VEECO INSTRUMENTS INC - Quarter Report: 2014 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended September 30, 2014

 

OR

 

 

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. Yesx  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). Yesx 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

 

40,217,447 shares of common stock were outstanding as of the close of business on October 24, 2014.

 

 

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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, which operate in highly concentrated industries;

·                  Our sales cycle is long and unpredictable;

·                  We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act and any delays or difficulty in satisfying these requirements or negative reports concerning our internal controls could adversely affect our future results of operations and our stock price;

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

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

·                  We are subject to foreign currency exchange risks;

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

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

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

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

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

 

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

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

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

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

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

·                  The matters set forth in this Report generally, including the risk factors set forth in “Part 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.

 

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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	23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	43
ITEM 4. CONTROLS AND PROCEDURES	45
PART II. OTHER INFORMATION	46
ITEM 1. LEGAL PROCEEDINGS	46
ITEM 1A. RISK FACTORS	46
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	46
ITEM 4. MINE SAFETY DISCLOSURES	46
ITEM 5. OTHER INFORMATION	46
ITEM 6. EXHIBITS	47
SIGNATURES	48

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Veeco Instruments Inc. and Subsidiaries
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,
		2014			2013			2014			2013
Net sales		$	93,341		$	99,324		$	279,304		$	258,540
Cost of sales		60,783			69,016			182,296			171,040
Gross profit		32,558			30,308			97,008			87,500
Operating expenses:
Selling, general and administrative		21,712			19,650			65,270			59,077
Research and development		19,968			18,993			60,747			60,600
Amortization		3,149			855			8,951			2,566
Restructuring		2,317			1,240			3,510			1,771
Asset impairment		2,864			—			2,864			—
Total operating expenses		50,010			40,738			141,342			124,014
Other operating, net		36			(493		)	(334		)	(141		)
Changes in contingent consideration		—			—			(29,368		)	—
Operating income (loss)		(17,488		)	(9,937		)	(14,632		)	(36,373		)
Interest income (expense), net		305			192			541			620
Income (loss) before income taxes		(17,183		)	(9,745		)	(14,091		)	(35,753		)
Income tax provision (benefit)		(3,206		)	(3,719		)	(4,063		)	(15,575		)
Net income (loss)		$	(13,977	)	$	(6,026	)	$	(10,028	)	$	(20,178	)
Income (loss) per common share:
Basic:
Income (loss)		$	(0.35	)	$	(0.16	)	$	(0.26	)	$	(0.52	)
Diluted :
Income (loss)		$	(0.35	)	$	(0.16	)	$	(0.26	)	$	(0.52	)
Weighted average shares outstanding:
Basic		39,401			38,841			39,317			38,774
Diluted		39,401			38,841			39,317			38,774

 

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

 

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

		For the three months ended						For the nine months ended
		September 30,						September 30,
		2014			2013			2014			2013
Net income (loss)		$	(13,977	)	$	(6,026	)	$	(10,028	)	$	(20,178	)
Other comprehensive income (loss), net of tax
Available-for-sale securities
Unrealized gain (loss) on available-for-sale securities		6			225			127			(15		)
Benefit (provision) for income taxes		—			(54		)	—			25
Less: Reclassification adjustments for gains included in net income (loss)		—			(1		)	(45		)	(52		)
Net unrealized gain (loss) on available-for-sale securities		6			170			82			(42		)
Foreign currency translation
Foreign currency translation		(138		)	(273		)	(29		)	(1,346		)
Benefit (provision) for income taxes		—			176			—			(13		)
Net foreign currency translation		(138		)	(97		)	(29		)	(1,359		)
Other comprehensive income (loss), net of tax		(132		)	73			53			(1,401		)
Comprehensive income (loss)		$	(14,109	)	$	(5,953	)	$	(9,975	)	$	(21,579	)

 

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

 

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

 

