VEECO INSTRUMENTS INC - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

 

 

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 September 30, 2013

 

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 0-16244

 

 

 VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Registrant’s telephone number, including area code: (516) 677-0200

 

Website: www.veeco.com

 

 

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 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. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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

 

39,245,212 shares of common stock were outstanding as of the close of business on November 1, 2013.

 

 

Table of Contents

 

Safe Harbor Statement

 

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 2 and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends” “will” and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. These risks and uncertainties include, without limitation, the following:

 

·                  Our operating results have been, and may continue to be, adversely affected by unfavorable market conditions;

·                  Timing of market adoption of light emitting diode (“LED”) technology for general lighting is uncertain;

·                  Our failure to successfully manage our outsourcing activities or failure of our outsourcing partners to perform as anticipated could adversely affect our results of operations and our ability to adapt to fluctuating order volumes;

·                  The further reduction or elimination of foreign government subsidies and economic incentives may adversely affect the future order rate for our metal organic chemical vapor deposition (“MOCVD”) equipment;

·                  Our operating results have been, and may continue to be, adversely affected by tightening credit markets;

·                  Our backlog is subject to customer cancellation or modification and such cancellation could result in decreased sales and increased provisions for excess and obsolete inventory and/or liabilities to our suppliers for products no longer needed;

·                  Our failure to estimate customer demand accurately could result in excess or obsolete inventory and/or liabilities to our suppliers for products no longer needed, while manufacturing interruptions or delays could affect our ability to meet customer demand;

·                  The cyclicality of the industries we serve directly affects our business;

·                  We rely on a limited number of suppliers, some of whom are our sole source for particular components;

·                  Our sales to LED and data storage manufacturers are highly dependent on these manufacturers’ sales for consumer electronics applications, which can experience significant volatility due to seasonal and other factors, which could materially adversely impact our future results of operations;

·                  We are exposed to the risks of operating a global business, including the need to obtain export licenses for certain of our shipments and political risks in the countries we operate;

·                  We may be exposed to liabilities under the Foreign Corrupt Practices Act and any determination that we violated these or similar laws could have a material adverse effect on our business;

·                  The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly;

·                  We operate in industries characterized by rapid technological change;

·                  We face significant competition;

·                  We depend on a limited number of customers, located primarily in a limited number of regions, that operate in highly concentrated industries;

·                  Our sales cycle is long and unpredictable;

·                  Our material weaknesses in our internal controls which have impeded, and may continue to impede, our ability to file timely and accurate periodic reports may cause us to incur significant additional costs and may continue to affect our stock price;

·                  The price of our common shares may be volatile and could decline significantly;

·                  Our inability to attract, retain, and motivate key employees could have a material adverse effect on our business;

·                  We are subject to foreign currency exchange risks;

·                  The enforcement and protection of our intellectual property rights may be expensive and could divert our limited resources;

·                  We may be subject to claims of intellectual property infringement by others;

·                  If we are subject to cyber-attacks we could incur substantial costs and, if such attacks are successful, could result in significant liabilities, reputational harm and disruption of our operations;

·                  Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses;

·                  We may be required to take additional impairment charges for goodwill and indefinite-lived intangible assets or definite-lived intangible and long-lived assets;

Table of Contents

 

·                  Changes in accounting pronouncements or taxation rules or practices may adversely affect our financial results;

·                  We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act 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;

·                  We are subject to risks of non-compliance with environmental, health and safety regulations;

·                  We have significant operations in locations which could be materially and adversely impacted in the event of a natural disaster or other significant disruption;

·                  We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our Company by another company more difficult;

·                  New regulations related to conflict minerals will force us to incur additional expenses, may make our supply chain more complex, and may result in damage to our relationships with customers; and

·                  The matters set forth in this Report generally, including the risk factors set forth in “Part II. Item 1A. Risk Factors.”

