UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20162017
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:file number 0-16244
VEECO INSTRUMENTS INC.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Its Charter)
Delaware |
| 11-2989601 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| ||
Terminal Drive | ||
Plainview, New York |
| 11803 |
(Address of Principal Executive Offices) | (Zip Code) |
(516) 677-0200
(Registrant’s telephone number, including area code)code:
(516) 677-0200
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer x |
|
Non-accelerated filer | |||
| Smaller reporting company | o | |
Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Title of Class |
| Shares Outstanding | |
Common Stock |
| as of | July 26, 2017 |
par value $0.01 per share |
|
| 48,420,617 |
This quarterly report on Form 10-Q (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, 2, and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future 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.
In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the ninesix months ended SeptemberJune 30, 20162017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.2017. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.
The risks and uncertainties of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “we,” “us,” and “our,” unless the context indicates otherwise) include, without limitation, the following:
· Unfavorable market conditions may adversely affect our operating results;
· A reduction or elimination of foreign government subsidies and economic incentives may adversely affect the future order rate for our MOCVD equipment;
· The cyclicality of the industries we serve directly affects our business;
· We operate in industries characterized by rapid technological change;
· We have a concentrated customer base, located primarily in a limited number of regions, which operate in highly concentrated industries;
· We face significant competition;
· The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly;
· Our sales cycle is long and unpredictable;
· Our 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;
· 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 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;
· We rely on a limited number of suppliers, some of whom are our sole source for particular components;
· Our inability to attract, retain, and motivate employees could have a material adverse effect on our business;
· Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses;
· Timing of market adoption of LED technology for general lighting is uncertain;
· Our sales to manufacturers are highly dependent on sales of consumer electronics applications, which can experience significant volatility due to seasonal and other factors and materially adversely impact our future results of operations;
· Our operating results have been, and may continue to be, adversely affected by tightening credit markets;
· 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;
· 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;
· Changes in accounting pronouncements or taxation rules or practices may adversely affect our financial results;
· Our income taxes can change;
·�� We may be required to take additional impairment charges on assets;
· We have indebtedness in the form of convertible senior notes which could adversely affect our financial position, prevent us from implementing our strategy, and dilute the ownership interest of our existing shareholders;
· The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, could have a material effect on our reported financial results;
· The price of our common shares is volatile and could decline significantly;
· The enforcement and protection of our intellectual property rights may be expensive and/or divert our limited resources;
· We may be subject to claims of intellectual property infringement by others;
· We are subject to foreign currency exchange risks;
· If we are subject to cyber-attacks we could incur substantial costs and, if such attacks are successful, we could incur significant liabilities, reputational harm, and disruption to our operations;
· 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 are subject to risks of non-compliance with environmental, health, and safety regulations;
· 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
· 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.disruption; and
· We may not be able to successfully integrate the business of Ultratech with our own or realize the anticipated benefits of the merger.
Consequently, such forward looking statements and estimates should be regarded solely as the current plans and beliefs of Veeco. We do not undertake any obligation to update any forward looking statements to reflect future events or circumstances after the date of such statements.
Veeco Instruments Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
|
| September 30, |
| December 31, |
|
| June 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
|
| (unaudited) |
|
|
|
| (unaudited) |
|
|
| ||||
Assets |
|
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 274,018 |
| $ | 269,232 |
|
| $ | 205,564 |
| $ | 277,444 |
|
Short-term investments |
| 62,835 |
| 116,050 |
|
| 97,086 |
| 66,787 |
| ||||
Accounts receivable, net |
| 50,463 |
| 49,524 |
|
| 108,349 |
| 58,020 |
| ||||
Inventories |
| 86,651 |
| 77,469 |
|
| 119,935 |
| 77,063 |
| ||||
Deferred cost of sales |
| 3,165 |
| 2,100 |
|
| 4,439 |
| 6,160 |
| ||||
Prepaid expenses and other current assets |
| 19,099 |
| 22,760 |
|
| 24,909 |
| 16,034 |
| ||||
Assets held for sale |
| 12,129 |
| 5,000 |
| |||||||||
Total current assets |
| 508,360 |
| 542,135 |
|
| 560,282 |
| 501,508 |
| ||||
Property, plant and equipment, net |
| 57,557 |
| 79,590 |
|
| 82,546 |
| 60,646 |
| ||||
Intangible assets, net |
| 61,812 |
| 131,674 |
|
| 396,097 |
| 58,378 |
| ||||
Goodwill |
| 114,908 |
| 114,908 |
|
| 303,160 |
| 114,908 |
| ||||
Deferred income taxes |
| 1,384 |
| 1,384 |
|
| 2,528 |
| 2,045 |
| ||||
Other assets |
| 21,047 |
| 21,098 |
|
| 25,056 |
| 21,047 |
| ||||
Total assets |
| $ | 765,068 |
| $ | 890,789 |
|
| $ | 1,369,669 |
| $ | 758,532 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Accounts payable |
| $ | 27,455 |
| $ | 30,074 |
|
| $ | 46,040 |
| $ | 22,607 |
|
Accrued expenses and other current liabilities |
| 38,421 |
| 49,393 |
|
| 44,305 |
| 33,201 |
| ||||
Customer deposits and deferred revenue |
| 79,699 |
| 76,216 |
|
| 76,985 |
| 85,022 |
| ||||
Income taxes payable |
| 1,825 |
| 6,208 |
|
| 4,316 |
| 2,311 |
| ||||
Current portion of long-term debt |
| 361 |
| 340 |
|
| 1,013 |
| 368 |
| ||||
Total current liabilities |
| 147,761 |
| 162,231 |
|
| 172,659 |
| 143,509 |
| ||||
Deferred income taxes |
| 13,146 |
| 11,211 |
|
| 46,291 |
| 13,199 |
| ||||
Long-term debt |
| 920 |
| 1,193 |
|
| 270,071 |
| 826 |
| ||||
Other liabilities |
| 6,503 |
| 1,539 |
|
| 11,163 |
| 6,403 |
| ||||
Total liabilities |
| 168,330 |
| 176,174 |
|
| 500,184 |
| 163,937 |
| ||||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
| ||||
Preferred stock, 500,000 shares authorized; no shares issued and outstanding |
| — |
| — |
| |||||||||
Common stock, $0.01 par value; 120,000,000 shares authorized; 40,837,811 shares issued and 40,596,820 shares outstanding at September 30, 2016; 40,995,694 shares issued and 40,526,902 shares outstanding at December 31, 2015. |
| 408 |
| 410 |
| |||||||||
Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding |
| — |
| — |
| |||||||||
Common stock, $0.01 par value; 120,000,000 shares authorized; 48,382,213 and 40,714,790 shares issued at June 30, 2017 and December 31, 2016, respectively; 48,382,213 and 40,588,194 shares outstanding at June 30, 2017 and December 31, 2016, respectively. |
| 484 |
| 407 |
| |||||||||
Additional paid-in capital |
| 761,975 |
| 767,137 |
|
| 1,053,138 |
| 763,303 |
| ||||
Accumulated deficit |
| (163,585 | ) | (45,058 | ) |
| (185,877 | ) | (168,583 | ) | ||||
Accumulated other comprehensive income |
| 2,266 |
| 1,348 |
|
| 1,740 |
| 1,777 |
| ||||
Treasury stock, at cost, 240,991 shares at September 30, 2016; 468,792 shares at December 31, 2015. |
| (4,326 | ) | (9,222 | ) | |||||||||
Treasury stock, at cost, 126,596 shares at December 31, 2016. |
| — |
| (2,309 | ) | |||||||||
Total stockholders’ equity |
| 596,738 |
| 714,615 |
|
| 869,485 |
| 594,595 |
| ||||
Total liabilities and stockholders’ equity |
| $ | 765,068 |
| $ | 890,789 |
|
| $ | 1,369,669 |
| $ | 758,532 |
|
See accompanying Notes to the Consolidated Financial Statements.
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
|
| Three months ended September 30, |
| Nine months ended September 30, |
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||||||
Net sales |
| $ | 85,482 |
| $ | 140,744 |
| $ | 238,842 |
| $ | 370,494 |
|
| $ | 115,066 |
| $ | 75,348 |
| $ | 209,452 |
| $ | 153,359 |
|
Cost of sales |
| 52,027 |
| 86,494 |
| 141,991 |
| 232,038 |
|
| 76,346 |
| 43,909 |
| 136,533 |
| 89,964 |
| ||||||||
Gross profit |
| 33,455 |
| 54,250 |
| 96,851 |
| 138,456 |
|
| 38,720 |
| 31,439 |
| 72,919 |
| 63,395 |
| ||||||||
Operating expenses, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Research and development |
| 19,892 |
| 19,200 |
| 63,545 |
| 57,904 |
|
| 18,619 |
| 21,543 |
| 33,608 |
| 43,653 |
| ||||||||
Selling, general, and administrative |
| 18,396 |
| 21,905 |
| 58,230 |
| 69,153 |
|
| 22,698 |
| 19,995 |
| 41,801 |
| 39,834 |
| ||||||||
Amortization of intangible assets |
| 5,261 |
| 5,891 |
| 15,785 |
| 21,832 |
|
| 6,354 |
| 5,273 |
| 9,221 |
| 10,524 |
| ||||||||
Restructuring |
| 1,798 |
| 469 |
| 3,993 |
| 3,509 |
|
| 3,257 |
| 2,095 |
| 4,595 |
| 2,195 |
| ||||||||
Acquisition costs |
| 14,133 |
| — |
| 15,494 |
| — |
| |||||||||||||||||
Asset impairment |
| 56,035 |
| — |
| 69,662 |
| 126 |
|
| 675 |
| 13,627 |
| 1,138 |
| 13,627 |
| ||||||||
Other, net |
| 795 |
| 207 |
| 884 |
| (795 | ) |
| (10 | ) | 159 |
| (87 | ) | 88 |
| ||||||||
Total operating expenses, net |
| 102,177 |
| 47,672 |
| 212,099 |
| 151,729 |
|
| 65,726 |
| 62,692 |
| 105,770 |
| 109,921 |
| ||||||||
Operating income (loss) |
| (68,722 | ) | 6,578 |
| (115,248 | ) | (13,273 | ) |
| (27,006 | ) | (31,253 | ) | (32,851 | ) | (46,526 | ) | ||||||||
Interest income |
| 283 |
| 256 |
| 879 |
| 787 |
|
| 782 |
| 290 |
| 1,575 |
| 596 |
| ||||||||
Interest expense |
| (23 | ) | (95 | ) | (166 | ) | (345 | ) |
| (5,061 | ) | (105 | ) | (9,196 | ) | (143 | ) | ||||||||
Income (loss) before income taxes |
| (68,462 | ) | 6,739 |
| (114,535 | ) | (12,831 | ) |
| (31,285 | ) | (31,068 | ) | (40,472 | ) | (46,073 | ) | ||||||||
Income tax expense |
| 1,136 |
| 1,433 |
| 2,677 |
| 9,360 |
| |||||||||||||||||
Income tax expense (benefit) |
| (12,897 | ) | 1,014 |
| (23,179 | ) | 1,542 |
| |||||||||||||||||
Net income (loss) |
| $ | (69,598 | ) | $ | 5,306 |
| $ | (117,212 | ) | $ | (22,191 | ) |
| $ | (18,388 | ) | $ | (32,082 | ) | $ | (17,293 | ) | $ | (47,615 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
| $ | (1.78 | ) | $ | 0.13 |
| $ | (2.99 | ) | $ | (0.56 | ) |
| $ | (0.43 | ) | $ | (0.82 | ) | $ | (0.42 | ) | $ | (1.22 | ) |
Diluted |
| $ | (1.78 | ) | $ | 0.13 |
| $ | (2.99 | ) | $ | (0.56 | ) |
| $ | (0.43 | ) | $ | (0.82 | ) | $ | (0.42 | ) | $ | (1.22 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average number of shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
| 39,131 |
| 40,846 |
| 39,193 |
| 39,729 |
|
| 42,656 |
| 38,965 |
| 41,160 |
| 39,035 |
| ||||||||
Diluted |
| 39,131 |
| 40,979 |
| 39,193 |
| 39,729 |
|
| 42,656 |
| 38,965 |
| 41,160 |
| 39,035 |
|
See accompanying Notes to the Consolidated Financial Statements.
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
|
| Three months ended September 30, |
| Nine months ended September 30, |
| ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||
Net income (loss) |
| $ | (69,598 | ) | $ | 5,306 |
| $ | (117,212 | ) | $ | (22,191 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
| ||||
Unrealized gain (loss) on available-for-sale securities |
| (7 | ) | (17 | ) | 32 |
| 9 |
| ||||
Reclassifications from AOCI into net income |
| — |
| — |
| — |
| (1 | ) | ||||
Minimum pension liability |
|
|
|
|
|
|
|
|
| ||||
Reclassifications from AOCI into net income |
| 866 |
| — |
| 866 |
| — |
| ||||
Foreign currency translation |
| (7 | ) | (63 | ) | 20 |
| (93 | ) | ||||
Total other comprehensive income (loss), net of tax |
| 852 |
| (80 | ) | 918 |
| (85 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income (loss) |
| $ | (68,746 | ) | $ | 5,226 |
| $ | (116,294 | ) | $ | (22,276 | ) |
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income (loss) |
| $ | (18,388 | ) | $ | (32,082 | ) | $ | (17,293 | ) | $ | (47,615 | ) |
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
| ||||
Unrealized gain (loss) on available-for-sale securities |
| 53 |
| (11 | ) | (61 | ) | 39 |
| ||||
Foreign currency translation |
| 9 |
| (12 | ) | 24 |
| 27 |
| ||||
Total other comprehensive income, net of tax |
| 62 |
| (23 | ) | (37 | ) | 66 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income (loss) |
| $ | (18,326 | ) | $ | (32,105 | ) | $ | (17,330 | ) | $ | (47,549 | ) |
See accompanying Notes to the Consolidated Financial Statements.