		September 30,			December 31,
		2014			2013
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	264,008		$	210,799
Short-term investments		222,954			281,538
Restricted cash		487			2,738
Accounts receivable, net		61,588			23,823
Inventories		46,594			59,726
Deferred cost of sales		7,434			724
Prepaid expenses and other current assets		43,898			22,579
Assets held for sale		2,653			—
Deferred income taxes		8,384			11,716
Total current assets		658,000			613,643
Property, plant and equipment at cost, net		80,720			89,139
Goodwill		91,521			91,348
Deferred income taxes		397			397
Intangible assets, net		106,015			114,716
Other assets		19,745			38,726
Total assets		$	956,398		$	947,969
Liabilities and equity
Current liabilities:
Accounts payable		$	26,113		$	35,755
Accrued expenses and other current liabilities		40,468			51,084
Customer deposits and deferred revenue		65,553			34,754
Income taxes payable		6,840			6,149
Deferred income taxes		159			159
Current portion of long-term debt		308			290
Total current liabilities		139,441			128,191
Deferred income taxes		19,741			28,052
Long-term debt		1,614			1,847
Other liabilities		3,484			9,649
Total liabilities		164,280			167,739
Equity:
Preferred stock, 500,000 shares authorized; no shares issued and outstanding		—			—
Common stock; $.01 par value; authorized 120,000,000 shares; 40,232,642 and 39,666,195 shares issued and outstanding in 2014 and 2013, respectively		402			397
Additional paid-in capital		743,210			721,352
Retained earnings		43,832			53,860
Accumulated other comprehensive income		4,674			4,621
Total equity		792,118			780,230
Total liabilities and equity		$	956,398		$	947,969

 

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

 

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

 

		Nine months ended September 30,
		2014			2013
Cash Flows from Operating Activities
Net income (loss)		$	(10,028	)	$	(20,178	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization		17,649			12,080
Deferred income taxes		(4,973		)	(5,196		)
Non-cash asset impairment		2,864			—
Non-cash equity-based compensation		14,303			9,054
Provision (recovery) for bad debt		(1,833		)	5
Gross profit from sales of lab tools		(2,435		)	—
Change in contingent consideration		(29,368		)	—
Excess tax benefits from equity-based compensation		—			(485		)
Other, net		—			15
Changes in operating assets and liabilities:
Accounts receivable		(36,149		)	25,095
Inventories		13,650			2,165
Prepaid expenses and other current assets		(3,046		)	(4,801		)
Accounts payable		(9,679		)	2,307
Accrued expenses, customer deposits, deferred revenue and other current liabilities		41,630			(15,235		)
Income taxes payable		691			(821		)
Other, net		124			605
Net cash provided by (used in) operating activities		(6,600		)	4,610
Cash Flows from Investing Activities
Capital expenditures		(10,476		)	(7,976		)
Proceeds from the liquidation of short-term investments		216,050			422,903
Payments for purchases of short-term investments		(157,733		)	(553,217		)
Payments for purchase of cost method investment		(2,388		)	(1,594		)
Proceeds from sale of lab tools		7,034			—
Other		126			25
Net cash provided by (used in) investing activities		52,613			(139,859		)
Cash Flows from Financing Activities
Proceeds from stock option exercises		9,485			313
Restricted stock tax withholdings		(1,925		)	(2,358		)
Excess tax benefits from equity-based compensation		—			485
Repayments of long-term debt		(215		)	(199		)
Net cash provided by (used in) financing activities		7,345			(1,759		)
Effect of exchange rate changes on cash and cash equivalents		(149		)	117
Net increase (decrease) in cash and cash equivalents		53,209			(136,891		)
Cash and cash equivalents as of beginning of period		210,799			384,557
Cash and cash equivalents as of end of period		$	264,008		$	247,666
Non-cash investing and financing activities
Settlement of stock option exercise (shares withheld)		$	1,334		$	—

 

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

 

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

 

Note 1—Basis of Presentation

 

The accompanying unaudited 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, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013.

 

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 2014 interim quarter ends are March 30, June 29 and September 28. The 2013 interim quarter ends were March 31, June 30 and September 29. For ease of reference, we report these interim quarter ends as March 31, June 30 and September 30 in our interim consolidated financial statements. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation.

 

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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include: the best estimate of selling price for our products and services; allowance for doubtful accounts; inventory obsolescence; recoverability and useful lives of property, plant and equipment and identifiable intangible assets; investment valuations; fair value of derivatives; recoverability of goodwill and long lived assets; recoverability of deferred tax assets; liabilities for product warranty; accounting for acquisitions; accruals for contingencies; equity-based payments, including forfeitures and performance based vesting; and liabilities for tax uncertainties. Actual results could differ from those estimates.

