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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x(Mark One)
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
OR
oFor the fiscal year ended December 31, 2015
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OR |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-16244 |
For the transition period from to .
Commission file number 0-16244
VEECO INSTRUMENTS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
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| 11-2989601
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(State or Other Jurisdiction of Incorporation or Organization) | | 11-2989601
(I.R.S. Employer Identification No.) |
Terminal Drive
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Terminal Drive
Plainview, New York |
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11803
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(Address of Principal Executive Offices) | | 11803
(Zip Code) |
Registrant’s telephone number, including area code code:
(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)
Common Stock, par value $0.01 per share | | (Name of each exchange on which registered)
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 x 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.) Yes x 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.files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’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. x
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 accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o |
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Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
| (Do not check if a smaller reporting company)
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
The aggregate market value of the votingcommon stock held by non-affiliates of the Registrant,registrant at June 26, 2015 (the last business day of the registrant’s most recently completed second quarter) was $1,202,150,344 based on the closing price of $29.81 on the common stockNASDAQ Stock Market on June 28, 2013 as reported on that date.
The Nasdaq National Market, was $1,376,219,104. 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.
39,846,244on February 10, 2016 was 39,972,031 shares of common stock, were outstanding as of the close of business on February 18, 2014.par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
TableCertain portions of Contentsthe definitive Proxy Statement to be used in connection with the Registrant’s 2016 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
Safe Harbor Statement
This annual report on Form 10-K (the “Report”) contains 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. Discussions containing such forward-looking statements may be found in Part I. Items 1, 3, 7 and 7A hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends”, “will” 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;
·Timing of market adoption of light emitting diode (“LED”) technology for general lighting is uncertain;
·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 metal organic chemical vapor deposition (“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 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;
·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;
·The cyclicality of the industries we serve directly affects our business;
·We rely on a limited number of suppliers, some of whom are our sole source for particular components;
·Our sales to LED 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;
·We may be exposed to liabilities under the Foreign Corrupt Practices Act and any determination that we violated these or similar laws could have a material adverse effect on our business;
·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, which operate in highly concentrated industries;
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·Our sales cycle is long and unpredictable;
·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;
·The price of our common shares may be volatile and could decline significantly;
·Our inability to attract, retain, and motivate key employees could have a material adverse effect on our business;
·We are subject to foreign currency exchange risks;
·The enforcement and protection of our intellectual property rights may be expensive and could divert our limited resources;
·We may be subject to claims of intellectual property infringement by others;
·If we are subject to cyber-attacks we could incur substantial costs and, if such attacks are successful, could result in significant liabilities, reputational harm and disruption of our operations;
·Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses;
·We may be required to take additional impairment charges for goodwill and indefinite-lived intangible assets or definite-lived intangible and long-lived assets;
·Changes in accounting pronouncements or taxation rules or practices may adversely affect our financial results;
·We are subject to risks of non-compliance with environmental, health and safety regulations;
·We have significant operations in locations which could be materially and adversely impacted in the event of a natural disaster or other significant disruption;
·We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our Company by another company more difficult;
·New regulations related to conflict minerals will force us to incur additional expenses, may make our supply chain more complex, and may result in damage to our relationships with customers; and
·The matters set forth in this Report generally, including the risk factors set forth in “Part I. Item 1A. Risk Factors.”
Consequently, such forward-looking statements should be regarded solely as the current plans, estimates and beliefs of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco”, the “Company”, “we”, “us”, and “our”, unless the context indicates otherwise). The Company does not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.
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TableThis Annual Report on Form 10-K (“Form 10-K”) contains certain forward-looking information relating to Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “Registrant,” “we,” “our,” or “us,” unless the context indicates otherwise) that is based on the beliefs of, Contentsand assumptions made by, our management as well as information currently available to management. When used in this Form 10-K, the 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 Form 10-K generally. This forward-looking information reflects our current views with respect to future events and is subject to certain risks, uncertainties, and assumptions, some of which are described under the caption “Risk Factors” in Part I, Item 1A, and elsewhere in this Form 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 forward-looking information described in this Form 10-K as believed, 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.I
Item 1. Business
The Company
Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco”, the “Company”, “we”, “us”, and “our”, unless the context indicates otherwise) createsWe create process equipment that enables technologies for a cleaner and more productive world. We design, develop, manufacture, market, and marketsupport thin film equipment aligned withto meet the demands of key global “megatrends”trends such as improving energy efficiency, enhancing mobility, and mobility.increasing connectivity. Our equipment is primarily soldused to make electronic devices which enable these trends, including light emitting diodes (“LED”s)LEDs”), flexible organic LED (OLED) displays, hard-diskmicro-electromechanical systems (“MEMS”), wireless devices, power electronics, hard disk drives solar cells, power semiconductors(“HDDs”), and wireless components.semiconductors. We may also license our technology to our customers or partners.
We develop highly differentiated, “best-in-class” process equipment for critical performance steps.steps in thin film processing. Our products featureprovide leading technology at low cost-of-ownership and high throughput.cost-of-ownership. Core competencies in advanced thin film technologies over 300 patents, and decades of specialized process know-how helpshelp us to stay at the forefront of these demandingrapidly advancing industries.
Our LED & Solar segment includes two related compound semiconductor technologies, metal organic chemical vapor deposition (“MOCVD”) and molecular beam epitaxy (“MBE”) as well as newly acquired atomic layer deposition (“ALD”) technology. Our MOCVD and MBE systems and components enable the manufacture of LEDs usedHeadquartered in consumer electronics, displays and lighting, power semiconductors, wireless components and solar cells. Our ALD technology is used by the manufacturers of OLED displays and has further applications in the semiconductor and solar markets.
Our Data Storage segment designs and manufactures systems used to create thin film magnetic heads (“TFMH”s) that read and write data on hard disk drives. These include ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, chemical vapor deposition, and slicing, dicing and lapping systems. While our systems are primarily sold to hard drive customers, they also have applications in optical coatings, micro-electro-mechanical systems (“MEMS”) and magnetic sensors, and extreme ultraviolet (“EUV”) lithography.
As of December 31, 2013,Plainview, New York, we had approximately 800 employees to support our customers through product and process development, training, manufacturing, and sales and service sites in the U.S., South Korea, Taiwan, China, Singapore, Japan, Europe and other locations.
Veeco Instruments Inc. waswere organized as a Delaware corporation in 1989. We have sales and service operations across the Asia-Pacific region, Europe, and North America to address our customers’ needs.
Our Growth StrategyBusiness Overview
Our growth strategy consists of:We are focused on:
· Providing differentiated process equipment to address customers’ current production requirements and next generation product development roadmaps;
· Investing to win through focused research and development spending in markets that we believe provide significant growth opportunities or are at an inflection point in process equipment requirements. Examples includerequirements, including LED, OLED, and power semiconductor devices;devices, and advanced packaging technologies;
· Leveraging our world-class sales channel and local process applications support teams to build strong strategic relationships with technology leaders;
· Expanding our portfolio of service products thatto improve the performance of our systems, including spare parts, upgrades, and consumables to drive growth, reduce our customers’ cost of ownership, and improve customer satisfaction;
· CombiningCross-selling our product portfolio across our broad customer base and end markets to both maximize sales opportunities and diversify our business;
·Utilizing a combination of outsourced and internal manufacturing strategies to flex manufacturing capacity through industry investment cycles;cycles without compromising quality; and
· Pursuing partnerships and acquisitions to expand our product portfolio into adjacent markets and accelerate ourdrive sales growth.
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Business Overview and Industry TrendsMarkets
Business Overview:Our deposition, etch and other systems are applicable toused in the creation of a broad range of microelectronic components, including LEDs, OLEDs, TFMHsMEMS, radio frequency (“RF”) filters, power semiconductors, thin film magnetic heads (“TFMHs”), and compound semiconductor devices. Our customers who manufacture these devices invest in equipment in orderour systems to advance theirdevelop next generation products and deliver more efficient, and cost effective, technologyand advanced technological solutions. Our businesses tend to beWe operate in a cyclical business environment, and are highly influenced by customerour customers’ buying patterns that are dependent upon industry trends. While ourOur products are sold tointo multiple end markets, we are focused hereinand the following discussion focuses on the trends that most influence our business.business within each of those markets.
Lighting, Display & Power Electronics
LED Industry Trends: Followingtechnology has existed for more than 50 years; however, commercial adoption of LEDs was limited to niche applications until the global recessionmost recent decade. In the early 1990’s, researchers developed a process utilizing Gallium Nitride (“GaN”) that created a low cost LED to produce white light. With that breakthrough, the LED industry started, and the number of applications for LEDs began to expand. The first wave of LED growth occurred between 2003 and 2006 driven by mobile phones, which implemented the use of LED technology for display backlighting. The LED industry experienced its second period of rapid growth as LEDs were adopted for TV display backlighting. Starting in 2008-2009, we experienced a rapid improvement in business conditions in late 2009, through mid-2011,LED producers, particularly in our MOCVD business. Demand for our MOCVD equipment increased dramatically, primarily from customers in South Korea China, and Taiwan, as LEDs becamemade significant investments in LED process equipment to capture share in these markets. Our metal organic chemical vapor deposition (“MOCVD”) technology is at the standard illuminationcore of the manufacturing process for TV backlighting. We experienced a strong increaseGaN-based LEDs. Over the next couple of years, our sales increased considerably driven in demandpart by Chinese government subsidies for MOCVD from customers in China due to government funding of LED fabrication facility expansions throughout the region.equipment. Following this large investment the LED industry enteredwave, there was an overcapacity situation, evidenced by low tool utilization rates being reported by many key global customers. As a result, our MOCVD business declined significantly from the middle of 2011 through the end of 2013. While utilization rates of our equipment in many customer facilities improved in 2013 from prior trough levels in 2012, weak business conditions in MOCVD persist and continue to be difficult at the start of 2014. In the short term, it is difficult for us to predict when the supply/demandoversupply of MOCVD equipment, will return to equilibrium and when order rates for our MOCVD products will meaningfully recover.business went into a deep decline.
While consumer electronics (e.g. cell phones, laptops, LED-TVs) have been the dominant end marketsThe adoption of LEDs for solid state lighting helped drive improvements in industry conditions in 2014. LED technology over the past decade, and for which most of the new MOCVD capacity was installed, these applications are expected to reach saturation in the next few years. Conversely, the general lighting market is in its infancy, and we believe that thousands of additional MOCVD tools will be required as LEDs become widely adopted for this much larger market application.
As part of the shift toward more efficient energy use across the globe, we believe LED technology will play a key role inoffered energy and cost savings opportunities in lighting. We see this opportunity as both vastlighting, which played an important role in the global shift toward energy efficiency initiatives. LEDs are up to 80% more efficient than traditional incandescent bulbs and long-term given thatup to 25% more efficient than compact fluorescent bulbs. LED penetration into the lighting market is growing, and for the first time, LED unit demand for general lighting surpassed demand for display backlighting in 2015. While LED industry conditions softened in the second half of 2015, due largely to weak TV and LED display backlighting demand, we expect to benefit from the ongoing adoption of LED lighting over time.
MOCVD technology is just now beginning to penetrate the global lighting market. LED adoption is happening initially in outdoor, commercial and industrial lighting where high usage and lower efficiency make incumbent lighting costly. Further adoption across all forms of lighting is expected to occurequally important in the coming years with rapidly decliningmanufacturing of red, orange, and yellow (“ROY”) LEDs, which are used in signage and automotive lighting applications. For these LEDs, our K475 MOCVD platform is used to deposit highly uniform Arsenic Phosphide (“AsP”) films which create amber and red hues. While ROY LEDs are predicted to grow at a slower pace than LED costs, shortening payback periods versus conventionalunits for general lighting, technologies,we expect to benefit from growth driven by increased adoption of LED technology for automobiles and “ban-the-bulb” legislation now underway in more than 20 countries around the globe.outdoor display/signage applications. In addition to depositing the incandescent bulb phase-outs, many countries are implementing policies to accelerate adoption of LEDs. These include China’s “10 cities 10,000 lights” program, South Korea’s “20-60” plan targeting 60% penetration of lighting on a national level by 2020,critical GaN layer with our MOCVD products, our Precision Surface Processing (“PSP”) products address multiple etch and Japan’s “Basic Energy Plan” with specific goalsclean steps required for energy efficient lighting. In March 2013,the LED industry forecasters at Digitimes Research projected that LED lighting will represent about 38.6% of the total lighting market, and will be worth approximately $44.2 billion by 2015.manufacturing process.
In order to capitalize on this opportunity, we introduced several new generationsOur products are also crucial in the manufacturing of MOCVD tools,GaN-on-Silicon based power electronic devices. Global demand is increasing for advanced power electronics with greater energy efficiency, smaller footprints, higher operating temperatures, faster switching capabilities, and greater reliability. These devices support many needs, including our TurboDisc® K-Series™more efficient IT servers, electrical motors, electric vehicles, wind turbines, and MaxBright® MOCVD systems which provide customers with significant cost of ownership advantages when compared with alternative equipment. These activities enabled us to overtake our primary competitor in market share in 2012. To maintain our leadership position, we continue to invest heavily in MOCVD research and development to help drive down cost of LED manufacturing for our customers in order to accelerate lighting adoption.photovoltaic power inverters.
Trends in other Markets Impacting our MOCVD Business: Power semiconductors are an emerging market opportunity for MOCVD equipment. While silicon-based transistors are the mainstream ofwidely used in power electronic devices today, gallium nitride (“GaN”)-on-SiliconGaN-on-Silicon based power electronics developed on MOCVD tools can potentially deliver higher performance (i.e.(e.g., smaller power supply form factors, higher efficiency, and faster switching speed)speeds). GlobalThese devices are ideal for applications such as IT servers, where heat generation is an ever-increasing problem as server banks become larger and where heat management and energy efficiency requirements continues to rise. In 2015, global industry leaders in power electronics are currently workingcontinued to focus on research and development (“R&D”) programs to explorecommercialize this new technology. GaN-on-Silicon based powerDevice manufacturers will likely begin to transition from development to production of these devices have potential for information technology and consumer devices (e.g. power supplies, inverters).over the next couple of years; we can benefit from this transition as our customers invest in process equipment to support this production ramp-up.
Advanced Packaging, MEMS & RF
Another application for MOCVD isAdvanced Packaging includes a portfolio of wafer-level assembly technologies that enable the miniaturization and performance improvement of electronic products, such as smartphones, smartwatches, tablets, and laptops. Our PSP products have been gaining traction in the solar market. MOCVD equipment can also be usedrapidly growing area of Advanced Packaging. Demand for higher performance, increased functionality, smaller form factor, and lower power consumption in mobile devices, consumer electronics, and high performance computing is driving the adoption of advanced packaging technology. Independent Device Manufacturers (“IDMs”) and Outsourced Semiconductor Assembly and Test (“OSAT”) companies are implementing multiple advanced packaging approaches including Fan-Out Wafer Level Packaging (“FO-WLP”) and Through Silicon Via (“TSV”) to manufacture high-efficiency triple junction photovoltaic cells. We currently sell a small number of MOCVD systems each year to make solar cells for Concentrator Photovoltaic (CPV)enable stacked memory, 2.5D, and Space Based applications.3D packaging devices.
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Trends Impacting our MBE Business: Our MBE systems, sources and componentsMEMS devices are used to manufacture critical epitaxial layers in applications such as solar cells, fiber-optics, mobile phones, radar systems and displays. Our business is primarily influenced by long-term market trends in cell phone manufacturing. Each one of these complex cell phone devices containsfor an increasing number of power amplifiers or other compound semiconductor radio frequency components. Due to industry consolidationapplications, including accelerometers for automobile airbags, pressure sensors for medical uses, and resulting overcapacity, our salesgyroscopes for a variety of MBE production tools haveconsumer products, such as gaming consoles and mobile devices. One of the fastest growing MEMS applications has been declining for about a year. In 2013, we refocused our business and product portfolio to increase our market share in sales of MBE systems to scientific research organizations and universities.
Trends Impacting our ALD Business: On October 1, 2013, we completed the acquisition of Synos Technology, Inc.(“Synos”), which brought atomic layer deposition technology to us. We are working with the world leader in mobile OLED displays to develop ALD systems that effectively encapsulate the OLED materials and potentially enable flexible displaysRF filters for mobile phones. Accordingdevices, driven by increasingly complex wireless standards and the exponential growth of mobile data. In order to industry forecasting firm IHS iSuppli, the flexible OLED display market is expectedaddress these growing demands, a high-end smartphone can have as many as 60 discrete RF filters, a figure that has more than doubled in recent years. These trends are positive for us, particularly for our PSP products as well as our ion beam etch and Molecular Beam Epitaxy (“MBE”) products, which are used to grow from $21 million in 2013 to almost $12 billion by 2020. In addition, we also see numerous extended opportunities for ALD technology in OLED TV, lighting, semiconductor, solarcreate Bulk Acoustic Wave (“BAW”) and other adjacent markets.Surface Acoustic Wave (“SAW”) RF filters.
Data Storage Business Overview and Trends: Worldwide
The Data Storage market involves the storage demand continues to increase.of data in electromagnetic or other forms for use by a computer or device, including HDDs used in large capacity storage applications. While hard disk drives (“HDDs”)HDDs face significant competition from flash memory, we believe that HDDs will continue to provide the best value for mass storage and will remain at the forefront of large capacity storage applications. According toThis is especially true for data center applications where large volumes of data storage research firm TrendFocus’ August 2013 report, shipmentsare required to serve an increasingly mobile population. The HDD manufacturing industry continues to optimize its existing manufacturing capacity to address demand. While we have seen signs of TFMHs, the HDD component thatcapacity constraints in some process areas and have experienced incremental orders for our equipment makes,in 2015, future orders are forecastedlikely to grow at a compound annual growth ratebe focused on implementation of 4.2%new technologies as opposed to capacity expansion. Future demand for our data storage systems is unclear and orders are expected to fluctuate from 2013quarter to 2017.quarter. Our process knowledge and magnetic materials expertise from the Data Storage market positions us well for certain front-end semiconductor and MEMS opportunities, as thin film magnetic manufacturing methods become increasingly used in these markets.
While technological change continues in data storage, the industry has gone through a period of maturation, including vertical integrationScientific & Industrial
The Scientific 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 us to report revenue growth in both 2010 and 2011. Natural disasters in Japan (tsunami) and Thailand (floods) caused major disruptions to the HDD supply chain in 2011. The floods in Thailand resulted in an unexpected increase in equipment orders for us in the fourth quarter of 2011 as customers rebuilt lost capacity. This led to record levels of Data Storage revenue in the first half of 2012. However, this significant equipment investment, combined with industry consolidationIndustrial markets include advanced materials research and a slowdown in hard drive unit demand in mid-2012 due to weak global economic conditions, caused our hard drive customers to freeze capacity additions. So, for the full yearbroad range of 2012, our Data Storage revenue was flatmanufacturing applications including laser diodes, infrared detectors, optical coatings, and orders were well below recent historical averages. Industry overcapacity and weak order rates continued into 2013 and it is unclear when hard drive manufacturers will need to make significant investments in new equipment capacity.
Throughout industry cycles, we continue to invest in developing systems to support advanced technologies such as heat assisted magnetic recordingextreme ultraviolet (“HAMR”EUV”). 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. photomasks.
Our Data StorageMBE systems are used by scientific research organizations and universities to drive new discoveries in the areas of materials science. MBE enables precise epitaxial crystal growth for a wide variety of materials, which supports the development of new performance materials used for emerging technologies. MBE technology is also sold for applicationsused in MEMS magnetic sensors, optical coatingsthe manufacturing of products such as laser diodes and EUV photomasks. We have put in place new product development, marketing and sales strategiesinfrared sensors. Our tools create highly uniform Gallium-Arsenide (“GaAs”) or Indium-Phosphide (“InPh”) film layers, which are critical to grow the non-data storage applications for our technologies.performance of these devices. Our PSP products are also used to manufacture infrared sensors.
We have two segments, LED & SolarOur Ion Beam Deposition (“IBD”) tools are used to produce high quality optical films for multiple applications including laser mirrors, optical filters and Data Storage. Net salesanti-reflective coatings. Our tools deposit thin layers of advanced materials on various substrates to alter how light is reflected and transmitted. Our ability to precisely deposit high quality films with extremely low particulate levels make our ion beam deposition technology ideal for these segments are illustrated in the following table (dollars in thousands):manufacturing defect-free EUV photomask blanks. The front-end semiconductor industry is expected to adopt EUV lithography to meet future device requirements. Future growth will depend on overall EUV production readiness.
| | For the year ended December 31, | |
| | | | Percent of | | | | Percent of | | | | Percent of | |
| | 2013 | | total | | 2012 | | total | | 2011 | | total | |
Segment Analysis | | | | | | | | | | | | | |
LED & Solar | | $ | 249,742 | | 75.3 | % | $ | 363,181 | | 70.4 | % | $ | 827,797 | | 84.5 | % |
Data Storage | | 82,007 | | 24.7 | % | 152,839 | | 29.6 | % | 151,338 | | 15.5 | % |
Total | | $ | 331,749 | | 100.0 | % | $ | 516,020 | | 100.0 | % | $ | 979,135 | | 100.0 | % |
Please see our footnote Foreign Operations, Geographic Area and Product Segment Information in our Consolidated Financial Statements for additional information regarding our segments and sales by geographic location.
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LED & SolarSystem products
Metal Organic Chemical Vapor Deposition Systems (“MOCVD”):
We are the world’s leading supplier of MOCVD technology.systems. MOCVD production systems are used to make GaN-based devices (blue(such as blue and green LEDs) and AsP-based devices (red, orange and yellow(such as ROY LEDs), which are used today in television and laptopcomputer backlighting, general illumination, large area signage, specialty illumination, power electronics, and many other applications. Our AsP MOCVD systems also are used to make high-efficiency triple junction photo cells. In 2011, we introduced the industry’s first production-proven multi-chamberIntroduced in 2014, our TurboDisc® EPIK™700 GaN MOCVD system the MaxBright, for high-volume production of LEDs. We sell MOCVD systems in either single or multi-chamber configurations. In 2012, we introduced the TurboDisc MaxBright M & MHP and K465i HP GaN MOCVD systems,combines the industry’s highest productivity highest footprint efficiency platformsand best-in-class yields with low cost of ownership, further enabling lower manufacturing costs for LED manufacturing.general lighting applications. Our TurboDisc K475™ AsP MOCVD systems are also used to make ROY LEDs and high-efficiency triple junction photovoltaic solar cells. Our Propel™ PowerGaN™ MOCVD System (“Propel”) enables the development of highly-efficient GaN-based power electronic devices that have the potential to accelerate the industry’s transition from research and development to high volume production. The Propel system offers 200mm technology and incorporates single-wafer reactor technology for outstanding film uniformity, yield, and device performance.
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, MEMS, LEDs, and compound semiconductor markets, which we renamed PSP. The two core platforms acquired are the WaferEtch™ and the WaferStorm™. The WaferEtch platform provides highly uniform, selective etching with onboard end point detection for improved process control and yield. 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. The TSV Revealer offers a significant cost of ownership reduction compared with dry etch processing by replacing up to four separate process steps. 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. This highly flexible platform targets solvent based cleaning applications that require a significant level of control.
Ion Beam Etch and Deposition Systems
Our NEXUS® IBD systems utilize ion beam technology to deposit precise layers of thin films. IBD systems deposit high purity thin film layers and provide maximum uniformity and repeatability. Our NEXUS Ion Beam Etch (“IBE”) systems utilize a charged particle beam consisting of ions to etch precise, complex features. The NEXUS systems may be included on our cluster system platform to allow either parallel or sequential deposition/etch processes. These systems are used primarily by data storage and telecommunications device manufacturers in the fabrication of discrete and integrated microelectronic devices.
We also provide a broad array of ion beam sources. These technologies are applicable in the HDD 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.
Molecular Beam Epitaxy Systems (“MBE”):
MBE is the process of precisely depositing epitaxially aligned atomically thin crystalepitaxially-aligned atomically-thin crystalline layers, or epilayers, of elemental materials onto a substrate in an ultra-high vacuum environment. We are the leading supplier of MBE systems worldwide. Our MBE systems, sources, and components are used to develop and manufacture critical epitaxial layers in a wide variety of applications such as solar cells, fiber lasers, infrared detectors, 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 (e.g., power amplifiers, high electron mobility transistors, or hetero-junction bipolar transistors) and a broad array of research applications for new compound semiconductor materials research applications.materials. In 2013, we introduced the GENxplor™, R&D MBE System, the industry’s first fully-integrated MBE system for the compound semiconductor R&Dresearch 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 including gallium arsenide, nitrides, and oxides. Our GEN2000® and
Fast Array Scanning Atomic Layer Deposition Systems (“FAST-ALD”GEN200): FAST-ALD™ represents a paradigm shift in a technology long known® production MBE systems continue to set standards 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 capablevolume production of deposition on substrates with virtually no size limitation. Our patented linear reactor allows the chemical reaction to occur at the substrate’s surface. We are primarily focused on applying this technology for the encapsulation of organic light emitting diode (OLED) materials used to enable flexible mobile devices and we are also exploring additional applications in solar,MBE-based compound semiconductor and other end markets.
Data Storage
Ion Beam Deposition (“IBD”) Systems: Our IBD systems and NEXUS® IBD systems utilize ion beam technology to deposit precise layers of thin films. The NEXUS systems may be included on our cluster system platform to allow either parallel or sequential etch/deposition processes. IBD systems deposit high purity thin film layers and provide maximum uniformity and repeatability. In addition to IBD systems, we provide a broad array of ion beam sources. These technologies are applicable in the hard drive industry as well as for optical coatings and other end markets.
Ion Beam Etch (“IBE”) Systems: Our NEXUS IBE systems etch precise, complex features for use primarily by data storage and telecommunications device manufacturers in the fabrication of discrete and integrated microelectronic devices.
Other Deposition and Industrial 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” applications in a data storage fabrication facilityfacilities where TFMHs or “sliders” are fabricated. This equipment includes lapping tools, which enable precise material removal within three nanometers, which is necessary for next generationadvanced TFMHs. We also manufacture tools that slice and dice wafers into rowbarsrow bars and TFMHs.
Optical Coatings: Our SPECTOR offers manufacturers improvements in target material utilization, optical endpoint controlSales and process time for cutting-edge optical interference coating applications.
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Service and Sales
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 wethe Asia-Pacific region. We believe that our customer service organization is a significant factor in our success. In 2010 and 2011, we significantly expanded our footprint in Asia to bring training, technology support and R&D closer to our customers through new sites in China, Taiwan and South Korea. We provide service and support on a warranty, service contract, orand an individual service-call basis. 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 29%22%, 21%25%, and 9%29% of our net sales for the years ended December 31, 2013, 20122015, 2014, and 2011,2013, respectively. Parts and consumablesupgrade sales represented approximately 23%18%, 17%21%, and 7%23% of our net sales for those years, respectively, and service and support sales were 6%4%, 4%, and 2%,6% respectively.
Customers
We sell our products to many of the world’s major LED, solarMEMS, OSAT, HDD and hard drivesemiconductor 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 HC SemiTek in our LED & Solar segmentSan’an Optoelectronics Co. and KAISTAR Lighting (Xiamen) Co. each accounted for more than 10% of our total net sales in 2013, Western Digital in our Data Storage segment accounted for more than 10% of our total net2015; sales in 2012,to HC SemiTek Corp. and Elec-Tech InternationalSeoul Viosys Co. Ltd. and Sanan Optoelectronics in our LED & Solar segment each accounted for more than 10% of our total net sales in 2011.2014; sales to HC SemiTek Corp. accounted for more than 10% of our total net sales in 2013. If any principal customer discontinues its relationship with us or suffers economic difficulties, our business prospects, financial condition, and operating results could be materially and adversely affected.
Research and Development and Marketing
Our marketing, research and development functions are organized by business unit.continually focused on the timely creation of new products and enhancements to existing products, both of which are necessary to maintain our competitive position. We believe that this organizational structure allows each business unit managercollaborate with our customers to more closely monitor the products for which they are responsible, resulting in more efficient marketingalign our technology and research and development.product roadmaps to customer requirements. Our research and development activities take place at our facilities in Fremont, California; St. Paul, Minnesota; Somerset, New Jersey; Plainview, New York; Poughkeepsie, New York; Camarillo, California; Ft. Collins, Colorado; Somerset, New Jersey; St. Paul, Minnesota; Fremont, California; and South Korea.
We believe that continued and timely development of new products and enhancements to existing products are necessary to maintain our competitive position. We work collaboratively with our customers to help ensure our technology and product roadmaps are aligned with customer requirements.Horsham, Pennsylvania.
Our research and development expenses were approximately $81.4$78.5 million, $95.2$81.2 million, and $96.6$81.4 million, or approximately 25%16%, 18%21%, and 10%25% of net sales for the years ended December 31, 2013, 20122015, 2014, and 2011,2013, respectively. These expenses consisted primarily of salaries, project materials, and other product development and enhancement costs.
Suppliers
We currently outsource certain functionsa portion of our manufacturing 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.
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Backlog
Our backlog consists of orders for which we received a firm purchase order, a customer-confirmed shipment date within twelve months, and a deposit wherewhen required.
Our backlog decreased to $143.3$186.0 million as ofat December 31, 20132015 from $150.2 $286.7
million as ofat December 31, 2012.2014. During the year ended December 31, 2013,2015, we recorded backlog adjustments of approximately $6.8$7.7 million consisting of a $5.6 million adjustment relatedrelating to orders that no longer met our bookings criteria as well as an adjustment related to foreign currency translation of $1.2 million.criteria.
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.
Some of ourOur competitors include, but are not limited to:include: Aixtron; AMEC; Applied Materials; Canon AnelvaAnelva; DCA Instruments; Grand Plastics Technology Corporation; LAM Research; Leybold Optics; Oerlikon Balzers;Oerlikon; Orbotech; Oxford Instruments; ToyoRiber; Scientech; Taiyo Nippon Sanso; and Riber.Tang Optoelectronics Equipment Company (TOPEC).
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 proprietyproprietary 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 ofAt December 31, 2013,2015 we had approximately 800783 employees, of which there were approximately 160200 in manufacturing and testing, 9086 in sales and marketing, 160147 in service and product support, 260201 in engineering and research and development, and 130149 in information technology, general administration, and finance. In addition, we had approximately 10 temporary employees/outside contractors in support of our variable cost strategy. The success of our future operations depends in large part on our ability to recruit and retain engineers, technicians, and other highly-skilledhighly skilled professionals who are in considerable demand. We feel that we have adequate programs in place to attract, motivate, and retain our employees. We plan to monitor industry practices to make sure that our compensation and employee benefits remain competitive. However, there can be no assurance that we will be successful in recruiting or retaining key personnel. We believe that our employee relations with our employees are good.
9Financial Information About Segments and Geographic Areas
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We operate as a single reportable segment and report our financial results in four geographic regions: the United States; China; Europe, Middle East, and Africa (“EMEA”); and the Rest of World (“ROW”). Refer to Note 18, “Segment Reporting and Geographic Information,” in the Notes to the Consolidated Financial Statements for financial data pertaining to our geographic operations.
Available Information
We file annual, quarterly and current reports, information statements and other informationOur 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 is www.sec.gov.
Internet Address
We maintain a website where additional information concerning our business and various upcoming events can be found. The address of our website is www.veeco.com. We provide a link on our website, under Investors—Financial—SEC Filings, through which investors can access our filings with the SEC,, including our filed annual reportAnnual Report on Form 10-K, filed 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
Key Risk Factors That May Impact Future Results
In addition toStockholders should consider carefully the other information set forth herein, the following risk factors should be carefully considered by shareholdersdescribed below. Any of these factors, many of which are beyond our control, could materially adversely affect our business, financial condition, operating results, cash flow, and potential investors in the Company.stock price.
OurUnfavorable market conditions may adversely affect our operating results have been, and may continue to be, adversely affected by unfavorable market conditions.results.
Market conditions relative toConditions of the segmentsmarkets in which we operate are volatile and have deteriorated significantly in many of the countries and regions in which we do business and may remain or become further depressed for the foreseeable future. Our MOCVD order volumes decreased significantly in the latter part of 2011, remained depressed through 2012 and 2013, and may continue to remain at low levels. Foreign government incentives designed to encourage the development of the LED industry have been curtailed, and the demand for our MOCVD products has softened.future. We have experienced and may continue to experience customer rescheduling and, to a lesser extent, cancellations of orders for our products. 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;
· increased price competition andleading to lower margin for our products;
· increased competition from sellers of used equipment or lower-priced alternatives to our products;
· increased risk of excess and obsolete inventories;inventory obsolescence;
· increased risk in the collectability ofuncollectable amounts due from our customers;
·increased riskcustomers resulting in potentialincreased reserves for doubtful accounts and write-offs of accounts receivable;
· disruptions in our supply chain as we reduce our purchasing volumes and limit our contract manufacturing operations; and
· higher operating costs as a percentage of revenues.
If the markets in which we participate continuefail to experience a slow recovery or an additional down turn,experience a further downturn, this could have a further negative impact on our sales and revenue generation, margins and operating expenses, and profitability.
A reduction or elimination of foreign government subsidies and economic incentives may adversely affect the future order rate for our MOCVD equipment.
We generate a significant portion of our revenue in China. In recent years, the Chinese government has provided various incentives to encourage development of the LED industry, including subsidizing a significant portion of the purchase cost of MOCVD equipment. These subsidies have enabled and encouraged certain customers in this region to purchase more of our MOCVD equipment than these customers might have purchased without these subsidies. The availability of these subsidies has varied over time and may end at some point in the future. A reduction or elimination of these incentives may result in a 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. In addition, in an effort to promote Chinese competition, the Chinese government could impose restrictions on the receipt of these subsidies, including requirements that the purchased equipment be sourced locally.
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, a reduction in order backlog, and could have other negative effects on our business, financial condition, and results of operations.
The cyclicality of the industries we serve directly affects our business.
Our business depends in large part upon the capital expenditures of manufacturers in the LED, mobile communication, data storage, 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 is 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 when selecting which development programs to fund and pursue. Our financial results 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. Our performance may be adversely affected if we are unable to accurately predict evolving market trends and related customer needs and to effectively allocate our resources among new and existing products and technologies.
We are also exposed to potential risks associated with unexpected product performance issues. Our product designs and manufacturing processes are complex and could contain unexpected product defects, especially when products are first introduced. Unexpected product performance issues could result in significant costs and damages, including increased service and warranty expenses, the need to provide product replacements or modifications, reimbursement for damages caused by our products, product recalls, related litigation, and product write-offs and disposal costs. These costs could be substantial and our reputation could be harmed, resulting in reduced demand for our products and could have a negative effect on our business, financial condition, and results of operations.
We have a concentrated customer base, 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 55% of our total net sales in 2015. Customer consolidation activity involving some of our largest customers could result in an even greater concentration of our sales in the future. Management changes at key customer accounts could result in a loss of future sales due to vendor preferences or other reasons and may introduce new challenges in managing customer relationships.
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 significant 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 2015, 51% of our total net sales were to customers located in China. 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. 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 evolve. Some of our competitors have greater financial, engineering, manufacturing, and marketing resources than us. Other competitors are located in regions with lower labor costs and other reduced costs of operation. In addition, our ability to compete in foreign countries against local manufacturers may be hampered by nationalism, social attitudes, laws, regulations, and policies within such countries that favor local companies over U.S. companies or that are otherwise designed to promote the development and growth of local competitors. Furthermore, 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.
To remain competitive, we may enter into strategic alliances with customers, suppliers, and other third parties to explore new market opportunities and possible technological advancements. These alliances may require significant investments of capital and other resources and often involve the exchange of sensitive confidential information. The success of these alliances may depend on factors over which we have limited control and will likely require ongoing cooperation and good faith efforts from our strategic partners. Strategic alliances are inherently subject to significant risks, and the inability to effectively manage these risks could materially and adversely affect our business and operating results.
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, a delay of only a week or two can impact 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 returnbuild a product to profitability.
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Tablecustomer specifications typically ranges from three to six months. When coupled with the fluctuating amount of Contentstime 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, development, selling, general, and/or 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 operations to fluctuate widely from period to period.
TimingOur backlog is subject to customer cancellation or modification which could result in decreased sales, increased inventory obsolescence, and/or liabilities to our suppliers for products no longer needed.
Customer purchase orders may be cancelled or rescheduled by the customer, sometimes with limited or no penalties, which may result in increased and/or unrecoverable costs for the Company. We adjust our backlog for such cancellations, contract modifications, and delivery delays that result in a delivery period in excess of market adoptionone year, among other items. A downturn in one or more of LED technologyour businesses could result in increases in order cancellations and/or postponements.
We write-off excess and obsolete inventory based on historical trends, future usage forecasts, and other factors including the consideration of the amount of backlog we have on hand. 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 write-off required for general lightingexcess and obsolete inventory. In the future, if we determine that our inventory is uncertain.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. If our customers cancel their orders with us, we may not be able to cancel our orders with our suppliers or 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 inventory obsolescence, liabilities to our suppliers for products no longer needed, and/or manufacturing interruptions or delays which could affect our ability to meet customer demand.
Our future business prospects depend largelydepends 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 adoptioninstabilities 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, that incorporateexcess inventory could result, which could be subject to heavy price discounting, which could become obsolete, and/or which could subject us to liabilities to 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 technologysuppliers 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 adoptionproducts no longer needed. Similarly, we may not occur at currently projected rates. Furthermore, the adoption of, or changes in, government policies that discourage the use of traditional lighting technologies may impact LED adoption. These barriers also apply to the adoption of OLED products. While the use of OLED is expected to growbe harmed in the near future, itevent 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 our 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 difficultprovided by suppliers located in countries other than the United States. We may experience significant interruptions of our manufacturing operations, delays in our ability to predict deliver products or services, increased costs, or customer order cancellations as a result of:
·the rate at which OLED willfailure 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 adoptedlimited by working capital constraints of our suppliers and may exacerbate any interruptions in our manufacturing operations and supply chain and the market. The market adoptionassociated effect on our working capital. Any or all of OLED products may not occur atthese factors could materially and adversely affect our currently projected rates.business, financial condition, and results of operations.
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 relyingrely 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.
We generate a significant portion of our revenue in China. In recent years, the Chinese government has provided various incentives to encourage development of the LED industry, including subsidizing a significant portion of the purchase cost of MOCVD equipment. These subsidies have enabled and encouraged certain customers in this region to purchase more of our MOCVD equipment than these customers might have purchased without these subsidies. These subsidies have now been curtailed and are expected to further decline over time and may end 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.
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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. 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. The current and forecasted downturn in our MOCVD reporting unit 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.
Our failure to estimate customer demand accurately could result in excess or obsolete inventory and/or liabilities to our suppliers for products no longer needed, while manufacturing interruptions or delays could affect our ability to meet customer demand.
Our business depends on our ability to accurately forecast and supply equipment, services and related products that meet the rapidly changing technical and volume requirements of our customers, which depends in part on the timely delivery of parts, components and subassemblies (collectively, parts) from suppliers. The current uncertain worldwide economic conditions and market instabilities make it increasingly difficult for us (and our customers and our suppliers) to accurately forecast future product demand. If actual demand for our products is different than expected, we may purchase more/fewer parts than necessary or incur costs for canceling, postponing or expediting delivery of parts. If we overestimate the demand for our products, excess inventory could result which could be subject to heavy price discounting, which could become
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obsolete, and which could subject us to liabilities to our suppliers for products no longer needed. In addition, the volatility of demand for capital equipment increases capital, technical and other risks for companies in the supply chain.
Furthermore, some key parts may be subject to long lead-times and/or obtainable only from a single supplier or limited group of suppliers, and some sourcing or subassembly is provided by suppliers located in countries other than the United States. We may experience significant interruptions of our manufacturing operations, delays in our ability to deliver products or services, increased costs or customer order cancellations as a result of:
·the failure or inability of suppliers to timely deliver quality parts;
·volatility in the availability and cost of materials;
·difficulties or delays in obtaining required import or export approvals;
·information technology or infrastructure failures;
·natural disasters (such as earthquakes, tsunamis, floods or storms); or
·other causes (such as regional economic downturns, pandemics, political instability, terrorism, or acts of war) could result in delayed deliveries, manufacturing inefficiencies, increased costs or order cancellations.
In addition, in the event of an unanticipated increase in demand for our products, our need to rapidly increase our business and manufacturing capacity may be limited by working capital constraints of our suppliers and may exacerbate any interruptions in our manufacturing operations and supply chain and the associated effect on our working capital. Any or all of these factors could materially and adversely affect our business, financial condition and results of operations.
The cyclicality of the industries we serve directly affects our business.
Our business depends in large part upon the capital expenditures of manufacturers in the LED markets, data storage markets, and other device markets. We are subject to the business cycles of these industries, the timing, length, and volatility of which are difficult to predict. These industries have historically been highly cyclical and have experienced significant economic downturns in the last decade. As a capital equipment provider, our revenues depend in large part on the spending patterns of these customers, who often delay expenditures or cancel or reschedule orders in reaction to variations in their businesses or general economic conditions. In downturns, we must be able to quickly and effectively align our costs with prevailing market conditions, as well as motivate and retain key employees. However, because a portion of our costs are fixed, our ability to reduce expenses quickly in response to revenue shortfalls may be limited. Downturns in one or more of these industries, including the current MOCVD and Data Storage downturn, have had and will likely have a material adverse effect on our business, financial condition and operating results. Alternatively, during periods of rapid growth, we must be able to acquire and/or develop sufficient manufacturing capacity to meet customer demand, and attract, hire, assimilate and retain a sufficient number of qualified people. We cannot give assurances that our net sales and operating results will not be adversely affected if our customers experience economic downturns or slowdowns in their businesses.
We rely on a limited number of suppliers, some of whom are our sole source for particular components.
We currently outsource certain functions to third parties, including the manufacture of all or substantially all of our new MOCVD systems, Data Storageion beam and other data storage systems, and ion sources. We primarily rely on severala small number of suppliers for the manufacturing of these systems. We plan toWhile we maintain some level of internal manufacturing capability for these systems. Thesystems, 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.
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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 operations.
Our inability to attract, retain, and motivate employees could have a material adverse effect on our business.
Our success depends upon our ability to attract, retain, and motivate 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. We have entered into employment agreements with certain key personnel but our inability to attract, retain, and motivate key personnel could have a material adverse effect on our business, financial condition, and results of operations.
Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.
We have completed several significant acquisitions in the past, and we will 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, but not limited to:
·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;
·the inability to complete proposed transactions as anticipated, resulting in obligations to pay professional and other expenses, including any applicable termination fees;
·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;
·the unattainability of 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 operations. In addition, if we issue equity securities to pay for an acquisition, the ownership percentage of our then-current 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 (and the related demand for our products) 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 LED and data storage manufacturers are highly dependent on these manufacturers’ sales forof consumer electronics applications, which can experience significant volatility due to seasonal and other factors which couldand materially adversely impact our future results of operations.
The demand for LEDs, HDDs, and hard disk drivesour other products is highly dependent on sales of consumer electronics, such as flat-panel televisions and computer monitors, computers, tablets, digital video recorders, camcorders, MP3/4 players, smartphones, cell phones, and other mobile devices. Manufacturers of LEDs and hard disk drives are among our largest customers and have accountedaccount for a substantial portion of our revenues for the past several years.revenue. 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’ products and, in turn, on our customers’ demand for our products and services and onimpacting our financial condition and results of operations. Furthermore, manufacturers of LEDs have in the past overestimated their potential for 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’ 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.HDDs. Unpredictable fluctuations in demand for our customers’ products or rapid shifts in demand from our 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 economic downturns in different parts of the world. In the event of a downturn, many of our customers may delay or further reduce their purchases of our products and services. If negative conditions in the credit markets prevent our customers from obtaining credit or necessary financing, product orders in these channels may decrease, which could result in lower revenue. In addition, we may experience cancellations of orders in backlog, rescheduling of customer deliveries, and 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.
In addition, we finance some 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, or if financial institutions providing letters of credit become insolvent. A significant loss in collections on our accounts receivable would have a negative impact on our financial condition and 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.
Approximately 83%, 84%, and 90%Most of our net sales for the years ended 2013, 2012 and 2011, respectively were generated from salesare to customers located 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;
· political and social attitudes, laws, rules, regulations, and policies within countries that favor domesticlocal companies over non-domesticU.S. companies, including government-supported efforts to promote the development and growth of local competitors;
· pressures from foreign customers and foreign governments for us to increase our operations and sourcing in the foreign country;
·longer sales cycles and difficulty in collecting accounts receivable;
· multiple, conflicting, and changing governmental laws and regulations, including varying labor laws, tax regulations, import/export controls, and other trade barriers;
· reliance on various information systems and information technology to conduct our business, which may be vulnerable to cyber-attacks by third parties or breached due to employee error, misuse or other causes that could result in business disruptions, loss of or damage to intellectual property, transaction errors, processing inefficiencies, or other adverse consequences should our security practices and procedures prove ineffective,ineffective; and
· different customs and ways of doing business.