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
| Nine months ended September 30, |
|
| Six months ended June 30, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | (117,212 | ) | $ | (22,191 | ) |
| $ | (17,293 | ) | $ | (47,615 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| 26,010 |
| 30,766 |
|
| 15,620 |
| 17,291 |
| ||||
Non-cash interest expense |
| 4,887 |
| — |
| |||||||||
Deferred income taxes |
| 1,529 |
| 1,794 |
|
| (19,412 | ) | 1,821 |
| ||||
Share-based compensation expense |
| 12,133 |
| 14,038 |
|
| 13,806 |
| 8,390 |
| ||||
Asset impairment |
| 69,662 |
| 126 |
|
| 1,138 |
| 13,627 |
| ||||
Gain on sale of lab tools |
| — |
| (841 | ) | |||||||||
Provision for bad debts |
| 160 |
| — |
|
| 92 |
| 160 |
| ||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Accounts receivable |
| (1,184 | ) | 13,484 |
|
| (4,956 | ) | 7,584 |
| ||||
Inventories and deferred cost of sales |
| (10,909 | ) | (13,029 | ) |
| 20,496 |
| (14,577 | ) | ||||
Prepaid expenses and other current assets |
| 3,661 |
| 332 |
|
| 608 |
| 2,404 |
| ||||
Accounts payable and accrued expenses |
| (13,995 | ) | 368 |
|
| (7,103 | ) | (9,156 | ) | ||||
Customer deposits and deferred revenue |
| 3,568 |
| (7,929 | ) |
| (12,872 | ) | (10,378 | ) | ||||
Income taxes receivable and payable, net |
| 80 |
| 2,323 |
| |||||||||
Long-term income tax liability |
| (4,877 | ) | — |
| |||||||||
Other, net |
| 2,189 |
| 2,609 |
|
| 277 |
| (682 | ) | ||||
Net cash provided by (used in) operating activities |
| (24,308 | ) | 21,850 |
|
| (9,589 | ) | (31,131 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
| ||||
Acquisitions of businesses, net of cash acquired |
| (399,478 | ) | — |
| |||||||||
Capital expenditures |
| (10,717 | ) | (11,069 | ) |
| (10,057 | ) | (9,179 | ) | ||||
Proceeds from the sale of investments |
| 131,297 |
| 68,647 |
|
| 235,586 |
| 78,145 |
| ||||
Payments for purchases of investments |
| (78,376 | ) | (17,000 | ) |
| (219,141 | ) | (35,533 | ) | ||||
Proceeds from sale of building |
| 693 |
| — |
| |||||||||
Proceeds from sale of lab tools |
| — |
| 2,648 |
| |||||||||
Other |
| (230 | ) | (662 | ) |
| — |
| (213 | ) | ||||
Net cash provided by investing activities |
| 42,667 |
| 42,564 |
| |||||||||
Net cash provided by (used in) investing activities |
| (393,090 | ) | 33,220 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from stock option exercises |
| 473 |
| 1,344 |
| |||||||||
Proceeds (tax withholdings) from stock option exercises and employee stock purchase plan |
| 1,498 |
| 473 |
| |||||||||
Restricted stock tax withholdings |
| (1,184 | ) | (2,129 | ) |
| (6,294 | ) | (665 | ) | ||||
Purchases of common stock |
| (13,349 | ) | — |
|
| — |
| (13,349 | ) | ||||
Proceeds from employee stock purchase plan |
| 719 |
| — |
| |||||||||
Repayments of long-term debt |
| (252 | ) | (233 | ) | |||||||||
Net cash used in financing activities |
| (13,593 | ) | (1,018 | ) | |||||||||
Proceeds from long-term debt borrowings |
| 335,751 |
| — |
| |||||||||
Principal payments on long-term debt |
| (180 | ) | (166 | ) | |||||||||
Net cash provided by (used in) financing activities |
| 330,775 |
| (13,707 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of exchange rate changes on cash and cash equivalents |
| 20 |
| (93 | ) |
| 24 |
| 27 |
| ||||
Net increase in cash and cash equivalents |
| 4,786 |
| 63,303 |
| |||||||||
Net increase (decrease) in cash and cash equivalents |
| (71,880 | ) | (11,591 | ) | |||||||||
Cash and cash equivalents - beginning of period |
| 269,232 |
| 270,811 |
|
| 277,444 |
| 269,232 |
| ||||
Cash and cash equivalents - end of period |
| $ | 274,018 |
| $ | 334,114 |
|
| $ | 205,564 |
| $ | 257,641 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
|
| ||||
Interest paid |
| $ | 179 |
| $ | 104 |
|
| $ | 65 |
| $ | 103 |
|
Income taxes paid |
| 1,456 |
| 6,040 |
|
| 1,422 |
| 1,284 |
| ||||
Non-cash operating and financing activities |
|
|
|
|
| |||||||||
Net transfer of inventory to property, plant and equipment |
| 33 |
| — |
|
See accompanying Notes to the Consolidated Financial Statements.
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 20152016 (“20152016 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature. Certain amounts previously reported have been reclassified in the financial statements to conform to the current presentation.
Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2017 interim quarters end on April 2, July 2, and October 1, and the 2016 interim quarters endended on April 3, July 3, and October 2, and the 2015 interim quarters ended on March 29, June 28, and September 27.2. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.
Revenue recognition
Veeco recognizes revenue when all of the following criteria have been met: persuasive evidence of an arrangement exists with a customer; delivery of the specified products has occurred or services have been rendered; prices are contractually fixed or determinable; and collectability is reasonably assured. Revenue is recorded including shipping and handling costs and excluding applicable taxes related to sales.
Contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, maintenance, and service plans. Judgment is required to properly identify the accounting units of the multiple-element arrangements and to determine how the revenue should be allocated among the accounting units. Veeco also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single, multiple-element arrangement based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria have been met in order to recognize revenue in the appropriate accounting period.
When there are separate units of accounting, Veeco allocates revenue to each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or the best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Veeco uses BESP for the majority of the elements in its arrangements. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.
Veeco considers many facts when evaluating each of its sales arrangements to determine the timing of revenue recognition including its contractual obligations, the customer’s creditworthiness, and the nature of the customer’s post-delivery acceptance provisions. Veeco’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For the majority of the arrangements, a customer source inspection of the system is performed in Veeco’s facility or test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When Veeco objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery, revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date, subject to the retention amount constraint described below.below for certain contracts. For new products, new applications of existing products, or for products with substantive customer acceptance provisions
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
where Veeco cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue and the associated costs are deferred and fully recognized upon the receipt of final customer acceptance, assuming all other revenue recognition criteria have been met.
Veeco’sThe Company’s system sales arrangements, including certain upgrades, generally do not contain provisions for the right of return, forfeiture, refund, or other purchase price concessions.concession. In the rare instances where such provisions are included, all revenue is deferred until such rights expire. The sales arrangements generally include installation. The installation process is not deemed essential to the functionality of the equipment since it is not complex; it does not require significant changes to the features or capabilities of the equipment or involve constructing elaborate interfaces or connections subsequent to factory acceptance. Veeco has a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage Veeco to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, installation is deemed to be inconsequential or perfunctory relative to the system sale as a whole, and as a result, installation service is not considered a separate element of the arrangement. As such, Veeco records the cost of the installation at the earlier of the time of revenue recognition for the system or when installation services are performed.
In manycertain cases Veeco’s products are sold with a billing retention, typically 10% of the sales price, which is billed by Veeco and payable by the customer when field acceptance provisions are completed. The amount of revenue recognized upon delivery of a system or upgrade, if any, is limited to the lower of i) the amount billed that is not contingent upon acceptance provisions or ii) the value of the arrangement consideration allocated to the delivered elements, if such sale is part of a multiple-element arrangement.
Veeco’s contractual terms with customers in Japan generally specify that title and risk and rewards of ownership transfer upon customer acceptance. A distributor is used for almost all sales to customers in Japan. Title passes to the distributor upon shipment; however, due to customary local business practices, generally the risk and rewards of ownership of the systems transfer to the end-customers upon their acceptance. As a result, for customers in Japan, Veeco recognizes revenue upon receipt of written acceptance from the end-customer.
VeecoThe Company recognizes revenue related to maintenance and service contracts ratably over the applicable contract term. Veeco recognizes revenue from the sales of components, spare parts, and specified service engagements at the time of delivery in accordance with the terms of the applicable sales arrangement.
Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred, even if the related revenue is deferred in accordance with the above policy.
Recent accounting pronouncements
In May 2014, theThe FASB issued Accounting Standards Update (“ASU”)ASU 2014-09, as amended:Revenue from Contracts with Customers, which has been codified as Accounting Standards Codification 606 (“ASC606”ASC 606”). ASC606ASC 606 requires Veeco’sthe Company’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which Veecoit expects to be entitled in exchange for those goods or services. ASC606ASC 606 outlines a five-step model to make the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adopt ASC606ASC 606 for reporting periods beginning after December 15, 2017. ASC6062017, but can adopt early for annual periods beginning after December 15, 2016. The Company is still completing its evaluation of the impact of adopting this standard; however, the Company currently expects the most significant financial statement impacts of adopting ASC 606 will be the elimination of the constraint on revenue associated with the billing retention related to the receipt of customer final acceptance as well as the identification of installation services as a performance obligation. The elimination of the constraint on revenue related to customer final acceptance, which is usually about 10 percent of a system sale, will generally be recognized at the time the Company transfers control of the system to the customer, which is earlier than under the Company’s current revenue recognition model for certain contracts that are subject to the billing retention constraint described above. The new performance obligation related to installation services under the new standard will generally be recognized as the installation services are performed, which is later than under the Company’s current revenue recognition model. Taken together, the Company currently believes there will be a net acceleration of a small percentage of its revenue under ASC 606 as compared to its current revenue recognition model. ASC 606 provides for different transition alternatives. Veeco has not yet determinedalternatives, and the Company is evaluating which method of adoption will be selected. Veeco is evaluating the impact of adopting ASC606 on its consolidated financial statements and related financial statement disclosures. A preliminary assessment of ASC606 indicates that the billing retention will no longer impact the timing of revenue recognition. As a result, a small portion of revenue for system sales arrangements may be recognized earlier under ASC606 than it is under current U.S. GAAP.
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continuedselect.
(unaudited)
In January 2016, the FASB issued ASU 2016-01: Financial Instruments — Overall, which requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017; early adoption is permitted. VeecoThe Company does not expect this ASU will have a material impact on itsthe consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02: Leases, which generally requires Veeco’s operating lessee rights and
obligations to be recognized as assets and liabilities on the Balance Sheet.balance sheet. In addition, interest on lease liabilities is to be recognized separately from the amortization of right-of-use assets in the Statement of Operations. Further, payments of the principal portion of lease liabilities are to be classified as financing activities while payments of interest on lease liabilities and variable lease payments are to be classified as operating activities in the Statement of Cash Flows. When the standard is adopted, Veecothe Company will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early application permitted. VeecoThe Company is evaluating the anticipated impact of adopting the ASU on itsthe consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues, including debt prepayments or debt extinguishment costs. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017. This ASU will not have a material impact on the consolidated financial statements.
VeecoIn October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017. The Company is evaluating the anticipated effect the ASU will have on the consolidated financial statements.
The Company is also evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on Veeco’sour consolidated financial statements.
Change in Accounting Principle
In March 2016, the FASB issued ASU 2016-09 Stock Compensation: Improvements to Employee Share-Based Payment Accounting. Veeco adopted the ASU during the first quarter of 2016. Beginning in 2016, excess tax benefits and deficiencies are recognized as income tax expense or benefit in the income statement in the reporting period incurred. In conjunction with adopting the ASU, Veeco has made an accounting policy election to account for forfeitures when they occur. The ASU transition guidance requires that this election be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the ASU is effective. Accordingly, Veeco recorded a $1.3 million charge to the opening accumulated deficit balance with a corresponding adjustment to additional paid-in capital, resulting in no impact to the opening balance of total stockholders’ equity. In addition, Veeco recorded additional deferred tax assets with an equally offsetting valuation allowance of $2.4 million.
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
Note 2 - Income (Loss) Per Common Share
The Company considers unvested share-based awards that have non-forfeitable rights to dividends prior to vesting to be participating shares, which are treated as a separate class of security from the Company’s common shares for calculating per share data. Therefore, the Company applies the two-class method when calculating income (loss) per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. However, since the holders of the participating shares are not obligated to fund losses, participating shares are excluded from the calculation of loss per share.
The dilutive effect of the Convertible Senior Notes on income (loss) per share is calculated using the treasury stock method since the Company has both the current intent and ability to settle the principal amount of the Convertible Senior Notes in cash. See Note 5, “Liabilities,” for additional information on the Convertible Senior Notes.
Basic income (loss) per common share is computed using the two-class method by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income per common share is calculated by dividing net income available to common stockholders(loss) by the weighted average number of common shares andoutstanding during the period under the two-class method. Diluted income per share is calculated by dividing net income by the weighted average number of shares used to calculate basic income (loss) per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and non-participating restricted shareshare-based awards and restricted share units is considered in diluted income per common share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share in the periods the performance targets have been achieved. The computations of basic and diluted income (loss) per common share for the three and ninesix months ended SeptemberJune 30, 2017 and 2016 are as follows:
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
| (in thousands, except per share amounts) |
| ||||||||||
Net income (loss) |
| $ | (18,388 | ) | $ | (32,082 | ) | $ | (17,293 | ) | $ | (47,615 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | (0.43 | ) | $ | (0.82 | ) | $ | (0.42 | ) | $ | (1.22 | ) |
Diluted |
| $ | (0.43 | ) | $ | (0.82 | ) | $ | (0.42 | ) | $ | (1.22 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Basic weighted average shares outstanding |
| 42,656 |
| 38,965 |
| 41,160 |
| 39,035 |
| ||||
Effect of potentially dilutive share-based awards |
| — |
| — |
| — |
| — |
| ||||
Diluted weighted average shares outstanding |
| 42,656 |
| 38,965 |
| 41,160 |
| 39,035 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Unvested participating shares excluded from basic weighted average shares outstanding since the securityholders are not obligated to fund losses |
| 228 |
| 659 |
| 228 |
| 691 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive |
| 330 |
| 34 |
| 294 |
| 50 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Potentially dilutive non-participating shares excluded from the diluted calculation as their effect would be antidilutive |
| 1,265 |
| 2,425 |
| 1,462 |
| 2,350 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Maximum potential shares to be issued for settlement of Convertible Senior Notes excluded from the diluted calculation as their effect would be antidilutive |
| 8,618 |
| — |
| 8,618 |
| — |
|
Note 3 — Business Combinations
Ultratech
On May 26, 2017, the Company completed its acquisition of Ultratech, Inc. (“Ultratech”). Ultratech designs, manufactures, and 2015markets lithography, laser annealing, and inspection equipment for manufacturers of semiconductor devices, including advanced packaging, MEMS, and atomic layer deposition (“ALD”) applications. Ultratech’s customers are primarily located throughout the United States, EMEA, China, Japan, Taiwan, and Korea. With the addition of Ultratech, the Company establishes itself as a leading equipment supplier in the advanced packaging market, forming a strong technology portfolio to address critical advanced packaging applications. The results of Ultratech’s operations have been included in the consolidated financial statements since the date of acquisition.
Ultratech shareholders received (i) $21.75 per share in cash and (ii) 0.2675 of a share of Veeco common stock for each Ultratech common share outstanding on the acquisition date. The Company plans to finalize the purchase accounting within the measurement period, which may include adjustments to the fair values of assets acquired and liabilities assumed. The preliminary acquisition date fair value of the consideration totaled $633.4 million, net of cash acquired, which consisted of the following:
|
| Acquisition Date |
| |
|
| (May 26, 2017) |
| |
|
| (in thousands) |
| |
Amount paid, net of cash acquired |
| $ | 399,478 |
|
Fair value of equity issuances (7.4 million shares issued) |
| 233,655 |
| |
Replacement equity awards attributable to pre-acquisition service |
| 228 |
| |
Acquisition date fair value |
| $ | 633,361 |
|
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
|
| Acquisition Date |
| |
|
| (May 26, 2017) |
| |
|
| (in thousands) |
| |
Short-term investments |
| $ | 47,161 |
|
Accounts receivable |
| 45,465 |
| |
Inventory and deferred cost of sales |
| 61,680 |
| |
Prepaid expense and other current assets |
| 7,217 |
| |
Property, plant, and equipment |
| 19,555 |
| |
Intangible assets |
| 346,940 |
| |
Other assets |
| 6,442 |
| |
Total identifiable assets acquired |
| 534,460 |
| |
|
|
|
| |
Accounts payable and accrued expenses |
| 40,087 |
| |
Customer deposits and deferred revenue |
| 4,834 |
| |
Deferred income taxes |
| 32,478 |
| |
Other liabilities |
| 11,952 |
| |
Total liabilities assumed |
| 89,351 |
| |
|
|
|
| |
Net identifiable assets acquired |
| 445,109 |
| |
Goodwill |
| 188,252 |
| |
Net assets acquired |
| $ | 633,361 |
|
The gross contractual value of the acquired accounts receivable was approximately $46.0 million. The fair value of the accounts receivables is the amount expected to be collected by the Company. Goodwill generated from the acquisition is primarily attributable to expected synergies from future growth and strategic advantages provided through the expansion of product offerings as well as assembled workforce and is not expected to be deductible for income tax purposes. The Company has not yet completed its analysis of the allocation of the above acquired goodwill to the reporting units.
The preliminary classes of intangible assets acquired and the estimated useful life of each class is presented in the table below:
|
| Acquisition Date |
| |||
|
| (May 26, 2017) |
| |||
|
| Amount |
| Useful life |
| |
|
| (in thousands) |
|
|
| |
Technology |
| $ | 158,390 |
| 9 years |
|
Customer relationships |
| 116,710 |
| 12 years |
| |
Backlog |
| 3,080 |
| 6 months |
| |
In-process research and development |
| 43,340 |
| * |
| |
Trademark and tradenames |
| 25,420 |
| 7 years |
| |
Intangible assets acquired |
| $ | 346,940 |
|
|
|
*In-process research and development will be amortized (or impaired) upon completion (or abandonment) of the development project
The Company determined the estimated fair value of the identifiable intangible assets based on various factors including: cost, discounted cash flow, income method, loss-of-revenue/income method, and relief-from-royalty method in determining the purchase price allocation.