 

Income (Loss) 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 September 30,				Nine months ended September 30,
		2014		2013		2014		2013
Basic weighted average shares outstanding		39,401		38,841		39,317		38,774
Dilutive effect of stock options and restricted stock		—		—		—		—
Diluted weighted average shares outstanding		39,401		38,841		39,317		38,774

 

Basic income (loss) per common share is computed using the basic weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is computed using the diluted weighted average number of common shares which include any common equivalent shares calculated to be outstanding during the period. For the three months and nine months ended September 30, 2014 and 2013, we reported a net loss, and accordingly, the basic and diluted weighted average shares outstanding are equal because any increase to basic weighted average shares outstanding would be antidilutive. As a result, for the three and nine months ended September 30, 2014, we excluded 0.6 million and 0.7 million common equivalent shares and for both the three and nine months ended September 30, 2013, we excluded 0.6 million common equivalent shares.

 

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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 1.8 million and 1.5 million of such underlying shares for the three and nine months ended September 30, 2014, respectively. There were 1.0 million and 1.1 million of such underlying shares for the three and nine months ended September 30, 2013, 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. We utilize BESP for the majority of the elements in our arrangements. The accounting guidance for selling price hierarchy did not include BESP for arrangements entered into prior to January 1, 2011; as such we recognized revenue for those arrangements as described below.

 

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

 

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

 

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

 

Our sales arrangements, including certain upgrades, generally include installation. The installation process is not deemed essential to the functionality of the equipment since it is not complex; that is, it does not require significant changes to the features or capabilities of the equipment or involve building elaborate interfaces or connections subsequent to factory

 

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acceptance. We have a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage us to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, we deem the installation of our systems to be inconsequential or perfunctory relative to the system as a whole, and as a result, do not consider such services to be a separate element of the arrangement. As such, we accrue the cost of the installation at the time of revenue recognition for the system.

 

In Japan, where our contractual terms with customers generally specify title and risk and rewards of ownership transfer upon customer acceptance, revenue is recognized upon the receipt of written customer acceptance. During the fourth quarter of fiscal 2013, we began using a distributor for almost all of our product and service sales to customers in Japan. Title passes to the distributor upon shipment, however, due to customary local business practices, the risk and rewards of ownership of our system sales transfer to the end-customers upon their acceptance.  As such, we recognize revenue upon receipt of written acceptance from the end customer.

 

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

 

Recent Accounting Pronouncements

 

Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern: In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The amendments in this ASU apply to all entities and provide guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016; early application is permitted. We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

 

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period: In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (Topic 718).  The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015; earlier adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

Revenue from Contracts with Customers: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (Topic 606).  ASU No. 2014-09 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard outlines a five-step model to be used to make the revenue recognition determination and requires new financial statement disclosures. The standard is effective for interim and annual periods beginning after December 15, 2016 and allows entities to choose among different transition alternatives. We are evaluating the impact of adopting the standard on our consolidated financial statements and related financial statement disclosures and we have not yet determined which method of adoption will be selected.

 

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity: In April 2014, the FASB issued ASU No. 2014-08 that changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” For disposals of individually significant components that do not qualify as discontinued operations, an entity must disclose pre-tax earnings of the disposed component. For public business entities, this guidance is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

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Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists: In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists.” ASU 2013-11 requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We adopted this as of January 1, 2014 and it did not have a material impact on our consolidated financial statements.

 

Presentation of Financial Statements: In April 2013, the FASB issued ASU No. 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.” The objective of ASU 2013-07 is to clarify when an entity should apply the liquidation basis of accounting. The update provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We adopted this as of January 1, 2014 and will evaluate the materiality of its impact on our consolidated financial statements when there are any indications that liquidation is imminent.

 

Parent’s Accounting for the Cumulative Translation Adjustment: In March 2013, the FASB issued ASU No. 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This new standard is intended to resolve diversity in practice regarding the release into net income of a cumulative translation adjustment (“CTA”) upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We have adopted this as of January 1, 2014 and currently anticipate that it could have an impact on our consolidated financial statements, in the event of derecognition of a foreign subsidiary in 2014 or thereafter. During the second quarter of 2014, the Company began executing a plan to liquidate our foreign subsidiary in Japan. Please see note Commitments, Contingencies and Other Matters for additional information.

 

Note 2 — Business Combinations

 

On October 1, 2013 (“the Acquisition Date”), Veeco acquired 100% of the outstanding common shares and voting interest of Synos Technology, Inc. (“Synos”). The results of Synos’ operations have been included in the consolidated financial statements since that date. Synos is an early stage manufacturer of fast array scanning atomic layer deposition (“FAST-ALD”) systems for Organic LED (“OLED”) and other applications.