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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, tsunamis, or epidemics in regions where we operate may adversely affect or disrupt our business and results of operations.
Furthermore, products which are either manufactured in the United States or based on U.S. technology are subject to the United StatesU.S. Export Administration Regulations (“EAR”) when exported to and re-exported from international jurisdictions, in addition to the local jurisdiction’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. 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 successful in obtaining export licenses in a timely manner, there can be no assurance that this will continue or that an export license can be obtained in each instance where it is required. If an export license is required but cannot be obtained, then we will not be permitted to export the product to the customer. The administrative processing, potential delay, and risk of ultimately not obtaining an export license pose a particular disadvantage to us relative to our non-U.S. competitors who are not required to comply with U.S. export controls. Non-compliance with the EAR or other applicable export regulations could result in a wide range of penalties including the denial of export privileges, fines, criminal penalties, and the seizure of commodities. In the event that any export regulatory body determines that any of our shipments violate applicable export regulations, we could be fined significant sums and/or our export capabilities could be restricted, which could have a material adverse impact on our business.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and any determination that we violated these or similar laws could have a material adverse effect on our business.
We are 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. In addition, we may acquire a company that has engaged in unlawful conduct in the past, and be held responsible for this conduct through successor liability principles. 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, operating results and financial condition.
The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly.
We derive a substantial portion of our net sales in any fiscal period from the sale of a relatively small number of high-priced systems. As a result, the timing of recognition of revenue for a single transaction could have a material effect on our sales and operating results for a particular fiscal period. As is typical in our industry, orders, shipments, and customer acceptances often occur during the last few weeks of a quarter. As a result, delay of only a week or two will determine which period revenue is reported in and can 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.
We operate in industries characterized by rapid technological change.
All of our businesses are subject to rapid technological change. Our ability to remain competitive depends on our ability to enhance existing products and develop and manufacture new products in a timely and cost effective manner and to accurately predict technology transitions. Because new product development commitments must be made well in advance of sales, we must anticipate the future demand for products in selecting which development programs to fund and pursue. Our financial results for 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.
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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, which operate in highly concentrated industries.
Our customer base is and has been highly concentrated. Orders from a relatively limited number of customers have accounted for, and likely will continue to account for, a substantial portion of our net sales, which may lead customers to demand pricing and other terms less favorable to us. Based on net sales, our five largest customers accounted for 42%, 34%, and 41% of our total net sales for the years ended 2013, 2012 and 2011, respectively. Customer consolidation activity involving some of our largest customers could result in 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 2013, 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.
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 typically ranges
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from one 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 and 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 net income to fluctuate widely from period to period.
We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act and any delays or difficulty in satisfying these requirements or negative reports concerning our internal controls could adversely affect our future results of operations and our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report by management on the effectiveness of our internal control over financial reporting. Ongoing compliance with this requirement is complex, costly, time-consuming, and is subject to significant judgment. If our internal controls are ineffective or if our management does not timely assess the adequacy of such internal controls, our ability to file timely and accurate periodic reports may be impeded. Any delays in filing may cause us to face the following risks and concerns, among others:
· concern on the part of our customers, partners, investors, and employees about our financial condition and filing delay status, including the potential loss of business opportunities;
· significant time and expense required to complete delayed filings and the distraction of our senior management team and board of directors as we work to complete delayed filings;
· investigations by the SEC and other regulatory authorities of the Company and of members ofand/or our management;
· limitations on our ability to raise capital and make acquisitions;capital;
· suspension or termination of our stock listing on theThe NASDAQ stock exchange,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 the commencement of stockholder lawsuits against the Company. Any such litigation, as well as any proceedings that could arise as a result of a filing delay and the circumstances which gave rise to it, may be time consuming and expensive, may divert management attention from the conduct of our business, could have a material adverse effect on our business, financial condition, and results of operations, and may expose us to costly indemnification obligations to current or former officers, directors, or other personnel, regardless of the outcome of such matters, which may not be adequately covered by insurance.
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, or the questioning of our current or past practices, such as those associated with our transfer pricing, may adversely affect our reported financial results.
Our income taxes can change.
We are subject to income tax on a jurisdictional or legal entity basis and significant judgment is required in certain instances to allocate our taxable income to a jurisdiction and to determine the related income tax expense and benefits. Losses in one jurisdiction generally may not be used to offset profits in other jurisdictions. As a result, changes in the mix of our earnings (or losses) between jurisdictions, among other factors, could alter our overall effective income tax rate, possibly resulting in significant tax rate increases.
We are regularly audited by various tax authorities. Income tax audit assessments or changes in tax laws, regulations or other interpretations may result in increased tax provisions which could materially affect our operating results in the period or periods in which such determinations are made or changes occur.
In addition, our effective tax rate could increase if we determine that it is no longer more likely than not that we are able to utilize our remaining net deferred tax assets, if we are unable to generate sufficient future taxable income in certain jurisdictions, or if we are otherwise required to increase our valuation allowances against our deferred tax assets.
We may be required to take additional impairment charges on 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 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.
As part of our long-term strategy, we may pursue future acquisitions of other companies or assets which could potentially increase our assets. Adverse changes in business conditions could materially impact our estimates of future operations and result in impairment charges to these assets. In the future, a significant decline in the market price of our common stock
could indicate a decline in the fair value of our reporting unit such that goodwill becomes impaired. If our assets were impaired, our financial condition and results of operations could be materially and adversely affected.
The price of our common shares may beis 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.volatility. If these industry-based market or industry-based fluctuations continue, the trading price of our common shares could decline significantly independent of our actual operating performance,the overall market, 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:
· difficult macroeconomic conditions, unfavorable geopolitical events, and general stock market conditions and uncertainty,uncertainties, such as those occasioned by a global liquidity crisis negative financial news, and a failure of large financial institutions;
· receipt of substantiallarge orders or cancellations of orders 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;
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· 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 theour publicly traded securities of the Company and technology companies generally. The price of our common shares is likely to be volatile in the future. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. If similar litigation were pursued against us, it could result in substantial costs and a diversion of management’s attention and resources, which could materially and adversely affect our financial condition, results of operations, financial condition and liquidity.
Our inability to attract, retain, and motivate key employees could have a material adverse effect on our business.
Our success depends upon our ability to attract, retain, and motivate key employees, including those in executive, managerial, engineering and marketing positions, as well as highly skilled and qualified technical personnel and personnel to implement and monitor our financial and managerial controls and reporting systems. Attracting, retaining, and motivating such qualified personnel may be difficult due to challenging industry conditions, competition for such personnel by other technology companies, consolidations and relocations of operations and workforce reductions. While we have entered into Employment Agreements with certain key personnel, our inability to attract, retain, and motivate key personnel could have a material adverse effect on our business, financial condition or operating results.
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 couldand/or 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. Policingchange, or through efforts by others to reverse engineer our products or design around patents that we own. Given these limitations, our success will depend in part upon our ability to innovate ahead of our competitors.
Furthermore, policing unauthorized use of our products and technologies is difficult and time consuming. Furthermore,consuming, and the laws of other countries may less effectively protect our proprietary rights than U.S. laws. Our outsourcing strategy requires that we share certain portions of our technology with our outsourcing partners, which poses additional risks of infringement and trade secret misappropriation. Infringement of our rights by a third party, possibly for purposes of developing and selling competing products, could result in uncompensated lost market and revenue opportunities. Similar exposure could result in the event that former employees seek to compete with us through their unauthorized use of our intellectual property and proprietary information. We cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our proprietary information and technologies, particularly in foreign countries where the laws may not protect our proprietary intellectual property rights as fully or as readily as United 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.
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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.costs, and jeopardize relationships with current or prospective customers or suppliers. Any action we take to enforce our intellectual property rights could be costly and could absorb significant management time and attention, which, in turn, could negatively impact our operating results. In addition, failure to protect our trademark rights could impair our brand identity.
We may be subject to claims of intellectual property infringement by others.
From time to time we have received communications from other parties asserting the existence of patent or other rights which they believe cover certain of our products. We also periodically receive notice from customers who believe that we are required to indemnify them for damages they may incur related to infringement claims made against these customers by third parties. Our customary practice is to evaluate such assertions and to consider the available alternatives, including whether to seek a license, if appropriate. However, we cannot ensure that licenses can be obtained or, if obtained, will be on acceptable terms or that costly litigation or other administrative proceedings will not occur. If we are not able to resolve a claim, negotiate a settlement of the matter, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend our position, our business, financial condition, and results of operations could be materially and adversely affected.
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 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 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 financial condition, results of operations, and liquidity.
If we are subject to cyber-attacks we could incur substantial costs and, if such attacks are successful, we could result inincur significant liabilities, reputational harm, and disruption ofto our operations.
We manage, store, and transmit various proprietary information and sensitive data relating to our operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate and/or compromise our confidential information (and/or those of third parties,party confidential information), create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or our products, or that otherwise exploit any security vulnerabilities.
The costs to address the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential customers, that may impedeimpeding our sales, manufacturing, distribution, or other critical functions. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive data about us, or our customers or other third parties, could expose us, our customers, or other third parties to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise harm our business.
Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.
We have considered numerous acquisition opportunities and completed several significant acquisitions in the past. We may consider acquisitions of, or investments in, other businesses in the future. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:
·difficulties and increased costs in integrating the personnel, operations, technologies and products of acquired companies;
·diversion of management’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;
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·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 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 operating results. We are subject to many of these risks in connection with our recent acquisition of Synos.
In addition, if we issue equity securities to pay for an acquisition, the ownership percentage of our then-existing shareholders would be reduced and the value of the shares held by these shareholders could be diluted, which could adversely affect the price of our stock. 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.
We may be required to take additional impairment charges for goodwill and indefinite-lived intangible assets or definite-lived intangible and long-lived assets.
We are required to assess goodwill and indefinite-lived intangible assets annually for impairment, or on an interim basis whenever certain events occur or circumstances change, such as an adverse change in business climate or a decline in the overall industry, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We are also required to test our definite-lived intangible and long-lived assets, including acquired intangible assets and property, plant and equipment, for recoverability and impairment whenever there are indicators of impairment, such as an adverse change in business climate.
As part of our long-term strategy, we may pursue future acquisitions of other companies or assets which could potentially increase our goodwill and intangible and long-lived assets. Adverse changes in business conditions could materially impact our estimates of future operations and result in additional impairment charges to these assets. If our goodwill or intangible and long-lived assets were to become further impaired, our results of operations could be materially and adversely affected.
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 current practices may adversely affect our reported financial results or change the way we conduct our business.
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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We have significant operations in locations which could be materially and adversely impacted in the event of a natural disaster or other significant disruption.
Our operations in the U.S., the Asia-Pacific region and in other areas could be subject to natural disasters or other significant disruptions, including earthquakes, tsunamis, fires, hurricanes, floods, water shortages, other extreme weather conditions, medical epidemics, acts of terrorism, power shortages and blackouts, telecommunications failures, and other natural and manmade disasters or disruptions. In the event of such a natural disaster or other disruption, we could experience disruptions or interruptions to our operations or the operations of our suppliers, distributors, resellers or customers; destruction of facilities; and/or loss of life, all of which could materially increase our costs and expenses and materially and adversely affect our business, revenue and financial condition.
We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our Company by another company more difficult.
We have adopted, and may in the future adopt, certain measures that may have the effect of delaying, deferring, or preventing a takeover or other change in control of our Company, any of which a holder of our common stock might not consider to be in the holder’s best interest. These measures include:
· “blank check” preferred stock;
· a classified board of directors; and
· certain other 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” 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 makemakes 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.” These measures and those described above may have the effect of delaying, deferring, or preventing a takeover or other change in control of Veecoour 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.
NewWe 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, recycling and disposal of related materials, and the operation and use of our facilities and real property. Failure or inability to comply with existing or future environmental and safety regulations, which vary from jurisdiction to jurisdiction, 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 operations. 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 operations.
Regulations related to conflict minerals will force us to incur additional expenses, and may make our supply chain more complex, and may result in damage to our relationships with customers.
On August 22, 2012, underUnder 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
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these new requirements could adversely affect the sourcing, availability, and pricing of minerals we use in the manufacture of our products. In addition, we have incurred and will continue to 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, an act of terrorism 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, 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 operations. In addition, various regions of the world in which we do business are subject to the threat of terrorism and acts of war. Any act of terrorism or war that affects the economy or the industries in which we operate could result in significant harm to us, including the loss of life and property, manufacturing and transportation delays, disruptions in our supply chain, the need to comply with enhanced security measures, and other increased costs.
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 |
| Size (sq. ft.) |
| Mortgaged |
| Use |
Plainview, NY | | 80,000 | | No | | Data Storage and Corporate HeadquartersHeadquarters; R&D; Manufacturing; Sales & Service
|
Somerset, NJ | | 80,000 | | No | | LEDR&D; Manufacturing; Sales & SolarService
|
Somerset, NJ | | 38,000 | | No | | LEDR&D; Sales & SolarService
|
St. Paul, MN(1)MN (1) | | 111,00043,000
| | Yes | | LEDR&D; Manufacturing; Sales & SolarService
|
St. Paul, MN (1) | | 75,000 | | Yes | | Assets held for sale |
Yongin-city, South Korea | | 56,000 | | No | | Sales Office, Customer Training Center and R&D Center& Service |
Hyeongok-ri, South Korea | | 18,00015,000
| | No | | Sales Office and Clean RoomBuilding for sale
|
| | | | | | | |
| | | | | | | |
| | Approximate | | Lease | | |
Leased Facilities Location | | Size (sq. ft.) | | Expires | | Use |
Camarillo, CA | | 23,000 | | 2015 | | Data Storage |
Fort Collins, CO | | 26,000 | | 2018 | | Data Storage |
Peabody, MA | | 30,000 | | 2014 | | Held for Sublease |
Somerset, NJ | | 14,000 | | 2014 | | LED & Solar |
Poughkeepsie, NY | | 9,000 | | 2015 | | LED & Solar |
Kingston, NY | | 44,000 | | 2018 | | LED & Solar |
Fremont, CA | | 17,000 | | 2015 | | LED & Solar |
Shanghai, China (2) | | 18,700 | | 2014 | | Customer Training Center |
Hsinchu City, Taiwan | | 13,500 | | 2015 | | Sales Office, Process Development, and Customer Training Center |
(1)Our LED & Solar segment utilizes approximately 95,000 square feet of this facility. The balance is available We consolidated our business into one building, leaving the adjacent building held for expansion.
(2)We have the option to renew this lease for two consecutive two year terms and also have the option to purchase this facility.sale.
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| | Approximate | | | | |
Leased Facilities Location | | Size (sq. ft.) | | Lease Expires | | Use |
Horsham, PA | | 48,900 | | 2024 | | R&D; Manufacturing; Sales & Service |
Somerset, NJ | | 14,000 | | 2016 | | Warehouse |
Poughkeepsie, NY | | 9,400 | | 2017 | | R&D and Manufacturing |
Kingston, NY | | 44,000 | | 2018 | | Manufacturing |
Fremont, CA | | 17,100 | | 2018 | | R&D; Manufacturing; Sales & Service |
Shanghai, China | | 9,900 | | 2017 | | Sales & Service |
Hsinchu City, Taiwan | | 13,000 | | 2020 | | Sales & Service |
The St. Paul, Minnesota facility is subject toWe lease a mortgage which, as of December 31, 2013, had an outstanding balance of $2.1 million. We also lease small officesoffice in Santa Clara, California and Edina, Minnesota for sales and service. Our foreign sales and service subsidiaries lease office space in 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 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, seekssought unspecified damages and assertsasserted 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,alleged, among other things, that the molecular beam epitaxy system was defective and that Veeco failed to adequately warn of the potential risks of the system. Veeco believes thisDuring the first quarter of 2016, the parties agreed to settle the lawsuit, without any admission of wrongdoing. The settlement amount is without merit and intendsexpected to defend vigorously against the claims. Veeco is unable to predict the outcome of this action or to reasonably estimate the possible loss or range of loss, if any, arising from the claims asserted therein. The Company believes that, in the event of any recovery by the plaintiff from Veeco, such recovery would be fully covered by Veeco’s insurance.our insurance and, as a result, is not expected to have a material impact on our financial condition or results of operations.
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
Not Applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | Market for Registrant’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.” The 20132015 and 20122014 high and low closing bid prices by quarter are as follows:
| | 2013 | | 2012 | | | 2015 | | 2014 | |
| | High | | Low | | High | | Low | | | High | | Low | | High | | Low | |
First Quarter | | $ | 38.41 | | $ | 28.71 | | $ | 33.40 | | $ | 21.46 | | | $ | 35.12 | | $ | 29.12 | | $ | 43.30 | | $ | 32.18 | |
Second Quarter | | 42.60 | | 32.23 | | 36.97 | | 26.54 | | | 31.89 | | 28.25 | | 43.63 | | 30.75 | |
Third Quarter | | 36.41 | | 33.16 | | 38.11 | | 30.00 | | | 28.88 | | 20.41 | | 37.26 | | 33.22 | |
Fourth Quarter | | 38.15 | | 28.44 | | 31.52 | | 26.89 | | | 21.83 | | 18.02 | | 37.72 | | 30.61 | |
|
On February 18, 2014,10, 2016, the closing bid price for our common stock on The NASDAQ NationalStock Market was $41.13$17.52 and we had 12090 shareholders of record.
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.
24Issuer Purchases of Equity Securities
Table of ContentsShare repurchase activity during the three months ended December 31, 2015 is as follows:
Period | | Total Number of
Shares Purchased | | Average Price
Paid Per Share | | Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs | | Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under the
Plans or Programs | |
| | (in thousands, except average price paid per share) | |
September 28, 2015 — October 25, 2015 | | — | | $ | — | | — | | $ | 100,000 | |
October 26, 2015 — November 29, 2015 | | 314 | | 19.19 | | 314 | | 93,979 | |
November 30, 2015 — December 31, 2015 | | 155 | | 20.66 | | 155 | | 90,778 | |
| | | | | | | | | | | |
On October 28, 2015, our Board of Directors authorized a program to repurchase up to $100 million of our common stock to be completed through October 28, 2017. At December 31, 2015, $9.2 million of the $100 million had been utilized. Repurchases are expected to be made from time to time on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. The timing and amount of future repurchases, if any, will depend upon market conditions, SEC regulations, and other factors. The repurchases would be funded using available cash balances and cash generated from operations. The program does not obligate us to acquire any particular amount of common stock and may be modified or suspended at any time at our discretion.
Stock Performance Graph
ASSUMES $100 INVESTED ON DEC. 31,, 2008 2010
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DEC. 31
| | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | |
Veeco Instruments Inc. | | 100.00 | | 521.14 | | 677.60 | | 328.08 | | 465.14 | | 519.09 | |
S&P Smallcap 600 | | 100.00 | | 125.57 | | 158.60 | | 160.22 | | 186.37 | | 263.37 | |
PHLX Semiconductor | | 100.00 | | 159.68 | | 183.23 | | 186.05 | | 204.93 | | 268.55 | |
RDG MidCap Technology | | 100.00 | | 166.67 | | 214.78 | | 179.75 | | 177.47 | | 239.71 | |
25 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | |
Veeco Instruments Inc. | | 100.00 | | 48.42 | | 68.65 | | 76.61 | | 81.19 | | 47.86 | |
S&P Smallcap 600 | | 100.00 | | 101.02 | | 117.51 | | 166.05 | | 175.61 | | 172.14 | |
RDG MidCap Technology | | 100.00 | | 82.95 | | 88.61 | | 129.62 | | 124.14 | | 111.39 | |
Table of Contents
Item 6. Selected Consolidated Financial Data
The financial datainformation set forth below should be read in conjunction with the “Results of Operations” section included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.Operations.”
| | Year ended December 31, | |
| | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | |
| | (in thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | | | |
Net sales | | $ | 331,749 | | $ | 516,020 | | $ | 979,135 | | $ | 930,892 | | $ | 282,262 | |
Operating income (loss) | | (71,812 | ) | 37,212 | | 276,259 | | 303,253 | | 7,631 | |
| | | | | | | | | | | |
Income (loss) from continuing operations net of income taxes | | (42,263 | ) | 26,529 | | 190,502 | | 277,176 | | (1,777 | ) |
Income (loss) from discontinued operations net of income taxes | | — | | 4,399 | | (62,515 | ) | 84,584 | | (13,855 | ) |
Net income (loss) attributable to noncontrolling interest | | — | | — | | — | | — | | (65 | ) |
Net income (loss) attributable to Veeco | | $ | (42,263 | ) | $ | 30,928 | | $ | 127,987 | | $ | 361,760 | | $ | (15,567 | ) |
| | | | | | | | | | | |
Income (loss) per common share attributable to Veeco: | | | | | | | | | | | |
Basic: | | | | | | | | | | | |
Continuing operations | | $ | (1.09 | ) | $ | 0.69 | | $ | 4.80 | | $ | 7.02 | | $ | (0.05 | ) |
Discontinued operations | | — | | 0.11 | | (1.57 | ) | 2.14 | | (0.43 | ) |
Income (loss) | | $ | (1.09 | ) | $ | 0.80 | | $ | 3.23 | | $ | 9.16 | | $ | (0.48 | ) |
Diluted : | | | | | | | | | | | |
Continuing operations | | $ | (1.09 | ) | $ | 0.68 | | $ | 4.63 | | $ | 6.52 | | $ | (0.05 | ) |
Discontinued operations | | — | | 0.11 | | (1.52 | ) | 1.99 | | (0.43 | ) |
Income (loss) | | $ | (1.09 | ) | $ | 0.79 | | $ | 3.11 | | $ | 8.51 | | $ | (0.48 | ) |
| | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | |
Basic | | 38,807 | | 38,477 | | 39,658 | | 39,499 | | 32,628 | |
Diluted | | 38,807 | | 39,051 | | 41,155 | | 42,514 | | 32,628 | |
| | December 31, | |
| | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | |
| | (in thousands) | |
Balance Sheet Data: | | | | | | | | | | | |
Cash and cash equivalents | | $ | 210,799 | | $ | 384,557 | | $ | 217,922 | | $ | 245,132 | | $ | 148,500 | |
Short-term investments | | 281,538 | | 192,234 | | 273,591 | | 394,180 | | 135,000 | |
Restricted cash | | 2,738 | | 2,017 | | 577 | | 76,115 | | — | |
Working capital | | 485,452 | | 632,197 | | 587,076 | | 640,139 | | 317,317 | |
Goodwill | | 91,348 | | 55,828 | | 55,828 | | 52,003 | | 52,003 | |
Total assets | | 947,969 | | 937,304 | | 936,063 | | 1,148,034 | | 605,372 | |
Long-term debt (including current installments) | | 2,137 | | 2,406 | | 2,654 | | 104,021 | | 101,176 | |
Total equity | | 780,230 | | 811,212 | | 760,520 | | 762,512 | | 359,059 | |
| | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands, except per share data) |
Statement of Operations Data (1): | | | | | | | | | | |
Net sales | | $ | 477,038 | | $ | 392,873 | | $ | 331,749 | | $ | 516,020 | | $ | 979,135 |
Operating income (loss) | | (23,232) | | (79,209) | | (71,812) | | 37,212 | | 276,259 |
Income (loss) from continuing operations, net of tax | | (31,978) | | (66,940) | | (42,263) | | 26,529 | | 190,502 |
Basic income (loss) per common share from continuing operations | | (0.80) | | (1.70) | | (1.09) | | 0.69 | | 4.80 |
Diluted income (loss) per common share from continuing operations | | (0.80) | | (1.70) | | (1.09) | | 0.68 | | 4.63 |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
26(1) Information presented excludes the results of our discontinued operations.
Table of Contents
| | December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands) |
Balance Sheet Data: | | | | | | | | | | |
Cash and cash equivalents | | $ | 269,232 | | $ | 270,811 | | $ | 210,799 | | $ | 384,557 | | $ | 217,922 |
Short-term investments | | 116,050 | | 120,572 | | 281,538 | | 192,234 | | 273,591 |
Working capital | | 379,904 | | 387,254 | | 485,452 | | 632,197 | | 587,076 |
Total assets | | 890,789 | | 929,455 | | 947,969 | | 937,304 | | 936,063 |
Long-term debt (less current installments) | | 1,193 | | 1,533 | | 1,847 | | 2,138 | | 2,406 |
Total equity | | 714,615 | | 738,932 | | 780,230 | | 811,212 | | 760,520 |
| | | | | | | | | | | | | | | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco”, the “Company”, “we”, “us”, and “our”, unless the context indicates otherwise) creates process equipment that enables technologies for a cleaner and more productive world. We design, manufacture, and market thin film process equipment aligned to meet the demands of key global trends such as energy conservation, mobility, and the ‘internet of things.’ Our equipment is primarily soldused to make components for electronic devices including LEDs, displays, power electronics, wireless devices, smartphones, MEMS, and hard-disk drives, as well as for concentrator photovoltaics, power semiconductors, wireless components, and micro-electro-mechanical systems (“MEMS”).
Veeco developsHDDs. We develop highly differentiated “best-in-class” process equipment for critical performance steps.steps in thin film processing. Our products featureprovide leading technology at low cost-of-ownership and high throughput.volume productivity. Core competencies in advanced thin film technologies, over 300 patents,patent protection, and decades of specialized process know-how helpshelp us to stay at the forefront of these demanding industries.
Veeco’s LED & Solar segment designs and manufactures metal organic chemical vapor deposition (“MOCVD”) and molecular beam epitaxy (“MBE”) systems and components sold to manufacturers of LEDs, wireless components, power semiconductors, and concentrator photovoltaics, as well as for R&D applications. Our ALD technology is used by the manufacturers of OLED displays and has further applications in the semiconductor and solarrapidly advancing markets.
Veeco’s Data Storage segment designs and manufactures systems used to create thin film magnetic heads (“TFMH”s) that read and write data on hard disk drives. These include ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, chemical vapor deposition, and slicing, dicing and lapping systems. While our systems are primarily sold to hard drive customers, they also have applications in optical coatings, MEMS and magnetic sensors, and extreme ultraviolet (“EUV”) lithography.
As of December 31, 2013, Veeco had approximately 800 employees to support our customers through product and process development, training, manufacturing, and sales and service sites in the U.S., South Korea, Taiwan, China, Singapore, Japan, Europe and other locations.
Veeco Instruments Inc. was organized as a Delaware corporation in 1989.
Summary of Results for 2013
Selected financial highlights include:
·Revenue decreased 35.7% to $331.7 million in 2013 from $516.0 million in 2012. LED & Solar revenues decreased 31.2% to $249.7 million from $363.2 million in 2012. Data Storage revenues decreased 46.3% to $82.0 million from $152.8 million in 2012;
·Orders were down 15.4%, to $331.6 million in 2013, compared to $391.9 million in 2012;
·Our gross margin decreased, to 31.1%, in 2013 compared to 41.7% in 2012. Gross margins in LED & Solar decreased from 40.9% in 2012 to 28.0%. Data Storage gross margins also decreased from 43.7% to 40.4%.
·Our selling, general and administrative expenses increased to $85.5 million, from $73.1 million in 2012. Selling, general and administrative expenses were 25.8% of net sales in 2013, compared to 14.2% in 2012;
·Our research and development expenses decreased to $81.4 million from $95.2 million in 2012. Research and development expenses were 24.5% of net sales in 2013, compared to 18.4% in 2012;
·Net income (loss) from continuing operations in 2013 was $(42.3) million compared to $26.5 million in 2012;
·Diluted net income (loss) from continuing operations per share in 2013 was $(1.09) compared to $0.68 in 2012.
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Outlook
As we begin 2014, it is unclear when business conditions may improve for Veeco.
We are seeing some positive signs in our MOCVD business. LED customer facility utilization rates are stable and at a high level. It is clear that LED lighting adoption is accelerating. Some of our key customers are currently contemplating capacity additions. However, it remains difficult to accurately predict if, and when, a turnaround will happen and to what extent we will see growth in our MOCVD business. Competitive pricing pressure, which had a dramatic effect on our gross margins in 2013, is also difficult to predict. Our focus is to introduce next-generation products that will offer our customers additional value, and that, combined with potentially higher volumes, could help restore gross margins in MOCVD.
Our new ALD business was acquired as a “pre-revenue” businessportfolio of technology solutions sell into four key market areas: Lighting, Display & Power Electronics; Advanced Packaging, MEMS & RF; Scientific & Industrial; and thus decreased our earnings in 2013. The timing of production ALD orders from our key customer could have a significant impact on our expected revenue growth and potential return to profitability.Data Storage.
While Data Storage ordersA majority of our sales in Lighting, Display & Power Electronics were derived from customers who manufacture LEDs. Demand for LED manufacturing equipment fluctuates quarter-to-quarter depending on various factors, including but not limited to macroeconomic conditions, customer utilization rates, demand for TVs and smartphones, and the rate of LED adoption for general lighting. Demand increased 8.4% fromin 2014 and through the prior year periodfirst half of 2015, supported by ongoing adoption of LED lighting for commercial and low growth is expectedresidential purposes. However, weak economic conditions in hard drives,China and steep declines in LED demand for TV display backlighting resulted in LED unit oversupply through the second half of 2015. Accordingly, customers delayed their LED investment plans which adversely impacted our customers have excess manufacturing capacitybookings, and they have only been making select technology purchases. Futurewe expect this will continue to negatively impact demand for our Data Storage products is unclear.MOCVD equipment into 2016. While we have limited visibility to determine when demand for LED units will improve, industry analysts project LED lighting adoption will continue, and we believe this will require additional capacity purchases over the next several years as macroeconomic conditions improve. Our MOCVD architecture has been developed to support the most significant industry trends,
including developing mid-power LEDs, utilizing larger wafer sizes, and optimizing cost-of-ownership. Our latest generation MOCVD system, the TurboDisc® EPIK™ 700, continues to perform well against our expectations.
Sales into the Advanced Packaging, MEMS & RF market were driven primarily by increasing content of RF filters and MEMS sensors for mobile devices and automobiles. These trends are particularly positive for our PSP products, which represented a majority of sales for this market in 2015. PSP has continued to perform ahead of our expectations since we acquired the business in December 2014. PSP provides single wafer wet etch, clean, and surface preparation equipment addressing multiple high growth markets, including advanced packaging, MEMS, and RF devices. We continue to build positive momentum in advanced packaging and received production orders for FO-WLP from a semiconductor foundry customer. We expect to benefit as additional customers invest in FO-WLP technologies over the near to mid-term. We also expanded our customer engagements for 3D TSV applications, which represent future growth opportunities for us.
In 2015, we grew sales in the Scientific & Industrial market primarily as a result of growth in sales of our PSP products. We continue to meet ongoing demand for our SPECTOR ion beam deposition products which are used by optical coating suppliers to manufacture a variety of products including laser mirrors, optical fibers, and anti-reflective coatings. We also continued to win a sizable proportion of the MBE research opportunities, supported by our GENXplor R&D product. Our prioritiessystems enable universities and research consortia to conduct advanced materials research. The diverse customer base represented by the Industrial & Scientific markets support ongoing demand for 2014 include taking the steps we believe are necessary to transition us back to profitable growth. We are focused on four areas to improve our financial performance: 1) developing and launching new products that enable cost effective LED lighting, flexible OLED encapsulation and other emerging technologies; 2) executing manufacturing cost reduction programs; 3) driving process improvement initiatives to make us more efficient; and 4) improving product differentiation and customer value to stem margin erosion. We currently anticipate that our losses will continueproducts; however, sales can be highly variable quarter-to-quarter.
The mature Data Storage market is facing softening demand for personal computers in the near term.
Our outlook discussion above constitutes “forward-looking statements” withinterm and a shift from HDDs to solid state drives in 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 resultslonger term. Accordingly, HDD industry customers are subjectnot expected to risks and uncertainties. Our actual results may differ materially from those anticipated.
You should not place undue reliancemake significant investments in new capacity. This is consistent with recent experience that investments are being made to support technology buys on any forward-looking statements, which speak only as of the dates theyan “as-needed” basis. Orders are made.
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Table of Contentsexpected to continue to fluctuate quarter-to-quarter.
Results of Operations
Years Ended December 31, 20132015 and 20122014
The following table showspresents revenue and expense line items reported in our Consolidated Statements of Operations percentagesfor 2015 and 2014 and the period-over-period dollar and percentage changes for those line items. Our results of sales and comparisons between 2013 and 2012 (dollars in thousands):operations are reported as one business segment, represented by our single operating segment.
| | Year ended | | Dollar and | | |
| | December 31, | | Percentage Change | | | | For the year ended December 31, | | | Change | |
| | 2013 | | 2012 | | Year to Year | | | | 2015 | | | 2014 | | | Period to Period | |
| | | | | | | | | | | | | | | (dollars in thousands) | |
Net sales | | $ | 331,749 | | 100.0 | % | $ | 516,020 | | 100.0 | % | $ | (184,271 | ) | (35.7 | )% | | $ | 477,038 | | 100.0 | % | $ | 392,873 | | 100.0 | % | $ | 84,165 | | 21.4 | % |
Cost of sales | | 228,607 | | 68.9 | % | 300,887 | | 58.3 | % | (72,280 | ) | (24.0 | )% | | 299,797 | | 62.8 | % | 257,991 | | 65.7 | % | 41,806 | | 16.2 | % |
Gross profit | | 103,142 | | 31.1 | % | 215,133 | | 41.7 | % | (111,991 | ) | (52.1 | )% | | 177,241 | | 37.2 | % | 134,882 | | 34.3 | % | 42,359 | | 31.4 | % |
Operating expenses: | | | | | | | | | | | | | | |
Selling, general and administrative | | 85,486 | | 25.8 | % | 73,110 | | 14.2 | % | 12,376 | | 16.9 | % | |
Operating expenses, net: | | | | | | | | | | | | | | |
Selling, general, and administrative | | | 90,188 | | 18.9 | % | 89,760 | | 22.8 | % | 428 | | 0.5 | % |
Research and development | | 81,424 | | 24.5 | % | 95,153 | | 18.4 | % | (13,729 | ) | (14.4 | )% | | 78,543 | | 16.5 | % | 81,171 | | 20.7 | % | (2,628 | ) | (3.2 | )% |
Amortization | | 5,527 | | 1.7 | % | 4,908 | | 1.0 | % | 619 | | 12.6 | % | | 27,634 | | 5.8 | % | 13,146 | | 3.3 | % | 14,488 | | 110.2 | % |
Restructuring | | 1,485 | | 0.4 | % | 3,813 | | 0.7 | % | (2,328 | ) | (61.1 | )% | | 4,679 | | 1.0 | % | 4,394 | | 1.1 | % | 285 | | 6.5 | % |
Asset impairment | | 1,220 | | 0.4 | % | 1,335 | | 0.3 | % | (115 | ) | (8.6 | )% | | 126 | | 0.0 | % | 58,170 | | 14.8 | % | (58,044 | ) | * | |
Total operating expenses | | 175,142 | | 52.8 | % | 178,319 | | 34.6 | % | (3,177 | ) | (1.8 | )% | |
Changes in contingent consideration | | | — | | 0.0 | % | (29,368 | ) | (7.5 | )% | 29,368 | | * | |
Other, net | | (1,017 | ) | (0.3 | )% | (398 | ) | (0.1 | )% | (619 | ) | 155.5 | % | | (697 | ) | (0.1 | )% | (3,182 | ) | (0.8 | )% | 2,485 | | 78.1 | % |
Changes in contingent consideration | | 829 | | 0.2 | % | — | | 0.0 | % | 829 | | * | | |
Total operating expenses, net | | | 200,473 | | 42.0 | % | 214,091 | | 54.5 | % | (13,618 | ) | (6.4 | )% |
Operating income (loss) | | (71,812 | ) | (21.6 | )% | 37,212 | | 7.2 | % | (109,024 | ) | * | | | (23,232 | ) | (4.9 | )% | (79,209 | ) | (20.2 | )% | 55,977 | | 70.7 | % |
Interest income (expense), net | | 602 | | 0.2 | % | 974 | | 0.2 | % | (372 | ) | (38.2 | )% | |
Income (loss) from continuing operations before income taxes | | (71,210 | ) | (21.5 | )% | 38,186 | | 7.4 | % | (109,396 | ) | * | | |
Income tax provision (benefit) | | (28,947 | ) | (8.7 | )% | 11,657 | | 2.3 | % | (40,604 | ) | * | | |
Income (loss) from continuing operations | | (42,263 | ) | (12.7 | )% | 26,529 | | 5.1 | % | (68,792 | ) | * | | |
| | | | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | | |
Income (loss) from discontinued operations before income taxes | | — | | 0.0 | % | 6,269 | | 1.2 | % | (6,269 | ) | * | | |
Income tax provision (benefit) | | — | | 0.0 | % | 1,870 | | 0.4 | % | (1,870 | ) | * | | |
Income (loss) from discontinued operations | | — | | 0.0 | % | 4,399 | | 0.9 | % | (4,399 | ) | * | | |
Interest income, net | | | 586 | | 0.1 | % | 855 | | 0.2 | % | (269 | ) | (31.5 | )% |
Income (loss) before income taxes | | | (22,646 | ) | (4.7 | )% | (78,354 | ) | (19.9 | )% | 55,708 | | 71.1 | % |
Income tax expense (benefit) | | | 9,332 | | 2.0 | % | (11,414 | ) | (2.9 | )% | 20,746 | | * | |
Net income (loss) | | $ | (42,263 | ) | (12.7 | )% | $ | 30,928 | | 6.0 | % | $ | (73,191 | ) | * | | | $ | (31,978 | ) | (6.7 | )% | $ | (66,940 | ) | (17.0 | )% | $ | 34,962 | | 52.2 | % |
* Not Meaningfulmeaningful
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Net Sales
The following is an analysis of sales by segmentmarket and by region (dollars in thousands):region:
| | For the year ended | | | | | |
| | December 31, | | Dollar and Percentage | |
| | | | Percent | | | | Percent | | Change | |
| | 2013 | | of total | | 2012 | | of total | | Year to Year | |
Segment Analysis | | | | | | | | | | | | | |
LED & Solar | | $ | 249,742 | | 75.3 | % | $ | 363,181 | | 70.4 | % | $ | (113,439 | ) | (31.2 | )% |
Data Storage | | 82,007 | | 24.7 | % | 152,839 | | 29.6 | % | (70,832 | ) | (46.3 | )% |
Total | | $ | 331,749 | | 100.0 | % | $ | 516,020 | | 100.0 | % | $ | (184,271 | ) | (35.7 | )% |
Regional Analysis | | | | | | | | | | | | | |
Asia Pacific | | $ | 252,199 | | 76.0 | % | $ | 390,995 | | 75.8 | % | $ | (138,796 | ) | (35.5 | )% |
Americas (1) | | 57,609 | | 17.4 | % | 83,317 | | 16.1 | % | (25,708 | ) | (30.9 | )% |
Europe, Middle East and Africa | | 21,941 | | 6.6 | % | 41,708 | | 8.1 | % | (19,767 | ) | (47.4 | )% |
Total | | $ | 331,749 | | 100.0 | % | $ | 516,020 | | 100.0 | % | $ | (184,271 | ) | (35.7 | )% |
(1)Less than 1% of sales included within the Americas caption above have been derived from other regions outside the United States.
| | | For the year ended December 31, | | | Change | |
| | | 2015 | | | 2014 | | | Period to Period | |
| | | (dollars in thousands) | |
Market Analysis | | | | | | | | | | | | | | |
Lighting, Display & Power Electronics | | | $ | 291,133 | | 61.0 | % | $ | 278,551 | | 70.9 | % | $ | 12,582 | | 4.5 | % |
Advanced Packaging, MEMS & RF | | | 61,935 | | 13.0 | % | 11,449 | | 2.9 | % | 50,486 | | 441.0 | % |
Scientific & Industrial | | | 64,297 | | 13.5 | % | 44,429 | | 11.3 | % | 19,868 | | 44.7 | % |
Data Storage | | | 59,673 | | 12.5 | % | 58,444 | | 14.9 | % | 1,229 | | 2.1 | % |
Total Sales | | | $ | 477,038 | | 100.0 | % | $ | 392,873 | | 100.0 | % | $ | 84,165 | | 21.4 | % |
Regional Analysis | | | | | | | | | | | | | | |
United States | | | $ | 86,627 | | 18.2 | % | $ | 44,060 | | 11.2 | % | $ | 42,567 | | 96.6 | % |
China | | | 242,442 | | 50.8 | % | 159,063 | | 40.5 | % | 83,379 | | 52.4 | % |
EMEA | | | 64,019 | | 13.4 | % | 35,644 | | 9.1 | % | 28,375 | | 79.6 | % |
Rest of World | | | 83,950 | | 17.6 | % | 154,106 | | 39.2 | % | (70,156 | ) | (45.5 | )% |
Total Sales | | | $ | 477,038 | | 100.0 | % | $ | 392,873 | | 100.0 | % | $ | 84,165 | | 21.4 | % |
LED & Solar segmentTotal sales decreasedincreased in 20132015 from 2014 primarily due to lower MOCVD sales asan increase in the Advanced Packaging, MEMS & RF market which was primarily attributed to the PSP business acquired in December 2014. Sales increases were also realized in the other three markets. Pricing was not a resultsignificant driver of continued industry manufacturing overcapacity and our customer’s hesitancy to make new investments. Data Storage sales decreasedthe change in 2013 due to customer fabrication facility overcapacity and weak hard drive demand. Our Data Storage sales in 2012 were favorably impacted by the replacement of equipment at one of our customer’s sites that was damaged by the floods in Thailand.total sales. By region, net sales decreased in Asia Pacific (“APAC”), primarily due to a significant decrease in MOCVD salesincreased in China, resulting from industry manufacturing overcapacity. Net salesEMEA, and the United States, partially offset by declines in the Americas and Europe, Middle East and Africa (“EMEA”) also decreased, due to reduced end-market demand resulting from the weak global economy.Rest of World, principally in South Korea. We believe that there will continue to be year-to-year variations in the geographic distribution of sales.sales in the future.
OrdersBetween 2015 and 2014, orders decreased 15.4%$125.6 million, or 25%, to $331.6 million from $391.9 million in the prior year,$384.4 million. The decrease is primarily attributable to a 22.1%57% decrease in LEDorders in the Lighting, Display & SolarPower Electronics as well as a 31% decrease in Data Storage. The pronounced decline in orders principallyand the corresponding drawdown on backlog is driven by a declineweakness in MOCVD ordersthe LED market, which is due to industry manufacturing overcapacity. Since hittinglower demand for LED TV display backlighting and an economic slowdown in China. As a peakresult, LED manufacturers delayed their MOCVD equipment investments, which impacted our full year orders in the second quarter of 2011,Lighting, Display & Power Electronics market. The uncertainty around LED unit demand and the Chinese economy has reduced our ability to forecast near-term orders have slowed dramatically. Whilewithin the Lighting, Display & Power Electronics market. We also expect Data Storage orders increased 8.4% from the prior year period and low growth is expected in hard drives, ourdemand to be weak as customers have excess manufacturing capacity and they havecontinue to only been makingmake select technology purchases. We continue to experience weak overall market conditions due to overcapacity in all of our businesses.
OurOne of the performance measures we use as a leading indicator of the business is the book-to-bill ratio. The ratio for 2013, which is calculated by dividingdefined as orders recorded in a given time period divided by revenue recognized in the same time period,period. A ratio greater than one indicates we are adding orders faster than we are recognizing revenue. In 2015, the ratio was 1 to 10.8, a reduction compared to 0.76 to 1 in 2012.2014, when it was 1.3. Our backlog as ofat December 31, 20132015 was $143.3$186.0 million, compared to $150.2 million as ofwhich was lower than the ending backlog at December 31, 2012.2014 of $286.7 million. During the year ended December 31, 2013,2015, we recorded backlog adjustments of approximately $6.8$7.7 million consisting of a $5.6 million adjustment relatedrelating to orders that no longer met our bookings criteria as well as an adjustment related to foreign currency translation of $1.2 million.criteria. For certain sales arrangements, we require a deposit for a portion of the sales price before shipment. As ofprior to manufacturing a system for a customer. At December 31, 20132015 and 2012,2014, we had customer deposits of $27.5$28.2 million and $32.7$73.0 million, respectively.
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Gross Profit
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2013 | | 2012 | | Year to Year | |
Gross profit - LED & Solar | | $ | 69,998 | | $ | 148,383 | | $ | (78,385 | ) | (52.8 | )% |
Gross margin | | 28.0 | % | 40.9 | % | | | | |
Gross profit - Data Storage | | $ | 33,144 | | $ | 66,750 | | $ | (33,606 | ) | (50.3 | )% |
Gross margin | | 40.4 | % | 43.7 | % | | | | |
Gross profit - Total Veeco | | $ | 103,142 | | $ | 215,133 | | $ | (111,991 | ) | (52.1 | )% |
Gross margin | | 31.1 | % | 41.7 | % | | | | |
LED & Solar grossGross margins decreasedincreased from the prior year primarily due to lower average selling prices, reducedour acquisition of PSP in 2015, which contributed to an increase in sales volume and fewer final acceptancesan improved product mix, as well as negatively impacting 2014 gross margin for an inventory fair value step-up that was recorded in connection with the purchase accounting. Products sold into our Scientific & Industrial markets improved margins as well. Finally, $4.6 million of customer deposits were forfeited and recognized into revenue and gross profit in 2015, favorably impacting gross margin.