 

Consequently, such forward looking statements should be regarded solely as the current plans, estimates and beliefs of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco”, the “Company”, “we”, “us”, and “our”, unless the context indicates otherwise). The Company does not undertake any obligation to update any forward looking statements to reflect future events or circumstances after the date of such statements.

 

Available Information

 

We file annual, quarterly and current reports, information statements and other information with the SEC. The public may obtain information by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

 

Internet Address

 

We maintain a website where additional information concerning our business and various upcoming events can be found. The address of our website is www.veeco.com. We provide a link on our website, under Investors — Financial Information — SEC Filings, through which investors can access our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports. These filings are posted to our website as soon as reasonably practicable after we electronically file such material with the SEC.

 

2

 

Table of Contents

 

VEECO INSTRUMENTS INC.

 

INDEX

 

SAFE HARBOR STATEMENT	1
PART I. FINANCIAL INFORMATION	4
ITEM 1. FINANCIAL STATEMENTS	4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34
ITEM 4. CONTROLS AND PROCEDURES	35
PART II. OTHER INFORMATION	38
ITEM 1. LEGAL PROCEEDINGS	38
ITEM 1A. RISK FACTORS	38
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	38
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	38
ITEM 4. MINE SAFETY DISCLOSURES	38
ITEM 5. OTHER INFORMATION	38
ITEM 6. EXHIBITS	39
SIGNATURES	40

 

3

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

 

		For the three months ended						For the nine months ended
		September 30,						September 30,
		2013			2012			2013			2012
Net sales		$	99,324		$	132,715		$	258,540		$	409,171
Cost of sales		69,016			82,831			171,040			232,765
Gross profit		30,308			49,884			87,500			176,406
Operating expenses (income):
Selling, general and administrative		19,650			13,892			59,077			54,558
Research and development		18,993			25,775			60,600			72,991
Amortization		855			1,477			2,566			3,877
Restructuring		1,240			2,014			1,771			2,077
Other, net		(493		)	(737		)	(141		)	(626		)
Total operating expenses		40,245			42,421			123,873			132,877
Operating (loss) income		(9,937		)	7,463			(36,373		)	43,529
Interest income, net		192			176			620			708
(Loss) income from continuing operations before income taxes		(9,745		)	7,639			(35,753		)	44,237
Income tax (benefit) provision		(3,719		)	(59		)	(15,575		)	9,066
(Loss) income from continuing operations		(6,026		)	7,698			(20,178		)	35,171
Discontinued operations:
Income from discontinued operations before income taxes		—			5,396			—			6,534
Income tax provision		—			1,341			—			1,722
Income from discontinued operations		—			4,055			—			4,812
Net (loss) income		$	(6,026	)	$	11,753		$	(20,178	)	$	39,983
(Loss) income per common share:
Basic:
Continuing operations		$	(0.16	)	$	0.20		$	(0.52	)	$	0.92
Discontinued operations		—			0.10			—			0.12
(Loss) income		$	(0.16	)	$	0.30		$	(0.52	)	$	1.04
Diluted :
Continuing operations		$	(0.16	)	$	0.20		$	(0.52	)	$	0.90
Discontinued operations		—			0.10			—			0.13
(Loss) income		$	(0.16	)	$	0.30		$	(0.52	)	$	1.03
Weighted average shares outstanding:
Basic		38,841			38,577			38,774			38,402
Diluted		38,841			39,169			38,774			39,006

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

 

		For the three months ended September 30,						For the nine months ended September 30,
		2013			2012			2013			2012
Net (loss) income		$	(6,026	)	$	11,753		$	(20,178	)	$	39,983
Other comprehensive (loss) income, net of tax
Available-for-sale securities
Unrealized gain (loss) on available-for-sale securities		225			122			(15		)	(129		)
(Provision) benefit for income taxes		(54		)	(14		)	25			53
Less: Reclassification adjustments for gains included in net (loss) income		(1		)	(11		)	(52		)	(20		)
Net unrealized gain (loss) on available-for-sale securities		170			97			(42		)	(96		)
Foreign currency translation
Foreign currency translation		(273		)	248			(1,346		)	(27		)
Benefit (provision) for income taxes		176			(2		)	(13		)	28
Net foreign currency translation		$	(97	)	$	246		$	(1,359	)	$	1
Comprehensive (loss) income		$	(5,953	)	$	12,096		$	(21,579	)	$	39,888