In-process research and development (IPR&D) represents the estimated fair values of incomplete Ultratech research and development projects that had not reached the commercialization stage and meet the criteria for recognition as IPR&D as of the date of the acquisition. In the future, the fair value of each project at the acquisition date will be either amortized or impaired depending on whether the projects are completed or abandoned. The fair value of IPR&D was determined using an income approach, and costs to complete the project and expected commercialization timelines are considered key assumptions. This valuation approach reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. The value of the IPR&D was determined to be $43.3 million, approximately half of which is related to the Company’s lithography technologies and one-third of which is related to the Company’s laser annealing technologies.
For the three and six months ended June 30, 2017, acquisition related costs were approximately $14.1 million and $15.5 million, respectively, including non-cash charges of $4.2 million for the three months ended June 30, 2017 related to accelerated share-based compensation for employee terminations.
The amounts of revenue and income (loss) from continuing operations before income taxes of Ultratech included in the Company’s consolidated statement of operations from the acquisition date to the period ending June 30, 2017 are as follows:
|
| Three months ended September 30, |
| Nine months ended September 30, |
| ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||
|
| (in thousands, except per share amounts) |
| ||||||||||
Net income (loss) |
| $ | (69,598 | ) | $ | 5,306 |
| $ | (117,212 | ) | $ | (22,191 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | (1.78 | ) | $ | 0.13 |
| $ | (2.99 | ) | $ | (0.56 | ) |
Diluted |
| $ | (1.78 | ) | $ | 0.13 |
| $ | (2.99 | ) | $ | (0.56 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Basic weighted average shares outstanding |
| 39,131 |
| 40,846 |
| 39,193 |
| 39,729 |
| ||||
Effect of potentially dilutive share-based awards |
| — |
| 133 |
| — |
| — |
| ||||
Diluted weighted average shares outstanding |
| 39,131 |
| 40,979 |
| 39,193 |
| 39,729 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Unvested participating shares excluded from basic weighted average shares outstanding since the securityholders are not obligated to fund losses |
| 469 |
| — |
| 469 |
| 1,076 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive |
| 140 |
| — |
| 45 |
| 165 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Potentially dilutive non-participating shares excluded from the diluted calculation as their effect would be antidilutive |
| 2,030 |
| 2,264 |
| 2,042 |
| 2,066 |
|
|
| Total |
| |
|
| (in thousands) |
| |
Revenue |
| $ | 24,050 |
|
Loss from operations before income taxes |
| $ | (21,445 | ) |
Loss from operations before income taxes of Ultratech for the period ending June 30, 2017 of $21.4 million includes acquisition costs of $14.1 million, release of inventory fair value step-up related to purchase accounting of $7.4 million, amortization expense on intangible assets of $3.5 million, and restructuring charges of $1.2 million.
The following table presents unaudited pro forma financial information as if the acquisition of Ultratech had occurred on January 1, 2016:
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
| (in thousands, except per share amounts) |
| ||||||||||
Revenue |
| $ | 128,399 |
| $ | 124,272 |
| $ | 280,194 |
| $ | 247,493 |
|
Loss from operations |
| (28,898 | ) | (54,380 | ) | (32,852 | ) | (128,860 | ) | ||||
Diluted earnings per share |
| $ | (0.61 | ) | $ | (1.17 | ) | $ | (0.70 | ) | $ | (2.78 | ) |
The pro-forma results were calculated by combining the results of the Company with the stand-alone results of Ultratech for the pre-acquisition period, and adjusting for the following:
(i) Additional amortization expense related to identified intangibles valued as part of the purchase price allocation that would have been incurred starting on January 1, 2016.
(ii) Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred starting on January 1, 2016.
(iii) All acquisition related costs incurred by the Company as well as by Ultratech pre-acquisition have been removed from their respective periods and included in the three months ended March 31, 2016, as such expenses would have been incurred in the first quarter following the acquisition.
(iv) All amortization of inventory step-up has been removed from their respective periods and recorded in the first two quarters of 2016, as such costs would have been incurred as the corresponding inventory was sold.
(v) Additional interest expense related to the Convertible Senior Notes (see Note 5, “Liabilities”) as if they had been issued on January 1, 2016.
(vi) Income tax expense (benefit) was adjusted for the impact of the above adjustments for each period.
Note 34 - Assets
Investments
Marketable securitiesShort-term investments are generally classified as available-for-sale and reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income” in the Consolidated Balance Sheets. These securities may include U.S. treasuries, government agency securities, corporate debt, and commercial paper, all with maturities of greater than three months when purchased.acquired. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other, net” in the Consolidated Statements of Operations.
Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. Veeco classifies certain assets based on the following fair value hierarchy:
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Veeco has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.
The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at SeptemberJune 30, 20162017 and December 31, 2015:2016:
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||
September 30, 2016 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
June 30, 2017 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Short-term investments |
|
|
|
|
|
|
|
|
| |||||||||||||||||
U.S. treasuries |
| $ | 34,951 |
| $ | — |
| $ | — |
| $ | 34,951 |
| |||||||||||||
Government agency securities |
| — |
| 62,135 |
| — |
| 62,135 |
| |||||||||||||||||
Total |
| $ | 34,951 |
| $ | 62,135 |
| $ | — |
| $ | 97,086 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
December 31, 2016 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Cash equivalents |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Corporate debt |
| $ | — |
| $ | 1,501 |
| $ | — |
| $ | 1,501 |
| |||||||||||||
Total |
| $ | — |
| $ | 1,501 |
| $ | — |
| $ | 1,501 |
| |||||||||||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
U.S. treasuries |
| $ | 40,043 |
| $ | — |
| $ | — |
| $ | 40,043 |
|
| $ | 40,008 |
| $ | — |
| $ | — |
| $ | 40,008 |
|
Government agency securities |
| — |
| 5,016 |
| — |
| 5,016 |
|
| — |
| 10,012 |
| — |
| 10,012 |
| ||||||||
Corporate debt |
| — |
| 13,789 |
| — |
| 13,789 |
|
| — |
| 13,773 |
| — |
| 13,773 |
| ||||||||
Commercial paper |
| — |
| 3,987 |
| — |
| 3,987 |
|
| — |
| 2,994 |
| — |
| 2,994 |
| ||||||||
Total |
| $ | 40,043 |
| $ | 22,792 |
| $ | — |
| $ | 62,835 |
|
| $ | 40,008 |
| $ | 26,779 |
| $ | — |
| $ | 66,787 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
December 31, 2015 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Cash equivalents |
|
|
|
|
|
|
|
|
| |||||||||||||||||
U.S. treasuries |
| $ | 9,999 |
| $ | — |
| $ | — |
| $ | 9,999 |
| |||||||||||||
Government agency securities |
| — |
| 4,998 |
| — |
| 4,998 |
| |||||||||||||||||
Commercial paper |
| — |
| 2,999 |
| — |
| 2,999 |
| |||||||||||||||||
Total |
| 9,999 |
| 7,997 |
| — |
| 17,996 |
| |||||||||||||||||
Short-term investments |
|
|
|
|
|
|
|
|
| |||||||||||||||||
U.S. treasuries |
| 94,918 |
| — |
| — |
| 94,918 |
| |||||||||||||||||
Government agency securities |
| — |
| 12,988 |
| — |
| 12,988 |
| |||||||||||||||||
Corporate debt |
| — |
| 8,144 |
| — |
| 8,144 |
| |||||||||||||||||
Total |
| $ | 94,918 |
| $ | 21,132 |
| $ | — |
| $ | 116,050 |
|
There were no transfers between fair value measurement levels during the three and ninesix months ended SeptemberJune 30, 2016.2017.
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
At SeptemberJune 30, 20162017 and December 31, 2015,2016, the amortized cost and fair value of available-for-sale securities consist of:
|
|
|
| Gross |
| Gross |
|
|
|
|
|
| Gross |
| Gross |
|
|
| ||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Estimated |
|
| Amortized |
| Unrealized |
| Unrealized |
| Estimated |
| ||||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||
September 30, 2016 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
June 30, 2017 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
U.S. treasuries |
| $ | 34,986 |
| $ | — |
| $ | (35 | ) | $ | 34,951 |
| |||||||||||||
Government agency securities |
| 62,181 |
| — |
| (46 | ) | 62,135 |
| |||||||||||||||||
Total |
| $ | 97,167 |
| $ | — |
| $ | (81 | ) | $ | 97,086 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
December 31, 2016 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
U.S. treasuries |
| $ | 40,033 |
| $ | 10 |
| $ | — |
| $ | 40,043 |
|
| $ | 40,013 |
| $ | — |
| $ | (5 | ) | $ | 40,008 |
|
Government agency securities |
| 5,016 |
| — |
| — |
| 5,016 |
|
| 10,020 |
| — |
| (8 | ) | 10,012 |
| ||||||||
Corporate debt |
| 13,799 |
| — |
| (10 | ) | 13,789 |
|
| 13,780 |
| — |
| (7 | ) | 13,773 |
| ||||||||
Commercial paper |
| 3,987 |
| — |
| — |
| 3,987 |
|
| 2,994 |
| — |
| — |
| 2,994 |
| ||||||||
Total |
| $ | 62,835 |
| $ | 10 |
| $ | (10 | ) | $ | 62,835 |
|
| $ | 66,807 |
| $ | — |
| $ | (20 | ) | $ | 66,787 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
December 31, 2015 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
U.S. treasuries |
| $ | 94,935 |
| $ | 6 |
| $ | (23 | ) | $ | 94,918 |
| |||||||||||||
Government agency securities |
| 12,985 |
| 3 |
| — |
| 12,988 |
| |||||||||||||||||
Corporate debt |
| 8,144 |
| 1 |
| (1 | ) | 8,144 |
| |||||||||||||||||
Total |
| $ | 116,064 |
| $ | 10 |
| $ | (24 | ) | $ | 116,050 |
|
Available-for-sale securities in a loss position at SeptemberJune 30, 20162017 and December 31, 20152016 consist of:
|
| September 30, 2016 |
| December 31, 2015 |
|
| June 30, 2017 |
| December 31, 2016 |
| ||||||||||||||||
|
|
|
| Gross |
|
|
| Gross |
|
|
|
| Gross |
|
|
| Gross |
| ||||||||
|
| Estimated |
| Unrealized |
| Estimated |
| Unrealized |
|
| Estimated |
| Unrealized |
| Estimated |
| Unrealized |
| ||||||||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| ||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||
U.S. treasuries |
| $ | 34,951 |
| $ | (35 | ) | $ | 20,002 |
| $ | (5 | ) | |||||||||||||
Government agency securities |
| $ | — |
| $ | — |
| $ | 64,922 |
| $ | (23 | ) |
| 62,135 |
| (46 | ) | 10,012 |
| (8 | ) | ||||
Corporate debt |
| 13,789 |
| (10 | ) | 3,353 |
| (1 | ) |
| — |
| — |
| 13,774 |
| (7 | ) | ||||||||
Total |
| $ | 13,789 |
| $ | (10 | ) | $ | 68,275 |
| $ | (24 | ) |
| $ | 97,086 |
| $ | (81 | ) | $ | 43,788 |
| $ | (20 | ) |
At SeptemberJune 30, 20162017 and December 31, 2015,2016, there were no short-term investments that had been in a continuous loss position for more than 12 months.
The contractual maturities of securities classified as available-for-sale securities at SeptemberJune 30, 2016 all contractually mature in one year or less. 2017 were as follows:
|
| June 30, 2017 |
| ||||
|
| Amortized |
| Estimated |
| ||
|
| cost |
| fair value |
| ||
|
| (in thousands) |
| ||||
Due in one year or less |
| $ | 72,278 |
| $ | 72,220 |
|
Due after one year through two years |
| 24,889 |
| 24,866 |
| ||
Total |
| $ | 97,167 |
| $ | 97,086 |
|
Actual maturities may differ from contractual maturities. Veeco may sell these securities prior to maturity based on the needs of the business. In addition, borrowers may have the right to call or prepay obligations prior to scheduled maturities.
There were minimal realized gains for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015.no realized gains for the three and six months ended June 30, 2016. The cost of securities liquidated is based on specific identification.
Accounts receivable
Accounts receivable is presented net of an allowance for doubtful accounts of $0.3 million and $0.2 million at Septemberboth June 30, 20162017 and December 31, 2015, respectively.
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)2016.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventories at SeptemberJune 30, 20162017 and December 31, 20152016 consist of the following:
|
| September 30, |
| December 31, |
|
| June 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||
Materials |
| $ | 50,370 |
| $ | 42,373 |
|
| $ | 58,372 |
| $ | 46,457 |
|
Work-in-process |
| 30,960 |
| 30,327 |
|
| 46,498 |
| 25,250 |
| ||||
Finished goods |
| 5,321 |
| 4,769 |
|
| 15,065 |
| 5,356 |
| ||||
Total |
| $ | 86,651 |
| $ | 77,469 |
|
| $ | 119,935 |
| $ | 77,063 |
|
Prepaid expenses and other current assets
Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, and prepaid licenses. Veeco had deposits with its suppliers of $13.1$7.9 million and $14.6$7.8 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.
Assets Also included within prepaid expenses and other current assets at June 30, 2017 were assets held for sale
During with a carrying value of $2.3 million related to one of the second quarter of 2016, theCompany’s properties in St. Paul, Minnesota. The Company undertook initiatives to streamline operations, enhance efficiency, and reduce costs. As part of that initiative, the Company listed its facility in Yongin-city, South Korea for sale. At that time, Veeco determined that the carrying value of this property exceeded the building exceeded its fair market value, less cost to sell, and recorded an impairment charge. During the third quartercharge of 2016, Veeco engaged potential buyers and re-evaluated market conditionsapproximately $0.7 million for the building. As a result, Veeco updated its assessment of fair market valuethree and increased the carrying value of the building by $1.6 million, which is still lower than the original pre-impairment carrying value. The increase in the carrying value was recorded as a contra-impairment charge in the Consolidated Statements of Operations.
During the third quarter of 2016, Veeco sold its building in Hyeongok-ri, South Korea, which had been designated as held for sale in the second quarter of 2016, at a price which approximated carrying value. The Company also continues to market one of its properties in St. Paul, Minnesota. The carrying value of assets held for sale reflects Veeco’s estimate of fair value less costs to sell using the sales comparison market approach.six months ended June 30, 2017.
Property, plant, and equipment
Property, plant, and equipment at SeptemberJune 30, 20162017 and December 31, 20152016 consist of the following:
|
| September 30, |
| December 31, |
|
| June 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||
Land |
| $ | 5,061 |
| $ | 9,592 |
|
| $ | 5,669 |
| $ | 5,669 |
|
Building and improvements |
| 47,242 |
| 54,622 |
|
| 49,832 |
| 50,814 |
| ||||
Machinery and equipment(1) |
| 98,220 |
| 110,075 |
|
| 122,131 |
| 99,370 |
| ||||
Leasehold improvements |
| 3,771 |
| 5,554 |
|
| 9,486 |
| 3,652 |
| ||||
Gross property, plant and equipment |
| 154,294 |
| 179,843 |
|
| 187,118 |
| 159,505 |
| ||||
Less: accumulated depreciation and amortization |
| 96,737 |
| 100,253 |
|
| 104,572 |
| 98,859 |
| ||||
Net property, plant, and equipment |
| $ | 57,557 |
| $ | 79,590 |
|
| $ | 82,546 |
| $ | 60,646 |
|
(1) Machinery and equipment also includes software, furniture and fixtures
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
For the three and ninesix months ended SeptemberJune 30, 2016,2017, depreciation expense was $3.5 million and $10.2$6.4 million, respectively, and $3.2$3.4 million and $8.9$6.8 million for the comparable 20152016 periods. During the second quarter of 2016, and as part of the Company’s efforts to streamline operations, enhance efficiency, and reduce costs, the Company removed certain lab equipment that was no longer required and recorded a non-cash impairment charge of $6.1 million. In addition, during the second quarter of 2016, land and buildings with a net carrying value of $13.7 million were classified as assets held for sale on the Consolidated Balance Sheets. During the third quarter of 2016, the Company decided to significantly reduce future investments in its Atomic Layer Deposition (“ALD”) technology development and, as a result, recorded a charge for impairment of its ALD assets, including a $3.3 million impairment of property, plant, and equipment.
