | 127,987 | | | 13.1 | % | $ | 361,760 | | | 38.9 | % | $ | (233,773 | ) | | (64.6 | )% |
| | | | | | | | | | | | | | |
| | For the year ended | | Dollar and |
| | December 31, | | | Percentage Change |
| | 2014 | | | 2013 | | | Period to Period |
| | (dollars in thousands) |
Net sales | | $ | 392,873 | | 100.0% | | | $ | 331,749 | | 100.0 | % | | $ | 61,124 | | 18.4 | % |
Cost of sales | | 257,991 | | | 65.7% | | | 228,607 | | | 68.9 | % | | 29,384 | | 12.9 | % |
Gross profit | | 134,882 | | 34.3% | | | 103,142 | | 31.1 | % | | 31,740 | | 30.8 | % |
Operating expenses, net: | | | | | | | | | | | | | | | |
Selling, general, and administrative | | 89,760 | | 22.8 | % | | 85,486 | | 25.8 | % | | 4,274 | | 5.0 | % |
Research and development | | 81,171 | | 20.7 | % | | 81,424 | | 24.5 | % | | (253 | ) | (0.3 | )% |
Amortization | | 13,146 | | 3.3 | % | | 5,527 | | 1.7 | % | | 7,619 | | 137.9 | % |
Restructuring | | 4,394 | | 1.1 | % | | 1,485 | | 0.4 | % | | 2,909 | | 195.9 | % |
Asset impairment | | 58,170 | | 14.8 | % | | 1,220 | | 0.4 | % | | 56,950 | | 4,668.0 | % |
Changes in contingent consideration | | (29,368 | ) | (7.5 | )% | | 829 | | 0.2 | % | | (30,197 | ) | * | |
Other, net | | (3,182 | ) | (0.8 | )% | | (1,017 | ) | (0.3 | )% | | (2,165 | ) | 212.9 | % |
Total operating expenses, net | | 214,091 | | 54.5 | % | | 174,954 | | 52.7 | % | | 39,137 | | 22.4 | % |
Operating income (loss) | | (79,209 | ) | (20.2 | )% | | (71,812 | ) | (21.6 | )% | | (7,397 | ) | 10.3 | % |
Interest income (expense), net | | 855 | | 0.2 | % | | 602 | | 0.2 | % | | 253 | | 42.0 | % |
Income (loss) before income taxes | | (78,354 | ) | (19.9 | )% | | (71,210 | ) | (21.5 | )% | | (7,144 | ) | 10.0 | % |
Income tax provision (benefit) | | (11,414 | ) | (2.9 | )% | | (28,947 | ) | (8.7 | )% | | 17,533 | | (60.6 | )% |
Income (loss) from continuing operations | | $ | (66,940 | ) | | (17.0 | )% | | $ | (42,263 | ) | | (12.7 | )% | | $ | (24,677 | ) | 58.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
*
- Not Meaningful
Net Sales and Orders
Net sales of $979.1 million for the year ended December 31, 2011, were up 5.2% compared to 2010.
The following is an analysis of sales by region:
| | | | Dollar and |
| | December 31, | | | Percentage Change |
| | 2014 | | | 2013 | | | Period to Period |
| | (dollars in thousands) |
Regional Analysis | | | | | | | | | | | | | | | |
United States | | $ | 44,060 | | 11.2 | % | | $ | 57,609 | | 17.4 | % | | $ | (13,549 | ) | (23.5 | )% |
Asia Pacific | | 311,182 | | 79.2 | % | | 252,199 | | 76.0 | % | | 58,983 | | 23.4 | % |
EMEA(1) and other | | 37,631 | | 9.5 | % | | 21,941 | | 6.6 | % | | 15,690 | | 71.5 | % |
Total | | $ | 392,873 | | 100.0 | % | | $ | 331,749 | | 100.0 | % | | $ | 61,124 | | 18.4 | % |
(1)Consists of Europe, the Middle East, and orders by segment and by region (dollars in 000s):Africa
22
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Sales | | Orders | |
| |
| |
|---|
| | Year ended
December 31, | | Dollar and
Percentage Change | | Year ended
December 31, | | Dollar and
Percentage Change | | Book to Bill
Ratio | |
|---|
| | 2011 | | 2010 | | Year to Year | | 2011 | | 2010 | | Year to Year | | 2011 | | 2010 | |
|---|
Segment Analysis | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LED & Solar | | $ | 827,797 | | $ | 795,565 | | $ | 32,232 | | | 4.1 | % | $ | 650,608 | | $ | 968,143 | | $ | (317,535 | ) | | (32.8 | )% | | 0.79 | | | 1.22 | |
Data Storage | | | 151,338 | | | 135,327 | | | 16,011 | | | 11.8 | | | 167,249 | | | 153,406 | | | 13,843 | | | 9.0 | | | 1.11 | | | 1.13 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 979,135 | | $ | 930,892 | | $ | 48,243 | | | 5.2 | % | $ | 817,857 | | $ | 1,121,549 | | $ | (303,692 | ) | | (27.1 | )% | | 0.84 | | | 1.20 | |
| | | | | | | | | | | | | | | | | | | | | | |
Regional Analysis | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 100,635 | | $ | 92,646 | | $ | 7,989 | | | 8.6 | % | $ | 87,355 | | $ | 107,039 | | $ | (19,684 | ) | | (18.4 | )% | | 0.87 | | | 1.16 | |
| | | | | | | | | | | | | | | | | | | | | | |
Europe, Middle East and Africa ("EMEA") | | | 57,617 | | | 92,112 | | | (34,495 | ) | | (37.4 | ) | | 52,366 | | | 83,784 | | | (31,418 | ) | | (37.5 | ) | | 0.91 | | | 0.91 | |
| | | | | | | | | | | | | | | | | | | | | | |
Asia Pacific ("APAC") | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
China | | | 649,846 | | | 266,813 | | | 383,033 | | | 143.6 | | | 479,141 | | | 537,740 | | | (58,599 | ) | | (10.9 | ) | | 0.74 | | | 2.02 | |
Taiwan | | | 64,228 | | | 101,130 | | | (36,902 | ) | | (36.5 | ) | | 60,455 | | | 112,016 | | | (51,561 | ) | | (46.0 | ) | | 0.94 | | | 1.11 | |
Korea | | | 24,701 | | | 301,026 | | | (276,325 | ) | | (91.8 | ) | | 14,813 | | | 207,337 | | | (192,524 | ) | | (92.9 | ) | | 0.60 | | | 0.69 | |
Other APAC | | | 82,108 | | | 77,165 | | | 4,943 | | | 6.4 | | | 123,727 | | | 73,633 | | | 50,094 | | | 68.0 | | | 1.51 | | | 0.95 | |
| | | | | | | | | | | | | | | | | | | | | | |
APAC | | | 820,883 | | | 746,134 | | | 74,749 | | | 10.0 | | | 678,136 | | | 930,726 | | | (252,590 | ) | | (27.1 | ) | | 0.83 | | | 1.25 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 979,135 | | $ | 930,892 | | $ | 48,243 | | | 5.2 | % | $ | 817,857 | | $ | 1,121,549 | | $ | (303,692 | ) | | (27.1 | )% | | 0.84 | | | 1.20 | |
| | | | | | | | | | | | | | | | | | | | | | |
Table of Contents
By segment, LED & Solar
Total sales increased 4.1% in 20112014 from 2013 primarily due to increases in shipments of our newest systems as compared to 2010 (3.9%an increase in the volume of MOCVD reactor shipments from 2010)systems, largely due to customers increasing their manufacturing capacity. Pricing was not a significant driver of the change in total sales. Total sales also increased as a result of our acquisition of PSP, which contributed $7.9 million to 2014 results. The increase in sales was partially offset by a decline in volume of our systems sold to data storage customers, primarily due to our customers’ unwillingness to make technology investments given the high demand which slowedovercapacity in the hard drive industry. By region, sales decreased in the United States in 2014 primarily due to a decrease in purchases by the beginning of the second half 2011 for LED applications. Data Storageour data storage customers. In Asia Pacific, sales also increased 11.8%, primarily as a result of anMOCVD sales growth in Korea and China. In EMEA, sales increased as a result of growth in both MOCVD and ion beam and other data storage system sales. We believe there will continue to be year-to-year variations in the geographic distribution of sales in the future.
Between 2014 and 2013, total orders increased $178.8 million, or 54%, to $510.0 million. The increase is primarily attributable to a 74% increase in capital spending byorders of our MOCVD systems largely as customers in China, Europe, and Korea begin to add manufacturing capacity. Ion beam and other data storage system and service orders increased 5% between 2014 and 2013, but given the slow growth and overcapacity in the hard drive industry, we expect demand to be weak as customers for capacity andcontinue to only make select technology buys. LED & Solar sales represented 84.5%purchases.
One of total sales forthe performance measures we use as a leading indicator of the business is the book-to-bill ratio. The ratio is defined as orders recorded in a given period divided by revenue recognized in the same period. A ratio greater than one indicates we are adding orders faster than we are recognizing revenue. In 2014, the ratio was 1.3, an improvement over 2013, when it was 1.0. Our backlog as of December 31, 2014 was $286.7 million, which was higher than the ending backlog as of December 31, 2013 of $143.3 million. As of December 31, 2014, $23.4 million of the backlog was from our acquisition of PSP. During the year ended December 31, 2011, down2014 we recorded backlog adjustments of approximately $1.6 million relating to orders that no longer met our bookings criteria. For certain sales arrangements we require a deposit for a portion of the sales price prior to manufacturing a system for a customer. As of December 31, 2014 and 2013, we had customer deposits of $73.0 million and $27.5 million, respectively.
Gross Profit
| | For the year ended | | Dollar and | |
| | December 31, | | Percentage Change | |
| | 2014 | | 2013 | | Period to Period | |
| | (dollars in thousands) | |
Gross profit - Total | | $ | 134,882 | | $ | 103,142 | | $ | 31,740 | | 30.8% | |
Gross margin | | 34.3% | | 31.1% | | | | | |
| | | | | | | | | | | | |
Gross margins increased from 85.5%the prior year primarily due to higher MOCVD sales volume, a favorable mix of products, and favorable warranty and service spending. This was partially offset by our acquisition of PSP, whereby we wrote up existing inventory on the date of acquisition to fair value, unfavorable overhead rates, primarily driven by our ALD business, and declines in margins from our ion beam and other data storage system sales that resulted from reduced sales volume, higher inventory reserves, and unfavorable overhead rates.
Selling, general, and administrative
Selling, general, and administrative expenses increased primarily due to an increase in personnel and personnel-related expenses, including an increase in share-based compensation of $3.5 million as well as additional costs from our ALD business, which was acquired in the prior year. Data Storage sales accounted for 15.5%fourth quarter of net sales, up from 14.5%2013. Our acquisition of PSP in the prior year.fourth quarter of 2014 also contributed to the increase in selling, general, and administrative expenses, including $3.2 million of acquisition related costs. Partially offsetting the increase in selling, general, and administrative expense was a reduction in third party professional fees associated with an accounting review, which was completed in the fourth quarter of 2013.
Research and development
We continue to invest in research and development of new products and enhancements to existing products and spent $81.2 million and $81.4 million in 2014 and 2013, respectively. In 2014, we spent additional amounts on our ALD technology as compared with 2013, offset by a reduction in spending in our other product lines. We continue to focus our research and development expenses on projects in areas we anticipate to be high-growth. We selectively funded these product development activities which resulted in lower professional consulting expense, as well as reduced spending for project materials and personnel and personnel-related costs.
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Table of Contents
Amortization expense
Amortization expense increased primarily due to additional amortization associated with intangible assets acquired as part of our acquisition of ALD during the fourth quarter of 2013. We expect to incur additional amortization expense in 2015 as a result of intangible assets acquired as part of our acquisition of PSP during the fourth quarter of 2014, partially offset by the elimination of amortization of certain ALD intangible assets that have been either impaired or fully amortized in the fourth quarter of 2014.
Restructuring expense
During 2014, we announced the closing of our Ft. Collins, Colorado and Camarillo, California facilities. Business activities formally conducted at these sites have been transferred to our Plainview, New York facility. In addition, we responded to the challenging business environment we were facing, particularly for sales to customers in the data storage industry, and reduced headcount by approximately 90 employees. As a results of these actions, we recorded $4.4 million in personnel severance and related costs and facility closing costs.
During 2013, we recorded $1.5 million in personnel severance and related costs principally resulting from the transition from a direct sales presence in Japan to a distributor model and the consolidation of certain sales and administrative functions.
Asset impairment
During 2014, based on a combination of factors, including our determination that incumbent deposition technology for flexible OLED display encapsulation had progressed to satisfy current market requirements, we believed that there were sufficient indicators that required an interim asset impairment analysis on our ALD reporting unit. As a result of our analysis, we recorded non-cash impairment charges of $28.0 million related to goodwill and $25.9 million related to other long-lived assets, including $17.4 million related to customer relationships, $4.8 million related to in-process research and development, and $3.6 million related to certain tangible assets. In addition, during 2014, we recognized $4.3 million of asset impairments on tangible assets held for sale, including certain lab tools and a vacant building and land. During 2013, we recognized asset impairment charges of $1.2 million on tangible assets held for sale, including certain lab tools.
Changes in Contingent Consideration
Included in our agreement to acquire ALD in the fourth quarter of 2013 were performance milestones that could trigger contingent payments to the original selling shareholders. During the year ended December 31, 2013, the first milestone was achieved, and we paid the former shareholders $5.0 million and increased the estimated fair value of the remaining contingent payments by $0.8 million. During 2014, we determined that all of the remaining performance milestones were not met, reversed the fair value of the liability, and recorded a non-cash gain of $29.4 million.
Other, net
During 2014, we completed our plan to liquidate our subsidiary in Japan, since we moved to a distributor model to serve our customers in that region. As a result of the liquidation, we reclassified a cumulative translation gain of $3.1 million from Other Comprehensive Income to “Other, net” on the Consolidated Statements of Operations.
Income Taxes
The 2014 net benefit for income taxes included a $13.4 million tax benefit relating to our domestic operations offset by a $2.0 million tax provision relating to our foreign operations. The 2013 net benefit for income taxes included a $32.4 million benefit relating to our domestic operations offset by a $3.5 million provision relating to our foreign operations. Our 2014 effective tax rate is lower than the statutory rate primarily related to a $4.9 million tax benefit associated with our successful negotiation of an incentive tax rate in one of our foreign subsidiaries, a $2.3 million reversal of uncertain tax positions as a result of concluding the 2010 IRS examination, and the recognition of only a portion of our U.S. deferred tax assets on a more-likely-than-not basis with respect to current year pre-tax operating losses. We maintain a valuation allowance on our net domestic deferred tax assets.
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Table of Contents
Years Ended December 31, 2013 and 2012
The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for fiscal 2013 and 2012 and the period-over-period dollar and percentage changes for those line items.
| | For the year ended | | Dollar and |
| | December 31, | | | Percentage Change |
| | 2013 | | | 2012 | | | Period to Period |
| | (dollars in thousands) |
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, net: | | | | | | | | | | | | | | | |
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 | )% |
Changes in contingent consideration | | 829 | | 0.2 | % | | — | | 0.0 | % | | 829 | | * | |
Other, net | | (1,017 | ) | (0.3 | )% | | (398 | ) | (0.1 | )% | | (619 | ) | 155.5 | % |
Total operating expenses, net | | 174,954 | | 52.7 | % | | 177,921 | | 34.5 | % | | (2,967 | ) | (1.7 | )% |
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) 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 | ) | * | |
| | | | | | | | | | | | | | | | | | | | | | |
* Not Meaningful
Net Sales
The following is an analysis of sales by region:
| | | | Dollar and |
| | December 31, | | | Percentage Change |
| | 2013 | | | 2012 | | | Period to Period |
| | (dollars in thousands) |
Regional Analysis | | | | | | | | | | | | | | | |
United States | | $ | 57,609 | | 17.4 | % | | $ | 83,317 | | 16.1 | % | | $ | (25,708 | ) | (30.9 | )% |
Asia Pacific | | 252,199 | | 76.0 | % | | 390,995 | | 75.8 | % | | (138,796 | ) | (35.5 | )% |
EMEA(1) and other | | 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 | )% |
| | | | | | | | | | | | | | | | | | | | |
(1) Consists of Europe, the Middle East, and Africa
Total sales decreased in 2013 from 2012 primarily due to lower MOCVD sales as a result of continued industry manufacturing overcapacity and our customers’ hesitancy to make new investments as well as lower sales of systems to data storage customers due to customer fabrication facility overcapacity and weak hard drive demand. Our data storage system sales in 2012 were favorably impacted by the replacement of equipment at one of our customer’s sites that was damaged by floods in Thailand. By region, net sales increased by 10.0%decreased in Asia Pacific 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 increased 8.6%United States and sales in EMEA also decreased 37.4%.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 2011
Between 2012 and 2013, total orders decreased 27.1% compared$60.3 million, or 15%, from $391.9 million to 2010,$331.6 million. The decrease was primarily attributable to a 32.8%22% decrease in LED & SolarMOCVD system orders that were principally driven by a mid-year deterioration due to oversupply in the LED market, slowing orders dramatically in the third and fourth quarters after industry manufacturing overcapacity. Since
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Table of Contents
hitting a peak in the second quarter of 2011. Data Storage2011, our orders have slowed dramatically. While ion beam and other data storage system orders increased 9.0% from the continued increase in8% between 2012 and 2013, hard drive growth is expected to be slow, and our customer's capital spending forcustomers have excess manufacturing capacity and have been making only select technology buys.purchases. We continue to experience weak overall market conditions due to overcapacity in all of our markets.
Our book-to-bill ratio for 2011,in 2013 was 1.0, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 0.84 to 1 compared to 1.20 to 1 in 2010.an improvement over 2012, when it was 0.8. Our backlog as of December 31, 20112013 was $332.9$143.3 million, compared to $535.4 million as ofslightly lower than the ending backlog at December 31, 2010.2012 of $150.2 million. During the year ended December 31, 2011,2013, we experienced a netrecorded backlog adjustmentadjustments of approximately $41.4 million. The adjustment consisted$6.8 million, consisting of $38.1 milliona reduction of order cancellations and $3.3$5.6 million related to other order adjustments. During the year ended December 31, 2011, we had a positive adjustment related toorders that no longer met our bookings criteria and $1.2 million in foreign currency translation of $0.1 million.adjustments. For certain sales arrangements we require a deposit for a portion of the sales price before shipment.prior to manufacturing a system for a customer. As of December 31, 20112013 and 20102012, we had customer deposits and advanced billings of $57.1$27.5 million and $129.2$32.7 million, respectively.
Gross Profit
Gross profit was $474.3 million or 48.4% for 2011 compared to $449.5 million or 48.3% in 2010. LED & Solar
| | For the year ended | | Dollar and | |
| | December 31, | | Percentage Change | |
| | 2013 | | 2012 | | Period to Period | |
| | (dollars in thousands) | |
Gross profit - Total | | $ | 103,142 | | $ | 215,133 | | $ | (111,991 | ) | (52.1)% |
Gross margin | | 31.1% | | 41.7% | | | | | |
| | | | | | | | | | | | |
Our gross margins decreased to 48.0% from 48.3% in the prior year,2013 compared with 2012 primarily due to higher overhead costslower average selling prices, reduced volume, and service support spending,fewer final acceptances partially offset by increasescost reductions associated with reduced volumes and reduced expenses in volume, favorable product mix2013 for slow moving inventory items.
Selling, general, and lower average material costs. Data Storage gross margins increased to 50.7% from 48.4% in the prior year due to increased sales volume and a favorable product mix, partially offset by higher overhead costs and service support spending.
Operating Expensesadministrative
Selling, general, and administrative expenses increased primarily from third party professional and consulting fees associated with our accounting review that began in 2012 and which was completed in October 2013, partially offset by $7.9 million or 9.0%, from the prior year primarilya reduction in bonus and profit sharing expenses and increased cost control measures put into place in response to support the increased levelweak market conditions, which resulted in lower personnel-related costs and discretionary expenses. The addition of our ALD business in the fourth quarter of 2013 also contributed to an increase in our LED & Solar segment. Selling,selling, general, and administrative expenses were 9.7% of net sales in 2011, compared with 9.4% of net sales in the prior year.expenses.
Research and development
Research and development expense increased $39.6 million or 69.6% from the prior year, primarily due to continueddecreased as we sharpened our focus on product development in areas of high-growthanticipated high-growth. We selectively funded certain product development activities which resulted in reduced spending for end market opportunities in our LED & Solar segment. As a percentage of net sales, researchproject materials and development expense increased to 9.9% from 6.1% in the prior year.professional consultants as well as lower personnel and personnel-related costs.
Amortization expense
Amortization expense increased $1.0 million from the prior year, primarily resulting from the increase indue to additional amortization associated with intangible assets acquired as a resultpart of our acquisition of a privately held company that occurredALD during the secondfourth quarter of 2011.2013, partially offset by certain intangible assets becoming fully amortized.
Restructuring expense
During 2013, we recorded $1.5 million in personnel severance and related costs principally resulting from the transition from a direct sales presence in Japan to a distributor model and the consolidation of $1.3certain sales and administrative functions. During 2012, we took measures to improve profitability, including a reduction in discretionary expenses, realignment of our senior management team, and the consolidation of certain sales and administrative functions. As a result of these actions, we reduced headcount by approximately 50 employees and recorded a restructuring charge of $3.8 million for the year ended December 31, 2011, consisted of personnel severance costs associated with the company-wide reductionand related costs.
26
Table of approximately 65 employees in our workforce. Restructuring creditContents
Asset impairment
During 2013, we recorded asset impairment charges of $0.2$0.9 million related to certain lab tools we are holding for the year ended December 31, 2010, was attributablesale and $0.3 million related to a change in estimate in our Data Storage segment.
certain other tangible assets. During 2011, the Company2012, we recorded a $0.6 millionan asset impairment charge related to the disposal of equipment associated with the discontinuance of a certain product line in our LED & Solar segment.
Interest Expense, netlicense agreement.
Interest expense,
Income Taxes
The 2013 net benefit for 2011 was $0.8income taxes included a $3.5 million comprised of $1.4 million in cash interest expense, $1.9 million in non-cash interest expense relating to net amortization of our short-term investments and $1.3 million in non-cash interest expenseprovision relating to our convertible debt, which was retired during the first half of 2011 creatingforeign operations and a loss on extinguishment of approximately $3.3 million. Interest expense was partially offset by $3.8$32.4 million in interest income earned on our cash and short-term investment balances. Interest expense, net for 2010 was $6.6 million, comprised of $4.7 million in cash interest expense, $0.4 million in non-cash interest expensebenefit relating to our short-term investments and $3.1 million in non-cash interest expense relating to our convertible debt, partially offset by $1.6 million in interest income earned on our cash and short-term investment balances.domestic operations. The non-cash interest expense is related to accounting rules that requires a portion of convertible debt to be allocated to equity in 2011 and 2010 and accretion of debt discounts and amortization of debt premiums related to our short-term investments in 2011 and 2010.
Income Taxes
The income tax provision attributable to continuing operations for the year ended December 31, 2011 was $81.6 million or 30.0% of income before taxes compared to $19.5 million or 6.6% of income before taxes in the prior year. The 20112012 provision for income taxes included $9.6$8.3 million relating to our foreign operations and $72.0 million relating to our domestic operations. The 2010 provision for income taxes included $8.0 million relating to our foreign operations and $11.5$3.4 million relating to our domestic operations. Our 2010 effective tax rate was lower than our 2011 effective tax rate as a result of the utilization of our domestic net operating loss and tax credit carry forwards due to the reversal of
our valuation allowance during 2010. Our 20112013 effective tax rate is lowerhigher 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 impactedextended the effective tax rate by approximately 1.9%, and other favorable tax benefits including the Domestic Production Activities Deduction and theFederal Research and Development Credit which impactedfor both the effective2012 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 by approximately 3.4%.
Discontinued Operationspursuant 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.
Discontinued operations represent the results
During 2012 we recorded an income tax expense 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 2011 results reflect an operational loss before taxes of $1.6$1.9 million related to the Metrology segmentdiscontinued operations and an operational loss before taxesa current tax benefit of $90.3$2.1 million related to equity-based compensation, neither of which occurred in 2013.
Liquidity and Capital Resources
Our cash and cash equivalents, short-term investments, and restricted cash were as follows:
| | December 31, |
| | 2014 | | 2013 |
| | (in thousands) |
Cash and cash equivalents | | $ | 270,811 | | $ | 210,799 | |
Short-term investments | | 120,572 | | 281,538 | |
Restricted cash | | 539 | | 2,738 | |
Total | | $ | 391,922 | | $ | 495,075 | |
A portion of our cash and cash equivalents is held by our subsidiaries throughout the CIGS solar systems business. The 2010 results reflect an operational loss before taxesworld, frequently in each subsidiary’s respective functional currency, which may not be the U.S. dollar. At December 31, 2014 and 2013, cash and cash equivalents of $0.8$220.5 million and a gain on disposal$150.6 million, respectively, were held outside the United States. It is our current intention to permanently reinvest the cash and cash equivalent balances held in Singapore, China, Taiwan, South Korea, and Malaysia, and our current forecasts do not require repatriation of $156.3 million before taxes relatedthese funds back to the Metrology segment and an operational loss before taxes of $25.7 million related to the CIGS solar systems business.
Years EndedUnited States. At December 31, 20102014, we had $125.2 million in cash held outside the United States on which we would have to pay significant U.S. income taxes to repatriate. Additionally, local government regulations may restrict our ability to move cash balances under certain circumstances. We currently do not expect such regulations and 2009restrictions to impact our ability to make acquisitions, pay vendors, or conduct operations. 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 requirements, contractual obligations, and other cash flow needs for the next twelve months.
The following table shows
At December 31, 2014 and 2013, our Consolidated Statementsshort-term investments were held in the United States and restricted cash was in Germany, which serves as collateral for bank guarantees that provide financial assurance that we will fulfill certain customer or lease 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.
A summary of Operations, percentages of sales and comparisons between 2010 and 2009 (dollars in 000s):
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | Dollar and
Percentage
Change
Year to Year | |
|---|
| | 2010 | | 2009 | |
|---|
Net sales | | $ | 930,892 | | | 100.0 | % | $ | 282,262 | | | 100.0 | % | $ | 648,630 | | | 229.8 | % |
Cost of sales | | | 481,407 | | | 51.7 | | | 168,003 | | | 59.5 | | | 313,404 | | | 186.5 | |
| | | | | | | | | | | | | | |
Gross profit | | | 449,485 | | | 48.3 | | | 114,259 | | | 40.5 | | | 335,226 | | | 293.4 | |
Operating expenses (income): | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 87,250 | | | 9.4 | | | 59,419 | | | 21.1 | | | 27,831 | | | 46.8 | |
Research and development | | | 56,948 | | | 6.1 | | | 37,767 | | | 13.4 | | | 19,181 | | | 50.8 | |
Amortization | | | 3,703 | | | 0.4 | | | 3,977 | | | 1.4 | | | (274 | ) | | (6.9 | ) |
Restructuring | | | (179 | ) | | (0.0 | ) | | 4,479 | | | 1.6 | | | (4,658 | ) | | * | |
Asset impairment | | | — | | | — | | | 304 | | | 0.1 | | | (304 | ) | | (100.0 | ) |
Other, net | | | (1,490 | ) | | — | | | 682 | | | 0.2 | | | (2,172 | ) | | * | |
| | | | | | | | | | | | | | |
Total operating expenses | | | 146,232 | | | 15.7 | | | 106,628 | | | 37.8 | | | 39,604 | | | 37.1 | |
| | | | | | | | | | | | | | |
Operating income | | | 303,253 | | | 32.6 | | | 7,631 | | | 2.7 | | | 295,622 | | | 3,874.0 | |
Interest expense, net | | | 6,572 | | | 0.7 | | | 6,850 | | | 2.4 | | | (278 | ) | | (4.1 | ) |
| | | | | | | | | | | | | | |
Income from continuing operations before income taxes | | | 296,681 | | | 31.9 | | | 781 | | | 0.3 | | | 295,900 | | | 37,887.3 | |
Income tax provision | | | 19,505 | | | 2.1 | | | 2,558 | | | 0.9 | | | 16,947 | | | 662.5 | |
| | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 277,176 | | | 29.8 | | | (1,777 | ) | | (0.6 | ) | | 278,953 | | | * | |
| | | | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | | | | | | | |
Income (loss) from discontinued operations, before income taxes | | | 129,776 | | | 13.9 | | | (15,066 | ) | | (5.3 | ) | | 144,842 | | | * | |
Income tax provision (benefit) | | | 45,192 | | | 4.9 | | | (1,211 | ) | | (0.4 | ) | | 46,403 | | | * | |
| | | | | | | | | | | | | | |
Income (loss) from discontinued operations | | | 84,584 | | | 9.1 | | | (13,855 | ) | | (4.9 | ) | | 98,439 | | | * | |
| | | | | | | | | | | | | | |
Net income (loss) | | | 361,760 | | | 38.9 | | | (15,632 | ) | | (5.5 | ) | | 377,392 | | | * | |
Net loss attributable to noncontrolling interest | | | — | | | — | | | (65 | ) | | (0.0 | ) | | 65 | | | (100.0 | ) |
| | | | | | | | | | | | | | |
Net income (loss) attributable to Veeco | | $ | 361,760 | | | 38.9 | % | $ | (15,567 | ) | | (5.5 | )% | $ | 377,327 | | | * | |
| | | | | | | | | | | | | | |
Net Sales and Orders
Net sales of $930.9 millionthe cash flow activity for the year ended December 31, 2010, were up 229.8% compared to 2009. The following is an analysis2014 and 2013 was as follows:
27
Table 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 | |
|---|
| | 2010 | | 2009 | | Year to Year | | 2010 | | 2009 | | Year to Year | | 2010 | | 2009 | |
|---|
Segment Analysis | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LED & Solar | | $ | 795,565 | | $ | 205,003 | | $ | 590,562 | | | 288.1 | % | $ | 968,143 | | $ | 409,232 | | $ | 558,911 | | | 136.6 | % | | 1.22 | | | 2.00 | |
Data Storage | | | 135,327 | | | 77,259 | | | 58,068 | | | 75.2 | | | 153,406 | | | 97,497 | | | 55,909 | | | 57.3 | | | 1.13 | | | 1.26 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 930,892 | | $ | 282,262 | | $ | 648,630 | | | 229.8 | % | $ | 1,121,549 | | $ | 506,729 | | $ | 614,820 | | | 121.3 | % | | 1.20 | | | 1.80 | |
| | | | | | | | | | | | | | | | | | | | | | |
Regional Analysis | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 92,646 | | $ | 60,730 | | $ | 31,916 | | | 52.6 | % | $ | 107,039 | | $ | 75,946 | | $ | 31,093 | | | 40.9 | % | | 1.16 | | | 1.25 | |
| | | | | | | | | | | | | | | | | | | | | | |
EMEA | | | 92,112 | | | 49,938 | | | 42,174 | | | 84.5 | | | 83,784 | | | 47,049 | | | 36,735 | | | 78.1 | | | 0.91 | | | 0.94 | |
| | | | | | | | | | | | | | | | | | | | | | |
Korea | | | 301,026 | | | 99,132 | | | 201,894 | | | 203.7 | | | 207,337 | | | 222,114 | | | (14,777 | ) | | (6.7 | ) | | 0.69 | | | 2.24 | |
China | | | 266,813 | | | 31,114 | | | 235,699 | | | 757.5 | | | 537,740 | | | 75,559 | | | 462,181 | | | 611.7 | | | 2.02 | | | 2.43 | |
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 | | | 383,734 | | | 546,992 | | | 142.5 | | | 1.25 | | | 2.24 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 930,892 | | $ | 282,262 | | $ | 648,630 | | | 229.8 | % | $ | 1,121,549 | | $ | 506,729 | | $ | 614,820 | | | 121.3 | % | | 1.20 | | | 1.80 | |
| | | | | | | | | | | | | | | | | | | | | | |
By segment, LED & Solar sales increased 288.1% in 2010 due to increases in shipments of our newest systems as compared to 2009 (363.9% increase in MOCVD reactor shipments from 2009) as a result of an increase in demand for HB LED backlighting applications and general illumination. Data Storage sales also increased 75.2%, primarily as a result of an increase in capital spending by data storage customers for capacity 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. Data Storage sales accounted for 14.5% of net sales, down from 27.4% in the prior year. By region, net sales increased by 334.8% in Asia Pacific, primarily due to MOCVD sales to HB LED customers. In addition, sales in the Americas and EMEA also increased 52.6% and 84.5%, respectively. We believe that there will continue to be year-to-year variations in the geographic distribution of sales.