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

Table of Contents

 

Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)

 

		September 30,			December 31,
		2013			2012
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	247,666		$	384,557
Short-term investments		322,488			192,234
Restricted cash		2,850			2,017
Accounts receivable, net		37,769			63,169
Inventories		57,585			59,807
Prepaid expenses and other current assets		36,864			32,155
Deferred income taxes		10,545			10,545
Total current assets		715,767			744,484
Property, plant and equipment at cost, net		95,698			98,302
Goodwill		55,828			55,828
Deferred income taxes		6,072			935
Intangible assets, net		18,407			20,974
Other assets		17,341			16,781
Total assets		$	909,113		$	937,304
Liabilities and equity
Current liabilities:
Accounts payable		$	28,334		$	26,087
Accrued expenses and other current liabilities		60,283			74,260
Deferred revenue		8,032			9,380
Income taxes payable		974			2,292
Current portion of long-term debt		285			268
Total current liabilities		97,908			112,287
Deferred income taxes		7,110			7,137
Long-term debt		1,922			2,138
Other liabilities		4,894			4,530
Total liabilities		111,834			126,092
Equity:
Preferred stock, 500,000 shares authorized; no shares issued and outstanding		—			—
Common stock; $.01 par value; authorized 120,000,000 shares; 39,247,833 and 39,328,503 shares issued and outstanding in 2013 and 2012, respectively		392			393
Additional paid-in capital		716,370			708,723
Retained earnings		75,945			96,123
Accumulated other comprehensive income		4,572			5,973
Total equity		797,279			811,212
Total liabilities and equity		$	909,113		$	937,304

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

Table of Contents

 

Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 (In thousands)
(Unaudited)

 

		Nine months ended September 30,
		2013			2012
Cash Flows from Operating Activities
Net (loss) income		$	(20,178	)	$	39,983
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		12,080			12,181
Deferred income taxes		(5,196		)	278
Non-cash equity-based compensation		9,054			10,629
Gain on disposal of segment		—			(4,112		)
Excess tax benefits from stock option exercises		(485		)	(2,211		)
Non-cash items from discontinued operations		—			(904		)
Other, net		20			10
Changes in operating assets and liabilities:
Accounts receivable		25,095			34,486
Inventories		2,165			40,271
Prepaid expenses and other current assets		(4,801		)	(219		)
Accounts payable		2,307			(2,811		)
Accrued expenses, deferred revenue and other current liabilities		(15,235		)	(24,897		)
Income taxes payable		(821		)	(224		)
Other, net		605			5,307
Discontinued operations		—			(1,932		)
Net cash provided by operating activities		4,610			105,835
Cash Flows from Investing Activities
Capital expenditures		(7,976		)	(22,706		)
Proceeds from liquidations of short-term investments		422,903			176,303
Payments for purchases of short-term investments		(553,217		)	(89,848		)
Payments for purchase of cost method investment		(1,594		)	(10,341		)
Proceeds from sale of assets from discontinued segment		—			3,758
Other		25			58
Net cash (used in) provided by investing activities		(139,859		)	57,224
Cash Flows from Financing Activities
Proceeds from stock option exercises		313			5,370
Restricted stock tax withholdings		(2,358		)	(1,418		)
Excess tax benefits from stock option exercises		485			2,211
Repayments of long-term debt		(199		)	(184		)
Net cash (used in) provided by financing activities		(1,759		)	5,979
Effect of exchange rate changes on cash and cash equivalents		117			88
Net (decrease) increase in cash and cash equivalents		(136,891		)	169,126
Cash and cash equivalents at beginning of period		384,557			217,922
Cash and cash equivalents at end of period		$	247,666		$	387,048
Non-cash investing and financing activities
Transfers from property, plant and equipment to inventory		$	2,224		$	1,242
Transfers from inventory to property, plant and equipment		1,144			—

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7

 

Table of Contents

 

Veeco Instruments Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1—Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco”, the “Company”, “we”, “us”, and “our”, unless the context indicates otherwise) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three and nine months ended September 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2012.