Goodwill
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. There were noThe following table presents the changes toin goodwill duringbalances for the ninesix months ended SeptemberJune 30, 2016.2017:
|
| Gross carrying |
| Accumulated |
|
|
| |||
|
| amount |
| impairment |
| Net amount |
| |||
|
| (in thousands) |
| |||||||
Balance at December 31, 2016 |
| $ | 238,108 |
| $ | 123,200 |
| $ | 114,908 |
|
Acquisition |
| 188,252 |
| — |
| 188,252 |
| |||
Balance at June 30, 2017 |
| $ | 426,360 |
| $ | 123,200 |
| $ | 303,160 |
|
Intangible assets
Intangible assets consist of purchased technology, customer-related intangible assets, patents,in-process research and development, trademarks (both long-lived and indefinite-lived), covenants not-to-compete,patents, backlog, and software licenses and are initially recorded at fair value. Long-lived intangibles are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line basis if such pattern cannot be reliably determined.
During the third quarter of 2016, the Company decided to significantly reduce future investments in its ALD technology development and, as a result, recorded a charge for impairment of its ALD assets, including $54.3 million for the full impairment of the intangible purchased ALD technology. The impairment charges were based on projected cash flows that required the use of unobservable inputs.
The components of purchased intangible assets at September 30, 2016 and December 31, 2015 consist of the following:were as follows:
|
| September 30, 2016 |
| December 31, 2015 |
|
| June 30, 2017 |
| December 31, 2016 |
| ||||||||||||||||||||||||||||
|
|
|
| Accumulated |
|
|
|
|
| Accumulated |
|
|
|
|
|
| Accumulated |
|
|
|
|
| Accumulated |
|
|
| ||||||||||||
|
| Gross |
| Amortization |
|
|
| Gross |
| Amortization |
|
|
|
| Gross |
| Amortization |
|
|
| Gross |
| Amortization |
|
|
| ||||||||||||
|
| Carrying |
| and |
| Net |
| Carrying |
| and |
| Net |
|
| Carrying |
| and |
| Net |
| Carrying |
| and |
| Net |
| ||||||||||||
|
| Amount |
| Impairment |
| Amount |
| Amount |
| Impairment |
| Amount |
|
| Amount |
| Impairment |
| Amount |
| Amount |
| Impairment |
| Amount |
| ||||||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||||||||
Technology |
| $ | 222,358 |
| $ | 185,341 |
| $ | 37,017 |
| $ | 222,358 |
| $ | 120,496 |
| $ | 101,862 |
|
| $ | 307,588 |
| $ | 118,863 |
| $ | 188,725 |
| $ | 149,198 |
| $ | 113,904 |
| $ | 35,294 |
|
Customer relationships |
| 47,885 |
| 27,111 |
| 20,774 |
| 47,885 |
| 22,470 |
| 25,415 |
|
| 164,595 |
| 31,971 |
| 132,624 |
| 47,885 |
| 28,659 |
| 19,226 |
| ||||||||||||
In-process R&D |
| 43,340 |
| — |
| 43,340 |
| — |
| — |
| — |
| |||||||||||||||||||||||||
Trademarks and tradenames |
| 2,590 |
| 1,910 |
| 680 |
| 2,730 |
| 1,937 |
| 793 |
|
| 28,010 |
| 2,326 |
| 25,684 |
| 2,590 |
| 1,948 |
| 642 |
| ||||||||||||
Indefinite-lived trademark |
| 2,900 |
| — |
| 2,900 |
| 2,900 |
| — |
| 2,900 |
|
| 2,900 |
| — |
| 2,900 |
| 2,900 |
| — |
| 2,900 |
| ||||||||||||
Other |
| 2,026 |
| 1,585 |
| 441 |
| 6,241 |
| 5,537 |
| 704 |
|
| 3,828 |
| 1,004 |
| 2,824 |
| 2,026 |
| 1,710 |
| 316 |
| ||||||||||||
Total |
| $ | 277,759 |
| $ | 215,947 |
| $ | 61,812 |
| $ | 282,114 |
| $ | 150,440 |
| $ | 131,674 |
|
| $ | 550,261 |
| $ | 154,164 |
| $ | 396,097 |
| $ | 204,599 |
| $ | 146,221 |
| $ | 58,378 |
|
Other intangible assets primarily consist of patents, licenses,backlog, and non-compete agreements.licenses.
Other assets
Veeco has an ownership interest of less than 20% in a non-marketable investment, Kateeva, Inc. (“Kateeva”). Veeco does not exert significant influence over Kateeva and therefore the investment is carried at cost. There was no change to the $21.0 million carrying value of the investment during the ninesix months ended SeptemberJune 30, 2016.2017. The investment is
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
included in “Other assets” on the Consolidated Balance Sheet. The investment is subject to a periodic impairment review; as there are no open-market valuations, the impairment analysis requires judgment. The analysis includes assessments of Kateeva’s financial condition, the business outlook for its products and technology, its projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by Veeco relative to other investors. Fair value of the investment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of the investment. No such events or circumstances are present.
Also included within Other assets at June 30, 2017 are deferred compensation plan assets of approximately $3.1 million representing the cash surrender value of life insurance policies held by the Company related to an executive non-qualified deferred compensation plan that was assumed from Ultratech that allows qualifying executives to defer cash compensation. The related plan liability of approximately $4.4 million is included in “Other liabilities” on the Consolidated Balance Sheet.
Note 45 - Liabilities
Accrued expenses and other current liabilities
The components of accrued expenses and other current liabilities at SeptemberJune 30, 20162017 and December 31, 20152016 consist of:
|
| September 30, |
| December 31, |
| ||
|
| 2016 |
| 2015 |
| ||
|
| (in thousands) |
| ||||
Payroll and related benefits |
| $ | 22,830 |
| $ | 30,917 |
|
Warranty |
| 4,849 |
| 8,159 |
| ||
Professional fees |
| 1,795 |
| 2,224 |
| ||
Installation |
| 1,826 |
| 1,110 |
| ||
Sales, use, and other taxes |
| 953 |
| 1,132 |
| ||
Restructuring liability |
| 2,053 |
| 824 |
| ||
Other |
| 4,115 |
| 5,027 |
| ||
Total |
| $ | 38,421 |
| $ | 49,393 |
|
Other liabilities include accruals for costs related to customer training, royalties, and travel.
|
| June 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
|
| (in thousands) |
| ||||
Payroll and related benefits |
| $ | 23,016 |
| $ | 18,780 |
|
Warranty |
| 6,741 |
| 4,217 |
| ||
Professional fees |
| 2,943 |
| 1,827 |
| ||
Installation |
| 1,386 |
| 1,382 |
| ||
Sales, use, and other taxes |
| 1,806 |
| 1,282 |
| ||
Restructuring liability |
| 1,373 |
| 1,796 |
| ||
Interest |
| 4,244 |
| — |
| ||
Other |
| 2,796 |
| 3,917 |
| ||
Total |
| $ | 44,305 |
| $ | 33,201 |
|
Warranty
Warranties are typically valid for one year from the date of system final acceptance, and Veeco estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and are affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs.Changes in product warranty reserves for the ninesix months ended SeptemberJune 30, 20162017 include:
|
| (in thousands) |
| |
Balance - December 31, 2015 |
| $ | 8,159 |
|
Warranties issued |
| 3,223 |
| |
Consumption of reserves |
| (5,739 | ) | |
Changes in estimate |
| (794 | ) | |
Balance - September 30, 2016 |
| $ | 4,849 |
|
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
|
| (in thousands) |
| |
Balance - December 31, 2016 |
| $ | 4,217 |
|
Warranties issued |
| 2,809 |
| |
Addition from Ultratech acquisition |
| 1,889 |
| |
Consumption of reserves |
| (2,673 | ) | |
Changes in estimate |
| 499 |
| |
Balance - June 30, 2017 |
| $ | 6,741 |
|
Restructuring accruals
During the ninesix months ended SeptemberJune 30, 2016,2017, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. During the second and third quarters of 2016, the Company undertook additional restructuring activities as part of its initiative to streamline operations, enhance efficiency, and reduce costs. As a result of these actions, the Company notified approximately 50 employees of their termination from the Company and recorded restructuring charges related to these actions of $2.9 million, consisting of $2.8 million of personnel severance and related costs and $0.1 million of facility closing costs.Company. In addition, during the third quarter of 2016, the Company decided to significantly reduce future investments in its ALD technology development, which impactsimpacted approximately 25 additional employees. As a result, the Company recorded personnel severance and related restructuring charges of $0.9 million in the third quarter of 2016. Over the next few quarters, the Company expects to incur additional restructuring costs of $4$1 million to $7$3 million as it finalizes all of these activities.
|
| Personnel |
|
|
|
|
| |||
|
| Severance and |
| Facility |
|
|
| |||
|
| Related Costs |
| Closing Costs |
| Total |
| |||
|
| (in thousands) |
| |||||||
Balance - December 31, 2016 |
| $ | 1,796 |
| $ | — |
| $ | 1,796 |
|
Provision |
| 1,405 |
| 2,349 |
| 3,754 |
| |||
Payments |
| (2,079 | ) | (2,098 | ) | (4,177 | ) | |||
Balance - June 30, 2017 |
| $ | 1,122 |
| $ | 251 |
| $ | 1,373 |
|
|
| Personnel |
|
|
|
|
| |||
|
| Severance and |
| Facility |
|
|
| |||
|
| Related Costs |
| Closing Costs |
| Total |
| |||
|
| (in thousands) |
| |||||||
Balance - December 31, 2015 |
| $ | 824 |
| $ | — |
| $ | 824 |
|
Provision |
| 3,721 |
| 274 |
| 3,995 |
| |||
Changes in estimate |
| (2 | ) | — |
| (2 | ) | |||
Payments |
| (2,490 | ) | (274 | ) | (2,764 | ) | |||
Balance - September 30, 2016 |
| $ | 2,053 |
| $ | — |
| $ | 2,053 |
|
Included within restructuring expense in the Consolidated Statements of Operations for the six months ended June 30, 2017 is approximately $0.8 million of non-cash charges related to accelerated share-based compensation for employee terminations.
Customer deposits
Customer deposits totaled $25.8$25.0 million and $28.2$22.2 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.
Long-term debtMortgage Payable
Debt consists ofThe Company has a mortgage note payable associated with aits property in St. Paul, Minnesota, which, during the second quarter of 2017 was designated an asset held for sale. The carrying value of $1.3the property exceeds the carrying value of the mortgage note, which was $1.0 million and $1.5$1.2 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. The mortgage note payable is secured by certain land and buildings. One of the buildings is currently held for sale. The annual interest rate on the mortgagenote is 7.91%, and the final payment is due on January 1, 2020. Veeco estimatedThe Company determined the mortgage fair value as $1.3 millionis a Level 3 liability in the fair-value hierarchy and, $1.6 million at September 30, 2016 and December 31, 2015, respectively, using a discounted cash flow model.model, estimated its fair value as $1.0 million and $1.2 million at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, the remaining principle balance on the mortgage note is included in “Current portion of long-term debt” on the Consolidated Balance Sheet as the associated asset is expected to be sold within the next twelve months.
Convertible Senior Notes
On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes due (the “Convertible Senior Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The Convertible Senior Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted.
The Convertible Senior Notes are unsecured obligations of Veeco and rank senior in right of payment to any of Veeco’s subordinated indebtedness; equal in right of payment to all of Veeco’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Veeco’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Veeco’s subsidiaries.
The Convertible Senior Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is 24.9800 shares of the Company’s common stock per $1,000 principal amount of Convertible Senior Notes, representing an initial effective conversion price of $40.03 per share of common stock. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the indenture governing the Convertible Senior Notes, dated January 18, 2017 between the Company and U.S. Bank National Association, as trustee (the “Indenture”), but will not be adjusted for accrued but unpaid interest.
Holders may convert all or any portion of their notes, in multiples of one thousand dollar principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 15, 2022 only under the
following circumstances:
(i) During any calendar quarter (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
(ii) During the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per one thousand dollar principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Veeco’s common stock and the conversion rate on each such trading day;
(iii) If the Company calls any or all of the Convertible Senior Notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
(iv) Upon the occurrence of specified corporate events.
On or after October 15, 2022, until the close of business on the business day immediately preceding the Maturity Date, holders may convert their notes at any time, regardless of the foregoing circumstances.
Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion option, the Company segregated the liability component of the instrument from the equity component. The liability component was measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Convertible Senior Notes. The calculation of the fair value of the debt component required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the Convertible Senior Notes at a discount rate of 7.00%, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the aggregate face value of the Convertible Senior Notes over the estimated fair value of the liability component of $72.5 million was recognized as a debt discount and recorded as an increase to additional paid-in capital, and will be amortized over the expected life of the Convertible Senior Notes using the effective interest rate method. Amortization of the debt discount is recognized as non-cash interest expense.
The transaction costs of $9.2 million incurred in connection with the issuance of the Convertible Senior Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected term of the Convertible Senior Notes. Transaction costs allocated to the equity component of $1.9 million reduced the value of the equity component recognized in stockholders’ equity.
The carrying value of the Convertible Senior Notes is as follows:
|
| June 30, |
| |
|
| 2017 |
| |
|
| (in thousands) |
| |
Principal amount |
| $ | 345,000 |
|
Unamortized debt discount |
| (68,072 | ) | |
Unamortized transaction costs |
| (6,857 | ) | |
Net carrying value |
| $ | 270,071 |
|
Total interest expense related to the Convertible Senior Notes is as follows:
|
| Three months |
| Six months ended |
| ||
|
| 2017 |
| 2017 |
| ||
|
| (in thousands) |
| ||||
Cash Interest Expense |
|
|
|
|
| ||
Coupon interest expense |
| $ | 2,329 |
| $ | 4,244 |
|
Non-Cash Interest Expense |
|
|
|
|
| ||
Amortization of debt discount |
| 2,455 |
| 4,440 |
| ||
Amortization of transaction costs |
| 247 |
| 447 |
| ||
Total Interest Expense |
| $ | 5,031 |
| $ | 9,131 |
|
The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $354.0 million at June 30, 2017.
Other Liabilities
Other liabilities primarily consistat June 30, 2017 included deferred compensation of income taxes payable$4.4 million, asset retirement obligations of $3.3 million, medical and dental benefits of $2.5 million, and acquisition related accruals of $1.0 million. At December 31, 2016, other liabilities not expected to be paid within one year. Non-currentprimarily consisted of a non-current income taxestax payable wereof $4.9 million and less than $0.1 million at September 30, 2016 and December 31, 2015, respectively.million.
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
Note 56 - Commitments and Contingencies
Minimum lease commitments
At SeptemberJune 30, 2016,2017, Veeco’s total future minimum lease payments under non-cancelable operating leases have not changed significantly from the disclosure in the 2015 Form 10-K.(exclusive of renewal options) are payable as follows:
|
| Operating |
| |
|
| (in thousands) |
| |
Payments due by period: |
|
|
| |
2017 |
| $ | 3,528 |
|
2018 |
| 5,433 |
| |
2019 |
| 4,994 |
| |
2020 |
| 4,756 |
| |
2021 |
| 1,799 |
| |
Thereafter |
| 4,493 |
| |
Total |
| $ | 25,003 |
|
Purchase commitments
Veeco has purchase commitments of $60.1$144.5 million at SeptemberJune 30, 2016,2017, substantially all of which become due within one year.
Bank guarantees
Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At SeptemberJune 30, 2016,2017, outstanding bank guarantees and letters of credit totaled $5.3$4.1 million, and unused bank guarantees and letters of credit of $59.8$67.2 million were available to be drawn upon.
Legal proceedings
On March 17, 2017, an Ultratech shareholder filed a purported class action complaint in the U.S. District Court for the Northern District of California (the “District Court”), captioned The Vladimir Gusinsky Rev. Trust v. Ultratech, Inc., et al.,
Case No. 4:17-cv-01468-PJH, on behalf of itself and all other Ultratech shareholders against Ultratech, its directors at the time the acquisition was announced, Veeco, and Merger Sub. The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech, the defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares, agreed to unreasonable deal-protection measures, and potentially engaged in supposed self-dealing.
On March 22, 2017, two other Ultratech shareholders filed a purported class action complaint in the District Court, captioned De Letter et al. v. Ultratech, Inc., et al., Case No. 3:17-cv-01542-WHA, on behalf of themselves and all other Ultratech shareholders against Ultratech and its directors at the time the acquisition was announced. The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech, the defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares and potentially engaged in supposed self-dealing.
On May 28, 2017, the District Court dismissed both cases.