Selling, general, and administrative
Selling, general, and administrative expenses remained relatively consistent in 2015 as compared to 2014. Increases related to a full year of expenses associated with our PSP business which was acquired in December of 2014 were offset by decreases in third party professional fees and personnel related expenses.
Research and development
We focus our research and development on areas we anticipate to be high-growth. Research and development expenses decreased due to reductions in personnel-related expenses largely related to the 2015 restructuring, which included closing the Hyeongok-ri, South Korea facility and reducing the workforce, including 23 employees whose positions were eliminated. We also continue to selectively fund product development activities, which has resulted in reductions in spending for project materials, and, in 2015, we received a small amount of research and development funding from a collaborative arrangement. These reductions were partially offset by cost reductionsan increase in spending as a result of a full year of expenses associated with reduced volumesour PSP business.
Amortization expense
The increase in amortization expense is related to the $79.8 million in amortizable intangible assets acquired as part of our acquisition of PSP in December 2014.
Restructuring expense
In 2015, we announced the closing of our Hyeongok-ri, South Korea facility and reduced expensesthe workforce, including 23 employees whose positions were eliminated, resulting in additional restructuring costs. And in an effort to better align our cost structure with the recently observed weakness in the LED market, we reduced spending primarily through the reduction of 16 employees and 12 temporary staff toward the end of 2015. 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.
Asset impairment
Limited asset impairment charges were observed in 2015. 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 Atomic Layer Deposition (“ALD”) business. 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.
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 2015 income tax expense is comprised of two components: (i) $1.8 million related primarily to U.S. tax amortization of the Company’s indefinite-lived intangible assets that is not available to offset existing deferred tax assets and related valuation allowance and state and local income taxes and (ii) $7.5 million in tax expense relating to our profitable foreign operations. The 2014 income tax benefit included $13.4 million in tax benefits relating to our domestic operations offset by $2.0 million in tax expense relating to our foreign operations. Our 2015 effective tax rate is different than the statutory rate primarily due to our inability to recognize our U.S. deferred tax assets on a more-likely-than-not basis with respect to current year pre-tax U.S. operating losses. 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 U.S. deferred tax assets.
Years Ended December 31, 2014 and 2013
The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for slow moving inventoryfiscal 2014 and 2013 and the period-over-period dollar and percentage changes for those line items. Data Storage gross marginsOur results of operations are reported as one business segment.
| | For the year ended December 31, | | 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 | | * | |
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
The following is an analysis of sales by market and by region:
| | For the year ended December 31, | | Change | |
| | 2014 | | 2013 | | Period to Period | |
| | (dollars in thousands) | |
Market Analysis | | | | | | | | | | | | | |
Lighting, Display & Power Electronics | | $ | 278,551 | | 70.9% | | $ | 216,852 | | 65.4% | | $ | 61,699 | | 28.5 | % |
Advanced Packaging, MEMS & RF | | 11,449 | | 2.9% | | 12,804 | | 3.9% | | (1,355 | ) | (10.6 | )% |
Scientific & Industrial | | 44,429 | | 11.3% | | 49,170 | | 14.8% | | (4,741 | ) | (9.6 | )% |
Data Storage | | 58,444 | | 14.9% | | 52,923 | | 15.9% | | 5,521 | | 10.4 | % |
Total Sales | | $ | 392,873 | | 100.0% | | $ | 331,749 | | 100.0% | | $ | 61,124 | | 18.4 | % |
Regional Analysis | | | | | | | | | | | | | |
United States | | $ | 44,060 | | 11.2% | | $ | 57,609 | | 17.4% | | $ | (13,549 | ) | (23.5 | )% |
China | | 159,063 | | 40.5% | | 149,050 | | 44.9% | | 10,013 | | 6.7 | % |
EMEA | | 35,644 | | 9.1% | | 21,941 | | 6.6% | | 13,703 | | 62.5 | % |
Rest of World | | 154,106 | | 39.2% | | 103,149 | | 31.1% | | 50,957 | | 49.4 | % |
Total Sales | | $ | 392,873 | | 100.0% | | $ | 331,749 | | 100.0% | | $ | 61,124 | | 18.4 | % |
Total sales increased in 2014 from 2013 primarily due to an increase in the volume of MOCVD 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 overcapacity in the HDD industry. By region, sales decreased in the United States in 2014 primarily due to a significant reductiondecrease in volume.purchases by our data storage customers. In China and Rest of World, sales increased as a result of MOCVD sales growth. 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 orders of our MOCVD systems largely as customers in China, Europe, and South Korea begin to add manufacturing capacity. Ion beam and other Data Storage orders increased 5% between 2014 and 2013, but given the slow growth and overcapacity in the HDD industry, we expect demand to be weak as customers continue to only make select technology purchases.
In 2014, the book-to-bill ratio was 1.3, an improvement over 2013, when it was 1.0. Our backlog at December 31, 2014 was $286.7 million, which was higher than the ending backlog at December 31, 2013 of $143.3 million. At December 31, 2014, $23.4 million of the backlog was from our acquisition of PSP. During the year ended December 31, 2014 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. At December 31, 2014 and 2013, we had customer deposits of $73.0 million and $27.5 million, respectively.
Operating ExpensesGross Profit
Gross margins increased from 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
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2013 | | 2012 | | Year to Year | |
Selling, general and administrative | | $ | 85,486 | | $ | 73,110 | | $ | 12,376 | | 16.9 | % |
Percentage of sales | | 25.8 | % | 14.2 | % | | | | |
| | | | | | | | | | | | |
Selling, general, and administrative expenses increased primarily 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 fourth quarter of 2013. Our acquisition of PSP in the 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 ouran accounting review, of our revenue accounting that began in 2012 andwhich was completed in Octoberthe 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, partiallyrespectively. In 2014, we spent additional amounts on our ALD technology as compared with 2013, offset by a reduction in bonus and profit sharing expense and increased cost control measures put into place in response to weak market conditions, which resulted in lower personnel-related costs and discretionary expenses. The addition of our ALD business in the fourth quarter of 2013 has also contributed to an increasespending in our selling, general and administrative expenses.
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2013 | | 2012 | | Year to Year | |
Research and development | | $ | 81,424 | | $ | 95,153 | | $ | (13,729 | ) | (14.4 | )% |
Percentage of sales | | 24.5 | % | 18.4 | % | | | | |
| | | | | | | | | | | | |
Researchother product lines. We continue to focus our research and development expense decreased as we sharpened our focusexpenses on product developmentprojects in areas of anticipatedwe anticipate to be high-growth. We selectively funded certainthese product development activities which resulted in lower professional consulting expense, as well as reduced spending for project materials and professional consultants as well as lower personnel and personnel-related costs.
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2013 | | 2012 | | Year to Year | |
Amortization | | $ | 5,527 | | $ | 4,908 | | $ | 619 | | 12.6 | % |
Percentage of sales | | 1.7 | % | 1.0 | % | | | | |
| | | | | | | | | | | | |
Amortization expense
Amortization expense increased primarily due to additional amortization associated with intangible assets acquired as part of our acquisition of SynosALD during the fourth quarter of 2013,2013. 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 becomingthat have been either impaired or fully amortized.amortized in the fourth quarter of 2014.
31Restructuring expense
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| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2013 | | 2012 | | Year to Year | |
Restructuring | | $ | 1,485 | | $ | 3,813 | | $ | (2,328 | ) | (61.1 | )% |
Percentage of sales | | 0.4 | % | 0.7 | % | | | | |
| | | | | | | | | | | | | |
During 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 result 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 in one of our international sales officesmodel and the consolidation of certain sales business and administrative functions.
Asset impairment
During 2012,2014, 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 took measures to improve profitability, including a reduction in discretionary expenses, realignment ofbelieved that there were sufficient indicators that required an interim asset impairment analysis on our senior management team and consolidation of certain sales, business and administrative functions.ALD business. As a result of these actions,our analysis, we recorded a restructuring charge in 2012 consisting of $3.0 million in personnel severance and related costs, $0.4 million in equity compensation and related costs and $0.4 million in other severance costs resulting from a headcount reduction of 52 employees.
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2013 | | 2012 | | Year to Year | |
Asset impairment | | $ | 1,220 | | $ | 1,335 | | $ | (115 | ) | (8.6 | )% |
Percentage of sales | | 0.4 | % | 0.3 | % | | | | |
| | | | | | | | | | | | |
During 2013, we recorded assetnon-cash impairment charges in LED & Solar of $0.9$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 carried in property, plant and equipment whicha vacant building and land. During 2013, we are holdingrecognized 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 $0.3we paid the former shareholders $5.0 million relatedand 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 another asset carriedliquidate our subsidiary in Other assets. During 2012,Japan, since we recorded an asset impairment charge relatedmoved to a license agreementdistributor model to serve our customers in our Data Storage segment.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
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2013 | | 2012 | | Year to Year | |
Income tax provision (benefit) | | $ | (28,947 | ) | $ | 11,657 | | $ | (40,604 | ) | * | |
Effective tax rate | | 40.7 | % | 30.5 | % | | | | |
| | | | | | | | | | | | |
* Not Meaningful
The 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 expense relating to our foreign operations. The 2013 net benefit for income taxes included a $3.5 million provision relating to our foreign operations and $32.4 million benefit relating to our domestic operations. The 2012 provision for income taxes included $8.3operations offset by a $3.5 million expense relating to our foreign operations and $3.4 million relating to our domestic operations. Our 2013 effective tax rate is higher than the statutory rate as a result of the jurisdictional mix of earnings in our foreign locations, an income tax benefit related to the generation of current year research and development tax credits and legislation enacted in the first quarter of 2013 which extended the Federal Research and Development Credit for both the 2012 and 2013 tax years.
During the fourth quarter of 2012, we determined that we may not meet the criteria required to receive a certain incentive tax rate pursuant to a negotiated tax holiday in one foreign jurisdiction. Although we are continuing to negotiate the criteria for the incentive, for financial reporting purposes we have recorded additional tax provisions of $0.9 million and $4.0 million in 2013 and 2012, respectively, totaling $4.9 million, which represents the cumulative effect of calculating the tax provision using the incentive tax rate as compared to the foreign country’s statutory rate. If we successfully renegotiate the incentive criteria, this additional tax provision could be reversed as a future benefit in the period in which the negotiations are finalized.
During 2012, we recorded an income tax expense of $1.9 million related to discontinued operations, with no comparable amount in 2013. In addition, we recorded a current tax benefit of $2.1 million related to equity-based compensation in 2012 for which no current tax benefit was recorded in 2013.
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Discontinued Operations
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2013 | | 2012 | | Year to Year | |
Income (loss) from discontinued operations before income taxes | | $ | — | | $ | 6,269 | | $ | (6,269 | ) | * | |
Income tax provision (benefit) | | — | | 1,870 | | (1,870 | ) | * | |
Income (loss) from discontinued operations | | $ | — | | $ | 4,399 | | $ | (4,399 | ) | * | |
* Not Meaningful
Discontinued operations represent the results of the operations of our disposed Metrology segment, which was sold to Bruker on October 7, 2010, and our CIGS solar systems business, which was discontinued on September 27, 2011. The 2012 results included a $1.4 million gain ($1.1 million net of taxes) on the sale of the assets of discontinued segment held for sale and a $5.4 million gain ($4.1 million net of taxes) associated with the closing of the sale to Bruker.
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Years Ended December 31, 2012 and 2011
The following table shows our Consolidated Statements of Operations, percentages of sales and comparisons between 2012 and 2011 (dollars in thousands):
| | Year ended | | Dollar and | |
| | December 31, | | Percentage Change | |
| | 2012 | | 2011 | | Year to Year | |
Net sales | | $ | 516,020 | | 100.0 | % | $ | 979,135 | | 100.0 | % | $ | (463,115 | ) | (47.3 | )% |
Cost of sales | | 300,887 | | 58.3 | % | 504,801 | | 51.6 | % | (203,914 | ) | (40.4 | )% |
Gross profit | | 215,133 | | 41.7 | % | 474,334 | | 48.4 | % | (259,201 | ) | (54.6 | )% |
Operating expenses: | | | | | | | | | | | | | |
Selling, general and administrative | | 73,110 | | 14.2 | % | 95,134 | | 9.7 | % | (22,024 | ) | (23.2 | )% |
Research and development | | 95,153 | | 18.4 | % | 96,596 | | 9.9 | % | (1,443 | ) | (1.5 | )% |
Amortization | | 4,908 | | 1.0 | % | 4,734 | | 0.5 | % | 174 | | 3.7 | % |
Restructuring | | 3,813 | | 0.7 | % | 1,288 | | 0.1 | % | 2,525 | | 196.0 | % |
Asset impairment | | 1,335 | | 0.3 | % | 584 | | 0.1 | % | 751 | | 128.6 | % |
Total operating expenses | | 178,319 | | 34.6 | % | 198,336 | | 20.3 | % | (20,017 | ) | (10.1 | )% |
Other, net | | (398 | ) | (0.1 | )% | (261 | ) | (0.0 | )% | (137 | ) | 52.5 | % |
Operating income (loss) | | 37,212 | | 7.2 | % | 276,259 | | 28.2 | % | (239,047 | ) | (86.5 | )% |
Interest income (expense), net | | 974 | | 0.2 | % | (824 | ) | (0.1 | )% | 1,798 | | * | |
Loss on extinguishment of debt | | — | | 0.0 | % | (3,349 | ) | (0.3 | )% | 3,349 | | * | |
Income (loss) from continuing operations before income taxes | | 38,186 | | 7.4 | % | 272,086 | | 27.8 | % | (233,900 | ) | (86.0 | )% |
Income tax provision (benefit) | | 11,657 | | 2.3 | % | 81,584 | | 8.3 | % | (69,927 | ) | (85.7 | )% |
Income (loss) from continuing operations | | 26,529 | | 5.1 | % | 190,502 | | 19.5 | % | (163,973 | ) | (86.1 | )% |
| | | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | |
Income (loss) from discontinued operations before income taxes | | 6,269 | | 1.2 | % | (91,885 | ) | (9.4 | )% | 98,154 | | * | |
Income tax provision (benefit) | | 1,870 | | 0.4 | % | (29,370 | ) | (3.0 | )% | 31,240 | | * | |
Income (loss) from discontinued operations | | 4,399 | | 0.9 | % | (62,515 | ) | (6.4 | )% | 66,914 | | * | |
Net income (loss) | | $ | 30,928 | | 6.0 | % | $ | 127,987 | | 13.1 | % | $ | (97,059 | ) | (75.8 | )% |
* Not Meaningful
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Net Sales
The following is an analysis of sales by segment and by region (dollars in thousands):
| | For the year ended | | | | | |
| | December 31, | | Dollar and Percentage | |
| | | | Percent of | | | | Percent of | | Change | |
| | 2012 | | total | | 2011 | | total | | Year to Year | |
Segment Analysis | | | | | | | | | | | | | |
LED & Solar | | $ | 363,181 | | 70.4 | % | $ | 827,797 | | 84.5 | % | $ | (464,616 | ) | (56.1 | )% |
Data Storage | | 152,839 | | 29.6 | % | 151,338 | | 15.5 | % | 1,501 | | 1.0 | % |
Total | | $ | 516,020 | | 100.0 | % | $ | 979,135 | | 100.0 | % | $ | (463,115 | ) | (47.3 | )% |
Regional Analysis | | | | | | | | | | | | | |
Asia Pacific | | $ | 390,995 | | 75.8 | % | $ | 820,883 | | 83.8 | % | $ | (429,888 | ) | (52.4 | )% |
Americas (1) | | 83,317 | | 16.1 | % | 100,635 | | 10.3 | % | (17,318 | ) | (17.2 | )% |
Europe, Middle East and Africa | | 41,708 | | 8.1 | % | 57,617 | | 5.9 | % | (15,909 | ) | (27.6 | )% |
Total | | $ | 516,020 | | 100.0 | % | $ | 979,135 | | 100.0 | % | $ | (463,115 | ) | (47.3 | )% |
(1)Less than 1%, of sales included within the United States caption above has been derived from other regions within the Americas.
By segment, LED & Solar sales decreased from the prior year primarily due to a 62.0% decrease in MOCVD reactor shipments as a result of industry overcapacity following over two years of strong customer investments. Data Storage sales increased slightly from the prior year, primarily due to an increase in shipments to replace equipment destroyed by flooding in customer facilities in Thailand offset by reduced demand due to our customers’ hesitancy to add manufacturing capacity during weak global economic conditions. By region, net sales decreased in APAC, primarily due to lower MOCVD sales to LED customers. Sales in the Americas and EMEA also decreased due to reduced end market demand resulting from the weak global economy. We believe that there will continue to be year-to-year variations in the geographic distribution of sales.
Orders in 2012 decreased 52.1% compared to 2011, primarily attributable to a 53.1% decrease in LED & Solar orders that were principally driven by a decline in MOCVD bookings due to industry overcapacity. After hitting a peak in the second quarter of 2011, our bookings slowed dramatically in the second half of 2011, which continued throughout 2012. Data Storage orders decreased 48.1% as strong prior year orders from hard drive customers recovering from the flood in Thailand resulted in those customers being over-invested in capacity. In addition, the industry appears to have frozen further investments as end-user hard drive demand has slowed.
Our book-to-bill ratio for 2012, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 0.76 to 1 compared to 0.84 to 1 in 2011. Our backlog as of December 31, 2012 was $150.2 million, compared to $332.9 million as of December 31, 2011. During the year ended December 31, 2012, we recorded net backlog adjustments of approximately $58.5 million. The adjustments consisted of $42.0 million related to orders that no longer met our booking criteria, primarily due to contracts being extended past a twelve month delivery time frame, and $15.4 million of order cancellations and order adjustments of $1.1 million. For certain sales arrangements we require a deposit for a portion of the sales price before shipment. As of December 31, 2012 and 2011, we had customer deposits of $32.7 million and $57.1 million, respectively.
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Gross Profit
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2012 | | 2011 | | Year to Year | |
Gross profit - LED & Solar | | $ | 148,383 | | $ | 397,614 | | $ | (249,231 | ) | (62.7 | )% |
Gross margin | | 40.9 | % | 48.0 | % | | | | |
Gross profit - Data Storage | | $ | 66,750 | | $ | 76,720 | | $ | (9,970 | ) | (13.0 | )% |
Gross margin | | 43.7 | % | 50.7 | % | | | | |
Gross profit - Total Veeco | | $ | 215,133 | | $ | 474,334 | | $ | (259,201 | ) | (54.6 | )% |
Gross margin | | 41.7 | % | 48.4 | % | | | | |
Total Veeco gross margins decreased primarily due to the weak business environment. As a result, we recorded a total expense for slow moving items in 2012 of approximately $9.6 million, which negatively impacted our gross margins.
LED & Solar gross margins decreased from the prior year, primarily due to a significant decrease in sales volumes, lower average selling prices and fewer final acceptances partially offset by lower plant and service spending associated with reduced volumes and cost reductions in response to lower business levels. Data Storage gross margins decreased from the prior year, primarily due to a sales mix of lower margin products. We anticipate a continuing weak business environment resulting in persistent selling price pressure in our MOCVD business.
Operating Expenses
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2012 | | 2011 | | Year to Year | |
Selling, general and administrative | | $ | 73,110 | | $ | 95,134 | | $ | (22,024 | ) | (23.2 | )% |
Percentage of sales | | 14.2 | % | 9.7 | % | | | | |
| | | | | | | | | | | | |
Selling, general and administrative expenses decreased primarily due to lower commissions and bonus and profit sharing expenses from the reduced level of business in each of our segments. In addition our cost control measures put into place throughout the year resulting in lower personnel-related costs, travel and entertainment expense, professional consulting fees and other discretionary expenses.
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2012 | | 2011 | | Year to Year | |
Research and development | | $ | 95,153 | | $ | 96,596 | | $ | (1,443 | ) | (1.5 | )% |
Percentage of sales | | 18.4 | % | 9.9 | % | | | | |
| | | | | | | | | | | | |
We continued to invest, at approximately the prior year levels, in the development of products in areas of high-growth for end market opportunities in our LED & Solar segment.
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2012 | | 2011 | | Year to Year | |
Amortization | | $ | 4,908 | | $ | 4,734 | | $ | 174 | | 3.7 | % |
Percentage of sales | | 1.0 | % | 0.5 | % | | | | |
| | | | | | | | | | | | |
Amortization expense increased from the prior year, primarily due to additional amortization associated with intangible assets acquired as part of our acquisition of a privately held company during the second quarter of 2011, partially offset by certain intangible assets becoming fully amortized.
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| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2012 | | 2011 | | Year to Year | |
Restructuring | | $ | 3,813 | | $ | 1,288 | | $ | 2,525 | | 196.0 | % |
Percentage of sales | | 0.7 | % | 0.1 | % | | | | |
| | | | | | | | | | | | |
During 2012, we took measures to improve profitability, including a reduction in discretionary expenses, realignment of our senior management team and consolidation of certain sales, business and administrative functions. As a result of these actions, we recorded a restructuring charge consisting of $3.0 million in personnel severance and related costs, $0.4 million in equity compensation and related costs and $0.4 million in other severance costs resulting from a headcount reduction of 52 employees. During 2011, we recorded $1.3 million in personnel severance and related costs related to a companywide reorganization resulting in a headcount reduction of 65 employees. These reductions in workforce included executives, management, administration, sales and service personnel and manufacturing employees companywide.
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2012 | | 2011 | | Year to Year | |
Asset impairment | | $ | 1,335 | | $ | 584 | | $ | 751 | | 128.6 | % |
Percentage of sales | | 0.3 | % | 0.1 | % | | | | |
| | | | | | | | | | | | |
During 2012, we recorded an asset impairment charge related to a license agreement in our Data Storage segment. During 2011, we recorded an asset impairment charge for property, plant and equipment related to the discontinuance of a certain product line in our LED & Solar segment.
Interest Income (Expense), Net
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2012 | | 2011 | | Year to Year | |
Interest income (expense), net | | $ | 974 | | $ | (824 | ) | $ | 1,798 | | * | |
Percentage of sales | | 0.2 | % | (0.1 | )% | | | | |
| | | | | | | | | | | | |
* Not Meaningful
Interest income, net for 2012 was comprised of $2.5 million in cash interest income, partially offset by $0.2 million in cash interest expense and $1.3 million in non-cash interest expense relating to net amortization of our short-term investments. Interest expense, net for 2011 was 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 expense relating to our convertible debt, which was retired during the first half of 2011 creating a loss on extinguishment of approximately $3.3 million. Interest expense in 2011 was partially offset by $3.8 million in interest income earned on our cash and short-term investment balances. 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 accretion of debt discounts and amortization of debt premiums related to our short-term investments in 2012 and 2011.
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Income Taxes
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2012 | | 2011 | | Year to Year | |
Income tax provision (benefit) | | $ | 11,657 | | $ | 81,584 | | $ | (69,927 | ) | (85.7 | )% |
Effective tax rate | | 30.5 | % | 30.0 | % | | | | |
| | | | | | | | | | | | |
The 2012 provision for income taxes included $8.3 million relating to our foreign operations and $3.4 million relating to our domestic operations. The 2011 provision for income taxes included $9.6 million relating to our foreign operations and $72.0 million relating to our domestic operations. Our 20122014 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 jurisdictional mix2010 IRS examination, and the recognition of earnings in our foreign locations and other favorable tax benefits including the Domestic Production Activities Deduction and an adjustment for the Research and Development Credit related to the filingonly a portion of our 2011 Federal incomeU.S. deferred tax return.assets on a more-likely-than-not basis with respect to current year pre-tax operating losses. We maintain a valuation allowance on our U.S. deferred tax assets.
During the fourth quarter of 2012, we determined that we may not meet the criteria required to receive a certain incentive tax rate pursuant to a negotiated tax holiday in one foreign jurisdiction. Although we are continuing to negotiate the criteria for the incentive, for financial reporting purposes we have recorded an additional tax provision of $4.0 million which represents the cumulative effect of calculating the tax provision using the incentive tax rate as compared to the foreign country’s statutory rate. As such amount is not expected to be paid within twelve months, we have recorded the $4.0 million as a long term taxes payable. If we successfully renegotiate the incentive criteria, this additional tax provision could be reversed as a future benefit in the period in which the successful negotiations are finalized.
During 2012, we recorded an income tax expense of $1.9 million related to discontinued operations compared to the $29.4 million income tax benefit from discontinued operations in the prior year which was reported in accordance with the intraperiod tax allocation provisions. In addition, we recorded a current tax benefit of $2.1 million related to equity-based compensation which was a credit to additional paid in capital compared to $10.4 million tax benefit recorded in the prior year.
Discontinued Operations
| | Year ended | | | | | |
| | December 31, | | Dollar and Percentage Change | |
(dollars in thousands) | | 2012 | | 2011 | | Year to Year | |
Income (loss) from discontinued operations before income taxes | | $ | 6,269 | | $ | (91,885 | ) | $ | 98,154 | | * | |
Income tax provision (benefit) | | 1,870 | | (29,370 | ) | 31,240 | | * | |
Income (loss) from discontinued operations | | $ | 4,399 | | $ | (62,515 | ) | $ | 66,914 | | * | |
* Not Meaningful
Discontinued operations represent the results of the operations of our disposed Metrology segment, which was sold to Bruker on October 7, 2010, and our CIGS solar systems business, which was discontinued on September 27, 2011, reported as discontinued operations. The 2012 results included a $1.4 million gain ($1.1 million net of taxes) on the sale of the assets of discontinued segment held for sale and a $5.4 million gain ($4.1 million net of taxes) associated with the closing of the China Assets with Bruker. The 2011 results reflect an operational loss before taxes of $1.6 million related to the Metrology segment and an operational loss before taxes of $90.3 million related to the CIGS solar systems business.
Liquidity and Capital Resources
AsOur cash and cash equivalents, short-term investments, and restricted cash are as follows:
| | | December 31, | |
| | | 2015 | | | | 2014 | |
| | (in thousands) | |
Cash and cash equivalents | | $ | 269,232 | | $ | 270,811 | |
Short-term investments | | 116,050 | | 120,572 | |
Restricted cash | | — | | 539 | |
Total | | $ | 385,282 | | $ | 391,922 | |
A portion of our cash and cash equivalents is held by our subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. At December 31, 20132015 and 2012, we had2014, cash and cash equivalents of $210.8$135.3 million and $384.6 million, respectively, of which $150.6 million and $128.0$220.5 million, respectively, were held outside the United States. Liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some of which arise from fluctuations relatedIn order to global economics and markets. Cash balances are generated and held in many locations throughout the world. Itfund continued international growth, it is our current intentintention to permanently reinvest our funds fromthe cash and cash equivalent balances held in Singapore, China, Taiwan, South Korea, Malaysia and Malaysia outside of the United StatesNetherlands, and our current plansforecasts do not demonstrate a needrequire repatriation of these funds back to repatriate them to fund ourthe United States operations. As ofStates. At December 31, 2013,2015, we had $115.0$109.6 million in cash held offshoreoutside the United States on which we wouldmay have to pay significant United StatesU.S. income taxes to repatriate in the event that we need the funds for our operations in the United
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States.repatriate. Additionally, local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances. We currently do not expect such regulations and restrictions to impact our ability to make acquisitions, pay vendors, or conduct operations throughout the global organization. As of December 31, 2013 and 2012, in addition to our cash balances, we also had short-term investments in the United States of $281.5 million and $192.2 million, respectively, and restricted cash in Germany of $2.7 million and $2.0 million, respectively.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 requirementsneeds for the next twelve months, as well as our contractual obligations.months.
At December 31, 2015 and 2014, all of our short-term investments were held in the United States. At December 31, 2014, the restricted cash was located in Germany to serve as collateral for bank guarantees that provided financial assurance that we would fulfill certain customer or lease obligations. This cash was held in custody by the issuing bank and was restricted as to withdrawal or use while the related bank guarantees were outstanding.
A summary of the cash flow activity for the year ended December 31, 2015 and 2014 is as follows (in thousands):follows:
| | Year ended December 31, | |
| | 2013 | | 2012 | |
Net income (loss) | | $ | (42,263 | ) | $ | 30,928 | |
Net cash provided by (used in) operating activities | | 727 | | 111,963 | |
Net cash provided by (used in) investing activities | | (168,056 | ) | 48,321 | |
Net cash provided by (used in) financing activities | | (5,766 | ) | 5,555 | |
Effect of exchange rate changes on cash and cash equivalents | | (663 | ) | 796 | |
Net increase (decrease) in cash and cash equivalents | | (173,758 | ) | 166,635 | |
Cash and cash equivalents as of beginning of year | | 384,557 | | 217,922 | |
Cash and cash equivalents as of end of year | | $ | 210,799 | | $ | 384,557 | |
Cash Flows from Operating Activities
| | | For the year ended December 31, | |
| | | 2015 | | | | 2014 | |
| | (in thousands) | |
Net income (loss) | | $ | (31,978 | ) | $ | (66,940 | ) |
Non-cash items: | | | | | |
Depreciation and amortization | | 39,850 | | 24,573 | |
Deferred income taxes | | 2,648 | | (11,330 | ) |
Share-based compensation expense | | 17,986 | | 18,813 | |
Asset impairment | | 126 | | 58,170 | |
Change in contingent consideration | | — | | (29,368 | ) |
Other | | (1,218 | ) | (6,505 | ) |
Changes in operating assets and liabilities | | (11,625 | ) | 54,656 | |
Net cash provided by operating activities | | $ | 15,789 | | $ | 42,069 | |
During 2013, we continuedNet cash provided by operating activities was $15.8 million in 2015 and was due to generatethe net loss of $32.0 million plus adjustments for non-cash items of $59.4 million, offset by a decline in cash flow from operations despite the $184.3 millionoperating activities due to changes in operating assets and liabilities of $11.6 million. The changes in operating assets and liabilities was largely attributable to an increase in inventory and a decrease in revenues. Cash providedcustomer deposits and deferred revenue, offset by operations declined primarily due to a $73.2 million reduction in net income, generating a net loss for 2013. The net loss for 2013 included $22.5 million of noncash items. A $38.8 million decrease in accounts receivable and $7.5 millionan increase in accounts payable contributed most significantly to ourand accrued expenses.
Net cash provided by operations was $42.1 million in 2014 and was due to the net loss of $66.9 million, adjustments for non-cash items of $54.3 million, and an increase in cash flow from operations. Thisoperating activities due to changes in operating assets and liabilities of $54.7 million. The changes in operating assets and liabilities was partially offset by a $17.3 million reduction of accrued expenses,largely attributable to an increase in customer deposits and deferred revenue and a $12.6 millionincome taxes payable, net, offset by an increase in income taxes receivable, primarily resulting from a net operating loss carryback claim.accounts receivable.
NetCash Flows from Investing Activities
| | | For the year ended December 31, | |
| | | 2015 | | | | 2014 | |
| | | (in thousands) | |
Acquisitions of businesses, net of cash acquired | | | $ | (68 | ) | | | $ | (144,069 | ) |
Capital expenditures | | | (13,887 | ) | | | (15,588 | ) |
Changes in investments, net | | | 4,403 | | | | 160,539 | |
Proceeds from sale of lab tools | | | 3,068 | | | | 9,259 | |
Other | | | (594 | ) | | | (2,038 | ) |
Net cash provided by (used in) investing activities | | | $ | (7,078 | ) | | | $ | 8,103 | |
The cash fromused by investing activities in 2013 declined2015 was primarily attributable to capital expenditures, partially offset by $216.4 million comparednet sales of marketable securities and sales of lab tools. The cash provided by investing activities in 2014 was primarily attributable to net sales of marketable securities and sales of lab tools, partially offset by our purchase of PSP, net of cash acquired, and other capital expenditures. Refer to Note 5, “Business Combinations” for additional information on the prior year. acquisition of PSP.
Cash Flows from Financing Activities
| | | For the year ended December 31, | |
| | | 2015 | | | | 2014 | |
| | (in thousands) | |
Settlement of equity awards, net of withholding taxes | | $ | (982 | ) | $ | 9,981 | |
Purchases of common stock | | (8,907 | ) | — | |
Repayments of long-term debt | | (314 | ) | (290 | ) |
Net cash provided by (used in) financing activities | | $ | (10,203 | ) | $ | 9,691 | |
The cash used in investingfinancing activities for 2015 was primarily related to the share repurchase program which commenced in November 2015. During 2014, cash provided by financing activities was primarily driven by our acquisitionattributable to net cash received from settlement of Synos, which consumed $71.5 million and the $89.3 million increase in short-term investments. This was partially offset by a $15.8 million reduction in capital expenditures from the prior year.equity awards related to employee share-based compensation programs.
Net cash from financing activities in 2013 declined by $11.3 million compared to the prior year. This change results primarily from a $5.0 million payment of a contingent consideration milestone made in accordance with the terms of our agreement to purchase SynosContractual Obligations and a change of $6.3 million related to option and restricted stock activity, including tax impacts.Commitments
On October 1, 2013, we acquired SynosWe have commitments under certain contractual arrangements to make future payments for an initial purchase price of $71.5 million. Synos develops atomic layer deposition technology. As a result of this purchase, we acquired $99.3 million of definite-lived intangibles, of which $78.2 million is relatedgoods and services. These contractual arrangements secure the rights to core technology,various assets and $35.5 million of goodwill. The financial results of this acquisition are included in our LED & Solar segment as of the acquisition date. As of October 1, 2013, we had a contingent obligationservices to pay up to an additional $115.0 million if certain conditions are met. The first $5.0 million of the $115.0 million was earned and paidbe used in the fourth quarter of 2013. Up to $35.0 million of the remaining contingent obligation could be payablefuture in the first quarternormal course of 2014, ifbusiness. We expect to fund these contractual arrangements with cash generated from operations in the conditions related to earning the payments are met. The remaining $75.0 million contingent consideration could be payable in 2015 if the conditions related to earning the payments are met. As partnormal course of the purchase price allocation, we recorded a liability of $33.5 million related to the fair value of the contingent consideration.business.
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TableThe following table summarizes our contractual arrangements at December 31, 2015 and the timing and effect that those commitments are expected to have on our liquidity and cash flow in future periods. The effect of Contentsunrecognized tax benefits, which total $5.3 million at December 31, 2015, have been excluded from the table since we are unable to reasonably estimate the period of potential cash settlement, if any, with the respective tax authorities.
As of December 31, 2013, our contractual cash obligations and commitments are as follows (in thousands):
| | Payments due by period | |
| | | | Less than | | | | | | More than 5 | |
| | Total | | 1 year | | 1-3 years | | 3-5 years | | years | |
Long-term debt (1) | | $ | 2,137 | | $ | 290 | | $ | 654 | | $ | 766 | | $ | 427 | |
Interest on debt (1) | | 553 | | 159 | | 244 | | 132 | | 18 | |
Operating leases (2) | | 8,082 | | 3,076 | | 3,418 | | 1,588 | | — | |
Letters of credit and bank guarantees (3) | | 6,493 | | 6,493 | | — | | — | | — | |
Purchase commitments (4) | | 60,290 | | 60,290 | | — | | — | | — | |
| | $ | 77,555 | | $ | 70,308 | | $ | 4,316 | | $ | 2,486 | | $ | 445 | |
| | | Payments due by period | |
| | | | Less than | | 1 – 3 | | 3 – 5 | | More than | |
| | | Total | | 1 year | | years | | years | | 5 years | |
| | (in thousands) | |
Long-term debt | | $ | 1,533 | | $ | 340 | | $ | 766 | | $ | 427 | | $ | — | |
Interest on debt | | 259 | | 109 | | 132 | | 18 | | — | |
Operating leases | | 8,074 | | 2,154 | | 2,688 | | 1,063 | | 2,169 | |
Bank guarantees | | 2,925 | | 2,925 | | — | | — | | — | |
Purchase commitments(1) | | 92,694 | | 92,694 | | — | | — | | — | |
Total | | $ | 105,485 | | $ | 98,222 | | $ | 3,586 | | $ | 1,508 | | $ | 2,169 | |
(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 2014 through 2018, excluding renewal options. There are future minimum annual rental payments required under the leases. Leasehold improvements made at the beginning of or during a lease are amortized over the shorter of the remaining lease term or the estimated useful lives of the assets. This also includes other operating leases we hold, such as cars, apartments and office equipment. There are no material sublease payments receivable associated with the leases.
(3)Issued by a bank on our behalf as needed. We had letters of credit outstanding of $0.6 million and bank guarantees outstanding of $5.9 million, of which, $2.7 million is collateralized against cash that is restricted from use. As of December 31, 2013, we had $40.4 million of unused lines of credit available. The line of credit is available to draw upon to cover performance bonds as required by our customers.
(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 have $9.4$14.6 million of offsetting supplier deposits against these purchase commitments as of December 31, 2013.2015.
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 Obligations and Commitments” table.
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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, accounting for acquisitions, 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. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to discontinued operations.implementing them.
Revenue Recognition
Revenue Recognition:We recognize revenue when all of the following criteria have been met: persuasive evidence of an arrangement exists, with a customer; delivery of the specified products has occurred or services have been rendered; prices are contractuallyrendered, the selling price is fixed or determinable; anddeterminable, collectability is reasonably assured. Revenue is recorded including shippingassured, and, handling costs and excluding applicable taxes related to sales. A significant portionfor system sales, we have received customer acceptance or we have otherwise objectively demonstrated that the delivered system meets all of our revenue is derivedthe agreed-to customer specifications. Each sales arrangement may contain commercial terms that differ from contractual arrangements with customers that have multiple elements, such as systems, upgrades, components, spare parts, maintenance and service plans. For sales arrangementsother arrangements. In addition, we frequently enter into contracts that contain multiple elements,deliverables. Judgment is required to 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 in order to recognize revenue in the appropriate accounting period. The maximum revenue we splitrecognize on a delivered element is limited to the arrangement into separateamount that is not contingent upon the delivery of additional items. While changes in the allocation of the estimated sales price between the units of accounting ifwill not affect the individually delivered elements have value to the customer onamount of total revenue recognized for a standalone basis. We also evaluate whether multiple transactions with the same customer or related party should be considered part of a multiple elementparticular sales arrangement, whereby we assess, among other factors, whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiatedany material changes in contemplation of each other. When we have separate units of accounting, we allocate revenue to each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or our best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. We utilize BESP for the majority of the elements in our arrangements. The accounting guidance for selling price hierarchy did not include BESP for arrangements entered into prior to January 1, 2011, and as such we recognized revenue for those arrangements as described below.
We consider many facts when evaluating each of our sales arrangements to determinethese allocations could impact the timing of revenue recognition, including the contractual obligations, the customer’s creditworthinesswhich could have a material effect on our financial condition and the natureresults of the customer’s post-delivery acceptance provisions. Our system sales arrangements, including certain upgrades,operations. We generally include field acceptance provisions that may include functional or mechanical test procedures. For the majority of our arrangements, a customer source inspection of the system is performed in our facility or test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery. Historically, such source inspection or test data replicates the field acceptance provisions that will be performed at the customer’s site prior to final acceptance of the system. As such, we objectively demonstrate that the criteria specified in the contractual acceptance provisions are achieved prior to delivery and, therefore, we recognize revenue upon delivery since there is no substantive contingency remaining related to the acceptance provisions at that date, subject to the retention amount constraint described below. For new products, new applicationssales of existing products or for products with substantive customer acceptance provisions where we cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery,components and spare parts upon shipment. We generally recognize revenue and the associated costs are deferred and fully recognized upon the receipt of final customer acceptance, assuming all other revenue recognition criteria have been met.
Our system sales arrangements, including certain upgrades, generally do not contain provisions for right of return or forfeiture, refund, or other purchase price concessions. In the rare instances where such provisions are included, we defer all revenue until such rights expire. In many cases our products are sold with a billing retention, typically 10% of the sales price (the “retention amount”), which is typically payable by the customer when field acceptance provisions are completed. The amount of revenue recognized upon delivery of a system or upgrade, if any, is limited to the lower of i) the amount billed that is not contingent upon acceptance provisions or ii) the value of the arrangement consideration allocated to the delivered elements, if such sale is part of a multiple-element arrangement.
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For transactions entered into prior to January 1, 2011, under the accounting rules for multiple-element arrangements in place at that time, we deferred the greater of the retention amount or the relative fair value of the undelivered elements based on VSOE. When we could not establish VSOE or TPE for all undelivered elements of an arrangement, revenue on the entire arrangement was deferred until the earlier of the point when we did have VSOE for all undelivered elements or the delivery of all elements of the arrangement.
Our sales arrangements, including certain upgrades, generally include installation. The installation process is not deemed essential to the functionality of the equipment since it is not complex; that is, it does not require significant changes to the features or capabilities of the equipment or involve building elaborate interfaces or connections subsequent to factory acceptance. We have a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage us to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, we deem the installation of our systems to be inconsequential or perfunctory relative to the system as a whole, and as a result, do not consider such services to be a separate element of the arrangement. As such, we accrue the cost of the installation at the time of revenue recognition for the system.
In Japan, where our contractual terms with customers generally specify title and risk and rewards of ownership transfer upon customer acceptance, revenue is recognized and the customer is billed upon the receipt of written customer acceptance. During the fourth quarter of fiscal 2013, we began using a distributor for almost all of our product and service sales to customers in Japan. Title and risk and rewards of ownership of our system sales still transfer to our end-customers upon their acceptance. As such, there is no impact to our policy of recognizing revenue upon receipt of written acceptance from the end customer.
Revenue related to maintenance and service contracts is recognized ratably over the applicable contract term. Component and spare part revenue are recognized atSee Note 1, “Significant Accounting Policies,” in the time of 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 U.S. treasuries and government agency securities with maturities of greater than three months. Securities classified as available-for-sale are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss) and reported in equity. Net realized gains and losses are included in net income (loss).revenue recognition policy.
Inventory Valuation:Valuation
Inventories are stated at the lower of cost (principallyor net realizable value using standard costs that approximate actual costs on a first-in, first-out method) or market. On a quarterly basis, management assessesbasis. Each quarter we assess the valuation and recoverability of all inventories, classified asinventories: materials (which include raw(raw materials, spare parts, and service inventory), work-in-process; work-in-process; and finished goods.
Materials Obsolete inventory or inventory in excess of our estimated usage requirements is used primarilywritten down to support the installed tool baseits estimated net realizable value if less than cost. We evaluate usage requirements by analyzing historical and spare parts salesanticipated demand, and anticipated demand is reviewed for excess quantities or obsolescence by comparing on-hand balances to historical usage, and adjusted forestimated based upon current economic conditions, utilization requirements related to current backlog, current sales trends, and other qualitative factors. Historically, the variability of such estimates has been impacted by customer demand and tool utilization rates.
The work-in-process and finished goods inventory is principally used to support system sales and is reviewed for recoverability by considering whether on hand inventory would be utilized to fulfill the related backlog. As we typically receive deposits for our orders, the variability of this estimate is reduced as customers have a vested interest in the orders they place with us. Recoverability of such inventory is evaluated by monitoring customer demand, current sales trends and product gross margins. Management also considers qualitative factors such as future product demand based on market outlook, which is based principally upon production requirements resulting from customer purchase orders received with a customer-confirmed shipment date within the next twelve months. Historically, the variability of these estimates of future product demand has been impacted by backlog cancellations or modifications resulting from unanticipated changes in technology or customer demand.
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Following identification of potential excess or obsolete inventory, management evaluates the need to write down inventory balances to its estimated market value, if less than its cost. Inherent in the estimates of market value are management’s estimates related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses, and ultimate realization of potential excess inventory. Unanticipated changes in demand for our products may require a write down of inventory that could materially affect our operating results.
Goodwill and Indefinite-Lived Intangible Asset Impairment: Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. We account for goodwill and intangible assets with indefinite useful lives in accordance with relevant accounting guidance related to goodwill and other intangible assets, which states that goodwill and intangible assets with indefinite useful lives should not be amortized, but instead tested for impairment at least annually at the reporting unit level. Our policy is to perform this annual impairment test in the fourth quarter, using a measurement date of October 1st, of each fiscal year or more frequently if impairment indicators arise. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets.
The guidance provides an option for an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
If we determine the two-step impairment test is necessary, we are required to determine if it is appropriate to use the operating segment, as defined under guidance for segment reporting, as the reporting unit, or one level below the operating segment, depending on whether certain criteria are met. We have identified five reporting units that are required to be reviewed for impairment. The five reporting units are aggregated into two segments: the VIBE and Mechanical reporting units which are reported in our Data Storage segment; and the MOCVD, MBE and ALD reporting units which are reported in our LED & Solar segment. In identifying the reporting units management considered the economic characteristics of operating segments including the products and services provided, production processes, types or classes of customer and product distribution.