 

Consistent with prior years, we report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday of each period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2013 interim quarter ends are March 31, June 30 and September 29. The 2012 interim quarter ends were April 1, July 1 and September 30. For ease of reference, we report these interim quarter ends as March 31, June 30 and September 30 in our interim condensed consolidated financial statements. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include: the best estimate of selling price for our products and services; allowance for doubtful accounts; inventory valuation; recoverability and useful lives of property, plant and equipment and identifiable intangible assets; investment valuations; fair value of derivatives; recoverability of goodwill and long-lived assets; recoverability of deferred tax assets; liabilities for product warranty; accruals for contingencies; equity-based payments, including forfeitures and performance based vesting; and liabilities for tax uncertainties. Actual results could differ from those estimates.

 

(Loss) Income Per Common Share

 

The following table sets forth the reconciliation of  basic weighted average shares outstanding and diluted weighted average shares outstanding (in thousands):

 

		Three months ended				Nine months ended
		September 30,				September 30,
		2013		2012		2013		2012
Basic weighted average shares outstanding		38,841		38,577		38,774		38,402
Dilutive effect of stock options and restricted stock		—		592		—		604
Diluted weighted average shares outstanding		38,841		39,169		38,774		39,006

 

Basic (loss) income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted (loss) income per common share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period, as adjusted. For the three and nine months ended September 30, 2013, we reported net losses applicable to common shareholders, and accordingly, the basic and diluted weighted average shares outstanding are equal because any increase to basic weighted average shares outstanding would be antidilutive. This resulted in our excluding from the computation 0.6 million common equivalent shares that would have otherwise been dilutive for the three and nine months ended September 30, 2013.

 

8

Table of Contents

 

Additionally, not included above, were additional stock options and restricted stock outstanding that had exercise or grant prices in excess of the average market value of our common stock during the period and are therefore antidilutive. There were 1.0 million and 1.1 million such underlying shares for the three and nine months ended September 30, 2013, respectively. There were 1.1 million and 1.2 million such underlying shares for the three and nine months ended September 30, 2012, respectively.

 

Revenue Recognition

 

We recognize revenue when all of the following criteria have been met: persuasive evidence of an arrangement exists with a customer; delivery of the specified products has occurred or services have been rendered; prices are contractually fixed or determinable; and collectability is reasonably assured. Revenue is recorded including shipping and handling costs and excluding applicable taxes related to sales. A significant portion of our revenue is derived from contractual arrangements with customers that have multiple elements, such as systems, upgrades, components, spare parts, maintenance and service plans. For sales arrangements that contain multiple elements, we split the arrangement into separate units of accounting if the individually delivered elements have value to the customer on a standalone basis. We also evaluate whether multiple transactions with the same customer or related party should be considered part of a multiple element arrangement, whereby we assess, among other factors, whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of each other. When we have separate units of accounting, we allocate revenue to each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or our best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.  For the majority of the elements in our arrangements we utilize BESP. The accounting guidance for selling price hierarchy did not include BESP for arrangements entered into prior to January 1, 2011, and as such we recognized revenue for those arrangements as described below.

 

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

 

Our system sales arrangements, including certain upgrades, generally do not contain provisions for right of return or forfeiture, refund, or other purchase price concessions.  In the rare instances where such provisions are included, we defer all revenue until such rights expire.  In many cases our products are sold with a billing retention, typically 10% of the sales price (the “retention amount”), which is typically payable by the customer when field acceptance provisions are completed.  The amount of revenue recognized upon delivery of a system or upgrade is limited to the lower of  i) the amount that is not contingent upon acceptance provisions or ii) the value allocated to the delivered elements, if such sale is part of a multiple-element arrangement.