Veeco is involved in various other legal proceedings arising in the normal course of business. Veeco does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
Note 67 - Equity
Accumulated Other Comprehensive Income (“AOCI”)
The following table presents the changes in the balances of each component of AOCI, net of tax:
|
|
|
|
|
| Unrealized |
|
|
| ||||
|
| Foreign Currency |
| Minimum Pension |
| Gains (Losses) on |
|
|
| ||||
|
| Translation |
| Liability |
| Securities |
| Total |
| ||||
|
| (in thousands) |
| ||||||||||
Balance - December 31, 2015 |
| $ | 2,246 |
| $ | (866 | ) | $ | (32 | ) | $ | 1,348 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income, before taxes |
| 20 |
| 1,290 |
| 14 |
| 1,324 |
| ||||
Provision for income taxes |
| — |
| (424 | ) | 18 |
| (406 | ) | ||||
Other comprehensive income, net of tax |
| 20 |
| 866 |
| 32 |
| 918 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance - September 30, 2016 |
| $ | 2,266 |
| $ | — |
| $ | — |
| $ | 2,266 |
|
|
|
|
| Unrealized |
|
|
| |||
|
| Foreign Currency |
| Gains (Losses) on |
|
|
| |||
|
| Translation |
| Securities |
| Total |
| |||
|
| (in thousands) |
| |||||||
Balance - December 31, 2016 |
| $ | 1,797 |
| $ | (20 | ) | $ | 1,777 |
|
Other comprehensive income (loss) |
| 24 |
| (61 | ) | (37 | ) | |||
Balance - June 30, 2017 |
| $ | 1,821 |
| $ | (81 | ) | $ | 1,740 |
|
Late in 2015, the Company began the process to terminate a defined benefit plan it had acquired in the year 2000. The plan had been frozen as of September 30, 1991, and no further benefits have been accrued by participants since that date. In connection with the termination, responsibilityThere were minimal reclassifications from AOCI into net income for the payment of benefits undersix months ended June 30, 2017.
For the plan was transferredsix months ended June 30, 2017, Additional Paid-in Capital increased approximately $233.8 million related to an insurance company during7.4 million shares issued for the third quarter of 2016. As a result, the Company reclassified the minimum pension liability of $1.3Ultratech merger consideration, $49.3 million and the $0.4 million income tax benefit from AOCI to “Other, net” and “Income tax expense,” respectively, on the Consolidated Statements of Operations.
Veeco Instruments Inc. and Subsidiaries
Notesrelated to the Consolidated Financial Statements - continuedissuance of the Convertible Senior Notes including deferred tax impact, and $6.7 million related to on-going share-based compensation activities.
(unaudited)
Note 78 - Share-based compensation
Restricted share awards are issued to employees that are subject to specified restrictions and a risk of forfeiture. The restrictions typically lapse over one to five years and may entitle holders to dividends and voting rights. Other types of share-based compensation include performance share awards, performance share units, and restricted share units (collectively with restricted share awards, “restricted shares”), as well as options to purchase common stock.
Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016:
|
| Three months ended September 30, |
| Nine months ended September 30, |
| ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||
|
| (in thousands) |
| ||||||||||
Cost of sales |
| $ | 607 |
| $ | 787 |
| $ | 1,639 |
| $ | 2,102 |
|
Research and development |
| 993 |
| 1,044 |
| 3,032 |
| 2,739 |
| ||||
Selling, general, and administrative |
| 2,143 |
| 3,288 |
| 7,462 |
| 9,197 |
| ||||
Total |
| $ | 3,743 |
| $ | 5,119 |
| $ | 12,133 |
| $ | 14,038 |
|
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
| (in thousands) |
| ||||||||||
Cost of sales |
| $ | 500 |
| $ | 486 |
| $ | 1,157 |
| $ | 1,032 |
|
Research and development |
| 708 |
| 940 |
| 1,137 |
| 2,039 |
| ||||
Selling, general, and administrative |
| 3,368 |
| 2,576 |
| 6,468 |
| 5,319 |
| ||||
Restructuring |
| 841 |
| — |
| 841 |
| — |
| ||||
Acquisition costs |
| 4,203 |
| — |
| 4,203 |
| — |
| ||||
Total |
| $ | 9,620 |
| $ | 4,002 |
| $ | 13,806 |
| $ | 8,390 |
|
For the ninesix months ended SeptemberJune 30, 2016,2017, equity activity related to stock options was as follows:
|
| Number of |
| Weighted |
|
| Number of |
| Weighted |
| ||
|
| Shares |
| Exercise Price |
|
| Shares |
| Exercise Price |
| ||
|
| (in thousands) |
|
|
|
| (in thousands) |
|
|
| ||
Balance - December 31, 2015 |
| 2,064 |
| $ | 32.91 |
| ||||||
Balance - December 31, 2016 |
| 1,576 |
| $ | 35.18 |
| ||||||
Granted |
| — |
| — |
|
| — |
| — |
| ||
Exercised |
| (193 | ) | 12.12 |
|
| (18 | ) | 30.03 |
| ||
Expired or forfeited |
| (170 | ) | 34.28 |
|
| (120 | ) | 37.14 |
| ||
Balance - September 30, 2016 |
| 1,701 |
| $ | 35.13 |
| ||||||
Balance - June 30, 2017 |
| 1,438 |
| 35.08 |
|
For the ninesix months ended SeptemberJune 30, 2016,2017, equity activity related to non-vested restricted shares and performance shares was as follows:
|
|
|
| Weighted Average |
| |
|
| Number of |
| Grant Date |
| |
|
| Shares |
| Fair Value |
| |
|
| (in thousands) |
|
|
| |
Balance - December 31, 2015 |
| 1,398 |
| $ | 31.97 |
|
Granted |
| 1,138 |
| 17.13 |
| |
Released |
| (208 | ) | 33.10 |
| |
Forfeited |
| (173 | ) | 28.33 |
| |
Balance - September 30, 2016 |
| 2,155 |
| $ | 24.31 |
|
|
|
|
| Weighted |
| |
|
| Number of |
| Grant Date |
| |
|
| Shares |
| Fair Value |
| |
|
| (in thousands) |
|
|
| |
Balance - December 31, 2016 |
| 1,949 |
| $ | 23.85 |
|
Granted |
| 649 |
| 29.67 |
| |
Assumed from Ultratech |
| 338 |
| 31.75 |
| |
Vested |
| (549 | ) | 25.98 |
| |
Forfeited |
| (130 | ) | 25.95 |
| |
Balance - June 30, 2017 |
| 2,257 |
| 25.94 |
| |
Note 89 - Income Taxes
Income taxes are estimated for each of the jurisdictions in which the Company operates. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. Realization of net
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
deferred tax assets is dependent on future taxable income. At June 30, 2017, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that that it is more likely than not that these future benefits will be realized before they expire.
At the end of each interim reporting period, the effective tax rate is aligned to expectations for the full year. This estimate is used to determine the income tax provision on a year-to-date basis and may change in subsequent interim periods. The year-to-date tax benefit for interim period losses is limited to the amount that could be recognizable at the end of the fiscal year. Income (loss) before income taxes and income tax expense (benefit) for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 were as follows:
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
| (in thousands) |
| ||||||||||
Loss before income taxes |
| $ | (31,285 | ) | $ | (31,068 | ) | $ | (40,472 | ) | $ | (46,073 | ) |
Income tax expense (benefit) |
| $ | (12,897 | ) | $ | 1,014 |
| $ | (23,179 | ) | $ | 1,542 |
|
|
| Three months ended September 30, |
| Nine months ended September 30, |
| ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||
|
| (in thousands) |
| ||||||||||
Loss before income taxes |
| $ | (68,462 | ) | $ | 6,739 |
| $ | (114,535 | ) | $ | (12,831 | ) |
Income tax expense |
| $ | 1,136 |
| $ | 1,433 |
| $ | 2,677 |
| $ | 9,360 |
|
The net income tax benefit for the three months ended June 30, 2017 was comprised of a net benefit of $15.4 million related to the Company’s U.S. operations, and a net tax expense of $2.5 million related to the Company’s non-U.S. operations. The net income tax benefit for the six months ended June 30, 2017 was comprised of a net benefit of $19.5 million and $3.7 million related to the Company’s U.S. and non-U.S. operations, respectively.
The net income tax benefit from the Company’s U.S. operations was primarily attributable to a tax benefit of $16.4 million and $21.3 million for losses incurred during the three and six months ended June 30, 2017, respectively. Under the intraperiod tax allocation rules, the deferred tax liability created upon the issuance of the Convertible Senior Notes and recorded through Additional Paid-in Capital is treated as a source of income, which enables the Company to recognize a benefit for the U.S. loss before income taxes through continuing operations during fiscal 2017. The tax benefit related to the issuance of the Convertible Senior Notes will not recur in future years. When calculating the income tax benefit for the six months ended June 30, 2017, the Company was subject to a loss limitation rule as the year-to-date ordinary loss exceeded the full-year expected ordinary loss. The tax benefit for the year-to-date ordinary loss was limited to the amount that we expect to be able to recognize for the full year. This benefit was partially offset by a deferred provision of approximately $1.0 million and $1.9 million related to tax amortization on indefinite-lived intangible assets for the three and six months ended June 30, 2017, respectively.
The net income tax benefit of $3.7 million for the six months ended June 30, 2017, from the Company’s non-U.S. operations was primarily attributable to the Company’s determination in the first quarter of 2017 that it was more likely than not that it will meet the requirements of an existing foreign tax incentive agreement. As a result, the Company remeasured this uncertain tax position and recognized a $6.3 million benefit during the first quarter, which is comprised of a reversal of a $4.9 million tax liability established in previous periods and the recognition of a deferred tax benefit of $1.4 million related to certain foreign net operating losses generated in prior years that are now determined to be realizable. This benefit was partially offset by a current year tax expense of approximately $2.7 million attributed to the profitable non-U.S. operations, of which approximately $2.5 million was recorded during the three months ended June 30, 2017.
For the three and six months ended SeptemberJune 30, 2016, the $1.1 million net expense for income taxes included $0.3 million relating to Veeco’s U.S. operations and $0.8 million relating to Veeco’s non-U.S. operations. For the nine months ended September 30, 2016, the $2.7 million net expense for income taxes included $1.2 million relating to Veeco’s U.S. operations and $1.5 million relating to Veeco’s non-U.S. operations. For the three and nine months ended September 30, 2016, VeecoCompany did not provide a current tax benefit on U.S. pre-tax losses assince the amounts areCompany could not realizable on a more-likely-than-not basis.conclude that it is more likely than not that the benefits would be realized. The U.S. tax expense is primarily related to U.S. tax amortization expense of indefinite-lived intangible assets that isare amortized for tax purposes but not availablefor financial reporting purposes, as well as taxes attributed to the profitable non-U.S. operations. The deferred tax liability created by the tax deductible expense cannot be used to offset existing deferred tax assets.
For three and nine months ended September 30, 2015, Veeco did not provide a current tax benefit on U.S. pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The U.S. tax expense is primarily related to withholding taxes and is also related to U.S. tax amortization expense of indefinite-lived intangible assets that is not available to offset existing deferred tax assets.
Note 910 - Segment Reporting and Geographic Information
Veeco operates and measures its results in one operating segment and thereforecontinues to do so with the integration of Ultratech’s business activities. As a result, the Company has one reportable segment: the design, development, manufacture, and support of thin filmsemiconductor process equipment primarily sold to make electronic devices.
Veeco categorizes its salesrevenue by the key markets into which it sells. As a result of the followingacquisition of Ultratech, the Company’s four end-markets:key markets are now: Lighting, Display & Power Electronics; Advanced Packaging, MEMS & RF; Scientific & Industrial, which now includes Data Storage, which was formerly a separate category; and Front-End Semiconductor, which was formerly included in the Scientific & Industrial market category.
Lighting, Display & Power Electronics
Lighting refers to Light Emitting Diode (“LED”); and semiconductor illumination sources used in various applications including, but not limited to, displays such as backlights, general lighting, automotive running lights, and head lamps.
Display refers to LEDLEDs used for displays includingand Organic Light Emitting Diode (“OLED”) displays found in outdoor display/signage applications.applications, smartphones, wearable devices, and tablets. Power Electronics refers to GaN-on-Silicon semiconductor devices such as rectifiers, inverters, and converters for the control and conversion of electric power.
Advanced Packaging, MEMS & RF (Mobility)
Advanced Packaging includes a portfolio of wafer-level assembly technologies that enable the miniaturization and performance improvement of electronic products, such as smartphones, smartwatches, tablets, and laptops. Micro-Electro Mechanical Systems (“MEMS”) includes tiny mechanical devices such as sensors, switches, mirrors, and actuators embedded in semiconductor chips used in vehicles, smartphones, tablets, and games. Radio Frequency (“RF”) includes semiconductor devices that make use of radio waves (RF fields) for wireless broadcasting and/or communications.
Scientific & Industrial
Scientific refers to advanced materials research at university research institutions, industry research institutions, industry
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
consortiums, and government research agencies. Industrial refers to large-scale product manufacturing applications including high powered lasers, data storage, and optical coatings: thin layers of material deposited on a lens or mirror that alters how light reflects and transmits; extreme ultraviolet (“EUV”) photomask: an opaque plate that allows lighttransmits.
Front-End Semiconductor
Front-End Semiconductor refers to shine through in a defined pattern for use in photolithography; front end semiconductor:the early steps in the process of integrated circuit fabrication where the microchips are created but still remain on the silicon wafer; and high power lasers such as fiber lasers used for industrial materials processing.
Data Storage
The Data Storage end-market referswafer. This includes the photomask market, which is an opaque plate that allows light to the archiving of datashine through in electromagnetic or other formsa defined pattern for use by a computer or device, including hard disk drives used in large capacity storage applications.lithography.
Sales by end-market and geographic region for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 were as follows:
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| Three months ended September 30, |
| Nine months ended September 30, |
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| Three months ended June 30, |
| Six months ended June 30, |
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| (in thousands) |
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| (in thousands) |
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Sales by end-market |
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Lighting, Display & Power Electronics |
| $ | 49,427 |
| $ | 94,302 |
| $ | 97,132 |
| $ | 240,751 |
|
| $ | 56,199 |
| $ | 24,762 |
| $ | 110,393 |
| $ | 47,705 |
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Advanced Packaging, MEMS & RF |
| 12,092 |
| 13,541 |
| 52,400 |
| 40,545 |
|
| 21,426 |
| 17,045 |
| 32,983 |
| 40,308 |
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Scientific & Industrial |
| 13,938 |
| 14,897 |
| 48,675 |
| 46,493 |
|
| 27,033 |
| 31,779 |
| 54,209 |
| 62,582 |
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Data Storage |
| 10,025 |
| 18,004 |
| 40,635 |
| 42,705 |
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Front-End Semiconductor |
| 10,408 |
| 1,762 |
| 11,867 |
| 2,764 |
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Total |
| $ | 85,482 |
| $ | 140,744 |
| $ | 238,842 |
| $ | 370,494 |
|
| $ | 115,066 |
| $ | 75,348 |
| $ | 209,452 |
| $ | 153,359 |
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Sales by geographic region |
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United States |
| $ | 19,104 |
| $ | 19,405 |
| $ | 66,550 |
| $ | 67,006 |
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| $ | 21,245 |
| $ | 20,734 |
| $ | 38,533 |
| $ | 47,446 |
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China |
| 21,238 |
| 81,156 |
| 54,621 |
| 191,874 |
|
| 26,287 |
| 24,582 |
| 66,613 |
| 33,383 |
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EMEA(1) |
| 19,703 |
| 21,304 |
| 61,999 |
| 51,618 |
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| 18,002 |
| 14,834 |
| 40,069 |
| 42,296 |
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Rest of World |
| 25,437 |
| 18,879 |
| 55,672 |
| 59,996 |
|
| 49,532 |
| 15,198 |
| 64,237 |
| 30,234 |
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Total |
| $ | 85,482 |
| $ | 140,744 |
| $ | 238,842 |
| $ | 370,494 |
|
| $ | 115,066 |
| $ | 75,348 |
| $ | 209,452 |
| $ | 153,359 |
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(1) EMEA consists of Europe, the Middle East, and Africa
For geographic reporting, sales are attributed to the location in which the customer facility is located.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
Our discussion below constitutes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future 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. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made.