We perform this impairment test by first comparing the fair value of our reporting units to their respective carrying amount. When determining the estimated fair value of a reporting unit, we utilize a discounted future cash flow approach since reported quoted market prices are not available for our reporting units. Developing the estimate of the discounted future cash flow requires significant judgment and projections of future financial performance. The key assumptions used in developing the discounted future cash flows are the projection of future revenues and expenses, working capital requirements, residual growth rates and the weighted average cost of capital. In developing our financial projections, we consider historical data, current internal estimates and market growth trends. Changes to any of these assumptions could materially change the fair value of the reporting unit. We reconcile the aggregate fair value of our reporting units to our adjusted market capitalization as a supporting calculation. The adjusted market capitalization is calculated by multiplying the average share price of our common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium.
If the carrying value of the reporting units exceed the fair value we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any.
Definite-Lived Intangible and Long-Lived Assets: Definite-lived intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, software licenses and deferred financing costs. Purchased technology consists of the core proprietary manufacturing technologies associated with the products and offerings obtained through acquisition and are initially recorded at fair value. Customer-related intangible assets, patents, trademarks, covenants not-to-compete and software licenses that are obtained in an acquisition are initially recorded at fair value. Other software licenses and deferred financing costs are initially recorded at cost. Intangible assets with definitive useful lives are amortized using the straight-line method over their estimated useful lives for periods 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.
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Long-lived assets, such as property, plant, and equipment and intangible assets with definite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flow expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Accounting for Acquisitions: Our growth strategy has included the acquisition of businesses. The purchase price of these acquisitions has been determined after due diligence of the acquired business, market research, strategic planning, and the forecasting of expected future results and synergies. Estimated future results and expected synergies are subject to judgment as we integrate each acquisition and attempt to leverage resources.
The accounting for the acquisitions we have made requires that the assets and liabilities acquired, as well as any contingent consideration that may be part of the agreement, be recorded at their respective fair values at the date of acquisition. This requires management to make significant estimates in determining the fair values, especially with respect to intangible assets, including estimates of expected cash flows, expected cost savings and the appropriate weighted average cost of capital. As a result of these significant judgments to be made we often obtain the assistance of independent valuation firms. We complete these assessments as soon as practical after the closing dates. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill
Fair Value Measurements: Accounting guidance requires that we disclose the type of inputs we use to value our assets and liabilities that are required to be measured at fair value, based on three categories of inputs as defined in such. Level 1 inputs are quoted, unadjusted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2 inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. These requirements apply to our long-lived assets, goodwill, cost method investment and intangible assets. We use Level 3 inputs to value all of such assets. We primarily apply the market approach for recurring fair value measurements.
Warranty Costs:Costs
Our warranties are typically valid for one year from the date of final acceptance. We estimate the costs that may be incurred under the warranty we provide and record a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Our warranty obligation is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.
Goodwill and Intangible Assets
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 the 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 unit to its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired and we are not required to perform further testing. If the carrying amount of the reporting unit exceeds its fair value, we determine the implied fair value of the goodwill and if the carrying amount of the goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.
We determine the fair value of our reporting unit based on a reconciliation of the aggregate fair value of our reporting unit to our adjusted market capitalization. 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 identifiable 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.
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 for additional information.
Income Taxes: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 treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. The carrying value of our deferred tax assets is adjusted by a partial valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net deferred tax assets consist primarily of tax credit carry forwards and timing differences between the bookasset and liability balances recognized for financial reporting purposes and the balances used for income tax treatmentpurposes, as well as the tax effect 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.
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carry 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 willpositions for only those positions which are estimated to more likely than not be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognizedif challenged. We reflect changes in recognition or measurement in the financial statements from suchperiod in which our change in judgment occurs. We record interest and penalties related to uncertain tax positions are measured basedin income tax expense.
We early adopted Accounting Standards Update (“ASU”) No. 2015-17: Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring that deferred income tax liabilities and assets be classified as noncurrent in our consolidated balance sheet. In accordance with the ASU’s transition requirements, we chose to apply the amendments in the update prospectively beginning with our 2015 fiscal year. As such, prior periods have not been retrospectively adjusted. The adoption of this ASU did not have a material impact on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.consolidated financial statements.
Equity-Based Compensation: Accounting for Share-Based CompensationWe grant equity-based awards, such as stock options and restricted stock or restricted stock units, to certain key employees to create a clear and meaningful alignment between compensation and shareholder return and to enable the employees to develop and maintain a stock ownership position. While the majority of our equity awards feature time-based vesting, performance-based equity awards, which are awarded from time to time to certain key Company executives, vest as a function of performance, and may also be subject to the recipient’s continued employment which also acts as a significant retention incentive.
Equity-based compensation cost is measured at the grant date,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 on our historicalperformance period and future expectationrecognize the impact of dividend payouts. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on objective data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which make them critical accounting estimates.
We use an expected stock-price volatility assumption that is a combination of both historical volatility calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option and implied volatility, and utilization of market data of actively traded options on our common stock, which are obtained from public data sources. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility and that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the bestany change in estimate of the future volatility of the market price of our common stock.
The expected option 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 of past grants and model the pattern of aggregate exercises.
We settle the exercise of stock options with newly issued shares.
With respect to grants of performance based awards, we assess the probability that such performance criteria will be met in order to determine the compensation expense. Consequently, the compensation expense is recognized straight-line over the vesting period. If that assessment of the probability of the performance condition being met changes, we would recognize the impact of the change in estimate in the period of the change. As with the use of any estimate, and owing to the significant judgment used to derive those estimates, actual results may vary.
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We have elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.
Recent Accounting Pronouncements
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists:In July 2013,May 2014, the FASB issued ASU No. 2013-11, 2014-09, as since amended by ASU 2015-14:Presentation Revenue from Contracts with Customers (the “Update”). The Update requires our revenue recognition to depict the transfer of promised goods or services to customers in an Unrecognized Tax Benefit Whenamount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The Update outlines a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists. ASU 2013-11five-step model to make the revenue recognition determination and requires entitiesnew financial statement disclosures. Publicly-traded companies are required to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax assetadopt the Update for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This ASU is effective prospectively for fiscal years, and interimreporting periods within those years, beginning after December 15, 2013.2017. The ASU provides for different transition alternatives. We are evaluating the potential impact of this adoptionadopting the Update on our consolidated financial statements.statements and related financial statement disclosures and have not yet determined which method of adoption will be selected.
Presentation of Financial Statements: In April 2013, the FASBWe have evaluated other pronouncements recently issued ASU No. 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.” The objective of ASU 2013-07 is to clarify when an entity should apply the liquidation basis of accounting. The update provides principles for the recognitionbut not yet adopted, and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Wewe do not anticipate thatbelieve the adoption of this standardthese pronouncements will have a material impact on ourthe consolidated financial statements, absent any indications that liquidation is imminent.
Parent’s Accounting for the Cumulative Translation Adjustment: In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This new standard is intended to resolve diversity in practice regarding the release into net income of a cumulative translation adjustment (“CTA”) upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We currently anticipate that its adoption could have an impact on our consolidated financial statements, in the event of derecognition of a foreign subsidiary in 2014 or subsequently. We cannot estimate the amount of CTA to be released into income from any potential derecognition.
Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date: In February 2013, the FASB issued Accounting Standards Update No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date”. ASU No. 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, ASU No. 2013-04 requires an entity to disclose the nature and amount of the obligation, as well as other information about the obligations. ASU No. 2013-04 is effective for interim and annual periods beginning after December 15, 2013 and is to be applied retrospectively. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
MarketInterest Rate Risk
The principalOur 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.
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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 $281.5$116.1 million as ofat December 31, 2013.2015. These securities are subject to interest rate risk and, will decline in value if interest rates increase. Basedbased on our investment portfolio as ofat December 31, 2013, an immediate2015, a 100 basis point increase in interest rates maywould result in a decrease in the fair value of the portfolio of approximately $2.0$0.3 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.
Foreign OperationsCurrency Exchange Risk
OperatingWe 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 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.
In the past, we have managed 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. We did not enter into any derivative transactions in 2015. During 2014 we did not designate our foreign exchange derivatives as hedges. Accordingly, all foreign exchange derivatives were recorded in our Consolidated Balance Sheets at fair value and changes in fair value from these contracts were recorded in “Other, net” in our Consolidated Statements of Operations.
Our net sales to foreign customers located outside of the United States represented approximately 83%82%, 84%89%, and 90%83% of our total net sales in 2013, 20122015, 2014, and 2011,2013, 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 2%, 8%, and 4%, 4% and 3% of total net sales in 2015, 2014, and 2013, 2012 and 2011, respectively.
We are exposed to financial market risks, including changes in foreign currency exchange rates. To mitigate these risks, we use derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. We enter into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known currency exposures. The foreign currency that has the largest impact on translating our international operating profit (loss) is the Japanese Yen. We believe that based upon our hedging program, aA 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of operations. We believe that this quantitative measure has inherent limitations because it does not take into account any governmental actions or changesoperations since most of our sales outside the United States are denominated in either customer purchasing patterns or our financing and operating strategies.U.S. dollars.
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| | As of December 31, 2013 | |
| | | | Fair | | Maturity | | Notional | |
(in thousands) | | Component of | | Value | | Dates | | Amount | |
Not Designated as Hedges under ASC 815 | | | | | | | | | |
Foreign currency exchange forwards | | Prepaid and other current assets | | 1 | | January 2014 | | 4,700 | |
Foreign currency collar | | Prepaid and other current assets | | 906 | | October 2014 | | 34,069 | |
Total Derivative Instruments | | | | $ | 907 | | | | $ | 38,769 | |
| | | | | | | | | | | |
| | As of December 31, 2012 | |
| | | | Fair | | Maturity | | Notional | |
(in thousands) | | Component of | | Value | | Dates | | Amount | |
Not Designated as Hedges under ASC 815 | | | | | | | | | |
Foreign currency exchange forwards | | Prepaid and other current assets | | 248 | | January 2013 | | 9,590 | |
Total Derivative Instruments | | | | $ | 248 | | | | $ | 9,590 | |
| | | | | | | | | | | |
| | | | Amount of realized net gain (loss) | |
| | | | and changes in the fair value of | |
| | Location of realized net gain | | derivatives for the year ended | |
| | (loss) and changes in the fair | | December 31, | |
(in thousands) | | value of derivatives | | 2013 | | 2012 | | 2011 | |
Foreign currency exchange forwards | | Other, net | | $ | 248 | | $ | 333 | | $ | 553 | |
Foreign currency collar | | Other, net | | $ | 906 | | $ | — | | $ | — | |
Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule filed as part of this Form 10-K.
Item 9.9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureDisclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013 (the “Evaluation”). Based upon the Evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) are effective.
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Management’s Report on Internal Control Over Financial Reporting
Our managementprincipal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective as of December 31, 2015. The disclosure controls and procedures are designed to ensure that the information required to be disclosed in this report filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure.
Our principal executive and financial officers are responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Management evaluates the effectiveness of our internal control over financial reporting, usingwhich is a process designed and put into effect 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. Using the criteria set forthestablished in the Internal Control – Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework).(“COSO”), Management under the supervisionhas evaluated, assessed, and with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of ourconcluded that internal control over financial reporting is effective as of December 31, 2013, and concluded that it is effective.2015.
We acquired Synos duringKPMG LLP, an independent registered public accounting firm, has audited the quarter ended December 31, 2013, which is included in our 2013 consolidated financial statements included in this Annual Report on Form 10-K and, constituted 14.6 percent and 17.0 percentas part of total and net assets, respectively, as of December 31, 2013 and 0.1 percent and 15.3 percent of our consolidated net sales and net loss, respectively, for the year ended December 31, 2013. We have excluded Synos from our annual assessment of and conclusiontheir audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting.
Our independent registered public accounting firm, Ernst & Young LLP, has audited the effectiveness of our internal control over financial reporting as of December 31, 2013, as stated in their report, which is included herein.
Changes in Internal Control Over Financial Reporting
We monitor and evaluate, on an ongoing basis, our disclosure controls and procedures in order to improve their overall effectiveness. In the course of these evaluations, we modify and refine our internal processes as conditions warrant. As required by Rule 13a-15(d), our management including the Chief Executive Officer and the Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred duringDuring the quarter ended December 31, 20132015, there were no changes in internal control that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. We implemented a material change in internal control over financial reporting during the quarter ended December 31, 2013. The change related to the remediation
Report of internal controls of revenue recognition and related costs. Specifically, we completed the implementation of redesigned processes and increased the level of review of work performed by our personnel and third-party professionals in the identification and calculation of revenue and cost of revenue. We have completed our testing of the additional control processes outlined above and conclude that our previously reported material weakness has been satisfactorily remediated as of December 31, 2013.Independent Registered Public Accounting Firm
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and ShareholdersStockholders of
Veeco Instruments Inc.:
We have audited Veeco InstrumentsInstrument Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2013,2015, based on criteria established in Internal Control-IntegratedControl – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria)(COSO). The Company’sVeeco Instrument Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;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 Synos Technology, Inc. which is included in the 2013 consolidated financial statements of Veeco Instruments Inc. and constituted 14.6 percent and 17.0 percent of total and net assets, respectively, as of December 31, 2013 and 0.1 percent and 15.3 percent of net sales and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Synos Technology, Inc.
In our opinion, Veeco Instruments Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO criteria.Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetssheet of Veeco InstrumentsInstrument’s Inc. and subsidiaries as of December 31, 2013 and 2012,2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the periodyear then ended, December 31, 2013 and our report dated February 28, 201425, 2016 expressed an unqualified opinion thereon.on those consolidated financial statements.
/s/ ERNST & YOUNG LLP
| |
| |
New York, New York
| |
February 28, 2014
| |
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Melville, New York
February 25, 2016
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 2014 Annual Meeting of Stockholders (the “Proxy Statement”).
Item 10. Directors, Executive Officers and Corporate Governance
The informationInformation required by this Item 10 of Form 10-K is incorporated by reference to our Proxy Statementthat will appear under the headings “Corporate “Governance,” “Executive Officers”Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance.”Compliance” in the definitive proxy statement to be filed with the SEC relating to our 2016 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)(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)(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 informationInformation required by this Item 11 of Form 10-K is incorporated by reference to our Proxy Statementthat will appear under the heading “Executive Compensation.”“Compensation” in the definitive proxy statement to be filed with the SEC relating to our 2016 Annual Meeting of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The informationInformation required by this Item 12 of Form 10-K is incorporated by reference to our Proxy Statementthat will appear under the headingheadings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
The following table gives information about our common stock that may be issued under our equity compensation plans as of December 31, 2013. See our footnote Equity Compensation Plans and EquityInformation” in the notesdefinitive proxy statement to be filed with the Consolidated Financial Statements included herein for information regarding the material features of these plans.
| | Number of | | | | Number of securities | |
| | securities to be | | Weighted | | remaining available | |
| | issued upon | | average exercise | | for future issuance | |
| | exercise of | | price of | | under equity | |
| | outstanding | | outstanding | | compensation plans | |
| | options, | | options, | | (excluding securities | |
| | warrants, and | | warrants, and | | reflected in column | |
| | rights | | rights (1) | | (a)) | |
| | (a) | | (b) | | (c) | |
Equity compensation plans approved by security holders | | 2,870,301 | | $ | 28.17 | | 2,775,167 | |
Equity compensation plans not approved by security holders (2) | | 210,800 | | $ | 37.70 | | — | |
Total | | 3,081,101 | | | | 2,775,167 | |
(1)The calculation of the weighted average exercise price includes only stock options and does not include the outstanding restricted stock units which do not have an exercise price.
(2)In connection with our acquisition of Synos on October 1, 2013, equity awards were granted to Synos’ employees, pursuantSEC relating to our 2013 Inducement Stock Incentive Plan, in order to create a retention incentive for those employees. Shares issued in connection with this
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equity award may be granted under the Veeco Instruments, Inc. 2010 Stock Incentive Plan. There are no awards available for future grant under the Inducement Plan.Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director IndependenceIndependence.
The informationInformation required by this Item 13 of Form 10-K is incorporated by reference to our Proxy Statementthat will appear under the headings “Independence of the Board of Directors” and “Certain“Certain Relationships and Related Transactions.”Transactions” and “Independence of Board” in the definitive proxy statement to be filed with the SEC relating to our 2016 Annual Meeting of Stockholders is incorporated herein by reference.
Item 14. Principal Accounting Fees and ServicesServices.
The informationInformation required by this Item 14 of Form 10-K is incorporated by reference to our Proxy Statementthat will appear under the heading “Proposal 3—6 — Ratification of the Appointment of Ernst & Young LLP as Independent Registered Public Accounting Firm.”KPMG” in the definitive proxy statement to be filed with the SEC relating to our 2016 Annual Meeting of Stockholders is incorporated herein by reference.
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PART IV
Item 15. Exhibits, and Financial Statements and ScheduleStatement Schedules.
(a) (1) The Registrant’s financial statements together with a separate table of contents are annexed hereto. The financial statement schedule ishereto
(2) Financial Statement Schedules are listed in the separate table of contents annexed hereto.
(b)(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. | | 10-K | 2.1 | 2/24/2015 | | |
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 | Amendment to Certificate of Incorporation of Veeco dated May 16, 2002. | | 10-Q | 3.1 | 10/26/2009 | | |
3.5 | Amendment to Certificate of Incorporation of Veeco dated May 14, 2010. | | 10-K | 3.8 | 2/24/2011 | | |
3.6 | Fourth Amended and Restated Bylaws of Veeco, effective October 23, 2008. | | 8-K | 3.1 | 10/27/2008 | | |
3.7 | Amendment No. 1 to the Fourth Amended and Restated Bylaws of Veeco effective May 20, 2010. | | 8-K | 3.1 | 5/26/2010 | | |
3.8 | Amendment No. 2 to the Fourth Amended and Restated Bylaws of Veeco effective October 20, 2011. | | 8-K | 3.1 | 10/24/2011 | | |
3.9 | Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of Veeco. | | 10-Q | 3.1 | 5/9/2001 | | |
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 | 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 | | |
10.3 | 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 | | |
10.4* | Veeco Amended and Restated 2000 Stock Incentive Plan, effective July 20, 2006. | | 10-Q | 10.4 | 8/4/2006 | | |
10.5* | 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 | | |
| | | | | | | Filed or |
Exhibit | | | Incorporated by Reference | | Furnished |
Number | Exhibit Description | | Form | Exhibit | Filing Date | | Herewith |
10.6* | Amendment No. 2 dated January 22, 2009 to Veeco Amended and Restated 2000 Stock Incentive Plan. | | 10-K | 10.41 | 3/2/2009 | | |
10.7* | Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 14, 2010. | | Def 14A | Appendix A | 11/4/2013 | | |
10.8* | Form of Notice of Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective June 2015. | | 10-Q | 10.1 | 8/3/2015 | | |
10.9* | Veeco 2013 Inducement Stock Incentive Plan, effective September 26, 2013. | | 10-Q | 10.1 | 11/4/2013 | | |
10.10* | Form of 2013 Inducement Stock Incentive Plan Stock Option Agreement. | | 10-Q | 10.2 | 11/4/2013 | | |
10.11* | Form of 2013 Inducement Stock Incentive Plan Restricted Stock Unit Agreement. | | 10-Q | 10.3 | 11/4/2013 | | |
10.12* | Form of Indemnification Agreement entered into between Veeco and each of its directors and executive officers. | | 8-K | 10.1 | 10/23/2006 | | |
10.13* | Veeco Amended and Restated Senior Executive Change in Control Policy, effective as of January 1, 2014. | | 10-K | 10.22 | 2/28/2014 | | |
10.14* | Employment Agreement effective as of July 1, 2007 between Veeco and John R. Peeler. | | 10-Q | 10.3 | 8/7/2007 | | |
10.15* | Amendment effective December 31, 2008 to Employment Agreement between Veeco and John R. Peeler. | | 10-K | 10.38 | 3/2/2009 | | |
10.16* | Second Amendment effective June 11, 2010 to Employment Agreement between Veeco and John R. Peeler. | | 10-Q | 10.1 | 7/29/2010 | | |
10.17* | Third Amendment effective April 27, 2012 to Employment Agreement between Veeco and John R. Peeler. | | 10-Q | 10.2 | 5/9/2012 | | |
10.18* | Amendment dated June 12, 2014 to Employment Agreement between Veeco and John R. Peeler. | | 10-Q | 10.3 | 7/31/2014 | | |
10.19* | Letter Agreement dated April 8, 2014 between Veeco and Shubham Maheshwari. | | 10-Q | 10.1 | 7/31/2014 | | |
10.20* | Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller. | | 10-K | 10.3 | 2/22/2012 | | |
10.21* | Letter dated December 22, 2015 from Veeco to Dr. William J. Miller. | | | | | | X |
10.22* | Letter Agreement dated January 21, 2004 between Veeco and John P. Kiernan. | | 10-K | 10.38 | 3/12/2004 | | |
10.23* | Amendment effective June 9, 2006 to Letter Agreement between Veeco and John P. Kiernan. | | 10-Q | 10.3 | 8/4/2006 | | |
10.24* | Amendment effective December 31, 2008 to Letter Agreement between Veeco and John P. Kiernan. | | 10-K | 10.40 | 3/2/2009 | | |
10.25* | Letter Agreement effective as of June 19, 2009 between Veeco and John P. Kiernan. | | 10-Q | 10.2 | 7/30/2009 | | |
16.1 | Letter to the Securities and Exchange Commission from Ernst & Young LLP, dated March 19, 2015. | | 8-K | 16.1 | 3/19/2015 | | |
21.1 | Subsidiaries of the Registrant. | | | | | | X |
23.1 | Consent of KPMG LLP. | | | | | | X |
23.2 | 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 |
Number
|
| Exhibit
|
| Incorporated by Reference to the Following
Documents
|
2.1
| | Agreement and Plan of Merger, dated September 18, 2013, by and among Veeco, Veeco Wyoming Inc., Synos Technology, Inc. certain stockholders of Synos Technology, Inc., and Shareholder Representative Services LLC
| | Filed herewith
|
| | | | |
3.1
| | Amended and Restated Certificate of Incorporation of Veeco dated December 1, 1994, as amended June 2, 1997 and July 25, 1997.
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, Exhibit 3.1Filed or
|
Exhibit | | | | |
3.2Incorporated by Reference
| | 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 3.2Furnished
|
| | | | |
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
|
53
Table of Contents
Number | Exhibit Description | | Form | Exhibit |
| Incorporated by Reference to the Following
DocumentsFiling Date
|
10.5*
| | Veeco Amended and Restated 2000 Stock Incentive Plan, effective July 20, 2006.
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.4
|
| | | | |
10.6*
| | Amendment No. 1 effective April 18, 2007 (ratified by the Board August 7, 2007) to Veeco Amended and Restated 2000 Stock Incentive Plan.
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, Exhibit 10.1
|
| | | | |
10.7*
| | Amendment No. 2 dated January 22, 2009 to Veeco Amended and Restated 2000 Stock Incentive Plan.
| | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.41
|
| | | | |
10.8*
| | Form of Restricted Stock Agreement pursuant to the Veeco 2000 Stock Incentive Plan, effective November 2005
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, Exhibit 10.3
|
| | | | |
10.9*
| | Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2000 Stock Incentive Plan, effective June 2006
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, Exhibit 10.3
|
| | | | |
10.10*
| | Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 14, 2010
| | Proxy Statement on Schedule 14A, filed November 4, 2013, Appendix A
|
| | | | |
10.11*
| | Form of 2010 Stock Incentive Plan Stock Option Agreement (2012 rev.)
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.2
|
| | | | |
10.12*
| | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (2012 rev.)
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.3
|
| | | | |
10.13*
| | Form of 2010 Stock Incentive Plan Restricted Stock Unit Agreement (2012 rev.)
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.4
|
| | | | |
10.14*
| | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (Non-Employee Director) (2011 rev.)
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.5
|
| | | | |
10.15*
| | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (Performance Based) (2012 rev.)
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.6
|
| | | | |
10.16*
| | Veeco 2013 Inducement Stock Incentive Plan, effective September 26, 2013
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.1
|
| | | | |
10.17*
| | Form of 2013 Inducement Stock Incentive Plan Stock Option Agreement
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.2
|
| | | | |
10.18*
| | Form of 2013 Inducement Stock Incentive Plan Restricted Stock Unit Agreement
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.3
|
| | | | |
10.19*
| | Veeco Performance-Based Restricted Stock 2010
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 10.2
|
| | | | |
10.20*
| | Senior Executive Change in Control Policy effective as of September 12, 2008
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, Exhibit 10.3
|
| | | | |
10.21*
| | Amendment No. 1 dated December 23, 2008 (effective September 12, 2008) to Veeco Senior Executive Change in Control Policy
| | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.37
|
| | | | |
10.22*
| | Veeco Amended and Restated Senior Executive Change in Control Policy, effective as of January 1, 2014
| | Filed herewith
|
| | | | |
10.23*
| | Amendment effective December 31, 2008 to Employment Agreement between Veeco and John R. Peeler
| | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.38
|
| | | | |
10.24*
| | Second Amendment effective June 11, 2010 to Employment Agreement between Veeco and John R. Peeler
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 10.1
|
54
Table of Contents
Number
|
| Exhibit
|
| Incorporated by Reference to the Following
DocumentsHerewith
|
10.25*
| | Third Amendment effective April 27, 2012 to Employment Agreement between Veeco and John R. Peeler
| | Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, Exhibit 10.2
|
| | | | |
10.26*
| | Employment Agreement dated December 17, 2009 (effective January 18, 2010) between Veeco and David D. Glass
| | Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, Exhibit 10.1
|
| | | | |
10.27*
| | Letter Agreement dated January 21, 2004 between Veeco and John P. Kiernan.
| | Annual Report on Form 10-K for the year ended December 31, 2003, Exhibit 10.38
|
| | | | |
10.28*
| | Amendment effective June 9, 2006 to Letter Agreement between Veeco and John P. Kiernan
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.3
|
| | | | |
10.29*
| | Amendment effective December 31, 2008 to Letter Agreement between Veeco and John P. Kiernan
| | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.40
|
| | | | |
10.30*
| | Letter agreement effective as of June 19, 2009 between Veeco and John P. Kiernan
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, Exhibit 10.2
|
| | | | |
10.31*
| | Letter agreement effective as of January 4, 2010 between Veeco and Peter Collingwood
| | Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, Exhibit 10.1
|
| | | | |
10.32*
| | Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller
| | Annual Report on Form 10-K for the year ended December 31, 2011, Exhibit 10.30
|
| | | | |
21.1
| | Subsidiaries of the Registrant.
| | Filed herewith
|
| | | | |
23.1
| | Consent of Ernst & Young LLP.
| | Filed herewith
|
| | | | |
31.1
| | Certification of Chief Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.
| | Filed herewith
|
| | | | |
31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934. | | Filed herewith
|
| | | | 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-Sarbanes - Oxley Act of 20022002. | | Filed herewith
|
| | | | | 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-Sarbanes - Oxley Act of 20022002. | | Filed herewith
|
| | | | | X |
101.INS | XBRL Instance. | XBRL Instance
| | **
|
| | | | | ** |
101.XSD | XBRL Schema. | XBRL Schema
| | **
|
| | | | | ** |
101.PRE | XBRL Presentation. | XBRL Presentation
| | **
|
| | | | | ** |
101.CAL | XBRL Calculation. | XBRL Calculation
| | **
|
| | | | | ** |
101.DEF | XBRL Definition. | XBRL Definition
| | **
|
| | | | | ** |
101.LAB | XBRL Label. | 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
55
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 28, 2014.
25, 2016.
| Veeco Instruments Inc. |
| | |
| By: | /S/ JOHN R. PEELER |
| | John R. Peeler |
| | Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on February 28, 2014.25, 2016.
Signature | | Title |
| | |
/s/ /s/ JOHN R. PEELER
| | Chairman and Chief Executive Officer |
John R. Peeler | | (principal executive officer) |
| | |
/s/ DAVID D. GLASS /s/ SHUBHAM MAHESHWARI
| | Executive Vice President and Chief Financial Officer |
David D. GlassShubham Maheshwari
| | (principal financial officer) |
| | |
/s/ JOHN P. KIERNAN
| | Senior Vice President, Finance, Chief Accounting Officer, |
/s/ JOHN P. KIERNAN | | Corporate Controller and Treasurer |
John P. Kiernan | | (principal accounting officer) |
| | |
/s/ /s/ EDWARD H. BRAUN
| | Director |
Edward H. Braun | | |
| | |
/s/ /s/ RICHARD A. D’AMORE
| | Director |
Richard A. D’Amore | | |
| | |
/s/ /s/ GORDON HUNTER
| | Director |
Gordon Hunter | | |
| | |
/s/ /s/ KEITH D. JACKSON
| | Director |
Keith D. Jackson | | |
| | |
/s/ /s/ ROGER D. MCDANIEL
| | Director |
Roger D. McDaniel | | |
| | |
/s/ /s/ PETER J. SIMONE
| | Director |
Peter J. Simone | | |
56
Table of Contents
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
| | Agreement and Plan of Merger, dated September 18, 2013, by and among Veeco, Veeco Wyoming Inc., Synos Technology, Inc. certain stockholders of Synos Technology, Inc., and Shareholder Representative Services LLC
| | Filed herewith
|
| | | | |
3.1 /s/ SUSAN WANG
| | 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 3.1Director
|
| | Susan Wang | | |
3.2
| | Amendment to Certificate of Incorporation of Veeco dated May 29, 1998.
| | Annual Report on Form 10-K for the year ended December 31, 2000, Exhibit 3.2
|
| | | | |
3.3
| | Amendment to Certificate of Incorporation of Veeco dated May 5, 2000.
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, Exhibit 3.1
|
| | | | |
3.4
| | Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of Veeco.
| | Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, Exhibit 3.1
|
| | | | |
3.5
| | Amendment to Certificate of Incorporation of Veeco dated May 16, 2002
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, Exhibit 3.1
|
| | | | |
3.6
| | Amendment to Certificate of Incorporation of Veeco dated May 14, 2010
| | Annual Report on Form 10-K for the year ended December 31, 2010, Exhibit 3.8
|
| | | | |
3.7
| | Fourth Amended and Restated Bylaws of Veeco, effective October 23, 2008
| | Current Report on Form 8-K filed October 27, 2008, Exhibit 3.1
|
| | | | |
3.8
| | Amendment No. 1 to the Fourth Amended and Restated Bylaws of Veeco effective May 20, 2010
| | Current Report on Form 8-K, filed May 26, 2010, Exhibit 3.1
|
| | | | |
3.9
| | Amendment No. 2 to the Fourth Amended and Restated Bylaws of Veeco effective October 20, 2011
| | Current Report on Form 8-K, filed October 24, 2011, Exhibit 3.1
|
| | | | |
10.1
| | Loan Agreement dated as of December 15, 1999 between Applied Epi, Inc. and Jackson National Life Insurance Company.
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Exhibit 10.2
|
| | | | |
10.2
| | Amendment to Loan Documents effective as of September 17, 2001 between Applied Epi, Inc. and Jackson National Life Insurance Company (executed in June 2002).
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, Exhibit 10.2
|
| | | | |
10.3
| | Promissory Note dated as of December 15, 1999 issued by Applied Epi, Inc. to Jackson National Life Insurance Company.
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Exhibit 10.3
|
| | | | |
10.4*
| | Form of Indemnification Agreement entered into between Veeco and each of its directors and executive officers.
| | Current Report on Form 8-K filed on October 23, 2006, Exhibit 10.1
|
| | | | |
10.5*
| | Veeco Amended and Restated 2000 Stock Incentive Plan, effective July 20, 2006.
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.4
|
| | | | |
10.6*
| | Amendment No. 1 effective April 18, 2007 (ratified by the Board August 7, 2007) to Veeco Amended and Restated 2000 Stock Incentive Plan.
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, Exhibit 10.1
|
| | | | |
10.7*
| | Amendment No. 2 dated January 22, 2009 to Veeco Amended and Restated 2000 Stock Incentive Plan.
| | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.41
|
5744
Table of Contents
Number
|
| Exhibit
|
| Incorporated by Reference to the Following
Documents
|
10.8*
| | Form of Restricted Stock Agreement pursuant to the Veeco 2000 Stock Incentive Plan, effective November 2005
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, Exhibit 10.3
|
| | | | |
10.9*
| | Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2000 Stock Incentive Plan, effective June 2006
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, Exhibit 10.3
|
| | | | |
10.10*
| | Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 14, 2010
| | Proxy Statement on Schedule 14A, filed November 4, 2013, Appendix A
|
| | | | |
10.11*
| | Form of 2010 Stock Incentive Plan Stock Option Agreement (2012 rev.)
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.2
|
| | | | |
10.12*
| | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (2012 rev.)
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.3
|
| | | | |
10.13*
| | Form of 2010 Stock Incentive Plan Restricted Stock Unit Agreement (2012 rev.)
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.4
|
| | | | |
10.14*
| | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (Non-Employee Director) (2011 rev.)
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.5
|
| | | | |
10.15*
| | Form of 2010 Stock Incentive Plan Restricted Stock Agreement (Performance Based) (2012 rev.)
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, Exhibit 10.6
|
| | | | |
10.16*
| | Veeco 2013 Inducement Stock Incentive Plan, effective September 26, 2013
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.1
|
| | | | |
10.17*
| | Form of 2013 Inducement Stock Incentive Plan Stock Option Agreement
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.2
|
| | | | |
10.18*
| | Form of 2013 Inducement Stock Incentive Plan Restricted Stock Unit Agreement
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, Exhibit 10.3
|
| | | | |
10.19*
| | Veeco Performance-Based Restricted Stock 2010
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 10.2
|
| | | | |
10.20*
| | Senior Executive Change in Control Policy effective as of September 12, 2008
| | Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, Exhibit 10.3
|
| | | | |
10.21*
| | Amendment No. 1 dated December 23, 2008 (effective September 12, 2008) to Veeco Senior Executive Change in Control Policy
| | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.37
|
| | | | |
10.22*
| | Veeco Amended and Restated Senior Executive Change in Control Policy, effective as of January 1, 2014
| | Filed herewith
|
| | | | |
10.23*
| | Amendment effective December 31, 2008 to Employment Agreement between Veeco and John R. Peeler
| | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.38
|
| | | | |
10.24*
| | Second Amendment effective June 11, 2010 to Employment Agreement between Veeco and John R. Peeler
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Exhibit 10.1
|
| | | | |
10.25*
| | Third Amendment effective April 27, 2012 to Employment Agreement between Veeco and John R. Peeler
| | Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, Exhibit 10.2
|
| | | | |
10.26*
| | Employment Agreement dated December 17, 2009 (effective January 18, 2010) between Veeco and David D. Glass
| | Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, Exhibit 10.1
|
| | | | |
10.27*
| | Letter Agreement dated January 21, 2004 between Veeco and John P. Kiernan.
| | Annual Report on Form 10-K for the year ended December 31, 2003, Exhibit 10.38
|
58
Table of Contents
Number
|
| Exhibit
|
| Incorporated by Reference to the Following
Documents
|
10.28*
| | Amendment effective June 9, 2006 to Letter Agreement between Veeco and John P. Kiernan
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.3
|
| | | | |
10.29*
| | Amendment effective December 31, 2008 to Letter Agreement between Veeco and John P. Kiernan
| | Annual Report on Form 10-K for the year ended December 31, 2008, Exhibit 10.40
|
| | | | |
10.30*
| | Letter agreement effective as of June 19, 2009 between Veeco and John P. Kiernan
| | Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, Exhibit 10.2
|
| | | | |
10.31*
| | Letter agreement effective as of January 4, 2010 between Veeco and Peter Collingwood
| | Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, Exhibit 10.1
|
| | | | |
10.32*
| | Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller
| | Annual Report on Form 10-K for the year ended December 31, 2011, Exhibit 10.30
|
| | | | |
21.1
| | Subsidiaries of the Registrant.
| | Filed herewith
|
| | | | |
23.1
| | Consent of Ernst & Young LLP.
| | Filed herewith
|
| | | | |
31.1
| | Certification of Chief Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.
| | Filed herewith
|
| | | | |
31.2
| | Certification of Chief Financial Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.
| | Filed herewith
|
| | | | |
32.1
| | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
| | Filed herewith
|
| | | | |
32.2
| | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
| | Filed herewith
|
| | | | |
101.INS
| | XBRL Instance
| | **
|
| | | | |
101.XSD
| | XBRL Schema
| | **
|
| | | | |
101.PRE
| | XBRL Presentation
| | **
|
| | | | |
101.CAL
| | XBRL Calculation
| | **
|
| | | | |
101.DEF
| | XBRL Definition
| | **
|
| | | | |
101.LAB
| | XBRL Label
| | **
|
* Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a) (3) of Form 10-K.
** Filed herewith electronically
59
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Index to Consolidated Financial Statements and Financial Statement Schedule
| | Page |
| | |
ReportReports of Independent Registered Public Accounting FirmFirms on Financial Statements
| | F-2 |
Consolidated Balance Sheets as ofat December 31, 20132015 and 20122014 | F-3
| F-4 |
Consolidated Statements of Operations for the years ended December 31, 2013, 20122015, 2014, and 20112013 | F-4
| F-5 |
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 20122015, 2014, and 20112013 | F-5
| F-6 |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 20122015, 2014, and 20112013 | F-6
| F-7 |
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 20122015, 2014, and 20112013 | F-7
| F-8 |
Notes to Consolidated Financial Statements | F-8
| F-9 |
Schedule II—Valuation and Qualifying Accounts | | S-1 |
F-1F-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 sheet of Veeco Instruments Inc. and subsidiaries as of December 31, 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited Schedule II – Valuation and Qualifying Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Veeco Instruments Inc. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year then ended, 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 consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Veeco Instrument Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Melville, New York
February 25, 2016
F-2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and ShareholdersStockholders of
Veeco Instruments Inc.
We have audited the accompanying consolidated balance sheetssheet of Veeco Instruments Inc. (the “Company”) as of December 31, 2013 and 20122014 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 and 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Veeco Instruments Inc. at December 31, 2013 and 2012,2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014 and 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, 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), Veeco Instruments Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 28, 2014 expressed an unqualified opinion thereon./s/ ERNST & YOUNG LLP
Jericho, New York
February 24, 2015 | /s/ ERNST & YOUNG LLP
|
| |
| New York, New York
|
| February 28, 2014
|
F-2F-3
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)amounts)
| | December 31, | | | | December 31, |
| | 2013 | | 2012 | | | | 2015 | | 2014 |
Assets | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 210,799 | | $ | 384,557 | | | $ | 269,232 | | $ | 270,811 | |
Short-term investments | | 281,538 | | 192,234 | | | 116,050 | | 120,572 | |
Restricted cash | | 2,738 | | 2,017 | | | — | | 539 | |
Accounts receivable, net | | 23,823 | | 63,169 | | | 49,524 | | 60,085 | |
Inventories | | 59,726 | | 59,807 | | | 77,469 | | 61,471 | |
Deferred cost of goods sold | | 724 | | 1,797 | | |
Deferred cost of sales | | | 2,100 | | 5,076 | |
Prepaid expenses and other current assets | | 22,579 | | 30,358 | | | 22,760 | | 23,132 | |
Assets held for sale | | | 5,000 | | 6,000 | |
Deferred income taxes | | 11,716 | | 10,545 | | | — | | 7,976 | |
Total current assets | | 613,643 | | 744,484 | | | 542,135 | | 555,662 | |
Property, plant and equipment at cost, net | | 89,139 | | 98,302 | | |
Property, plant and equipment, net | | | 79,590 | | 78,752 | |
Intangible assets, net | | | 131,674 | | 159,308 | |
Goodwill | | 91,348 | | 55,828 | | | 114,908 | | 114,959 | |
Intangible assets, net | | 114,716 | | 20,974 | | |
Deferred income taxes | | | 1,384 | | 1,180 | |
Other assets | | 38,726 | | 16,781 | | | 21,098 | | 19,594 | |
Deferred income taxes | | 397 | | 935 | | |
Total assets | | $ | 947,969 | | $ | 937,304 | | | $ | 890,789 | | $ | 929,455 | |
Liabilities and equity | | | | | | |
| | | | | | |
Liabilities and stockholders’ equity | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable | | $ | 35,755 | | $ | 26,087 | | | $ | 30,074 | | $ | 18,111 | |
Accrued expenses and other current liabilities | | 51,084 | | 41,401 | | | 49,393 | | 48,418 | |
Customer deposits and deferred revenue | | 34,754 | | 42,099 | | | 76,216 | | 96,004 | |
Income taxes payable | | 6,149 | | 2,292 | | | 6,208 | | 5,441 | |
Deferred income taxes | | 159 | | 140 | | | — | | 120 | |
Current portion of long-term debt | | 290 | | 268 | | | 340 | | 314 | |
Total current liabilities | | 128,191 | | 112,287 | | | 162,231 | | 168,408 | |
| | | | | | |
Deferred income taxes | | 28,052 | | 7,137 | | | 11,211 | | 16,397 | |
Long-term debt | | 1,847 | | 2,138 | | | 1,193 | | 1,533 | |
Other liabilities | | 9,649 | | 4,530 | | | 1,539 | | 4,185 | |
Total liabilities | | 167,739 | | 126,092 | | | 176,174 | | 190,523 | |
Equity: | | | | | | |
Stockholders’ equity: | | | | | | |
Preferred stock, 500,000 shares authorized; no shares issued and outstanding | | — | | — | | | — | | — | |
Common stock; $.01 par value; authorized 120,000,000 shares; 39,666,195 shares issued and outstanding in 2013; and 39,328,503 shares issued and outstanding in 2012 | | 397 | | 393 | | |
Common stock, $0.01 par value; 120,000,000 shares authorized; 40,995,694 shares issued and 40,526,902 shares outstanding at December 31, 2015; and 40,360,069 shares issued and outstanding at December 31, 2014 | | | 410 | | 404 | |
Additional paid-in capital | | 721,352 | | 708,723 | | | 767,137 | | 750,139 | |
Retained earnings | | 53,860 | | 96,123 | | |
Accumulated deficit | | | (45,058 | ) | | (13,080 | ) |
Accumulated other comprehensive income | | 4,621 | | 5,973 | | | 1,348 | | 1,469 | |
Total equity | | 780,230 | | 811,212 | | |
Total liabilities and equity | | $ | 947,969 | | $ | 937,304 | | |
Treasury stock, at cost, 468,792 shares at December 31, 2015 | | | (9,222 | ) | | — | |
Total stockholders’ equity | | | 714,615 | | 738,932 | |
Total liabilities and stockholders’ equity | | | $ | 890,789 | | $ | 929,455 | |
The
See accompanying notes are an integral part of these consolidated financial statements.Notes to the Consolidated Financial Statements.