 

As part of Veeco’s acquisition agreement with Synos, there were certain contingent payments due to the selling shareholders of Synos dependent on the achievement of certain milestones. The aggregate fair value of the contingent consideration arrangement as of December 31, 2013 was $29.4 million.

 

We estimate the fair value of acquisition-related contingent consideration based on management’s probability-weighted present value of the consideration expected to be transferred during the remainder of the earn-out period, based on the forecast related to the milestones. The fair value of the contingent consideration is reassessed by us on a quarterly basis using additional information as it becomes available. Any change in the fair value of an acquisition’s contingent consideration liability results in a gain or loss that is recorded in the earnings of that period. As of March 31, 2014, we determined that the agreed upon post-closing milestones were not met or are not expected to be achieved and therefore reversed the remaining $29.4 million fair value of the liability of the contingent consideration and recorded it as a change in contingent consideration in the Consolidated Statement of Operations.

 

The post-closing milestones are divided into two contingencies. The first, tied to receipt of certain purchase orders, had an evaluation date of March 31, 2014, which was not met and accounted for $20.2 million of the fair value of the reversed liability. The second is based on achieving certain full year 2014 revenue and gross margin thresholds, which are unlikely to be met and accounted for $9.2 million of the fair value of the reversed liability. As of September 30, 2014 the second contingency, with a maximum potential value of $75.0 million, remains contractually outstanding. We currently do not expect this contingency to be met.

 

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During the second quarter of 2014, we finalized the working capital adjustment under the purchase agreement. Upon acquisition, the working capital adjustment was estimated to be $2.7 million. Based on the final adjustment, the working capital adjustment was reduced to $1.3 million. As a result, a $1.4 million adjustment was made that increased goodwill by $0.2 million and reduced accrued expenses by $1.2 million for the relief of a potential liability that the former shareholders have retained. During the third quarter of 2014, we received payment of the $1.3 million working capital adjustment from the former shareholders.

 

Note 3—Income Taxes

 

At the end of each interim reporting period, we estimate the effective 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.

 

Our effective tax rate for the three months ended September 30, 2014 was a benefit of 18.7% compared to a benefit of 38.2% during the three months ended September 30, 2013. Our effective tax rate for the nine months ended September 30, 2014 was a benefit of 28.8% compared to a benefit of 43.6% during the nine months ended September 30, 2013. A tax benefit for each period was provided to the extent of future reversals of taxable temporary differences which relate primarily to non-tax deductible intangibles.

 

Our effective tax rate for 2014 differed from the U.S. federal statutory rate of 35% primarily related to our ability to recognize only a portion of the deferred tax assets on a more likely than not basis with respect to current year pre-tax operating losses. The effective tax rate for the nine months ended September 30, 2014 was also impacted by a discrete tax benefit in connection with the settlement of our 2010 IRS examination and because we did not provide a tax provision on the gain from the settlement of the contingent consideration related to the Synos acquisition.

 

Our effective tax rate for 2013 differed from the U.S. federal statutory rate as a result of the jurisdictional mix of earnings in our foreign locations, an income tax benefit related to the generation of current year research and development tax credits, and legislation enacted in the first quarter of 2013 which extended the Federal Research & Development Credit for both the 2012 and 2013 tax years.

 

We recently settled our 2010 IRS examination, resulting in the release of $2.3 million of liabilities relating to uncertain tax positions. We were also notified that the IRS will commence an examination of our 2011 tax year beginning in the quarter ending December 31, 2014.

 

Note 4—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, U.S. treasuries, government agency securities and corporate debt. The investments that are classified as cash equivalents are carried at cost, which approximates fair value.

 

Short-Term Investments

 

Total available-for-sale securities and gains and losses in Accumulated Other Comprehensive Income (Loss) consist of the following (in thousands):

 

		September 30, 2014
		Amortized Cost			Gains in Accumulated Other Comprehensive Income			Losses in Accumulated Other Comprehensive Income			Estimated Fair Value
U.S. treasuries		$	90,523		$	35		$	(1	)	$	90,557
Corporate debt		69,109			93			(4		)	69,198
Government agency securities		63,191			8			—			63,199
Total available-for-sale securities		$	222,823		$	136		$	(5	)	$	222,954

 

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During the three and nine months ended September 30, 2014, available-for-sale securities were liquidated for total proceeds of $94.8 million and $216.1 million, respectively. For the three and nine months ended September 30, 2014 there were minimal realized gains on these liquidations. 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. The cost of securities liquidated is based on specific identification.