Executive Summary
We createOn May 26, 2017, we completed the acquisition of Ultratech. Ultratech designs, manufactures, and markets lithography, laser annealing, and inspection equipment for manufacturers of semiconductor devices, including advanced packaging, MEMS, and atomic layer deposition (“ALD”) applications. Ultratech’s customers are primarily located throughout the United States, EMEA, China, Japan, Taiwan, and Korea. The results of Ultratech’s operations have been included in the consolidated financial statements since the date of acquisition.
Together with Ultratech, we design, manufacture, and market semiconductor process equipment that enables technologies for a cleaner, more productive and connected world. We design, develop, manufacture, market, and service thin film process equipmentaligned to meet the demands of key global trends such as improving energy efficiency, enhancingconservation, mobility, and increasing connectivity. Our MOCVD, lithography, laser annealing, ion beam, and single wafer etch and clean technologies play an integral role in producing LEDs for solid-state lighting and displays and in the fabrication of advanced semiconductor devices. With equipment is useddesigned to make electronic devices which enablemaximize performance, yield, and cost of ownership, we hold technology leadership positions in all these trends, including light emitting diodes (“LEDs”), micro-electromechanical systems (“MEMS”), wireless devices, power electronics, hard disk drives (“HDDs”), and semiconductors.served markets.
We develop highly differentiated, “best-in-class” equipment for critical performance steps in thin film processing. Our products provide leading technology solutions with competitive cost-of-ownership. Core competencies in advanced thin film technologies and decadescategorize our revenue by the key markets into which we sell. As a result of specialized process know-how help us stay at the forefrontacquisition of these rapidly advancing industries.
Our solutions sell intoUltratech, our four key end-markets:markets are now: Lighting, Display & Power Electronics; Advanced Packaging, MEMS & RF; Scientific & Industrial;Industrial, which now includes Data Storage, which was formerly a separate category; and Data Storage.Front-End Semiconductor, which was formerly included in the Scientific & Industrial market category.
Sales in the Lighting, Display & Power Electronics marketsmarket were driven by the continued roll-out of MOCVD systems for the LED industry. The largest applications for LEDs are solid state lighting, followed by TV displays. Over the past few quarters demand has increased in the third quarter, reflectingfor larger LCD TV displays, which require relatively more LEDs to backlight than smaller display sizes. We have also seen an improvement in LED industry conditions. Following a prolonged period of weakness, demand for TV display backlighting has started to stabilize and consume excess LED capacity. As a result, LED chip manufacturers have begun to make capital investments to support ongoing growthincrease in LED demand for general lighting, signage,fine-pitch digital signage. These trends have driven an increase in demand for our MOCVD equipment and automotive applications. While we have limited long-term visibility,build-up in our MOCVD backlog. As a result, we believe these trends are positive for metal organic chemical vapor deposition (“MOCVD”) demandthat our MOCVD shipments have the potential to be higher in the near term.second half of the year relative to the first half of 2017. Our broad portfolio of MOCVD technologies 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 TurboDisc® EPIK™ EPIK™ 700 Gallium-Nitride (“GaN”)GaN MOCVD system continues to win new business for blue LEDs. Our recently introduced TurboDisc K475i™ Arsenic-Phosphide (“AsP”)K475i™ AsP MOCVD system targets red-orange-yellow LEDs, laser diodes, and high-efficiency triple junction photovoltaic solar cells and has quickly gainedcontinues to gain market momentum.
Following recordIncreased sales ininto Advanced Packaging, MEMS & RF were driven primarily by the first halfinclusion of the year,Ultratech sales to Advanced Packaging customers. Sales in the Advanced Packaging, MEMS & RF markets declined in the third quarter. RF applications represented the largest portion of sales in these markets as customers made incremental investments to support next generation mobile devices. We continue to focus on expanding intobe influenced by the advanced packaging markets with our Precision Surface Processing (“PSP”) product family.mobility trend and increasing functionality in mobile devices. Our versatile PSP product architecture, iscombined with Ultratech’s Advanced Packaging lithography tools, positions us well suited for a multitude of advanced packaging process schemes,processes, including WLFO (wafer level fan out) and 3D TSV (thru silicon via) applications.
Sales in thefrom Scientific & Industrial marketmarkets were comprised of a broad range of customers, spanning multiple product lines. Our SPECTOR ion beam deposition products represented the largest component of these sales. SPECTOR is used by optical coating suppliers to manufacture a variety of products including laser mirrors, optical fibers, and anti-reflective coatings. We continue to win a majority of research opportunities, supported by our molecular beam epitaxy (“MBE”) GENXplor R&D product. Ourshipments of AD&E systems for data storage and optical applications and by shipments of MBE systems enableto universities and research consortialaboratories. While equipment demand from each individual market may fluctuate quarter to conduct advanced materials research. Our MBE systems are also used for production applications, such as fiber lasers, where high volume throughput
and low cost of ownership are required. Thequarter, the diverse customer base represented byhas historically provided a relatively stable revenue stream for the Industrial & Scientific markets support ongoing demand for our products; however, sales can be highly variable quarter to quarter.
Sales in the Data Storage market were lower in the third quarter, although disk drive manufacturers continued to make incremental investments to upgrade their installed base of equipment. This mature market is facing softening demand for personal computers in the near term andcompany on a shift from HDDs to solid state drives in the longer term. Accordingly, our customers in the HDD industry are not expected to make significant investments in new capacity. This is consistent with recent experience that investments are being made on an “as-needed”combined basis. Orders are expected to continue to fluctuate from quarter to quarter.
Results of Operations
For the three months ended SeptemberJune 30, 20162017 and 20152016
The following table presents operating results as a percentagerevenue and expense line items reported in our Consolidated Statements of net sales, as well asOperations for 2017 and 2016 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment.segment, represented by our single operating segment, including the Ultratech business acquired.
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| Three months ended September 30, |
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| Three months ended June 30, |
| Change |
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| 2015 |
| Period to Period |
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| 2016 |
| Period to Period |
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Net sales |
| $ | 85,482 |
| 100 | % | $ | 140,744 |
| 100 | % | $ | (55,262 | ) | (39 | )% |
| $ | 115,066 |
| 100% |
| $ | 75,348 |
| 100% |
| $ | 39,718 |
| 53% |
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Cost of sales |
| 52,027 |
| 61 | % | 86,494 |
| 61 | % | (34,467 | ) | (40 | )% |
| 76,346 |
| 66% |
| 43,909 |
| 58% |
| 32,437 |
| 74% |
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Gross profit |
| 33,455 |
| 39 | % | 54,250 |
| 39 | % | (20,795 | ) | (38 | )% |
| 38,720 |
| 34% |
| 31,439 |
| 42% |
| 7,281 |
| 23% |
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Operating expenses, net: |
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Research and development |
| 19,892 |
| 23 | % | 19,200 |
| 14 | % | 692 |
| 4 | % |
| 18,619 |
| 16% |
| 21,543 |
| 29% |
| (2,924 | ) | (14)% |
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Selling, general, and administrative |
| 18,396 |
| 22 | % | 21,905 |
| 16 | % | (3,509 | ) | (16 | )% |
| 22,698 |
| 20% |
| 19,995 |
| 27% |
| 2,703 |
| 14% |
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Amortization |
| 5,261 |
| 6 | % | 5,891 |
| 4 | % | (630 | ) | (11 | )% |
| 6,354 |
| 6% |
| 5,273 |
| 7% |
| 1,081 |
| 21% |
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Restructuring |
| 1,798 |
| 2 | % | 469 |
| 0 | % | 1,329 |
| * |
|
| 3,257 |
| 3% |
| 2,095 |
| 3% |
| 1,162 |
| 55% |
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Acquisition costs |
| 14,133 |
| 12% |
| — |
| 0% |
| 14,133 |
| 100% |
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Asset impairment |
| 56,035 |
| 66 | % | — |
| 0 | % | 56,035 |
| * |
|
| 675 |
| 1% |
| 13,627 |
| 18% |
| (12,952 | ) | (95)% |
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Other, net |
| 795 |
| 1 | % | 207 |
| 0 | % | 588 |
| * |
|
| (10 | ) | (0)% |
| 159 |
| 0% |
| (169 | ) | (106)% |
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Total operating expenses, net |
| 102,177 |
| 120 | % | 47,672 |
| 34 | % | 54,505 |
| 114 | % |
| 65,726 |
| 57% |
| 62,692 |
| 83% |
| 3,034 |
| 5% |
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Operating income (loss) |
| (68,722 | ) | (80 | )% | 6,578 |
| 5 | % | (75,300 | ) | * |
|
| (27,006 | ) | (23)% |
| (31,253 | ) | (41)% |
| 4,247 |
| (14)% |
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Interest income, net |
| 260 |
| 0 | % | 161 |
| 0 | % | 99 |
| 61 | % | |||||||||||||||||||
Interest income (expense), net |
| (4,279 | ) | (4)% |
| 185 |
| 0% |
| (4,464 | ) | * |
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Income (loss) before income taxes |
| (68,462 | ) | (80 | )% | 6,739 |
| 5 | % | (75,201 | ) | * |
|
| (31,285 | ) | (27)% |
| (31,068 | ) | (41)% |
| (217 | ) | 1% |
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Income tax expense |
| 1,136 |
| 1 | % | 1,433 |
| 1 | % | (297 | ) | (21 | )% | |||||||||||||||||||
Income tax expense (benefit) |
| (12,897 | ) | (11)% |
| 1,014 |
| 1% |
| (13,911 | ) | * |
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Net income (loss) |
| $ | (69,598 | ) | (81 | )% | $ | 5,306 |
| 4 | % | $ | (74,904 | ) | * |
|
| $ | (18,388 | ) | (16)% |
| $ | (32,082 | ) | (43)% |
| $ | 13,694 |
| (43)% |
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* Not meaningful
Net Sales
The following is an analysis of sales by market and by region:
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| Three months ended September 30, |
| Change |
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| Three months ended June 30, |
| Change |
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| 2015 |
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| 2016 |
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Saless by market |
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Sales by market |
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Lighting, Display & Power Electronics |
| $ | 49,427 |
| 58 | % | $ | 94,302 |
| 67 | % | $ | (44,875 | ) | (48 | )% |
| $ | 56,199 |
| 49% |
| $ | 24,762 |
| 33% |
| $ | 31,437 |
| 127% |
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Advanced Packaging, MEMS & RF |
| 12,092 |
| 14 | % | 13,541 |
| 10 | % | (1,449 | ) | (11 | )% |
| 21,426 |
| 19% |
| 17,045 |
| 23% |
| 4,381 |
| 26% |
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Scientific & Industrial |
| 13,938 |
| 16 | % | 14,897 |
| 10 | % | (959 | ) | (6 | )% |
| 27,033 |
| 23% |
| 31,779 |
| 42% |
| (4,746 | ) | (15)% |
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Data Storage |
| 10,025 |
| 12 | % | 18,004 |
| 13 | % | (7,979 | ) | (44 | )% | |||||||||||||||||||
Front-End Semiconductor |
| 10,408 |
| 9% |
| 1,762 |
| 2% |
| 8,646 |
| 491% |
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Total |
| $ | 85,482 |
| 100 | % | $ | 140,744 |
| 100 | % | $ | (55,262 | ) | (39 | )% |
| $ | 115,066 |
| 100% |
| $ | 75,348 |
| 100% |
| $ | 39,718 |
| 53% |
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Sales by geographic region |
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United States |
| $ | 19,104 |
| 22 | % | $ | 19,405 |
| 14 | % | $ | (301 | ) | (2 | )% |
| $ | 21,245 |
| 18% |
| $ | 20,734 |
| 27% |
| $ | 511 |
| 2% |
|
China |
| 21,238 |
| 25 | % | 81,156 |
| 58 | % | (59,918 | ) | (74 | )% |
| 26,287 |
| 23% |
| 24,582 |
| 33% |
| 1,705 |
| 7% |
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EMEA |
| 19,703 |
| 23 | % | 21,304 |
| 15 | % | (1,601 | ) | (8 | )% |
| 18,002 |
| 16% |
| 14,834 |
| 20% |
| 3,168 |
| 21% |
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Rest of World |
| 25,437 |
| 30 | % | 18,879 |
| 13 | % | 6,558 |
| 35 | % |
| 49,532 |
| 43% |
| 15,198 |
| 20% |
| 34,334 |
| 226% |
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Total |
| $ | 85,482 |
| 100 | % | $ | 140,744 |
| 100 | % | $ | (55,262 | ) | (39 | )% |
| $ | 115,066 |
| 100% |
| $ | 75,348 |
| 100% |
| $ | 39,718 |
| 53% |
|
The overall* Not meaningful
Total sales decline wasincreased for the three months ended June 30, 2017 against the comparable prior year period, primarily due to reducedincreased sales in Lighting, Display & Power Electronics whichas we continue to see ongoing improvements in LED industry conditions, as well as additional sales from the Ultratech business acquired in May 2017, spread across all markets. The increase was drivenpartially offset by an oversupplydecreased sales in the Scientific & Industrial markets. Pricing was not a significant driver of LED unitsthe change in this market, and a decline in Data Storage, which was a result of demand variability associated with this mature market.total sales. By geography, sales increased in all geographic regions. The most significant increase occurred in the largest sales decline was in China,Rest of World region, which was attributable to the declineincreased sales in the Lighting, Display & Power Electronics partially offset by increases in Rest of World.market, as well as additional sales from the Ultratech business acquired. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies.
BookingsOrders increased to $118.0$122.7 million for the three months ended SeptemberJune 30, 20162017 from $51.7$67.7 million for the comparable prior year period. The increase in bookingsorders was primarily attributable to improvementsan increase of over 180% in theorders in Lighting, Display & Power Electronics, market as we are seeing some improvementwell as additional bookings from the Ultratech business acquired in LED industry conditions. We expect continued variationsMay 2017 largely in quarter-to-quarter results,Advanced Packaging, MEMS, and we expect Data Storage demand to generally be weak as customers make limited technology purchases.RF.
One of the performance measures we use as a leading indicator of the business is the book-to-bill ratio. The ratio is defined as orders recorded in a given period divided by revenue recognized in the same period. A ratio greater than one indicates we are adding orders faster than we are recognizing revenue. For the three months ended SeptemberJune 30, 2016,2017, the book-to-bill ratio was about 1.4.1.1, compared to 0.9 for the comparable prior period. Our backlog increased from $144.2 million at June 30, 20162017 was $269.5 million, which was higher than the backlog at March 31, 2017 of $221.1 million. During the three months ended June 30, 2017, we recorded backlog adjustments of approximately $41.6 million relating to $176.5backlog acquired from Ultratech, as well as $0.8 million at September 30, 2016.relating to orders that no longer met our bookings criteria.
Gross Profit
In the thirdsecond quarter of 2016,2017, gross profit decreasedincreased compared to 2015the second quarter of 2016 due to a sharp declineincrease in sales volume.volume, including the acquisition of Ultratech, partially offset by decreased gross margins. Gross margins remained steady despite the decline in overall sales volumedecreased principally due to a favorablean inventory fair value step-up that was recorded in connection with the purchase accounting relating to the Ultratech acquisition, as well as product and region mix of products soldsales in the period and from the benefits associated with ongoing cost reduction activities.temporary impact of our manufacturing consolidation efforts.
Research and development expenses
The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses increased slightly due to small changes in personnel-related expenses. However, we expect research and development expenses to declinedecreased in the fourthsecond quarter of 2017 compared to the second quarter of 2016 primarily as certain development programs are completed. We expecta result of our decision to fund research and development programs that position the Company for future growth.
Selling, general, and administrative expenses
Selling, general, and administrative expenses decreased primarily due to reductionssignificantly reduce investments in personnel andour Atomic Layer Deposition (“ALD”) technology, as well as decreases in other personnel-related expenses equity compensation, and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs in responsecosts. These decreases were partially offset by the addition of the acquired Ultratech related research and development projects.
Selling, general, and administrative
Selling, general, and administrative expenses increased primarily due to market conditions.the addition of the acquired Ultratech related selling, general and administrative costs.
Amortization expense
The decreaseincrease in amortization expense is a result of the additional intangibles acquired as part of the acquisition of Ultratech, offset by the lower amortization resulting from the impairment of the ALD technology asset in the prior year as well as certain other intangible assets becoming fully amortized includingduring 2016.