F-3F-4
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)amounts)
| | For the year ended | |
| | December 31, | |
| | 2013 | | 2012 | | 2011 | |
Net sales | | $ | 331,749 | | $ | 516,020 | | $ | 979,135 | |
Cost of sales | | 228,607 | | 300,887 | | 504,801 | |
Gross profit | | 103,142 | | 215,133 | | 474,334 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | | 85,486 | | 73,110 | | 95,134 | |
Research and development | | 81,424 | | 95,153 | | 96,596 | |
Amortization | | 5,527 | | 4,908 | | 4,734 | |
Restructuring | | 1,485 | | 3,813 | | 1,288 | |
Asset impairment | | 1,220 | | 1,335 | | 584 | |
Total operating expenses | | 175,142 | | 178,319 | | 198,336 | |
Other, net | | (1,017 | ) | (398 | ) | (261 | ) |
Changes in contingent consideration | | 829 | | — | | — | |
Operating income (loss) | | (71,812 | ) | 37,212 | | 276,259 | |
Interest income | | 1,200 | | 2,476 | | 3,776 | |
Interest expense | | (598 | ) | (1,502 | ) | (4,600 | ) |
Interest income (expense), net | | 602 | | 974 | | (824 | ) |
Loss on extinguishment of debt | | — | | — | | (3,349 | ) |
Income (loss) from continuing operations before income taxes | | (71,210 | ) | 38,186 | | 272,086 | |
Income tax provision (benefit) | | (28,947 | ) | 11,657 | | 81,584 | |
Income (loss) from continuing operations | | (42,263 | ) | 26,529 | | 190,502 | |
| | | | | | | |
Discontinued operations: | | | | | | | |
Income (loss) from discontinued operations before income taxes | | — | | 6,269 | | (91,885 | ) |
Income tax provision (benefit) | | — | | 1,870 | | (29,370 | ) |
Income (loss) from discontinued operations | | — | | 4,399 | | (62,515 | ) |
Net income (loss) | | $ | (42,263 | ) | $ | 30,928 | | $ | 127,987 | |
| | | | | | | |
Net Income (loss) per common share: | | | | | | | |
Basic: | | | | | | | |
Continuing operations | | $ | (1.09 | ) | $ | 0.69 | | $ | 4.80 | |
Discontinued operations | | — | | 0.11 | | (1.57 | ) |
Income (loss) | | $ | (1.09 | ) | $ | 0.80 | | $ | 3.23 | |
Diluted : | | | | | | | |
Continuing operations | | $ | (1.09 | ) | $ | 0.68 | | $ | 4.63 | |
Discontinued operations | | — | | 0.11 | | (1.52 | ) |
Income (loss) | | $ | (1.09 | ) | $ | 0.79 | | $ | 3.11 | |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | | 38,807 | | 38,477 | | 39,658 | |
Diluted | | 38,807 | | 39,051 | | 41,155 | |
| | | For the year ended December 31, |
| | | 2015 | | 2014 | | 2013 |
Net sales | | $ | 477,038 | | | $ | 392,873 | | | $ | 331,749 | |
Cost of sales | | 299,797 | | | 257,991 | | | 228,607 | |
Gross profit | | 177,241 | | | 134,882 | | | 103,142 | |
Operating expenses, net: | | | | | | | | | |
Selling, general, and administrative | | 90,188 | | | 89,760 | | | 85,486 | |
Research and development | | 78,543 | | | 81,171 | | | 81,424 | |
Amortization of intangible assets | | 27,634 | | | 13,146 | | | 5,527 | |
Restructuring | | 4,679 | | | 4,394 | | | 1,485 | |
Asset impairment | | 126 | | | 58,170 | | | 1,220 | |
Changes in contingent consideration | | — | | | (29,368 | ) | | 829 | |
Other, net | | (697 | ) | | (3,182 | ) | | (1,017 | ) |
Total operating expenses, net | | 200,473 | | | 214,091 | | | 174,954 | |
Operating income (loss) | | (23,232 | ) | | (79,209 | ) | | (71,812 | ) |
Interest income | | 1,050 | | | 1,570 | | | 1,200 | |
Interest expense | | (464 | ) | | (715 | ) | | (598 | ) |
Income (loss) before income taxes | | (22,646 | ) | | (78,354 | ) | | (71,210 | ) |
Income tax expense (benefit) | | 9,332 | | | (11,414 | ) | | (28,947 | ) |
Net income (loss) | | $ | (31,978 | ) | | $ | (66,940 | ) | | $ | (42,263 | ) |
| | | | | | | | | |
Income (loss) per common share: | | | | | | | | | |
Basic | | $ | (0.80 | ) | | $ | (1.70 | ) | | $ | (1.09 | ) |
Diluted | | $ | (0.80 | ) | | $ | (1.70 | ) | | $ | (1.09 | ) |
| | | | | | | | | |
Weighted average number of shares: | | | | | | | | | |
Basic | | 39,742 | | | 39,350 | | | 38,807 | |
Diluted | | 39,742 | | | 39,350 | | | 38,807 | |
The
See accompanying notes are an integral part of these consolidated financial statements.Notes to the Consolidated Financial Statements.
F-4F-5
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
| | For the year ended | | |
| | December 31, | | | | For the year ended December 31, |
| | 2013 | | 2012 | | 2011 | | | | 2015 | | 2014 | | 2013 |
Net income (loss) | | $ | (42,263 | ) | $ | 30,928 | | $ | 127,987 | | | $ | (31,978 | ) | | $ | (66,940 | ) | | $ | (42,263 | ) |
| | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | |
Unrealized gain (loss) on available-for-sale securities | | 34 | | (118 | ) | 393 | | | (49 | ) | | 51 | | | 34 | |
Benefit (provision) for income taxes | | 11 | | 50 | | (79 | ) | |
Less: Reclassification adjustments for gains included in net income (loss) | | (61 | ) | (24 | ) | (271 | ) | |
Net unrealized gain (loss) on available-for-sale securities | | (16 | ) | (92 | ) | 43 | | |
Benefit (expense) for income taxes | | | — | | | — | | | 11 | |
Reclassifications from AOCI into net income | | | — | | | (65 | ) | | (61 | ) |
Net unrealized loss on available-for-sale securities | | | (49 | ) | | (14 | ) | | (16 | ) |
| | | | | | | | | | |
Minimum pension liability | | | | | | | | | 15 | | | (145 | ) | | 125 | |
Minimum pension liability | | 125 | | (216 | ) | (73 | ) | |
Benefit (provision) for income taxes | | (86 | ) | 79 | | 30 | | |
Benefit (expense) for income taxes | | | — | | | — | | | (86 | ) |
Net minimum pension liability | | 39 | | (137 | ) | (43 | ) | | 15 | | | (145 | ) | | 39 | |
| | | | | | | | | | |
Foreign currency translation | | | | | | | | | (87 | ) | | 149 | | | (1,322 | ) |
Foreign currency translation | | (1,322 | ) | (1,071 | ) | 1,228 | | |
Benefit (provision) for income taxes | | (53 | ) | 683 | | (434 | ) | |
Benefit (expense) for income taxes | | | — | | | — | | | (53 | ) |
Reclassifications from AOCI into net income | | | — | | | (3,142 | ) | | — | |
Net foreign currency translation | | (1,375 | ) | (388 | ) | 794 | | | (87 | ) | | (2,993 | ) | | (1,375 | ) |
| | | | | | | | | | |
Other comprehensive income (loss), net of tax | | (1,352 | ) | (617 | ) | 794 | | | (121 | ) | | (3,152 | ) | | (1,352 | ) |
Comprehensive income (loss) | | $ | (43,615 | ) | $ | 30,311 | | $ | 128,781 | | | $ | (32,099 | ) | | $ | (70,092 | ) | | $ | (43,615 | ) |
The
See accompanying notes are an integral part of these consolidated financial statements.Notes to the Consolidated Financial Statements.
F-5F-6
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands)
| | | | | | | | | | | | Accumulated | | | |
| | | | | | | | Additional | | | | Other | | | |
| | Common Stock | | Treasury | | Paid-in | | Retained | | Comprehensive | | Total | |
| | Shares | | Amount | | Stock | | Capital | | Earnings | | Income | | Equity | |
Balance as of January 1, 2011 | | 40,337,950 | | $ | 409 | | $ | (38,098 | ) | $ | 656,969 | | $ | 137,436 | | $ | 5,796 | | $ | 762,512 | |
Exercise of stock options | | 688,105 | | 7 | | — | | 10,707 | | — | | — | | 10,714 | |
Equity-based compensation expense-continuing operations | | — | | — | | — | | 12,807 | | — | | — | | 12,807 | |
Equity-based compensation expense-discontinued operations | | — | | — | | — | | 689 | | — | | — | | 689 | |
Issuance, vesting and cancellation of restricted stock | | 131,196 | | 1 | | — | | (3,175 | ) | — | | — | | (3,174 | ) |
Treasury stock | | (4,160,228 | ) | — | | (162,077 | ) | — | | — | | — | | (162,077 | ) |
Debt Conversion | | 1,771,413 | | 18 | | — | | (50 | ) | — | | — | | (32 | ) |
Excess tax benefits from stock option exercises | | — | | — | | — | | 10,406 | | — | | — | | 10,406 | |
Other comprehensive income (loss), net of tax | | — | | — | | — | | — | | (106 | ) | 794 | | 688 | |
Net income (loss) | | — | | — | | — | | — | | 127,987 | | — | | 127,987 | |
Balance as of December 31, 2011 | | 38,768,436 | | 435 | | (200,175 | ) | 688,353 | | 265,317 | | 6,590 | | 760,520 | |
Exercise of stock options | | 351,436 | | 4 | | — | | 5,405 | | — | | — | | 5,409 | |
Equity-based compensation expense-continuing operations | | — | | — | | — | | 14,268 | | — | | — | | 14,268 | |
Issuance, vesting and cancellation of restricted stock | | 208,631 | | 7 | | — | | (1,732 | ) | — | | — | | (1,725 | ) |
Treasury stock | | — | | (53 | ) | 200,175 | | — | | (200,122 | ) | — | | — | |
Prior period debt conversion adjustment | | — | | — | | — | | 310 | | — | | — | | 310 | |
Excess tax benefits from stock option exercises | | — | | — | | — | | 2,119 | | — | | — | | 2,119 | |
Other comprehensive income (loss), net of tax | | — | | — | | — | | — | | — | | (617 | ) | (617 | ) |
Net income (loss) | | — | | — | | — | | — | | 30,928 | | — | | 30,928 | |
Balance as of December 31, 2012 | | 39,328,503 | | 393 | | — | | 708,723 | | 96,123 | | 5,973 | | 811,212 | |
Exercise of stock options | | 149,170 | | 2 | | — | | 2,197 | | — | | — | | 2,199 | |
Equity-based compensation expense-continuing operations | | — | | — | | — | | 13,130 | | — | | — | | 13,130 | |
Issuance, vesting and cancellation of restricted stock | | 188,522 | | 2 | | — | | (2,698 | ) | — | | — | | (2,696 | ) |
Other comprehensive income (loss), net of tax | | — | | — | | — | | — | | — | | (1,352 | ) | (1,352 | ) |
Net income (loss) | | — | | — | | — | | — | | (42,263 | ) | — | | (42,263 | ) |
Balance as of December 31, 2013 | | 39,666,195 | | $ | 397 | | $ | — | | $ | 721,352 | | $ | 53,860 | | $ | 4,621 | | $ | 780,230 | |
| | | | | | | | | | | | Retained | | Accumulated | | | |
| | | | | | | | | | Additional | | Earnings | | Other | | | |
| | Common Stock | | Treasury Stock | | Paid-in | | (Accumulated | | Comprehensive | | | |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit) | | Income | | Total | |
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 loss | | — | | — | | — | | — | | — | | (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 at December 31, 2014 | | 40,360 | | 404 | | — | | — | | 750,139 | | (13,080 | ) | 1,469 | | 738,932 | |
Net loss | | — | | — | | — | | — | | — | | (31,978 | ) | — | | (31,978 | ) |
Other comprehensive loss, net of tax | | — | | — | | — | | — | | — | | — | | (121 | ) | (121 | ) |
Share-based compensation expense | | — | | — | | — | | — | | 17,986 | | — | | — | | 17,986 | |
Net issuance under employee stock plans | | 636 | | 6 | | — | | — | | (988 | ) | — | | — | | (982 | ) |
Purchases of common stock | | — | | — | | 469 | | (9,222 | ) | — | | — | | — | | (9,222 | ) |
Balance at December 31, 2015 | | 40,996 | | $ | 410 | | 469 | | $ | (9,222 | ) | $ | 767,137 | | $ | (45,058 | ) | $ | 1,348 | | $ | 714,615 | |
The
See accompanying notes are an integral part of these consolidated financial statements.Notes to the Consolidated Financial Statements.
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
| | Year ended December 31, | |
| | 2013 | | 2012 | | 2011 | |
Cash Flows from Operating Activities | | | | | | | |
Net income (loss) | | $ | (42,263 | ) | $ | 30,928 | | $ | 127,987 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
Depreciation and amortization | | 18,425 | | 16,192 | | 12,892 | |
Amortization of debt discount | | — | | — | | 1,260 | |
Non-cash equity-based compensation | | 13,130 | | 14,268 | | 12,807 | |
Non-cash asset impairment | | 1,220 | | 1,335 | | 584 | |
Loss on extinguishment of debt | | — | | — | | 3,349 | |
Deferred income taxes | | (12,264 | ) | (340 | ) | 11,276 | |
Gain on disposal of segment | | — | | (4,112 | ) | — | |
Gain on sale of lab tools | | (767 | ) | — | | — | |
Excess tax benefits from stock option exercises | | — | | (2,119 | ) | (10,406 | ) |
Change in contingent consideration | | 829 | | — | | — | |
Other, net | | 1,971 | | 262 | | (31 | ) |
Non-cash items from discontinued operations | | — | | (706 | ) | 44,381 | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | | 38,844 | | 31,215 | | 56,843 | |
Inventories | | 2,753 | | 53,937 | | (18,627 | ) |
Prepaid expenses and other current assets | | 842 | | 8,524 | | (13,087 | ) |
Income taxes receivable | | (12,604 | ) | 654 | | (9,076 | ) |
Accounts payable | | 7,542 | | (12,106 | ) | 8,098 | |
Accrued expenses, customer deposits, deferred revenue and other current liabilities | | (17,329 | ) | (34,227 | ) | (72,723 | ) |
Income taxes payable | | (130 | ) | 1,199 | | (42,204 | ) |
Transfers to restricted cash | | (721 | ) | (1,440 | ) | — | |
Other, net | | 1,249 | | 10,431 | | 2,119 | |
Discontinued operations | | — | | (1,932 | ) | — | |
Net cash provided by (used in) operating activities | | 727 | | 111,963 | | 115,442 | |
Cash Flows from Investing Activities | | | | | | | |
Capital expenditures | | (9,174 | ) | (24,994 | ) | (60,364 | ) |
Payments for net assets of businesses acquired | | (71,488 | ) | — | | (28,273 | ) |
Payment for purchase of cost method investment | | (2,391 | ) | (10,341 | ) | — | |
Transfers from (to) restricted cash related to discontinued operations | | — | | — | | 75,540 | |
Proceeds from short-term investments | | 499,645 | | 244,929 | | 707,649 | |
Payments for purchases of short-term investments | | (589,099 | ) | (165,080 | ) | (588,453 | ) |
Proceeds from the sale of lab tools | | 4,440 | | — | | — | |
Other | | 11 | | 49 | | 195 | |
Proceeds from sale of assets from discontinued segment | | — | | 3,758 | | — | |
Net cash provided by (used in) investing activities | | (168,056 | ) | 48,321 | | 106,294 | |
Cash Flows from Financing Activities | | | | | | | |
Proceeds from stock option exercises | | 2,199 | | 5,409 | | 10,714 | |
Contingent consideration payments | | (5,000 | ) | — | | — | |
Restricted stock tax withholdings | | (2,696 | ) | (1,725 | ) | (3,173 | ) |
Excess tax benefits from stock option exercises | | — | | 2,119 | | 10,406 | |
Purchases of treasury stock | | — | | — | | (162,077 | ) |
Repayments of long-term debt | | (269 | ) | (248 | ) | (105,803 | ) |
Other | | — | | — | | (2 | ) |
Net cash provided by (used in) financing activities | | (5,766 | ) | 5,555 | | (249,935 | ) |
Effect of exchange rate changes on cash and cash equivalents | | (663 | ) | 796 | | 989 | |
Net increase (decrease) in cash and cash equivalents | | (173,758 | ) | 166,635 | | (27,210 | ) |
Cash and cash equivalents as of beginning of year | | 384,557 | | 217,922 | | 245,132 | |
Cash and cash equivalents as of end of year | | $ | 210,799 | | $ | 384,557 | | $ | 217,922 | |
| | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | |
Interest paid | | $ | 357 | | $ | 209 | | $ | 1,393 | |
Income taxes paid | | 8,001 | | 11,566 | | 89,745 | |
Non-cash investing and financing activities | | | | | | | |
Accrual of fair value of contingent consideration | | $ | 33,539 | | $ | — | | $ | — | |
Merger consideration adjustment | | 2,695 | | — | | — | |
| | | For the year ended December 31, |
| | | 2015 | | 2014 | | 2013 |
Cash Flows from Operating Activities | | | | | | | | | |
Net income (loss) | | $ | (31,978 | ) | | $ | (66,940 | ) | | $ | (42,263 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | |
Depreciation and amortization | | 39,850 | | | 24,573 | | | 18,425 | |
Deferred income taxes | | 2,648 | | | (11,330 | ) | | (12,264 | ) |
Share-based compensation expense | | 17,986 | | | 18,813 | | | 13,130 | |
Provision (recovery) for bad debts | | 43 | | | (1,814 | ) | | 1,946 | |
Asset impairment | | 126 | | | 58,170 | | | 1,220 | |
Gain on sale of lab tools | | (1,261 | ) | | (1,549 | ) | | (767 | ) |
Gain on cumulative translation adjustment | | — | | | (3,142 | ) | | — | |
Change in contingent consideration | | — | | | (29,368 | ) | | 829 | |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | | 10,715 | | | (25,390 | ) | | 36,898 | |
Inventory and deferred cost of sales | | (12,312 | ) | | 6,513 | | | 2,753 | |
Prepaid expenses and other current assets | | (39 | ) | | (2,245 | ) | | 842 | |
Accounts payable and accrued expenses | | 9,470 | | | (5,534 | ) | | 7,542 | |
Customer deposits and deferred revenue | | (20,738 | ) | | 55,536 | | | (17,329 | ) |
Income taxes receivable and payable, net | | 759 | | | 20,279 | | | (12,734 | ) |
Other, net | | 520 | | | 5,497 | | | 2,499 | |
Net cash provided by operating activities | | 15,789 | | | 42,069 | | | 727 | |
| | | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | | |
Acquisitions of businesses, net of cash acquired | | (68 | ) | | (144,069 | ) | | (71,488 | ) |
Capital expenditures | | (13,887 | ) | | (15,588 | ) | | (9,174 | ) |
Proceeds from the liquidation of investments | | 88,647 | | | 318,276 | | | 499,645 | |
Payments for purchases of investments | | (84,244 | ) | | (157,737 | ) | | (589,099 | ) |
Payment for purchase of cost method investment | | (1,594 | ) | | (2,388 | ) | | (2,391 | ) |
Proceeds from sale of lab tools | | 3,068 | | | 9,259 | | | 4,440 | |
Other | | 1,000 | | | 350 | | | 11 | |
Net cash provided by (used in) investing activities | | (7,078 | ) | | 8,103 | | | (168,056 | ) |
| | | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | | |
Proceeds from stock option exercises | | 2,233 | | | 12,056 | | | 2,199 | |
Restricted stock tax withholdings | | (3,215 | ) | | (2,075 | ) | | (2,696 | ) |
Contingent consideration payments | | — | | | — | | | (5,000 | ) |
Purchases of common stock | | (8,907 | ) | | — | | | — | |
Repayments of long-term debt | | (314 | ) | | (290 | ) | | (269 | ) |
Net cash provided by (used in) financing activities | | (10,203 | ) | | 9,691 | | | (5,766 | ) |
| | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | (87 | ) | | 149 | | | (663 | ) |
Net increase (decrease) in cash and cash equivalents | | (1,579 | ) | | 60,012 | | | (173,758 | ) |
Cash and cash equivalents - beginning of period | | 270,811 | | | 210,799 | | | 384,557 | |
Cash and cash equivalents - end of period | | $ | 269,232 | | | $ | 270,811 | | | $ | 210,799 | |
| | | | | | | | | |
Supplemental Disclosure of Cash Flow Information | | | | | | | | | |
Interest paid | | $ | 485 | | | $ | 159 | | | $ | 357 | |
Income taxes paid | | 7,091 | | | 3,320 | | | 8,001 | |
The
See accompanying notes are an integral part of these consolidated financial statements.Notes to the Consolidated Financial Statements.
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
1. Description of Business andNote 1 — Significant Accounting Policies
(a) Description of Business
Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” or the “Company” or “we”) 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 (“LED”s) and hard-disk drives, as well as for emerging applications such as concentrator photovoltaics,LEDs”), power semiconductors, wireless components, micro-electromechanical systems (“MEMS”), and other next-generation devices.
Our LED & Solar segment designs and manufactures metal organic chemical vapor deposition (“MOCVD”) and molecular beam epitaxy (“MBE”) systems as well as newly acquired atomic layer deposition (“ALD”) technology. Our MOCVD and MBE systems are sold to manufacturers of LEDs,electronics, wireless devices, power semiconductors, and concentrator photovoltaics, as well as for R&D applications. Our ALD technology is used by the manufacturers of OLED displays and has further applications in the semiconductor and solar markets. In 2011 we discontinued the sale of our products related to Copper, Indium, Gallium, Selenide (“CIGS”) solar systems technology.
Our Data Storage segment designs and manufactures systems used to create thin film magnetic heads (“TFMH”s) that read and write data on hard disk drives. These include ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, chemical vapor deposition,drives, and slicing, dicing and lapping systems. While our systems are primarily sold to hard drive customers, they also have applications in optical coatings, micro-electro mechanical systems (“MEMS”) and magnetic sensors, and extreme ultraviolet (“EUV”) lithography.semiconductors.
(b) Basis of Presentation
We reportThe 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 2013last day of the calendar year, December 31. During 2015 the interim quarter ends werequarters ended on March 31,29, June 3028 and September 29. The 201227, and during 2014 the interim quarter ends were April 1, July 1quarters ended on March 30, June 29 and September 30.28. The 2011 interim quarter ends were April 3, July 3 and October 2. For ease of reference, we reportCompany reports these interim quarter endsquarters as March 31, June 30, and September 30 in ourits interim consolidated financial statements. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to discontinued operations.
(c) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”)GAAP 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 amounts of revenuesfuture, these estimates may ultimately differ from actual results. Significant items subject to such estimates and expenses during the reporting period. Significant estimates made by managementassumptions include: (i) the best estimate of selling price for ourthe Company’s products and services; allowance(ii) allowances for doubtful accounts; (iii) inventory obsolescence; recoverability(iv) the useful lives and useful livesexpected future cash flows of property, plant, and equipment and identifiable intangible assets; investment valuations;(v) the fair value of derivatives;the Company’s reporting unit and related goodwill; (vi) the fair value, less cost to sell, of assets held for sale; (vii) investment valuations and the valuation of derivatives, deferred tax assets, and assets acquired in business combinations; (viii) the recoverability of goodwill and long livedlong-lived assets; recoverability of deferred tax assets;(ix) liabilities for product warranty; accounting for acquisitions; accruals forwarranty and legal contingencies; equity-based payments, including forfeitures(x) share-based compensation; and performance based vesting; and liabilities for(xi) income tax uncertainties. Actual results could differ from those estimates.
(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. Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period.
(e) Foreign Currencies
Assets and liabilities of the Company’s foreign subsidiaries that operate using local functional currencies are translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using monthly average exchange rates. Adjustments arising from the translation of the foreign currency financial statements of the Company’s subsidiaries into U.S. dollars, including intercompany transactions of a long-term nature, are reported as currency translation adjustments in “Accumulated other comprehensive income” in the Consolidated Balance Sheets. Foreign currency transaction gains or losses are included in “Other, net” in the Consolidated Statements of Operations.
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(f) Revenue Recognition
We recognizeThe Company recognizes revenue when all of the following criteria have been met: persuasive evidence of an arrangement exists with a customer; delivery of the specified products has occurred or services have been rendered; prices are contractually fixed or determinable; and collectability is reasonably assured. Revenue is recorded including shipping and handling costs and
F-8
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
excluding applicable taxes related to sales. A significant portion of our revenue is derived from contractual arrangements
Contracts with customers that havefrequently contain multiple elements,deliverables, such as systems, upgrades, components, spare parts, maintenance, and service plans. For sales arrangements that contain multiple elements, we splitJudgment is required to properly identify the arrangement into separateaccounting units of the multiple-element arrangements and to determine how the revenue should be allocated among the accounting if the individually delivered elements have value to the customer on a standalone basis. Weunits. The Company also evaluateevaluates whether multiple transactions with the same customer or related partyparties should be considered part of a multiple elementsingle, multiple-element arrangement whereby we assess, among other factors,based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of each other. one another. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria have been met in order to recognize revenue in the appropriate accounting period.
When we havethere are separate units of accounting, we allocatethe Company allocates revenue to each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or ourthe best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. We utilizeThe Company uses BESP for the majority of the elements in ourits arrangements. The accounting guidance for selling price hierarchy didmaximum revenue recognized on a delivered element is limited to the amount that is not include BESP for arrangements entered into prior to January 1, 2011, and as such we recognized revenue for those arrangements as described below.contingent upon the delivery of additional items.
We considerThe Company considers many facts when evaluating each of ourits sales arrangements to determine the timing of revenue recognition including theits contractual obligations, the customer’s creditworthiness, and the nature of the customer’s post-delivery acceptance provisions. OurThe Company’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For the majority of ourthe arrangements, a customer source inspection of the system is performed in ourthe Company’s facility or test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery. Historically, such source inspection or test data replicates the field acceptance provisions that will beare performed at the customer’s site prior to final acceptance of the system. As such, weWhen the Company objectively demonstratedemonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery, and, therefore, we recognize revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date, subject to the retention amount constraint described below. For new products, new applications of existing products, or for products with substantive customer acceptance provisions where wethe Company cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue and the associated costs are deferred and fully recognized upon the receipt of final customer acceptance, assuming all other revenue recognition criteria have been met.
OurThe Company’s system sales arrangements, including certain upgrades, generally do not contain provisions for right of return, or forfeiture, refund, or other purchase price concessions.concession. In the rare instances where such provisions are included, we defer all revenue is deferred until such rights expire. The sales arrangements generally include installation. The installation process is not deemed essential to the functionality of the equipment since it is not complex; it does not require significant changes to the features or capabilities of the equipment or involve constructing elaborate interfaces or connections subsequent to factory acceptance. The Company has a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage the Company to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, installation is deemed to be inconsequential or perfunctory relative to the system sale as a whole, and as a result, installation service is not considered a separate element of the arrangement. As such, the Company accrues the cost of the installation at the time of revenue recognition for the system.
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
In many cases ourthe 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.
For transactions enteredThe Company’s contractual terms with customers in Japan generally specify that title and risk and rewards of ownership transfer upon customer acceptance. As a result, for customers in Japan, revenue is recognized upon the receipt of written customer acceptance. A distributor is used for almost all sales to customers in Japan. Title passes to the distributor upon shipment; however, due to customary local business practices, the 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 acceptance from the end customer.
The Company recognizes revenue related to maintenance and service contracts ratably over the applicable contract term. The Company recognizes revenue from the sales of components, spare parts, and specified service engagements at the time of delivery in accordance with the terms of the applicable sales arrangement.
Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred, even if the related revenue is deferred in accordance with the above policy.
(g) Warranty Costs
The Company typically provides standard warranty coverage on its systems for one year from the date of final acceptance by providing labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost when revenue is recognized on the related system. Warranty cost is included in “Cost of sales” in the Consolidated Statements of Operations. The estimated warranty cost is based on the Company’s historical experience with its systems and regional labor costs. The Company calculates the average service hours by region and parts expense per system utilizing actual service records to determine the estimated warranty charge. The Company updates its warranty estimates on a semiannual basis when the actual product performance 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 prior to January 1, 2011,new products or services.
(j) Advertising Expense
The cost of advertising is expensed as incurred and totaled $0.9 million, $0.6 million, and $0.5 million for the years ended December 31, 2015, 2014, and 2013, respectively.
(k) Accounting for Share-Based Compensation
Share-based awards exchanged for employee services are accounted for under the accounting rules for multiple-element arrangements in placefair value method. Accordingly, share-based compensation cost is measured at that time, we deferred the greater ofgrant date based on the retention amount or the relative fair value of the undelivered elements based on VSOE. When we could not establish VSOE or TPEaward. The expense for all undelivered elements of an arrangement, revenue onawards expected to vest is recognized over the entire arrangement was deferred untilemployee’s requisite service period (generally the earliervesting period of the point when we did have VSOE for all undelivered elements or the delivery of all elements of the arrangement.
Our sales arrangements, including certain upgrades, generally include installation. The installation process is not deemed essential to the functionality of the equipment since it is not complex; that is, it does not require significant changes to the features or capabilities of the equipment or involve building elaborate interfaces or connections subsequent to factory acceptance. We have a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage us to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, we deem the installation of our systems to be inconsequential or perfunctory relative to the system as a whole, and as a result, do not consider such services to be a separate element of the arrangement. As such, we accrue the cost of the installation at the time of revenue recognition for the system.award).
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
In Japan, where our contractual terms with customers generally specify title and risk and rewards of ownership transfer upon customer acceptance, revenue is recognized and the customer is billed upon the receipt of written customer acceptance. During the fourth quarter of fiscal 2013, we began using a distributor for almost all of our product and service salesAwards expected to customers in Japan. Title and risk and rewards of ownership of our system sales still transfer to our end-customers upon their acceptance. As such, there is no impact to our policy of recognizing revenue upon receipt of written acceptance from the end customer.
Revenue related to maintenance and service contracts is recognized ratably over the applicable contract term. Component and spare part revenuevest are recognized at the time of delivery in accordance with the terms of the applicable sales arrangement.
Cash and Cash Equivalents
Cash and cash equivalents include cash and certain highly liquid investments. Highly liquid investments with maturities of three months or less when purchased may be classified as cash equivalents. Such items may include liquid money market accounts, U.S. treasuries, government agency securities and corporate debt. The investments that are classified as cash equivalents are carried at cost, which approximates fair value.
Short-Term Investments
We determine the appropriate balance sheet classification of our investments at the time of purchase and evaluate the classification at each balance sheet date. As part of our cash management program, we maintain a portfolio of marketable securities which are classified as available-for-sale. These securities include U.S. treasuries and government agency securities with maturities of greater than three months when purchased. Securities classified as available-for-sale are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss) and reported in equity. Net realized gains and losses are included in net income (loss).
Accounts Receivable, Net
Accounts receivable are presented net of allowance for doubtful accounts of $2.4 million and $0.5 million as of December 31, 2013 and 2012, respectively. We evaluate the collectability of accounts receivableestimated based on a combination of factors. In cases where we become aware of circumstances that may impair a customer’s ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due,historical experience and thereby reduce the net recognized receivable to the amount the we reasonably believes will be collected. For all other customers, we recognize an allowance for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry conditions, the current business environment and its historical experience.
Concentration of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of accounts receivable, short-term investments and cash and cash equivalents. We perform ongoing credit evaluations of our customers and, where appropriate, require that letters of credit be provided on certain foreign sales arrangements. We maintain allowances for potential credit losses and make investments with strong, higher credit quality issuers and continuously monitor the amount of credit exposure to any one issuer.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-out method) or market. On a quarterly basis, management assesses the valuation and recoverability of all inventories, classified as materials (which include raw materials, spare parts and service inventory), work-in-process and finished goods.
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Materials inventory is used primarily to support the installed tool base and spare parts sales and is reviewed for excess quantities or obsolescence by comparing on-hand balances to historical usage, and adjusted for current economic conditions and other qualitative factors. Historically, the variability of such estimates has been impacted by customer demand and tool utilization rates.future expectations.
The work-in-process and finished goods inventory is principally used to support system sales and is reviewed for recoverability by considering whether on hand inventory would be utilized to fulfill the related backlog. As we typically receive deposits for our orders, the variability of this estimate is reduced as customers have a vested interest in the orders they place with us. Recoverability of such inventory is evaluated by monitoring customer demand, current sales trends and product gross margins. Management also considers qualitative factors such as future product demand based on market outlook, which is based principally upon production requirements resulting from customer purchase orders received with a customer-confirmed shipment date within the next twelve months. Historically, the variability of these estimates of future product demandCompany has been impacted by backlog cancellations or modifications resulting from unanticipated changes in technology or customer demand.
Following identification of potential excess or obsolete inventory, management evaluates the need to write down inventory balances to its estimated market value, if less than its cost. Inherent in the estimates of market value are management’s estimates related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses, and ultimate realization of potential excess inventory. Unanticipated changes in demand for our products may require a write down of inventory that could materially affect our operating results.
Goodwill and Indefinite-Lived Intangibles
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. We account for goodwill and intangible assets with indefinite useful lives in accordance with relevant accounting guidance related to goodwill and other intangible assets, which states that goodwill and intangible assets with indefinite useful lives should not be amortized, but instead tested for impairment at least annually at the reporting unit level. Our policy is to perform this annual impairment test in the fourth quarter, using a measurement date of October 1st, of each fiscal year or more frequently if impairment indicators arise. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets.
The guidance provides an option for an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
If we determine the two-step impairment test is necessary, we are required to determine if it is appropriate to use the operating segment, as defined under guidance for segment reporting, as the reporting unit, or one level below the operating segment, depending on whether certain criteria are met. We have identified five reporting units that are required to be reviewed for impairment. The five reporting units are aggregated into two segments: the VIBE and Mechanical reporting units which are reported in our Data Storage segment; and the MOCVD, MBE and ALD reporting units which are reported in our LED & Solar segment. In identifying the reporting units management considered the economic characteristics of operating segments including the products and services provided, production processes, types or classes of customer and product distribution.
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
If required, we perform this impairment test by first comparing the fair value of our reporting units to their respective carrying amount. When determining the estimated fair value of a reporting unit, we utilize a discounted future cash flow approach since reported quoted market prices are not available for our reporting units. Developing the estimate of the discounted future cash flow requires significant judgment and projections of future financial performance. The key assumptions used in developing the discounted future cash flows are the projection of future revenues and expenses, working capital requirements, residual growth rates and the weighted average cost of capital. In developing our financial projections, we consider historical data, current internal estimates and market growth trends. Changes to any of these assumptions could materially change the fair value of the reporting unit. We reconcile the aggregate fair value of our reporting units to our adjusted market capitalization as a supporting calculation. The adjusted market capitalization is calculated by multiplying the average share price of our common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium.
If the carrying value of the reporting units exceed the fair value we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any.
Definite-Lived Intangible and Long-Lived Assets
Definite-lived intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, software licenses and deferred financing costs. Purchased technology consists of the core proprietary manufacturing technologies associated with the products and offerings obtained through acquisition and are initially recorded at fair value. Customer-related intangible assets, patents, trademarks, covenants not-to-compete and software licenses that are obtained in an acquisition are initially recorded at fair value. Other software licenses and deferred financing costs are initially recorded at cost. Intangible assets with definitive useful lives are amortized using the straight-line method over their estimated useful lives for periods up to 17 years.
Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Long-lived assets, such as property, plant, and equipment and intangible assets with definite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flow expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Accounting for Acquisitions
Our growth strategy has included the acquisition of businesses. The purchase price of these acquisitions has been determined after due diligence of the acquired business, market research, strategic planning, and the forecasting of expected future results and synergies. Estimated future results and expected synergies are subject to judgment as we integrate each acquisition and attempt to leverage resources.
F-12
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
The accounting for the acquisitions we have made requires that the assets and liabilities acquired, as well as any contingent consideration that may be part of the agreement, be recorded at their respective fair values at the date of acquisition. This requires management to make significant estimates in determining the fair values, especially with respect to intangible assets, including estimates of expected cash flows, expected cost savings and the appropriate weighted average cost of capital. As a result of these significant judgments to be made we often obtain the assistance of independent valuation firms. We complete these assessments as soon as practical after the closing dates. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Please see our footnote Business Combinations in these Notes to Consolidated Financial Statements.
Cost Method of Accounting for Investments
Investee companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, our share of the earnings or losses of such investee companies are not included in the Consolidated Balance Sheet or Statements of Operations. However, impairment charges are recognized in the Consolidated Statements of Operations. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded.
Fair Value of Financial Instruments
We believe the carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, reflected in the consolidated financial statements approximate fair value due to their short-term maturities. The fair value of our debt, including current maturities, is estimated using a discounted cash flow analysis, based on the estimated current incremental borrowing rates for similar types of securities.
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.
Environmental Compliance and Remediation
Environmental compliance costs include ongoing maintenance, monitoring and similar costs. Such costs are expensed as incurred. Environmental remediation costs are accrued when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated.
Research and Development Costs
Research and development costs are charged to expense as incurred and include expenses for the development of new technology and the transition of technology into new products or services.
Warranty Costs
Our warranties are typically valid for one year from the date of final acceptance. We estimate the costs that may be incurred under the warranty that we provide for our products. We record a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Our warranty obligation is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. The carrying value of our deferred tax assets is adjusted by a partial valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net deferred tax assets consist primarily of tax credit carry forwards and timing differences between the book and tax treatment of inventory, acquired intangible assets and other asset valuations. Realization of these net deferred tax assets is dependent upon our ability to generate future taxable income.
We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under the relevant accounting guidance, factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.
Relevant accounting guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under such guidance, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Advertising Expense
The cost of advertising is expensed as of the first showing of each advertisement. We incurred $0.5 million, $0.8 million and $1.4 million in advertising expenses during 2013, 2012 and 2011, respectively.
Shipping and Handling Costs
Shipping and handling costs are costs that are incurred to move, package and prepare our products for shipment and then to move the products to the customer’s designated location. These costs are generally comprised of payments to third-party shippers. Shipping and handling costs are included in cost of sales in our Consolidated Statements of Operations.
Equity-Based Compensation
We grant equity-based awards, such as stock options and restricted stock or restricted stock units, to certain key employees to create a clear and meaningful alignment between compensation and shareholder return and to enable the employees to develop and maintain a stock ownership position. While the majority of our equity awards feature time-based vesting, performance-based equity awards, which are awarded from time to time to certain of our key executives, vest as a function of performance, and may also be subject to the recipient’s continued employment which also acts as a significant retention incentive.
Equity-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as expense over the employee requisite service period. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in the model are assumptions related to risk-free interest rate, dividend yield, expected stock-price volatility and option life.
The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The dividend yield assumption is based on our historical and future expectation of dividend payouts. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on objective data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which results in more subjective accounting estimates.
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
We use an expected stock-price volatility assumption that is a combination of both historical volatility calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option and implied volatility which utilizes market data of actively traded options on our common stock, which are obtained from public data sources. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility and that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock.
The expected option term, representing the period of time that options granted are expected to be outstanding, is estimated using a lattice-based model incorporating historical post vest exercise and employee termination behavior.
We estimate forfeitures using our historical experience, which is adjusted over the requisite service period based on the extent to which actual forfeitures differ or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change.
We settle the exercise of stock options with newly issued shares.
With respect to grants of performance based awards, we assess the probability that such performance criteria will be met in order to determine the compensation expense. Consequently, the compensation expense is recognized straight-line over the vesting period. If that assessment of the probability of the performance condition being met changes, we would recognize the impact of the change in estimate in the period of the change. As with the use of any estimate, and due to the significant judgment used to derive those estimates, actual results may vary.
We have elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.
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 15, “Stock Plans,” for additional information.
In addition to stock options, restricted share awards (“RSAs”) and restricted stock units (“RSUs”) with time-based vesting, the Company issues performance share units and awards (“PSUs” and “PSAs”). Compensation cost for PSUs and PSAs is recognized over the requisite service period based on the timing and expected level of achievement of the performance targets. A change in the assessment of the probability of a performance condition being met is recognized in the period of the change in estimate. At the conclusion of the performance period, the number of shares granted may vary based on the level of achievement of the performance targets.
Negotiable Letters of Credit(l) Income Taxes
ForIncome taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in income in the period that includes the enactment date.
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 17, “Income Taxes,” for additional information.
(m) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments, derivative financial instruments used in hedging activities, and accounts receivable. The Company invests in a variety of financial instruments and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. The Company has not experienced any material credit losses on its investments.
The Company maintains an allowance reserve for potentially uncollectible accounts for estimated losses resulting from the inability of its customers to make required payments. The Company evaluates its allowance for doubtful accounts based on a combination of factors. In circumstances where specific invoices are deemed to be uncollectible, the Company provides a specific allowance for bad debt against the amount due to reduce the net recognized receivable to the amount reasonably expected to be collected. The Company also provides allowances based on its write-off history. The allowance for doubtful accounts totaled $0.2 million and $0.7 million at December 31, 2015 and 2014, respectively.
To further mitigate the Company’s exposure to uncollectable accounts, the Company may request certain transactions, we request that our customers provide us with a negotiable irrevocable letter of credit drawn on a reputable financial institution. These irrevocable letters of credit are typically issued to mature on average, for 0 tobetween zero and 90 days postfrom the date the documentation requirements but occasionally for longer. Forare met, typically when a fee, onesystem ships or upon receipt of our banks confirmsfinal acceptance from the reputation of the issuing institution and,customer. The Company, at our option, monetizesits discretion, may monetize these letters of credit on a non-recourse basis soon after they become negotiable. Once we monetize the letter of credit with the confirming bank, we have no further obligations or interest in the letter of credit and they are not included in our consolidated balance sheets.negotiable, but before maturity. The fees that we pay are included in selling, general and administrative expense and are not material.
Recent Accounting Pronouncements
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists: In July 2013, the FASB issued ASU No. 2013-11. ASU 2013-11 requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the potential impact of this adoption on our consolidated financial statements.
Presentation of Financial Statements: In April 2013, the FASB issued ASU No. 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.” The objective of ASU 2013-07 is to clarify when an entity should apply the liquidation basis of accounting. The update provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements, absent any indications that liquidation is imminent.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
Parent’s Accounting forassociated with the Cumulative Translation Adjustment: In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investmentmonetization are included in a Foreign Entity. This new standard is intended to resolve diversity in practice regarding the release into net income of a cumulative translation adjustment (“CTA”) upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We currently anticipate that its adoption could have an impact on our consolidated financial statements,“Selling, general, and administrative” in the eventConsolidated Statements of derecognition of a foreign subsidiary in 2014 or subsequently. We cannot estimate the amount of CTA to be released into income from any potential derecognition.
Obligations Resulting from JointOperations and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date: In February 2013, the FASB issued Accounting Standards Update No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date”. ASU No. 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, ASU No. 2013-04 requires an entity to disclose the nature and amount of the obligation, as well as other information about the obligations. ASU No. 2013-04 is effective for interim and annual periods beginning after December 15, 2013 and is to be applied retrospectively. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
2. Income (Loss) Per Common Share
The following table sets forth basic and diluted net income (loss) per common share and the basic weighted average shares outstanding and diluted weighted average shares outstanding (in thousands, except per share data):
| | Year ended December 31, | |
| | 2013 | | 2012 | | 2011 | |
Net income (loss) | | $ | (42,263 | ) | $ | 30,928 | | $ | 127,987 | |
Net income (loss) per common share: | | | | | | | |
Basic | | $ | (1.09 | ) | $ | 0.80 | | $ | 3.23 | |
Diluted | | $ | (1.09 | ) | $ | 0.79 | | $ | 3.11 | |
| | | | | | | |
Basic weighted average shares outstanding | | 38,807 | | 38,477 | | 39,658 | |
Dilutive effect of stock options, restricted stock awards and units and convertible debt | | — | | 574 | | 1,497 | |
Diluted weighted average shares outstanding | | 38,807 | | 39,051 | | 41,155 | |
Basic income (loss) per common share is computed using the basic weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is computed using the basic weighted average number of common shares and common equivalent shares outstanding during the period. For the year ended December 31, 2013, the effect of approximately 0.6 million common equivalent shares were excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive due to the net loss sustained during the period. Potentially dilutive securities attributable to outstanding stock options and restricted stock of approximately 1.3 million, 1.3 million and 0.7 million common equivalent shares during the years ended December 31, 2013, 2012 and 2011 were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive.
During the second quarter of 2011 the entire outstanding principal balance of our convertible debt was converted, with the principal amount paid in cash and the conversion premium paid in shares. The convertible notes met the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, since we had settled the principal amount of the notes in cash. Using the treasury stock method, it was determined that the impact of the assumed conversioninsignificant for the years ended December 31, 2011 had2015, 2014, and 2013.
(n) Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses reflected in the consolidated financial statements approximate fair value due to their short-term maturities. The fair value of debt for footnote disclosure purposes, including current maturities, is estimated using a dilutive effectdiscounted cash flow analysis based on the estimated current incremental borrowing rates for similar types of 0.6securities.
(o) Cash, Cash Equivalents, and Short-Term Investments
All financial instruments purchased with an original maturity of three months or less at the time of purchase are considered cash equivalents. Such items may include liquid money market accounts, U.S. treasuries, government agency securities, and corporate debt. Investments that are classified as cash equivalents are carried at cost, which approximates fair value. At December 31, 2015 the Company’s cash and cash equivalents include $18.0 million shares.of cash equivalents. There were no cash equivalents at December 31, 2014.
A portion of the Company’s cash and cash equivalents is held by its subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. Approximately 50% and 81% of cash and cash equivalents were maintained outside the United States at December 31, 2015 and 2014, respectively.
Marketable securities are generally classified as available-for-sale for use in current operations, if required, and are reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income.” These securities can include U.S. treasuries, government agency securities, corporate debt, and commercial paper, all with maturities of greater than three months when purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other, net” in the Consolidated Statements of Operations. The specific identification method is used to determine the realized gains and losses on investments.
(p) Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company reviews and sets standard costs on a periodic basis at current manufacturing costs in order to approximate actual costs. The Company assesses the valuation of all inventories, including manufacturing raw materials, work-in-process, finished goods, and spare parts, each quarter. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost. Estimates of net realizable value include, but are not limited to, management’s forecasts related to the Company’s future manufacturing schedules, customer demand, technological and/or market obsolescence, general market conditions, possible alternative uses, and ultimate realization of excess inventory. If future customer demand or market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made. Inventory acquired as part of a business combination is recorded at fair value on the date of acquisition. See Note 5, “Business Combinations,” for additional information.
(q) Business Combinations
The Company allocates the fair value of the purchase consideration of the Company’s acquisitions to the tangible assets, intangible assets, including in-process research and development (“IPR&D”), if any, and liabilities assumed, based on estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When a project underlying reported IPR&D is completed, the corresponding
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
3. Discontinuedamount of IPR&D is amortized over the asset’s estimated useful life. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred in “Selling, General, and Administrative” in the Consolidated Statements of Operations. See Note 5, “Business Combinations,” for additional information.