Orders in 2010 increased 121.3% compared to 2009, primarily attributable to a 136.6% increase in LED & Solar orders that were principally driven by HB LED manufacturers increasing production for television and laptop backlighting applications. Data Storage orders increased 57.3% from the continued increase in our customer's capital spending for capacity and technology buys.
Our book-to-bill ratio for 2010, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.20 to 1 compared to 1.80 to 1 in 2009. Our backlog as of December 31, 2010 was $535.4 million, compared to $345.9 million as of December 31, 2009. During the year ended December 31, 2010, we experienced a net backlog adjustment of approximately $2.9 million, consisting of order cancellations. During the year ended December 31, 2010, we had a positive adjustment related to foreign currency translation of $1.8 million. For certain sales arrangements we require a deposit for a portion of the sales price before shipment. As of December 31, 2010 and 2009 we had deposits and advanced billings of $129.2 million and $59.8 million, respectively.
ContentsGross Profit
Gross profit was $449.5 million or 48.3% for 2010 compared to $114.3 million or 40.5% in 2009. LED & Solar gross margins increased to 48.3%
Cash Flows from 42.0% 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 48.4% from 36.4% 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 ExpensesActivities
Selling, general and administrative expenses increased by $27.8 million or 46.8%, from the prior year primarily to support the business ramp in our LED & Solar segment. Selling, general and administrative expenses were 9.4% of net sales in 2010, compared with 21.1% of net sales in the prior year.
| | December 31, |
| | 2014 | | 2013 |
| | (in thousands) |
Net loss | | $ | (66,940 | ) | $ | (42,263 | ) |
Non-cash items: | | | | | |
Depreciation and amortization | | 24,573 | | 18,425 | |
Deferred income taxes | | (11,330 | ) | (12,264 | ) |
Share-based compensation | | 18,813 | | 13,130 | |
Impairment of long-lived assets | | 58,170 | | 1,220 | |
Change in contingent consideration | | (29,368 | ) | 829 | |
Other | | (6,505 | ) | 1,179 | |
Changes in operating assets and liabilities | | 54,656 | | 20,471 | |
Net cash provided by operating activities | | $ | 42,069 | | $ | 727 | |
Research and development expense increased $19.2 million or 50.8% from the prior year, primarily due to continued product development 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 6.1% from 13.4% in the prior year.
Amortization expense decreased $0.3 million or 6.9% from the prior year. This decrease is mainly due to certain intangibles being fully amortized at the end of 2009.
Restructuring credit of $0.2 million for the year ended December 31, 2010, was attributable to a change in estimate in our Data Storage segment. Restructuring expense of $4.5 million for the year ended December 31, 2009, consisted primarily of personnel severance costs of $3.1 million associated with the reduction of approximately 161 employees in our workforce. Additionally, 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 million asset impairment charge. The charge was for property, plant and equipment no longer being utilized in our Data Storage segment.
Interest Expense, net
Interest expense, net for 2010 was $6.6 million, comprised of $4.7 million in cash interest expense, $0.4 million in non-cash interest expense relating to net amortization of our short-term investments and $3.1 million in non-cash interest expense relating to our convertible debt, partially offset by $1.6 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 expense and $2.8 million in non-cash interest expense, 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 2009 and accretion of debt discounts and amortization of debt premiums related to our short-term investments in 2010.
Income Taxes
The income tax provision attributable to continuing operations for the year ended December 31, 2010 was $19.5 million or 6.6% of income before taxes compared to $2.6 million or 327.5% of income before taxes in the prior year. The 2010 provision for income taxes included $8.0 million relating to our foreign operations and $11.5 million relating to our domestic operations. The 2009 provision for income taxes included $1.6 million relating to our foreign operations and $1.0 million relating to our domestic operations. Our effective tax rate in 2010 is lower than the statutory rate as a result of the reversal of our valuation allowance, which impacted the effective tax rate by approximately 28.0%.
Discontinued Operations
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 2010 results reflect an operational loss before taxes of $0.8 million and a gain on disposal of $156.3 million before taxes related to the Metrology segment and an operational loss before taxes of $25.7 million related to the CIGS solar systems business. The 2009 results reflect an operational loss before taxes of $2.7 million related to the Metrology segment and an operational loss before taxes of $12.4 million related to the CIGS solar systems business.
Liquidity and Capital Resources
Historically, our principal capital requirements have included the funding of acquisitions, working capital, capital expenditures and the repayment of debt. We traditionally have generated cash from operations 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 as of December 31, 2011 was $217.9 million. This amount represents a decrease of $27.2 million from December 31, 2010. We also had short-term investments and restricted cash of $273.6 million and $0.6 million, respectively, as of December 31, 2011. A summary of the current year cash flow activity is as follows (in thousands):
| | | | | | | |
| | Year ended
December 31, | |
|---|
| | 2011 | | 2010 | |
|---|
Net income | | $ | 127,987 | | $ | 361,760 | |
| | | | | | |
Net cash provided by operating activities | | $ | 115,442 | | $ | 194,214 | |
Net cash provided by (used in) investing activities | | | 106,294 | | | (121,621 | ) |
Net cash (used in) provided by financing activities | | | (249,935 | ) | | 25,505 | |
Effect of exchange rate changes on cash and cash equivalents | | | 989 | | | (1,466 | ) |
| | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (27,210 | ) | | 96,632 | |
Cash and cash equivalents at beginning of year | | | 245,132 | | | 148,500 | |
| | | | | | |
Cash and cash equivalents at end of year | | $ | 217,922 | | $ | 245,132 | |
| | | | | | |
Cash provided by operations during the year ended December 31, 2011 was $115.4 million compared to $194.2 million during the year ended December 31, 2010. The $115.4 million cash provided by operations in 2011 included adjustments to the $128.0 million of net income for non-cash items, which increased the cash provided by net income by $76.9 million. The adjustments consisted of $44.4 million of discontinued operations, $12.9 million of depreciation and amortization, $12.8 million of non-cash equity-based compensation expense, $11.3 million of deferred income taxes, $(10.4) million of excess tax benefits from stock option exercises, $3.3 million of loss on extinguishment of debt, $1.3 million of amortization of debt discount, $0.8 million of inventory write-offs and a $0.6 million asset impairment charge. Net cash provided by operations was unfavorably impacted by a$42.1 million in fiscal year 2014, and was due to the net $89.4loss of $66.9 million, adjustments for non-cash items of $54.3 million, and an increase in cash flow from operating activities due to changes in operating assets and liabilities which included a $19.4 millionof $54.7 million. The changes in operating assets and liabilities was largely attributable to an increase in inventories, a $42.2 million decrease incustomer deposits and deferred revenue and income taxes payable, a $72.7 million decrease in accrued expenses, principally resulting from customer deposits associated primarily with the significant increase in shipments in our LED & Solar segment compared to bookings, a $25.5 million increase in prepaid expenses and other current assets and $6.9 million increase in other, net, partially offset by a $56.8 million decrease in accounts receivable, $8.1 millionan increase in accounts payable and a $12.4 million decrease in supplier deposits. Cash provided by operations during the year ended December 31, 2010 was $194.2 million and included adjustments to the $361.8 million of net income for non-cash items, which reduced the cash provided by net income by $168.3 million. The adjustmentsreceivable.
consisted of $10.8 million of depreciation and amortization, $8.8 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 $14.0 million of discontinued operations.
Net cash provided by operations was favorably impacted by a net $0.7 million in fiscal year 2013, and was due to the net loss of $42.3 million, adjustments for non-cash items of $22.5 million, and an increase in cash flow from operating activities due to changes in operating assets and liabilities.liabilities of $20.5 million. The changes in operating assets and liabilities was largely attributable to decreases in accounts receivable offset by decreases in customer deposits and deferred revenue and income taxes payable, net.
Cash Flows from Investing Activities
| | December 31, |
| | 2014 | | 2013 |
| | (in thousands) |
Acquisitions of businesses, net of cash acquired | | $ | (144,069 | ) | $ | (71,488 | ) |
Changes in investments, net | | 160,539 | | (89,454 | ) |
Capital expenditures | | (15,588 | ) | (9,174 | ) |
Proceeds from sale of lab tools | | 9,259 | | 4,440 | |
Other | | (2,038 | ) | (2,380 | ) |
Net cash provided by (used in) investing activities | | $ | 8,103 | | $ | (168,056 | ) |
The cash provided by investing activities in 2014 was primarily attributable to net sales of $106.3 million for the year ended December 31, 2011, resulted primarily from proceedsmarketable securities and sales of $707.7 million from the sale of short-term investments, $75.5 million of transfers from restricted cash and $0.2 million of other, net,lab tools, partially offset by $588.5 millionour purchase of PSP, net of cash acquired, and other capital expenditures. Our cash used in investing activities in 2013 was primarily driven by our purchase of ALD, net of cash acquired, net purchases of short-term investments, $60.4 millionand other capital expenditures. Refer to Note 5, “Business Combinations” for additional information on the acquisitions of capital expendituresPSP and $28.3 million of payments for net assets of a business acquired. ALD.
Cash used in investingFlows from Financing Activities
During 2014, cash provided by financing activities of $121.6$9.7 million during the year ended December 31, 2010, resultedwas primarily attributable to net cash received from $506.1 million of purchases of short-term investments, $10.7 million of capital expenditures, $76.1 million of transfersstock activity related to restrictedemployee share-based compensation programs. During 2013, 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 financing activities of $249.9$5.8 million during the year ended December 31, 2011, consistedwas primarily of $162.1 million of purchases of treasury stock, $105.8 million of repayments of long-term debt and $3.2 million of restricted stock tax withholdings, partially offset by $10.7 million from stock option exercises and $10.4 million excess tax benefits from stock option exercises. 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.
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, calculated as defined in the indenture relatingattributable to the notes, 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. We recorded a loss on extinguishment totaling $0.3$5.0 million related to these transactions.
During the second quarterpayment of 2011, we issued a noticeportion of redemptionthe contingent consideration from our acquisition of ALD and net cash payments from stock activity related to employee share-based compensation programs. Refer to Note 5, “Business Combinations” for additional information on the remaining notes outstanding. In lieucontingent consideration related to our ALD acquisition.
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Table of redemption, atContents
Contractual Obligations and Commitments
We have commitments under certain contractual arrangements to make future payments for goods and services. These contractual arrangements secure the option of the holders, the notes were tendered for conversion at a price of $50.59 per share, calculated as definedrights to various assets and services to be used in the indenture relating to the notes, in a net share settlement. Accordingly, 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.
On April 4, 2011, we purchased a privately-held company which supplies certain components to our business for $28.3 million in cash.
On October 6, 2011, the restriction has lapsed on the $22.9 million of cash held in escrow relating to the proceeds received from the sale of our Metrology segment. This cash was held in escrow and was restricted from use for one year from the closing date of the transaction to secure potential losses, if any, arising out of breaches of representations, warranties and covenants we madefuture in the stock purchase agreement and related documents.
On July 28, 2011, we announced a plannormal course of business. We expect to discontinue our CIGS solar systems business. The action, which was completed on September 27, 2011 and impacted approximately 80 employees, was in response to the dramatically reduced cost of mainstream solar technologies driven by significant reductions in prices, large industry investment, a lower than expected end market acceptance for CIGS technology and technical barriers in scaling CIGS. This business was previously included as part of our LED & Solar segment.
Accordingly, the results of operations for the CIGS solar systems business have been recorded as discontinuedfund these contractual arrangements with cash generated from operations in the accompanying consolidated statementsnormal course of operations for all periodsbusiness.
presented. During the year ended
The following table summarizes our contractual arrangements at December 31, 2011,2014 and the timing and effect that those commitments are expected to have on our liquidity and cash flow in future periods. The effect of unrecognized tax benefits, which total discontinued operations include 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.
As ofat December 31, 2011, our contractual2014, have been excluded from the table since the Company is unable to reasonably estimate the period of cash obligations and commitments are as follows (in thousands):settlement with the respective tax authorities.
| | | | | | | | | | | | | | | | |
| | 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) | | $ | 2,654 | | $ | 248 | | $ | 558 | | $ | 654 | | $ | 1,194 | |
Interest on debt(1) | | | 935 | | | 201 | | | 339 | | | 244 | | | 151 | |
Operating leases(2) | | | 10,804 | | | 3,936 | | | 4,348 | | | 1,804 | | | 716 | |
Letters of credit and bank guarantees(3) | | | 5,295 | | | 5,295 | | | — | | | — | | | — | |
Purchase commitments(4) | | | 91,069 | | | 91,069 | | | — | | | — | | | — | |
| | | | | | | | | | | | |
| | $ | 110,757 | | $ | 100,749 | | $ | 5,245 | | $ | 2,702 | | $ | 2,061 | |
| | | | | | | | | | | | |
| | Payments due by period |
| | | | Less than | | 1 – 3 | | 3 – 5 | | More than |
| | Total | | 1 year | | years | | years | | 5 years |
| | (in thousands) |
Long-term debt | | $ | 1,847 | | $ | 314 | | $ | 708 | | $ | 825 | | $ | — | |
Interest on debt | | 395 | | 135 | | 190 | | 70 | | — | |
Operating leases | | 11,188 | | 2,322 | | 4,416 | | 1,750 | | 2,700 | |
Bank guarantees | | 45,458 | | 45,458 | | — | | — | | — | |
Purchase commitments(1) | | 112,421 | | 112,421 | | — | | — | | — | |
Total | | $ | 171,309 | | $ | 160,650 | | $ | 5,314 | | $ | 2,645 | | $ | 2,700 | |
(1)
Long-term debt obligations consist of mortgage 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 2012 through 2017. 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.
(3)Issued by a bank on our behalf as needed. We had letters of credit outstanding of $1.7 million and bank guarantees outstanding of $3.6 million, of which, $0.6 million that is collateralized against cash that is restricted from use.
(4)- Purchase commitments are primarily for inventory used in manufacturing our products.
It has been our practiceWe generally do not to enter into purchase commitments extending beyond one year.
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.
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 Cash“Contractual 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 makerequire a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Management continually monitors and evaluates itsOn an ongoing basis, we evaluate our 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 judgmentsbased on historical experience and on variousas well as other factors that are believedwe believe to be reasonable under the circumstances, thecircumstances. The results of whichour evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. ActualThese estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates under different assumptions or conditions. estimates.
We consider certainthe following significant 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, fair value measurements, warranty costs, income taxes and equity-based compensation to be critical policies due tobecause of their complexity and the estimation processeshigh degree of judgment involved in each.implementing them.
Revenue Recognition: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 selling price.
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,persuasive evidence of an arrangement exists, prices are contractuallydelivery has occurred or services have been rendered, the selling price is fixed or determinable, collectability is reasonably assured, and, there are no material uncertainties regardingfor system sales, we have received customer acceptance. Revenue from installation services is recognized atacceptance or we have otherwise objectively demonstrated that the time acceptance is received from the customer. If the arrangement does not meetdelivered system meets all the above criteria, the entire amount of the agreed-to customer specifications. Each sales arrangement may contain commercial terms that differ from other arrangements. In addition, we frequently enter into contracts that contain multiple deliverables. Judgment is deferred untilrequired to
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Table of Contents
properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria have been met or all elements have beenin order to recognize revenue in the appropriate accounting period. The maximum revenue we recognize on a delivered element is limited to the customer or been completed.
For those transactions on which we recognize systems revenue, either atamount that is not contingent upon the timedelivery 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. Inadditional items. While changes 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 greaterallocation of the retentionestimated sales price between the units of accounting will not affect the amount orof total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the estimated selling pricetiming of the installationrevenue recognition, which could have a material effect on systems that weour financial condition and results of operations. We generally recognize revenue at the timerelated to sales 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 agreedcomponents and spare parts upon specifications at the customer site,shipment. We generally recognize 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, solar and other 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,
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 atSee Note 1, “Significant Accounting Policies,” in the time of shipment or delivery in accordance withNotes to the terms of the applicable sales arrangement.
Short-Term Investments: We determine the appropriate balance sheet classificationConsolidated Financial Statements for a description 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.revenue recognition policy.
Inventory Valuation:Valuation
Inventories are stated at the lower of cost (principallyor market using standard costs that approximate actual costs on a 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 toEach quarter we assess the valuation and recoverability of all inventories, including rawinventories: materials work-in-process, finished goods, and(raw materials, spare parts, and other service inventory.inventory); work-in-process; and finished goods. Obsolete or slow-moving inventory based upon historical usage, or inventory in excess of management'sour estimated usage for the next 12 month's requirements is written-downwritten down to its estimated market value if less than its cost. Inherent in the estimates of market value are management's estimatesWe evaluate usage requirements by analyzing historical and anticipated demand, and anticipated demand is estimated based upon current economic conditions, utilization requirements related to current backlog, current sales trends, and other qualitative factors. Unanticipated changes in demand for our future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses, and ultimate realizationproducts may require a write down of excess inventory.inventory that could materially affect our operating results.
Goodwill and Indefinite-Lived Intangible Asset Impairment:Warranty Costs The Company does not amortize goodwill or intangible assets with indefinite useful lives, but instead tests the balances in these asset accounts
Our warranties are typically valid for impairment at least annually atone year from 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 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 change 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: 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 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. The Company primarily applies the market approach for recurring fair value measurements.
Warranty Costs: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:Goodwill and Intangible Assets As part
Goodwill is tested for impairment at least annually in the fourth quarter of our fiscal year. We may first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount, and, if so, we then apply the two-step impairment test. The two-step impairment test first compares the fair value of our reporting units to their carrying amount (i.e., book value). If the fair value of the processreporting unit exceeds its carrying amount, goodwill is not impaired and we are not required to perform further testing. If the carrying amount of preparingthe reporting unit exceeds its fair value, we determine the implied fair value of the reporting unit’s goodwill and if the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.
We determine the fair value of our reporting units based on a discounted future cash flow approach since market prices are not available for our reporting units. Under this approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include the revenue growth rates and operating profit margins that are used to project future cash flows, working capital requirements, residual growth rates, discount rates, and future economic and market conditions. We base our fair value estimates on assumptions that are consistent with information used by the business for planning purposes and that we believe to be reasonable; however, actual future results could differ from those estimates. Changes in judgments could materially affect the 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.
The carrying values of indefinite-lived intangible assets are reviewed for recoverability on a quarterly basis. The facts and circumstances considered include the recoverability of the cost of other intangible assets from future cash flows to be derived from the use of the asset. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude of any impairment.
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Intangible assets with finite useful lives, including purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, and software licenses, are subject to amortization over the expected period of economic benefit to us. We evaluate whether events or circumstances have occurred that warrant a revision to the remaining useful lives of intangible assets. In cases where a revision is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the revised remaining useful life.
Accounting for Business Combinations
The allocation of the purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed based on their respective fair values. The estimates we make include expected cash flows, expected cost savings, and the appropriate weighted average cost of capital. We complete these assessments as soon as practical after the acquisition 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 of Financial Instruments
The measurement of fair value for our financial instruments is based on the authoritative guidance which establishes a fair value hierarchy that is based on three levels of inputs and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 3, “Fair Value Measurements,” in the Notes to the Consolidated Financial Statements wefor additional information.
Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimatingDeferred income taxes reflect the actual currentnet tax expense, together with assessingeffect of temporary differences resulting from differing treatmentbetween the carrying amount 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 valuefor financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect 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.
forwards. We record a valuation allowances in orderallowance 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 itthat is more likely than not thatto be realized. Realization of our net deferred tax assets is dependent on future taxable income.
We recognize the effect of income tax position will be sustained on examination bypositions only if those positions are more likely than not of being sustained. We reflect changes in recognition or measurement in a period in which the taxing authorities, based on the technical merits of the position. The tax benefits recognizedchange in the financial statements from suchjudgment occurs. We record interest and penalties related to uncertain tax positions are measured basedin income tax expense.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on the largest benefit that has a greater than fifty percent likelihoodour results of being realized upon ultimate resolution.operations and financial condition.
Equity-based Compensation:Accounting for Share-Based Compensation Equity-based compensation cost is measured at the grant date,
We account for stock-based awards granted to employees for services based on the fair value of those awards. We use the award and is recognized as expense overBlack-Scholes option-pricing model to compute the employee requisite service period. In order to determine theestimated fair value of stock options on the date of grant, we apply theoption awards. The Black-Scholes option-pricing model. Inherent in the model areincludes assumptions related toregarding expected volatility, expected term, and risk-free interest rate, dividend yield, expected stock-price volatility and option life.
The risk-free rate assumed in valuing the options isrates. These assumptions reflect our best estimates, but these items involve uncertainties based on market and other conditions outside of our control. As a result, if other assumptions had been used, stock-based compensation expense could have been materially affected. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially affected in future years.
We have granted performance share awards to senior executives where the U.S. Treasury yield curvenumber and, in effect atsome instances, the timetiming of grant forthe vesting of restricted shares ultimately received by the senior executives depends on our performance, as measured against specified targets. We reevaluate the expected termtarget achievement each reporting period until the conclusion of the option. The dividend yield assumption is based onperformance period and recognize the Company's historical and future expectationimpact 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 bestany change in estimate of the future volatility of the market price of our common stock.
The expected term, representingin 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.change.
We estimate forfeitures of share based awards 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.forfeitures.
With regard to the weighted-average option life assumption, we consider the exercise behavior
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Table of past grants and model the pattern of aggregate exercises.Contents
Recent Accounting Pronouncements
Balance Sheet:In December 2011,May 2014, the FASB issued amended guidance related to the Balance Sheet (Disclosures about Offsetting Assets and Liabilities)ASU No. 2014-09: Revenue from Contracts with Customers. This amendment requiresThe amendments in this ASU require that an entity recognize revenue to disclose information about offsettingdepict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard outlines a five-step model to make the revenue recognition determination and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The amendment should be applied retrospectively. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
Comprehensive Income: In December 2011, the FASB issued amended guidance related to Comprehensive Income. In order to defer only those changes in the June amendment (addressed below) that relate to the presentation of reclassification adjustments, the FASB issued this amendment to supersede certain pending paragraphs in the June amendment. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs ofrequires new financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before the June amendment. All other requirements are not affected, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted.disclosures. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
In June 2011, the FASB issued amended guidance related to Comprehensive Income. This amendment allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendment eliminates the option to present the components of other comprehensive income as part of the statement of equity. The amendments do
not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendment should be applied retrospectively. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
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 a material acquisition occurs.
Intangibles—Goodwill and Other: In September 2011, the FASB issued amended guidance related to Intangibles—Goodwill and Other: Testing Goodwill for Impairment. The amendment is intended to simplify how entities test goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This amendmentstandard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
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.
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.
In May 2011, the FASB issued amended guidance related to Fair Value Measurements. This amendment represents the converged guidance of the FASB and the International Accounting Standards Board (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in this amendment, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early application is2016 and allows entities to choose among different transition alternatives. We are evaluating the impact of adopting the standard on our consolidated financial statements and related financial statement disclosures and we have not permitted. The Company doesyet determined which method of adoption will be selected.
We have evaluated other pronouncements recently issued but not yet adopted, and we do not believe that this guidancethe adoption of these pronouncements will have a material impact on itsthe 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 adoption of this guidance did not have a material impact on the Company's 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 adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
The principal
Interest Rate Risk
Our exposure to market risks (such as therate risk of loss arising from adversefor changes in marketinterest rates and prices)primarily relates to which we are exposed are:
•rates onour investment portfolios, and
•exchange rates, generating translation and transaction gains and losses.
Interest Rates
portfolio. We centrally manage our investment portfolios considering investment opportunities and risk,risks, tax consequences, and overall financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately $273.6$120.6 million atas of December 31, 2011.2014. These securities are subject to interest rate risk and, will decline in value if interest rates increase. Basedbased on our investment portfolio atas of December 31, 2011, an immediate2014, a 100 basis point increase in interest rates maywould result in a decrease in the fair value of the portfolio of approximately $1.6$0.7 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 statementConsolidated Statements of operationsOperations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.
Foreign OperationsCurrency Exchange Risk
Operating
We conduct business on a worldwide basis and, as such, a portion of our revenues, earnings, and net investments in international markets involves exposureforeign affiliates is exposed to movementschanges in currency exchange rates, which are volatile at times.rates. 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.
We manage our risks and exposures to currency exchange rates through the use of derivative financial instruments (e.g., forward contracts). We only use derivative financial instruments in the context of hedging and do not use them for speculative purposes. During fiscal 2014 and 2013, we did not designate our foreign exchange derivatives as hedges. Accordingly, all foreign exchange derivatives are recorded in our Consolidated Balance Sheets at fair value and changes in fair value from these contracts are recorded in “Other, net” in our Consolidated Statements of Operations.
Our net sales to foreign customers located outside of the United States represented approximately 90%89%, 90%83% and 79%84% of our total net sales in 2011, 20102014, 2013 and 2009,2012, respectively. We expect that net sales to foreign customers outside the United States will continue to represent a large percentage of our total net sales. Our net sales denominated in foreign currencies other than the U.S. dollar represented approximately 3%8%, 2%4%, and 6%4% of total net sales in 2011, 20102014, 2013, and 2009,2012, respectively. The aggregate foreign currency exchange (loss) gain included in determining consolidated results of operations was approximately $(1.0) million, $1.3 million and $(0.7) million in 2011, 2010 and 2009, respectively. Included in the aggregate foreign currency exchange (loss) gain were gains relating to forward contracts of $0.5 million, $0.1 million and $0.1 million in 2011, 2010 and 2009, respectively. These amounts were recognized and are included in other, net in the accompanying Consolidated Statements of Operations.