Restructuring expense
During the backlogthree months ended June 30, 2017, additional accruals were recognized and trademark/tradename assets associated withpayments made related to previous years’ restructuring initiatives. During the December 2014 Precision Surface Processing (“PSP”) acquisition.second and third quarters of 2016, we undertook restructuring activities as part of our initiative to streamline operations, enhance efficiency, and reduce costs. As a result of these actions,we notified approximately 50 employees of their termination from the Company. In addition, during the third quarter of 2016, we decided to significantly reduce future investments in our Atomic Layer Deposition (“ALD”) technology development and, as a result, recorded a charge for impairment of the ALD assets, including a non-cash $54.3 million impairment of intangible purchased technology. As a result, going forward we expect there will be a significant decline in amortization expense.
Restructuring expense
During the third quarter of 2016, we undertook additional restructuring activities as part of our initiative to streamline operations, enhance efficiency, and reduce costs that was announced during the second quarter of 2016. As a result of these actions, we notified approximately 10 additional employees of their termination. We also incurred restructuring costs associated with our decision to reduce future investments in our ALD technology development, which impacts approximately 25 additional employees. WeFinally, during the three months ended June 30, 2017, the Company incurred $1.7non-cash charges of approximately $0.8 million of personnel severance and related costs and $0.1 million of facility closing costs.to share-based compensation. Over the next few quarters, we expect to incur additional restructuring costs of $4$1 to $7$3 million as we finalize all of these activities.
Asset impairment expenseAcquisition costs
As a result of our decision to significantly reduce future investmentsAcquisition costs are non-recurring charges incurred in our ALD technology development, duringconnection with the third quarter of 2016 we recorded non-cash asset impairment charges of $57.6 million, the vast majority of which relates to the impairmentacquisition of the intangible ALD technology asset. In addition, we engaged potential buyers and re-evaluated market conditionsUltratech business, which included $4.2 million on non-cash charges related to accelerated share-based compensation for employee terminations for the sale of a building that was previously impaired when it was designated as held for sale during the second quarter of 2016. Our updated assessment of fair market value for the building required us to increase the carrying value of the building, which is still lower than the original pre-impairment carrying value, and record a contra-impairment charge of $1.6 million.three months ended June 30, 2017.
Income tax expenseTaxes
At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods. The year-to-date tax benefit for interim period losses is limited to the amount that could be recognizable at the end of the fiscal year.
Our tax expensebenefit for the three months ended SeptemberJune 30, 2016 and 20152017 was $1.1$ 12.9 million and $1.4 million, respectively. The 2016compared to a tax expense of $1.0 million for the comparable prior period. The 2017 tax benefit included $0.3a $15.4 million benefit relating to our U.S.domestic operations and $0.8a $2.5 million expense relating to our non-U.S. operations, compared to 20152016 when our expense included $0.4$0.5 million benefit related to U.S.domestic operations and $1.8$0.5 million expense related to our non-U.S. operations. The decreasecurrent period domestic tax benefit is primarily attributable to an income tax benefit for losses incurred during the three months ended June 30, 2017, as the deferred tax liability created by the issuance of the Convertible Senior Notes is treated as a source of income in our expense in 2016 was primarilyfiscal 2017, offset by a deferred provision related to reduced pretax income from ourtax amortization on indefinite-lived intangible assets. The current period non-U.S. operations,tax expense is attributable to the profitable non-U.S. operations. The tax expense for the comparable period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset by an increase in our U.S. deferred tax expense.assets.
For the ninesix months ended SeptemberJune 30, 20162017 and 20152016
The following table presents operating results as a percentage of net sales, as well as period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment.segment, including the Ultratech business acquired.
|
| Nine months ended September 30, |
| Change |
| |||||||||||
|
| 2016 |
| 2015 |
| Period to Period |
| |||||||||
|
| (dollars in thousands) |
| |||||||||||||
Net sales |
| $ | 238,842 |
| 100 | % | $ | 370,494 |
| 100 | % | $ | (131,652 | ) | (36 | )% |
Cost of sales |
| 141,991 |
| 59 | % | 232,038 |
| 63 | % | (90,047 | ) | (39 | )% | |||
Gross profit |
| 96,851 |
| 41 | % | 138,456 |
| 37 | % | (41,605 | ) | (30 | )% | |||
Operating expenses, net: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Research and development |
| 63,545 |
| 27 | % | 57,904 |
| 16 | % | 5,641 |
| 10 | % | |||
Selling, general, and administrative |
| 58,230 |
| 24 | % | 69,153 |
| 19 | % | (10,923 | ) | (16 | )% | |||
Amortization |
| 15,785 |
| 7 | % | 21,832 |
| 6 | % | (6,047 | ) | (28 | )% | |||
Restructuring |
| 3,993 |
| 2 | % | 3,509 |
| 1 | % | 484 |
| 14 | % | |||
Asset impairment |
| 69,662 |
| 29 | % | 126 |
| 0 | % | 69,536 |
| * |
| |||
Other, net |
| 884 |
| 0 | % | (795 | ) | 0 | % | 1,679 |
| * |
| |||
Total operating expenses, net |
| 212,099 |
| 89 | % | 151,729 |
| 41 | % | 60,370 |
| 40 | % | |||
Operating income (loss) |
| (115,248 | ) | (48 | )% | (13,273 | ) | (4 | )% | (101,975 | ) | * |
| |||
Interest income (expense), net |
| 713 |
| 0 | % | 442 |
| 0 | % | 271 |
| 61 | % | |||
Income (loss) before income taxes |
| (114,535 | ) | (48 | )% | (12,831 | ) | (3 | )% | (101,704 | ) | * |
| |||
Income tax provision (benefit) |
| 2,677 |
| 1 | % | 9,360 |
| 3 | % | (6,683 | ) | 71 | % | |||
Income (loss) from continuing operations |
| $ | (117,212 | ) | (49 | )% | $ | (22,191 | ) | (6 | )% | $ | (95,021 | ) | * |
|
|
| Six months ended June 30, |
| Change |
| |||||||||||
|
| 2017 |
| 2016 |
| Period to Period |
| |||||||||
|
| (dollars in thousands) |
| |||||||||||||
Net sales |
| $ | 209,452 |
| 100% |
| $ | 153,359 |
| 100% |
| $ | 56,093 |
| 37% |
|
Cost of sales |
| 136,533 |
| 65% |
| 89,964 |
| 59% |
| 46,569 |
| 52% |
| |||
Gross profit |
| 72,919 |
| 35% |
| 63,395 |
| 41% |
| 9,524 |
| 15% |
| |||
Operating expenses, net: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Research and development |
| 33,608 |
| 16% |
| 43,653 |
| 28% |
| (10,045 | ) | (23)% |
| |||
Selling, general, and administrative |
| 41,801 |
| 20% |
| 39,834 |
| 26% |
| 1,967 |
| 5% |
| |||
Amortization |
| 9,221 |
| 4% |
| 10,524 |
| 7% |
| (1,303 | ) | (12)% |
| |||
Restructuring |
| 4,595 |
| 2% |
| 2,195 |
| 1% |
| 2,400 |
| 109% |
| |||
Acquisition costs |
| 15,494 |
| 7% |
| — |
| 0% |
| 15,494 |
| 100% |
| |||
Asset impairment |
| 1,138 |
| 1% |
| 13,627 |
| 9% |
| (12,489 | ) | (92)% |
| |||
Other, net |
| (87 | ) | (0)% |
| 88 |
| 0% |
| (175 | ) | (199)% |
| |||
Total operating expenses, net |
| 105,770 |
| 50% |
| 109,921 |
| 72% |
| (4,151 | ) | (4)% |
| |||
Operating income (loss) |
| (32,851 | ) | (16)% |
| (46,526 | ) | (30)% |
| 13,675 |
| * |
| |||
Interest income (expense), net |
| (7,621 | ) | (4)% |
| 453 |
| 0% |
| (8,074 | ) | * |
| |||
Income (loss) before income taxes |
| (40,472 | ) | (19)% |
| (46,073 | ) | (30)% |
| 5,601 |
| * |
| |||
Income tax expense (benefit) |
| (23,179 | ) | (11)% |
| 1,542 |
| 1% |
| (24,721 | ) | * |
| |||
Income (loss) from continuing operations |
| $ | (17,293 | ) | (8)% |
| $ | (47,615 | ) | (31)% |
| $ | 30,322 |
| * |
|
* Not Meaningful
Net Sales
The following is an analysis of sales by market and by region:
|
| Nine months ended September 30, |
| Change |
|
| Six months ended June 30, |
| Change |
| ||||||||||||||||||||||
|
| 2016 |
| 2015 |
| Period to Period |
|
| 2017 |
| 2016 |
| Period to Period |
| ||||||||||||||||||
|
| (dollars in thousands) |
|
| (dollars in thousands) |
| ||||||||||||||||||||||||||
Market Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Lighting, Display & Power Electronics |
| $ | 97,132 |
| 41 | % | $ | 240,751 |
| 65 | % | $ | (143,619 | ) | (60 | )% |
| $ | 110,393 |
| 52% |
| $ | 47,705 |
| 31% |
| $ | 62,688 |
| 131% |
|
Advanced Packaging, MEMS & RF |
| 52,400 |
| 22 | % | 40,545 |
| 11 | % | 11,855 |
| 29 | % |
| 32,983 |
| 16% |
| 40,308 |
| 26% |
| (7,325 | ) | (18)% |
| ||||||
Scientific & Industrial |
| 48,675 |
| 20 | % | 46,493 |
| 13 | % | 2,182 |
| 5 | % |
| 54,209 |
| 26% |
| 62,582 |
| 41% |
| (8,373 | ) | (13)% |
| ||||||
Data Storage |
| 40,635 |
| 17 | % | 42,705 |
| 11 | % | (2,070 | ) | (5 | )% | |||||||||||||||||||
Front-End Semiconductor |
| 11,867 |
| 6% |
| 2,764 |
| 2% |
| 9,103 |
| 329% |
| |||||||||||||||||||
Total Sales |
| $ | 238,842 |
| 100 | % | $ | 370,494 |
| 100 | % | $ | (131,652 | ) | (36 | )% |
| $ | 209,452 |
| 100% |
| $ | 153,359 |
| 100% |
| $ | 56,093 |
| 37% |
|
Regional Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
United States |
| $ | 66,550 |
| 28 | % | $ | 67,006 |
| 18 | % | $ | (456 | ) | (1 | )% |
| $ | 38,533 |
| 18% |
| $ | 47,446 |
| 30% |
| $ | (8,913 | ) | (19)% |
|
China |
| 54,621 |
| 23 | % | 191,874 |
| 52 | % | (137,253 | ) | (72 | )% |
| 66,613 |
| 32% |
| 33,383 |
| 22% |
| 33,230 |
| 100% |
| ||||||
EMEA |
| 61,999 |
| 26 | % | 51,618 |
| 14 | % | 10,381 |
| 20 | % |
| 40,069 |
| 19% |
| 42,296 |
| 28% |
| (2,227 | ) | (5)% |
| ||||||
Rest of World |
| 55,672 |
| 23 | % | 59,996 |
| 16 | % | (4,324 | ) | (7 | )% |
| 64,237 |
| 31% |
| 30,234 |
| 20% |
| 34,003 |
| 112% |
| ||||||
Total Sales |
| $ | 238,842 |
| 100 | % | $ | 370,494 |
| 100 | % | $ | (131,652 | ) | (36 | )% |
| $ | 209,452 |
| 100% |
| $ | 153,359 |
| 100% |
| $ | 56,093 |
| 37% |
|
The overallTotal sales decline wasincreased for the six months ended June 30, 2017 against the comparable prior year period, primarily due to reducedincreased sales in Lighting, Display & Power Electronics driven by an oversupply ofas we continue to see ongoing improvements in LED units in the market.industry conditions. The decreaseincrease was partially offset by increaseddecreased sales intoin the Advanced Packaging, MEMS & RF and Scientific & Industrial markets. Pricing was not a significant driver of the change in total sales. By geography, sales decreasedincreased in all regions, except EMEA. The largest sales decline was in China and Rest of World, which was attributable to the declineincreased sales in the Lighting, Display & Power Electronics.Electronics market, as well as additional sales from the Ultratech business acquired in May 2017. This increase was partially offset by decreases in the other geographic regions. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies.
Bookings decreasedOrders increased to $247.3$230.0 million for the ninesix months ended SeptemberJune 30, 20162017 from $277.3$129.3 million for the comparable prior year period. The decreaseincrease in bookingsorders was primarily attributable to weak activityan increase of over 170% in theorders in Lighting, Display & Power Electronics, marketas well as a 49% increase in the first halfAdvanced Packaging, MEMS, and RF market primarily related to the Ultratech business acquired.
One of 2016 driventhe performance measures we use as a leading indicator of the business is the book-to-bill ratio. The ratio is defined as orders recorded in a given period divided by an oversupply of LED unitsrevenue recognized in the market. Beginning in the third quarter of 2016,same period. A ratio greater than one indicates we are seeing some improvement in LED industry conditions. While there may continue to be quarter-to-quarter variations,adding orders faster than we also expect Data Storage demand to generally be weak as customers make limited technology purchases.
are recognizing revenue. For the ninesix months ended SeptemberJune 30, 2016,2017, the book-to-bill ratio was 1.04.1.1, compared to 0.8 for the comparable prior period. Our backlog decreased slightly from $186.0at June 30, 2017 was $269.5 million, which was higher than the backlog at December 31, 2015 to $176.5 million at September2016 of $209.2 million. During the six months ended June 30, 2016, which includes a2017, we recorded backlog adjustmentadjustments of approximately $17.6$41.6 million relating to a partial cancellation of a prior period sales order.backlog acquired from Ultratech, as well as $1.6 million relating to orders that no longer met our bookings criteria.
Gross Profit
For the ninesix months ended SeptemberJune 30, 2016,2017, gross profit decreasedincreased compared to 20152016 due to a sharp declineincrease in sales volume, including the addition of the Ultratech business acquired in May 2017, partially offset by improveddecreased gross margins. Gross margins increased despite the decline in overall sales volumedecreased principally due to a favorable mix of products soldan inventory fair value step-up that was recorded in connection with the period and frompurchase accounting relating to the benefits associated with ongoing cost reduction activities.Ultratech acquisition.
Research and development expenses
The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses increased due to the additional use of third party contractors to accelerate the development of productsdecreased for the Lighting, Display & Power Electronics market,six months ended June 30, 2017 compared to 2016 primarily as a result of our decision to significantly reduce investments in our Atomic Layer Deposition (“ALD”) technology, as well as decreases in other personnel-related expenses and depreciationprofessional fees as a result of researchour initiative to streamline operations, enhance efficiency, and development-related property, plant, and equipment,reduce costs. These decreases were partially offset by decreased incentive compensation. We expectthe addition of the acquired Ultratech related research and development expenses expect to decline in the fourth quarter as certain development programs are completed. We expect to fund research and development programs that position the Company for future growth.projects.
Selling, general, and administrative expenses
Selling, general, and administrative expenses decreasedincreased for the six months ended June 30, 2017 compared to 2016 primarily due to reductions in sales commissions, incentive compensation, as a resultthe addition of the decline in our financial performance as well asacquired Ultratech related selling, general and administrative costs, partially offset by a decrease in personnel-related expenses as a result of our initiative to streamline operations, enhance efficiency, and reduce costs in response to market conditions.costs.
Amortization expense
The slight decrease in amortization expense is a result of certain intangible assets become fully amortized, including the backlog and trademark/tradename assets associated with the December 2014 Precision Surface Processing (“PSP”) acquisition. In addition, during the third quarter of 2016, we decided to significantly reduce future investments in our ALD technology development and, as a result, recorded a charge for impairment of the ALD technology asset in the prior year as well as certain other intangible assets including a non-cash $54.3 million impairmentbecoming fully amortized during 2016, offset by increased amortization expense related to the additional intangibles acquired as part of intangible purchased technology. As a result, going forward, we expect there will be a significant decline in amortization expense.the Ultratech business acquisition.