CIGS Solar Systems Business(r) Goodwill and Indefinite-Lived Intangibles
On July 28, 2011, we announcedGoodwill is an asset representing the future economic benefits arising from assets acquired in a planbusiness combination that are not individually identified and separately recognized. Goodwill is measured as the excess of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed. Intangible assets with indefinite useful lives are measured at their respective fair values on the acquisition date. Intangible assets related to discontinue our CIGS solar systems business. TheIPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, the associated assets would be deemed long-lived and would then be amortized based on their respective estimated useful lives at that point in time. Goodwill and indefinite-lived intangibles are not amortized into results of operations but instead are evaluated for impairment. The Company performs the evaluation in the fourth quarter of each year or more frequently if impairment indicators arise.
The Company may first perform a qualitative assessment of whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount, and, if so, the Company then applies the two-step impairment test. The two-step impairment test first compares the fair value of the Company’s reporting unit to its carrying amount. If the fair value exceeds the carrying amount, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying amount exceeds fair value, the Company determines the implied fair value of the goodwill and, if the carrying amount of the goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference.
The Company determines the fair value of its reporting unit based on a reconciliation of the aggregate fair value of the reporting unit to the Company’s adjusted market capitalization. The adjusted market capitalization is calculated by multiplying the average share price of the Company’s common stock for the CIGS solar systems business have been recorded as discontinued operations for all periods presented. During the year ended December 31, 2011, total discontinued operations relatedlast ten trading days prior to the discontinued CIGS business include pre-tax charges totaling $69.8 million. These charges include an asset impairment charge totaling $6.2 million,measurement date by the number of outstanding common shares and adding 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.control premium.
Metrology(s) Long-Lived Assets and Cost Method Investment
On August 15, 2010, we signedLong-lived intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, and software licenses and are initially recorded at fair value. Long-lived intangibles are amortized over their estimated useful lives in a definitive agreement to sell our Metrology business to Bruker. The results of operations formethod reflecting the Metrology business have beenpattern in which the economic benefits are consumed or straight-lined if such pattern cannot be reliably determined.
Property, plant, and equipment are recorded as discontinued operations for all periods presented. The sale transaction closedat cost. Depreciation expense is calculated based on October 7, 2010, except for assets located in China due to local restrictions. Total proceeds, which included a working capital adjustment of $1 million, totaled $230.4 million of which $7.2 million relates to the assets in China. During 2010, we recognized a pre-tax gain on disposal of $156.3 million and a pre-tax deferred gain of $5.4 million related to the assets in China. We recognized into income the pre-tax deferred gain of $5.4 million during 2012 related to the completion of the saleestimated 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 Chinacircumstances 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 Bruker. We alsobe generated by that asset or asset group compared to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized a $1.4 million gain ($1.1 million net of taxes) onto the sale of assets of this discontinued segment that were previously held for saleextent 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 sold during 2012.third-party appraisals.
Summary information related to discontinued operations is as follows (in thousands):F-
| | 2012 | | 2011 | |
| | Solar | | | | | | Solar | | | | | |
| | Systems | | Metrology | | Total | | Systems | | Metrology | | Total | |
Net sales | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Net income (loss) from discontinued operations | | $ | (62 | ) | $ | 4,461 | | $ | 4,399 | | $ | (61,453 | ) | $ | (1,062 | ) | $ | (62,515 | ) |
4. Fair Value Measurements
We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy. The levels of fair value hierarchy are as follows:
·Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
·Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
·Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented below may include changes in fair value that were attributable to both observable (e.g. changes in market interest rates) and unobservable (e.g. changes in historical company data) inputs.(t) Recent Accounting Pronouncements
The major categoriesFASB issued Accounting Standards Update (“ASU”) No. 2014-09, as amended by ASU 2015-14: Revenue from Contracts with Customers (the “Update”). The Update requires the Company’s revenue recognition to depict the transfer of assetspromised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Update outlines a five-step model to make the revenue recognition determination and liabilities measuredrequires new financial statement disclosures. Publicly-traded companies are required to adopt the Update for reporting periods beginning after December 15, 2017. The Update provides for different transition alternatives. The Company is evaluating the impact of adopting the Update on a recurring basis, at fair value, asits consolidated financial statements and related financial statement disclosures and has not yet determined which method of December 31, 2013 and 2012 are as follows (in thousands):
| | December 31, 2013 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
U.S. treasuries | | $ | 130,977 | | $ | — | | $ | — | | $ | 130,977 | |
Corporate debt | | — | | 77,601 | | — | | 77,601 | |
Government agency securities | | — | | 61,013 | | — | | 61,013 | |
Commercial paper | | — | | 11,947 | | — | | 11,947 | |
Derivative instrument | | — | | 907 | | — | | 907 | |
Contingent consideration | | — | | — | | (29,368 | ) | (29,368 | ) |
| | | | | | | | | | | | | |
| | December 31, 2012 (1) | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
U.S. treasuries | | $ | 278,698 | | $ | — | | $ | — | | $ | 278,698 | |
Government agency securities | | — | | 123,054 | | — | | 123,054 | |
Derivative instrument | | — | | 248 | | — | | 248 | |
| | | | | | | | | | | | | |
(1)December 31, 2012 table has been conformed to present year presentation.adoption will be selected.
Highly liquid investments with maturitiesThe Company has evaluated other pronouncements issued but not yet adopted and does not believe the adoption of three months or less when purchased maythese pronouncements will have a material impact on the consolidated financial statements.
The Company early adopted ASU No. 2015-17: Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring that deferred income tax liabilities and assets be classified as cash equivalents. Such items may include liquid money market accounts, U.S. treasuries, government agency securities and corporate debt. The investments that are classified as cash equivalents are carried at cost, which approximates fair value. Accordingly, no gains or losses (realized/unrealized) have been incurred for cash equivalents. All investments classified as available-for-sale are recorded at fair value within short-term investmentsnoncurrent in the Consolidated Balance Sheets.balance sheet. In accordance with the ASU’s transition requirements, the Company chose to apply the amendments in the update prospectively beginning with the 2015 fiscal year. As such, prior periods have not been retrospectively adjusted. The adoption of this ASU did not have a material impact on the consolidated financial statements.
In determining the fair value of our investments and levels, through a third-party service provider, we use pricing information from pricing services that value securities based on quoted market prices in active markets and matrix pricing. Matrix pricingNote 2 — Income (Loss) Per Common Share
Basic income (loss) per common share is a mathematical valuation technique that does not rely exclusively on quoted prices of specific investments, but on the investment’s relationshipcalculated by dividing net income (loss) available to other benchmarked quoted securities. We have a process in place for investment valuations to facilitate identification and resolution of potentially erroneous prices. We review the information providedcommon stockholders by the third-party service providerweighted-average number of common shares outstanding during the period. Diluted income (loss) per common share is calculated by dividing net income available to recordcommon stockholders by using the fair valueweighted average number of its portfolio.common shares and common share equivalents outstanding during the period. The computations of basic and diluted income (loss) per common share are as follows:
| | | For the year ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| | (in thousands, except per share amounts) | |
Net income (loss) | | $ | (31,978 | ) | | $ | (66,940 | ) | | $ | (42,263 | ) |
Net income (loss) per common share: | | | | | | | | | |
Basic | | $ | (0.80 | ) | | $ | (1.70 | ) | | $ | (1.09 | ) |
Diluted | | $ | (0.80 | ) | | $ | (1.70 | ) | | $ | (1.09 | ) |
| | | | | | | | | |
Basic weighted average shares outstanding | | 39,742 | | | 39,350 | | | 38,807 | |
Effect of potentially dilutive share-based awards | | — | | | — | | | — | |
Diluted weighted average shares outstanding | | 39,742 | | | 39,350 | | | 38,807 | |
Consistent with Level 1 measurement principles, U.S. treasuries are priced using active market prices
For the years ended December 31, 2015, 2014, and 2013, 1.2 million, 0.7 million and 0.6 million common equivalent shares, respectively, were excluded from the computation of identical securities. Consistent with Level 2 measurement principles, corporate debt, government agencynet loss per share since the Company incurred a net loss. In addition, for the years ended December 31, 2015, 2014, and 2013, respectively, 2.1 million, 1.6 million and 1.3 million potentially dilutive securities commercial paper,underlying restricted stock awards, restricted stock units, and derivative instruments are priced with matrix pricing.options to purchase common stock were excluded from the calculation since they would have had an antidilutive effect on diluted income (loss) per common share.
F-18F-15
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
A reconciliation ofNote 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 3 is as follows (1: Quoted prices in thousands):active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
| | Level 3 | |
Balance at December 31, 2012 | | $ | — | |
Addition of contingent consideration | | (33,539 | ) |
Payment on contingent consideration | | 5,000 | |
Fair value adjustment of contingent consideration | | (829 | ) |
Balance at December 31, 2013 | | $ | (29,368 | ) |
·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
We estimated·Level 3: Prices or valuations that require inputs that are both significant to the fair value ofmeasurement and unobservable.
A financial instrument’s level within the contingent consideration by applying various probabilities and discount factors to each of the various performance milestones as further discussed in note Business Combinations. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The discount rates used ranged from 3.6% to 13.0% for the purchase order related contingent payments and from 15.5% to 30.5% for the revenue and gross margin related contingent payments. These rates were determinedhierarchy is based on the naturelowest level of any input that is significant to the milestone,fair value measurement. The Company has evaluated the risksestimated fair value of financial instruments using available market information and uncertainties involved andvaluations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the time period until the milestone was measured.estimated fair value amounts.
We measure certainThe following table presents the Company’s assets forthat were measured at fair value on a non-recurringrecurring basis when thereat December 31, 2015 and 2014:
| | | | Level 1 | | | | Level 2 | | | | Level 3 | | | | Total | |
| | (in thousands) | |
December 31, 2015 | | | | | | | | | |
Cash equivalents | | | | | | | | | |
U.S. treasuries | | $ | 9,999 | | $ | — | | $ | — | | $ | 9,999 | |
Government agency securities | | — | | 4,998 | | — | | 4,998 | |
Commercial paper | | — | | 2,999 | | — | | 2,999 | |
Total | | $ | 9,999 | | $ | 7,997 | | $ | — | | $ | 17,996 | |
Short-term investments | | | | | | | | | |
U.S. treasuries | | $ | 94,918 | | $ | — | | $ | — | | $ | 94,918 | |
Government agency securities | | — | | 12,988 | | — | | 12,988 | |
Corporate debt | | — | | 8,144 | | — | | 8,144 | |
Total | | $ | 94,918 | | $ | 21,132 | | $ | — | | $ | 116,050 | |
Other | | | | | | | | | |
Assets held for sale | | $ | — | | $ | 5,000 | | $ | — | | $ | 5,000 | |
Total | | $ | — | | $ | 5,000 | | $ | — | | $ | 5,000 | |
| | | | | | | | | |
December 31, 2014 | | | | | | | | | |
Short-term investments | | | | | | | | | |
U.S. treasuries | | $ | 81,527 | | $ | — | | $ | — | | $ | 81,527 | |
Corporate debt | | — | | 39,045 | | — | | 39,045 | |
Total | | $ | 81,527 | | $ | 39,045 | | $ | — | | $ | 120,572 | |
Other | | | | | | | | | |
Assets held for sale | | $ | — | | $ | 6,000 | | $ | — | | $ | 6,000 | |
Total | | $ | — | | $ | 6,000 | | $ | — | | $ | 6,000 | |
The above table includes highly liquid investments with maturities of three months or less which are indications of impairment.classified as cashequivalents and are carried at cost, which approximates fair value. All investments classified as available-for-sale are
In 2013F-16
Table of Contents
Veeco Instruments Inc. and 2012 we measured certain assets consistent withSubsidiaries
Notes to Consolidated Financial Statements (Continued)
recorded at fair value within short-term investments in the Consolidated Balance Sheets. The Company’s investments classified as Level 3 measurement principles using an income approach1 are based on a discounted cash flow modelquoted prices that are available in orderactive markets. The Company’s investments classified as Level 2 are valued using observable inputs to determine the amountquoted market prices, benchmark yields, reported trades, broker/dealer quotes, or alternative pricing sources with reasonable levels of impairment, if any. In 2013, we evaluated certain tangible assets in our LED & Solar segment for impairment. As a result of the evaluation we adjusted the carrying value by $0.9 million related to tools that we had previously used in our laboratories held in Property, plant and equipment which we are holding for sale and by $0.3 million related to an asset held in Other assets with $1.2 million of adjustments recorded as impairment in 2013. In 2012, we evaluated an asset in our Data Storage segment for impairment. As a result of the evaluation we adjusted the carrying value of the asset carried in Other assets from $1.4 million to $0.1 million with the $1.3 million adjustment recorded as impairment in 2012.price transparency.
5. Business CombinationsNote 4 — Investments
On April 4, 2011, we purchased a privately-held company which supplies certain components to oneAt December 31, 2015 and 2014 the amortized cost and fair value of our businesses for $28.3 million in cash. As a result of this purchase, we acquired $16.4 million of definite-lived intangibles, of which $13.6 million related to core technology, and $14.7 million of goodwill. The financial results of this acquisition are included in our LED & Solar segmentmarketable securities were as of the acquisition date. We determined that this acquisition does not constitute a material business combination and therefore we have not included pro forma financial information in this report.follows:
| | | | | | | | Gross | | | | Gross | | | | | |
| | | | Amortized | | | | Unrealized | | | | Unrealized | | | | Estimated | |
| | | | Cost | | | | Gains | | | | Losses | | | | Fair Value | |
| | | | (in thousands) | |
December 31, 2015 | | | | | | | | | |
U.S. treasuries | | $ | 94,935 | | $ | 6 | | $ | (23 | ) | $ | 94,918 | |
Government agency securities | | 12,985 | | 3 | | — | | 12,988 | |
Corporate debt | | 8,144 | | 1 | | (1 | ) | 8,144 | |
Total available-for-sale securities | | $ | 116,064 | | $ | 10 | | $ | (24 | ) | $ | 116,050 | |
| | | | | | | | | |
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 | |
On October 1, 2013 (“the Acquisition Date”), Veeco acquired 100% of the outstanding common shares
Available-for-sale securities in a loss position at December 31, 2015 and voting interest of Synos Technology, Inc. (“Synos”). The results of Synos’ operations have2014 were as follows:
| | | | December 31, 2015 | | | | December 31, 2014 | |
| | | | | | | | Gross | | | | | | | | Gross | |
| | | | Estimated | | | | Unrealized | | | | Estimated | | | | Unrealized | |
| | | | Fair Value | | | | Losses | | | | Fair Value | | | | Losses | |
| | (in thousands) | |
U.S. treasuries | | $ | 64,922 | | $ | (23 | ) | $ | 35,001 | | $ | (6 | ) |
Corporate debt | | 3,353 | | (1 | ) | 13,069 | | (6 | ) |
Total | | $ | 68,275 | | $ | (24 | ) | $ | 48,070 | | $ | (12 | ) |
At December 31, 2015 and 2014, there were no short-term investments that had been included in the consolidated financial statements since that date. Synos is an early stage manufacturer of fast array scanning atomic layer deposition (“FAST-ALD”) toolsa continuous loss position for OLED and other applications. As a result of the acquisition, the Company has entered the FAST-ALD market which is complimentary to the Company’s MOCVD LED offerings.more than 12 months.
F-19The maturities of securities classified as available-for-sale at December 31, 2015 were all due in one year or less. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were minimal realized gains for the years ended December 31, 2015, 2014, and 2013, which were included in “Other, net” in the Consolidated Statements of Operations. There were no realized losses in any of the three years.
Restricted Cash
The Company did not have any restricted cash at December 31, 2015. At December 31, 2014 the restricted cash balance was $0.5 million, which served as collateral for bank guarantees that provide financial assurance that the Company willfulfill 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.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)(Continued)
December 31, 2013Cost Method Investment
The Acquisition DateCompany has an ownership interest of less than 20% in a non-marketable investment. The Company does not exert significant influence over the investee and therefore the investment is carried at cost. Additional investments of $1.6 million were made during the year ended December 31, 2015, increasing the carrying value of the investment from $19.4 million at December 31, 2014 to $21.0 million at December 31, 2015. The Company’s ownership interest and participating rights have not substantively changed. Therefore, the Company continues to carry the investment at cost. The investment is included in “Other assets” on the Consolidated Balance Sheet. The investment is subject to a periodic impairment review; as there are no open-market valuations, the impairment analysis requires judgment. The analysis includes assessments of the investee’s financial condition, the business outlook for its products and technology, its projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by the Company relative to other investors. Fair value of the investment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of the investment. No such events or circumstances are present.
Note 5 — Business Combinations
PSP
On December 4, 2014 the Company acquired 100% of Solid State Equipment, LLC (“SSEC”) and rebranded the business Veeco Precision Surface Processing (“PSP”). The results of PSP operations have been included in the consolidated financial statements since the date of acquisition. PSP designs and develops wafer wet processing capabilities. Target market applications include semiconductor advanced packaging (including 2.5D and 3D ICs), micro-electromechanical systems (“MEMS”), compound semiconductor (RF, power electronics, LED and others), data storage, photomask, and flat panel displays. PSP further extends the Company’s penetration in the compound semiconductor and MEMS markets and represents the Company’s entry into the advanced packaging market.
The acquisition date fair value of the consideration totaled $102.3$145.5 million, net of cash acquired, which consisted of the following (in thousands):
| | Acquisition Date | |
| | (October 1, 2013) | |
Cash (net of cash acquired) | | $ | 71,488 | |
Working capital adjustment | | (2,695 | ) |
Contingent consideration | | 33,539 | |
Total | | $ | 102,332 | |
As part of Veeco’s acquisition of Synos, we may be obligated to pay to the selling shareholders of Synos certain contingent consideration. The aggregate fair value of the contingent consideration arrangement at the acquisition date was $33.5 million. The contingency arrangements are generally as follows:
·Up to $40.0 million based on defined milestones tied to the receipt of certain purchase orders from customers by certain dates through the first quarter of 2014. The Company determined the fair value of these contingent payments to be $24.3 million. Of this amount, $5.0 million was earned and paid in the fourth quarter of 2013. The second milestone pertaining to this contingency is to be measured by March 31, 2014 and could result in either no payment, a payment of $17.5 million or a payment of $35 million. The difference between the amount earned and the fair value recorded will be recorded in the statement of operations for the period ended March 31, 2014. The outcome is currently unknown.
·Up to $75.0 million based on defined milestones tied to meeting certain revenue and gross margin thresholds based on full year 2014 results. The Company has determined the fair value of these contingent payments to be $9.2 million. The fair value of this contingency will continued to be measured at each reporting period and changes in fair value will be recorded in the statement of operations.following:
We estimated the fair value of the contingent consideration by applying various probabilities and discount factors to each of the various performance milestones. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The discount rates used ranged from 3.6% to 13.0% for the purchase order related contingent payments and from 15.5% to 30.5% for the revenue and gross margin related contingent payments. These rates were determined based on the nature of the milestone, the risks and uncertainties involved and the time period until the milestone was measured. The determination of the various probabilities and discount factors are highly subjective and require significant judgment and are influenced by a number of factors, including the adoption of OLED technology and limited history. While the use of OLED is expected to grow in the near future, it is difficult to predict the rate at which OLED will be adopted by the market and thus would impact the sales of our equipment.
As of December 31, 2013, the first milestone was achieved and we paid the former shareholders of Synos $5.0 million. In addition, the recognized amount for the contingencies increased by $0.8 million as of December 31, 2013 as a result of changes in the fair value of contingent consideration.
|
| 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, net of the cash acquired, and liabilities assumed at the Acquisition Date. Veeco utilized third-party valuations of the tangible and intangible assets acquired as well as the contingent consideration. The amounts below are preliminary and are subject to change (in thousands):F-
| | Acquisition Date | |
| | (October 1, 2013) | |
Accounts receivable | | $ | 1,523 | |
Inventory | | 386 | |
Other current assets | | 512 | |
Property, plant, and equipment | | 1,917 | |
Intangible assets | | 99,270 | |
Total identifiable assets acquired | | 103,608 | |
| | | |
Current liabilities | | 4,370 | |
Estimated deferred tax liability, net | | 32,426 | |
Total liabilities assumed | | 36,796 | |
Net identifiable assets acquired | | 66,812 | |
Goodwill | | 35,520 | |
Net assets acquired | | $ | 102,332 | |
F-2018
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
The $35.5 millionfollowing table summarizes the estimated fair values of goodwillthe assets acquired and liabilities assumed at the acquisition date. The Company utilized third-party valuations to estimate the fair value of certain of the acquired tangible and intangible assets:
| | Acquisition Date (December 4, 2014) | |
| | (in thousands) | |
Accounts receivable | | $ | 9,383 | |
Inventory | | 13,812 | |
Other current assets | | 463 | |
Property, plant, and equipment | | 6,912 | |
Intangible assets | | 79,810 | |
Total identifiable assets acquired | | 110,380 | |
| | | |
Accounts payable and accrued expenses | | 6,473 | |
Customer deposits | | 6,039 | |
Deferred tax liability, net | | 2,705 | |
Other | | 1,089 | |
Total liabilities assumed | | 16,306 | |
| | | |
Net identifiable assets acquired | | 94,074 | |
Goodwill | | 51,396 | |
Net assets acquired | | $ | 145,470 | |
The gross contractual value of the acquired accounts receivable was assignedapproximately $10.5 million. The fair value of the accounts receivables is the amount expected to be collected by the LED & Solar segment. NoneCompany. 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. As of December 31, 2013, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Synos.
During 2015, the Company finalized the purchase accounting, including taxes and the working capital adjustment under the purchase agreement. Based on the final adjustments, net working capital increased $0.7 million, goodwill decreased $0.1 million, deferred tax liabilities decreased $0.2 million, and a lease-related asset retirement obligation of $0.8 million was recognized.
The classes of intangible assets acquired and the estimated weighted-average useful life of each class is presented in the table below (in thousands):below:
| | Acquisition Date | |
| | (October 1, 2013) | |
| | Amount | | Average useful life | |
Technology | | $ | 73,160 | | 14 years | |
In-process research and development | | 5,070 | | To be determined | |
Customer relationship | | 20,630 | | 8 years | |
Trademark and trade name | | 140 | | 1 year | |
Non-compete agreement | | 270 | | 3 years | |
Intangible assets acquired | | $ | 99,270 | | | |
| | 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 | | | |
WeThe Company determined the estimated fair value of the identifiable intangible assets based on various factors including: cost, discounted cash flow, income method, loss-of-revenue/income method, and relief-from-royalty method in determining the purchase price allocation.
Technology is being amortized on an accelerated basis consistent with the timing of the cash flows it is expected to generate. Pursuant to the accounting guidance, acquired in-process research and development is not amortized until such time as it is completed or abandoned. Upon completion, we will amortize the acquired amount over its useful life. As noted earlier, the fair value of the acquired assets is provisional pending the final valuations for these assets.
We recognized $1.0 million of acquisition related costs that were expensed in 2013. These costs are included in the Consolidated Statements of Operations in the line item entitled “Selling, general and administrative.”
The amounts of revenue and income (loss) from continuing operations before income taxes of Synos included in the Company’s consolidated statement of operations from the acquisition date (October 1, 2013) to the period ending December 31, 2013 are as follows (in thousands):F-
Revenue | | $ | 409 | |
Income (loss) from continuing operations before income taxes | | $ | (6,480 | ) |
The following represents the pro forma Consolidated Statements of Operations as if Synos had been included in our consolidated results (in thousands):
| | For the year ended December 31, | |
| | (unaudited) | |
| | 2013 | | 2012 | |
Revenue | | $ | 346,319 | | $ | 522,029 | |
Income (loss) from continuing operations before income taxes | | $ | (60,983 | ) | $ | 16,840 | |
These amounts have been calculated after applying our accounting policies to material amounts and also adjusting the results of Synos to reflect the additional amortization that would have been expensed assuming the fair value adjustments to intangible assets had been applied on January 1, 2012.
F-2119
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
During 2014, the Company recognized $3.2 million of acquisition related costs that are included in “Selling, general, and administrative” in the Consolidated Statements of Operations.
The amounts of revenue and income (loss) from continuing operations before income taxes of PSP included in the Company’s consolidated statement of operations from the acquisition date (December 4, 2014) to the period ending December 31, 2014 are as follows:
| | Total | |
| | (in thousands) | |
Revenue | | $ | 7,906 | |
Loss from operations before income taxes | | $ | (3,011 | ) |
6. Balance Sheet InformationThe following represents the unaudited pro forma Consolidated Statements of Operations as if PSP had been included in the Company’s consolidated results for the periods indicated. These amounts have been calculated after applying the Company’s accounting policies to material amounts and also adjusting the results of PSP to reflect the additional amortization and depreciation that would have been expensed assuming the fair value adjustments to the acquired assets had been applied on January 1, 2013:
| | December 31, | |
| | 2014 | | 2013 | |
| | (in thousands) | |
Revenue | | $ | 447,089 | | $ | 379,272 | |
Loss from operations before income taxes | | $ | (68,715 | ) | $ | (77,252 | ) |
| | | | | | | | |
Short-Term InvestmentsALD
Available-for-sale securities consistOn October 1, 2013 the Company acquired 100% of the following (outstanding 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 thousandsthe consolidated financial statements since the date of acquisition, and ALD has been integrated into the Company’s single operating segment. The ALD business includes early stage manufacturing of fast array scanning atomic layer deposition (“FAST-ALD”): tools for the flexible organic light-emitting diode (“OLED”) and semiconductor markets.
| | December 31, 2013 | |
| | | | Gains in | | Losses in | | | |
| | | | Accumulated | | Accumulated | | | |
| | | | Other | | Other | | | |
| | Amortized | | Comprehensive | | Comprehensive | | Estimated | |
| | Cost | | Income | | Income | | Fair Value | |
U.S. treasuries | | $ | 130,956 | | $ | 22 | | $ | (1 | ) | $ | 130,977 | |
Government agency securities | | 61,004 | | 9 | | — | | 61,013 | |
Corporate debt | | 77,582 | | 55 | | (36 | ) | 77,601 | |
Commercial paper | | 11,947 | | — | | — | | 11,947 | |
Total available-for-sale securities | | $ | 281,489 | | $ | 86 | | $ | (37 | ) | $ | 281,538 | |
The acquisition date fair value of the consideration totaled $102.3 million, net of cash acquired, which consisted of the following:
| | 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, 2013, salesthe first milestone was achieved, and maturitiesthe Company paid the former shareholders $5.0 million and increased the estimated fair value of available-for-sale securities provided total proceedsthe remaining contingent payments by $0.8 million. During 2014, the Company determined that all of $499.6the remaining performance milestones were not met, reversed the fair value of the liability, and recorded a non-cash gain of $29.4 million, which is included in “Changes in contingent consideration” in the Consolidated Statements of Operations.
During 2014, the Company finalized the working capital adjustment under the purchase agreement. Based on the final adjustment, the working capital adjustment was reduced to $1.3 million. The gross realized gains on these sales were $0.1As a result, a $1.4 million adjustment was made that increased goodwill by $0.2 million and reduced accrued expenses by $1.2 million for the year ended December 31, 2013. For purposerelief of determining gross realized gains, the cost of securities sold is based on specific identification. The change in the net unrealized holding gain on available-for-sale securities was minimal for the year ended December 31, 2013, and has been included in accumulated other comprehensive income. The tax impact on the unrealized gains, which is excluded from the table above, was less than $0.1 million.
| | December 31, 2012 | |
| | | | Gains in | | Losses in | | | |
| | | | Accumulated | | Accumulated | | | |
| | | | Other | | Other | | | |
| | Amortized | | Comprehensive | | Comprehensive | | Estimated | |
| | Cost | | Income | | Income | | Fair Value | |
U.S. treasuries | | $ | 184,102 | | $ | 76 | | $ | — | | $ | 184,178 | |
Government agency securities | | 8,056 | | — | | — | | 8,056 | |
Total available-for-sale securities | | $ | 192,158 | | $ | 76 | | $ | — | | $ | 192,234 | |
During the year ended December 31, 2012, sales and maturities of available-for-sale securities provided total proceeds of $244.9 million. The gross realized gains on these sales were minimal for the year ended December 31, 2012. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification. The change in the net unrealized holding gain on available-for-sale securities amounted to $0.1 million for the year ended December 31, 2012, and has been included in accumulated other comprehensive income. The tax impact on the unrealized gains, which is excluded from the table above, was minimal.a potential liability
F-22F-20
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
Available-for-sale securitiesthat the former shareholders have retained. During 2014, the Company received payment of the $1.3 million working capital adjustment from the former shareholders, which is included in a loss position at December 31, 2013 are as follows (“Acquisitions of business, net of cash acquired” within the Cash Provided by Investing Activities in thousands):the Consolidated Statements of Cash Flows.
| | Less than 12 months | | Total | |
| | | | Gross | | | | Gross | |
| | | | Unrealized | | | | Unrealized | |
| | Fair value | | Losses | | Fair value | | Losses | |
Corporate debt | | $ | 37,654 | | $ | (36 | ) | $ | 37,654 | | $ | (36 | ) |
U.S. treasuries | | 29,068 | | (1 | ) | 29,068 | | (1 | ) |
Total | | $ | 66,722 | | $ | (37 | ) | $ | 66,722 | | $ | (37 | ) |
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed 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 contingent 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 | |
AsThe goodwill is not deductible for income tax purposes.
The classes of December 31, 2013 we had $66.7 millionintangible assets acquired and the original estimated useful life of each class is presented in short-term investments that had an aggregate unrealizedthe table below:
| | 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 loss of less than $0.1the identifiable intangible assets based on various factors including: cost, discounted cash flow, income method, loss-of-revenue/income method, and relief-from-royalty method in determining the purchase price allocation.
During the fourth quarter of 2014, the Company determined that, while its ALD technology was successfully demonstrated at its key OLED display customer, it was unlikely to be adopted in the near-term for flexible OLED applications. The significant reduction in near-term forecasted bookings and cash flows required the Company in December 2014 to assess its ALD business for impairment, which in 2014 was its own reporting unit. As a result, the Company recorded a non-cash impairment charge of $53.9 million none of which had been in an unrealized loss positionrelated to goodwill and other long-lived assets for 12 months or longer. As of December 31, 2012 we did not hold any short-term investments that were in a loss position.ALD. See Note 6, “Goodwill and Intangible Assets,” for additional information.
Contractual maturities of available-for-sale securities as of December 31, 2013 are as follows (in thousands):F-
| | Estimated | |
| | Fair Value | |
Due in one year or less | | $ | 196,015 | |
Due in 1–2 years | | 64,156 | |
Due in 2–3 years | | 21,367 | |
Total investments in securities | | $ | 281,538 | |
Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Restricted Cash
As of December 31, 2013 and 2012, restricted cash consisted of $2.7 million and $2.0 million, respectively, which serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations. This cash is held in custody by the issuing bank, and is restricted as to withdrawal or use while the related bank guarantees are outstanding.
Accounts Receivable, Net
Accounts receivable are shown net of the allowance for doubtful accounts of $2.4 million and $0.5 million as of December 31, 2013 and 2012, respectively.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
Inventories (in thousands)
| | December 31, | |
| | 2013 | | 2012 | |
Materials | | $ | 34,301 | | $ | 36,523 | |
Work in process | | 12,900 | | 13,363 | |
Finished goods | | 12,525 | | 9,921 | |
| | $ | 59,726 | | $ | 59,807 | |
Property, PlantDuring 2013, the Company recognized $1.0 million of acquisition related costs that are included in “Selling, general, and Equipment (in thousands)
| | December 31, | | Estimated | |
| | 2013 | | 2012 | | Useful Lives | |
Land | | $ | 12,535 | | $ | 12,535 | | | |
Building and improvements | | 52,050 | | 49,498 | | 10-40 years | |
Machinery and equipment | | 110,228 | | 110,150 | | 3-10 years | |
Leasehold improvements | | 5,888 | | 5,677 | | 3-7 years | |
Gross property, plant and equipment at cost | | 180,701 | | 177,860 | | | |
Less: accumulated depreciation and amortization | | 91,562 | | 79,558 | | | |
Net property, plant and equipment | | $ | 89,139 | | $ | 98,302 | | | |
Foradministrative” in the years ended December 31, 2013, 2012 and 2011, depreciation expense was $12.9 million, $11.3 million and $8.2 million, respectively.Consolidated Statements of Operations.
AsThe following represents the unaudited pro forma Consolidated Statements of December 31, 2013, weOperations as if ALD had $7.2 million of tools that we previously used in our laboratories carried in machinery and equipment which we are holding for sale. These tools are the same type of tools we sell to our customersbeen included in the ordinary courseCompany’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 our business. In addition,ALD 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.
| | December 31, | |
| | 2013 | |
| | (in thousands) | |
Revenue | | $ | 346,319 | |
Loss from operations before income taxes | | $ | (60,983 | ) |
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 each business combination. The following table presents the changes in goodwill balances during the years indicated:
| | Gross carrying | | Accumulated | | | |
| | | | amount | | | | impairment | | | | Net amount | |
| | (in thousands) | |
Balance at December 31, 2013 | | $ | 186,589 | | $ | 95,241 | | $ | 91,348 | |
Acquisition | | 51,396 | | — | | 51,396 | |
Purchase price adjustments | | 173 | | — | | 173 | |
Impairments | | — | | 27,958 | | (27,958 | ) |
Balance at December 31, 2014 | | 238,158 | | 123,199 | | 114,959 | |
Purchase price adjustments | | (51 | ) | — | | (51 | ) |
Balance at December 31, 2015 | | $ | 238,107 | | $ | 123,199 | | $ | 114,908 | |
| | | | | | | | | | | | | | | | |
Additions to the gross goodwill balance during the year ended December 31, 2013, we converted2014 resulted from the acquisition of privately-held businesses as described further in Note 5, “Business Combinations.”
The Company performed its annual goodwill impairment test during the year ended December 31, 2015. The fair value of the Company’s reporting unit exceeded the carrying amount and sold $3.7 million of tools that we had previously usedtherefore goodwill was not impaired. In the future, a significant decline in our laboratories as Veeco Certified Equipment at an aggregate sellingthe market price of $7.4 millionthe Company’s common stock could indicate a decline in the fair value of the Company’s reporting unit such that goodwill becomes impaired.
During 2014, the Company successfully demonstrated its FAST-ALD technology for flexible OLED encapsulation. But, subsequent to the Company’s annual goodwill impairment test in 2014, the incumbent deposition technology had progressed to satisfy current market requirements, which is includedrequired an additional impairment test to be performed in revenue. During 2013, wethe fourth quarter of 2014. After estimating the fair value of significant tangible and intangible long-lived assets related to the ALD business, the Company recorded assetnon-cash impairment charges in LED & Solar of $0.9$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 tools used in our laboratories carried in machinery and equipment which we are holding for sale.
Goodwill and Indefinite-Lived Intangible Assetstangible assets.
In accordance with the relevant accounting guidance related to goodwill and other intangible assets, we conducted our annual impairment test of goodwill and indefinite-lived intangible assets during the fourth quarters of 2013 and 2012, using October 1st as our measurement date as described in our footnote Description of Business and Significant Accounting Policies. Based upon the results of the qualitative assessment we determined that it was not more likely than not that goodwill or our indefinite-lived intangible assets were impaired. Therefore, we determined that no impairment of goodwill and indefinite-lived intangible asset existed as of October 1, 2013. In 2012, we determined not to perform the optional qualitative assessment and performed our step 1 assessment utilizing discounted future cash flows and a reconciliation to our market capitalization. Based on our assessment we determined that there was no impairment of our goodwill or our indefinite-lived assets as of October 1, 2012.
Changes in our goodwill are as follows (in thousands):F-
| | December 31, | |
| | 2013 | | 2012 | |
Beginning balance | | $ | 55,828 | | $ | 55,828 | |
Acquisition (see Business Combinations) | | 35,520 | | — | |
Ending balance | | $ | 91,348 | | $ | 55,828 | |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
Intangible AssetsThe components of purchased intangible assets on the dates indicated below were as follows:
| | | | | | December 31, 2015 | | | | December 31, 2014 | |
| | 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 | | 8.7 | | $ | 222,358 | | $ | 120,496 | | $ | 101,862 | | $ | 222,358 | | $ | 106,342 | | $ | 116,016 | |
Customer relationships | | 12.9 | | 47,885 | | 22,470 | | 25,415 | | 69,350 | | 35,549 | | 33,801 | |
Trademarks and tradenames | | 5.3 | | 2,730 | | 1,937 | | 793 | | 3,050 | | 1,096 | | 1,954 | |
Indefinite-lived trademark | | — | | 2,900 | | — | | 2,900 | | 2,900 | | — | | 2,900 | |
IPR&D | | — | | — | | — | | — | | 5,070 | | 5,070 | | — | |
Other | | 1.8 | | 6,241 | | 5,537 | | 704 | | 5,485 | | 848 | | 4,637 | |
Total | | 9.4 | | $ | 282,114 | | $ | 150,440 | | $ | 131,674 | | $ | 308,213 | | $ | 148,905 | | $ | 159,308 | |
Other intangible assets primarily consist of patents, licenses, customer backlog, and non-compete agreements.
As ofFor the years ended December 31, 2013, we had $8.0 million of indefinite-lived intangible assets consisting of trademarks, tradenames2015, 2014, and in-process research and development (“IPR&D”). Pursuant to acquisition guidance, IPR&D is carried as an indefinite lived intangible until abandonment or completion. As of December 31, 2012, we had $2.9 million of indefinite-lived intangible assets consisting of trademarks and tradenames. These intangibles are included in the accompanying Consolidated Balance Sheets in the caption intangible assets, net.
| | December 31, 2013 | | December 31, 2012 | |
| | | | Other | | Total | | | | Other | | Total | |
| | Purchased | | intangible | | intangible | | Purchased | | intangible | | intangible | |
(in thousands) | | technology | | assets | | assets | | technology | | assets | | assets | |
Gross intangible assets | | $ | 187,478 | | $ | 40,675 | | $ | 228,153 | | $ | 109,248 | | $ | 19,635 | | $ | 128,883 | |
Less accumulated amortization | | (97,524 | ) | (15,913 | ) | (113,437 | ) | (93,436 | ) | (14,473 | ) | (107,909 | ) |
Intangible assets, net | | $ | 89,954 | | $ | 24,762 | | $ | 114,716 | | $ | 15,812 | | $ | 5,162 | | $ | 20,974 | |
The estimated aggregate2013, amortization expense for intangible assets with definite useful lives for eachwas $27.6 million, $13.1 million, and $5.5 million, respectively. Based on the intangible assets recorded at December 31, 2015, and assuming no subsequent additions to or impairment of the next five fiscal yearsunderlying assets, the remaining estimated annual amortization expense is expected to be as follows (in thousands):follows:
2014 | | $ | 11,569 | | |
2015 | | 19,376 | | |
| | | | Amortization | |
| | | (in thousands) | |
2016 | | 18,498 | | | $ | 20,816 | |
2017 | | 15,876 | | | 17,976 | |
2018 | | 12,244 | | | 16,399 | |
2019 | | | 15,165 | |
2020 | | | 14,112 | |
Thereafter | | | 44,306 | |
Total | | | $ | 128,774 | |
Other AssetsNote 7 — Inventories
| | December 31, | |
(in thousands) | | 2013 | | 2012 | |
Cost method investment | | $ | 16,884 | | $ | 14,494 | |
Income taxes receivable | | 21,128 | | — | |
Other | | 714 | | 2,287 | |
| | $ | 38,726 | | $ | 16,781 | |
Cost Method Investment
On September 28, 2010, we completed a $3 million investment in a rapidly developing organic light emitting diode (also known as OLED) equipment company (the “Investment”). We invested an additional $10.3 million and $1.2 million in the Investment during 2012 and 2011, respectively. In 2013, we invested an additional $2.4 million in the Investment in the form of bridge notes bearing 4% interest. The bridge notesInventories are payable in equitystated at the timelower of cost or net realizable value using standard costs that approximate actual costs on a liquidity event or a qualifying equity investment round, otherwise they are payable in cash in June 2014. As of December 31, 2013, we have a 15.4% ownershipfirst-in, first-out basis. Inventories consist of the preferred shares, and effectively hold a 11.0% ownership interest of the total company. Since we do not exert significant influence on the Investment, this investment is treated under the cost method in accordance with applicable accounting guidance. This investment is recorded in other assets in our Consolidated Balance Sheets as of December 31, 2013 and 2012.following:
| | | December 31, | |
| | | 2015 | | | | 2014 | |
| | (in thousands) | |
Materials | | $ | 42,373 | | $ | 30,319 | |
Work-in-process | | 30,327 | | 25,096 | |
Finished goods | | 4,769 | | 6,056 | |
Total | | $ | 77,469 | | $ | 61,471 | |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
Note 8 — Property, Plant, and Equipment and Assets Held for Sale
Property and equipment, net, consist of the following:
| | | | December 31, | | | | Average | |
| | | | 2015 | | | | 2014 | | | | Useful Life | |
| | (in thousands) | | | |
Land | | $ | 9,592 | | $ | 9,392 | | N/A | |
Building and improvements | | 54,622 | | 51,979 | | 10 – 40 years | |
Machinery and equipment | | 110,075 | | 104,815 | | 3 – 10 years | |
Leasehold improvements | | 5,554 | | 4,356 | | 3 – 7 years | |
Gross property, plant and equipment | | 179,843 | | 170,542 | | | |
Less: accumulated depreciation and amortization | | 100,253 | | 91,790 | | | |
Net property, plant, and equipment | | $ | 79,590 | | $ | 78,752 | | | |
Depreciation expense was $12.2 million, $11.4 million, and $12.9 million for the years ended December 31, 2015, 2014, and 2013, respectively.
Assets Held for Sale
At December 31, 2015, assets held for sale consist of a vacant building and land which were designated as held for sale during 2014. The carrying value reflects the Company’s estimate of fair value less costs to sell using the sales comparison market approach.
During the year ended December 31, 2014, the Company classified property, plant, and equipment with a carrying value of $9.5 million as assets held for sale. 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 recorded an impairment charge of approximately $3.5 million, which consisted of $1.6 million related to the 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.
During the year ended December 31, 2015, the Company sold its assets previously held for sale related to its research and demonstration labs in Asia for $1.0 million, which was the carrying value for the assets. The Company continues to actively market the remaining assets held for sale.
Note 9 — Accrued Expenses and Other Current Liabilities
| | December 31, | |
(in thousands) | | 2013 | | 2012 | |
Payroll and related benefits | | $ | 11,020 | | $ | 14,581 | |
Sales, use and other taxes | | 5,402 | | 6,480 | |
Contingent consideration | | 20,098 | | — | |
Warranty | | 5,662 | | 4,942 | |
Restructuring liability | | 533 | | 1,875 | |
Other | | 8,369 | | 13,523 | |
| | $ | 51,084 | | $ | 41,401 | |
Customer deposits and deferred revenue
AsThe components of December 31, 2013accrued expenses and 2012, we had customer deposits of $27.5 million and $32.7 million, respectively recorded as a component of customer deposits and deferred revenue.
Accrued Warranty
Typically, we provide our customers a one year manufacturer’s warranty from the date of final acceptance on the products they purchase from us. We estimate the costs that may be incurred under the warranty we provide for our products and recognize a liability in the amount of such costs at the time the related revenue is recognized. Factors that affect our warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. Changes in our warranty liability during the year areother current liabilities were as follows:
| | December 31, | |
| | 2013 | | 2012 | |
Balance as of the beginning of year | | $ | 4,942 | | $ | 8,731 | |
Warranties issued during the year | | 5,291 | | 3,563 | |
Settlements made during the year | | (5,580 | ) | (7,060 | ) |
Changes in estimate during the period | | 1,009 | | (292 | ) |
Balance as of the end of year | | $ | 5,662 | | $ | 4,942 | |
Other Liabilities
| | December 31, | |
(in thousands) | | 2013 | | 2012 | |
Contingent consideration | | $ | 9,270 | | $ | — | |
Income taxes payable | | — | | 3,986 | |
Other | | 379 | | 544 | |
| | $ | 9,649 | | $ | 4,530 | |
| | | | December 31, | | | | | |
| | | | 2015 | | | | 2014 | | | | | |
| | (in thousands) | | | | | |
Payroll and related benefits | | $ | 30,917 | | $ | 26,605 | | | | | |
Warranty | | 8,159 | | 5,411 | | | | | |
Sales, use, and other taxes | | 1,132 | | 1,776 | | | | | |
Restructuring liability | | 824 | | 1,428 | | | | | |
Other | | 8,361 | | 13,198 | | | | | |
Total | | $ | 49,393 | | $ | 48,418 | | | | | |
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
Customer deposits and deferred revenue
Customer deposits totaled $28.2 million and $73.0 million at December 31, 2015 and 2014, respectively, which are included in “Customer deposits and deferred revenue” in the Consolidated Balance Sheets.