 

		December 31, 2013
		Amortized Cost			Gains in Accumulated Other Comprehensive Income			Losses in Accumulated Other Comprehensive Income			Estimated Fair Value
U.S. treasuries		$	130,956		$	22		$	(1	)	$	130,977
Corporate debt		77,582			55			(36		)	77,601
Government agency securities		61,004			9			—			61,013
Commercial paper		11,947			—			—			11,947
Total available-for-sale securities		$	281,489		$	86		$	(37	)	$	281,538

 

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, 2014
		Less than 12 months
		Estimated Fair Value			Gross Unrealized Losses
U.S. treasuries		$	15,006		$	(1	)
Corporate debt		7,221			(4		)
Total		$	22,227		$	(5	)

 

		December 31, 2013
		Less than 12 months
		Estimated Fair Value			Gross Unrealized Losses
Corporate debt		$	37,654		$	(36	)
U. S. treasuries		29,068			(1		)
Total		$	66,722		$	(37	)

 

We did not hold any short-term investments that have been in an unrealized loss position for 12 months or longer for the periods noted in the tables 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, 2014 and December 31, 2013 were temporary in nature and therefore did not recognize any impairment.

 

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

 

		September 30, 2014
		Estimated Fair Value
Due in one year or less		$	135,948
Due in 1–2 years		87,006
Total available-for-sale securities		$	222,954

 

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, 2014 and December 31, 2013, restricted cash was $0.5 million and $2.7 million, respectively, which serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations. This cash is held in custody by the issuing bank and is restricted as to withdrawal or use while the related bank guarantees are outstanding.

 

Accounts Receivable, Net

 

Accounts receivable are presented net of allowance for doubtful accounts of $0.9 million and $2.4 million as of September 30, 2014 and December 31, 2013, respectively. We evaluate the collectability of accounts receivable based on a combination of factors. In cases where we become aware of circumstances that may impair a customer’s ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the we reasonably believe will be collected. For all other customers, we recognize an allowance for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry conditions, the current business environment and its historical experience.

 

During the nine months ended September 30, 2014, we collected $1.9 million of previously reserved accounts. As a result, we reversed the related allowance and bad debt expense associated with this receivable.

 

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,
		2014			2013
Materials		$	26,305		$	34,301
Work in process		15,169			12,900
Finished goods		5,120			12,525
		$	46,594		$	59,726

 

Assets Held for Sale and Property, Plant and Equipment, Net

 

During the three and nine months ended September 30, 2014, we transferred $2.7 million of assets from property, plant and equipment, net to assets held for sale. In conjunction with the transfer, these assets were evaluated for impairment in accordance with the accounting guidance. As a result, during the three and nine months ended September 30, 2014, we recognized an asset impairment charge of $2.4 million and a corresponding reduction to property, plant and equipment of $5.1 million. The $2.4 million impairment charge consisted of $1.6 million relating to our research and demonstration labs in Asia and $0.8 million relating to vacant land in our LED and Solar segment. During the three and nine months ended September 30, 2014, we recognized an additional asset impairment charge of $0.4 million relating to assets in our LED and Solar segment that we abandoned during the quarter.

 

As of September 30, 2014, we are holding $2.9 million of tools that were previously used in our laboratories, for sale. These tools are carried in machinery and equipment, as a component of property, plant and equipment, net in our Consolidated Balance Sheets. These tools are the same type of tools we sell to our customers in the ordinary course of our business. During

 

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the nine months ended September 30, 2014, we converted and sold $4.6 million of tools that we had previously used in our laboratories as Veeco Certified Equipment at an aggregate selling price of $7.0 million which is included in revenue in our Consolidated Statements of Operations. We did not sell any of these tools during the three months ended September 30, 2014.

 

Intangible Assets, Net

 

During the three months ended September 30, 2014, we completed the $5.1 million of in-process research and development acquired with our ALD business (see Note Business Combinations). No impairment was required, and as such, we will amortize this asset over a useful life of 13 years. During the three months ended September 30, 2014 we recognized amortization expense of approximately $0.1 million relating to this asset.