Restructuring expense
During the ninethree months ended SeptemberJune 30, 2017, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. During the second and third quarters of 2016, we undertook restructuring activities as part of our initiative to streamline operations, enhance efficiency, and reduce costs. As a result of these actions, we notified approximately 50 employees of their termination. Duringtermination from the first nine months of 2016, we recorded restructuring charges of $3.1 million, consisting of $2.8 million of personnel severance and related costs and $0.3 million of facility closing costs.Company. In addition, during the third quarter of 2016, we decided to significantly reduce our future investments in our ALD technology development, and, as a result, recorded personnel severance and related restructuringwhich impacts approximately 25 additional employees. Finally, during the three months ended June 30, 2017, the Company incurred non-cash charges of $0.9 million.approximately $0.8 million related to share-based compensation. Over the next few quarters, we expect to incur additional restructuring costs of $4$1 to $7$3 million as we finalize all of these activities.
Asset Impairment expenseAcquisition costs
As a result of our decision to significantly reduce future investmentsAcquisition costs are non-recurring charges incurred in our ALD technology development, during third quarter we recorded non-cash asset impairment charges of $57.6 million,connection with the vast majority of which relates to the impairmentacquisition of the intangible ALD technology asset. We evaluatedUltratech business, which included $4.2 million on non-cash charges related to accelerated share-based compensation for employee terminations for the market conditions for all of our assets held for sale and made adjustments to the carrying value of the assets to match their fair market value, less cost to sell. As a result, we recorded net non-cash impairment charges of approximately $5.9 million. Additionally, we removed certain lab equipment that was no longer required from our facilities and recorded a non-cash impairment of $6.1 million.six months ended June 30, 2017.
Income tax expenseTaxes
At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods. The year-to-date tax benefit for interim period losses is limited to the amount that could be recognizable at the end of the fiscal year.
Our tax expensebenefit for the ninesix months ended SeptemberJune 30, 2016 and 20152017 was $2.7$23.2 million and $9.4 million, respectively. The 2016compared to a tax expense of $1.5 million for the comparable prior period. The 2017 tax benefit included $1.2$19.5 million relating to our U.S.domestic operations and $1.5$3.7 million relating to our non-U.S. operations, compared to 20152016 when our expense included $4.9$0.9 million related to U.S.domestic operations and $4.5$0.6 million related to our non-U.S. operations. The decreasecurrent period domestic tax benefit is primarily attributable to an income tax benefit for losses incurred during the six months ended June 30, 2017, as the deferred tax liability created by the issuance of the Convertible Senior Notes is treated as a source of income in our expense in 2016 was primarilyfiscal 2017, offset by a deferred provision related to tax amortization on indefinite-lived intangible assets. The current period non-U.S. tax benefit is primarily attributable to the remeasurement of an uncertain tax position, which included the reversal of a significant reductionpreviously established non-U.S. tax liability and the recognition of a deferred tax benefit related to certain foreign net operating losses generated in our withholding taxes included in our 2015 U.S.prior years that are now determined to be realizable, offset by tax expense as well as reduced pretax income from ourattributed to the profitable non-U.S. operations in 2016.operations. The tax expense for the comparable period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.
Liquidity and Capital Resources
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, contractual obligations, and other cash flow needs for the next twelve months. Our cash and cash equivalents, as well as short-term investments, at Septemberand restricted cash are as follows:
|
| June 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
|
| (in thousands) |
| ||||
Cash and cash equivalents |
| $ | 205,564 |
| $ | 277,444 |
|
Short-term investments |
| 97,086 |
| 66,787 |
| ||
Total |
| $ | 302,650 |
| $ | 344,231 |
|
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 June 30, 20162017 and December 31, 2015 were:
|
| September 30, |
| December 31, |
| ||
|
| 2016 |
| 2015 |
| ||
|
| (in thousands) |
| ||||
Cash and cash equivalents |
| $ | 274,018 |
| $ | 269,232 |
|
Short-term investments |
| 62,835 |
| 116,050 |
| ||
Total |
| $ | 336,853 |
| $ | 385,282 |
|
At September 30, 2016, and December 31, 2015, cash and cash equivalents of $161.5$152.2 million and $135.3$149.2 million, respectively, were held outside the United States. ItIn order to fund continued international growth, it is our current intention to permanently reinvest the cash and cash equivalent balances held in China, Taiwan, and Malaysia, and our current forecasts do not require repatriation of thethese funds back to the United States. At SeptemberJune 30, 2016,2017, we had $108.4$134.0 million in cash held outside the United States on which we may have to pay significant U.S. income taxes to repatriate.repatriate or utilize net operating loss carryforwards. 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. We believe that our projected cash flow from operations, throughoutcombined with our global organization, or make acquisitions.cash and short term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months, including the scheduled interest payments on our Convertible Senior Notes issued in January 2017.
A summary of the cash flow activity at June 30, 2017 and December 31, 2016 is as follows:
Cash Flows from Operating Activities
|
| Nine months ended September 30, |
|
| Six months ended June 30, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||
Net income (loss) |
| $ | (117,212 | ) | $ | (22,191 | ) |
| $ | (17,293 | ) | $ | (47,615 | ) |
Non-cash items: |
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| 26,010 |
| 30,766 |
|
| 15,620 |
| 17,291 |
| ||||
Non-cash interest expense |
| 4,887 |
| — |
| |||||||||
Deferred income taxes |
| 1,529 |
| 1,794 |
|
| (19,412 | ) | 1,821 |
| ||||
Share-based compensation expense |
| 12,133 |
| 14,038 |
|
| 13,806 |
| 8,390 |
| ||||
Asset impairment |
| 69,662 |
| 126 |
|
| 1,138 |
| 13,627 |
| ||||
Other |
| 160 |
| (841 | ) | |||||||||
Provision for bad debts |
| 92 |
| 160 |
| |||||||||
Changes in operating assets and liabilities |
| (16,590 | ) | (1,842 | ) |
| (8,427 | ) | (24,805 | ) | ||||
Net cash provided by (used in) operating activities |
| $ | (24,308 | ) | $ | 21,850 |
|
| $ | (9,589 | ) | $ | (31,131 | ) |
CashNet cash used in operating activities was $9.6 million for the ninesix months ended SeptemberJune 30, 2016 reflects2017 and was due to the net income adjustedloss of $17.3 million plus adjustments for the effectnon-cash items of non-cash charges and changes$16.1 million, offset by a decrease in working capital components. Non-cash charges included depreciation, amortization, share-based compensation expense, asset impairment, and deferred taxes. Cashcash flow from operating activities was negatively impacted bydue to changes in inventory, accounts payableoperating assets and accrued expenses, and accounts receivable, partially offset by changes in customer deposits and deferred revenue and prepaid expenses and other current assets.liabilities of $8.4 million.
Cash Flows from Investing Activities
|
| Nine months ended September 30, |
|
| Six months ended June 30, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||
Acquisitions of businesses, net of cash acquired |
| $ | (399,478 | ) | $ | — |
| |||||||
Capital expenditures |
| $ | (10,717 | ) | $ | (11,069 | ) |
| (10,057 | ) | (9,179 | ) | ||
Changes in investments, net |
| 52,921 |
| 51,647 |
|
| 16,445 |
| 42,612 |
| ||||
Proceeds from sale of lab tools |
| — |
| 2,648 |
| |||||||||
Other |
| 463 |
| (662 | ) |
| — |
| (213 | ) | ||||
Net cash provided by investing activities |
| $ | 42,667 |
| $ | 42,564 |
| |||||||
Net cash provided by (used in) investing activities |
| $ | (393,090 | ) | $ | 33,220 |
|
Cash provided byThe net cash used in investing activities during the ninesix months ended SeptemberJune 30, 2016 is2017 was primarily attributedattributable to the net liquidationscash used in the acquisition of short-term investments, offset byUltratech as well as capital expenditures. As part of our efforts to streamline operations, enhance efficiency, and reduce costs, we are making certain investments in our facilities to support the consolidation activities, and, in 2017, we expect to incur additionalfuture capital expenditures of $6 to $9 million over the next few quarters related to these activities.activities of approximately $5 million to $10 million.
Cash Flows from Financing Activities
|
| Nine months ended September 30, |
|
| Six months ended June 30, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||
Settlement of equity awards, net of withholding taxes |
| $ | (711 | ) | $ | (785 | ) |
| $ | (4,796 | ) | $ | (192 | ) |
Proceeds from employee stock purchase plan |
| 719 |
| $ | — |
| ||||||||
Purchases of common stock |
| (13,349 | ) | — |
|
| — |
| (13,349 | ) | ||||
Proceeds from long-term debt borrowings |
| 335,751 |
| — |
| |||||||||
Repayments of long-term debt |
| (252 | ) | (233 | ) |
| (180 | ) | (166 | ) | ||||
Net cash used in financing activities |
| $ | (13,593 | ) | $ | (1,018 | ) | |||||||
Net cash provided by (used in) financing activities |
| $ | 330,775 |
| $ | (13,707 | ) |
Cash flowsThe cash provided by financing activities for the six months ended June 30, 2017 was primarily related to the net cash proceeds received from the issuance of the Convertible Senior Notes in January 2017. The cash used in financing activities duringfor the ninesix months ended SeptemberJune 30, 2016 iswas primarily a result of our purchases of common shares as part ofrelated to the share buybackshare repurchase program, initiated during the fourth quarter ofwhich commenced in November 2015. There were no share repurchases in 2017.
Off-Balance Sheet ArrangementsConvertible Senior Notes
On January 10, 2017, we issued $345.0 million of 2.70% convertible senior unsecured notes due (the “Convertible Senior Notes”). We received net proceeds, after deducting underwriting discounts and Contractual Obligationsfees and expenses payable by the Company, of approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The Convertible Senior Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted. We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on this debt.
Off-Balance Sheet ArrangementsBusiness Combination
We do not have any off-balance sheet arrangements that have, or are reasonably likelyAs discussed above, on May 26, 2017, the Company acquired 100% of Ultratech, Inc., a leading supplier of lithography, laser-processing, and inspection systems used to have, a current or future material effect on our financial condition,manufacture semiconductor devices and LEDs. The results of Ultratech’s operations liquidity, capital expenditures or capital resources other than operating leases, bank guarantees, and purchase commitments disclosedhave been included in the preceding footnotes.consolidated financial statements since the date of acquisition.
Contractual Obligations and Commitments
We have commitments under certain contractual arrangements to make future payments for goods and services. These contractual arrangements secure the rights to various assets and services to be used in the future in the normal course of business. We expect to fund these contractual arrangements with cash generated from operations.operations in the normal course of business.
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, expenses, and results of operations, liquidity, capital expenditures or capital resources other than operating leases, bank guarantees, and purchase commitments disclosed in the preceding footnotes.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market rate risk for changes in interest rate changesrates primarily relates to our investment portfolio. We centrally manage our investment portfolioportfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our short term investment portfolio includes fixed incomefixed-income securities with a fair value of $62.8approximately $97.1 million at SeptemberJune 30, 2016.2017. These securities are subject to interest rate risk;risk and, based on our investment portfolio at June 30, 2017, a 100 basis point increase in interest rates would result in a decrease in the fair value of the September 30, 2016 investment portfolio of $0.2$0.6 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we wouldwill not realize the losses in the Consolidated Statements of Operations unless the individual fixed incomefixed-income securities are sold prior to maturityrecovery or athe loss position is determined to be other-than-temporary.
Currency Exchange Risk
We conduct business on a worldwide basis exposingand, as such, a portion of our revenues, operating costs,earnings, and net investments in foreign affiliates is exposed to changes in currency exchange 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.
We may managehave managed our risks and exposures to currency exchange rates through the use of derivative financial instruments.instruments (e.g., forward contracts). We onlymainly use derivative financial instruments in the context of hedging and generally do not use them for speculative purposes. During the nine months ended September 30, 2016 and 2015,second quarter of 2017, we did not owndesignate foreign exchange derivatives as hedges, consistent with 2016. Accordingly, all foreign exchange derivatives, if any, derivatives.are recorded in our Consolidated Balance Sheet at fair value and changes in fair value from these contracts are recorded in “Other, net” in our Consolidated Statements of Operations.
Our net sales to customers located outside of the United States represented approximately 78% and 72%82% of our total net sales for the three and ninesix months ended SeptemberJune 30, 2016, respectively and 86%73% and 82%70% for the comparable 20152016 periods. We expect that net sales to customers outside the United States will continue to represent a large percentage of our total net sales. Our sales denominated in currencies other than the U.S. dollar represented 2% and 4%3% of total net sales in the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively, and 2%3% and 4% for the comparable 20152016 periods.
A 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of operations.operations since most of our sales outside the United States are denominated in U.S. dollars.
Item 4. Controls and Procedures
Management’s Report on Internal Control Over Financial Reporting
Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective at Septemberas of June 30, 2016.2017. 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.
Changes in Internal Control Over Financial Reporting
DuringOn May 26, 2017, we completed the three months ended September 30, 2016, thereacquisition of Ultratech, Inc., and are integrating the acquired business into our overall internal control over financial reporting process. Management is in the process of assessing the internal control over financial reporting and is implementing or revising internal controls where necessary. See Note 3 to the Condensed Consolidated
Financial Statements — Business Combinations, for further details. There were no other changes in internal control for the quarter ended June 30, 2017 that have materially affected or are reasonably likely to materially affect internal control over financial reporting.
On March 17, 2017, an Ultratech shareholder filed a purported class action complaint in the U.S. District Court for the Northern District of California (the “District Court”), captioned The Vladimir Gusinsky Rev. Trust v. Ultratech, Inc., et al., Case No. 4:17-cv-01468-PJH, on behalf of itself and all other Ultratech shareholders against Ultratech, its directors at the time the acquisition was announced, Veeco, and Merger Sub. The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech, the defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares, agreed to unreasonable deal-protection measures, and potentially engaged in supposed self-dealing.
Information regardingOn March 22, 2017, two other Ultratech shareholders filed a purported class action complaint in the District Court, captioned De Letter et al. v. Ultratech, Inc., et al., Case No. 3:17-cv-01542-WHA, on behalf of themselves and all other Ultratech shareholders against Ultratech and its directors at the time the acquisition was announced. The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech, the defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares and potentially engaged in supposed self-dealing.
On May 28, 2017, the District Court dismissed both cases.
Veeco is involved in various other legal proceedings appearsarising in the Commitments and Contingencies Note tonormal course of business. Veeco does not believe that the Consolidated Financial Statements in this quarterly reportultimate resolution of these matters will have a material adverse effect on Form 10-Q and in Part I — Item 3its consolidated financial position, results of our 2015 Form 10-K.operations, or cash flows.
Information regarding risk factors appears in the Safe Harbor Statement at the beginning of this quarterly report on Form 10-Q and in Part I — Item 1A of our 20152016 Form 10-K. There have been no material changes from the risk factors previously disclosed in our 20152016 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 March 31, 2016,June 30, 2017, $22.3 million of the $100 million had been utilized. No repurchases occurred duringafter the second and thirdfirst quarter of 2016. Repurchases may 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.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
None.
Unless otherwise indicated, each of the following exhibits has been filed with the Securities and Exchange Commission by Veeco under File No. 0-16244.
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| Furnished | ||||
Number |
| Exhibit Description |
| Form |
| Exhibit |
| Filing Date |
| Herewith |
10.1 |
| Amendment dated June 12, 2017 to Employment Agreement between Veeco and John R. Peeler. |
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10.2 |
| Form of Amended and Restated Indemnification Agreement entered into between Veeco and each of its directors and executive officers, (August 2017). |
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| * |
10.3 |
| Ultratech, Inc. 1993 Stock Option/Stock Issuance Plan (as Amended and Restated as of May 31, 2011). |
| S-8 |
| 4.6 |
| 5/26/2017 |
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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. |
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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. |
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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. |
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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. |
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101.INS |
| XBRL Instance. |
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101.XSD |
| XBRL Schema. |
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101.PRE |
| XBRL Presentation. |
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101.CAL |
| XBRL Calculation. |
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101.DEF |
| XBRL Definition. |
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101.LAB |
| XBRL Label. |
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| * Filed herewith ** Filed herewith electronically |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 1, 2016.August 3, 2017.
| Veeco Instruments Inc. | ||
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| By: | /S/ JOHN R. PEELER | |
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| John R. Peeler | |
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| Chairman and Chief Executive Officer | |
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| By: | /s/ SHUBHAM MAHESHWARI | |
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| Shubham Maheshwari | |
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| Executive Vice President and Chief Financial Officer |