 

For transactions entered into prior to January 1, 2011, under the accounting rules for multiple-element arrangements in place at that time, we deferred the greater of the retention amount or the relative fair value of the undelivered elements based on VSOE.  When we could not establish VSOE or TPE for all undelivered elements of an arrangement, revenue on the entire arrangement was deferred until the earlier of the point when we did have VSOE for all undelivered elements or the delivery of all elements of the arrangement.

 

9

Table of Contents

 

Our sales arrangements, including certain upgrades, generally include installation. The installation process is not deemed essential to the functionality of the equipment since it is not complex; that is, it does not require significant changes to the features or capabilities of the equipment or involve building elaborate interfaces or connections subsequent to factory acceptance. We have a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage us to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, we deem the installation of our systems to be inconsequential and perfunctory relative to the system as a whole, and as a result, do not consider such services to be a separate element of the arrangement. As such, we accrue the cost of the installation at the time of revenue recognition for the system.

 

In Japan, where our contractual terms with customers generally specify title and risk and rewards of ownership transfer upon customer acceptance, revenue is recognized and the customer is billed upon the receipt of written customer acceptance.

 

Revenue related to maintenance and service contracts is recognized ratably over the applicable contract term.  Component and spare part revenue are recognized at the time of delivery in accordance with the terms of the applicable sales arrangement.

 

Note 2 — Discontinued Operations

 

During the three months ended September 30, 2012 we had $4.1 million in income from discontinued operations, primarily consisting of the recognition of the previously deferred $5.4 million pre-tax gain in China from the sale of our Metrology business to Bruker Corporation (“Bruker”). During the nine months ended September 30, 2012 we had $4.8 million in income from discontinued operations, primarily consisting of the recognition of the previously deferred $5.4 million pre-tax gain in China from the sale of our Metrology business to Bruker and the $1.4 million pre-tax gain on sale of assets previously held for sale. There were no sales included in the results of our discontinued operations.

 

Note 3—Balance Sheet Information

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash and certain highly liquid investments. Highly liquid investments with maturities of three months or less when purchased may be classified as cash equivalents. Such items may include liquid money market accounts, treasury bills, government agency securities and corporate debt. The investments that are classified as cash equivalents are carried at cost, which approximates fair value.

 

Short-Term Investments

 

Total available-for-sale securities and gains and losses in accumulated other comprehensive income consist of the following (in thousands):

 

		September 30, 2013
		Amortized Cost			Gains in Accumulated Other Comprehensive Income			Losses in Accumulated Other Comprehensive Income			Estimated Fair Value
United States treasuries		$	180,101		$	63		$	(3	)	$	180,161
Corporate bonds		74,778			29			(86		)	74,721
Government agency securities		55,657			7			(1		)	55,663
Commercial paper		11,943			—			—			11,943
Total available-for-sale securities		$	322,479		$	99		$	(90	)	$	322,488

 

10

Table of Contents

 

During the three and nine months ended September 30, 2013, available-for-sale securities were liquidated for total proceeds of $150.5 million and $422.9 million, respectively. There were minimal gross realized gains on these sales for the three months ended September 30, 2013 and $0.1 million of gross realized gains on these sales for the nine months ended September 30, 2013.

 

Total available-for-sale securities and gains and losses in accumulated other comprehensive income consist of the following (in thousands):

 

		December 31, 2012
		Amortized Cost			Gains in Accumulated Other Comprehensive Income			Losses in Accumulated Other Comprehensive Income			Estimated Fair Value
United States treasuries		$	184,102		$	76		$	—		$	184,178
Government agency securities		8,056			—			—			8,056
Total available-for-sale securities		$	192,158		$	76		$	—		$	192,234

 

During the three and nine months ended September 30, 2012, available-for-sale securities were liquidated for total proceeds of $76.8 million and $176.3 million, respectively. The gross realized gains and losses on these sales were minimal for the three and nine months ended September 30, 2012.