As of December 31, 2011, there were no gains or losses related to forward contracts included in prepaid expenses and other current assets or accrued expenses and other current liabilities. 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 $3.6 million for the month of January 2012 were entered into in December 2011. 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 $10.3 million for the year ended December 31, 2011. The changes in currency exchange rates that have the largest impact on translating our international operating profit (loss) are the Japanese Yen and the Euro. We believe that based upon our hedging program, a
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 2011 and 2010. 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 2011 interim quarter ends were April 3, July 3 and October 2. The 2010 interim quarter ends were March 28, June 27 and September 26. 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 2011 | | Fiscal 2010 | |
|---|
| | Q1 | | Q2 | | Q3 | | Q4 | | Year | | Q1 | | Q2 | | Q3 | | Q4 | | Year | |
|---|
| | (in thousands, except per share data)
| |
|---|
Net sales | | $ | 254,676 | | $ | 264,815 | | $ | 267,959 | | $ | 191,685 | | $ | 979,135 | | $ | 132,647 | | $ | 221,389 | | $ | 277,094 | | $ | 299,762 | | $ | 930,892 | |
Gross profit | | | 130,963 | | | 135,349 | | | 124,934 | | | 83,088 | | | 474,334 | | | 56,636 | | | 100,283 | | | 137,383 | | | 155,183 | | | 449,485 | |
Income from continuing operations, net of income taxes | | | 57,979 | | | 56,318 | | | 52,617 | | | 23,588 | | | 190,502 | | | 26,156 | | | 53,910 | | | 93,687 | | | 103,423 | | | 277,176 | |
(Loss) income from discontinued operations, net of income taxes | | | (5,337 | ) | | (37,112 | ) | | (16,754 | ) | | (3,312 | ) | | (62,515 | ) | | (112 | ) | | (1,517 | ) | | (7,524 | ) | | 93,737 | | | 84,584 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to Veeco | | $ | 52,642 | | $ | 19,206 | | $ | 35,863 | | $ | 20,276 | | $ | 127,987 | | $ | 26,044 | | $ | 52,393 | | $ | 86,163 | | $ | 197,160 | | $ | 361,760 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income (loss) per common share attributable to Veeco: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 1.46 | | $ | 1.37 | | $ | 1.34 | | $ | 0.62 | | $ | 4.80 | | $ | 0.67 | | $ | 1.36 | | $ | 2.35 | | $ | 2.62 | | $ | 7.02 | |
Discontinued operations | | | (0.14 | ) | | (0.90 | ) | | (0.43 | ) | | (0.09 | ) | | (1.57 | ) | | — | | | (0.04 | ) | | (0.19 | ) | | 2.38 | | | 2.14 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income | | $ | 1.32 | | $ | 0.47 | | $ | 0.91 | | $ | 0.53 | | $ | 3.23 | | $ | 0.67 | | $ | 1.32 | | $ | 2.16 | | $ | 5.00 | | $ | 9.16 | |
| | | | | | | | | | | | | | | | | | | | | | |
Diluted : | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 1.36 | | $ | 1.31 | | $ | 1.31 | | $ | 0.61 | | $ | 4.63 | | $ | 0.62 | | $ | 1.24 | | $ | 2.22 | | $ | 2.46 | | $ | 6.52 | |
Discontinued operations | | | (0.12 | ) | | (0.86 | ) | | (0.41 | ) | | (0.09 | ) | | (1.52 | ) | | — | | | (0.04 | ) | | (0.18 | ) | | 2.24 | | | 1.99 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income | | $ | 1.24 | | $ | 0.45 | | $ | 0.90 | | $ | 0.52 | | $ | 3.11 | | $ | 0.62 | | $ | 1.20 | | $ | 2.04 | | $ | 4.70 | | $ | 8.51 | |
| | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 39,842 | | | 40,998 | | | 39,335 | | | 38,212 | | | 39,658 | | | 38,784 | | | 39,761 | | | 39,946 | | | 39,453 | | | 39,499 | |
Diluted | | | 42,531 | | | 43,002 | | | 40,069 | | | 38,771 | | | 41,155 | | | 42,269 | | | 43,506 | | | 42,258 | | | 41,972 | | | 42,514 | |
CIGS Solar Systems Business Disposal
On July 28, 2011, we announced a plan to discontinue our CIGS solar systems business. The action, which was completed on September 27, 2011 and impacted approximately 80 employees, was in response to the dramatically reduced cost of mainstream solar technologies driven by significant reductions in prices, large industry investment, a lower than expected end market acceptance for CIGS
technology and technical barriers in scaling CIGS. This business was previously included as part of our LED & Solar segment.
Accordingly, the results of operations for the CIGS solar systems business have been recorded as discontinued operations in the accompanying consolidated statements of operations for all periods presented. During the year ended December 31, 2011, total discontinued operations include charges totaling $69.8 million ($50.7 million in the second quarter and $19.1 million in the third quarter). 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 Divestiture
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 was held in escrow and was 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. 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 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.
Other Quarterly Items
During the fourth quarter of 2011, we recognized a restructuring charge of $1.3 million for personnel severance related to a company-wide reorganization. We also recognized an asset impairment charge of $0.6 million for property and equipment and $0.8 million inventory write-off charged to cost of sales related to the discontinuance of a certain product line in our LED & Solar reporting unit.
During the third quarter of 2011 there was overstatement in our discontinued operations tax benefit totaling $3.4 million. We corrected this error in the discontinued operations income tax provision in the fourth quarter of 2011 for the same amount, representing the amount not previously recorded in the third quarter of 2011. We do not believe that this difference was material to our results of operations for the third and fourth quarter of 2011.
During the first quarter of 2010, we recognized a restructuring credit of $0.2 million associated with a change in estimate.
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 DisclosureDisclosure.
None.
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None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management’s Report on Internal Control Over Financial Reporting
Our senior management is responsible for establishingprincipal executive and maintaining a system offinancial officers have evaluated and concluded that our disclosure controls and procedures (as definedare effective as of December 31, 2014. The disclosure controls and procedures are designed to ensure that the information required to be disclosed in Rule 13a-14 and 15d-14this report filed 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'sCommission’s rules and forms. Disclosure controlsforms 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 itsour principal executive officer orand financial 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
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, 2011. 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 reportofficers are included in our Consolidated Financial Statements for the year ended December 31, 2011 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 quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
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 2012 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, 2011. 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 | | | 2,105,777 | | $ | 25.58 | | | 1,764,570 | |
Equity compensation plans not approved by security holders | | | — | | | — | | | — | |
| | | | | | | | | |
Total | | | 2,105,777 | | | | | | 1,764,570 | |
| | | | | | | | | |
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."
PART IV
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.
| | | | |
Number | | Exhibit | | Incorporated by Reference to the Following Documents |
|---|
2.1 | | Stock Purchase Agreement dated August 15, 2010 among Veeco Instruments Inc. (Veeco), Veeco Metrology Inc. and Bruker Corporation | | Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, Exhibit 2.1 |
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 |
| | | | |
Number | | Exhibit | | Incorporated by Reference to the Following Documents |
|---|
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 |
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 2010 Stock Incentive Plan, effective May 14, 2010 |
|
Registration Statement on Form S-8 (File Number 333-166852) filed May 14, 2010, Exhibit 10.1 |
10.11* |
|
Form of 2010 Stock Incentive Plan Stock Option Agreement |
|
Registration Statement on Form S-8 (File Number 333-166852) filed May 14, 2010, Exhibit 10.2 |
10.12* |
|
Form of 2010 Stock Incentive Plan Restricted Stock Agreement |
|
Registration Statement on Form S-8 (File Number 333-166852) filed May 14, 2010, Exhibit 10.3 |
10.13* |
|
Veeco Performance-Based Restricted Stock 2010 |
|
Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 10.2 |
10.14* |
|
Veeco 2010 Management Bonus Plan dated January 22, 2010 |
|
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, Exhibit 10.2 |
10.15* |
|
Veeco 2010 Special Profit Sharing Plan dated February 15, 2010 |
|
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, Exhibit 10.3 |
| | | | |
Number | | Exhibit | | Incorporated by Reference to the Following Documents |
|---|
10.16* | | 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 |
10.17* |
|
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 |
10.18* |
|
Employment Agreement effective as of July 1, 2007 between Veeco and John R. Peeler |
|
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, Exhibit 10.3 |
10.19* |
|
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 |
10.20* |
|
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 |
10.21* |
|
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 |
10.22* |
|
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 |
10.23* |
|
Form of Amendment effective June 9, 2006 to Letter Agreements between Veeco and each of John P. Kiernan and Robert P. Oates |
|
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.3 |
10.24* |
|
Form of Amendment effective December 31, 2008 to Letter Agreements between Veeco and each of John P. Kiernan and Robert P. Oates |
|
Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.40 |
10.25* |
|
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 |
10.26* |
|
Letter Agreement dated October 31, 2005 between Veeco and Robert P. Oates |
|
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, Exhibit 10.1 |
10.27* |
|
Amendment dated September 12, 2008 to Employment Agreement between Veeco and Robert P. Oates |
|
Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, Exhibit 10.2 |
10.28* |
|
Veeco 2011 Management Bonus Plan, dated January 26, 2011 |
|
Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, Exhibit 10.1 |
10.29* |
|
Service Agreement effective January 1, 2012 between Veeco and Edward H. Braun |
|
Filed herewith |
10.30* |
|
Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller |
|
Filed herewith |
| | | | |
Number | | Exhibit | | Incorporated by Reference to the Following Documents |
|---|
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.
SIGNATURES
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 22, 2012.
| | | | |
| | VEECO INSTRUMENTS INC. |
|
|
By: |
|
/s/ JOHN R. PEELER
John R. Peeler
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 22, 2012.
| | |
Signature
| | Title
|
|---|
|
|
|
/s/ EDWARD H. BRAUN
Edward H. Braun | | Director and Chairman |
/s/ RICHARD A. D'AMORE
Richard A. D'Amore |
|
Director |
/s/ JOEL A. ELFTMANN
Joel A. Elftmann |
|
Director |
/s/ GORDON HUNTER
Gordon Hunter |
|
Director |
/s/ ROGER D. MCDANIEL
Roger D. McDaniel |
|
Director |
/s/ JOHN R. PEELER
John R. Peeler |
|
Director and Chief Executive Officer
(principal executive officer) |
/s/ PETER J. SIMONE
Peter J. Simone |
|
Director |
/s/ DAVID D. GLASS
David D. Glass |
|
Executive Vice President and Chief Financial Officer
(principal financial officer) |
/s/ JOHN P. KIERNAN
John P. Kiernan |
|
Senior Vice President, Finance, Corporate Controller
and Treasurer (principal accounting officer) |
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Index to Consolidated Financial Statements
and Financial Statement Schedule
| | |
| | Page |
|---|
Management's Report on Internal Control Over Financial Reporting
| | F-2 |
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
| | F-3 |
Report of Independent Registered Public Accounting Firm on Financial Statements
| | F-4 |
Consolidated Balance Sheets at December 31, 2011 and 2010
| | F-5 |
Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009
| | F-6 |
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2011, 2010 and 2009
| | F-7 |
Consolidated Statements of Equity for the years ended December 31, 2011, 2010 and 2009
| | F-8 |
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
| | F-9 |
Notes to Consolidated Financial Statements
| | F-10 |
Schedule II—Valuation and Qualifying Accounts
| | S-1 |
Table of Contents
Management's Report on Internal Control
Over 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)which is a process designed and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designedput into effect 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 accounting principles. Using the criteria established 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, 2011. In making this assessment, management used the criteria set forthInternal Control – Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”) inInternal Control-Integrated Framework.
Based on our assessment, Management has evaluated, assessed, and those criteria, management believesconcluded that the Company maintained effective internal control over financial reporting is effective as of December 31, 2011.2014.
We acquired Solid State Equipment Holdings LLC (now known as Veeco Precision Surface Processing (“PSP”) during the quarter ended December 31, 2014, and the results of PSP from the acquisition date through December 31, 2014 are included in our 2014 consolidated financial statements. The results of PSP constituted 18 percent and 20 percent of total and net assets, respectively, as of December 31, 2014, and 2 percent and 4 percent of net sales and net loss before taxes, respectively, for the year then ended. We have excluded PSP from our annual assessment of and conclusion on the effectiveness of the Company'sour internal control over financial reporting as of December 31, 2011 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as statedreporting.
Changes in their report which appears under the heading "Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting."Reporting
Veeco Instruments Inc.
Plainview, NY
February 22, 2012
During the quarter ended December 31, 2014, there were no changes in internal control that have materially affected or are reasonably likely to materially affect internal control over financial reporting.
33
| | |
/s/ JOHN R. PEELER
John R. Peeler
Chief Executive Officer
Veeco Instruments Inc.
February 22, 2012 | | |
/s/ DAVID D. GLASS
David D. Glass
Executive Vice President and
Chief Financial Officer
Veeco Instruments Inc.
February 22, 2012 |
|
|
Table of Contents
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and ShareholdersStockholders of
Veeco Instruments Inc.
We have audited Veeco Instruments Inc. and Subsidiaries’s (the "Company"“Company”) internal control over financial reporting as of December 31, 2011,2014, based on criteria established in Internal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Company'sCompany’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'sManagement’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’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'scompany’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'scompany’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;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 companyCompany are being made only in accordance with authorizations of management and directors of the company;Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'sCompany’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 Solid State Equipment Holdings LLC, which is included in the 2014 consolidated financial statements of Veeco Instruments Inc. and constituted 18 percent and 20 percent of total and net assets, respectively, as of December 31, 2014 and 2 percent and 4 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 Solid State Equipment Holdings LLC.
In our opinion, the CompanyVeeco Instruments Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2011 consolidated financial statements of the Company and our report dated February 22, 2012 expressed an unqualified opinion thereon.
New York, New York
February 22, 2012
Table of Contents
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, 20112014 and 2010,2013, and the related consolidated statements of operations, equity, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011.2014 and our report dated February 24, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP | |
| |
Jericho, New York | |
February 24, 2015 | |
34
Table of Contents
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item that will appear under the headings “Corporate Governance,” “Executive Officers,” and “Section 16(a) Reporting Compliance” in the definitive proxy statement to be filed with the SEC relating to our 2015 Annual Meeting of Stockholders is incorporated herein by reference.
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
Information required by this Item that will appear under the heading “Executive Compensation” in the definitive proxy statement to be filed with the SEC relating to our 2015 Annual Meeting of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item that will appear under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the definitive proxy statement to be filed with the SEC relating to our 2015 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this Item that will appear under the headings “Certain Relationships and Related Transactions” and “Independence of the Board of Directors” in the definitive proxy statement to be filed with the SEC relating to our 2015 Annual Meeting of Stockholders is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Information required by this Item that will appear under the heading “Proposal 3 — Ratification of the Appointment of Ernst & Young LLP as Independent Registered Public Accounting Firm” in the definitive proxy statement to be filed with the SEC relating to our 2015 Annual Meeting of Stockholders is incorporated herein by reference.
35
Table of Contents
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1)The Registrant’s financial statements together with a separate table of contents are annexed hereto
(2)Financial Statement Schedules are listed in the separate table of contents annexed hereto.
(3)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.
| | | | | | | | | | Filed or | |
Exhibit | | | | Incorporated by Reference | | Furnished | |
Number | | Exhibit Description | | Form | | Exhibit | | Filing Date | | Herewith | |
2.1 | | Securities Purchase Agreement, dated December 4, 2014, by and among Solid State Equipment Holdings LLC, certain securityholders thereof, Veeco Instruments Inc. and certain other parties thereto. | | | | | | | | X | |
2.2 | | 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. | | 10-K | | 2.1 | | 2/28/2014 | | | |
3.1 | | Amended and Restated Certificate of Incorporation of Veeco dated December 1, 1994, as amended June 2, 1997 and July 25, 1997. | | 10-Q | | 3.1 | | 8/14/1997 | | | |
3.2 | | Amendment to Certificate of Incorporation of Veeco dated May 29, 1998. | | 10-K | | 3.2 | | 3/14/2001 | | | |
3.3 | | Amendment to Certificate of Incorporation of Veeco dated May 5, 2000. | | 10-Q | | 3.1 | | 8/14/2000 | | | |
| | | | | | | | | | | |
3.4 | | Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of Veeco. | | 10-Q | | 3.1 | | 5/9/2001 | | | |
3.5 | | Amendment to Certificate of Incorporation of Veeco dated May 16, 2002. | | 10-Q | | 3.1 | | 10/26/2009 | | | |
3.6 | | Amendment to Certificate of Incorporation of Veeco dated May 14, 2010. | | 10-K | | 3.8 | | 2/24/2011 | | | |
3.7 | | Fourth Amended and Restated Bylaws of Veeco, effective October 23, 2008. | | 8-K | | 3.1 | | 10/27/2008 | | | |
3.8 | | Amendment No. 1 to the Fourth Amended and Restated Bylaws of Veeco effective May 20, 2010. | | 8-K | | 3.1 | | 5/26/2010 | | | |
3.9 | | Amendment No. 2 to the Fourth Amended and Restated Bylaws of Veeco effective October 20, 2011. | | 8-K | | 3.1 | | 10/24/2011 | | | |
10.1 | | Loan Agreement dated as of December 15, 1999 between Applied Epi, Inc. and Jackson National Life Insurance Company. | | 10-Q | | 10.2 | | 11/14/2001 | | | |
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). | | 10-Q | | 10.2 | | 8/14/2002 | | | |
10.3 | | Promissory Note dated as of December 15, 1999 issued by Applied Epi, Inc. to Jackson National Life Insurance Company. | | 10-Q | | 10.3 | | 11/14/2001 | | | |
10.4* | | Form of Indemnification Agreement entered into between Veeco and each of its directors and executive officers. | | 8-K | | 10.1 | | 10/23/2006 | | | |
10.5* | | Veeco Amended and Restated 2000 Stock Incentive Plan, effective July 20, 2006. | | 10-Q | | 10.4 | | 8/4/2006 | | | |
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. | | 10-Q | | 10.1 | | 8/7/2007 | | | |
10.7* | | Amendment No. 2 dated January 22, 2009 to Veeco Amended and Restated 2000 Stock Incentive Plan. | | 10-K | | 10.41 | | 3/2/2009 | | | |
10.8* | | Form of Restricted Stock Agreement pursuant to the Veeco 2000 Stock Incentive Plan, effective November 2005. | | 10-Q | | 10.3 | | 11/2/2005 | | | |
36
Table of Contents
| |
| |
|
|
|
|
|
| Filed or |
|
Exhibit | |
| | Incorporated by Reference |
| Furnished |
|
Number | | Exhibit Description | | Form |
| Exhibit |
| Filing Date |
| Herewith |
|
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. | | 10-Q | | 10.3 | | 11/6/2006 | | | |
10.10* | | Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 14, 2010. | | Def 14A | | Appendix A | | 11/4/2013 | | | |
| | | | | | | | | | | |
10.11* | | Form of 2010 Stock Incentive Plan Stock Option Agreement (2012 rev.). | | 10-Q | | 10.2 | | 7/27/2012 | | | |
| | | | | | | | | | | |
10.12* | | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (2012 rev.). | | 10-Q | | 10.3 | | 7/27/2012 | | | |
10.13* | | Form of 2010 Stock Incentive Plan Restricted Stock Unit Agreement (2012 rev.). | | 10-Q | | 10.4 | | 7/27/2012 | | | |
10.14* | | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (Non-Employee Director) (2011 rev.). | | 10-Q | | 10.5 | | 7/27/2012 | | | |
10.15* | | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (Performance Based) (2012 rev.). | | 10-Q | | 10.6 | | 7/27/2012 | | | |
10.16* | | Form of Notice of Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective June 2014. | | 10-Q | | 10.2 | | 7/31/2014 | | | |
10.17* | | Veeco 2013 Inducement Stock Incentive Plan, effective September 26, 2013. | | 10-Q | | 10.1 | | 11/4/2013 | | | |
10.18* | | Form of 2013 Inducement Stock Incentive Plan Stock Option Agreement. | | 10-Q | | 10.2 | | 11/4/2013 | | | |
| | | | | | | | | | | |
10.19* | | Form of 2013 Inducement Stock Incentive Plan Restricted Stock Unit Agreement. | | 10-Q | | 10.3 | | 11/4/2013 | | | |
10.20* | | Veeco Performance-Based Restricted Stock 2010. | | 10-Q | | 10.2 | | 7/29/2010 | | | |
10.21* | | Veeco Amended and Restated Senior Executive Change in Control Policy, effective as of January 1, 2014. | | 10-K | | 10.22 | | 2/28/2014 | | | |
10.22* | | Amendment effective December 31, 2008 to Employment Agreement between Veeco and John R. Peeler. | | 10-K | | 10.38 | | 3/2/2009 | | | |
10.23* | | Second Amendment effective June 11, 2010 to Employment Agreement between Veeco and John R. Peeler. | | 10-Q | | 10.1 | | 7/29/2010 | | | |
10.24* | | Third Amendment effective April 27, 2012 to Employment Agreement between Veeco and John R. Peeler. | | 10-Q | | 10.2 | | 5/9/2012 | | | |
10.25* | | Amendment dated June 12, 2014 to Employment Agreement between Veeco and John R. Peeler. | | 10-Q | | 10.3 | | 7/31/2014 | | | |
10.26* | | Letter Agreement dated April 8, 2014 between Veeco and Shubham Maheshwari. | | 10-Q | | 10.1 | | 7/31/2014 | | | |
10.27* | | Letter Agreement dated January 21, 2004 between Veeco and John P. Kiernan. | | 10-K | | 10.38 | | 3/12/2004 | | | |
10.28* | | Amendment effective June 9, 2006 to Letter Agreement between Veeco and John P. Kiernan. | | 10-Q | | 10.3 | | 8/4/2006 | | | |
10.29* | | Amendment effective December 31, 2008 to Letter Agreement between Veeco and John P. Kiernan. | | 10-K | | 10.40 | | 3/2/2009 | | | |
10.30* | | Letter agreement effective as of June 19, 2009 between Veeco and John P. Kiernan. | | 10-Q | | 10.2 | | 7/30/2009 | | | |
10.31* | | Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller. | | 10-K | | 10.30 | | 2/22/2012 | | | |
37
Table of Contents
| |
| |
|
|
|
|
|
| Filed or |
|
Exhibit | |
| | Incorporated by Reference |
| Furnished |
|
Number | | Exhibit Description | | Form |
| Exhibit |
| Filing Date |
| Herewith |
|
21.1 | | Subsidiaries of the Registrant. | | | | | | | | X | |
23.1 | | Consent of Ernst & Young LLP. | | | | | | | | X | |
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. | | | | | | | | X | |
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. | | | | | | | | X | |
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. | | | | | | | | X | |
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. | | | | | | | | X | |
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
38
Table of Contents
SIGNATURES
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 24, 2015.
| 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 24, 2015.
Signature |
| Title |
|
|
|
/s/ JOHN R. PEELER | | Chairman and Chief Executive Officer |
John R. Peeler | | (principal executive officer) |
| | |
/s/ SHUBHAM MAHESHWARI | | Executive Vice President and Chief Financial Officer |
Shubham Maheshwari | | (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 | | |
39
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Index to Consolidated Financial Statements and Financial Statement Schedule
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Veeco Instruments Inc.
We have audited the accompanying consolidated balance sheets of Veeco Instruments Inc. (the “Company”) as of December 31, 2014 and 2013 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the accompanying index.Index at Item 15(a). These financial statements and the schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements and schedulesschedule 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 CompanyVeeco Instruments Inc. at December 31, 20112014 and 2010,2013, and the consolidated results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2011,2014, 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, presentspresent 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'sVeeco Instruments Inc.’s internal control over financial reporting as of December 31, 2011,2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2012,24, 2015 expressed an unqualified opinion thereon.
| | |
| | /s/ ERNST & YOUNG LLP | |
| |
Jericho, New York | |
February 24, 2015 | |
New York, New York
February 22, 2012
F-2
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
thousands, except share amounts)
| | | | | | | |
| | December 31, | |
|---|
| | 2011 | | 2010 | |
|---|
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 217,922 | | $ | 245,132 | |
Short-term investments | | | 273,591 | | | 394,180 | |
Restricted cash | | | 577 | | | 76,115 | |
Accounts receivable, net | | | 95,038 | | | 150,528 | |
Inventories | | | 113,434 | | | 108,487 | |
Prepaid expenses and other current assets | | | 40,756 | | | 34,328 | |
Assets held for sale | | | 2,341 | | | — | |
Deferred income taxes | | | 10,885 | | | 13,803 | |
| | | | | | |
Total current assets | | | 754,544 | | | 1,022,573 | |
Property, plant and equipment at cost, net | | | 86,067 | | | 42,320 | |
Goodwill | | | 55,828 | | | 52,003 | |
Deferred income taxes | | | — | | | 9,403 | |
Intangible assets, net | | | 25,882 | | | 16,893 | |
Other assets | | | 13,742 | | | 4,842 | |
| | | | | | |
Total assets | | $ | 936,063 | | $ | 1,148,034 | |
| | | | | | |
Liabilities and equity | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 40,398 | | $ | 32,220 | |
Accrued expenses and other current liabilities | | | 107,656 | | | 183,010 | |
Deferred profit | | | 10,275 | | | 4,109 | |
Income taxes payable | | | 3,532 | | | 56,369 | |
Liabilities of discontinued segment held for sale | | | 5,359 | | | 5,359 | |
Current portion of long-term debt | | | 248 | | | 101,367 | |
| | | | | | |
Total current liabilities | | | 167,468 | | | 382,434 | |
Deferred income taxes | | | 5,029 | | | — | |
Long-term debt | | | 2,406 | | | 2,654 | |
Other liabilities | | | 640 | | | 434 | |
Equity: | | | | | | | |
Preferred stock, 500,000 shares authorized; no shares issued and outstanding | | | — | | | — | |
Common stock; $.01 par value; authorized 120,000,000 shares; 38,768,436 and 40,337,950 shares issued and outstanding in 2011 and 2010, respectively | | | 435 | | | 409 | |
Additional paid-in-capital | | | 688,353 | | | 656,969 | |
Retained earnings | | | 265,317 | | | 137,436 | |
Accumulated other comprehensive income | | | 6,590 | | | 5,796 | |
Less: treasury stock, at cost; 5,278,828 shares and 1,118,600 shares in 2011 and 2010, respectively | | | (200,175 | ) | | (38,098 | ) |
| | | | | | |
Total equity | | | 760,520 | | | 762,512 | |
| | | | | | |
Total liabilities and equity | | $ | 936,063 | | $ | 1,148,034 | |
| | | | | | |
The
| | December 31, |
| | 2014 | | | | 2013 | |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 270,811 | | $ | 210,799 | |
Short-term investments | | 120,572 | | 281,538 | |
Restricted cash | | 539 | | 2,738 | |
Accounts receivable, net | | 60,085 | | 23,823 | |
Inventories | | 61,471 | | 59,726 | |
Deferred cost of sales | | 5,076 | | 724 | |
Prepaid expenses and other current assets | | 23,132 | | 22,579 | |
Assets held for sale | | 6,000 | | — | |
Deferred income taxes | | 7,976 | | 11,716 | |
Total current assets | | 555,662 | | 613,643 | |
Property, plant and equipment at cost, net | | 78,752 | | 89,139 | |
Goodwill | | 114,959 | | 91,348 | |
Deferred income taxes | | 1,180 | | 397 | |
Intangible assets, net | | 159,308 | | 114,716 | |
Other assets | | 19,594 | | 38,726 | |
Total assets | | $ | 929,455 | | $ | 947,969 | |
| | | | | |
Liabilities and stockholders’ equity | | | | | |
Current liabilities : | | | | | |
Accounts payable | | $ | 18,111 | | $ | 35,755 | |
Accrued expenses and other current liabilities | | 48,418 | | 51,084 | |
Customer deposits and deferred revenue | | 96,004 | | 34,754 | |
Income taxes payable | | 5,441 | | 6,149 | |
Deferred income taxes | | 120 | | 159 | |
Current portion of long-term debt | | 314 | | 290 | |
Total current liabilities | | 168,408 | | 128,191 | |
Deferred income taxes | | 16,397 | | 28,052 | |
Long-term debt | | 1,533 | | 1,847 | |
Other liabilities | | 4,185 | | 9,649 | |
Total liabilities | | 190,523 | | 167,739 | |
Stockholders ‘ Equity: | | | | | |
Preferred stock, 500,000 shares authorized; no shares issued and outstanding | | — | | — | |
Common stock, $0.01par value, 120,000,000 shares authorized; 40,360,069 and 39,666,195 shares issued and outstanding at December 31,2014 and 2013, respectively | | 404 | | 397 | |
Additional paid-in capital | | 750,139 | | 721,352 | |
Retained earnings (accumulated deficit) | | (13,080 | ) | 53,860 | |
Accumulated other comprehensive income | | 1,469 | | 4,621 | |
Total stockholders’ equity | | 738,932 | | 780,230 | |
Total liabilities and stockholders’ equity | | $ | 929,455 | | $ | 947,969 | |
See accompanying notes are an integral part of these consolidated financial statements.Notes to the Consolidated Financial Statements.