Note 10 — Restructuring Charges
During 2013, the Company recorded $1.5 million in personnel severance and related costs resulting from the restructuring of one of its 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. Business 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.
During 2015, additional charges of $2.7 million were recognized and payments made related to the 2014 closing of the Ft. Collins, Colorado and Camarillo, California facilities. In 2015, the Company announced the closing of its Hyeongok-ri, South Korea facility and reduced the workforce, including 23 employees whose positions were eliminated, resulting in additional restructuring costs of $1.1 million. And in an effort to better align the Company’s cost structure with the recently observed weakness in the LED market, the Company incurred $0.9 million to reduce spending primarily through the reduction of 16 employees and 12 temporary staff.
Additional restructuring costs to be accrued for these activities are not expected to be significant.
The following table shows the amounts incurred and paid for restructuring activities during the years ended December 31, 2015, 2014, and 2013 and the remaining accrued balance of restructuring costs at December 31, 2015, which is included in “Accrued expenses and other 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 | |
Provision | | 3,513 | | 1,166 | | 4,679 | |
Payments | | (4,117 | ) | (1,166 | ) | (5,283 | ) |
Balance at December 31, 2015 | | $ | 824 | | $ | — | | $ | 824 | |
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 11 — Commitments and Contingencies
Warranty
Warranties are typically valid for one year from the date of system final acceptance, and the Company estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs.
Changes in the Company’s product warranty reserves were as follows:
| | | | December 31, | |
| | | | 2015 | | | | 2014 | | | | 2013 | |
| | (in thousands) | |
Balance, beginning of the year | | $ | 5,411 | | $ | 5,662 | | $ | 4,942 | |
Addition for new warranties issued | | 7,873 | | 3,484 | | 5,291 | |
Addition from PSP acquisition | | — | | 809 | | — | |
Settlements | | (3,551 | ) | (3,802 | ) | (5,580 | ) |
Changes in estimate | | (1,574 | ) | (742 | ) | 1,009 | |
Balance, end of the year | | $ | 8,159 | | $ | 5,411 | | $ | 5,662 | |
Minimum Lease Commitments
Minimum lease commitments at December 31, 2015 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows:
| | Operating | |
| | Leases | |
Payments due by period: | | (in thousands) | |
2016 | | $ | 2,154 | |
2017 | | 1,677 | |
2018 | | 1,011 | |
2019 | | 529 | |
2020 | | 534 | |
Thereafter | | 2,169 | |
Total | | $ | 8,074 | |
Lease expense was $2.3 million, $2.3 million, and $2.9 million for the years ended December 31, 2015, 2014, and 2013, respectively. In addition, the Company is obligated under such leases for certain other expenses, including real estate taxes and insurance.
Legal Proceedings
Veeco and certain other parties were named as defendants in a lawsuit filed on April 25, 2013 in the Superior Court of California, County of Sonoma. The plaintiff in the lawsuit, Patrick Colbus, sought unspecified damages and asserted claims that he suffered burns and other injuries while cleaning a molecular beam epitaxy system alleged to have been manufactured by Veeco. The lawsuit alleged, among other things, that the molecular beam epitaxy system was defective and that Veeco failed to adequately warn of the potential risks of the system. During the first quarter of 2016, the partiesagreed to settle the lawsuit, without any admission of wrongdoing. The settlement amount is expected to be fully covered
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
by Veeco’s insurance and, as a result, is not expected to have a material impact on the Company’s financial condition or results of operations.
The Company is involved in various other legal proceedings arising in the normal course of business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
Concentrations of Credit Risk
The Company depends on purchases from its ten largest customers, which accounted for 75% and 65% of net accounts receivable at December 31, 2015 and 2014, respectively.
Customers who accounted for more than 10% of net accounts receivable or net sales are as follows:
| | Accounts Receivable | | Net Sales |
| | | | |
| | Year ended December 31, | | For the Year Ended December 31, |
Customer | | 2015 | | 2014 | | 2015 | | 2014 | | 2013 |
Customer A | | * | | * | | * | | 15% | | * |
Customer B | | * | | 20% | | * | | 11% | | 14% |
Customer C | | 23% | | 13% | | * | | * | | * |
Customer D | | * | | * | | 20% | | * | | * |
Customer E | | * | | * | | 12% | | * | | * |
* Less than 10% of aggregate accounts receivable or net sales
The Company manufactures and sells its products to companies in different geographic locations. Refer to Note 18, “Segment Reporting and Geographic Information,” for additional information. In certain instances, the Company requires deposits from its customers for a portion of the sales price in advance of shipment and performs periodic credit evaluations on its customers. Where appropriate, the Company requires letters of credit on certain non-U.S. sales arrangements. Receivables generally are due within 30 – 90 days from the date of invoice.
The net accounts receivable balance is concentrated in the following geographic locations:
| | December 31, |
| | | | | | | | |
| | | 2015 | | | | 2014 | |
| | | (in thousands) | |
| | | | | | | | |
United States | | | $ | 14,471 | | | | $ | 13,139 | |
China | | | 10,629 | | | | 17,911 | |
EMEA(1) | | | 7,766 | | | | 4,760 | |
Rest of World | | | 16,658 | | | | 24,275 | |
Total | | | | $ | 49,524 | | | | $ | 60,085 | |
| | | | | | | | | | | |
(1) Europe, Middle East, and Africa
Suppliers
The Company outsources certain functions to third parties, including the manufacture of all or substantially all of its MOCVD systems, ion beam and other data storage systems, and ion sources. The Company primarily relies on several suppliers for the manufacturing of these systems, but the Company does maintain a minimum level of internal manufacturing capability for these systems. The failure of the Company’s present suppliers to meet their contractual obligations under its supply arrangements and the Company’s inability to make alternative arrangements or resume the manufacture of these
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
systems could have a material adverse effect on the Company’s revenues, profitability, cash flows, and relationships with its customers.
In addition, certain of the components and sub-assemblies included in the Company’s products are obtained from a single source or a limited group of suppliers. The 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 the Company’s operating results.
The Company had deposits with its suppliers of $14.6 million and $12.7 million at December 31, 2015 and 2014, respectively, that were included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets.
Purchase Commitments
The Company had purchase commitments of $92.7 million at December 31, 2015, all of which will come due within one year.
Bank Guarantees
The Company has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At December 31, 2015, outstanding bank guarantees and letters of credit totaled $2.9 million, and unused bank guarantees and letters of credit of $62.6 million were available to be drawn upon.
Note 12 — Debt
Debt consists of a mortgage note payable with a carrying value of $1.5 million and $1.8 million at December 31, 2015 and 2014, respectively. The mortgage note payable is secured by certain land and buildings with a carrying value of $3.3 million at December 31, 2015 and 2014. 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 $1.6 million and $2.0 million at December 31, 2015 and 2014, respectively, using a discounted cash flow model. Payments due under the note are as follows:
| | | Total | |
| | | (in thousands) | |
2016 | | | $ | 340 | |
2017 | | | 368 | |
2018 | | | 398 | |
2019 | | | 427 | |
Total | | | 1,533 | |
Less current portion | | | 340 | |
Total (less current maturities) | | | $ | 1,193 | |
Note 13 — 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. We did not enter into any derivative transactions in 2015. In the past, the Company entered into monthly forward derivative contracts with the intent of mitigating a portion of this risk. The Company only used derivative financial instruments in the context of hedging and not for speculative purposes and had not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts were recorded as “Other, net” in the Company’s Consolidated Statements of Operations. The fair value of these contracts was included in “Prepaid
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
expenses and other current assets” in the Company’s Consolidated Balance Sheets. The Company executed derivative transactions with highly rated financial institutions to mitigate counterparty risk.
The Company did not have any outstanding derivative contracts at December 31, 2015 and 2014.
The following table shows the gains and (losses) from currency exchange derivatives during the years ended December 31, 2015, 2014, and 2013, which are included in “Other, net” in the Consolidated Statements of Operations:
| | | Year ended December 31, | |
| | | 2015 | | | | 2014 | | | | 2013 | |
| | | (in thousands) | |
Foreign currency exchange forwards | | | $ | — | | | | $ | (89 | ) | | | $ | 248 | |
Foreign currency collar | | | — | | | | (457 | ) | | | 906 | |
Total | | | $ | — | | | | $ | (546 | ) | | | $ | 1,154 | |
Note 14 — Stockholders’ Equity
Accumulated Other Comprehensive Income
The componentsfollowing table presents the changes in the balances of accumulatedeach 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 (expense) 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 | |
Other comprehensive income (loss) | | | (87 | ) | | | 15 | | | | (49 | ) | | | (121 | ) |
Balance at December 31, 2015 | | | $ | 2,246 | | | | $ | (866 | ) | | | $ | (32 | ) | | | $ | 1,348 | |
The Company did not allocate tax expense to other comprehensive income are:
As of December 31, 2013 | | Gross | | Taxes | | Net | |
Translation adjustments | | $ | 5,718 | | $ | (392 | ) | $ | 5,326 | |
Minimum pension liability | | (1,160 | ) | 424 | | (736 | ) |
Unrealized gain on available-for-sale securities | | 49 | | (18 | ) | 31 | |
Accumulated other comprehensive income | | $ | 4,607 | | $ | 14 | | $ | 4,621 | |
As of December 31, 2012 | | Gross | | Taxes | | Net | |
Translation adjustments | | $ | 7,040 | | $ | (339 | ) | $ | 6,701 | |
Minimum pension liability | | (1,285 | ) | 510 | | (775 | ) |
Unrealized gain on available-for-sale securities | | 76 | | (29 | ) | 47 | |
Accumulated other comprehensive income | | $ | 5,831 | | $ | 142 | | $ | 5,973 | |
7. Debt
Long-Term Debt
Long-term debtin 2015 or 2014 as of December 31, 2013, consists ofthe Company is in a mortgage note payable, whichfull valuation allowance position such that a deferred tax asset related to amounts recognized in other comprehensive income is secured by certain land and buildings with carrying amounts aggregating approximately $4.7 million and $4.8 millionnot regarded as of December 31, 2013 and December 31, 2012, respectively. The mortgage note payable ($2.1 million as of December 31, 2013 and $2.4 million as of December 31, 2012) bears interest at an annual rate of 7.91%, with the final payment duerealizable on January 1, 2020. We estimate the fair market value of this note as of December 31, 2013 and 2012 was approximately $2.3 million and $2.6 million, respectively.
Maturity of Long-Term Debta more-likely-than-not basis.
Long-term debt matures as follows (in thousands):During 2015, there were minimal realized gains reclassified from Accumulated Other Comprehensive Income to “Other, net” on the Consolidated Statements of Operations.
2014 | | $ | 290 | |
2015 | | 314 | |
2016 | | 340 | |
2017 | | 368 | |
2018 | | 398 | |
Thereafter | | 427 | |
| | 2,137 | |
Less current portion | | 290 | |
| | $ | 1,847 | |
Convertible Notes
In 2011, we retired our convertible notes which were initially convertible into 36.7277 shares of common stock per $1,000 principal amount of notes (equivalentDuring 2014, the Company completed its plan to liquidate its subsidiary in Japan, since the Company moved to a conversion pricedistributor model to serve its customers in that region. As a result of $27.23 per share orthe liquidation, a premiumcumulative translation gain of 38% over$3.1 million was reclassified from Other Comprehensive Income to “Other, net” on the closing market price for Veeco’s common stock on April 16, 2007). We paid interest on these notes on April 15 and October 15Consolidated Statements 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.Operations.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)(Continued)
December 31, 2013
During the first quarter of 2011, at the option of the holders, $7.5 million of notes were tendered for conversion at a price of $45.95 per share in a net share settlement. We paid the principal amount of $7.5 million in cash and issued 111,318 shares of our common stock. We recorded a loss on extinguishment totaling $0.3 million related to these transactions.
During the second quarter of 2011, we issued a notice of redemption on the remaining outstanding principal balance of notes outstanding. As a result, at the option of the holders, the notes were tendered for conversion at a price of $50.59 per share, calculated as defined in the indenture relating to the notes, in a net share settlement. As a result, we paid the principal amount of $98.1 million in cash and issued 1,660,095 shares of our common stock. We recorded a loss on extinguishment totaling $3.0 million related to these transactions.
Certain accounting guidance requires a portion of convertible debt to be allocated to equity. This guidance requires issuers of convertible debt that can be settled in cash to separately account for (i.e. bifurcate) a portion of the debt associated with the conversion feature and reclassify this portion to equity. The liability portion, which represents the fair value of the debt without the conversion feature, is accreted to its face value over the life of the debt using the effective interest method by amortizing the discount between the face amount and the fair value. The amortization is recorded as interest expense. Our convertible notes were subject to this accounting guidance. This additional interest expense did not require the use of cash.
The components of interest expense recorded on the notes were as follows (in thousands):
| | For the year ended | |
| | December 31, | |
| | 2011 | |
Contractual interest | | $ | 2,025 | |
Accretion of the discount on the notes | | 1,260 | |
Total interest expense on the notes | | $ | 3,285 | |
Effective interest rate | | 6.7 | % |
8. Equity Compensation Plans and Equity
Stock Option and Restricted Stock Plans
We have several stock option and restricted stock plans. In connection with our acquisition of Synos Technology, Inc. on October 1, 2013, the Board of Directors granted equity awards to the Synos employees. Pursuant to Nasdaq Listing Rules, the equity awards were granted under our 2013 Inducement Stock Incentive Plan (the “Inducement Plan”), which the Board of Directors adopted to facilitate the granting of equity awards as an inducement to these employees to commence employment with us. We issued 124,500 stock options and 87,000 restricted stock units under this plan. The stock options will vest over a three year period and have a 10-year term and the restricted stock units will vest over a two or four year period. As of December 31, 2013, the Inducement Plan was effectively merged into the 2010 Stock Incentive Plan (as amended to date, the “2010 Plan”), and is therefore considered an inactive plan with no further shares available for future grant. As of December 31, 2013, there are 124,500 options outstanding under the Inducement Plan.
On April 1, 2010, our Board of Directors, and on May 14, 2010, our shareholders, approved the 2010 Plan. The 2010 Plan replaced the 2000 Stock Incentive Plan, as amended (the “2000 Plan”), as the Company’s active stock plan. Our employees, directors and consultants are eligible to receive awards under the 2010 Plan. The 2010 Plan permits the granting of a variety of awards, including both non-qualified and incentive stock options, share appreciation rights, restricted shares, restricted share units and dividend equivalent rights. We are authorized to issue up to 6,750,000 shares under the 2010 Plan, including an additional 3,250,000 shares (including up to 2,995,000 shares of Common Stock available for issuance under the 2010 Plan and up to 255,000 shares underlying awards granted under the Inducement Plan) that were approved by the shareholders on December 10, 2013. Option awards are generally granted with an exercise price equal to the closing price of our stock on the trading day prior to the date of grant; those option awards generally vest over a 3 year period and have a 7 or 10-year term. Restricted share awards generally vest over 1-5 years. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 2010 Plan. As of December 31, 2013, there are 1,746,092 options outstanding under the 2010 Plan.
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Notes to Consolidated Financial Statements (continued)
December 31, 2013
The 2000 Plan was approved by our Board of Directors and shareholders in May 2000. The 2000 Plan provides for the grant to officers and key employees of stock awards, either in the form of options to purchase shares of our common stock or restricted stock awards. Stock awards granted pursuant to the 2000 Plan expire after seven years and generally vest over a two-year to five-year period following the grant date. In addition, the 2000 Plan provides for automatic annual grants of restricted stock to each member of our Board of Directors who is not an employee. As of December 31, 2013, there are 727,552 options outstanding under the 2000 Plan.
Equity-Based Compensation Expense, Stock Option and Restricted Stock Activity
Equity-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period. We recorded equity compensation expense of $13.1 million, $14.3 million and $12.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. We did not capitalize any equity compensation in the years ended December 31, 2013, 2012 and 2011.
During the year ended December 31, 2011, we discontinued our CIGS solar systems business and as a result the equity-based compensation expense related to each CIGS solar systems business employee has been classified as discontinued operations in determining the consolidated results of operations for the years ended December 31, 2011. For the year ended December 31, 2011 discontinued operations included compensation expense of $0.7 million.
As of December 31, 2013, the total unrecognized compensation cost related to nonvested stock awards and option awards expected to vest is $33.2 million and $12.3 million, respectively, and the related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 3.1 years and 2.2 years for the nonvested stock awards and for option awards, respectively.
The fair value of each option granted during the years ended December 31, 2013, 2012 and 2011, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| | For the year ended December 31, | |
| | 2013 | | 2012 | | 2011 | |
Weighted-average expected stock-price volatility | | 48 | % | 59 | % | 55 | % |
Weighted-average expected option life | | 5 years | | 5 years | | 4 years | |
Average risk-free interest rate | | 1.27 | % | 0.70 | % | 1.40 | % |
Average dividend yield | | 0 | % | 0 | % | 0 | % |
A summary of our restricted stock awards including restricted stock units as of December 31, 2013 is presented below:
| | | | Weighted- | |
| | | | Average | |
| | Shares | | Grant-Date | |
| | (000’s) | | Fair Value | |
Nonvested as of December 31, 2012 | | 693 | | $ | 36.11 | |
Granted | | 798 | | 33.16 | |
Vested | | (207 | ) | 32.44 | |
Forfeited (including cancelled awards) | | (126 | ) | 34.33 | |
Nonvested as of December 31, 2013 | | 1,158 | | $ | 34.93 | |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
During the year ended December 31, 2013, we granted 797,583 shares of restricted common stock and restricted stock units to key employees, which generally vest over a four year period. Included in this grant were 16,165 shares of restricted common stock granted to the non-employee members of the Board of Directors, which vest over the lesser of one year or at the time of the next annual meeting. The vested shares include the impact of 71,342 shares of restricted stock which were cancelled in 2013 due to employees electing to receive fewer shares in lieu of paying withholding taxes. The total fair value of shares that vested during the years ended December 31, 2013, 2012 and 2011 was $7.9 million, $5.4 million and $9.7 million, respectively.
A summary of our stock option plans as of the year ended December 31, 2013 is presented below:
| | | | | | | | Weighted- | |
| | | | | | | | Average | |
| | | | Weighted- | | | | Remaining | |
| | | | Average | | Aggregate | | Contractual | |
| | Shares | | Exercise | | Intrinsic | | Life | |
| | (000’s) | | Price | | Value (000’s) | | (in years) | |
Outstanding as of December 31, 2012 | | 2,322 | | $ | 28.63 | | | | | |
Granted | | 539 | | 32.68 | | | | | |
Exercised | | (149 | ) | 14.74 | | | | | |
Forfeited (including cancelled options) | | (114 | ) | 35.22 | | | | | |
Outstanding as of December 31, 2013 | | 2,598 | | $ | 29.98 | | $ | 14,277 | | 6.5 | |
Options exercisable as of December 31, 2013 | | 1,567 | | $ | 27.19 | | $ | 13,208 | | 4.7 | |
The weighted-average grant date fair value of stock options granted for the years ended December 31, 2013, 2012 and 2011 was $13.47, $15.56 and $21.90 per option, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2013, 2012 and 2011 was $2.5 million, $6.8 million and $22.8 million, respectively.
The following table summarizes information about stock options outstanding as of December 31, 2013:
| | Options Outstanding | | Options Exercisable | |
| | Number | | Weighted-Average | | Weighted- | | Number | | Weighted- | |
| | Outstanding at | | Remaining | | Average | | Exercisable at | | Average | |
| | December 31, | | Contractual Life | | Exercise | | December 31, | | Exercise | |
Range of Exercise Prices | | 2013 (000s) | | (in years) | | Price | | 2013 (000s) | | Price | |
$8.82 - 16.37 | | 432 | | 2.4 | | $ | 10.98 | | 432 | | $ | 10.98 | |
17.48 - 26.69 | | 296 | | 2.2 | | 19.85 | | 278 | | 19.55 | |
28.60 - 42.96 | | 1,601 | | 8.2 | | 33.43 | | 674 | | 34.27 | |
44.09 - 51.70 | | 269 | | 7.4 | | 51.02 | | 183 | | 50.96 | |
| | 2,598 | | 6.5 | | $ | 29.98 | | 1,567 | | $ | 27.19 | |
Shares Reserved for Future Issuance
As of December 31, 2013, we have 5,856,268 shares reserved for future issuance upon exercise of stock options and grants of restricted stock.
Preferred Stock
OurThe Board of Directors has authority under ourthe 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)
December 31, 2013
Treasury StockConcentrations of Credit Risk
On August 24, 2010, our BoardThe Company depends on purchases from its ten largest customers, which accounted for 75% and 65% of Directors authorizednet accounts receivable at December 31, 2015 and 2014, respectively.
Customers who accounted for more than 10% of net accounts receivable or net sales are as follows:
| | Accounts Receivable | | Net Sales |
| | | | |
| | Year ended December 31, | | For the Year Ended December 31, |
Customer | | 2015 | | 2014 | | 2015 | | 2014 | | 2013 |
Customer A | | * | | * | | * | | 15% | | * |
Customer B | | * | | 20% | | * | | 11% | | 14% |
Customer C | | 23% | | 13% | | * | | * | | * |
Customer D | | * | | * | | 20% | | * | | * |
Customer E | | * | | * | | 12% | | * | | * |
* Less than 10% of aggregate accounts receivable or net sales
The Company manufactures and sells its products to companies in different geographic locations. Refer to Note 18, “Segment Reporting and Geographic Information,” for additional information. In certain instances, the repurchaseCompany requires deposits from its customers for a portion of upthe sales price in advance of shipment and performs periodic credit evaluations on its customers. Where appropriate, the Company requires letters of credit on certain non-U.S. sales arrangements. Receivables generally are due within 30 – 90 days from the date of invoice.
The net accounts receivable balance is concentrated in the following geographic locations:
| | December 31, |
| | | | | | | | |
| | | 2015 | | | | 2014 | |
| | | (in thousands) | |
| | | | | | | | |
United States | | | $ | 14,471 | | | | $ | 13,139 | |
China | | | 10,629 | | | | 17,911 | |
EMEA(1) | | | 7,766 | | | | 4,760 | |
Rest of World | | | 16,658 | | | | 24,275 | |
Total | | | | $ | 49,524 | | | | $ | 60,085 | |
| | | | | | | | | | | |
(1) Europe, Middle East, and Africa
Suppliers
The Company outsources certain functions to $200 millionthird parties, including the manufacture of our common stock. All fundsall or substantially all of its MOCVD systems, ion beam and other data storage systems, and ion sources. The Company primarily relies on several suppliers for this repurchase program were exhausted asthe manufacturing of August 19, 2011. Repurchases were made from timethese systems, but the Company does maintain a minimum level of internal manufacturing capability for these systems. The failure of the Company’s present suppliers to timemeet their contractual obligations under its supply arrangements and the Company’s inability to make alternative arrangements or resume the manufacture of these
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
systems could have a material adverse effect on the open marketCompany’s revenues, profitability, cash flows, and relationships with its customers.
In addition, certain of the components and sub-assemblies included in accordancethe Company’s products are obtained from a single source or a limited group of suppliers. The 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 the Company’s operating results.
The Company had deposits with applicable federal securities laws. During 2011, we purchased 4,160,228 shares for $162its suppliers of $14.6 million (including transaction costs) under the programand $12.7 million 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 isDecember 31, 2015 and 2014, respectively, that were included as treasury stock in“Prepaid expenses and other current assets” on the Consolidated Balance Sheet asSheets.
Purchase Commitments
The Company had purchase commitments of $92.7 million at December 31, 2011. During the year ended2015, all of which will come due within one year.
Bank Guarantees
The Company has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At December 31, 2012, we cancelled2015, outstanding bank guarantees and retired the 5,278,828 sharesletters of treasury stock we purchased under this repurchase program. As a result of this transaction, we recorded a reduction in treasury stock of $200.2credit totaled $2.9 million, and a corresponding reductionunused bank guarantees and letters of $200.1credit of $62.6 million and $0.1 million in retained earnings and common stock, respectively.were available to be drawn upon.
9. Income TaxesNote 12 — Debt
Debt consists of a mortgage note payable with a carrying value of $1.5 million and $1.8 million at December 31, 2015 and 2014, respectively. The mortgage note payable is secured by certain land and buildings with a carrying value of $3.3 million at December 31, 2015 and 2014. 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 $1.6 million and $2.0 million at December 31, 2015 and 2014, respectively, using a discounted cash flow model. Payments due under the note are as follows:
| | | Total | |
| | | (in thousands) | |
2016 | | | $ | 340 | |
2017 | | | 368 | |
2018 | | | 398 | |
2019 | | | 427 | |
Total | | | 1,533 | |
Less current portion | | | 340 | |
Total (less current maturities) | | | $ | 1,193 | |
Note 13 — Derivative Financial Instruments
Our income (loss)The Company is exposed to financial market risks arising from continuing operations before income taxeschanges 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. We did not enter into any derivative transactions in 2015. In the past, the Company entered into monthly forward derivative contracts with the intent of mitigating a portion of this risk. The Company only used derivative financial instruments in the accompanyingcontext of hedging and not for speculative purposes and had not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts were recorded as “Other, net” in the Company’s Consolidated Statements of Operations consistsOperations. The fair value of (these contracts was included in thousands):
| | Year ended December 31, | |
| | 2013 | | 2012 | | 2011 | |
Domestic | | $ | (84,942 | ) | $ | 5,811 | | $ | 230,204 | |
Foreign | | 13,732 | | 32,375 | | 41,882 | |
| | $ | (71,210 | ) | $ | 38,186 | | $ | 272,086 | |
Significant components of the provision (benefit) for income taxes from continuing operations are presented below (in thousands):
| | Year ended December 31, | |
| | 2013 | | 2012 | | 2011 | |
Current: | | | | | | | |
Federal | | $ | (21,022 | ) | $ | 2,515 | | $ | 59,921 | |
Foreign | | 3,921 | | 7,576 | | 10,714 | |
State and local | | 148 | | (317 | ) | 805 | |
Total current provision (benefit) for income taxes | | (16,953 | ) | 9,774 | | 71,440 | |
Deferred: | | | | | | | |
Federal | | (11,589 | ) | (482 | ) | 10,454 | |
Foreign | | (462 | ) | 727 | | (1,073 | ) |
State and local | | 57 | | 1,638 | | 763 | |
Total deferred provision (benefit) for income taxes | | (11,994 | ) | 1,883 | | 10,144 | |
Total provision (benefit) for income taxes | | $ | (28,947 | ) | $ | 11,657 | | $ | 81,584 | |
The following is a reconciliation of the income tax provision (benefit) computed using the Federal statutory rate to our actual income tax provision (in thousands):“Prepaid
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
| | Year ended December 31, | |
| | 2013 | | 2012 | | 2011 | |
Income tax provision (benefit) at U.S. statutory rates | | $ | (24,923 | ) | $ | 13,366 | | $ | 95,231 | |
State income tax expense (benefit), net of federal impact | | (1,554 | ) | (89 | ) | 1,616 | |
Nondeductible expenses | | 195 | | 622 | | (749 | ) |
Domestic production activities deduction | | 1,554 | | (489 | ) | (4,581 | ) |
Nondeductible compensation | | 11 | | 205 | | 841 | |
Research and development tax credit | | (3,151 | ) | (3,013 | ) | (4,675 | ) |
Net change in valuation allowance | | 2,420 | | 2,943 | | 121 | |
Change in accrual for unrecognized tax benefits | | 577 | | 533 | | 824 | |
Foreign tax rate differential | | (4,275 | ) | (2,387 | ) | (5,225 | ) |
Other | | 199 | | (34 | ) | (1,819 | ) |
Total provision (benefit) for income taxes | | $ | (28,947 | ) | $ | 11,657 | | $ | 81,584 | |
expenses and other current assets” in the Company’s Consolidated Balance Sheets. The Company executed derivative transactions with highly rated financial institutions to mitigate counterparty risk.
On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, and this legislation retroactively extended the research and development tax credit for 2 years, from January 1, 2012 throughThe Company did not have any outstanding derivative contracts at December 31, 2013.2015 and 2014.
The following table shows the gains and (losses) from currency exchange derivatives during the years ended December 31, 2015, 2014, and 2013, which are included in “Other, net” in the Consolidated Statements of Operations:
| | | Year ended December 31, | |
| | | 2015 | | | | 2014 | | | | 2013 | |
| | | (in thousands) | |
Foreign currency exchange forwards | | | $ | — | | | | $ | (89 | ) | | | $ | 248 | |
Foreign currency collar | | | — | | | | (457 | ) | | | 906 | |
Total | | | $ | — | | | | $ | (546 | ) | | | $ | 1,154 | |
Note 14 — 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 (expense) 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 | |
Other comprehensive income (loss) | | | (87 | ) | | | 15 | | | | (49 | ) | | | (121 | ) |
Balance at December 31, 2015 | | | $ | 2,246 | | | | $ | (866 | ) | | | $ | (32 | ) | | | $ | 1,348 | |
The Company did not allocate tax benefit for 2013 includes $1.9 million forexpense to other comprehensive income in 2015 or 2014 as the entire benefitCompany is in a full valuation allowance position such that a deferred tax asset related to amounts recognized in other comprehensive income is not regarded as realizable on a more-likely-than-not basis.
During 2015, there were minimal realized gains reclassified from Accumulated Other Comprehensive Income to “Other, net” on the Consolidated Statements of the research and development tax credit attributable to 2012.Operations.
During 2014, the fourth quarter of 2012, we determined that we may not meetCompany completed its plan to liquidate its subsidiary in Japan, since the criteria required to receive a certain incentive tax rate pursuantCompany moved to a negotiated tax holidaydistributor model to serve its customers 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 asthat region. As a future benefit in the period in which the successful negotiations are finalized.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
On October 1, 2013, we acquired 100% of Synos’s total outstanding stock. In connection with the acquisition, we recorded a $32.4 million deferred tax liability related to the difference between the financial reporting amount and the tax basisresult of the assets acquired.
During 2012, we recordedliquidation, a current tax benefitcumulative translation gain of $2.1$3.1 million relatedwas reclassified from Other Comprehensive Income to equity-based compensation which was a credit to additional paid in capital. We did not record any tax benefits related to equity-based compensation during 2013. We will credit $0.5 million to additional paid-in capital when“Other, net” on the research and development credits are realized for financial reporting purposes.Consolidated Statements of Operations.
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Notes to Consolidated Financial Statements (continued)(Continued)
December 31, 2013
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
| | December 31, | |
| | 2013 | | 2012 | |
Deferred tax assets: | | | | | |
Inventory valuation | | $ | 6,983 | | $ | 6,386 | |
Domestic net operating loss carry forwards | | 5,585 | | 1,144 | |
Tax credit carry forwards | | 12,566 | | 4,145 | |
Foreign net operating loss carry forwards | | 821 | | — | |
Warranty and installation accruals | | 3,002 | | 2,174 | |
Equity compensation | | 10,638 | | 9,114 | |
Other accruals | | 2,556 | | 3,270 | |
Other | | 1,160 | | 760 | |
Total deferred tax assets | | 43,311 | | 26,993 | |
Valuation allowance | | (7,753 | ) | (4,708 | ) |
Net deferred tax assets | | 35,558 | | 22,285 | |
| | | | | |
Deferred tax liabilities: | | | | | |
Purchased intangible assets | | 45,208 | | 9,973 | |
Undistributed earnings | | 1,737 | | 1,095 | |
Depreciation | | 4,711 | | 7,014 | |
Total deferred tax liabilities | | 51,656 | | 18,082 | |
Net deferred taxes | | $ | (16,098 | ) | $ | 4,203 | |
No provision has been made as of December 31, 2013 for United States or additional foreign withholding taxes on approximately $101.0 million of undistributed earnings of our foreign subsidiaries because it is the present intention of management to permanently reinvest the undistributed earnings of our foreign subsidiaries in China, South Korea, Malaysia, Singapore and Taiwan. As it is our intention to reinvest those earnings permanently, it is not practicable to estimate the amount of tax that might be payable if they were remitted. In the fourth quarter of 2013, we changed our assertion relating to Japan and such earnings will no longer be permanently reinvested based on the future liquidation of our Japanese entity. We have provided deferred income taxes and future withholding taxes on the earnings that we anticipate will be remitted.
As of December 31, 2013, we have credit carry forwards of approximately $12.6 million for financial reporting purposes, consisting primarily of foreign tax credits, which expire between 2022 and 2023, federal research and development credits which expire between 2031 and 2033, and various state tax credits which expire at various dates through 2028.
Our valuation allowance of approximately $7.8 million as of December 31, 2013 increased by approximately $3.0 million during the year then ended. The increase relates primarily to state and local deferred tax assets of $1.6 million and foreign tax attributes of $1.4 million for which we could not conclude were realizable on a more-likely-than-not basis.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | December 31, | |
| | 2013 | | 2012 | |
Beginning balance as of December 31 | | $ | 5,818 | | $ | 4,748 | |
Additions for tax positions related to current year | | 324 | | 435 | |
Reductions for tax positions related to current year | | — | | — | |
Additions for tax positions related to prior years | | 477 | | 742 | |
Reductions for tax positions related to prior years | | (224 | ) | (59 | ) |
Reductions due to the lapse of the applicable statute of limitations | | — | | (48 | ) |
Settlements | | (167 | ) | — | |
Ending balance as of December 31 | | $ | 6,228 | | $ | 5,818 | |
We do not anticipate that our uncertain tax position will change significantly within the next twelve months subject to the completion of our ongoing federal tax audit and any resultant settlement.
Of the amounts reflected in the table above as of December 31, 2013, the entire amount if recognized would reduce our effective tax rate. It is our policy to recognize interest and penalties related to income tax matters in income tax expense. The total accrual for interest and penalties related to unrecognized tax benefits was approximately $0.8 million and $0.5 million as of December 31, 2013 and 2012, respectively.
We or one of our subsidiaries file income tax returns in the United States federal jurisdiction and various state, local and foreign jurisdictions. All material federal income tax matters have been concluded for years through 2006 subject to subsequent utilization of net operating losses generated in such years. Our 2010 federal tax return is currently under examination. All material state and local income tax matters have been reviewed through 2008 with one state jurisdiction currently under examination for open tax years between 2007 and 2011. The majority of our foreign jurisdictions have been reviewed through 2009. Principally all of our foreign jurisdictions remain open with respect to the 2010 through 2013 tax years.
10. Commitments and Contingencies and Other Matters
Restructuring and Other ChargesPreferred Stock
During 2011 through 2013, in responseThe Board of Directors has authority under the Company’s Certificate of Incorporation to challenging business conditions, we initiated activitiesissue shares of preferred stock with voting and economic rights to reduce and contain spending, including reducing our workforce, consultants and discretionary expenses.be determined by the Board of Directors.
In conjunction with these activities, we recognized restructuring charges of approximately $1.5 million, $3.8 million and $1.3 million during the years ended December 31, 2013, 2012 and 2011, respectively. During the years ended December 31, 2012 and 2011, we also recorded inventory write-offs of $1.0 million related to a discontinued product line in our Data Storage segment and $0.8 million related to a discontinued product line in our LED & Solar segment, respectively. These inventory write-offs are included in cost of sales in the accompanying Consolidated Statements of Operations.
Restructuring expense for the years ended December 31, 2013, 2012 and 2011 are as follows (in thousands):
| | Year ended December 31, | |
| | 2013 | | 2012 | | 2011 | |
Personnel severance and related costs | | $ | 1,485 | | $ | 3,040 | | $ | 1,288 | |
Equity compensation and related costs | | — | | 414 | | — | |
Lease-related and other | | — | | 359 | | — | |
| | $ | 1,485 | | $ | 3,813 | | $ | 1,288 | |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Personnel Severance and Related Costs
During 2013, we recorded $1.5 million in personnel severance and related costs resulting from the restructuring of one of our international sales offices and the consolidation of certain sales, business and administrative functions. During 2012, we recorded $3.0 million in personnel severance and related costs resulting from a headcount reduction of 52 employees. During 2011, we recorded $1.3 million in personnel severance and related costs related to a companywide reorganization resulting in a headcount reduction of 65 employees. These reductions in workforce included executives, management, administration, sales and service personnel and manufacturing employees’ companywide.
Lease-Related and Other
During 2012, we recorded $0.4 million in other associated costs resulting from a headcount reduction of 52 employees. These charges primarily consist of job placement services, consulting and relocation expenses, as well as duplicate wages incurred during the transition period.
The following is a reconciliation of the liability for the 2013, 2012 and 2011 restructuring charges through December 31, 2013 (in thousands):
| | LED & Solar | | Data Storage | | Unallocated | | Total | |
Short-term liability | | | | | | | | | |
Balance as of January 1, 2011 | | $ | — | | $ | 178 | | $ | 536 | | $ | 714 | |
| | | | | | | | | |
Personnel severance and related costs 2011 | | 672 | | 51 | | 311 | | 1,034 | |
Personnel severance and related costs 2012 | | 874 | | 1,684 | | 135 | | 2,693 | |
Personnel severance and related costs 2013 | | 1,017 | | 410 | | 58 | | 1,485 | |
Short-term/long-term reclassification 2011 | | — | | 58 | | — | | 58 | |
Cash payments 2011 | | (138 | ) | (159 | ) | (553 | ) | (850 | ) |
Cash payments 2012 | | (960 | ) | (504 | ) | (310 | ) | (1,774 | ) |
Cash payments 2013 | | (1,282 | ) | (1,368 | ) | (177 | ) | (2,827 | ) |
Balance as of December 31, 2013 | | $ | 183 | | $ | 350 | | $ | — | | $ | 533 | |
| | | | | | | | | |
Long-term liability | | | | | | | | | |
Balance as of January 1, 2011 | | $ | — | | $ | 58 | | $ | — | | $ | 58 | |
Short-term/long-term reclassification 2011 | | — | | (58 | ) | — | | (58 | ) |
Balance as of December 31, 2011 | | $ | — | | $ | — | | $ | — | | $ | — | |
Minimum Lease Commitments
Minimum lease commitments as of December 31, 2013 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows (in thousands):
2014 | | $ | 3,076 | |
2015 | | 2,091 | |
2016 | | 1,327 | |
2017 | | 1,052 | |
2018 | | 536 | |
| | $ | 8,082 | |
Rent amounted to $2.9 million, $3.5 million and $2.7 million in 2013, 2012 and 2011, respectively. In addition, we are obligated under such leases for certain other expenses, including real estate taxes and insurance.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
Environmental Remediation
We are aware that petroleum hydrocarbon contamination has been detected in the soil at the site of a facility formerly leased by us in Santa Barbara, California. We have been indemnified for any liabilities we may incur which arise from environmental contamination at the site. Even without consideration of such indemnification, we do not believe that any material loss or expense is probable in connection with any such liabilities. The former owner of the land and building in Santa Barbara, California in which our former Metrology operations were located, which business (sold to Bruker on October 7, 2010), has disclosed that there are hazardous substances present in the ground under the building. Management believes that the comprehensive indemnification clause that was part of the purchase contract relating to the purchase of such land provides adequate protection against any environmental issues that may arise. We have provided Bruker indemnification as part of the sale.
Litigation
Veeco and certain other parties were named as defendants in a lawsuit filed on April 25, 2013 in the Superior Court of California, County of Sonoma. The plaintiff in the lawsuit, Patrick Colbus, seeks unspecified damages and asserts claims that he suffered burns and other injuries while he was cleaning a molecular beam epitaxy system alleged to have been manufactured by Veeco. The lawsuit alleges, among other things, that the molecular beam epitaxy system was defective and that Veeco failed to adequately warn of the potential risks of the system. Veeco believes this lawsuit is without merit and intends to defend vigorously against the claims. Veeco is unable to predict the outcome of this action or to reasonably estimate the possible loss or range of loss, if any, arising from the claims asserted therein. The Company believes that, in the event of any recovery by the plaintiff from Veeco, such recovery would be fully covered by Veeco’s insurance.
We are involved in various other legal proceedings arising in the normal course of our business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Concentrations of Credit Risk
Our businessThe Company depends in large part upon the capital expenditures of our topon purchases from its ten largest customers, which accounted for 69%75% and 77%65% of totalnet accounts receivable as ofat December 31, 20132015 and 2012,2014, respectively. Of such, LED & Solar and Data Storage customers accounted for approximately 30% and 39%, and 56% and 21%, respectively, of total accounts receivable as of December 31, 2013 and 2012.
Customers who accounted for more than 10% of our aggregatenet accounts receivable or net sales are as follows:
| | | Accounts Receivable | | Net Sales |
| | | | Accounts Receivable | | Net Sales for the year ended | | | | | |
| | | | December 31, | | December 31, | | | Year ended December 31, | | For the Year Ended December 31, |
Customer | | Segment | | 2013 | | 2012 | | 2013 | | 2012 | | 2011 | | | 2015 | | 2014 | | 2015 | | 2014 | | 2013 |
Customer A | | Data Storage | | 23 | % | 16 | % | * | | 14 | % | * | | | * | | * | | * | | 15% | | * |
Customer B | | Data Storage | | 11 | % | * | | * | | * | | * | | | * | | 20% | | * | | 11% | | 14% |
Customer C | | LED & Solar | | 10 | % | 16 | % | 14 | % | * | | * | | | 23% | | 13% | | * | | * | | * |
Customer D | | LED & Solar | | * | | * | | * | | * | | 11 | % | | * | | * | | 20% | | * | | * |
Customer E | | LED & Solar | | * | | * | | * | | * | | 12 | % | | * | | * | | 12% | | * | | * |
* Less than 10% of aggregate accounts receivable or net sales.sales
The Company manufactures and sells its products to companies in different geographic locations. Refer to Note 18, “Segment Reporting and Geographic Information,” for additional information. In certain instances, the Company requires deposits from its customers for a portion of the sales price in advance of shipment and performs periodic credit evaluations on its customers. Where appropriate, the Company requires letters of credit on certain non-U.S. sales arrangements. Receivables generally are due within 30 – 90 days from the date of invoice.
The net accounts receivable balance is concentrated in the following geographic locations:
| | December 31, |
| | | | | | | | |
| | | 2015 | | | | 2014 | |
| | | (in thousands) | |
| | | | | | | | |
United States | | | $ | 14,471 | | | | $ | 13,139 | |
China | | | 10,629 | | | | 17,911 | |
EMEA(1) | | | 7,766 | | | | 4,760 | |
Rest of World | | | 16,658 | | | | 24,275 | |
Total | | | | $ | 49,524 | | | | $ | 60,085 | |
| | | | | | | | | | | |
(1) Europe, Middle East, and Africa
Suppliers
The Company outsources certain functions to third parties, including the manufacture of all or substantially all of its MOCVD systems, ion beam and other data storage systems, and ion sources. The Company primarily relies on several suppliers for the manufacturing of these systems, but the Company does maintain a minimum level of internal manufacturing capability for these systems. The failure of the Company’s present suppliers to meet their contractual obligations under its supply arrangements and the Company’s inability to make alternative arrangements or resume the manufacture of these
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
We manufacture and sell our products to companies in different geographic locations. In certain instances, we require deposits for a portion of the sales price in advance of shipment. We perform periodic credit evaluations of our customers’ financial condition and, where appropriate, require that letters of credit be provided on certain foreign sales arrangements. Receivables generally are due within 30-90 days, other than receivables generated from customers in Japan where payment terms generally range from 60-150 days. Our net accounts receivable balance is concentrated in the following geographic locations (in thousands):
| | December 31, | |
| | 2013 | | 2012 | |
China | | $ | 4,845 | | $ | 28,132 | |
Singapore | | 3,192 | | 7,266 | |
Taiwan | | 553 | | 6,390 | |
Other | | 6,162 | | 3,853 | |
Asia Pacific | | 14,752 | | 45,641 | |
Americas | | 7,526 | | 13,917 | |
Europe, Middle East and Africa | | 1,545 | | 3,611 | |
| | $ | 23,823 | | $ | 63,169 | |
Suppliers
We currently outsource certain functions to third parties, including the manufacture of all or substantially all of our new MOCVD systems Data Storage systems and ion sources. We primarily rely on several suppliers for the manufacturing of these systems. We plan to maintain some level of internal manufacturing capability for these systems. The failure of our present suppliers to meet their contractual obligations under our supply arrangements and our inability to make alternative arrangements or resume the manufacture of these systems ourselves could have a material adverse effect on ourthe Company’s revenues, profitability, cash flows, and relationships with ourits customers.
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.
The Company had deposits with its suppliers of $14.6 million and $12.7 million at December 31, 2015 and 2014, respectively, that were included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets.
Purchase Commitments
As of December 31, 2013, weThe Company had purchase commitments totaling $60.3of $92.7 million at December 31, 2015, all of which will come due within one year. We have $9.4 million of offsetting supplier deposits against these purchase commitments as of December 31, 2013.