 

Goodwill

 

Changes in our goodwill are as follows (in thousands):

 

Beginning balance as of December 31, 2013		$	91,348
Purchase price adjustment (see Business Combinations)		173
Ending balance as of September 30, 2014		$	91,521

 

Cost Method Investment

 

We maintain certain investments in support of our strategic business objectives, including a non-marketable cost method investment. Our ownership interest is less than 20% of the investee’s voting stock and we do not exert significant influence, therefore the investment is recorded at cost. The carrying value of the investment was $19.4 million and $16.9 million at September 30, 2014 and December 31, 2013, respectively and is included in “Other assets” on the Consolidated Balance Sheet. The investment is subject to a periodic impairment review; however, there are no open-market valuations, and the impairment analysis requires significant judgment. This analysis includes assessment of the investee’s financial condition, the business outlook for its products and technology, its projected results and cash flow, the likelihood of obtaining subsequent rounds of financing, and the impact of any relevant contractual equity preferences held by us or others. 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.

 

Customer Deposits and Deferred Revenue

 

As of September 30, 2014 and December 31, 2013, we had customer deposits of $35.8 million and $27.5 million, respectively recorded as a component of customer deposits and deferred revenue.

 

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 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,
		2014			2013
Balance as of the beginning of period		$	5,662		$	4,942
Warranties issued during the period		2,536			2,778
Settlements made during the period		(3,160		)	(3,315		)
Changes in estimate during the period		259			—
Balance as of the end of period		$	5,297		$	4,405

 

Mortgage Payable

 

We have a mortgage payable with approximately $1.9 million and $2.1 million outstanding as of September 30, 2014 and December 31, 2013, respectively. The mortgage accrues interest at an annual rate of 7.91%, and the final payment is due on

 

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January 1, 2020. Our estimate of the fair value of the mortgage as of September 30, 2014 and December 31, 2013 was approximately $2.0 million and $2.3 million, respectively. We believe the mortgage is a Level 3 liability in the fair-value hierarchy.

 

Accumulated Other Comprehensive Income

 

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

 

		Gross			Taxes			Net
As of September 30, 2014
Translation adjustments		$	5,689		$	(392	)	$	5,297
Minimum pension liability		(1,160		)	424			(736		)
Unrealized gain on available-for-sale securities		131			(18		)	113
Accumulated other comprehensive income		$	4,660		$	14		$	4,674

 

		Gross			Taxes			Net
As of December 31, 2013
Translation adjustments		$	5,718		$	(392	)	$	5,326
Minimum pension liability		(1,160		)	424			(736		)
Unrealized gain on available-for-sale securities		49			(18		)	31
Accumulated other comprehensive income		$	4,607		$	14		$	4,621

 

Equity

 

Summary share activities impacting our common stock and additional paid-in capital balances are as follows (in thousands):

 

		For the nine months ended September 30, 2014
		Shares
Restricted Stock
Grants		221
Gross Vesting		173
Shares Withheld to Cover Taxes & Cancelled		(57	)
Net Shares Vested		116
Stock Options
Exercised		402

 

Note 5—Segment Information

 

We have five identified operating segments that we aggregate into two reportable segments: the VIBE and Mechanical operating segments which are reported in our Data Storage segment; and the metal organic chemical vapor deposition (“MOCVD”), molecular beam epitaxy (“MBE”) and atomic layer deposition (“ALD”) operating segments are reported in our LED & Solar segment. We manage the business, review operating results and assess performance, as well as allocate resources, based upon our operating segments that reflect the market focus of each business. The LED & Solar segment consists of MOCVD systems, MBE systems, thermal deposition sources, ALD technology and other types of deposition systems. These systems are primarily sold to customers in the LED, OLED and solar industries, as well as to scientific research customers. This segment has product development and marketing sites in Somerset, New Jersey, Poughkeepsie, New York, St. Paul, Minnesota, Fremont, California, and Korea. The Data Storage segment consists of the ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, and dicing and slicing products sold primarily to customers in the data storage industry. This segment has product development and marketing sites in Plainview, New York, Ft. Collins, Colorado and Camarillo, California. As of September 30, 2014, we are continuing the consolidation of our Ft. Collins, Colorado facility into our Plainview, New York facility and have begun consolidation of our Camarillo, California facility into the Plainview, New York facility.