F-3
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Operations
(Inin thousands, except per share data)
amounts)
|
| | Year ended December 31, | | | For the year ended December 31, |
|---|
| | 2011 | | 2010 | | 2009 | | | | 2014 | | | | 2013 | | | | 2012 | |
|---|
Net sales | | $ | 979,135 | | $ | 930,892 | | $ | 282,262 | | | $ | 392,873 | | $ | 331,749 | | $ | 516,020 | |
Cost of sales | | 504,801 | | 481,407 | | 168,003 | | | 257,991 | | 228,607 | | 300,887 | |
| | | | | | | | | |
Gross profit | | 474,334 | | 449,485 | | 114,259 | | | 134,882 | | 103,142 | | 215,133 | |
Operating expenses (income): | | |
Selling, general and administrative | | 95,134 | | 87,250 | | 59,419 | | |
Operating expenses, net: | | | | | | | | |
Selling, general, and administrative | | | 89,760 | | 85,486 | | 73,110 | |
Research and development | | 96,596 | | 56,948 | | 37,767 | | | 81,171 | | 81,424 | | 95,153 | |
Amortization | | 4,734 | | 3,703 | | 3,977 | | | 13,146 | | 5,527 | | 4,908 | |
Restructuring | | 1,288 | | (179 | ) | | 4,479 | | | 4,394 | | 1,485 | | 3,813 | |
Asset impairment | | 584 | | — | | 304 | | | 58,170 | | 1,220 | | 1,335 | |
Changes in contingent consideration | | | (29,368 | ) | 829 | | — | |
Other, net | | (261 | ) | | (1,490 | ) | | 682 | | | (3,182 | ) | (1,017 | ) | (398 | ) |
| | | | | | | | | |
Total operating expenses | | 198,075 | | 146,232 | | 106,628 | | |
| | | | | | | | | |
Operating income | | 276,259 | | 303,253 | | 7,631 | | |
Total operating expenses, net | | | 214,091 | | 174,954 | | 177,921 | |
Operating income (loss) | | | (79,209 | ) | (71,812 | ) | 37,212 | |
Interest income | | | 1,570 | | 1,200 | | 2,476 | |
Interest expense | | 4,600 | | 8,201 | | 7,732 | | | (715 | ) | (598 | ) | (1,502 | ) |
Interest income | | (3,776 | ) | | (1,629 | ) | | (882 | ) | |
Loss on extinguishment of debt | | 3,349 | | — | | — | | |
| | | | | | | | | |
Income from continuing operations before income taxes | | 272,086 | | 296,681 | | 781 | | |
Income tax provision | | 81,584 | | 19,505 | | 2,558 | | |
| | | | | | | | | |
Income (loss) from continuing operations before income taxes | | | (78,354 | ) | (71,210 | ) | 38,186 | |
Income tax provision (benefit) | | | (11,414 | ) | (28,947 | ) | 11,657 | |
Income (loss) from continuing operations | | 190,502 | | 277,176 | | (1,777 | ) | | (66,940 | ) | (42,263 | ) | 26,529 | |
| | | | | | | | | | | | | | | |
Discontinued operations: | | |
(Loss) income from discontinued operations, before income taxes (includes gain on disposal of $156,290 in 2010) | | (91,885 | ) | | 129,776 | | (15,066 | ) | |
Income tax (benefit) provision | | (29,370 | ) | | 45,192 | | (1,211 | ) | |
Discontinued operations : | | | | | | | | |
Income from discontinued operations before income taxes | | | — | | — | | 6,269 | |
Income tax provision | | | — | | — | | 1,870 | |
Income from discontinued operations | | | — | | — | | 4,399 | |
Net income (loss) | | | $ | (66,940 | ) | $ | (42,263 | ) | $ | 30,928 | |
| | | | | | | | | | | | | | | |
(Loss) income from discontinued operations | | (62,515 | ) | | 84,584 | | (13,855 | ) | |
| | | | | | | | | |
Net income (loss) | | 127,987 | | 361,760 | | (15,632 | ) | |
Net loss attributable to noncontrolling interest | | — | | — | | (65 | ) | |
| | | | | | | | | |
Net income (loss) attributable to Veeco | | $ | 127,987 | | $ | 361,760 | | $ | (15,567 | ) | |
| | | | | | | | | |
Income (loss) per common share attributable to Veeco: | | |
Basic: | | |
Basic income (loss) per common share: | | | | | | | | |
Continuing operations | | $ | 4.80 | | $ | 7.02 | | $ | (0.05 | ) | | $ | (1.70 | ) | $ | (1.09 | ) | $ | 0.69 | |
Discontinued operations | | (1.57 | ) | | 2.14 | | (0.43 | ) | | — | | — | | 0.11 | |
| | | | | | | | | |
Income (loss) | | $ | 3.23 | | $ | 9.16 | | $ | (0.48 | ) | |
| | | | | | | | | |
Diluted: | | |
Net income (loss) | | | $ | (1.70 | ) | $ | (1.09 | ) | $ | 0.80 | |
Diluted income (loss) per common share: | | | | | | | | |
Continuing operations | | $ | 4.63 | | $ | 6.52 | | $ | (0.05 | ) | | $ | (1.70 | ) | $ | (1.09 | ) | $ | 0.68 | |
Discontinued operations | | (1.52 | ) | | 1.99 | | (0.43 | ) | | — | | — | | 0.11 | |
Net income (loss) | | | $ | (1.70 | ) | $ | (1.09 | ) | $ | 0.79 | |
| | | | | | | | | | | | | | | |
Income (loss) | | $ | 3.11 | | $ | 8.51 | | $ | (0.48 | ) | |
| | | | | | | | | |
Weighted average shares outstanding: | | |
Weighted average number of shares: | | | | | | | | |
Basic | | 39,658 | | 39,499 | | 32,628 | | | 39,350 | | 38,807 | | 38,477 | |
Diluted | | 41,155 | | 42,514 | | 32,628 | | | 39,350 | | 38,807 | | 39,051 | |
TheSee accompanying notes are an integral part of these consolidated financial statements.Notes to the Consolidated Financial Statements.
F-4
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Inin thousands)
| | | | | | | | | | |
| | Year ended December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Net income (loss) | | $ | 127,987 | | $ | 361,760 | | $ | (15,632 | ) |
Other comprehensive income (loss), net of tax | | | | | | | | | | |
Foreign currency translation | | | 794 | | | (1,322 | ) | | (58 | ) |
Unrealized gain on available-for-sale securities | | | 43 | | | 97 | | | — | |
Defined benefit pension plan | | | (43 | ) | | (120 | ) | | 32 | |
| | | | | | | | |
Comprehensive income (loss) | | | 128,781 | | | 360,415 | | | (15,658 | ) |
Comprehensive loss attributable to noncontrolling interest | | | — | | | — | | | (65 | ) |
| | | | | | | | |
Comprehensive income (loss) attributable to Veeco | | $ | 128,781 | | $ | 360,415 | | $ | (15,593 | ) |
| | | | | | | | |
The
| | For the year ended December 31, |
| | | 2014 | | | 2013 | | | 2012 | |
Net income (loss) | | | $ | (66,940 | ) | | $ | (42,263 | ) | | $ | 30,928 | |
Other comprehensive income (loss), net of tax | | | | | | | |
Unrealized gain (loss) on available-for-sale securities | | 51 | | 34 | | (118 | ) |
Benefit (provision) for income taxes | | — | | 11 | | 50 | |
Less: Reclassification adjustments included in net income (loss) | | (65 | ) | (61 | ) | (24 | ) |
Net unrealized loss on available-for-sale securities | | (14 | ) | (16 | ) | (92 | ) |
| | | | | | | |
Minimum pension liability | | (145 | ) | 125 | | (216 | ) |
Benefit (provision) for income taxes | | — | | (86 | ) | 79 | |
Net minimum pension liability | | (145 | ) | 39 | | (137 | ) |
| | | | | | | |
Foreign currency translation | | 149 | | (1,322 | ) | (1,071 | ) |
Benefit (provision) for income taxes | | — | | (53 | ) | 683 | |
Less: Reclassification adjustments included in net income (loss) | | (3,142 | ) | — | | — | |
Net foreign currency translation | | (2,993 | ) | (1,375 | ) | (388 | ) |
| | | | | | | |
Other comprehensive income (loss), net of tax | | (3,152 | ) | (1,352 | ) | (617 | ) |
Comprehensive income (loss) | | $ | (70,092 | ) | $ | (43,615 | ) | $ | 30,311 | |
See accompanying notes are an integral part of these consolidated financial statements.Notes to the Consolidated Financial Statements.
F-5
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| |
| | Equity Attributable to | |
|---|
| | Common Stock | |
| |
| | Retained
Earnings
(Accumulated
Deficit) | | Accumulated
Other
Comprehensive
Income | |
|---|
| | Treasury
Stock | | Additional
Paid-in
Capital | |
| | Noncontrolling
Interest | |
| |
|---|
| | Shares | | Amount | | Veeco | | Total | |
|---|
Balance at January 1, 2009 | | | 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 | | | — | | | — | | | — | | | 7,113 | | | — | | | — | | | 7,113 | | | — | | | 7,113 | |
Equity-based compensation expense-discontinued operations | | | — | | | — | | | — | | | 1,424 | | | — | | | — | | | 1,424 | | | — | | | 1,424 | |
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 | | | — | | | — | | | — | | | 8,769 | | | — | | | — | | | 8,769 | | | — | | | 8,769 | |
Equity-based compensation expense-discontinued operations | | | — | | | — | | | — | | | 8,551 | | | — | | | — | | | 8,551 | | | — | | | 8,551 | |
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 | |
Exercise of stock options | | | 688,105 | | | 7 | | | — | | | 10,707 | | | — | | | — | | | 10,714 | | | — | | | 10,714 | |
Equity-based compensation expense-continuing operations | | | — | | | — | | | — | | | 12,807 | | | — | | | — | | | 12,807 | | | — | | | 12,807 | |
Equity-based compensation expense-discontinued operations | | | — | | | — | | | — | | | 689 | | | — | | | — | | | 689 | | | — | | | 689 | |
Issuance, vesting and cancellation of restricted stock | | | 131,196 | | | 1 | | | — | | | (3,175 | ) | | — | | | — | | | (3,174 | ) | | — | | | (3,174 | ) |
Treasury stock | | | (4,160,228 | ) | | — | | | (162,077 | ) | | — | | | — | | | — | | | (162,077 | ) | | — | | | (162,077 | ) |
Debt Conversion | | | 1,771,413 | | | 18 | | | — | | | (50 | ) | | — | | | — | | | (32 | ) | | — | | | (32 | ) |
Excess tax benefits from stock option exercises | | | — | | | — | | | — | | | 10,406 | | | — | | | — | | | 10,406 | | | — | | | 10,406 | |
Translation adjustments | | | — | | | — | | | — | | | — | | | (106 | ) | | 794 | | | 688 | | | — | | | 688 | |
Defined benefit pension plan | | | — | | | — | | | — | | | — | | | — | | | (43 | ) | | (43 | ) | | — | | | (43 | ) |
Unrealized gain on short-term investments | | | — | | | — | | | — | | | — | | | — | | | 43 | | | 43 | | | — | | | 43 | |
Net income | | | — | | | — | | | — | | | — | | | 127,987 | | | — | | | 127,987 | | | — | | | 127,987 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2011 | | | 38,768,436 | | $ | 435 | | $ | (200,175 | ) | $ | 688,353 | | $ | 265,317 | | $ | 6,590 | | $ | 760,520 | | $ | — | | $ | 760,520 | |
| | | | | | | | | | | | | | | | | | | | |
The
| | | | | | | | | | Retained | | Accumulated | | | |
| | | | | | | | Additional | | Earnings | | Other | | | |
| | Common Stock | | Treasury | | Paid-in | | (Accumulated | | Comprehensive | | | |
| | Shares | | Amount | | Stock | | Capital | | Deficit) | | Income | | Total | |
Balance at December 31, 2011 | | 38,768 | | $ | 435 | | $ | (200,175 | ) | $ | 688,353 | | $ | 265,317 | | $ | 6,590 | | $ | 760,520 | |
Net income | | — | | — | | — | | — | | 30,928 | | — | | 30,928 | |
Other comprehensive loss , net of tax | | — | | — | | — | | — | | — | | (617 | ) | (617 | ) |
Share-based compensation expense | | — | | — | | — | | 14,268 | | — | | — | | 14,268 | |
Net issuance under employee stock plans | | 560 | | 11 | | — | | 5,792 | | — | | — | | 5,803 | |
Retirement of treasury stock | | — | | (53 | ) | 200,175 | | — | | (200,122 | ) | — | | — | |
Prior period debt conversion adjustment | | — | | — | | — | | 310 | | — | | — | | 310 | |
Balance at December 31, 2012 | | 39,328 | | 393 | | — | | 708,723 | | 96,123 | | 5,973 | | 811,212 | |
Net loss | | — | | — | | — | | — | | (42,263 | ) | — | | (42,263 | ) |
Other comprehensive loss, net of tax | | — | | — | | — | | — | | — | | (1,352 | ) | (1,352 | ) |
Share-based compensation expense | | — | | — | | — | | 13,130 | | — | | — | | 13,130 | |
Net issuance under employee stock plans | | 338 | | 4 | | — | | (501 | ) | — | | — | | (497 | ) |
Balance at December 31, 2013 | | 39,666 | | 397 | | — | | 721,352 | | 53,860 | | 4,621 | | 780,230 | |
Net income | | — | | — | | — | | — | | (66,940 | ) | — | | (66,940 | ) |
Other comprehensive loss, net of tax | | — | | — | | — | | — | | — | | (3,152 | ) | (3,152 | ) |
Share-based compensation expense | | — | | — | | — | | 18,813 | | — | | — | | 18,813 | |
Net issuance under employee stock plans | | 694 | | 7 | | — | | 9,974 | | — | | — | | 9,981 | |
Balance as of December 31, 2014 | | 40,360 | | $ | 404 | | $ | — | | $ | 750,139 | | $ | (13,080 | ) | $ | 1,469 | | $ | 738,932 | |
| | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes are an integral part of these consolidated financial statements.Notes to the Consolidated Financial Statements.
F-6
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
| | | | | | | | | | |
| | Year ended December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Operating activities | | | | | | | | | | |
Net income (loss) | | $ | 127,987 | | $ | 361,760 | | $ | (15,632 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | | | 12,892 | | | 10,789 | | | 12,227 | |
Amortization of debt discount | | | 1,260 | | | 3,058 | | | 2,846 | |
Non-cash equity-based compensation | | | 12,807 | | | 8,769 | | | 7,113 | |
Non-cash asset impairment | | | 584 | | | — | | | 304 | |
Non-cash inventory write-off | | | 758 | | | — | | | 1,526 | |
Non-cash restructuring | | | — | | | (179 | ) | | — | |
Loss on extinguishment of debt | | | 3,349 | | | — | | | — | |
Deferred income taxes | | | 11,276 | | | (25,141 | ) | | (414 | ) |
Gain on disposal of segment (see Note 3) | | | — | | | (156,290 | ) | | — | |
Excess tax benefits from stock option exercises | | | (10,406 | ) | | (23,271 | ) | | — | |
Other, net | | | (31 | ) | | (27 | ) | | 44 | |
Non-cash items from discontinued operations | | | 44,381 | | | 14,030 | | | 10,877 | |
Changes in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | | | 56,843 | | | (83,160 | ) | | (28,379 | ) |
Inventories | | | (19,385 | ) | | (49,535 | ) | | 10,322 | |
Prepaid expenses and other current assets | | | (25,487 | ) | | (4,749 | ) | | (1,418 | ) |
Supplier deposits | | | 12,400 | | | (23,296 | ) | | 117 | |
Accounts payable | | | 8,098 | | | 7,299 | | | 3,067 | |
Accrued expenses, deferred profit and other current liabilities | | | (72,723 | ) | | 85,500 | | | 51,582 | |
Income taxes payable | | | (42,204 | ) | | 78,894 | | | 1,482 | |
Other, net | | | (6,957 | ) | | (4,742 | ) | | (1,486 | ) |
Discontinued operations | | | — | | | (5,495 | ) | | 4,860 | |
| | | | | | | | |
Net cash provided by operating activities | | | 115,442 | | | 194,214 | | | 59,038 | |
Investing activities | | | | | | | | | | |
Capital expenditures | | | (60,364 | ) | | (10,724 | ) | | (7,460 | ) |
Payments for net assets of businesses acquired | | | (28,273 | ) | | — | | | (2,434 | ) |
Payments of earn-outs for businesses acquired | | | — | | | — | | | (195 | ) |
Transfers from restricted cash, net | | | 75,540 | | | (76,115 | ) | | — | |
Proceeds from the maturity of CDARS | | | — | | | 213,641 | | | — | |
Proceeds from sales of short-term investments | | | 707,649 | | | 32,971 | | | — | |
Payments for purchases of short-term investments | | | (588,453 | ) | | (506,103 | ) | | (135,000 | ) |
Proceeds from the sale of property, plant and equipment | | | — | | | 13 | | | 834 | |
Proceeds from disposal of segment, net of transaction fees (see Note 3) | | | — | | | 225,188 | | | — | |
Other | | | 195 | | | — | | | — | |
Discontinued operations | | | — | | | (492 | ) | | (10,510 | ) |
| | | | | | | | |
Net cash provided by (used in) investing activities | | | 106,294 | | | (121,621 | ) | | (154,765 | ) |
Financing activities | | | | | | | | | | |
Proceeds from stock option exercises | | | 10,714 | | | 45,164 | | | 12,586 | |
Proceeds from issuance of common stock | | | — | | | — | | | 130,086 | |
Restricted stock tax withholdings | | | (3,173 | ) | | (4,619 | ) | | (607 | ) |
Excess tax benefits from stock option exercises | | | 10,406 | | | 23,271 | | | — | |
Purchases of treasury stock | | | (162,077 | ) | | (38,098 | ) | | — | |
Repayments of long-term debt | | | (105,803 | ) | | (213 | ) | | (196 | ) |
Other | | | (2 | ) | | — | | | — | |
| | | | | | | | |
Net cash (used in) provided by financing activities | | | (249,935 | ) | | 25,505 | | | 141,869 | |
Effect of exchange rate changes on cash and cash equivalents | | | 989 | | | (1,466 | ) | | (163 | ) |
| | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (27,210 | ) | | 96,632 | | | 45,979 | |
Cash and cash equivalents at beginning of year | | | 245,132 | | | 148,500 | | | 102,521 | |
| | | | | | | | |
Cash and cash equivalents at end of year | | $ | 217,922 | | $ | 245,132 | | $ | 148,500 | |
| | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | | | |
Interest paid | | $ | 1,393 | | $ | 4,727 | | $ | 4,935 | |
Income taxes paid | | | 89,745 | | | 9,925 | | | 1,808 | |
Non-cash investing and financing activities | | | | | | | | | | |
Accrual of payment for net assets of businesses acquired | | $ | — | | $ | — | | $ | 1,000 | |
Transfers from property, plant and equipment to inventory | | | — | | | 3,913 | | | 1,159 | |
Transfers from inventory to property, plant and equipment | | | — | | | 850 | | | 23 | |
Sale of property, plant and equipment with note receivable | | | — | | | 140 | | | — | |
| | | 2014 | | | 2013 | | | 2012 | |
Cash Flows from Operating Activities | | | | | | | |
Net income (loss) | | $ | (66,940 | ) | $ | (42,263 | ) | $ | 30,928 | |
Adjustments to reconcile net income (loss) to net cash from operating activities : | | | | | | | |
Depreciation and amortization | | 24,573 | | 18,425 | | 16,192 | |
Deferred income taxes | | (11,330 | ) | (12,264 | ) | (340 | ) |
Share-based compensation expense | | 18,813 | | 13,130 | | 14,268 | |
Excess tax benefits from share-based compensation | | — | | — | | (2,119 | ) |
Provision (recovery) for bad debts | | (1,814 | ) | 1,946 | | 198 | |
Impairment of long-lived assets | | 58,170 | | 1,220 | | 1,335 | |
Gain on sale of lab tools | | (1,549 | ) | (767 | ) | — | |
Gain on disposal of segment | | — | | — | | (4,112 | ) |
Gain on cumulative translation adjustment | | (3,142 | ) | — | | — | |
Change in contingent consideration | | (29,368 | ) | 829 | | — | |
Changes in operating assets and liabilities : | | | | | | | |
Accounts receivable | | (25,390 | ) | 36,898 | | 31,017 | |
Inventories and deferred cost of sales | | 6,513 | | 2,753 | | 53,937 | |
Prepaid expenses and other current assets | | (2,245 | ) | 842 | | 8,524 | |
Accounts payable and accrued expenses | | (5,534 | ) | 7,542 | | (12,106 | ) |
Customer deposits and deferred revenue | | 55,536 | | (17,329 | ) | (34,227 | ) |
Income taxes receivable and payable, net | | 20,279 | | (12,734 | ) | 1,853 | |
Other, net | | 5,497 | | 2,499 | | 9,253 | |
Discontinued operations | | — | | — | | (2,638 | ) |
Net cash provided by operating activities | | 42,069 | | 727 | | 111,963 | |
Cash Flows from Investing Activities | | | | | | | |
Acquisitions of businesses, net of cash acquired | | (144,069 | ) | (71,488 | ) | — | |
Capital expenditures | | (15,588 | ) | (9,174 | ) | (24,994 | ) |
Proceeds from the liquidation of investments | | 318,276 | | 499,645 | | 244,929 | |
Payments for purchases of investments | | (157,737 | ) | (589,099 | ) | (165,080 | ) |
Payments for purchase of cost method investment | | (2,388 | ) | (2,391 | ) | (10,341 | ) |
Proceeds from sale of assets from discontinued segment | | — | | — | | 3,758 | |
Proceeds from sale of lab tools | | 9,259 | | 4,440 | | — | |
Other | | 350 | | 11 | | 49 | |
Net cash provided by (used in) investing activities | | 8,103 | | (168,056 | ) | 48,321 | |
Cash Flows from Financing Activities | | | | | | | |
Proceeds from stock option exercises | | 12,056 | | 2,199 | | 5,409 | |
Restricted stock tax withholdings | | (2,075 | ) | (2,696 | ) | (1,725 | ) |
Excess tax benefits from equity-based compensation | | — | | — | | 2,119 | |
Contingent consideration payments | | — | | (5,000 | ) | — | |
Repayments of long-term debt | | (290 | ) | (269 | ) | (248 | ) |
Net cash provided by (used in) financing activities | | 9,691 | | (5,766 | ) | 5,555 | |
Effect of exchange rate changes on cash and cash equivalents | | 149 | | (663 | ) | 796 | |
Net increase (decrease) in cash and cash equivalents | | 60,012 | | (173,758 | ) | 166,635 | |
Cash and cash equivalents as of beginning of period | | 210,799 | | 384,557 | | 217,922 | |
Cash and cash equivalents as of end of period | | $ | 270,811 | | $ | 210,799 | | $ | 384,557 | |
Supplemental disclosure of cash flow information | | | | | | | |
Interest paid | | $ | 159 | | $ | 357 | | $ | 209 | |
Income taxes paid | | 3,320 | | 8,001 | | 11,566 | |
TheSee accompanying notes are an integral part of these consolidated financial statements.Notes to the Consolidated Financial Statements.
F-7
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
1.Note 1 — Significant Accounting Policies
(a) Description of Business and Significant Accounting Policies
Business
Veeco Instruments Inc. (together with its consolidated subsidiaries, "Veeco,"“Veeco,” or the "Company" or "we"“Company”) creates Process Equipment solutions that enable technologies foroperates in a cleaner and more productive world. Wesingle segment: the design, development, manufacture, and marketsupport of thin film process equipment primarily sold to make electronic devices including light emitting diodes ("LEDs") and hard-disk drives, as well as for emerging applications such as concentrator photovoltaics,(“LED”s), power semiconductors, wireless components, microelectromechanical systems (MEMS) and other next-generation devices.
Veeco's LED & Solar segmentdesigns and manufactures metal organic chemical vapor deposition ("MOCVD") and molecular beam epitaxy ("MBE") systems and components sold to manufacturers of LEDs,electronics, wireless devices, power semiconductors, and concentrator photovoltaics, as well as to R&D applications. In 2011 we discontinued the sale of our products related to Copper, Indium, Gallium, Selenide ("CIGS") solar systems technology.
Veeco's Data Storage segmentdesigns and manufactures the critical technologies used to create thin film magnetic heads ("TFMHs") that read and write data on hard disk drives. These technologies include ion beam etch (IBE), ion beam deposition (IBD), diamond-like carbon (DLC), physical vapor deposition (PVD), chemical vapor deposition (CVD),drives, and slicing, dicing and lapping systems.semiconductors.
We support our customers through product and process development, training, manufacturing, and sales and service sites in the U.S., Korea, Taiwan, China, Singapore, Japan, Europe and other locations.
(b) Basis of Presentation
We report
The accompanying audited Consolidated Financial Statements of the Company have been prepared in accordance with United States generally accepted accounting principles (GAAP). The Company reports interim quarters 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 areof each period, which is determined at the beginningstart of each year basedyear. The Company’s fourth quarter always ends on the 13-week quarters. The 2011last day of the calendar year, December 31. During 2014 the interim quarter ends were April 3, July 3 and October 2. The 2010 interim quarter ends werequarters ended on March 28,30, June 2729 and September 26. For ease of reference, we report28, and during 2013 the interim quarters ended on March 31, June 30 and September 29. The Company reports these interim quarter endsquarters as March 31, June 30 and September 30 in ourits interim condensed consolidated financial statements.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United StatesGAAP requires management to make estimates and assumptions that affect the amounts reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date ofin the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the reported amountsfuture, these estimates may ultimately differ from actual results. Significant items subject to such estimates and assumptions include: (i) the best estimate of revenuesselling price for the Company’s products and expenses during the reporting period. Significant estimates made by management include allowanceservices; (ii) allowances for doubtful accounts and inventory obsolescence, purchase accounting allocations, recoverability andobsolescence; (iii) the useful lives and expected future cash flows of property, plant, and equipment and identifiable intangible assets; (iv) the fair value of the Company’s reporting units and related goodwill; (v) the fair value, less cost to sell, of assets held for sale; (vi) investment valuations and the valuation of derivatives, deferred tax assets, and assets acquired in business combinations; (vii) the recoverability of goodwill, recoverability of deferred tax assets,long lived assets; (viii) liabilities for product warranty accruals for contingencies and equity-based payments, including forfeitureslegal contingencies; (ix) share-based compensation; and liabilities for(x) income tax uncertainties. Actual results could differ from those estimates.
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
(d) Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Veecothe Company and its subsidiaries. Intercompany itemsbalances and transactions have been eliminated in consolidation.
Revenue Recognition
We recognize revenue based on current accounting guidance provided by Companies acquired during each reporting period are reflected in 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 selling price.
We consider a broad array of facts and circumstances when evaluating each of our sales arrangements in determining when to recognize revenue, including specific termsresults of the purchase order, contractual obligations toCompany effective from their respective dates of acquisition through the customer, the complexityend of the customer's post-delivery acceptance provisions, customer creditworthinessreporting period.
(e) Foreign Currencies
Assets and liabilities of the installation process. Management also considersCompany’s foreign subsidiaries that operate using local functional currencies are translated using the party responsible for installation, whether thereexchange rates in effect at the balance sheet date. Results of operations are process specification requirements which need to be demonstrated before final sign off and payment, whether Veeco can replicatetranslated using monthly average exchange rates. Adjustments arising from the field testing conditions and procedurestranslation of the foreign currency financial statements of the Company’s subsidiaries into U.S. dollars, including intercompany transactions of a long-term nature, are reported as currency translation adjustments in our factory and our past experience with demonstrating and installing a particular system. Sales arrangements“Accumulated other comprehensive income” in the Consolidated Balance Sheets. Foreign currency transaction gains or losses are reviewed on a case-by-case basis; however,included in “Other, net” in the Company's revenue recognition protocol for established systems is as described below.Consolidated Statements of Operations.
System
(f) Revenue Recognition
The Company recognizes revenue is generally recognized upon shipment or delivery provided title and riskwhen all of loss has passed to the customer,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,determinable; and collectability is reasonably assuredassured. Revenue is recorded including shipping 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 amounthandling costs and excluding applicable taxes related to sales. A significant portion of the sales arrangementCompany’s revenue 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 andderived from contractual arrangements with customers do notthat have multiple elements, such as systems, upgrades, components, spare parts, maintenance, and service plans. For sales arrangements that contain provisions for rightmultiple elements, the arrangement is split into separate units of returnaccounting if the individually delivered elements have value to the customer on a standalone basis. The Company also evaluates whether multiple transactions with the same customer or forfeiture, refundrelated parties should be considered part of a multiple element arrangement, based on an assessment of whether the contracts or agreements are negotiated or
F-8
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
executed within a short time frame of each other purchase price concessions. Inor if there are indicators that the rare instances where such provisionscontracts are included,negotiated in contemplation of one another. When there are separate units of accounting, the Company defers allallocates revenue until customerto each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or the best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. The Company uses BESP for the majority of the elements in its arrangements.
The Company considers many facts when evaluating each of its sales arrangements to determine the timing of revenue recognition including its contractual obligations, the customer’s creditworthiness, and the nature of the customer’s post-delivery acceptance is achieved. In cases where products are sold with a retention of 10% to 20%, which is typically payable by the customer when installation andprovisions. The Company’s system sales arrangements, including certain upgrades, generally include field acceptance provisions are completed,that may include functional or mechanical test procedures. For the majority of the arrangements, a customer source inspection of the system is performed in the Company’s facility or test data is sent to the customer hasdocumenting that the rightsystem is functioning to withhold this payment untilthe agreed upon specifications prior to delivery. Historically, such source inspection or test data replicates the field acceptance provisions have been achieved. We deferthat are performed at the greatercustomer’s site prior to final acceptance of the system. As such, the Company objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery and, therefore, revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date, subject to the retention amount or the estimated selling price of the installation on systems that we recognize revenue at the time of shipment or delivery.
constraint described below. For new products, new applications of existing products or for products with substantive customer acceptance provisions where performancethe Company cannot be fully assessedobjectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to meeting agreed upon specifications atdelivery, revenue and the customer site, revenue isassociated costs are deferred as deferred profit in the accompanying Consolidated Balance Sheets and fully recognized upon completion of installation andthe receipt of final customer acceptance.acceptance, assuming all other revenue recognition criteria have been met.
Our systems
The Company’s system sales arrangements, including certain upgrades, generally do not contain provisions for right of return, forfeiture, refund, or other purchase price concession. In the rare instances where such provisions are principally sold to manufacturers in the HB-LED, the data storage, solar and other industries. Salesincluded, all revenue is deferred until such rights expire. The 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
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
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, 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 theinstallation. 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. We haveconnections subsequent to factory acceptance. The Company has 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 Company to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, installation is deemed to be inconsequential or perfunctory relative to the system sale as a whole, and as a result, installation service is not considered a separate element of the arrangement. As such, the Company accrues the cost of the installation at the time of revenue recognition for the system.
In Japan, where ourmany cases the Company’s 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.
The Company’s contractual terms with customers in Japan generally specify that title and risk and rewards of loss and title transfersownership transfer upon customer acceptance,acceptance. As a result, for customers in Japan, revenue is recognized upon the receipt of written customer acceptance. During the fourth quarter of fiscal 2013, the Company began using a distributor for almost all of its product and service sales to customers in Japan. Title passes to the customer is billeddistributor upon shipment, however, due to customary local business practices, the risk and rewards of ownership of the system transfers to the end-customers upon their acceptance. As such, the Company recognizes revenue upon receipt of written customer acceptance.acceptance from the end customer.
Revenue
The Company recognizes revenue related to maintenance and service contracts is recognized ratably over the applicable contract term. ComponentThe Company recognizes revenue from the sales of components, spare parts, and spare part revenue is recognizedspecified service engagements 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 maturitiesIncremental direct costs incurred related to the acquisition of three months or less when purchased. Such items may include casha customer contract, such as sales commissions, are expensed as incurred, even if the related revenue is deferred 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,accordance 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.above policy.