Lines of Credit andBank Guarantees
AsThe Company has bank guarantees and letters of December 31, 2013, we had letter of credit and bank guarantees issued by a bankfinancial institution on ourits behalf as needed. We hadAt December 31, 2015, outstanding bank guarantees and letters of credit outstanding of $0.6totaled $2.9 million, and unused bank guarantees outstanding of $5.9 million, of which, $2.7 million is collateralized against cash that is restricted from use. As of December 31, 2013, we had $40.4 million of unused linesand letters of credit available. The line of credit is$62.6 million were available to draw upon to cover performance bonds as required by our customers.be drawn upon.
11. Foreign Operations, Geographic AreaNote 12 — Debt
Debt consists of a mortgage note payable with a carrying value of $1.5 million and Product Segment Information$1.8 million at December 31, 2015 and 2014, respectively. The mortgage note payable is secured by certain land and buildings with a carrying value of $3.3 million at December 31, 2015 and 2014. 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 $1.6 million and $2.0 million at December 31, 2015 and 2014, respectively, using a discounted cash flow model. Payments due under the note are as follows:
| | | Total | |
| | | (in thousands) | |
2016 | | | $ | 340 | |
2017 | | | 368 | |
2018 | | | 398 | |
2019 | | | 427 | |
Total | | | 1,533 | |
Less current portion | | | 340 | |
Total (less current maturities) | | | $ | 1,193 | |
Note 13 — Derivative Financial Instruments
Net sales which are attributedThe Company is exposed to financial market risks arising from changes in currency exchange rates. Changes in currency exchange rate changes could affect the geographic locationCompany’s foreign currency denominated monetary assets and liabilities and forecasted cash flows. We did not enter into any derivative transactions in which2015. In the customer facility is located and long-lived tangible assets related to operationspast, the Company entered into monthly forward derivative contracts with the intent of mitigating a portion of this risk. The Company only used derivative financial instruments in the United Statescontext of hedging and othernot for speculative purposes and had not designated its foreign countriesexchange derivatives as hedges. Accordingly, changes in fair value from these contracts were recorded as “Other, net” in the Company’s Consolidated Statements of and for the years ended December 31, 2013, 2012 and 2011 are as follows (Operations. The fair value of these contracts was included in thousands):“Prepaid
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
| | Net Sales to Unaffiliated | | | | | | | |
| | Customers | | Long-Lived Tangible Assets | |
| | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 | |
Americas (1) | | $ | 57,609 | | $ | 83,317 | | $ | 100,635 | | $ | 66,002 | | $ | 74,497 | | $ | 67,788 | |
Europe, Middle East and Africa (1) | | 21,941 | | 41,708 | | 57,617 | | 95 | | 36 | | 203 | |
Asia Pacific (1) | | 252,199 | | 390,995 | | 820,883 | | 23,042 | | 23,769 | | 20,417 | |
| | $ | 331,749 | | $ | 516,020 | | $ | 979,135 | | $ | 89,139 | | $ | 98,302 | | $ | 88,408 | |
(1) For the year ended December 31, 2013, net sales to customers in China were 44.8% of total net sales. For the year ended December 31, 2012, net sales to customers in China and Taiwan were 42.0% and 11.4% of total net sales, respectively. For the year ended December 31, 2011, net sales to customers in China were 66.4% of total net sales. No other country in Europe, Middle East, and Africa (“EMEA”) and Asia Pacific (“APAC”) accounted for more than 10% of our net sales for the years presented. A minimal amount, less than 1%, of sales included within the Americas caption above have been derived from other regions outside of the United States.
We have five identified reporting units that we aggregate into two reportable segments: the VIBE and Mechanical reporting units which are reported in our Data Storage segment; and the MOCVD, MBE and ALD reporting units are reported in our LED & Solar segment. We manage the business, review operating results and assess performance, as well as allocate resources, based upon our reporting units that reflect the market focus of each business. The LED & Solar segment consists of metal organic chemical vapor deposition (“MOCVD”) systems, molecular beam epitaxy (“MBE”) systems, thermal deposition sources expenses and other types of deposition systems as well as newly acquired atomic layer deposition (“ALD”) technology. These systems are primarily sold to customerscurrent assets” in the LED, OLED and solar industries, as well asCompany’s Consolidated Balance Sheets. The Company executed derivative transactions with highly rated financial institutions to scientific research customers. This segment has product development and marketing sites in Somerset, New Jersey, Poughkeepsie, New York, St. Paul, Minnesota, Fremont, California, and Korea. During 2011 we discontinued our CIGS solar systems business, located in Tewksbury, Massachusetts and Clifton Park, New York. The Data Storage segment consists of the ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, and dicing and slicing products sold primarily to customers in the data storage industry. This segment has product development and marketing sites in Plainview, New York, Ft. Collins, Colorado and Camarillo, California.
We evaluate the performance of our reportable segments based on income (loss) from operations before interest, income taxes, amortization and certain items (“segment profit (loss)”), which is the primary indicator used to plan and forecast future periods. The presentation of this financial measure facilitates meaningful comparison with prior periods, as management believes segment profit (loss) reports baseline performance and thus provides useful information. Certain items include restructuring expenses, asset impairment charges, inventory write-offs, equity-based compensation expense and other non-recurring items. The accounting policies of the reportable segments are the same as those described in the summary of critical accounting policies.mitigate counterparty risk.
The Company did not have any outstanding derivative contracts at December 31, 2015 and 2014.
The following tables present certain data pertaining to our reportable product segments table shows the gains and a reconciliation of segment profit (loss) to income (loss) (losses) from continuing operations, before income taxes forcurrency exchange derivatives during the years ended December 31, 2015, 2014, and 2013, 2012 and 2011, and goodwill and total assetswhich are included in “Other, net” in the Consolidated Statements of Operations:
| | | Year ended December 31, | |
| | | 2015 | | | | 2014 | | | | 2013 | |
| | | (in thousands) | |
Foreign currency exchange forwards | | | $ | — | | | | $ | (89 | ) | | | $ | 248 | |
Foreign currency collar | | | — | | | | (457 | ) | | | 906 | |
Total | | | $ | — | | | | $ | (546 | ) | | | $ | 1,154 | |
Note 14 — 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 (expense) 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 | |
Other comprehensive income (loss) | | | (87 | ) | | | 15 | | | | (49 | ) | | | (121 | ) |
Balance at December 31, 2015 | | | $ | 2,246 | | | | $ | (866 | ) | | | $ | (32 | ) | | | $ | 1,348 | |
The Company did not allocate tax expense to other comprehensive income in 2015 or 2014 as of December 31, 2013 and 2012 (in thousands):the Company is in a full valuation allowance position such that a deferred tax asset related to amounts recognized in other comprehensive income is not regarded as realizable on a more-likely-than-not basis.
F-38During 2015, there were minimal realized gains reclassified from Accumulated Other Comprehensive Income to “Other, net” on the Consolidated Statements of Operations.
During 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.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)(Continued)
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.
Treasury Stock
On October 28, 2015, the Board of Directors authorized the repurchase of up to $100 million of the Company’s outstanding common stock to be completed over the next two years. Repurchases are expected to be made from time to time on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. During 2015 the Company purchased 0.5 million shares for $9.2 million, $0.3 million of which had not been cash settled at December 31, 20132015 and is included in “Accrued expenses and other current liabilities” on the Consolidated Balance Sheet. At December 31, 2015, $90.8 million remains available for future stock repurchases under this program.
The Company records treasury stock purchases under the cost method using the first-in, first-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If the Company reissues treasury stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained earnings.
Note 15 — Stock Plans
| | | | Data | | | | | |
| | LED & Solar | | Storage | | Unallocated | | Total | |
Year ended December 31, 2013 | | | | | | | | | |
Net sales | | $ | 249,742 | | $ | 82,007 | | $ | — | | $ | 331,749 | |
Segment loss | | $ | (26,362 | ) | $ | (671 | ) | $ | (22,588 | ) | $ | (49,621 | ) |
Interest income (expense), net | | — | | — | | 602 | | 602 | |
Amortization | | (4,233 | ) | (1,294 | ) | — | | (5,527 | ) |
Equity-based compensation | | (5,126 | ) | (1,703 | ) | (6,301 | ) | (13,130 | ) |
Restructuring | | (1,017 | ) | (410 | ) | (58 | ) | (1,485 | ) |
Asset impairment charge | | (1,174 | ) | (46 | ) | — | | (1,220 | ) |
Changes in contingent consideration | | (829 | ) | — | | — | | (829 | ) |
Income (loss) from continuing operations before income taxes | | $ | (38,741 | ) | $ | (4,124 | ) | $ | (28,345 | ) | $ | (71,210 | ) |
| | | | | | | | | |
Year ended December 31, 2012 | | | | | | | | | |
Net sales | | $ | 363,181 | | $ | 152,839 | | $ | — | | $ | 516,020 | |
Segment profit (loss) | | $ | 41,603 | | $ | 25,414 | | $ | (4,919 | ) | $ | 62,098 | |
Interest income (expense), net | | — | | — | | 974 | | 974 | |
Amortization | | (3,586 | ) | (1,322 | ) | — | | (4,908 | ) |
Equity-based compensation | | (5,400 | ) | (1,920 | ) | (6,534 | ) | (13,854 | ) |
Restructuring | | (1,233 | ) | (2,521 | ) | (59 | ) | (3,813 | ) |
Asset impairment charge | | — | | (1,335 | ) | — | | (1,335 | ) |
Other | | — | | (976 | ) | — | | (976 | ) |
Income (loss) from continuing operations before income taxes | | $ | 31,384 | | $ | 17,340 | | $ | (10,538 | ) | $ | 38,186 | |
| | | | | | | | | |
Year ended December 31, 2011 | | | | | | | | | |
Net sales | | $ | 827,797 | | $ | 151,338 | | $ | — | | $ | 979,135 | |
Segment profit (loss) | | $ | 267,059 | | $ | 38,358 | | $ | (8,987 | ) | $ | 296,430 | |
Interest income (expense), net | | — | | — | | (824 | ) | (824 | ) |
Amortization | | (3,227 | ) | (1,424 | ) | (83 | ) | (4,734 | ) |
Equity-based compensation | | (3,473 | ) | (1,458 | ) | (7,876 | ) | (12,807 | ) |
Restructuring | | (204 | ) | (12 | ) | (1,072 | ) | (1,288 | ) |
Asset impairment charge | | (584 | ) | — | | — | | (584 | ) |
Other | | (758 | ) | — | | — | | (758 | ) |
Loss on extinguishment of debt | | — | | — | | (3,349 | ) | (3,349 | ) |
Income (loss) from continuing operations before income taxes | | $ | 258,813 | | $ | 35,464 | | $ | (22,191 | ) | $ | 272,086 | |
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”), performance share awards (“PSAs”), performance share units (“PSUs”), share appreciation rights, dividend equivalent rights, or any combination thereof. The Company settles awards under the Plans with newly issued shares or with shares held in treasury. All Plans, with the exception of acquired companies’ stock plans, have been approved by the Company’s shareholders.
Unallocated assets are comprised principallyThe Board of cashDirectors granted equity awards to certain employees in connection with the Company’s 2013 acquisition of ALD. 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 cash equivalents87,000 RSUs under this plan. The stock options will vest over a three year period and short-term investments as ofhave a 10-year term, and the RSUs will vest over a two or four year period. At December 31, 2013, the Inducement Plan was merged into the 2010 Plan and 2012.is considered an inactive plan with no further shares available for grant. At December 31, 2015, there are 88,200 option shares and 27,700 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 closing 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 control, as defined in the 2010 Plan. At December 31, 2015, there are 1.8 million option shares and 0.5 million RSUs outstanding under the 2010 Plan.
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
| | LED & Solar | | Data Storage | | Unallocated | | Total | |
As of December 31, 2013 | | | | | | | | | |
Goodwill | | $ | 91,348 | | $ | — | | $ | — | | $ | 91,348 | |
Total assets | | $ | 359,464 | | $ | 37,910 | | $ | 550,595 | | $ | 947,969 | |
| | | | | | | | | |
As of December 31, 2012 | | | | | | | | | |
Goodwill | | $ | 55,828 | | $ | — | | $ | — | | $ | 55,828 | |
Total assets | | $ | 276,352 | | $ | 38,664 | | $ | 622,288 | | $ | 937,304 | |
Other Segment Data (in thousands):
| | Year ended December 31, | |
| | 2013 | | 2012 | | 2011 | |
Depreciation and amortization expense: | | | | | | | |
LED & Solar | | $ | 14,365 | | $ | 12,020 | | $ | 8,320 | |
Data Storage | | 2,907 | | 3,008 | | 3,245 | |
Unallocated | | 1,153 | | 1,164 | | 1,327 | |
Total depreciation and amortization expense | | $ | 18,425 | | $ | 16,192 | | $ | 12,892 | |
Expenditures for long-lived assets: | | | | | | | |
LED & Solar | | $ | 6,796 | | $ | 20,279 | | $ | 56,141 | |
Data Storage | | 1,271 | | 3,341 | | 2,703 | |
Unallocated | | 1,108 | | 1,374 | | 1,520 | |
Total expenditures for long-lived assets | | $ | 9,175 | | $ | 24,994 | | $ | 60,364 | |
12. Derivative Financial Instruments(Continued)
We use derivative financial instrumentsThe 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 minimize the impact2000 Plan expire after seven years and generally vest over a two to five year period. At December 31, 2015, there are 0.2 million option shares outstanding under the 2000 Plan.
Shares Reserved for Future Issuance
At December 31, 2015, the Company has 3.9 million shares reserved to cover exercises of foreign exchange rate changes on earningsoutstanding stock options, vesting of RSUs, and cash flows. Inadditional grants under the normal course2010 Plan.
Share-Based Compensation
The Company recognized share-based compensation in the following line items in the Consolidated Statements of business, our operations are exposed to fluctuationsOperations for the periods indicated:
| | | | Year ended December 31, | | |
| | | | 2015 | | | | 2014 | | | | 2013 | | |
| | | | (in thousands) | | |
Cost of sales | | | | $ | 2,495 | | | | $ | 2,456 | | | | $ | 1,446 | | |
Selling, general, and administrative | | | | 11,474 | | | | 11,859 | | | | 8,339 | | |
Research and development | | | | 4,031 | | | | 4,498 | | | | 3,347 | | |
Share-based compensation expense, before tax | | | | 18,000 | | | | 18,813 | | | | 13,132 | | |
Income tax benefit(1) | | | | (6,048 | ) | | | (6,011 | ) | | | (4,367 | ) | |
Net share-based compensation expense | | | | $ | 11,952 | | | | $ | 12,802 | | | | $ | 8,765 | | |
| |
| | | | | | | | | | | | | | | | | | |
(1) The income tax benefit presented for 2015 and 2014 has not been realized in foreign exchange rates. In order to reduce the effectConsolidated Statements of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known foreign currency exposures, we enter into monthly forward contracts. We do not use derivative financial instruments for trading or speculative purposes. Our forward contracts are not expected to subject us to material risksOperations 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 counterparty risk.Company’s full valuation allowance.
| | As of December 31, 2013 | |
| | | | Fair | | Maturity | | Notional | |
(in thousands) | | Component of | | Value | | Dates | | Amount | |
Not Designated as Hedges under ASC 815 | | | | | | | | | |
Foreign currency exchange forwards | | Prepaid and other current assets | | 1 | | January 2014 | | 4,700 | |
Foreign currency collar | | Prepaid and other current assets | | 906 | | October 2014 | | 34,069 | |
Total Derivative Instruments | | | | $ | 907 | | | | $ | 38,769 | |
| | | | | | | | | | | |
The Company capitalized an insignificant amount of share-based compensation into inventory for the years ended December 31, 2015, 2014, and 2013.
| | As of December 31, 2012 | |
| | | | Fair | | Maturity | | Notional | |
(in thousands) | | Component of | | Value | | Dates | | Amount | |
Not Designated as Hedges under ASC 815 | | | | | | | | | |
Foreign currency exchange forwards | | Prepaid and other current assets | | 248 | | January 2013 | | 9,590 | |
Total Derivative Instruments | | | | $ | 248 | | | | $ | 9,590 | |
| | | | | | | | | | | |
Unrecognized share-based compensation costs at December 31, 2015 are summarized below:
| | | | Unrecognized | | | | Weighted | |
| | | | Share-Based | | | | Average Period | |
| | | | Compensation | | | | Expected to be | |
| | | | Costs | | | | Recognized | |
| | | | (in thousands) | | | | (in years) | |
Stock option awards | | | | $ | 4,252 | | | | 1.3 | |
Restricted stock units | | | | 5,581 | | | | 2.0 | |
Restricted stock awards | | | | 21,523 | | | | 2.8 | |
Performance share units | | | | 5,912 | | | | 3.1 | |
Total unrecognized share-based compensation cost | | | | $ | 37,268 | | | | 2.6 | |
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013
| | | | Amount of realized net gain (loss) | |
| | | | and changes in the fair value of | |
| | Location of realized net gain | | derivatives for the year ended | |
| | (loss) and changes in the fair | | December 31, | |
(in thousands) | | value of derivatives | | 2013 | | 2012 | | 2011 | |
Foreign currency exchange forwards | | Other, net | | $ | 248 | | $ | 333 | | $ | 553 | |
Foreign currency collar | | Other, net | | $ | 906 | | $ | — | | $ | — | |
These contracts were valued using market quotes in the secondary market for similar instruments (fair value Level 2, please see our footnote Fair Value Measurements).
The weighted average notional amount of derivative contracts outstanding during the year ended December 31, 2013 and 2012 was approximately $5.2 million and $3.5 million, respectively
13. Retirement Plans(Continued)
We maintain a defined contribution benefit plan under Section 401(k)Stock Option Awards
Stock options are awards issued to employees that entitle the holder to purchase shares of the Internal Revenue Code. Almost allCompany’s stock at a fixed price. At December 31, 2015, 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 | | 1,609 | | | $ | 32.95 | | | 5.3 | | | $ | 1,671 | |
Expected to vest | | 435 | | | 32.75 | | | 6.6 | | | — | |
Total | | 2,044 | | | $ | 32.91 | | | 5.6 | | | $ | 1,671 | |
Outstanding options expected to vest are net of our domestic full-time employees are eligible to participate in this plan. Underestimated future forfeitures. The aggregate intrinsic value represents the plan during 2011, we provided matching contributions of fifty cents for every dollar employees contribute up to a maximum of $3,000. During 2012, we provided matching contributions of fifty cents for every dollar employees contribute, up todifference between the lesser of 3%option exercise price and $20.56, the closing price of the employee’s eligible compensation or $7,500. During 2013, we provided a matching contributions of fifty cents for every dollar employees contribute, up toCompany’s common stock on December 31, 2015, the lesser of 3%last trading day of the employee’s eligible compensation or $7,650. Generally, the plan calls for vesting of Company contributions over the initial five years of a participant’s employment. We maintain a similar type of contribution plan at one of our foreign subsidiaries. Our contributions to these plans in 2013, 2012 and 2011 were $2.3 million, $2.5 million and $2.1 million, respectively.Company’s fiscal year as reported on The NASDAQ Stock Market.
We acquired a defined benefit plan on May 5, 2000 that had been frozenAdditional information with respect to stock option activity was as of September 30, 1991. No further benefits since September 30, 1991 accrued to any participant. The benefit that participants are entitled to receive as of their normal retirement date is their accrued benefit as of September 30, 1991. In connection with the freezing of the Plan as of September 30, 1991, all participants became fully vested in their benefit. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”). This plan has a plan year end of September 30. There are 110 participants in the plan as of September 30, 2013. The plan is funded in accordance with ERISA guidelines and has $1.6 million in contract assets as of September 30, 2013.follows:
14. Selected Quarterly Financial Information (unaudited)
| | | | Weighted | |
| | Number of | | Average | |
| | Shares | | Exercise Price | |
| | | (in thousands) | | | | |
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 | |
Granted | | | 17 | | | 30.22 | |
Exercised | | | (192 | ) | | 12.95 | |
Expired or forfeited | | | (152 | ) | | 38.15 | |
Outstanding at December 31, 2015 | | | 2,064 | | | $ | 32.91 | |
The following table presents selected unaudited financial data for each fiscal quarter of 2013 and 2012. Although unaudited, thissummarizes stock option 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.at December 31, 2015:
| | Options Outstanding | | Options Exercisable | |
| | | | | | | Weighted | | | | | | | | | | | Weighted | | | | |
Range of | | | | | Aggregate | | Average | | Weighted | | | | | Aggregate | | Average | | Weighted | |
Exercise | | | | | Intrinsic | | Remaining | | Average | | | | | Intrinsic | | Remaining | | Average | |
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 – $20.80 | | | 199 | | | $ | 1,671 | | | 0.5 | | | $ | 12.15 | | | 199 | | | $ | 1,671 | | | 0.5 | | | $ | 12.15 | |
$24.40 – $36.97 | | | 1,497 | | | — | | | 6.2 | | | 32.55 | | | 1,088 | | | — | | | 6.1 | | | 32.69 | |
$37.22 – $51.70 | | | 368 | | | — | | | 5.9 | | | 45.57 | | | 322 | | | — | | | 5.7 | | | 46.65 | |
| | | 2,064 | | | $ | 1,671 | | | 5.6 | | | $ | 32.91 | | | 1,609 | | | $ | 1,671 | | | 5.3 | | | $ | 32.95 | |
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
| | Fiscal 2013 (unaudited) | | Fiscal 2012 (unaudited) | |
(in thousands, except per share data) | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | |
Net sales | | $ | 61,781 | | $ | 97,435 | | $ | 99,324 | | $ | 73,209 | | $ | 139,909 | | $ | 136,547 | | $ | 132,715 | | $ | 106,849 | |
Gross profit | | 22,552 | | 34,640 | | 30,308 | | 15,642 | | 65,268 | | 61,254 | | 49,884 | | 38,727 | |
| | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations, net of income taxes | | (10,071 | ) | (4,081 | ) | (6,026 | ) | (22,085 | ) | 16,462 | | 11,011 | | 7,698 | | (8,642 | ) |
Income (loss) from discontinued operations, net of income taxes | | — | | — | | — | | — | | (50 | ) | 807 | | 4,055 | | (413 | ) |
| | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (10,071 | ) | $ | (4,081 | ) | $ | (6,026 | ) | $ | (22,085 | ) | $ | 16,412 | | $ | 11,818 | | $ | 11,753 | | $ | (9,055 | ) |
| | | | | | | | | | | | | | | | | |
Income (loss) per common share: | | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (0.26 | ) | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.57 | ) | $ | 0.43 | | $ | 0.29 | | $ | 0.20 | | $ | (0.22 | ) |
Discontinued operations | | — | | — | | — | | — | | — | | 0.02 | | 0.10 | | (0.01 | ) |
Income (loss) | | $ | (0.26 | ) | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.57 | ) | $ | 0.43 | | $ | 0.31 | | $ | 0.30 | | $ | (0.23 | ) |
Diluted : | | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (0.26 | ) | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.57 | ) | $ | 0.42 | | $ | 0.28 | | $ | 0.20 | | $ | (0.22 | ) |
Discontinued operations | | — | | — | | — | | — | | — | | 0.02 | | 0.10 | | (0.01 | ) |
Income (loss) | | $ | (0.26 | ) | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.57 | ) | $ | 0.42 | | $ | 0.30 | | $ | 0.30 | | $ | (0.23 | ) |
| | | | | | | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | |
Basic | | 38,716 | | 38,764 | | 38,841 | | 38,904 | | 38,261 | | 38,370 | | 38,577 | | 38,698 | |
Diluted | | 38,716 | | 38,764 | | 38,841 | | 38,904 | | 38,863 | | 38,988 | | 39,169 | | 38,698 | |
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model.
A varietyEstimates of factors influencefair value are not intended to predict actual future events or the levelvalue ultimately realized by employees who receive equity awards. The weighted average estimated values of our net salesemployee stock option grants as well as the weighted average assumptions that were used in a particular quarter including economic conditions incalculating such values during fiscal years 2015, 2014, and 2013 were based on estimates at the LED, solar, data storage and semiconductor industries,date of grant as follows:
| | Year ended December 31, | |
| | 2015 | | 2014 | | 2013 | |
Weighted average fair value | | $ | 10.58 | | $ | 11.58 | | $ | 13.47 | |
Dividend yield | | 0% | | 0% | | 0% | |
Expected volatility factor(1) | | 44% | | 44% | | 49% | |
Risk-free interest rate(2) | | 1.18% | | 1.19% | | 1.27% | |
Expected life (in years)(3) | | 3.9 | | 3.9 | | 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 options. |
| |
(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 outstanding 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 timing of significant orders, shipment delays, specific feature requests by customers, the introduction of new products by us and our competitors, production and quality problems, changes in material costs, disruption in sources of supply, seasonal patterns of capital spending by customers, interpretation and application of accounting principles, and other factors, many of which are beyond our control. In addition, we derive a substantial portion of our revenues from the sale of products with a selling price of up to $8.0 million. 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.periods indicated:
| | Year ended December 31, | |
| | 2015 | | 2014 | | 2013 | |
| | (in thousands) | |
Cash received from options exercised | | $ | 2,233 | | $ | 12,056 | | $ | 2,199 | |
Intrinsic value of options exercised | | $ | 2,089 | | $ | 8,390 | | $ | 2,509 | |
Synos AcquisitionRSAs, RSUs, PSAs, PSUs
On October 1, 2013 (“RSAs are stock awards issued to employees that are subject to specified restrictions and a risk of forfeiture. RSUs are stock awards issued to employees that entitle the Acquisition Date”), Veeco acquired 100%holder to receive shares of common stock as the awards vest. PSAs and PSUs are awards that result in a payment to a grantee in shares of common stock if certain performance goals and vesting criteria are achieved. RSAs, RSUs, PSAs, and PSUs typically vest over one to five years and vesting is subject to the grantee’s continued service with the Company. The fair value of the outstanding common sharesawards is determined and voting interest of Synos. The results of Synos’ operations have been included infixed based on the consolidated financial statements since that date. Synos is an early stage manufacturer of fast array scanning atomic layer deposition (“FAST-ALD”) tools for OLED and other applications. As a resultclosing price of the acquisition,Company’s common stock on the Company has entered the FAST-ALD market which is complimentarytrading day prior to the Company’s MOCVD LED offerings.
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 resultsdate of operations. The sale transaction closed on October 7, 2010, except for assets located in China due to local restrictions. Total proceeds, which included a working capital adjustment of $1 million, totaled $230.4 million of which $7.2 million relates to the assets in China. As part of our agreement with Bruker,grant.
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Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2013(Continued)
$22.9 millionThe following table summarizes the activity of proceeds was heldRSAs, RSUs, PSAs, and PSUs under the Plans:
| | | | Weighted | |
| | | | Average | |
| | Number of | | Grant Date | |
| | Shares | | Fair Value | |
| | (in thousands) | | | |
Outstanding at December 31, 2012 | | | 693 | | | $ | 36.11 | |
Granted | | | 798 | | | 33.16 | |
Released | | | (207 | ) | | 32.44 | |
Forfeited | | | (126 | ) | | 34.33 | |
Outstanding at December 31, 2013 | | | 1,158 | | | $ | 34.93 | |
Granted | | | 395 | | | 34.18 | |
Released | | | (183 | ) | | 38.65 | |
Forfeited | | | (133 | ) | | 33.66 | |
Outstanding at December 31, 2014 | | | 1,237 | | | $ | 34.27 | |
Granted | | | 672 | | | 30.33 | |
Released | | | (389 | ) | | 35.65 | |
Forfeited | | | (122 | ) | | 34.46 | |
Outstanding at December 31, 2015 | | | 1,398 | | | $ | 31.97 | |
While attainment percentages vary depending on achievement of results relative to targets, each PSA and PSU is included in escrow and was restricted from use for one year following the closingtable above at the grant date target amount until the end of the transactionperformance period. Released shares include the impact of restricted stock shares that were cancelled due to secure certain specified losses arising outelections by employees to cover withholding taxes with such shares. The total fair value of breachesshares that vested during the years ended December 31, 2015, 2014, and 2013 was $9.6 million, $6.2 million, and $7.9 million, respectively.
Note 16 — Retirement Plans
The Company maintains a defined contribution plan for the benefit of representations, warrantiesits U.S. employees. The plan is intended to be tax qualified and covenants we madecontains a qualified cash or deferred arrangement as described under Section 401(k) of the Internal Revenue Code. Eligible participants may elect to contribute a percentage of their base compensation, and the Company may make matching contributions, generally equal to fifty cents for every dollar employees contribute, up to the lesser of three percent of the employee’s eligible compensation or three percent of the maximum the employee is permitted to contribute under then current Internal Revenue Code limitations. Generally, the plan calls for vesting in the stock purchase agreementCompany contributions over the initial five years of a participant’s employment. The Company recognized costs associated with these plans of approximately $2.5 million, $1.9 million, and $2.3 million for the years ended December 31, 2015, 2014, and 2013, respectively.
In the year 2000, the Company acquired a defined benefit plan 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, 2015, the plan had $1.6 million in assets and $2.0 million in benefit obligations. Accordingly, the Company has recorded a $0.4 million pension liability. The Company has begun the process to terminate the plan. In connection with the plan termination, responsibility for the payment of benefits under the plan will be transferred to an insurance company that will provide an identical benefit to plan participants under a group annuity contract.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 17 — Income Taxes
The amounts of income (loss) before income taxes attributable to domestic and foreign operations were as follows:
| | | Year ended December 31, | |
| | 2015 | | 2014 | | 2013 |
| | | | | | (in thousands) | | | | |
Domestic | | | $ | (53,553 | ) | | $ | (95,195 | ) | | $ | (84,942 | ) |
Foreign | | | 30,907 | | | 16,841 | | | 13,732 | |
Total | | | $ | (22,646 | ) | | $ | (78,354 | ) | | $ | (71,210 | ) |
Significant components of the expense (benefit) for income taxes consisted of the following:
| | | Year ended December 31, | |
| | 2015 | | 2014 | | 2013 |
| | | | | | (in thousands) | | | | |
Current: | | | | | | | | | | |
Federal | | | $ | 139 | | | $ | (2,464 | ) | | $ | (21,022 | ) |
Foreign | | | 6,952 | | | 2,325 | | | 3,921 | |
State and local | | | (407 | ) | | 55 | | | 148 | |
Total current expense (benefit) for income taxes | | | 6,684 | | | (84 | ) | | (16,953 | ) |
Deferred: | | | | | | | | | | |
Federal | | | 2,104 | | | (11,230 | ) | | (11,589 | ) |
Foreign | | | 516 | | | (291 | ) | | (462 | ) |
State and local | | | 28 | | | 191 | | | 57 | |
Total deferred expense (benefit) for income taxes | | | 2,648 | | | (11,330 | ) | | (11,994 | ) |
Total expense (benefit) for income taxes | | | $ | 9,332 | | | $ | (11,414 | ) | | $ | (28,947 | ) |
The income tax expense was reconciled to the tax expense computed at the U.S. federal statutory tax rate as follows:
| | | Year ended December 31, | |
| | 2015 | | 2014 | | 2013 |
| | | | | | (in thousands) | | | | |
Income tax expense (benefit) at U.S. statutory rates | | | $ | (7,926 | ) | | $ | (27,424 | ) | | $ | (24,923 | ) |
State taxes, net of U.S. federal impact | | | (1,607 | ) | | (662 | ) | | (1,554 | ) |
Effect of international operations | | | (7,659 | ) | | (6,160 | ) | | (4,275 | ) |
Domestic production activities deduction | | | — | | | — | | | 1,554 | |
Research and development tax credit | | | (1,628 | ) | | (1,935 | ) | | (3,151 | ) |
Net change in valuation allowance | | | 23,655 | | | 27,156 | | | 2,420 | |
Change in accrual for unrecognized tax benefits | | | 4,876 | | | (1,940 | ) | | 577 | |
Goodwill impairment | | | — | | | 9,786 | | | — | |
Change in contingent consideration | | | — | | | (10,279 | ) | | 290 | |
Worthless stock deduction | | | (2,069 | ) | | — | | | — | |
Change in entity tax status | | | 904 | | | — | | | — | |
Other | | | 786 | | | 44 | | | 115 | |
Total expense (benefit) for income taxes | | | $ | 9,332 | | | $ | (11,414 | ) | | $ | (28,947 | ) |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company has not recorded excess tax benefits related documents.to share-based compensation since fiscal year 2013 due to the U.S. net operating losses. At December 31, 2015, excess tax benefits were $0.5 million. The restrictionCompany will record this amount to “Additional paid-in capital” when the excess tax benefits are utilized and reduce the Company’s current taxes payable.
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, | |
| | 2015 | | 2014 |
| | | (in thousands) | |
Deferred tax assets: | | | | | | | |
Inventory valuation | | | $ | 6,334 | | | $ | 8,244 | |
Net operating losses and credit carry forwards | | | 53,918 | | | 39,750 | |
Warranty and installation accruals | | | 3,022 | | | 2,452 | |
Share-based compensation | | | 12,461 | | | 11,794 | |
Other | | | 5,787 | | | 2,647 | |
Total deferred tax assets | | | 81,522 | | | 64,887 | |
Valuation allowance | | | (56,273 | ) | | (34,909 | ) |
Net deferred tax assets | | | 25,249 | | | 29,978 | |
| | | | | | | |
Deferred tax liabilities: | | | | | | | |
Purchased intangible assets | | | 32,550 | | | 34,018 | |
Undistributed earnings | | | 618 | | | 1,047 | |
Depreciation | | | 1,908 | | | 2,274 | |
Total deferred tax liabilities | | | 35,076 | | | 37,339 | |
Net deferred taxes | | | $ | (9,827 | ) | | $ | (7,361 | ) |
The Company did not record a provision for U.S. federal income taxes or any additional withholding taxes on unremitted earnings in foreign subsidiaries in the amount of $100.1 million at December 31, 2015, as such amount is permanently reinvested. It is not practicable to determine the hypothetical amount of tax associated with such unremitted earnings if the Company were to assume they were remitted to the U.S. 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.
At December 31, 2015 the Company had U.S. federal net operating loss carryforwards of approximately $87.8 million that will expire between 2031 and 2035, if not utilized. At December 31, 2015 the Company had U.S. foreign tax credit carryforwards of $7.5 million that will expire between 2023 and 2025 and U.S. federal research and development credits of $11.0 million that will expire between 2031 and 2035. The Company also has state and local net operating loss carryforwards of approximately $57.8 million (a net deferred tax asset of $2.8 million net of federal tax benefits and before the valuation allowance) that will expire between 2016 and 2036. In addition, the Company has state credits of $9.4 million some of which are indefinite and others that will expire between 2016 and 2030.
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 in fiscal year 2014, because the Company could not conclude that such amounts are realizable on a more-likely-than-not basis. As the cumulative three year loss continued in 2015, the Company increased the valuation allowance by approximately $21.4 million during the period ended December 31, 2015.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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, 2015 includes $11.2 million relating to the escrowed proceeds was released on October 6, 2011. As parttax 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 carryforward period.
A roll-forward of the sale we incurred transaction costs,Company’s uncertain tax positions for all U.S. federal, state, and foreign tax jurisdictions was as follows:
| | | December 31, | |
| | | 2015 | | | | 2014 | | | | 2013 | |
| | | (in thousands) | |
Balance at beginning of year | | | $ | 4,276 | | | | $ | 6,228 | | | | $ | 5,818 | |
Additions for tax positions related to current year | | | 5,596 | | | | 244 | | | | 324 | |
Additions for tax positions related to prior years | | | 143 | | | | 199 | | | | 477 | |
Reductions for tax positions related to prior years | | | — | | | | (2,345 | ) | | | (224 | ) |
Reductions due to the lapse of the applicable statute of limitations | | | (642 | ) | | | (38 | ) | | | — | |
Settlements | | | (221 | ) | | | (12 | ) | | | (167 | ) |
Balance at end of year | | | $ | 9,152 | | | | $ | 4,276 | | | | $ | 6,228 | |
If the amount of unrecognized tax benefits at December 31, 2015 were recognized, the Company’s income tax provision would decrease by $5.1 million. The year to date change of $4.9 million primarily relates to the Company’s Development and Expansion Incentive tax rewards with the Singapore Economic Development Board. The gross amount of interest and penalties accrued in income tax payable in the Consolidated Balance Sheets was approximately $0.2 million and $0.3 million at December 31, 2015 and 2014, respectively.
The Company or one of its subsidiaries files income tax returns in the United States federal jurisdiction and various state, local, and foreign jurisdictions. All material federal income tax matters have been concluded for years through 2010 subject to subsequent utilization of net operating losses generated in such years. The Company’s U.S. federal tax returns from 2011 through 2013 were examined and are currently under joint committee review. All material state and local income tax matters have been reviewed through 2009. The majority of the Company’s foreign jurisdictions have been reviewed through 2010. Substantially all of the Company’s foreign jurisdictions’ statutes of limitation remain open with respect to the tax years from 2010 through 2015. It is reasonably possible that within the next twelve months the Company’s uncertain tax position will be reduced by approximately $2.0 million related to the completion of tax audits in various tax jurisdictions.
Note 18 — 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.
Sales by market is as follows:
| | | Year ended December 31, | |
| | | 2015 | | | | 2014 | | | | 2013 | |
| | | (in thousands) | |
Lighting, Display & Power Electronics | | | $ | 291,133 | | | | $ | 278,551 | | | | $ | 216,852 | |
Advanced Packaging, MEMS & RF | | | 61,935 | | | | 11,449 | | | | 12,804 | |
Scientific & Industrial | | | 64,297 | | | | 44,429 | | | | 49,170 | |
Data Storage | | | 59,673 | | | | 58,444 | | | | 52,923 | |
Total | | | $ | 477,038 | | | | $ | 392,873 | | | | $ | 331,749 | |
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company’s significant operations outside the United States include sales and service offices in China, Europe and Rest of World. For geographic reporting, sales are attributed to the location in which consistedthe customer facility is located.
Sales and long-lived tangible assets by geographic region are as follows:
| | Net Sales to Unaffiliated Customers | | Long-Lived Tangible Assets |
| | | 2015 | | | | 2014 | | | | 2013 | | | | 2015 | | | | 2014 | | | | 2013 | |
| | | (in thousands) | |
United States | | | $ | 86,627 | | | | $ | 44,060 | | | | $ | 57,609 | | | | $ | 64,951 | | | | $ | 63,349 | | | | $ | 66,002 | |
China | | | 242,442 | | | | 159,063 | | | | 149,050 | | | | 422 | | | | 621 | | | | 1,895 | |
EMEA | | | 64,019 | | | | 35,644 | | | | 21,941 | | | | 96 | | | | 78 | | | | 95 | |
Rest of World | | | 83,950 | | | | 154,106 | | | | 103,149 | | | | 14,121 | | | | 14,704 | | | | 21,147 | |
Total Sales | | | $ | 477,038 | | | | $ | 392,873 | | | | $ | 331,749 | | | | $ | 79,590 | | | | $ | 78,752 | | | | $ | 89,139 | |
Note 19 — Selected Quarterly Financial Information (unaudited)
The following table presents selected unaudited financial data for each fiscal quarter of investment banking fees2015 and legal fees, totaling $5.2 million. 2014. Although unaudited, this information has been prepared on 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 information in accordance with GAAP. Such quarterly results are not necessarily indicative of future results of operations.
| | Fiscal 2015 | | Fiscal 2014 |
| | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | |
| | (in thousands, except per share amounts) | |
Net sales | | $ | 98,341 | | $ | 131,410 | | $ | 140,744 | | $ | 106,543 | | $ | 90,841 | | $ | 95,122 | | $ | 93,341 | | $ | 113,569 | |
Gross profit | | 35,136 | | 49,069 | | 54,250 | | 38,786 | | 33,777 | | 30,673 | | 32,558 | | 37,874 | |
Net income (loss) | | (19,110) | | (8,386) | | 5,306 | | (9,788) | | 19,160 | | (15,211) | | (13,977) | | (56,912) | |
Basic income (loss) per common share | | (0.48) | | (0.21) | | 0.13 | | (0.25) | | 0.49 | | (0.39) | | (0.35) | | (1.44) | |
Diluted income (loss) per common share | | (0.48) | | (0.21) | | 0.13 | | (0.25) | | 0.48 | | (0.39) | | (0.35) | | (1.44) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Impairment Charge
During the fourth quarter of 2010, we recognized2014, the Company recorded a pre-tax gain on disposalnon-cash asset impairment charge of $156.3 million and a pre-tax deferred gain of $5.4$53.9 million related to the assets in China. We recognized into income the pre-tax deferred gain of $5.4 million during the third quarter of 2012 relatedits ALD business. Refer to the completion of the sale of the assets in China to Bruker.Note 6, “Goodwill and Intangible Assets,” for additional information.
Other Quarterly ItemsAcquisition of PSP
During the fourth quarter of 2013, we recorded asset impairment charges2014, the Company acquired PSP. The results of operations of PSP have been included in LED & Solar of $0.9 million relatedthe consolidated financial statements since that date. Refer to certain tools previously usedNote 5, “Business Combinations,” for additional information.
Change in our laboratories carried in property, plant and equipment which we are holding for sale and $0.3 million related to another asset carried in other assets. Contingent Consideration
During the fourthfirst quarter of 2012, we2014, the Company recorded an asset impairment chargea non-cash gain of $1.3$29.4 million related to a particular asset in our Data Storage segment.
During 2012, we took measures to improve profitability, including a reduction in discretionary expenses, realignment of our senior management team and consolidation of certain sales, business and administrative functions. As a result of these actions, we recorded a $3.8 million restructuring charge consisting of $3.0 million in personnel severance and related costs, $0.4 million in equity compensation and related costs and $0.4 million in other severance costs resulting from a headcount reduction of 52 employees. We recorded $2.0 million of these chargeschange in the third quarterCompany’s assessment of 2012 and $1.8 million of these charges in the fourth quarter of 2012 with the balance recorded in the first quarter of 2012.
As a result of the delay in filing our Form 10-Q for September 30, 2012 (“Q3 10-Q”), we were required to evaluate the impact of events and circumstances occurring through the date of the filing of the Q3 10-Q. After considering declines in systems shipments and parts usage occurring though the date of the filing of the Q3 10-Q, we determined that an increase in our reserve for slow moving and obsolete inventory was warranted and resulted in us recording a total charge of $7.2 million to cost of sales in the third quarter of 2012. The evaluation resulted in relatively lower provisions for inventory reserves over the first three quarters of 2013. We recorded a $1.8 million charge to cost of sales for inventory write downs in the fourth quarter of 2012 thatpotential future payments related to a terminated program. The effect on the comparative statements above wasits ALD business. Refer to reduce gross profitNote 5, “Business Combinations,” for September 30, 2012 compared to all other periods presented.
Out of Period Adjustmentadditional information.
We identified net cumulative errors which overstated cumulative net income from continuing operations through December 31, 2011 by $0.6 million and net cumulative errors that understated net income from continuing operations in the six month period ended June 30, 2012 by $1.1 million. As a result, in the third quarter of 2012, we recorded adjustments to correct all prior periods resulting in an increase in income from continuing operations of $0.5 million.
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Table of Contents
Schedule II—II — Valuation and Qualifying Accounts (in thousands)
COL. A | | COL. B | | COL. C | | COL. D | | COL. E | | |
| | | | | Additions | | | | | |
| | | | Additions | | | | | | | | | Charged | | | | | | | |
| | Balance at | | Charged to | | Charged to | | | | Balance at | | | Balance at | | (Credited) | | Charged to | | | | Balance at | |
| | Beginning | | Costs and | | Other | | | | End of | | | Beginning | | to Costs and | | Other | | | | End of | |
Description | | of Period | | Expenses | | Accounts | | Deductions | | Period | | | of Period | | Expenses | | Accounts | | Deductions | | Period | |
Deducted from asset accounts: | | | | | | | | | | | | | | | | | (in thousands) | | | | | |
Year ended December 31, 2015 | | | | | | | | | | | | |
Allowance for doubtful accounts | | | $ | 731 | | $ | 43 | | $ | — | | $ | (568 | ) | $ | 206 | |
Valuation allowance in net deferred tax assets | | | 34,909 | | 23,655 | | (2,291 | ) | — | | 56,273 | |
| | | $ | 35,640 | | $ | 23,698 | | $ | (2,291 | ) | $ | (568 | ) | $ | 56,479 | |
| | | | | | | | | | | | |
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 | | | $ | 492 | | $ | 1,946 | | $ | — | | $ | — | | $ | 2,438 | |
Valuation allowance in net deferred tax assets | | 4,708 | | 2,420 | | 625 | | — | | 7,753 | | | 4,708 | | 2,420 | | 625 | | — | | 7,753 | |
| | $ | 5,200 | | $ | 4,366 | | $ | 625 | | $ | — | | $ | 10,191 | | | $ | 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 | | |
| | | | | | | | | | | | |
Year ended December 31, 2011 | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 512 | | $ | — | | $ | — | | $ | (44 | ) | $ | 468 | | |
Valuation allowance in net deferred tax assets | | 1,644 | | — | | — | | 121 | | 1,765 | | |
| | $ | 2,156 | | $ | — | | $ | — | | $ | 77 | | $ | 2,233 | | |
S-1S-1