 

The table below shows the fair value of short-term investments that have been in an unrealized loss position for less than 12 months (in thousands):

 

		September 30, 2013
		Less than 12 months						Total
		Estimated Fair Value			Gross Unrealized Losses			Estimated Fair Value			Gross Unrealized Losses
United States treasuries		$	8,882		$	(3	)	$	8,882		$	(3	)
Corporate bonds		49,447			(86		)	49,447			(86		)
Government agency securities		7,999			(1		)	7,999			(1		)
Total		$	66,328		$	(90	)	$	66,328		$	(90	)

 

As of December 31, 2012 we did not hold any short-term investments that were in a loss position. We did not hold any short-term investments that have been in an unrealized loss position for 12 months or longer for the period noted in the table above.

 

The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss was considered to be temporary or other-than-temporary and therefore impaired include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition and near-term prospects of the investee; and whether it is more likely than not that the Company will be required to sell the security prior to recovery. The Company believes the gross unrealized losses on the Company’s short-term investments as of September 30, 2013 were temporary in nature and therefore did not recognize any impairment.

 

11

Table of Contents

 

Contractual maturities of available-for-sale debt securities are as follows (in thousands):

 

		September 30, 2013
		Estimated Fair Value
Due in one year or less		$	230,968
Due in 1–2 years		53,295
Due in 2–3 years		38,225
Total available-for-sale securities		$	322,488

 

Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

Restricted Cash

 

As of September 30, 2013 and December 31, 2012, restricted cash consisted of $2.9 million and $2.0 million, respectively, which serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations. This cash is held in custody by the issuing bank and is restricted as to withdrawal or use while the related bank guarantees are outstanding.

 

Accounts Receivable, Net

 

Accounts receivable are shown net of the allowance for doubtful accounts of $0.5 million as of September 30, 2013 and December 31, 2012.

 

Inventories

 

Inventories are stated at the lower of cost (principally first-in, first-out) or market. Inventories consist of (in thousands):

 

		September 30,			December 31,
		2013			2012
Materials		$	35,377		$	36,523
Work in process		19,590			13,363
Finished goods		2,618			9,921
		$	57,585		$	59,807

 

Cost Method Investment

 

During the three and nine months ended September 30, 2013, we invested an additional $0.8 million and $1.6 million, respectively, into a rapidly developing organic light emitting diode (“OLED”) equipment company (the “Investment”). While Veeco is not obligated to increase amounts invested in the Investment, we may choose to do so if the opportunity arises in the future. As of September 30, 2013 and December 31, 2012 we have recorded a total investment of $16.1 million and $14.5 million, respectively, in the Investment. Our ownership in the Investment is approximately 15.3% of the preferred shares and a 12.0% interest in the total of the company. Since we do not exert significant influence on the Investment, this investment is accounted for under the cost method in accordance with applicable accounting guidance. The fair value of this investment is not estimated because there are no identified events or changes in circumstances that may indicate an other-than-temporary decline in the fair value of the investment, and we are exempt from estimating interim fair values because the investment does not meet the definition of a publicly traded company. This investment is recorded in other assets in our Condensed Consolidated Balance Sheets.

 

Customer Deposits

 

As of September 30, 2013 and December 31, 2012, we had customer deposits of $24.2 million and $32.7 million, respectively, which are recorded as a component of accrued expenses and other current liabilities.

 

12

Table of Contents

 

Accrued Warranty

 

We estimate the costs that may be incurred under the warranties we provide and record a liability in the amount of such costs at the time the related revenue is recognized. Factors that affect our warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. This accrual is recorded in accrued expenses and other current liabilities in our Condensed Consolidated Balance Sheets.  We periodically assess the adequacy of our recognized warranty liability and adjust the amount as necessary.  Changes in our warranty liability during the period are as follows (in thousands):

 

		September 30,
		2013			2012
Balance as of the beginning of period		$	4,942		$	8,731
Warranties issued during the period		2,778			2,486
Settlements made during the period		(3,315		)	(6,389		)
Changes in estimate during the period		—			1,418
Balance as of the end of period		$	4,405		$	6,246

 

In the current year’s presentation we no longer include installation in the accrued warranty balance; therefore, in order to conform the balance to current year presentation, we have reclassified $1.047 million from the beginning balance of 2012 accrued warranty to accrued installation which, along with accrued warranty, is also a component of accrued expenses and other current liabilities.