F-9
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(g) Warranty Costs
The Company typically provides standard warranty coverage on its systems for one year from the date of final acceptance by providing labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost when revenue is recognized on the related system. Warranty cost is included in “Cost of sales” in the Consolidated Statements of Operations. The estimated warranty cost is based on the Company’s historical experience with its systems and regional labor costs. The Company calculates the average service hours by region and parts expense per system utilizing actual service records to determine the estimated warranty charge. The Company updates its warranty estimates on a semiannual basis when the actual product performance and/or field expense differs from original estimates.
(h) Shipping and Handling Costs
Shipping and handling costs are expenses incurred to move, package and prepare the Company’s products for shipment and to move the products to a customer’s designated location. These costs are generally comprised of payments to third-party shippers. Shipping and handling costs are included in “Cost of sales” in the Consolidated Statements of Operations.
(i) Research and Development Costs
Research and development costs are expensed as incurred and include charges for the development of new technology and the transition of existing technology into new products or services.
(j) Advertising Expense
The cost of advertising is expensed as incurred and totaled $0.6 million, $0.5 million, and $0.8 million during 2014, 2013 and 2012, respectively.
(k) Accounting for Share-Based Compensation
Share-based awards exchanged for employee services are accounted for under the fair value method. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award. The expense for awards expected to vest is recognized over the employee’s requisite service period (generally the vesting period of the award). Awards expected to vest are estimated based on a combination of historical experience and future expectations.
The Company has elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.
The Company uses the Black-Scholes option-pricing model to compute the estimated fair value of option awards. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected option term, and risk-free interest rates. See Note 16, “Stock Plans,” for additional information.
In addition to stock options, restricted share awards (“RSAs”) and restricted stock units (“RSUs”) with time-based vesting, the Company issues performance share units and awards (“PSUs” and “PSAs”). Compensation cost for PSUs and PSAs is recognized over the requisite service period based on the timing and expected level of achievement of the performance targets. A change in the assessment of the probability of a performance condition being met is recognized in the period of the change in estimate. At the conclusion of the performance period, the applicable number of shares of RSAs, RSUs, or unrestricted shares granted may vary based on the level of achievement of the performance targets.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate
December 31, 2011F-10
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
is recognized in income in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to uncertain tax positions in income tax expense. See Note 18, “Income Taxes,” for additional information.
(m) Concentration of Credit Risk
Financial instruments whichthat potentially subject usthe Company to concentrations of credit risk consist primarily of accounts receivable, short-term investments and cash and cash equivalents. We perform ongoing credit evaluationsequivalents, investments, derivative financial instruments used in hedging activities, and accounts receivable. The Company invests in a variety of our customersfinancial instruments 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 monitorby policy, limits the amount of credit exposure towith any one financial institution or commercial issuer.
Inventories The Company has not experienced any material credit losses on its investments.
Inventories are stated at
The Company maintains an allowance reserve for potentially uncollectible accounts for estimated losses resulting from the lowerinability of cost (principally first-in, first-out method) or market. Managementits customers to make required payments. The Company evaluates the need to record adjustmentsits allowance for impairment of inventorydoubtful accounts based on a quarterly basis. Our policy iscombination of factors. In circumstances where specific invoices are deemed to assessbe uncollectible, 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 usageCompany provides a specific allowance for bad debt against the next 12 months' requirements is written downamount due to its estimated market value, if less than its cost. Inherent inreduce 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
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.
Pursuantnet recognized receivable to the aforementioned guidance 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 two reporting units that are required to be reviewed for impairment. The reporting units are Data Storage and LED & Solar. 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
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
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
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 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 flowreasonably expected to be generated bycollected. The Company also provides allowances based on its write-off history. The allowance for doubtful accounts totaled $0.7 million and $2.4 million at December 31, 2014 and 2013, respectively.
To further mitigate the asset. IfCompany’s exposure to uncollectable accounts, the carrying amountCompany may request certain customers provide a negotiable irrevocable letter of an asset exceedscredit drawn on a reputable financial institution. These irrevocable letters of credit are typically issued to mature between zero and 90 days from the date the documentation requirements are met, typically when a system ships or upon receipt of final acceptance from the customer. The Company, at its estimated future cash flows, an impairment charge is recognized bydiscretion, may monetize these letters of credit on a non-recourse basis after they become negotiable, but before maturity. The fees associates with the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Cost Method of Accounting for Investments
Investee companies not accounted for under the consolidation or the equity method of accountingmonetization are accounted for under the cost method of accounting. Under this method, the Company's share of the earnings or losses of such investee companies is not included in “Selling, general, and administrative” in the Consolidated Balance Sheet or StatementStatements of Operations. However, impairment charges are recognized inOperations and were insignificant for the Consolidated Statement of Operations. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
fiscal years ended December 31, 20112014, 2013, and 2012.
(n) Fair Value of Financial Instruments
We believe the
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 for footnote disclosure purposes, including current maturities, is estimated using a discounted cash flow analysis based on the estimated current incremental borrowing rates for similar types of securities.
Derivative Financial Instruments(o) Cash, Cash Equivalents, and Short-Term Investments
We use derivative
All financial instruments to minimize the impactpurchased with an original maturity 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 tradingthree months 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 credit risk.
The aggregate foreign currency exchange (loss) gain included in determining consolidated results of operations was approximately $(1.0) million, $1.3 million and $(0.7) million in 2011, 2010 and 2009, respectively. Included in the aggregate foreign currency exchange (loss) gain were gains relating to forward contracts of $0.5 million, $0.1 million and $0.1 million in 2011, 2010 and 2009, respectively. These amounts were recognized and are included in other, net in the accompanying Consolidated Statements of Operations.
As of December 31, 2011, there were no gains or losses related to forward contracts included in prepaid expenses and other current assets or accrued expenses and other current liabilities. 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. Monthly forward contracts with a notional amount of $3.6 million, entered into in December 2011 for January 2012, will be settled in January 2012.
The weighted average notional amount of derivative contracts outstanding during the year ended December 31, 2011 was approximately $10.3 million.
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 losses resulting from the translation of foreign financial statements and the effect of exchange rates on intercompany 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.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
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
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 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.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
Advertising Expense
The cost of advertising is expensed as of the first showing of each advertisement. We incurred $1.4 million, $1.3 million and $0.6 million in advertising expenses during 2011, 2010 and 2009, 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 effectless 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 yieldpurchase 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.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
Recent Accounting Pronouncements
Balance Sheet: In December 2011, the FASB issued amended guidance related to the Balance Sheet (Disclosures about Offsetting Assets and Liabilities). This amendment requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The amendment should be applied retrospectively. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
Comprehensive Income: In December 2011, the FASB issued amended guidance related to Comprehensive Income. In order to defer only those changes in the June amendment (addressed below) that relate to the presentation of reclassification adjustments, the FASB issued this amendment to supersede certain pending paragraphs in the June amendment. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before the June amendment. All other requirements are not affected, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
In June 2011, the FASB issued amended guidance related to Comprehensive Income. This amendment allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendment eliminates the option to present the components of other comprehensive income as part of the statement of equity. The amendments do not change theconsidered cash equivalents. Such items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendment should be applied retrospectively. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
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
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
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 a material acquisition occurs.
Intangibles—Goodwill and Other: In September 2011, the FASB issued amended guidance related to Intangibles—Goodwill and Other: Testing Goodwill for Impairment. The amendment is intended to simplify how entities test goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
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 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
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
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 adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In May 2011, the FASB issued amended guidance related to Fair Value Measurements. This amendment represents the converged guidance of the FASB and the International Accounting Standards Board (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in this amendment, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early application is not 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 adoption of this guidance did not have a material impact on the Company's 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 adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
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, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Net income (loss) | | $ | 127,987 | | $ | 361,760 | | $ | (15,632 | ) |
Net loss attributable to noncontrolling interest | | | — | | | — | | | (65 | ) |
| | | | | | | | |
Net income (loss) from continuing operations attributable to Veeco | | $ | 127,987 | | $ | 361,760 | | $ | (15,567 | ) |
| | | | | | | | |
Income (loss) from continuing operations per common share attributable to Veeco: | | | | | | | | | | |
Basic | | $ | 3.23 | | $ | 9.16 | | $ | (0.48 | ) |
| | | | | | | | |
Diluted | | $ | 3.11 | | $ | 8.51 | | $ | (0.48 | ) |
| | | | | | | | |
Basic weighted average shares outstanding | | | 39,658 | | | 39,499 | | | 32,628 | |
Dilutive effect of stock options, restricted stock awards and units and convertible debt | | | 1,497 | | | 3,015 | | | — | |
| | | | | | | | |
Diluted weighted average shares outstanding | | | 41,155 | | | 42,514 | | | 32,628 | |
| | | | | | | | |
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 0.8 million common equivalent shares for the year ended December 31, 2009 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 years ended December 31, 2011 and 2010.
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 and 2010 had a dilutive effect of 0.6 million shares and 1.2 million shares, respectively. For the year ended December 31, 2009, the assumed conversion was anti-dilutive, as the average stock price was below the conversion price of $27.23 for the period.
3. Discontinued Operations
CIGS Solar Systems Business
On July 28, 2011, we announced a plan to discontinue our CIGS solar systems business. The action, which was completed on September 27, 2011 and impacted approximately 80 employees, was in response to the dramatically reduced cost of mainstream solar technologies driven by significant
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
reductions in prices, large industry investment, a lower than expected end market acceptance for CIGS technology and technical barriers in scaling CIGS. This business was previously included as part of our LED & Solar segment.
Accordingly, the results of operations for the CIGS solar systems business have been recorded as discontinued operations in the accompanying consolidated statements of operations for all periods presented. During the year ended December 31, 2011, total discontinued operations 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 Corporation ("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 and the related assets and liabilities are classified as held for 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 million of proceeds was held in escrow and was 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. This restriction lapsed on October 6, 2011. 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.
The following is a summary of the net assets sold as 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 | |
| | | | |
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
Summary information related to discontinued operations is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2011 | | Year ended December 31, 2010 | | Year ended December 31, 2009 | |
|---|
| | Solar Systems | | Metrology | | Total | | Solar Systems | | Metrology | | Total | | Solar Systems | | Metrology | | Total | |
|---|
Net sales | | $ | — | | $ | — | | $ | — | | $ | 2,339 | | $ | 92,011 | | $ | 94,350 | | $ | 150 | | $ | 97,737 | | $ | 97,887 | |
Cost of sales | | | 30,904 | | | — | | | 30,904 | | | 8,000 | | | 47,822 | | | 55,822 | | | 3,174 | | | 57,410 | | | 60,584 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | (30,904 | ) | | — | | | (30,904 | ) | | (5,661 | ) | | 44,189 | | | 38,528 | | | (3,024 | ) | | 40,327 | | | 37,303 | |
Total operating expenses | | | 59,420 | | | 1,561 | | | 60,981 | | | 20,018 | | | 45,024 | | | 65,042 | | | 9,339 | | | 43,030 | | | 52,369 | |
| | | | | | | | | | | | | | | | | | | | |
Operating loss | | $ | (90,324 | ) | $ | (1,561 | ) | $ | (91,885 | ) | $ | (25,679 | ) | $ | (835 | ) | $ | (26,514 | ) | $ | (12,363 | ) | $ | (2,703 | ) | $ | (15,066 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net (loss) income from discontinued operations, net of tax | | $ | (61,453 | ) | $ | (1,062 | ) | $ | (62,515 | ) | $ | (16,645 | ) | $ | 101,229 | | $ | 84,584 | | $ | (12,452 | ) | $ | (1,403 | ) | $ | (13,855 | ) |
| | | | | | | | | | | | | | | | | | | | |
Liabilities of discontinued segment held for sale, totaling $5.4 million, as of December 31, 2011 and 2010, consist of the deferred gain related to the assets in China.
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.
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 inliquid money market interest rates)accounts, U.S. treasuries, government agency securities, and unobservable (e.g., changes in historical company data) inputs.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
The major categories of assets and liabilities measured on a recurring basis, at fair value, as of December 31, 2011 and 2010 are as follows (in millions):
| | | | | | | | | | | | | |
| | December 31, 2011 | |
|---|
| | Level 1 | | Level 2 | | Level 3 | | Total | |
|---|
Treasury bills | | $ | 70.2 | | $ | 20.0 | | $ | — | | $ | 90.2 | |
FDIC insured corporate bonds | | | 187.5 | | | — | | | — | | | 187.5 | |
Commercial paper | | | 15.9 | | | 81.2 | | | — | | | 97.1 | |
Money market instruments | | | — | | | 0.2 | | | — | | | 0.2 | |
| | | | | | | | | | |
Total | | $ | 273.6 | | $ | 101.4 | | $ | — | | $ | 375.0 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | |
CDARS, commercial paper and treasury billscorporate debt. Investments that are classified as cash equivalents are carried at cost, which approximates marketfair value. Accordingly, no gains or losses (realized/unrealized) have been incurred for
A portion of the Company’s cash equivalents. All investmentsand cash equivalents is held by its subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which may not be the U.S. dollar. Approximately 81% and 71% of cash and cash equivalents were maintained outside the United States at December 31, 2014 and 2013, respectively.
Marketable securities are generally classified as available-for-sale contain quoted pricesfor use in active markets.
Derivative instruments include foreign currency forward contracts to hedge certain foreign currency transactions. Derivative instrumentscurrent operations, if required, and 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,reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of December 31, 2011stockholders’ equity under the caption “Accumulated other comprehensive income.” These securities can include U.S. treasuries, government agency securities, corporate debt, and 2010commercial paper, all with maturities of greater than three months when purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are as follows (other than temporary are included in millions“Other, net” in the Consolidated Statements of Operations. The specific identification method is used to determine the realized gains and losses on investments.
):F-11
| | | | | | | | | | | | | |
| | December 31, 2011 | |
|---|
| | Level 1 | | Level 2 | | Level 3 | | Total | |
|---|
Property, plant and equipment, net | | $ | — | | $ | — | | $ | 86.1 | | $ | 86.1 | |
Goodwill | | | — | | | — | | | 55.8 | | | 55.8 | |
Intangible assets, net | | | — | | | — | | | 25.9 | | | 25.9 | |
| | | | | | | | | | |
Total | | $ | — | | $ | — | | $ | 167.8 | | $ | 167.8 | |
| | | | | | | | | | |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
(p) Inventories
| | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | |
Total | | $ | — | | $ | — | | $ | 111.2 | | $ | 111.2 | |
| | | | | | | | | | |
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. The Company reviews and sets standard costs on a periodic basis at current manufacturing costs in order to approximate actual costs. The Company assesses the valuation of all inventories, including manufacturing raw materials, work-in-process, finished goods, and spare parts, each quarter. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated market value if less than cost. Estimates of market value include, but are not limited to, management’s forecasts related to the Company’s future manufacturing schedules, customer demand, technological and/or market obsolescence, general market conditions, possible alternative uses, and ultimate realization of excess inventory. If future customer demand or market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made. Inventory acquired as part of a business combination is recorded at fair value on the date of acquisition. See Note 5, “Business Combinations,” for additional information.
5.(q) Business Combinations
On April 4, 2011, we purchased
The Company allocates the fair value of the purchase consideration of the Company’s acquisitions to the tangible assets, intangible assets, including in-process research and development (“IPR&D”), if any, and liabilities assumed, based on estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When a privately-held company which supplies certain components to oneproject underlying reported IPR&D is completed, the corresponding amount of our businessesIPR&D is amortized over the asset’s estimated useful life. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred in “Selling, General, and Administrative” in the Consolidated Statements of Operations. See Note 5, “Business Combinations,” for $28.3 millionadditional information.
(r) Goodwill and Indefinite-Lived Intangibles
Goodwill is an asset representing the future economic benefits arising from assets acquired in cash. As a resultbusiness combination that are not individually identified and separately recognized. Goodwill is measured as the excess of this purchase, wethe consideration transferred over the net of the acquisition-date amounts of the identifiable assets 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 acquisitionliabilities assumed. Intangible assets with indefinite useful lives are included in our LED & Solar segmentmeasured at their respective fair values as of the acquisition date. We have determinedIntangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that this acquisition does not constitute a material business combinationpoint in time. Goodwill and thereforeindefinite-lived intangibles are not including pro forma financial statementsamortized into results of operations but instead are evaluated for impairment. The Company performs the evaluation in this report.the fourth quarter of each fiscal year or more frequently if impairment indicators arise.
6. Balance Sheet Information
Short-term Investments
Available-for-sale securities consistThe Company first performs a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount, and, if so, the Company then applies the two-step impairment test. The two-step impairment test first compares the fair value of the following (in thousands):Company’s reporting units to their carrying amount. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying amount of the reporting unit exceeds its fair value, the Company determines the implied fair value of the reporting unit’s goodwill and, if the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference.
| | | | | | | | | | | | | |
| | December 31, 2011 | |
|---|
| | Amortized
Cost | | Gains in Accumulated
Other Comprehensive
Income | | Losses in Accumulated
Other Comprehensive
Income | | Estimated
Fair Value | |
|---|
Commercial paper | | $ | 15,889 | | $ | 6 | | $ | — | | $ | 15,895 | |
FDIC insured corporate bonds | | | 187,336 | | | 169 | | | — | | | 187,505 | |
Treasury bills | | | 70,147 | | | 44 | | | — | | | 70,191 | |
| | | | | | | | | | |
Total available-for-sale securities | | $ | 273,372 | | $ | 219 | | $ | — | | $ | 273,591 | |
| | | | | | | | | | |
During
The Company determines the year ended December 31, 2011, available-for-sale securities were sold for total proceedsfair value of $707.6 million. The gross realized gains on these sales were $0.4 million for the year ended December 31, 2011. For purpose of determining gross realized gains, the cost of securities sold isits reporting units based on specific identification.income and/or market approaches. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenues and expenses, working capital requirements, residual growth rates, discount rates, and future economic and market conditions. The net unrealized holding gainCompany considers historical data, current internal estimates, and market growth trends when developing financial projections. Market participant assumption estimates consider the information being used internally for business planning purposes, however, actual future results may differ from those estimates. Changes in judgments on available-for-sale securities amounted to $0.1 million forany of these factors could materially affect the year ended December 31, 2011, and has been included in accumulated other comprehensive income. The tax impact onestimated value of the unrealized gains, which was excluded from the table above, was $0.1 million.reporting unit.
F-12
| | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | |
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(s) Long-Lived Assets and Cost Method Investment
Definite-lived intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, and software licenses, and are initially recorded at fair value. Definite-lived intangibles are amortized over their estimated useful lives for periods up to 17 years, in a method reflecting the pattern in which the economic benefits are consumed, or straight-lined if such pattern cannot be reliably determined.
Property, plant and equipment are recorded at cost. Depreciation expense is calculated based on the estimated useful lives of the assets by using the straight-line method. Amortization of leasehold improvements is recognized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Long-lived assets and cost method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, a recoverability test is performed utilizing undiscounted cash flows expected to be generated by that asset or asset group compared to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models or, when available, quoted market values and third-party appraisals.
(t) Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09: Revenue from Contracts with Customers. The amendments in this ASU require that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard outlines a five-step model to be used to make the revenue recognition determination and requires new financial statement disclosures. The standard is effective for interim and annual periods beginning after December 31, 201115, 2016 and allows entities to choose among different transition alternatives. The Company is evaluating the impact of adopting the standard on its consolidated financial statements and related financial statement disclosures, and has not yet determined which method of adoption will be selected.
During
The Company has evaluated other pronouncements recently issued but not yet adopted and does not believe the adoption of these pronouncements will have a material impact on the consolidated financial statements.
Note 2 — Income (Loss) Per Common Share
Basic income (loss) per common share is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted income per common share is calculated by dividing net income available to common stockholders by using the weighted average number of common shares and common share equivalents outstanding during the period. The computations of basic and diluted income (loss) per common share are as follows:
| | Year ended December 31, | |
| | 2014 | | 2013 | | 2012 | |
| | (in thousands, except per share amounts) | |
Net income (loss) | | $ | (66,940 | ) | $ | (42,263 | ) | $ | 30,928 | |
Net income (loss) per common share: | | | | | | | |
Basic | | $ | (1.70 | ) | $ | (1.09 | ) | $ | 0.80 | |
Diluted | | $ | (1.70 | ) | $ | (1.09 | ) | $ | 0.79 | |
| | | | | | | |
Basic weighted average shares outstanding | | 39,350 | | 38,807 | | 38,477 | |
Effect of potentially dilutive share-based awards | | — | | — | | 574 | |
Diluted weighted average shares outstanding | | 39,350 | | 38,807 | | 39,051 | |
F-13
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
For the year ended December 31, 2010, available-for-sale securities2014 and 2013, 0.7 million and 0.6 million common equivalent shares, respectively, were sold for total proceedsexcluded from the computation of $246.6 million.diluted net loss per share as their effect would be anti-dilutive since the Company incurred a net loss. The gross realized gains on these sales were minimal fordilutive effect of outstanding options and restricted stock units is reflected in diluted income per common share by application of the yeartreasury stock method. For the years ended December 31, 2010. For purpose of determining gross realized gains,2014, 2013, and 2012, respectively, approximately 1.6 million, 1.3 million and 1.3 million potentially dilutive securities underlying restricted stock awards, restricted stock units, and options to purchase common stock were excluded from the cost of securities soldcalculation since they would have had an antidilutive effect on diluted income per common share.
Note 3 — Fair Value Measurements
Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy:
·Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
·Level 2: Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
·Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on specific identification.the lowest level of any input that is significant to the fair value measurement. The net unrealized holding gainCompany has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on available-for-sale securities amounted to $0.1 million for the year ended December 31, 2010,estimated fair value amounts.
The following table presents the Company’s assets and has been included in accumulated other comprehensive income.
Contractual maturities of available-for-sale debt securities(liabilities) that were measured at fair value on a recurring basis at December 31, 20112014 and 2013:
| | December 31, 2014 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
| | (in thousands) | |
U.S. treasuries | | $ | 81,527 | | $ | — | | $ | — | | $ | 81,527 | |
Corporate debt | | — | | 39,045 | | — | | 39,045 | |
Assets held for sale | | — | | 6,000 | | — | | 6,000 | |
| | | | | | | | | | | | | |
| | December 31, 2013 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
| | (in thousands) | |
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 | ) |
| | | | | | | | | | | | | |
Highly liquid investments with maturities of three months or less are classified as follows (cash equivalents and are carried at cost, which approximates fair value. All investments classified as available-for-sale are recorded at fair value within short-term
in thousands):F-14
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
investments in the Consolidated Balance Sheets. The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets. The Company’s investments classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency.
A reconciliation of the amounts classified as Level 3 is as follows:
| | Contingent | |
| | Consideration | |
| | (in thousands) | |
Balance as of December 31, 2013 | | $ | (29,368 | ) |
Fair value adjustment | | 29,368 | |
Balance as of December 31, 2014 | | $ | — | |
The Company estimated the fair value of the contingent consideration by applying various probabilities and discount factors to each of the performance milestones. At December 31, 2013, contingent consideration consisted of $20.1 million and $9.3 million in current and noncurrent other liabilities, respectively, in the Consolidated Balance Sheets. During 2014, the Company determined that the agreed upon post-closing milestones were not met and reversed the fair value of the liability, which is included in “Changes in contingent consideration” in the Consolidated Statements of Operations. Refer to Note 5, “Business Combinations,” for additional information.
Note 4 — Investments
At December 31, 2014 and 2013 the amortized cost and fair value of marketable securities were as follows:
| | | | | | Gross | | | Gross | | | Estimated | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | | Cost | | | Gains | | | Losses | | | Value | |
| | | (in thousands) | |
December 31, 2014 | | | | | | | | | |
U.S. treasuries | | $ | 81,506 | | $ | 27 | | $ | (6 | ) | $ | 81,527 | |
Corporate debt | | 39,031 | | 20 | | (6 | ) | 39,045 | |
Total available-for-sale securities | | $ | 120,537 | | $ | 47 | | $ | (12 | ) | $ | 120,572 | |
| | | | | | | | | |
December 31, 2013 | | | | | | | | | |
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 | |
Available-for-sale securities in a loss position at December 31, 2014 and 2013 were as follows:
F-15
| | | | |
| | Estimated
Fair Value | |
|---|
Due in one year or less | | $ | 37,088 | |
Due in 1-2 years | | | 236,503 | |
| | | | |
Total investments in debt securities | | $ | 273,591 | |
| | | | |
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
| | | December 31, 2014 | | | December 31, 2013 | |
| | | Estimated | | | Gross | | | Estimated | | | Gross | |
| | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
| | | Value | | | Losses | | | Value | | | Losses | |
| | (in thousands) | |
U.S. treasuries | | $ | 35,001 | | $ | (6 | ) | $ | 29,068 | | $ | (1 | ) |
Corporate debt | | 13,069 | | (6 | ) | 37,654 | | (36 | ) |
Total | | $ | 48,070 | | $ | (12 | ) | $ | 66,722 | | $ | (37 | ) |
As of December 31, 2014 and 2013, there were no short-term investments that had been in a continuous loss position for more than 12 months.
The contractual maturities of securities classified as available-for-sale at December 31, 2014 were as follows:
| | | December 31, 2014 | |
| | | | | | Estimated | |
| | | Amortized | | | Fair | |
| | | Cost | | | Value | |
| | | (in thousands) | |
Due in one year or less | | $ | 74,710 | | $ | 74,718 | |
Due after one year through two years | | 45,827 | | 45,854 | |
Total | | $ | 120,537 | | $ | 120,572 | |
Actual maturities may differ from contractual maturities because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Restricted Cash
As of Realized gains for the fiscal years ended December 31, 2011,2014 and 2013 were $0.1 million in each period, and are included in “Other, net” in the Consolidated Statements of Operations. There were minimal realized gains for the year ended December 31, 2012 and no realized losses in any of the three years.
Restricted Cash
The total amount of restricted cash consists of $0.6at December 31, 2014 and 2013 was $0.5 million and $2.7 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.
As
Cost Method Investment
The Company maintains certain investments in support of its strategic business objectives, including a non-marketable cost method investment. The Company’s ownership interest is less than 20% of the investee’s voting stock, and the Company does not exert significant influence, therefore the investment is recorded at cost. The carrying value of the investment was $19.4 million and $16.9 million at December 31, 2010, restricted cash consists of $22.9 million that relates2014 and 2013, respectively and is included in “Other assets” on the Consolidated Balance Sheet. The investment is subject to a periodic impairment review; however, there are no open-market valuations, and the proceeds received from the sale of our Metrology segment. This cash was held in escrow and was restricted from use for one year from the closing dateimpairment analysis requires significant judgment. The analysis includes assessments of the transaction (see Note 3). Additionally, restrictedinvestee’s financial condition, the business outlook for its products and technology, its projected results and cash also consistedflow, the likelihood of $53.2 million which serves as collateral for bank guarantees that provide financial assurance thatobtaining subsequent rounds of financing, and the impact of any relevant contractual equity preferences held by 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 netothers. Fair value of the allowance for doubtful accountsinvestment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of $0.5 million as of December 31, 2011 and December 31, 2010.the investment. No such events or circumstances are present.
InventoriesF-16
| | | | | | | | |
| | December 31,
2011 | | December 31,
2010 | |
|
|---|
Raw materials | | $ | 57,169 | | $ | 49,953 | | |
Work in process | | | 20,118 | | | 33,181 | | |
Finished goods | | | 36,147 | | | 25,353 | | |
| | | | | | | |
| | $ | 113,434 | | $ | 108,487 | | |
| | | | | | | |
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 5 — Business Combinations
PSP
On December 31, 2011
Property, Plant4, 2014 the Company acquired 100% of Solid State Equipment, LLC (“SSEC”) and Equipment
| | | | | | | | |
| | December 31, | |
|
|---|
| | Estimated
Useful Lives |
|---|
| | 2011 | | 2010 |
|---|
Land | | $ | 12,535 | | $ | 7,274 | | |
Buildings and improvements | | | 34,589 | | | 30,731 | | 10-40 years |
Machinery and equipment | | | 102,241 | | | 73,173 | | 3-10 years |
Leasehold improvements | | | 6,025 | | | 2,276 | | 3-7 years |
| | | | | | | |
Gross property, plant, and equipment at cost | | | 155,390 | | | 113,454 | | |
Less: accumulated depreciation and amortization | | | 69,323 | | | 71,134 | | |
| | | | | | | |
Net property, plant, and equipment at cost | | $ | 86,067 | | $ | 42,320 | | |
| | | | | | | |
Forrebranded the years ended December 31, 2011, 2010 and 2009, depreciation expense was $8.2 million, $7.1 million and $8.3 million, respectively.
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 2011 and 2010, 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 thebusiness Veeco Precision Surface Processing (“PSP”). 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, 2011 and 2010, respectively.
Changes in our goodwill are as follows (in thousands):
| | | | | | | |
| | Year ended
December 31, | |
|---|
| | 2011 | | 2010 | |
|---|
Beginning Balance | | $ | 52,003 | | $ | 52,003 | |
Write-off (see Note 3) | | | (10,836 | ) | | — | |
Acquisition (see Note 5) | | | 14,661 | | | — | |
| | | | | | |
Ending Balance | | $ | 55,828 | | $ | 52,003 | |
| | | | | | |
As of December 31, 2011 and 2010, we had $2.9 million of indefinite-lived intangible assets consisting of trademarks and tradenames, which arePSP operations have been included in the accompanying Consolidated Balance Sheetsconsolidated financial statements since the date of acquisition. PSP designs and develops wafer wet processing capabilities. Target market applications include semiconductor advanced packaging (including 2.5D and 3D ICs), MEMS, compound semiconductor (rf, power electronics, LED and others), data storage, photomask, and flat panel displays. PSP further extends the Company’s penetration in the captioncompound semiconductor and MEMS markets and represents the Company’s entry into the advanced packaging market.