 

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We evaluate the performance of our reportable segments based on income (loss) from operations before interest, income taxes, amortization and other items (“segment profit (loss)”), which is the primary indicator used to plan and forecast future periods. The presentation of this financial measure facilitates meaningful comparison with prior periods, as management believes segment profit (loss) reports baseline performance and thus provides useful information. Other items include restructuring expenses, asset impairment charges, equity-based compensation expense and other non-recurring items. The accounting policies of the reportable segments are the same as those described in the summary of critical accounting policies. Beginning in the third quarter of 2014, we began evaluating our reportable segments using segment profit (loss) before depreciation. Prior period segment profit (loss) reported below reflect this change for comparability.

 

The following table presents certain data pertaining to our reportable segments and a reconciliation of segment profit (loss) to income (loss) before income taxes for the three months ended September 30, 2014 and 2013, respectively (in thousands):

 

		LED & Solar			Data Storage			Unallocated			Total
Three months ended September 30, 2014
Net sales		$	76,850		$	16,491		$	—		$	93,341
Segment profit (loss)		$	3,767		$	(1,417	)	$	(4,118	)	$	(1,768	)
Interest income (expense), net		—			—			305			305
Depreciation		(2,267		)	(417		)	(216		)	(2,900		)
Amortization		(2,825		)	(324		)	—			(3,149		)
Equity-based compensation		(2,083		)	(647		)	(1,760		)	(4,490		)
Restructuring		(557		)	(1,403		)	(357		)	(2,317		)
Asset impairment		(2,799		)	(65		)	—			(2,864		)
Income (loss) before income taxes		$	(6,764	)	$	(4,273	)	$	(6,146	)	$	(17,183	)
Three months ended September 30, 2013
Net sales		$	75,001		$	24,323		$	—		$	99,324
Segment profit (loss)		$	801		$	2,570		$	(5,210	)	$	(1,839	)
Interest income (expense), net		—			—			192			192
Depreciation		(2,524		)	(435		)	(281		)	(3,240		)
Amortization		(531		)	(324		)	—			(855		)
Equity-based compensation		(1,016		)	(439		)	(1,308		)	(2,763		)
Restructuring		(793		)	(447		)	—			(1,240		)
Income (loss) before income taxes		$	(4,063	)	$	925		$	(6,607	)	$	(9,745	)

 

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The following table presents certain data pertaining to our reportable segments and a reconciliation of segment profit (loss) to income (loss) before income taxes for the nine months ended September 30, 2014 and 2013, respectively (in thousands):

 

		LED & Solar			Data Storage			Unallocated			Total
Nine months ended September 30, 2014
Net sales		$	224,759		$	54,545		$	—		$	279,304
Segment profit (loss)		$	8,768		$	(1,634	)	$	(12,808	)	$	(5,674	)
Interest income (expense), net		—			—			541			541
Depreciation		(6,760		)	(1,191		)	(747		)	(8,698		)
Amortization		(7,980		)	(971		)	—			(8,951		)
Equity-based compensation		(6,595		)	(2,029		)	(5,679		)	(14,303		)
Restructuring		(794		)	(2,359		)	(357		)	(3,510		)
Changes in contingent consideration		29,368			—			—			29,368
Asset impairment		(2,799		)	(65		)	—			(2,864		)
Income (loss) before income taxes		$	13,208		$	(8,249	)	$	(19,050	)	$	(14,091	)
Nine months ended September 30, 2013
Net sales		$	193,241		$	65,299		$	—		$	258,540
Segment profit (loss)		$	(2,327	)	$	3,531		$	(14,671	)	$	(13,467	)
Interest income (expense), net		—			—			620			620
Depreciation		(7,494		)	(1,142		)	(878		)	(9,514		)
Amortization		(1,595		)	(971		)	—			(2,566		)
Equity-based compensation		(3,042		)	(1,057		)	(4,956		)	(9,055		)
Restructuring		(1,216		)	(497		)	(58		)	(1,771		)
Income (loss) before income taxes		$	(15,674	)	$	(136	)	$	(19,943	)	$	(35,753	)

 

The following table presents goodwill and total assets as of September 30, 2014 and December 31, 2013 (in thousands):

 

		LED & Solar			Data Storage			Unallocated			Total
As of September 30, 2014
Goodwill		$	91,521		$	—		$	—		$	91,521
Total assets		$	388,745		$	33,936		$	533,717		$	956,398
As of December 31, 2013
Goodwill		$	91,348		$	—		$	—		$	91,348
Total assets		$	359,464		$	37,910		$	550,595		$	947,969

 

As of September 30, 2014 and December 31, 2013 unallocated assets were comprised principally of cash and cash equivalents, restricted cash and short-term investments.

 

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