 

Mortgage Payable

 

We have a mortgage payable with approximately $2.2 million outstanding as of September 30, 2013 and $2.4 million outstanding as of December 31, 2012. The mortgage accrues interest at an annual rate of 7.91%, and the final payment is due on January 1, 2020. We estimate the fair value of the mortgage as of September 30, 2013 was approximately $2.4 million and $2.6 million as of December 31, 2012.

 

Accumulated Other Comprehensive Income

 

The components of accumulated other comprehensive income are (in thousands):

 

		Gross			Taxes			Net
As of September 30, 2013
Translation adjustments		$	5,694		$	(352	)	$	5,342
Minimum pension liability		(1,285		)	510			(775		)
Unrealized gain on available-for-sale securities		9			(4		)	5
Accumulated other comprehensive income		$	4,418		$	154		$	4,572

 

		Gross			Taxes			Net
As of December 31, 2012
Translation adjustments		$	7,040		$	(339	)	$	6,701
Minimum pension liability		(1,285		)	510			(775		)
Unrealized gain on available-for-sale securities		76			(29		)	47
Accumulated other comprehensive income		$	5,831		$	142		$	5,973

 

13

Table of Contents

 

Note 4—Segment Information

 

We manage the business, review operating results and assess performance, as well as allocate resources, based upon four reporting units that are aggregated into two segments: the VIBE and Mechanical reporting units which are reported in our Data Storage segment; and the MOCVD and molecular beam epitaxy (“MBE”) reporting units which are reported in our Light Emitting Diode (“LED”) and Solar segment. In identifying the reporting units, management considered the economic characteristics of operating segments including the products and services provided, production processes, types or classes of customer and product distribution.  Our LED & Solar segment consists of MOCVD systems, MBE systems and thermal deposition sources. These systems are primarily sold to customers in the LED, wireless devices and solar industries, as well as to scientific research customers. This segment has manufacturing, product development and marketing sites in Somerset, New Jersey; Poughkeepsie, New York; and St. Paul, Minnesota. Our Data Storage segment consists of the ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition and dicing and slicing products sold primarily to customers in the data storage industry. This segment has manufacturing, product development and marketing sites in Plainview, New York; Camarillo, California; and Ft. Collins, Colorado.

 

We evaluate the performance of our reportable segments based on income (loss) from continuing operations before interest, income taxes, amortization and certain items (in the aggregate “segment profit (loss)”), which is the primary indicator used to plan and forecast future periods. The presentation of this financial measure facilitates meaningful comparison with prior periods, as management believes segment profit (loss) reports baseline performance and thus provides useful information. Certain items include restructuring charges and equity-based compensation expense. The accounting policies of the reportable segments are the same as those described in the summary of critical accounting policies.

 

14

Table of Contents

 

The following tables present certain data pertaining to our reportable segments and a reconciliation of segment (loss) profit to (loss) income from continuing operations before income taxes for the three and nine months ended September 30, 2013 and 2012, respectively, and goodwill and total assets as of September 30, 2013 and December 31, 2012 (in thousands):

 