The acquisition date fair value of the consideration totaled $145.5 million, net of cash acquired, which consisted of the following:
| | Acquisition Date | |
| | (December 4, 2014) | |
| | (in thousands) | |
Amount paid, net of cash acquired | | $ | 145,382 | |
Working capital adjustment | | 88 | |
Acquisition date fair value | | $ | 145,470 | |
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The Company utilized third-party valuations to estimate the fair value of certain of the acquired tangible and intangible assets. The values assigned to certain acquired assets net.and liabilities are preliminary and may be adjusted as further information becomes available during the allocation period of up to 12 months from the acquisition date.
| | Acquisition Date | |
| | (December 4, 2014) | |
| | (in thousands) | |
Accounts receivable | | $ | 9,383 | |
Inventory | | 13,812 | |
Other current assets | | 463 | |
Property, plant, and equipment | | 6,912 | |
Intangible assets | | 79,810 | |
Total identifiable assets acquired | | 110,380 | |
| | | |
Accounts payable and accrued expenses | | 6,473 | |
Customer deposits | | 6,039 | |
Deferred tax liability, net | | 2,705 | |
Other | | 1,089 | |
Total liabilities assumed | | 16,306 | |
| | | |
Net identifiable assets acquired | | 94,074 | |
Goodwill | | 51,396 | |
Net assets acquired | | $ | 145,470 | |
The gross contractual value of the acquired accounts receivable was approximately $10.5 million. The fair value of the accounts receivables as indicated above is the amount expected to be collected by the Company. Goodwill generated from the acquisition is primarily attributable to expected synergies from future growth and strategic advantages provided through the expansion of product offerings, as well as assembled workforce. Approximately 80% of the value of the goodwill is expected to be deductible for income tax purposes.
F-17
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
Intangible Assets
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2011 | | December 31, 2010 | |
|---|
| | Purchased
technology | | Other
intangible
assets | | Total
intangible
assets | | Purchased
technology | | Other
intangible
assets | | Total
intangible
assets | |
|---|
Gross intangible assets | | $ | 109,248 | | $ | 19,635 | | $ | 128,883 | | $ | 98,473 | | $ | 22,734 | | $ | 121,207 | |
Less accumulated amortization | | | (89,620 | ) | | (13,381 | ) | | (103,001 | ) | | (86,376 | ) | | (17,938 | ) | | (104,314 | ) |
| | | | | | | | | | | | | | |
Intangible assets, net | | $ | 19,628 | | $ | 6,254 | | $ | 25,882 | | $ | 12,097 | | $ | 4,796 | | $ | 16,893 | |
| | | | | | | | | | | | | | |
The estimated aggregate amortization expense forclasses of intangible assets with definiteacquired and the estimated useful lives forlife of each of the next five fiscal yearsclass is as follows (in thousands):
| | | | |
2012 | | $ | 4,538 | |
2013 | | | 3,286 | |
2014 | | | 2,961 | |
2015 | | | 2,859 | |
2016 | | | 2,671 | |
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, 2011 and 2010 of our definite-lived intangible and long-lived assets. No impairment existed in any of our reporting units.
Accrued Expenses
| | | | | | | |
| | December 31, | |
|---|
| | 2011 | | 2010 | |
|---|
Payroll and related benefits | | $ | 19,017 | | $ | 27,374 | |
Sales, use, income and other taxes | | | 6,315 | | | 4,914 | |
Customer deposits and advanced billings | | | 57,075 | | | 129,225 | |
Warranty | | | 9,778 | | | 9,238 | |
Restructuring liability | | | 956 | | | 714 | |
Other | | | 14,515 | | | 11,545 | |
| | | | | | |
| | $ | 107,656 | | $ | 183,010 | |
| | | | | | |
Accrued Warranty
We estimate the costs that may be incurred under the warranty we provide for our products and recognize a liabilitypresented in the amount of such costs attable below:
| | Acquisition Date | |
| | (December 4, 2014) | |
| | Amount | | Useful life | |
| | (in thousands) | | | |
Technology | | $ | 39,950 | | | 10 years | |
Customer relationships | | 34,310 | | | 14 years | |
Backlog | | 3,340 | | | 6 months | |
Non-compete agreements | | 1,130 | | | 2 years | |
Trademark and tradenames | | 1,080 | | | 1 year | |
Intangible assets acquired | | $ | 79,810 | | | |
The Company determined the time the related revenue is recognized. Factors that affect our warranty liability include product failure rates, material usage and labor costs incurred
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
in correcting product failures during the warranty period. Changes in our warranty liability during the year are as follows:
| | | | | | | |
| | Year ended
December 31, | |
|---|
| | 2011 | | 2010 | |
|---|
Balance as of the beginning of year | | $ | 9,238 | | $ | 6,675 | |
Warranties issued during the year | | | 12,465 | | | 9,695 | |
Settlements made during the year | | | (11,925 | ) | | (7,132 | ) |
| | | | | | |
Balance as of the end of year | | $ | 9,778 | | $ | 9,238 | |
| | | | | | |
7. Debt
Long-term Debt
Long-term debt as of December 31, 2011, consists of a mortgage note payable, which is secured by certain land and buildings with carrying amounts aggregating approximately $5.0 million and $5.1 million as of December 31, 2011 and December 31, 2010, respectively. The mortgage note payable ($2.7 million as of December 31, 2011 and $2.9 million as of December 31, 2010) 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, 2011 and 2010 was approximately $2.9 million and $3.1 million, respectively.
Maturity of Long-term Debt
Long-term debt matures as follows (in thousands):
| | | | |
2012 | | $ | 248 | |
2013 | | | 268 | |
2014 | | | 290 | |
2015 | | | 314 | |
2016 | | | 340 | |
Thereafter | | | 1,194 | |
| | | | |
| | | 2,654 | |
Less current portion | | | 248 | |
| | | | |
| | $ | 2,406 | |
| | | | |
Convertible Notes
Our convertible notes 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.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
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 theestimated 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):
| | | | | | | | | | |
| | Year ended December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Contractual interest | | $ | 2,025 | | $ | 4,355 | | $ | 4,356 | |
Accretion of the discount on the notes | | | 1,260 | | | 3,058 | | | 2,846 | |
| | | | | | | | |
Total interest expense on the notes | | $ | 3,285 | | $ | 7,413 | | $ | 7,202 | |
| | | | | | | | |
Effective interest rate | | | 6.7 | % | | 7.0 | % | | 6.8 | % |
| | | | | | | | |
The carrying amounts of the liability and equity components of the notes were as follows (in thousands):
| | | | | | | |
| | December 31,
2011 | | December 31,
2010 | |
|---|
Carrying amount of the equity component | | $ | — | | $ | 16,318 | |
| | | | | | |
Principal balance of the liability component | | $ | — | | $ | 105,574 | |
Less: unamortized discount | | | — | | | 4,436 | |
| | | | | | |
Net carrying value of the liability component | | $ | — | | $ | 101,138 | |
| | | | | | |
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
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
"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 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, 2011, there are 900,034 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 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, 2011, there are 1,205,743 options outstanding under this plan.
Equity-Based Compensation Expense, Stock Option and Restricted Stock Activity
Equity-based compensation cost is measured at the grant date,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. The fair value of the award,acquired assets is provisional pending the final valuations for these assets.
During 2014, the Company recognized $3.2 million of acquisition related costs that are included in “Selling, general, and is recognized as expense over the employee requisite service period. The following compensation expense was included as part of continuing operationsadministrative” in the Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 (in thousands):
| | | | | | | | | | |
| | Years ended December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Equity-based compensation expense | | $ | 12,807 | | $ | 8,769 | | $ | 7,113 | |
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, 2010 and 2009. For the years ended December 31, 2011, 2010 and 2009 discontinued operations included compensation expense of $0.7 million, $0.9 million and $0.4 million, respectively.Operations.
As a result
The amounts 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, 2010revenue and 2009. 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, discontinued operations included compensation expense of $1.0 million.
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.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
As of December 31, 2011, the total unrecognized compensation cost related to nonvested stock awards and option awards expected to vest is $15.7 million and $12.8 million, respectively, and the related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 3.0 years and 1.9 years for the nonvested stock awards and for option awards, respectively.
The fair value of each option granted during the years ended December 31, 2011, 2010 and 2009, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| | | | | | | | | | |
| | Year ended December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Weighted-average expected stock-price volatility | | | 55% | | | 62% | | | 65% | |
Weighted-average expected option life | | | 4 years | | | 5 years | | | 4 years | |
Average risk-free interest rate | | | 1.40% | | | 1.92% | | | 1.79% | |
Average dividend yield | | | 0% | | | 0% | | | 0% | |
A summary of our restricted stock awards including restricted stock units as of December 31, 2011, is presented below:
| | | | | | | |
| | Shares (000's) | | Weighted-
Average
Grant-Date
Fair Value | |
|---|
Nonvested at December 31, 2010 | | | 616 | | $ | 19.06 | |
Granted | | | 304 | | | 48.91 | |
Vested | | | (199 | ) | | 14.50 | |
Forfeited (including cancelled awards) | | | (103 | ) | | 28.72 | |
| | | | | | | |
Nonvested at December 31, 2011 | | | 618 | | $ | 33.61 | |
| | | | | | | |
During the year ended December 31, 2011, we granted 304,356 shares of restricted common stock and restricted stock units to key employees, which vest over three or four year periods. Included in this grant were 9,826 shares of restricted common stock granted to the non-employee members of the Board of Directors in May, which vest over the lesser of one year or at the time of the next annual meeting. The vested shares include the impact of 67,256 shares of restricted stock which were cancelled in 2011 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 2011 was $9.7 million.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
A summary of our stock option plans as of and for the year ended December 31, 2011, is presented below:
| | | | | | | | | | | | | |
| | Shares (000s) | | Weighted-
Average
Exercise
Price | | Aggregate
Intrinsic
Value (000s) | | Weighted-
Average
Remaining
Contractual
Life
(in years) | |
|---|
Outstanding at December 31, 2010 | | | 2,569 | | $ | 19.71 | | | | | | | |
Granted | | | 404 | | | 48.11 | | | | | | | |
Exercised | | | (688 | ) | | 15.57 | | | | | | | |
Forfeited (including cancelled options) | | | (179 | ) | | 30.72 | | | | | | | |
| | | | | | | | | | | | | |
Outstanding at December 31, 2011 | | | 2,106 | | $ | 25.58 | | $ | 8,274 | | | 6.0 | |
| | | | | | | | | | | | | |
Options exercisable at December 31, 2011 | | | 983 | | $ | 17.92 | | $ | 4,963 | | | 4.4 | |
| | | | | | | | | | | | | |
The weighted-average grant date fair value of stock options granted for the years ended December 31, 2011, 2010 and 2009 was $21.90, $18.41, and $5.35 per option, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2011, 2010 and 2009 was $22.8 million, $53.1 million and $7.3 million, respectively.
The following table summarizes information about stock options outstanding at December 31, 2011:
| | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable | |
|---|
Range of Exercise Prices | | Number
Outstanding at
December 31, 2011
(000s) | | Weighted-
Average
Remaining
Contractual Life
(in years) | | Weighted-
Average
Exercise Price | | Number
Exercisable at
December 31, 2011
(000s) | | Weighted-
Average
Exercise Price | |
|---|
$8.82-15.08 | | | 737 | | | 4.4 | | $ | 10.98 | | | 412 | | $ | 11.27 | |
15.29-23.55 | | | 425 | | | 3.1 | | | 18.49 | | | 417 | | | 18.39 | |
24.40-39.79 | | | 545 | | | 8.3 | | | 33.39 | | | 150 | | | 34.11 | |
42.19-51.70 | | | 399 | | | 8.9 | | | 49.45 | | | 4 | | | 47.37 | |
| | | | | | | | | | | | |
| | | 2,106 | | | 6.0 | | $ | 25.58 | | | 983 | | $ | 17.92 | |
| | | | | | | | | | | | |
Shares Reserved for Future Issuance
As of December 31, 2011, we have 3,961,178 shares reserved for future issuance upon exercise of stock options and grants of restricted stock.
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
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
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.
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.
9. Income Taxes
Our income (loss) from continuing operations before income taxes of PSP included in the accompanyingCompany’s consolidated statement of operations from the acquisition date (December 4, 2014) to the period ending December 31, 2014 are as follows:
| | Total | |
| | (in thousands) | |
Revenue | | $ | 7,906 | |
Loss from operations before income taxes | | $ | (3,011 | ) |
The following represents the unaudited pro forma Consolidated Statements of Operations consistsas if PSP had been included in the Company’s consolidated results for the periods indicated. These amounts have been calculated after applying the Company’s accounting policies to material amounts and also adjusting the result of (PSP to reflect the additional amortization and depreciation that would have been expensed assuming the fair value adjustments to the acquired assets had been applied on January 1, 2013:
| | December 31, | |
| | 2014 | | 2013 | |
| | (in thousands) | |
Revenue | | $ | 447,089 | | $ | 379,272 | |
Loss from operations before income taxes | | $ | (68,715 | ) | $ | (77,252 | ) |
ALDin thousands):
| | | | | | | | | | |
| | Year ended December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Domestic | | $ | 230,204 | | $ | 260,268 | | $ | (3,425 | ) |
Foreign | | | 41,882 | | | 36,413 | | | 4,206 | |
| | | | | | | | |
| | $ | 272,086 | | $ | 296,681 | | $ | 781 | |
| | | | | | | | |
Significant componentsOn October 1, 2013 the Company acquired 100% of the provisionoutstanding common shares and voting interest of Synos Technology, Inc. and rebranded the business Veeco ALD (“ALD”). The results of ALD operations have been included in the consolidated financial statements since the date of acquisition. ALD is an early stage manufacturer of fast array scanning atomic layer deposition (“FAST-ALD”) tools for income taxes from continuing operations are presented below (the flexible organic light-emitting diode (“OLED”) and semiconductor markets.
The acquisition date fair value of the consideration totaled $102.3 million, net of cash acquired, which consisted of the following:
in thousands):F-18
| | | | | | | | | | |
| | Year ended December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Current: | | | | | | | | | | |
Federal | | $ | 59,921 | | $ | 42,324 | | $ | (344 | ) |
Foreign | | | 10,714 | | | 7,720 | | | 1,879 | |
State and local | | | 805 | | | 5,215 | | | 799 | |
| | | | | | | | |
Total current provision for income taxes | | | 71,440 | | | 55,259 | | | 2,334 | |
Deferred: | | | | | | | | | | |
Federal | | | 10,454 | | | (32,033 | ) | | 940 | |
Foreign | | | (1,073 | ) | | 239 | | | (273 | ) |
State and local | | | 763 | | | (3,960 | ) | | (443 | ) |
| | | | | | | | |
Total deferred (benefit) provision for income taxes | | | 10,144 | | | (35,754 | ) | | 224 | |
| | | | | | | | |
Total provision for income taxes | | $ | 81,584 | | $ | 19,505 | | $ | 2,558 | |
| | | | | | | | |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
| | Acquisition Date | |
| | (October 1, 2013) | |
| | (in thousands) | |
Cash (net of cash acquired) | | $ | 71,488 | |
Contingent consideration | | 33,539 | |
Working capital adjustment | | (2,695 | ) |
Acquisition date fair value | | $ | 102,332 | |
The acquisition agreement included performance milestones that could trigger contingent payments to the original selling shareholders. During the year ended December 31, 2011
The following is a reconciliation2013, the first milestone was achieved, and the Company paid the former shareholders $5.0 million and increased the estimated fair value of the income tax provision (benefit) computed using the Federal statutory rate to our actual income tax provision (in thousands):
| | | | | | | | | | |
| | Year ended December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Income tax provision (benefit) at U.S. statutory rates | | $ | 95,231 | | $ | 103,838 | | $ | (4,053 | ) |
State income tax expense (benefit) (net of federal impact) | | | 1,616 | | | 6,379 | | | 188 | |
Nondeductible expenses | | | (749 | ) | | 333 | | | 145 | |
Noncontrolling interest | | | — | | | — | | | 28 | |
Equity compensation | | | — | | | — | | | 1,678 | |
Domestic production activities deduction | | | (4,581 | ) | | (6,365 | ) | | — | |
Nondeductible compensation | | | 841 | | | 2,840 | | | 826 | |
Research and development tax credit | | | (4,675 | ) | | (1,823 | ) | | (1,855 | ) |
Net change in valuation allowance | | | 121 | | | (83,079 | ) | | 5,110 | |
Change in accrual for unrecognized tax benefits | | | 824 | | | (1,076 | ) | | (4,114 | ) |
Foreign tax rate differential | | | (5,225 | ) | | (5,280 | ) | | 5,450 | |
Other | | | (1,819 | ) | | 3,738 | | | (845 | ) |
| | | | | | | | |
| | $ | 81,584 | | $ | 19,505 | | $ | 2,558 | |
| | | | | | | | |
remaining contingent payments by $0.8 million. During 2011,2014, the Company determined that all of the remaining performance milestones were not met, reversed the fair value of the liability, and recorded an income tax benefita non-cash gain of $29.4 million, relating to discontinued operations compared to the $45.2 million income tax expense from discontinued operationswhich is included in “Changes in contingent consideration” in the prior which was reported in accordance with the intraperiod tax allocation provisions. In addition,Consolidated Statements of Operations.
During 2014, the Company recordedfinalized the working capital adjustment under the purchase agreement. Based on the final adjustment, the working capital adjustment was reduced to $1.3 million. As a current tax benefitresult, a $1.4 million adjustment was made that increased goodwill by $0.2 million and reduced accrued expenses by $1.2 million for the relief of $10.4a potential liability that the former shareholders have retained. During 2014, the Company received payment of the $1.3 million related to equity-based compensationworking capital adjustment from the former shareholders, which was credit to additional paid-in capital compared to $23.3 million tax benefit recordedis included in “Acquisitions of business, net of cash acquired” within the Cash Provided by Investing Activities in the prior year.Consolidated Statements of Cash Flows.
Deferred income taxes reflect
The following table summarizes the net tax effectsestimated fair value of temporary differences between the carrying amounts of assets acquired and liabilities for financial reporting purposesassumed at the acquisition date. The Company utilized third-party valuations to estimate the fair value of the acquired tangible and intangible assets as well as the amounts usedcontingent consideration:
| | Acquisition Date | |
| | (October 1, 2013) | |
| | (in thousands) | |
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 | |
The goodwill is not deductible for income tax purposes.
The classes of intangible assets acquired and the original estimated useful life of each class is presented in the table below:
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Notes to Consolidated Financial Statements (Continued)
December 31, 2011
Significant components
| | Acquisition Date | |
| | (October 1, 2013) | |
| | Amount | | Uuseful life | |
| | (in thousands) | | | |
Technology | | $ | 73,160 | | 14 years | |
Customer relationships | | 20,630 | | 8 years | |
In-process research and development | | 5,070 | | To be determined |
Trademarks and trade names | | 140 | | 1 year | |
Non-compete agreement | | 270 | | 3 years | |
Intangible assets acquired | | $ | 99,270 | | | |
The Company determined the estimated fair value of our deferred taxthe identifiable intangible assets based on various factors including: cost, discounted cash flow, income method, loss-of-revenue/income method, and liabilities are as follows (relief-from-royalty method in thousands):determining the purchase price allocation.
| | | | | | | |
| | December 31, | |
|---|
| | 2011 | | 2010 | |
|---|
Deferred tax assets: | | | | | | | |
Inventory valuation | | $ | 5,468 | | $ | 8,999 | |
Domestic net operating loss carry forwards | | | 1,082 | | | 1,219 | |
Tax credit carry forwards | | | 3,015 | | | 9,961 | |
Foreign net operating loss carry forwards | | | 89 | | | 147 | |
Warranty and installation accruals | | | 3,044 | | | 2,742 | |
Equity compensation | | | 5,821 | | | 3,655 | |
Other accruals | | | 2,373 | | | 2,063 | |
Depreciation | | | — | | | 1,325 | |
Other | | | 1,636 | | | 1,890 | |
| | | | | | |
Total deferred tax assets | | | 22,528 | | | 32,001 | |
Valuation allowance | | | (1,765 | ) | | (1,644 | ) |
| | | | | | |
Net deferred tax assets | | | 20,763 | | | 30,357 | |
| | | | | | |
Deferred tax liabilities: | | | | | | | |
Purchased intangible assets | | | 9,818 | | | 4,854 | |
Convertible debt discount | | | — | | | 1,663 | |
Undistributed earnings | | | 974 | | | 370 | |
Depreciation | | | 4,115 | | | — | |
Other | | | — | | | 264 | |
| | | | | | |
Total deferred tax liabilities | | | 14,907 | | | 7,151 | |
| | | | | | |
Net deferred taxes | | $ | 5,856 | | $ | 23,206 | |
| | | | | | |
A provision has not been made
During the fourth quarter of 2014, the Company determined that, while its ALD technology was successfully demonstrated at December 31, 2011its key OLED display customer, it was unlikely to be adopted in the near-term for U.S. orflexible OLED applications. The significant reduction in near-term forecasted bookings and cash flows required the Company to assess its ALD reporting unit for impairment. As a result, the Company recorded a non-cash impairment charge of $53.9 million related to goodwill and other long-lived assets for ALD. See Note 6, “Goodwill and Intangible Assets,” for additional foreign withholding taxes on approximately $72.5information.
During 2013, the Company recognized $1.0 million of undistributed earningsacquisition related costs that are included in “Selling, general, and administrative” in the Consolidated Statements of our foreign subsidiaries because it isOperations.
The following represents the present intentionpro forma Consolidated Statements of managementOperations as if Veeco ALD had been included in the Company’s consolidated results for the periods indicated:
| | December 31, | |
| | 2013 | | 2012 | |
| | (in thousands) | |
Revenue | | $ | 346,319 | | $ | 522,029 | |
Income (loss) from operations before income taxes | | $ | (60,983) | | $ | 16,840 | |
These amounts have been calculated after applying the Company’s accounting policies to permanently reinvestmaterial amounts and also adjusting the undistributed earningsresult of our foreign subsidiariesALD to reflect the additional amortization that would have been expensed assuming the fair value adjustments to the acquired assets had been applied on January 1, 2012.
Note 6 — Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed in China, Korea, Japan, Malaysia, Singapore and Taiwan. As it is our intention to reinvest those earnings permanently, it is not practicable to estimateeach business combination. The following table presents 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.
Our valuation allowance of approximately $1.8 million at December 31, 2011 increased by approximately $0.1 millionchanges in goodwill balances during the year then ended and relates primarily to state and local tax attributes for which we could not conclude were realizable on a more-likely-than-not basis.fiscal years indicated:
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Notes to Consolidated Financial Statements (Continued)
| | Gross | | | | | |
| | Carrying | | Accumulated | | Net | |
| | Amount | | Impairment | | Amount | |
| | (in thousands) | |
As of December 31, 2012 | | $ | 151,069 | | $ | 95,241 | | $ | 55,828 | |
Acquisition | | 35,520 | | — | | 35,520 | |
As of December 31, 2013 | | 186,589 | | 95,241 | | 91,348 | |
Acquisition | | 51,396 | | — | | 51,396 | |
Purchase price adjustments | | 173 | | — | | 173 | |
Impairments | | — | | 27,958 | | (27,958 | ) |
As of December 31, 2014 | | $ | 238,158 | | $ | 123,199 | | $ | 114,959 | |
Additions to the gross goodwill balance during the years ended December 31, 20112014 and 2013 resulted from the acquisition of privately-held businesses as described further in Note 5, “Business Combinations.”
A reconciliation
The Company performed its annual goodwill impairment test in the fourth quarter. The reporting units’ fair value exceeded their respective carrying amount and therefore goodwill within these reporting units was not impaired. The fair value of each reporting unit was determined using an income approach to determine the present value of expected future cash flows.
During 2014, the Company successfully demonstrated its FAST-ALD technology for flexible OLED encapsulation. But subsequent to the Company’s annual goodwill impairment test, the Company determined that the incumbent deposition technology had progressed to satisfy current market requirements. The carrying amount of the beginningALD reporting unit was determined to exceed its fair value, and endingtherefore the fair value of the reporting unit’s goodwill was estimated. An impairment loss was recognized equal to the excess of the carrying amount of unrecognized tax benefits is as follows (in thousands):
| | | | | | | |
| | December 31, | |
|---|
| | 2011 | | 2010 | |
|---|
Beginning balance as of December 31 | | $ | 3,660 | | $ | 1,357 | |
Additions for tax positions related to current year | | | 1,069 | | | 1,227 | |
Reductions for tax positions relating to current year | | | — | | | — | |
Additions for tax positions relating to prior years | | | 1,209 | | | 1,736 | |
Reductions for tax positions relating to prior years | | | (422 | ) | | (478 | ) |
Reductions due to the lapse of the applicable statute of limitations | | | (586 | ) | | (17 | ) |
Settlements | | | (182 | ) | | (165 | ) |
| | | | | | |
Ending balance as of December 31 | | $ | 4,748 | | $ | 3,660 | |
| | | | | | |
Thethe reporting unit’s goodwill over its implied fair value. As part of its valuation to determine the total impairment charge, the Company does not anticipate that its uncertain tax position will change significantlyalso estimated the fair value of significant tangible and intangible long-lived assets within the next twelve months.ALD reporting unit. These tangible and intangible long-lived assets were valued using appropriate valuation techniques for assets of their nature, including income and market approaches. As a result of the impairment analysis, the Company recorded non-cash impairment charges of $28.0 million related to goodwill and $25.9 million related to other long-lived assets, including $17.4 million related to customer relationships, $4.8 million related to in-process research and development, and $3.6 million related to certain tangible assets.
Of
The components of purchased intangible assets as of the amounts reflected indates indicated below were as follows:
| | | | December 31, 2014 | | December 31, 2013 | |
| | Weighted | | | | Accumulated | | | | | | Accumulated | | | |
| | Average Remaining | | Gross | | Amortization | | | | Gross | | Amortization | | | |
| | Amortization | | Carrying | | and | | Net | | Carrying | | and | | Net | |
| | Period | | Amount | | Impairment | | Amount | | Amount | | Impairment | | Amount | |
| | (in years) | | (in thousands) | |
Technology | | 9.6 | | $ | 222,358 | | $ | 106,342 | | $ | 116,016 | | $ | 182,408 | | $ | 97,524 | | $ | 84,884 | |
Customer relationships | | 13.9 | | 69,350 | | 35,549 | | 33,801 | | 35,040 | | 14,721 | | 20,319 | |
Trademarks and tradenames | | 3.5 | | 3,050 | | 1,096 | | 1,954 | | 1,970 | | 763 | | 1,207 | |
Indefinite-lived trademark | | — | | 2,900 | | — | | 2,900 | | 2,900 | | — | | 2,900 | |
IPR&D | | — | | 5,070 | | 5,070 | | — | | 5,070 | | — | | 5,070 | |
Other | | 1.1 | | 5,485 | | 848 | | 4,637 | | 765 | | 429 | | 336 | |
Total | | 10.2 | | $ | 308,213 | | $ | 148,905 | | $ | 159,308 | | $ | 228,153 | | $ | 113,437 | | $ | 114,716 | |
Other intangible assets primarily consist of patents, licenses, customer backlog, and non-compete agreements.
For the table above atfiscal years ended December 31, 2011, the entire amount if recognized would reduce our effective tax rate. It is our policy to recognize interest2014, 2013, and penalties related to income tax matters in income tax expense. The total accrual2012, amortization expense for interest and penalties related to unrecognized tax benefitsintangible assets was approximately $0.2$13.1 million, $5.5 million, and $0.3$4.9 million, respectively. Based on the intangible assets recorded as of December 31, 20112014, and 2010,
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:
| | | Amortization | |
| | | (in thousands) | |
2015 | | | $ | 27,003 | |
2016 | | | 20,969 | |
2017 | | | 18,100 | |
2018 | | | 16,492 | |
2019 | | | 15,235 | |
Thereafter | | | 58,609 | |
Total | | | $ | 156,408 | |
Note 7 — Inventories
Inventories are stated at the lower of cost or market using standard costs that approximate actual costs on a first-in, first-out basis. Inventories consist of the following:
| | December 31, | |
| | 2014 | | 2013 | |
| | (in thousands) | |
Materials | | $ | 30,319 | | $ | 34,301 | |
Work-in-process | | 25,096 | | 12,900 | |
Finished goods | | 6,056 | | 12,525 | |
Total | | $ | 61,471 | | $ | 59,726 | |
Note 8 — Property, Plant, and Equipment and Assets Held for Sale
Property and equipment, net, consist of the following:
| | | December 31, | | | Average | |
| | | 2014 | | 2013 | | | Useful Life | |
| | (in thousands) | | | | |
Land | | $ | 9,392 | | $ | 12,535 | | | |
Building and improvements | | 51,979 | | 52,050 | | 10 – 40 years | |
Machinery and equipment | | 104,815 | | 110,228 | | 3 – 10 years | |
Leasehold improvements | | 4,356 | | 5,888 | | 3 – 7 years | |
Gross property,plant and equipment | | 170,542 | | 180,701 | | | |
Less: accumulated depreciation and amortization | | 91,790 | | 91,562 | | | |
Net property, plant, and equipment | | $ | 78,752 | | $ | 89,139 | | | |
Depreciation expense was $11.4 million, $12.9 million, and $11.3 million for the years ended December 31, 2014, 2013, and 2012, respectively.
We or one
Lab Tools
At December 31, 2014 and 2013, the carrying value of our subsidiaries file income tax returnssystems that had previously been used in the U.S. federal jurisdictionCompany’s laboratories as Veeco Certified Equipment was approximately $1.3 million and various state, local$7.2 million, respectively, and foreign jurisdictions. All material federal income tax matters have been concludedwas included in “Property, plant, and equipment, net” in the Consolidated Balance Sheets. These systems are being held for sale and are the same types of tools that the Company sells to its customers in the ordinary course of business. During the years through 2006 subjectended December 31, 2014 and 2013, the Company had aggregate sales of $8.9 million and $7.4 million, respectively, of these
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Veeco Instruments Inc. and Subsidiaries
Notes to subsequent utilizationConsolidated Financial Statements (Continued)
tools with associated costs of net operating losses generated$7.4 million and $3.7 million, respectively, which was included in such years. None“Net sales” and “Cost of our federal tax returns are currently under examination. All material statesales” in the Consolidated Statements of Operations. During the years ended December 31, 2014 and local income tax matters have been reviewed through 20082013, the Company evaluated certain systems and reduced the carrying value of these systems that were held for sale by $0.1 million and $0.9 million, respectively, which was included in “Asset impairment” in the Consolidated Statements of Operations.