		LED & Solar				Data Storage				Unallocated Corporate					Total
Three months ended September 30, 2013
Net sales		$	75,001			$	24,323			$		—			$	99,324
Segment (loss) profit		$	(1,723		)	$	2,135			$		(5,491		)	$	(5,079		)
Interest income, net		—				—				192					192
Amortization		(531			)	(324			)	—					(855			)
Equity-based compensation		(1,016			)	(439			)	(1,308				)	(2,763			)
Restructuring		(793			)	(447			)	—					(1,240			)
(Loss) income from continuing operations before income taxes		$	(4,063		)	$	925			$		(6,607		)	$	(9,745		)
Three months ended September 30, 2012
Net sales		$	98,905			$	33,810			$		—			$	132,715
Segment profit		$	9,461			$	4,278			$		480			$	14,219
Interest income, net		—				—				176					176
Amortization		(1,154			)	(323			)	—					(1,477			)
Equity-based compensation		(1,914			)	(763			)	(588				)	(3,265			)
Restructuring		(660			)	(1,296			)	(58				)	(2,014			)
Income from continuing operations before income taxes		$	5,733			$	1,896			$		10			$	7,639
Nine months ended September 30, 2013
Net sales		$	193,241			$	65,299			$		—			$	258,540
Segment (loss) profit		$	(9,821		)	$	2,389			$		(15,549		)	$	(22,981		)
Interest income, net		—				—				620					620
Amortization		(1,595			)	(971			)	—					(2,566			)
Equity-based compensation		(3,042			)	(1,057			)	(4,956				)	(9,055			)
Restructuring		(1,216			)	(497			)	(58				)	(1,771			)
Loss from continuing operations before income taxes		$	(15,674		)	$	(136		)	$		(19,943		)	$	(35,753		)
Nine months ended September 30, 2012
Net sales		$	281,257			$	127,914			$		—			$	409,171
Segment profit (loss)		$	36,534			$	25,367			$		(2,009		)	$	59,892
Interest income, net		—				—				708					708
Amortization		(2,878			)	(999			)	—					(3,877			)
Equity-based compensation		(4,016			)	(1,614			)	(4,779				)	(10,409			)
Restructuring		(718			)	(1,301			)	(58				)	(2,077			)
Income (loss) from continuing operations before income taxes		$	28,922			$	21,453			$		(6,138		)	$	44,237
		LED & Solar				Data Storage					Unallocated Corporate				Total
As of September 30, 2013
Goodwill		$		55,828		$		—			$		—		$		55,828
Total assets		$		235,356		$		37,277			$		636,480		$		909,113
As of December 31, 2012
Goodwill		$		55,828		$		—			$		—		$		55,828
Total assets		$		276,352		$		38,664			$		622,288		$		937,304

 

15

Table of Contents

 

As of September 30, 2013 and December 31, 2012 corporate total assets were comprised principally of cash and cash equivalents, restricted cash, and short-term investments.

 

Note 5— Fair Value Measurements

 

We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy. The levels of fair value hierarchy are as follows:

 

·                  Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

·                  Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

·                  Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset.

 

Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.

 

The major categories of assets and liabilities measured on a recurring basis, at fair value, as of September 30, 2013 and December 31, 2012, are as follows (in thousands):

 

		September 30, 2013
		Level 1			Level 2			Level 3			Total
United States treasuries		$	180,161		$	—		$	—		$	180,161
Commercial paper		—			11,943			—			11,943
Corporate bonds		—			74,721			—			74,721
Government agency securities		—			62,663			—			62,663
Total		$	180,161		$	149,327		$	—		$	329,488
		December 31, 2012
		Level 1			Level 2			Level 3			Total
United States treasuries		$	278,698		$	—		$	—		$	278,698
Government agency securities		—			123,054			—			123,054
Total		$	278,698		$	123,054		$	—		$	401,752

 

Consistent with Level 1 measurement principles, treasury bills and treasury notes are priced using active market prices of identical securities. Consistent with Level 2 measurement principles, commercial paper, corporate bonds and government agency securities are priced with matrix pricing.

 

Government agency securities and treasury bills that are classified as cash equivalents are carried at cost, which approximates market value. Accordingly, no gains or losses (realized/unrealized) have been incurred for cash equivalents. All investments classified as available-for-sale are recorded at fair value within short-term investments in the Condensed Consolidated Balance Sheets.

 

16