Assets Held for Sale
During the year ended December 31, 2014, the Company classified property, plant, and equipment with two states currently under examinationa carrying value of $9.5 million as assets held for open tax years between 2007sale. Using Level 2 measurement principles, the Company determined that the carrying cost of these assets exceeded the fair market value, less cost to sell, and 2010. The majorityrecorded an impairment charge of our foreign jurisdictions have been reviewed through 2009 with only a few jurisdictions having open tax years between 2006 and 2009. Principally all our foreign jurisdictions remain open with respectapproximately $3.5 million, which consisted of $1.6 million related to the 2010 tax year.Company’s research and demonstration labs in Asia and $1.9 million related to a vacant building and land. These amounts were included in “Asset impairment” in the Consolidated Statements of Operations. The net $6.0 million carrying value of these assets are included in “Assets held for sale” in the Consolidated Balance Sheet. During the year ended December 31, 2014, the Company recognized additional asset impairment charges of $0.7 million relating to assets that were abandoned during the year, which was included in “Asset impairment” in the Consolidated Statements of Operations.
10. Commitments and ContingenciesNote 9 — Accrued Expenses and Other MattersLiabilities
The components of accrued expenses and other current liabilities as of the dates indicated were as follows:
| | December 31, | |
| | 2014 | | 2013 | |
| | (in thousands) | |
Payroll and related benefits | | $ | 26,605 | | $ | 11,020 | |
Sales, use, and other taxes | | 1,776 | | 5,402 | |
Contingent consideration | | — | | 20,098 | |
Warranty | | 5,411 | | 5,662 | |
Restructuring liability | | 1,428 | | 533 | |
Other | | 13,198 | | 8,369 | |
Total | | $ | 48,418 | | $ | 51,084 | |
Customer deposits and deferred revenue
Customer deposits totaled $73.0 million and $27.5 million at December 31, 2014 and 2013, respectively, which are included in “Customer deposits and deferred revenue” in the Consolidated Balance Sheets.
Note 10 — Discontinued Operations
CIGS Solar Systems Business
During 2011, the Company announced a plan to discontinue its CIGS solar systems business and reflected the results of operations for the CIGS solar systems business as discontinued operations.
Metrology
During 2010, the Company completed the sale of its Metrology business, except for assets located in China due to local restrictions. The Company reflected the results of operations for the Metrology business as discontinued operations and recognized a pre-tax deferred gain of $5.4 million during 2012 related to the completion of the sale of the assets in China. The Company 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:
Restructuring and Other ChargesF-23
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During
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
| | | 2012 | |
| | Solar | | | | | | | |
| | | Systems | | | Metrology | | | Total | |
| | (in thousands) | |
Net sales | | $ | — | | | $ | — | | | $ | — | |
Net income (loss) from discontinued operations | | $ | (62 | ) | | $ | 4,461 | | | $ | 4,399 | |
| | | | | | | | | | | | | | | |
Note 11 — Restructuring Charges
Beginning in 2011 and in response to challenging business conditions, wethe Company initiated activities to reduce and contain spending, including reducing ourits workforce, consultants, and discretionary expenses.
During 2009, we continued our multi-quarter plan to improve profitability and reduce and contain spending. We made progress against2012, 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 charges (credits) of approximately $1.3 million, $(0.2) million and $4.5 million during the years ended December 31, 2011, 2010 and 2009, respectively. We also recognized inventory write-offs of $0.8 million and $1.5 million, included in cost of sales in the accompanying Consolidated Statement of Operations, related to a discontinued product line in our LED & Solar segment during the year ended December 31, 2011 and discontinued data
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
storage products during the year ended December 31, 2009. Restructuring expense for the years ended December 31, 2011, 2010 and 2009 are as follows (in thousands):
| | | | | | | | | | |
| | Year ended December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Personnel severance and related costs | | $ | 1,288 | | $ | — | | $ | 3,109 | |
Lease-related and other (credits) costs | | | — | | | (179 | ) | | 1,370 | |
| | | | | | | | |
| | $ | 1,288 | | $ | (179 | ) | $ | 4,479 | |
| | | | | | | | |
Personnel Severance Costs
During 2011, weCompany recorded $1.3 million in personnel severance and related costs related to a companywide reorganization resulting in a headcount reduction of 65 employees. During 2009, we recorded $3.1$3.8 million in personnel severance and related costs resulting from a headcount reduction of 16152 employees. These reductions in workforce included executives, management, administration, sales and service, personnel and manufacturing employees'employees companywide.
Lease-related and Other Costs This consolidation was substantially complete at the end of 2012.
During 2010, we had a change2013, the Company recorded $1.5 million in estimate relating topersonnel severance and related costs resulting from the restructuring of one of our leased Data Storageits international sales offices and the consolidation of certain sales and administrative functions. This consolidation was substantially complete at the end of 2013.
During 2014, the Company announced the closing of its Ft. Collins, Colorado and Camarillo, California facilities. As a result, weBusiness activities formally conducted at these sites have been transferred to the Company’s Plainview, New York facility, and the Company recorded $0.4 million of facility closing costs. The Company also took additional measures to improve profitability in the challenging business environment and notified 93 employees of their termination from the Company and recorded $4.0 million of personnel severance and related costs. These actions were substantially complete at the end of 2014. The total remaining amount expected to be incurred arelated to facility closing costs is approximately $0.5 million.
The following table shows the amounts incurred and paid for restructuring credit of $0.2 million, consisting primarily ofactivities during the years ended December 31, 2014, 2013, and 2012 and the remaining lease payment obligationsaccrued balance of restructuring costs as of December 31, 2014, which is included in “Accrued expenses and estimated property taxesother current liabilities” in the Consolidated Balance Sheets:
| | Personnel | | | | | | | |
| | Severance and | | | Facility | | | | |
| | | Related Costs | | | Closing Costs | | | Total | |
| | (in thousands) | |
Balance at December 31, 2012 | | $ | 1,875 | | | $ | — | | | $ | 1,875 | |
Provision | | 1,485 | | | — | | | 1,485 | |
Payments | | (2,827 | ) | | — | | | (2,827 | ) |
Balance at December 31, 2013 | | 533 | | | — | | | 533 | |
Provision | | 4,012 | | | 382 | | | 4,394 | |
Payments | | (3,117 | ) | | (382 | ) | | (3,499 | ) |
Balance at December 31, 2014 | | $ | 1,428 | | | $ | — | | | $ | 1,428 | |
| | | | | | | | | | | | | | | |
Note 12 — Commitments and Contingencies
Warranty
Warranties are typically valid for a portionone year from the date of system final acceptance, and the facility we will occupy, offsetCompany estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by a reductionanalyzing specific product and historical configuration statistics and regional warranty support costs and is affected by product failure rates, material usage, and labor costs incurred in expected sublease income. We made certain assumptionscorrecting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in determining the credit, which included a reduction in estimated sublease income and terms of the sublease as well as the estimated discount ratechanges 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.warranty costs.
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.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
The following is a reconciliation of the liability for the 2011, 2010 and 2009 restructuring charge from inception through December 31, 2011 (in thousands):
| | | | | | | | | | | | | |
| | LED & Solar | | Data Storage | | Unallocated Corporate | | Total | |
|---|
Short-term liability | | | | | | | | | | | | | |
Beginning Balance January 1, 2009 | | $ | 36 | | $ | 270 | | $ | 1,859 | | $ | 2,165 | |
Lease-related and other costs 2009 | | | 190 | | | 803 | | | — | | | 993 | |
Personnel severance and related costs 2009 | | | 647 | | | 1,826 | | | 636 | | | 3,109 | |
| | | | | | | | | | |
Total charged to accrual 2009 | | | 837 | | | 2,629 | | | 636 | | | 4,102 | |
| | | | | | | | | | |
Lease-related and other credits 2010 | | | — | | | (87 | ) | | — | | | (87 | ) |
| | | | | | | | | | |
Total credited to accrual 2010 | | | — | | | (87 | ) | | — | | | (87 | ) |
| | | | | | | | | | |
Personnel severance and related costs 2011 | | | 672 | | | 51 | | | 311 | | | 1,034 | |
| | | | | | | | | | |
Total charged to accrual 2011 | | | 672 | | | 51 | | | 311 | | | 1,034 | |
| | | | | | | | | | |
Short-term/long-term reclassification 2009 | | | — | | | 148 | | | 1,084 | | | 1,232 | |
Short-term/long-term reclassification 2010 | | | — | | | 123 | | | 536 | | | 659 | |
Short-term/long-term reclassification 2011 | | | — | | | 58 | | | — | | | 58 | |
Cash payments 2009 | | | (677 | ) | | (2,561 | ) | | (1,982 | ) | | (5,220 | ) |
Cash payments 2010 | | | (196 | ) | | (344 | ) | | (1,597 | ) | | (2,137 | ) |
Cash payments 2011 | | | (138 | ) | | (159 | ) | | (553 | ) | | (850 | ) |
| | | | | | | | | | |
Balance as of December 31, 2011 | | $ | 534 | | $ | 128 | | $ | 294 | | $ | 956 | |
| | | | | | | | | | |
Long-term liability | | | | | | | | | | | | | |
Beginning Balance January 1, 2009 | | $ | — | | $ | — | | $ | 1,620 | | $ | 1,620 | |
Lease-related and other costs 2009 | | | — | | | 377 | | | — | | | 377 | |
Lease-related and other credits 2010 | | | — | | | (48 | ) | | — | | | (48 | ) |
Short-term/long-term reclassification 2009 | | | — | | | (148 | ) | | (1,084 | ) | | (1,232 | ) |
Short-term/long-term reclassification 2010 | | | — | | | (123 | ) | | (536 | ) | | (659 | ) |
Short-term/long-term reclassification 2011 | | | — | | | (58 | ) | | — | | | (58 | ) |
| | | | | | | | | | |
Balance as of December 31, 2011 | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | |
Asset Impairment Charges
During 2011, we recorded a $0.6 million asset impairment charge
Changes in the fourth quarter for property, plant and equipment related to the discontinuance of a certainCompany’s product line in our LED & Solar reporting unit.warranty reserves were as follows:
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.
| | | December 31, | |
| | | 2014 | | | 2013 | |
| | (in thousands) | |
Balance, beginning of the year | | $ | 5,662 | | | $ | 4,942 | |
Addition for new warranties issued | | 3,484 | | | 5,291 | |
Addition from PSP acquisition | | 809 | | | — | |
Settlements | | (3,802 | ) | | (5,580 | ) |
Changes in estimate | | (742 | ) | | 1,009 | |
Balance, end of the year | | $ | 5,411 | | | $ | 5,662 | |
| | | | | | | | | | |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
Minimum Lease Commitments
Minimum lease commitments as ofat December 31, 20112014 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows (in thousands):follows:
| | | | |
2012 | | $ | 3,936 | |
2013 | | | 2,659 | |
2014 | | | 1,689 | |
2015 | | | 1,150 | |
2016 | | | 654 | |
Thereafter | | | 716 | |
| | | | |
| | $ | 10,804 | |
| | | | |
| | Operating | |
| | | Leases | |
Payments due by period: | | | (in thousands) | |
2015 | | $ | 2,322 | |
2016 | | 2,423 | |
2017 | | 1,993 | |
2018 | | 1,224 | |
2019 | | 526 | |
Thereafter | | 2,700 | |
Total | | $ | 11,188 | |
Rent charged to operations amounted to $2.7expense was $2.3 million, $1.7$2.9 million, and $1.6$3.5 million in 2011, 20102014, 2013 and 2009,2012, respectively. In addition, we arethe Company is 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 $250,000 with respect to any such remediation and have a liability recorded for this amount as of December 31, 2011. No comprehensive plan has been required to date. Even without consideration of such indemnification, we do not believe that any material loss or expense
The Company 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 usthe Company in Santa Barbara, California. We haveThe Company has been indemnified for any liabilities wethat may incurbe incurred which arise from environmental contamination at the site. Even without consideration of such indemnification, we dothe Company does 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 ourthe Company’s former Metrology operations were located which(which business (soldwas 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 haveThe Company has provided Bruker with similar indemnification as part of the sale.
LitigationLegal Proceedings
Veeco and certain other parties were named as defendants in a lawsuit filed on April 25, 2013 in the Superior Court of California, County of Sonoma. The plaintiff in the lawsuit, Patrick Colbus, 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. The Company believes this lawsuit is without merit and intends to defend vigorously against the claims. The Company is unable to predict the outcome of this action or to
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We are
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 insurance.
The Company is involved in various other legal proceedings arising in the normal course of our business. We doThe Company does not believe that the ultimate resolution of these matters will have a material adverse effect on ourits consolidated financial position, results of operations, or cash flows.
Concentrations of Credit Risk
Our business
The Company depends in large part upon the capital expenditures of our topon purchases from its ten largest customers, which accounted for 79%65% and 80%69% of total accounts receivable atas of December 31, 20112014 and 2010,2013, respectively.
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
Of such, HB LED and data storage customers accounted for approximately 58% and 19%, and 62% and 18%, respectively, of total accounts receivable at December 31, 2011 and 2010.
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 | |
| | Year ended December 31, | | December 31, | |
Customer | | 2014 | | 2013 | | 2014 | | 2013 | | 2012 | |
Customer A | | | * | | | * | | | 15% | | | * | | | * | |
Customer B | | | 20% | | | 10% | | | 11% | | | 14% | | | * | |
Customer C | | | 13% | | | 11% | | | * | | | * | | | * | |
Customer D | | | * | | | 23% | | | * | | | * | | | 14% | |
| | | | | | | | | | | | | | | | |
| | Accounts
Receivable
December 31, | | Net Sales
For the Year Ended
December 31, | |
|---|
| | 2011 | | 2010 | | 2011 | | 2010 | | 2009 | |
|---|
Customer A | | | 33 | % | | * | | | 11 | % | | * | | | * | |
Customer B | | | * | | | 26 | % | | 12 | % | | 12 | % | | * | |
Customer C | | | * | | | 20 | % | | * | | | 17 | % | | 27 | % |
Customer D | | | * | | | * | | | * | | | 12 | % | | * | |
Customer E | | | * | | | * | | | * | | | * | | | 10 | % |
*
- Less than 10% of aggregate accounts receivable or net sales.
Both of our reportable product segments sell to these major customers.
We manufactureThe Company manufactures and sell oursells its products to companies in different geographic locations. Refer to Note 19, “Segment Reporting and Geographic Information,” for additional information. In certain instances, we requirethe Company requires deposits from its customers for a portion of the sales price in advance of shipment. We performshipment and performs periodic credit evaluations of our customers' financial condition and, whereon its customers. Where appropriate, require thatthe Company requires letters of credit be provided on certain foreignnon-U.S. sales arrangements. Receivables generally are due within 30-6030 – 90 days other than receivables generated from customers in Japan where payment terms generally range from 60-90 days. Ourthe date of invoice. The net accounts receivable balance is concentrated in the following geographic locations (in thousands):
| | | | | | | |
| | December 31, | |
|---|
| | 2011 | | 2010 | |
|---|
Americas | | $ | 11,098 | | $ | 13,600 | |
Europe, Middle East and Africa ("EMEA") | | | 3,979 | | | 17,321 | |
Asia Pacific(1) | | | 79,961 | | | 119,607 | |
| | | | | | |
| | $ | 95,038 | | $ | 150,528 | |
| | | | | | |
(1)As of December 31, 2011, accounts receivable in China and Singapore amounted to $59.2 million and $15.3 million, respectively. As of December 31, 2010, accounts receivable in China and Singapore amounted to $66.5 million and $48.3 million, respectively. No other country accounted for more than 10% of our accounts receivable as of December 31 for the years presented.
Supplierslocations:
We currently outsource
| | �� | December 31, | |
| | | 2014 | | | 2013 | |
| | (in thousands) | |
China | | $ | 17,911 | | | $ | 4,130 | |
Korea | | 8,118 | | | 2,411 | |
Thailand | | 6,324 | | | 2,041 | |
Taiwan | | 5,838 | | | 427 | |
Other | | 3,986 | | | 4,890 | |
Asia Pacific | | 42,177 | | | 13,899 | |
United States | | 13,139 | | | 8,369 | |
EMEA and other | | 4,769 | | | 1,555 | |
Total | | $ | 60,085 | | | $ | 23,823 | |
| | | | | | | | | | |
Suppliers
The Company outsources certain functions to third parties, including the manufacture of all or substantially all of our newits MOCVD systems, Data Storageion beam and other data storage systems, and ion sources. WeThe Company primarily relyrelies on several suppliers for the manufacturing of these systems. We plan tosystems, but the Company does maintain somea minimum level of internal manufacturing capability for these systems. The failure of ourthe Company’s present suppliers to meet their contractual obligations under ourits supply arrangements and ourthe Company’s inability to make alternative arrangements or resume the manufacture of these systems ourselves could have a material adverse effect on ourthe Company’s revenues, profitability, cash flows and relationships with ourits customers.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2011
In addition, certain of the components and sub-assemblies included in ourthe Company’s products are obtained from a single source or a limited group of suppliers. OurThe Company’s 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 ourthe Company’s operating results.
11. Foreign Operations, Geographic Area
The Company had deposits with its suppliers of $12.7 million and Product Segment Information$9.4 million at December 31, 2014 and 2013, respectively, that were included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets.
Purchase Commitments
The Company had purchase commitments of $112.4 million at December 31, 2014, all of which will come due within one year.
Bank Guarantees
The Company has bank guarantees issued by a financial institution on its behalf as needed. At December 31, 2014, outstanding bank guarantees totaled $45 million, of which $0.5 million is collateralized against cash that is restricted from use. As of December 31, 2014, the Company had $26 million of unused lines of credit available, which can be drawn upon to cover performance bonds required by customers.
Note 13 — Debt
Debt consists of a mortgage note payable with a carrying value of $1.8 million and $2.1 million as of December 31, 2014 and 2013, respectively. The mortgage note payable is secured by certain land and buildings with a carrying value of $3.3 million and $4.7 million as of December 31, 2014 and 2013, respectively. One of the buildings is currently held for sale. The annual interest rate on the mortgage is 7.91%, and the final payment is due on January 1, 2020. The Company determined the mortgage is a Level 3 liability in the fair-value hierarchy and estimated its fair value as $2.0 million and $2.3 million at December 31, 2014 and 2013, respectively, using a discounted cash flow model. Payments due under the note are as follows:
| | | Total | |
| | (in thousands) | |
2015 | | $ | 314 | |
2016 | | 340 | |
2017 | | 368 | |
2018 | | 398 | |
2019 | | 427 | |
Total | | 1,847 | |
Less current portion | | 314 | |
Total (less current maturities) | | $ | 1,533 | |
Note 14 — Derivative Financial Instruments
The Company is exposed to financial market risks arising from changes in currency exchange rates. Changes in currency exchange rate changes could affect the Company’s foreign currency denominated monetary assets and liabilities and forecasted cash flows. The Company enters into monthly forward derivative contracts with the intent of mitigating a portion of this risk. The Company only uses derivative financial instruments in the context of hedging and not for speculative purposes and has not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other, net” in the Company’s Consolidated Statements of Operations. The fair value of these contracts is included in “Prepaid expenses and other current assets” in the Company’s Consolidated Balance Sheets. The Company executes derivative transactions with highly rated financial institutions to mitigate counterparty risk.
The Company did not have any outstanding derivative contracts at December 31, 2014. A summary of the foreign exchange derivatives outstanding on December 31, 2013 is as follows:
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Net salesVeeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
| | Fair | | Maturity | | Notional | |
| | | Value | | Dates | | Amount | |
| | (in thousands) | |
December 31, 2013 | | | | | | | |
Foreign currency exchange forwards | | $ | 1 | | January 2014 | | $ | 4,700 | |
Foreign currency collar | | 906 | | October 2014 | | 34,069 | |
Total | | $ | 907 | | | | $ | 38,769 | |
| | | | | | | | | | | | | |
The following table shows the gains and (losses) from currency exchange derivatives during the years ended December 31, 2014, 2013, and 2012, which are attributedincluded in “Other, net” in the Consolidated Statements of Operations:
| | Year ended December 31, | |
| | 2014 | | 2013 | | 2012 | |
| | (in thousands) | |
Foreign currency exchange forwards | | $ | (89 | ) | $ | 248 | | $ | 333 | |
Foreign currency collar | | (457 | ) | 906 | | — | |
| | $ | (546 | ) | $ | 1,154 | | $ | 333 | |
Note 15 — Stockholders’ Equity
Accumulated Other Comprehensive Income
The following table presents the changes in the balances of each component of AOCI, net of tax:
| | | Foreign | | | Minimum | | | Unrealized | | | | |
| | | Currency | | | Pension | | | Gains (losses) on | | | | |
| | | Translation | | | Liability | | | AFS Securities | | | Total | |
| | (in thousands) | |
Balance at December 31, 2012 | | $ | 6,701 | | $ | (775 | ) | $ | 47 | | $ | 5,973 | |
Other comprehensive income (loss) before reclassifications | | (1,322 | ) | 125 | | 34 | | (1,163 | ) |
Benefit (provision) for income taxes | | (53 | ) | (86 | ) | 11 | | (128 | ) |
Amounts reclassified from AOCI | | — | | — | | (61 | ) | (61 | ) |
Other comprehensive income (loss) | | (1,375 | ) | 39 | | (16 | ) | (1,352 | ) |
Balance at December 31, 2013 | | 5,326 | | (736 | ) | 31 | | 4,621 | |
Other comprehensive income (loss) before reclassifications | | 149 | | (145 | ) | 51 | | 55 | |
Amounts reclassified from AOCI | | (3,142 | ) | — | | (65 | ) | (3,207 | ) |
Other comprehensive income (loss) | | (2,993 | ) | (145 | ) | (14 | ) | (3,152 | ) |
Balance at December 31, 2014 | | $ | 2,333 | | $ | (881 | ) | $ | 17 | | $ | 1,469 | |
During the 2014, the Company completed its plan to liquidate its subsidiary in Japan, since the Company moved to a distributor model to serve its customers in that region. As a result of the liquidation, a cumulative translation gain of $3.1 million was reclassified from Other Comprehensive Income to “Other, net” on the Consolidated Statements of Operations.
Preferred Stock
The Board of Directors has authority under the Company’s Certificate of Incorporation to issue shares of preferred stock with voting and economic rights to be determined by the Board of Directors.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Treasury Stock
On August 24, 2010, the Board of Directors authorized the repurchase of up to $200 million of the Company’s common stock. All funds for this repurchase program were exhausted during fiscal year 2011, and during fiscal year 2012, the Company cancelled and retired the 5,278,828 shares of treasury stock previously purchased. During 2012 the Company 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.
Note 16 — Stock Plans
Share-based incentive awards are provided to employees under the terms of the Company’s equity incentive compensation plans (the “Plans”). During 2010 the Company’s Board of Directors approved the 2010 Stock Incentive Plan (as amended to date, the “2010 Plan”), which replaced the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The Plans are administered by the Compensation Committee of the Board of Directors. The Company’s employees, non-employee directors, and consultants are eligible to receive awards under the 2010 Plan, which can include non-qualified stock options, incentive stock options, restricted share awards (“RSAs”), restricted share units (“RSUs”), share appreciation rights, dividend equivalent rights or any combination thereof. The Company typically settles awards under the Plans with newly issued shares. All Plans, with the exception of acquired companies’ stock plans, have been approved by the Company’s shareholders.
The Board of Directors granted equity awards to certain employees in connection with the Company’s acquisition of ALD during fiscal year 2013 (Refer to Note 5, “Business Combinations” for additional information on the acquisition). The equity awards were granted under the Company’s 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 the Company. The Company issued 124,500 stock option shares and 87,000 RSUs under this plan. The stock options will vest over a three year period and have a 10-year term, and the RSUs will vest over a two or four year period. As of December 31, 2013, the Inducement Plan was merged into the 2010 Plan and is considered an inactive plan with no further shares available for grant. As of December 31, 2014, there are 124,500 option shares and 82,700 RSUs outstanding under the Inducement Plan.
The Company is authorized to issue up to 6.8 million shares under the 2010 Plan, including additional shares authorized under a 2013 plan amendment approved by shareholders. Option awards are generally granted with an exercise price equal to the geographic locationclosing price of the Company’s common stock on the trading day prior to the date of grant; option awards generally vest over a three year period and have a seven or ten year term. RSAs and RSUs generally vest over one to five years. Certain option and share awards provide for accelerated vesting if there is a change in which the customer facility is located and long-lived tangible assets related to operationscontrol, as defined in the United States2010 Plan. As of December 31, 2014, there are 1.9 million option shares and other foreign countries as0.4 million RSUs outstanding under the 2010 Plan.
The 2000 Plan was approved by the Company’s Board of Directors and shareholders in fiscal year 2000 and was replaced by the 2010 Plan. Therefore, no additional awards are made under this plan. Stock awards granted pursuant to the 2000 Plan expire after seven years and generally vest over a two to five year period. As of December 31, 2014, there are 0.4 million option shares outstanding under the 2000 Plan.
Shares Reserved for Future Issuance
At December 31, 2014, the Company has 4.9 million shares reserved to cover exercises of outstanding stock options, vesting of RSUs, and additional grants under the 2010 Plan.
Share-Based Compensation
The Company recognized share-based compensation in the following line items in the Consolidated Statements of Operations for the periods indicated:
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
| | Year ended December 31, | |
| | 2014 | | 2013 | | 2012 | |
| | | | (in thousands) | | | |
Cost of sales | | $ | 2,456 | | $ | 1,446 | | $ | 1,467 | |
Selling, general, and administrative | | 11,859 | | 8,339 | | 9,677 | |
Research and development | | 4,498 | | 3,347 | | 2,709 | |
Share-based compensation expense before tax | | 18,813 | | 13,132 | | 13,853 | |
Income tax benefit | | (6,011 | ) | (4,367 | ) | (4,849 | ) |
Net share-based compensation expense | | $ | 12,802 | | $ | 8,765 | | $ | 9,004 | |
The Company capitalized an insignificant amount of share-based compensation into inventory for the years ended December 31, 2011, 20102014, 2013, and 2009 are as follows (in thousands):2012.
| | | | | | | | | | | | | | | | | | | |
| | Net Sales to Unaffiliated Customers | | Long-Lived Tangible Assets | |
|---|
| | 2011 | | 2010 | | 2009 | | 2011 | | 2010 | | 2009 | |
|---|
United States | | $ | 100,310 | | $ | 92,414 | | $ | 60,553 | | $ | 67,788 | | $ | 41,072 | | $ | 43,577 | |
Other | | | 325 | | | 232 | | | 177 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
Total Americas | | | 100,635 | | | 92,646 | | | 60,730 | | | 67,788 | | | 41,072 | | | 43,577 | |
EMEA(1) | | |
57,617 | | |
92,112 | | |
49,938 | | |
203 | | |
274 | | |
315 | |
Asia Pacific(1) | | | 820,883 | | | 746,134 | | | 171,594 | | | 20,417 | | | 974 | | | 815 | |
| | | | | | | | | | | | | | |
Total Other Foreign Countries | | | 878,500 | | | 838,246 | | | 221,532 | | | 20,620 | | | 1,248 | | | 1,130 | |
| | | | | | | | | | | | | | |
| | $ | 979,135 | | $ | 930,892 | | $ | 282,262 | | $ | 88,408 | | $ | 42,320 | | $ | 44,707 | |
| | | | | | | | | | | | | | |
(1)For the year endedThe following table summarizes information about unrecognized share-based compensation costs at December 31, 2011, net sales2014:
| | Unrecognized | | Weighted | |
| | Share-Based | | Average Period | |
| | Compensation | | Expected to be | |
| | Costs | | Recognized | |
| | (in thousands) | | (in years) | |
Stock option awards | | $ | 9,939 | | 2.0 | |
Restricted stock units | | 9,980 | | 2.5 | |
Restricted stock awards | | 17,501 | | 2.8 | |
Performance share units | | 2,855 | | 3.3 | |
Performance share awards | | 152 | | 0.4 | |
Total unrecognized share-based compensation cost | | $ | 40,427 | | 2.5 | |
Stock Option Awards
Stock options are awards issued to customers in China were 66.4%employees that entitle the holder to purchase shares of total net sales. For the year endedCompany’s stock at a fixed price. At December 31, 2010,2014, options outstanding that have vested and are expected to vest were as follows:
| | | | | | Weighted | | | |
| | Number | | Weighted | | Average | | Aggregate | |
| | of | | Average | | Remaining | | Intrinsic | |
| | Shares | | Exercise Price | | Contractual Life | | Value | |
| | (in thousands) | | | | (in years) | | (in thousands) | |
Vested | | 1,409 | | $ | 30.76 | | 5.2 | | $ | 10,127 | |
Expected to vest | | 903 | | $ | 32.93 | | 7.7 | | 2,091 | |
Total | | 2,312 | | $ | 31.61 | | 6.2 | | $ | 12,218 | |
Outstanding options expected to vest are net sales to customers in Korea, Chinaof estimated future forfeitures. The aggregate intrinsic value represents the difference between the option exercise price and Taiwan were 32.3%, 28.7% and 10.9%$34.88, the closing price of total net sales, respectively. For the year endedCompany’s common stock on December 31, 2009, net sales to customers in Korea and China were 35.1% and 11.0% of total net sales, respectively. No other country in EMEA and Asia Pacific accounted for more than 10% of our net sales for2014, 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. 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 and St. Paul, Minnesota. During 2011 we discontinued our CIGS solar systems business, located in Tewksbury, Massachusetts and Clifton Park, New York. The Data Storage segment consistslast trading day of the ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, and dicing and slicing products sold primarilyCompany’s fiscal year as reported on The NASDAQ Stock Market for all in-the-money options.
Additional information with respect 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.stock option activity was as follows:
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)
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
| | | | Weighted | |
| | Number of | | Average | |
| | Shares | | Exercise Price | |
| | (in thousands) | | | |
Outstanding at December 31, 2011 | | 2,106 | | $ | 25.58 | |
Granted | | 704 | | 32.55 | |
Exercised | | (351 | ) | 15.39 | |
Expired or forfeited | | (137 | ) | 35.88 | |
Outstanding at December 31, 2012 | | 2,322 | | $ | 28.63 | |
Granted | | 539 | | 32.68 | |
Exercised | | (149 | ) | 14.74 | |
Expired or forfeited | | (114 | ) | 35.22 | |
Outstanding at December 31, 2013 | | 2,598 | | $ | 29.98 | |
Granted | | 509 | | 33.05 | |
Exercised | | (561 | ) | 23.88 | |
Expired or forfeited | | (155 | ) | 36.22 | |
Outstanding at December 31, 2014 | | 2,391 | | $ | 31.65 | |
The following table summarizes stock option information at December 31, 20112014:
reports baseline performance
| | Options Outstanding | | Options Exercisable | |
| | | | | | Weighted | | | | | | | | Weighted | | | |
| | | | Aggregate | | Average | | Weighted | | | | Aggregate | | Average | | Weighted | |
Range of | | | | Intrinsic | | Remaining | | Average | | | | Intrinsic | | Remaining | | Average | |
Exercise Prices | | Shares | | Value | | Contractual Life | | Exercise Price | | Shares | | Value | | Contractual Life | | Exercise Price | |
| | (in thousands) | | (in thousands) | | (in years) | | | | (in thousands) | | (in thousands) | | (in years) | | | |
$8.82 – $17.48 | | 386 | | $ | 8,769 | | 1.3 | | $ | 12.15 | | 386 | | $ | 8,769 | | 1.3 | | $ | 12.15 | |
$20.80 – $31.45 | | 347 | | 1,626 | | 8.8 | | 30.20 | | 125 | | 616 | | 8.7 | | 29.94 | |
$31.91 – $48.04 | | 1,429 | | 2,000 | | 6.9 | | 34.14 | | 669 | | 742 | | 6.4 | | 34.63 | |
$48.90 – $51.70 | | 229 | | — | | 6.4 | | 51.21 | | 229 | | — | | 6.4 | | 51.21 | |
| | 2,391 | | $ | 12,395 | | 6.2 | | $ | 31.65 | | 1,409 | | $ | 10,127 | | 5.2 | | $ | 30.76 | |
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards. The weighted average estimated values of employee stock option grants as well as the weighted average assumptions that were used in calculating such values during fiscal years 2014, 2013, 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 policies2012 were based on estimates at the date of the reportable segments are the samegrant as those described in the summary of critical accounting policies.follows:
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, 2011, 2010 and 2009, and goodwill and total assets as of December 31, 2011 and 2010 (in thousands):F-31
| | | | | | | | | | | | | |
| | LED & Solar | | Data Storage | | Unallocated
Corporate | | Total | |
|---|
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 expense, net | | | — | | | — | | | 824 | | | 824 | |
Amortization expense | | | 3,227 | | | 1,424 | | | 83 | | | 4,734 | |
Equity-based compensation expense | | | 3,473 | | | 1,458 | | | 7,876 | | | 12,807 | |
Restructuring expense | | | 204 | | | 12 | | | 1,072 | | | 1,288 | |
Asset impairment charge | | | 584 | | | — | | | — | | | 584 | |
Inventory write-offs | | | 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 | |
| | | | | | | | | | |
Year ended December 31, 2010 | | | | | | | | | | | | | |
Net sales | | $ | 795,565 | | $ | 135,327 | | $ | — | | $ | 930,892 | |
| | | | | | | | | | |
Segment profit (loss) | | $ | 300,311 | | $ | 33,910 | | $ | (18,675 | ) | $ | 315,546 | |
Interest expense, net | | | — | | | — | | | 6,572 | | | 6,572 | |
Amortization expense | | | 1,948 | | | 1,522 | | | 233 | | | 3,703 | |
Equity-based compensation expense | | | 1,764 | | | 1,140 | | | 5,865 | | | 8,769 | |
Restructuring credit | | | — | | | (179 | ) | | — | | | (179 | ) |
| | | | | | | | | | |
Income (loss) from continuing operations, before income taxes | | $ | 296,599 | | $ | 31,427 | | $ | (31,345 | ) | $ | 296,681 | |
| | | | | | | | | | |
Year ended December 31, 2009 | | | | | | | | | | | | | |
Net sales | | $ | 205,003 | | $ | 77,259 | | $ | — | | $ | 282,262 | |
| | | | | | | | | | |
Segment profit (loss) | | $ | 38,836 | | $ | (3,208 | ) | $ | (10,598 | ) | $ | 25,030 | |
Interest expense, net | | | — | | | — | | | 6,850 | | | 6,850 | |
Amortization expense | | | 1,946 | | | 1,599 | | | 432 | | | 3,977 | |
Equity-based compensation expense | | | 924 | | | 1,020 | | | 5,169 | | | 7,113 | |
Restructuring expense | | | 838 | | | 3,006 | | | 635 | | | 4,479 | |
Asset impairment charge | | | — | | | 304 | | | — | | | 304 | |
Inventory write-offs | | | — | | | 1,526 | | | — | | | 1,526 | |
| | | | | | | | | | |
Income (loss) from continuing operations, before income taxes | | $ | 35,128 | | $ | (10,663 | ) | $ | (23,684 | ) | $ | 781 | |
| | | | | | | | | | |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
| | Year ended December 31, |
| | 2014 | | 2013 | | 2012 |
Weighted average fair value | | $ | 11.58 | | $ | 13.47 | | $ | 15.56 |
Dividend yield | | 0 | % | | 0 | % | | 0 | % |
Expected volatility factor(1) | | 44 | % | | 49 | % | | 59 | % |
Risk-free interest rate(2) | | 1.19 | % | | 1.27 | % | | 0.70 | % |
Expected life(in years)(3) | | 3.9 | | 4.5 | | 4.5 |
| | | | | | | | | | | | |
(1)Expected volatility is measured using historical daily price changes of the Company’s stock over the respective expected term of the options and the implied volatility derived from the market prices of the Company’s traded opt ions.
(2)The risk-free rate for periods within the contractual term of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant.
(3)The expected life is the number of years the Company estimates that options will be out standing prior to exercise. The Company’s computation of expected life was determined using a lattice-based model incorporating historical post vest exercise and employee termination behavior.
The following table summarizes information on options exercised for the periods indicated:
| | Year ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | | | (in thousands) | | |
Cash received from options exercised | | $ | 12,056 | | $ | 2,199 | | $ | 5,409 |
Intrinsic value of options exercised | | $ | 8,390 | | $ | 2,509 | | $ | 6,800 |
RSAs and RSUs
RSAs are stock awards issued to employees that are subject to specified restrictions and a risk of forfeiture. RSAs entitle holders to dividends. The restrictions typically lapse over one to five years. The fair value of the awards is determined and fixed based on the closing price of the Company’s common stock on the trading day prior to the date of grant. RSUs are stock awards issued to employees that entitle the holder to receive shares of common stock as the awards vest, typically over one to five years. RSUs do not entitle holders to dividends. The fair value of the awards is determined and fixed based on the closing price of the Company’s common stock on the trading day prior to the date of grant reduced by the present value of dividends expected to be paid on the Company’s stock prior to vesting of the RSUs, which is currently assumed to be zero.
The following table summarizes the activity of RSAs and RSUs under the Plans:
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
| | | | Weighted | |
| | | | Average | |
| | Number of | | Grant Date | |
| | Shares | | Fair Value | |
| | (in thousands) | | | |
Outstanding at December 31, 2011 | | 618 | | $ | 33.61 | |
Granted | | 324 | | 32.62 | |
Released | | (167 | ) | 20.60 | |
Forfeitures | | (82 | ) | 34.98 | |
Outstanding at December 31, 2012 | | 693 | | $ | 36.11 | |
Granted | | 798 | | 33.16 | |
Released | | (207 | ) | 32.44 | |
Forfeitures | | (126 | ) | 34.33 | |
Outstanding at December 31, 2013 | | 1,158 | | $ | 34.93 | |
Granted | | 395 | | 34.18 | |
Released | | (183 | ) | 38.65 | |
Forfeitures | | (133 | ) | 33.66 | |
Outstanding at December 31, 2014 | | 1,237 | | $ | 34.27 | |
Released shares include the impact of restricted stock shares that were cancelled due to elections by employees to cover withholding taxes with such shares. The total fair value of shares that vested during the years ended December 31, 2011
| | | | | | | | | | | | | |
| | LED & Solar | | Data Storage | | Unallocated
Corporate | | Total | |
|---|
As of December 31, 2011 | | | | | | | | | | | | | |
Goodwill | | $ | 55,828 | | $ | — | | $ | — | | $ | 55,828 | |
Total assets | | $ | 319,457 | | $ | 57,203 | | $ | 559,403 | | $ | 936,063 | |
As of December 31, 2010 | | | | | | | | | | | | | |
Goodwill | | $ | 52,003 | | $ | — | | $ | — | | $ | 52,003 | |
Total assets | | $ | 323,096 | | $ | 61,691 | | $ | 763,247 | | $ | 1,148,034 | |
Corporate total assets are comprised principally of cash2014, 2013, and cash equivalents, short-term investments2012 was $6.2 million, $7.9 million, and restricted cash as of December 31, 2011 and 2010.
Other Segment Data (in thousands):
| | | | | | | | | | |
| | Year ended December 31, | |
|---|
| | 2011 | | 2010 | | 2009 | |
|---|
Depreciation and amortization expense: | | | | | | | | | | |
LED & Solar | | $ | 8,320 | | $ | 5,506 | | $ | 5,753 | |
Data Storage | | | 3,245 | | | 3,581 | | | 4,448 | |
Unallocated Corporate | | | 1,327 | | | 1,702 | | | 2,026 | |
| | | | | | | | |
Total depreciation and amortization expense | | $ | 12,892 | | $ | 10,789 | | $ | 12,227 | |
| | | | | | | | |
Expenditures for long-lived assets: | | | | | | | | | | |
LED & Solar | | $ | 56,141 | | $ | 8,086 | | $ | 6,656 | |
Data Storage | | | 2,703 | | | 572 | | | 192 | |
Unallocated Corporate | | | 1,520 | | | 2,066 | | | 612 | |
| | | | | | | | |
Total expenditures for long-lived assets | | $ | 60,364 | | $ | 10,724 | | $ | 7,460 | |
| | | | | | | | |
12. Defined Contribution Benefit Plan$5.4 million, respectively.
We maintain
Note 17 — Retirement Plans
The Company maintains a defined contribution plan for the benefit of its U.S. employees. The plan is intended to be tax qualified and contains a qualified cash or deferred arrangement as described under Section 401(k) of the Internal Revenue Code. Almost allEligible participants may elect to contribute a percentage of our domestic full-time employees are eligible to participate in this plan. Undertheir base compensation, and the plan during 2011, we providedCompany may make matching contributions, of fifty cents for every dollar employees contribute upgenerally equal to a maximum of $3,000. During 2012, we will provide matching contributions of fifty cents for every dollar employees contribute, up to the lesser of 3%three percent of the employee'semployee’s eligible compensation or $7,500.three percent of the maximum the employee is permitted to contribute under then current Internal Revenue Code limitations. Generally, the plan calls for vesting ofin the Company contributions over the initial five years of a participant'sparticipant’s employment. We maintainThe Company maintains a similar type of contribution plan at one of ourits foreign subsidiaries. Our contributions toThe Company recognized costs associated with these plans of approximately $1.9 million, $2.3 million, and $2.5 million for fiscal years 2014, 2013, and 2012, respectively.
The Company acquired a defined benefit plan in 2011,fiscal year 2000 that had been frozen as of September 30, 1991, and no further benefits have been accrued by participants since that date. All participants are fully vested in their respective benefits. The plan year end is September 30 and is subject to the provisions of the Employee Retirement Income Security Act of 1974. At September 30, 2014, the plan had 73 participants and $1.5 million in contract assets.
Note 18 — Income Taxes
The amounts of income from continuing operations before income taxes attributable to domestic and foreign operations were as follows:
| | Year ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | |
| | | | | (in thousands) | | | | |
Domestic | | $ | (95,195 | ) | | $ | (84,942 | ) | | $ | 5,811 | |
Foreign | | 16,841 | | | 13,732 | | | 32,375 | |
| | $ | (78,354 | ) | | $ | (71,210 | ) | | $ | 38,186 | |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Significant components of the provision (benefit) for income taxes from continuing operations consisted of the following:
| | Year ended December 31, | |
| | 2014 | | 2013 | | 2012 | |
| | | | (in thousands) | | | |
Current: | | | | | | | |
Federal | | $ | (2,464 | ) | $ | (21,022 | ) | $ | 2,515 | |
Foreign | | 2,325 | | 3,921 | | 7,576 | |
State and local | | 55 | | 148 | | (317 | ) |
Total current provision (benefit) for income taxes | | (84 | ) | (16,953 | ) | 9,774 | |
Deferred: | | | | | | | |
Federal | | (11,230 | ) | (11,589 | ) | (482 | ) |
Foreign | | (291 | ) | (462 | ) | 727 | |
State and local | | 191 | | 57 | | 1,638 | |
Total deferred provision (benefit) for income taxes | | (11,330 | ) | (11,994 | ) | 1,883 | |
Total provision (benefit) for income taxes | | $ | (11,414 | ) | $ | (28,947 | ) | $ | 11,657 | |
The income tax expense from continuing operations was reconciled to the tax expense computed at the U.S. federal statutory tax rate as follows:
| | Year ended December 31, | |
| | 2014 | | 2013 | | 2012 | |
| | | | (in thousands) | | | |
Income tax provision (benefit) at U.S. statutory rates | | $ | (27,424 | ) | $ | (24,923 | ) | $ | 13,366 | |
State taxes, net of U.S. federal impact | | (662 | ) | (1,554 | ) | (89 | ) |
Effect of international operations | | (6,160 | ) | (4,275 | ) | (2,387 | ) |
Domestic production activities deduction | | — | | 1,554 | | (489 | ) |
Research and development tax credit | | (1,935 | ) | (3,151 | ) | (3,013 | ) |
Net change in valuation allowance | | 27,156 | | 2,420 | | 2,943 | |
Change in accrual for unrecognized tax benefits | | (1,940 | ) | 577 | | 533 | |
Goodwill impairment | | 9,786 | | — | | — | |
Change in contingent consideration | | (10,279 | ) | 290 | | — | |
Other | | 44 | | 115 | | 793 | |
Total provision (benefit) for income taxes | | $ | (11,414 | ) | $ | (28,947 | ) | $ | 11,657 | |
| | | | | | | | | | | |
The Company entered into an agreement during the fourth quarter of fiscal year 2014 that concludes that it will receive a tax incentive pursuant to a negotiated tax holiday for the period from August 1, 2010 through July 31, 2014 in one of its foreign subsidiaries. As such, the Company reversed a $4.9 million tax liability, which represents the cumulative effect of calculating the tax provision using the incentive tax rate as compared to the foreign country’s statutory rate through the end of 2013.
In connection with the acquisition of PSP, the Company recorded a $2.7 million deferred tax liability related to the difference between the basis of assets acquired as calculated for financial reporting purposes as compared with the basis of assets acquired as calculated for income tax purposes. Refer to Note 5, “Business combinations” for additional information on the acquisition of PSP.
The Company did not record any excess tax benefits related to share-based compensation in 2014 or 2013, which would have been $0.6 million and 2009 were$0.5 million, respectively. In the future, the Company will record the excess tax benefits to
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
additional paid-in capital for financial reporting purposes when the net operating losses for excess tax benefits are utilized and reduce the Company’s current taxes payable. During 2012, the tax benefit from share-based incentive awards that was deductible for tax purposes exceeded that which was recorded for financial reporting purposes by $2.1 million $1.7and was recorded to “Additional paid-in capital” in the Consolidated Balance Sheets.
Deferred income taxes reflect the effect of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The tax effects of the temporary differences were as follows:
| | December 31, | |
| | 2014 | | 2013 | |
| | (in thousands) | |
Deferred tax assets: | | | | | |
Inventory valuation | | $ | 8,244 | | $ | 6,983 | |
Net operating losses and credit carry forwards | | 39,750 | | 18,972 | |
Warranty and installation accruals | | 2,452 | | 3,002 | |
Share-based compensation | | 11,794 | | 10,638 | |
Other | | 2,647 | | 3,716 | |
Total deferred tax assets | | 64,887 | | 43,311 | |
Valuation allowance | | (34,909 | ) | (7,753 | ) |
Net deferred tax assets | | 29,978 | | 35,558 | |
| | | | | |
Deferred tax liabilities: | | | | | |
Purchased intangible assets | | 34,018 | | 45,208 | |
Undistributed earnings | | 1,047 | | 1,737 | |
Depreciation | | 2,274 | | 4,711 | |
Total deferred tax liabilities | | 37,339 | | 51,656 | |
Net deferred taxes | | $ | (7,361 | ) | $ | (16,098 | ) |
The Company did not make a provision for U.S. federal income taxes or additional withholding taxes on amounts invested in foreign subsidiaries in the amounts of $115.8 million and $0.9$101.0 million respectively.at December 31, 2014 and 2013, respectively, since such amounts are indefinitely reinvested. As such, it is not practicable to determine the amount of tax associated with such unremitted earnings. For financial reporting purposes, these balances are determined as amounts that exceed the tax basis of such investments. The Company has provided U.S. federal income taxes and additional withholding taxes on foreign earnings that are anticipated to be remitted.
As of December 31, 2014, the Company had U.S. federal net operating loss carryforwards of approximately $53.3 million that will expire between 2031 and 2034, if not utilized. As of December 31, 2014, the Company had U.S. foreign tax credit carryforwards of $7.0 million that will expire between 2023 and 2024 and U.S. federal research and development credits of $9.2 million that will expire between 2031 and 2034. The Company also has state and local net operating losses and credit carryforwards.
The Company makes assessments to estimate if sufficient taxable income will be generated in the future to use existing deferred tax assets. The Company’s cumulative three year loss in its domestic operations led to a full valuation allowance against the Company’s U.S. deferred tax assets, since the Company could not conclude that such amounts are realizable on a more-likely-than-not basis. As such, the Company increased the valuation allowance by approximately $27.2 million at December 31, 2014.
The Company may amortize indefinite-lived intangible assets for tax purposes, which are not amortizable for financial reporting purposes. The deferred tax liability at December 31, 2014 relates to the tax effect of differences between financial reporting and tax bases of intangible assets that are not expected to reverse within the Company’s net operating loss
13. Cost Method InvestmentF-35
Table of Contents
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% ownershipInstruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
carryforward period.
A roll-forward of the preferred shares,Company’s uncertain tax positions for all U.S. federal, state, and 5.6% ownershipforeign tax jurisdictions was as follows:
| | December 31, | |
| | 2014 | | 2013 | | 2012 | |
| | (in thousands) | |
Balance at beginning of year | | $ | 6,228 | | $ | 5,818 | | $ | 4,748 | |
Additions for tax positions related to current year | | 244 | | 324 | | 435 | |
Additions for tax positions related to prior years | | 199 | | 477 | | 742 | |
Reductions for tax positions related to prior years | | (2,345 | ) | (224 | ) | (59 | ) |
Reductions due to the lapse of the applicable statute of limitations | | (38 | ) | — | | (48 | ) |
Settlements | | (12 | ) | (167 | ) | — | |
Balance at end of year | | $ | 4,276 | | $ | 6,228 | | $ | 5,818 | |
The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $4.3 million and $6.2 million at December 31, 2014 and 2013, respectively. The gross amount of interest and penalties accrued in income tax payable in the Consolidated Balance Sheets was approximately $0.3 million and $0.8 million at December 31, 2014 and 2013, respectively.
The Company or one of its subsidiaries files income tax returns in the United States federal jurisdiction and various states, local, and foreign jurisdictions. All material federal income tax matters have been concluded for years through 2010 subject to subsequent utilization of net operating losses generated in such years. The recently settled 2010 IRS examination resulted in the reversal of approximately $2.3 million of liabilities relating to uncertain tax positions. The 2011 federal tax return is currently under examination. All material state and local income tax matters have been reviewed through 2008. The majority of the company. During 2011, Company’s foreign jurisdictions have been reviewed through 2009. Principally all of the Company’s foreign jurisdictions remain open with respect to the tax years from 2010 through 2014. The Company does not anticipate that its uncertain tax position will change significantly within the next twelve months subject to the completion of the ongoing federal tax audit and any resultant settlement.
Note 19 — Segment Reporting and Geographic Information
The Company operates and measures its results in one operating segment and therefore has one reportable segment: the design, development, manufacture, and support of thin film process equipment primarily sold to make electronic devices. The Company’s Chief Operating Decision Maker, the Chief Executive Officer, evaluates performance of the Company and makes decisions regarding allocation of resources based on total Company results.
Revenue by major class of product is as follows:
| | Year ended December 31, | |
| | 2014 | | 2013 | | 2012 | |
| | (in thousands) | |
MOCVD | | $ | 279,751 | | $ | 219,914 | | $ | 314,152 | |
MBE | | 28,033 | | 29,419 | | 49,029 | |
Surface Processing | | 7,906 | | — | | — | |
Ion Beam and other | | 77,183 | | 82,416 | | 152,839 | |
Total Revenue | | $ | 392,873 | | $ | 331,749 | | $ | 516,020 | |
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Table of Contents
Veeco investedInstruments Inc. and additional $1.2 millionSubsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company’s significant operations outside the United States include sales and service offices in Asia-Pacific and Europe. For geographic reporting, revenues are attributed to the location in which the customer facility is located. Revenue and long-lived tangible assets by geographic region is as follows:
| | Net Sales to Unaffiliated Customers | | Long-Lived Tangible Assets | |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | |
| | (in thousands) | |
United States | | $ | 44,060 | | $ | 57,609 | | $ | 83,317 | | $ | 63,349 | | $ | 66,002 | | $ | 74,497 | |
Asia Pacific(1) | | 311,182 | | 252,199 | | 390,995 | | 15,325 | | 23,042 | | 23,769 | |
EMEA(2) and other | | 37,631 | | 21,941 | | 41,708 | | 78 | | 95 | | 36 | |
Total | | $ | 392,873 | | $ | 331,749 | | $ | 516,020 | | $ | 78,752 | | $ | 89,139 | | $ | 98,302 | |
(1) Net sales to customers in China were 40%, 45%, and 42% of total net sales for the years ended December 31, 2014, 2013, 2012, respectively.
(2) Consists of Europe, the Middle East, and Africa
Note 20 — Selected Quarterly Financial Information (unaudited)
The following table presents selected unaudited financial data for each fiscal quarter of 2014 and 2013. Although unaudited, this company. Since we do not exhibit significant influenceinformation has been prepared on such company,a basis consistent with the Company’s audited Consolidated Financial Statements and, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are considered necessary for a fair presentation of this investment is treated under the cost methodinformation in accordance with applicable accounting guidance.GAAP. Such quarterly results are not necessarily indicative of future results of operations.
| | Fiscal 2014 | | Fiscal 2013 | |
| | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | |
| | (in thousands, except per share amounts) |
Net sales | | $ | 90,841 | | $ | 95,122 | | $ | 93,341 | | $ | 113,569 | | $ | 61,781 | | $ | 97,435 | | $ | 99,324 | | $ | 73,209 | |
Gross profit | | $ | 33,777 | | $ | 30,673 | | $ | | 32,558 | | $ | 37,874 | | $ | 22,552 | | $ | 34,640 | | $ | 30,308 | | $ | 15,642 | |
Net income (loss) | | $ | 19,160 | | $ | (15,211) | | $ | | (13,977) | | $ | (56,912) | | $ | (10,071) | | $ | (4,081) | | $ | (6,026) | | $ | (22,085) | |
Basic income (loss) per common share | | $ | 0.49 | | $ | (0.39) | | $ | | (0.35) | | $ | (1.44) | | $ | (0.26) | | $ | (0.11) | | $ | (0.16) | | $ | (0.57) | |
Diluted income (loss) per common share | | $ | 0.48 | | $ | (0.39) | | $ | | (0.35) | | $ | (1.44) | | $ | (0.26) | | $ | (0.11) | | $ | (0.16) | | $ | (0.57) | |
Impairment Charge
During the fourth quarter of 2014, the Company recorded a non-cash asset impairment charge of $53.9 million related to its ALD reporting unit. Refer to Note 6, “Goodwill and Intangible Assets,” for additional information.
Acquisition of PSP
During the fourth quarter of 2014, the Company acquired PSP. The fair valueresults of this investment is not estimated because there are no identified events or changesoperations of PSP have been included in circumstancesthe consolidated financial statements since that may havedate. Refer to Note 5, “Business Combinations,” for additional information.
Change in Contingent Consideration
During the first quarter of 2014, the Company recorded a significant adverse effect onnon-cash gain of $29.4 million related to a change in the fair valueCompany’s assessment 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 Sheets as of December 31, 2011 and 2010.potential future payments related to its ALD reporting unit. Refer to Note 5, “Business Combinations,” for additional information.
F-37
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Acquisition of ALD
During the fourth quarter of 2013, the Company acquired ALD. The results of operations of ALD have been included in the consolidated financial statements since that date. Refer to Note 5, “Business Combinations,” for additional information.
F-38
Table of Contents
Schedule II—II — Valuation and Qualifying Accounts (
| | | | Additions | | | | | |
| | | | Charged | | | | | | | |
| | Balance at | | (Credited) | | Charged to | | | | Balance at | |
| | Beginning | | to Costs and | | Other | | | | End of | |
Description | | of Period | | Expenses | | Accounts | | Deductions | | Period | |
Deducted from asset accounts: | | | | | | (in thousands) | | | | | |
Year ended December 31, 2014 | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 2,438 | | $ | (1,814 | ) | $ | 325 | | $ | (218 | ) | $ | 731 | |
Valuation allowance in net deferred tax assets | | 7,753 | | 27,156 | | — | | — | | 34,909 | |
| | $ | 10,191 | | $ | 25,342 | | $ | 325 | | $ | (218 | ) | $ | 35,640 | |
| | | | | | | | | | | |
Year ended December 31, 2013 | | | | | | | | | | | |
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 | | | | | | | | | | | |
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 | |
in thousands)
S-1
| | | | | | | | | | | | | | | | |
| 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, 2011: | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 512 | | $ | — | | $ | — | | $ | (44 | ) | $ | 468 | |
Valuation allowance on net deferred tax assets | | | 1,644 | | | — | | | — | | | 121 | | | 1,765 | |
| | | | | | | | | | | | |
| | $ | 2,156 | | $ | — | | $ | — | | $ | 77 | | $ | 2,233 | |
| | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | |
INDEX TO 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 Documents |
|---|
| 2.1 | | Stock Purchase Agreement dated August 15, 2010 among Veeco Instruments Inc. (Veeco), Veeco Metrology Inc. and Bruker Corporation | | Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, Exhibit 2.1 |
| 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 |
| | | | | |
Number | | Exhibit | | Incorporated by Reference to the Following Documents |
|---|
| 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 2010 Stock Incentive Plan, effective May 14, 2010 | | Registration Statement on Form S-8 (File Number 333-166852) filed May 14, 2010, Exhibit 10.1 |
| 10.11 | * | Form of 2010 Stock Incentive Plan Stock Option Agreement | | Registration Statement on Form S-8 (File Number 333-166852) filed May 14, 2010, Exhibit 10.2 |
| 10.12 | * | Form of 2010 Stock Incentive Plan Restricted Stock Agreement | | Registration Statement on Form S-8 (File Number 333-166852) filed May 14, 2010, Exhibit 10.3 |
| 10.13 | * | Veeco Performance-Based Restricted Stock 2010 | | Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 10.2 |
| 10.14 | * | Veeco 2010 Management Bonus Plan dated January 22, 2010 | | Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, Exhibit 10.2 |
| 10.15 | * | Veeco 2010 Special Profit Sharing Plan dated February 15, 2010 | | Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, Exhibit 10.3 |
| 10.16 | * | 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 |
| 10.17 | * | 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 |
| 10.18 | * | Employment Agreement effective as of July 1, 2007 between Veeco and John R. Peeler | | Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, Exhibit 10.3 |
| 10.19 | * | 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 |
| 10.20 | * | 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 |
| 10.21 | * | 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 |
| | | | | |
Number | | Exhibit | | Incorporated by Reference to the Following Documents |
|---|
| 10.22 | * | 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 |
| 10.23 | * | Form of Amendment effective June 9, 2006 to Letter Agreements between Veeco and each of John P. Kiernan and Robert P. Oates | | Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.3 |
| 10.24 | * | Form of Amendment effective December 31, 2008 to Letter Agreements between Veeco and each of John P. Kiernan and Robert P. Oates | | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.40 |
| 10.25 | * | 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 |
| 10.26 | * | Letter Agreement dated October 31, 2005 between Veeco and Robert P. Oates | | Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, Exhibit 10.1 |
| 10.27 | * | Amendment dated September 12, 2008 to Employment Agreement between Veeco and Robert P. Oates | | Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, Exhibit 10.2 |
| 10.28 | * | Veeco 2011 Management Bonus Plan, dated January 26, 2011 | | Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, Exhibit 10.1 |
| 10.29 | * | Service Agreement effective January 1, 2012 between Veeco and Edward H. Braun | | Filed herewith |
| 10.30 | * | Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller | | Filed herewith |
| 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.