VEECO INSTRUMENTS INC - Quarter Report: 2016 March (Form 10-Q)

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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 March 31, 2016

 

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)

 

 

 

(516) 677-0200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

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VEECO INSTRUMENTS INC.

 

INDEX

 

Safe Harbor Statement	1
PART I—FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures about Market Risk	26
Item 4. Controls and Procedures	26
PART II—OTHER INFORMATION	27
Item 1. Legal Proceedings	27
Item 1A. Risk Factors	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3. Defaults Upon Senior Securities	27
Item 4. Mine Safety Disclosures	27
Item 5. Other Information	27
Item 6. Exhibits	28
SIGNATURES	29

 

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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 1, 2, and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results.

 

In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.

 

The risks and uncertainties of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “we,” “us,” and “our,” unless the context indicates otherwise) include, without limitation, the following:

 

·                  Unfavorable market conditions may adversely affect our operating results;

 

·                  A reduction or elimination of foreign government subsidies and economic incentives may adversely affect the future order rate for our MOCVD equipment;

 

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

 

·                  We operate in industries characterized by rapid technological change;

 

·                  We have a concentrated customer base, located primarily in a limited number of regions, which operate in highly concentrated industries;

 

·                  We face significant competition;

 

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

 

·                  Our sales cycle is long and unpredictable;

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  Timing of market adoption of LED technology for general lighting is uncertain;

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  Our income taxes can change;

 

·                  We may be required to take additional impairment charges on assets;

 

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

 

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

 

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

 

·                  We are subject to foreign currency exchange risks;

 

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

 

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

 

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

 

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

 

·                  We have significant operations in locations which could be materially and adversely impacted in the event of a natural disaster, an act of terrorism or other significant disruption.

 

Consequently, such forward looking statements and estimates should be regarded solely as the current plans and beliefs of Veeco. We do not undertake any obligation to update any forward looking statements to reflect future events or circumstances after the date of such statements.

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Veeco Instruments Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)

 

		March 31,			December 31,
		2016			2015
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	243,722		$	269,232
Short-term investments		104,979			116,050
Accounts receivable, net		56,089			49,524
Inventories		77,205			77,469
Deferred cost of sales		1,090			2,100
Prepaid expenses and other current assets		29,420			22,760
Assets held for sale		4,983			5,000
Total current assets		517,488			542,135
Property, plant and equipment, net		80,225			79,590
Intangible assets, net		126,653			131,674
Goodwill		114,908			114,908
Deferred income taxes		1,384			1,384
Other assets		21,098			21,098
Total assets		$	861,756		$	890,789
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	30,624		$	30,074
Accrued expenses and other current liabilities		46,318			49,393
Customer deposits and deferred revenue		74,473			76,216
Income taxes payable		5,315			6,208
Current portion of long-term debt		347			340
Total current liabilities		157,077			162,231
Deferred income taxes		11,658			11,211
Long-term debt		1,104			1,193
Other liabilities		1,447			1,539
Total liabilities		171,286			176,174
Stockholders’ equity:
Preferred stock, 500,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.01 par value; 120,000,000 shares authorized; 40,984,233 shares issued and 39,829,128 shares outstanding at March 31, 2016; 40,995,694 shares issued and 40,526,902 shares outstanding at December 31, 2015.		410			410
Additional paid-in capital		771,983			767,137
Accumulated deficit		(61,906		)	(45,058		)
Accumulated other comprehensive income		1,437			1,348
Treasury stock, at cost, 1,155,105 shares at March 31, 2016; 468,792 shares at December 31, 2015.		(21,454		)	(9,222		)
Total stockholders’ equity		690,470			714,615
Total liabilities and stockholders’ equity		$	861,756		$	890,789

 

See accompanying Notes to the Consolidated Financial Statements.

 

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

		Three months ended March 31,
		2016			2015
Net sales		$	78,011		$	98,341
Cost of sales		46,055			63,205
Gross profit		31,956			35,136
Operating expenses, net:
Selling, general, and administrative		19,839			22,882
Research and development		22,110			18,585
Amortization of intangible assets		5,251			7,962
Restructuring		100			2,357
Asset impairment		—			126
Other, net		(71		)	(951		)
Total operating expenses, net		47,229			50,961
Operating income (loss)		(15,273		)	(15,825		)
Interest income		306			287
Interest expense		(38		)	(126		)
Income (loss) before income taxes		(15,005		)	(15,664		)
Income tax expense		528			3,446
Net income (loss)		$	(15,533	)	$	(19,110	)
Income (loss) per common share:
Basic		$	(0.40	)	$	(0.48	)
Diluted		$	(0.40	)	$	(0.48	)
Weighted average number of shares:
Basic		39,113			39,639
Diluted		39,113			39,639

 

See accompanying Notes to the Consolidated Financial Statements.

 

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

		Three months ended March 31,
		2016			2015
Net income (loss)		$	(15,533	)	$	(19,110	)
Other comprehensive income, net of tax
Unrealized gain on available-for-sale securities		50			32
Foreign currency translation		39			(15		)
Total other comprehensive income, net of tax		89			17
Comprehensive income (loss)		$	(15,444	)	$	(19,093	)

 

See accompanying Notes to the Consolidated Financial Statements.

 

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		Three months ended March 31,
		2016			2015
Cash Flows from Operating Activities
Net income (loss)		$	(15,533	)	$	(19,110	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		8,593			10,724
Deferred income taxes		465			607
Share-based compensation expense		4,388			3,998
Asset impairment		—			126
Provision for bad debts		160			—
Changes in operating assets and liabilities:
Accounts receivable		(6,958		)	(4,200		)
Inventories and deferred cost of sales		1,274			(7,249		)
Prepaid expenses and other current assets		(6,660		)	(8,970		)
Accounts payable and accrued expenses		(2,210		)	11,157
Customer deposits and deferred revenue		(1,510		)	13,989
Income taxes receivable and payable, net		(893		)	2,600
Other, net		86			616
Net cash provided by (used in) operating activities		(18,798		)	4,288
Cash Flows from Investing Activities
Capital expenditures		(3,988		)	(4,781		)
Proceeds from the liquidation of investments		10,930			43,556
Payments for purchases of investments		—			(11,998		)
Proceeds from sale of lab tools		—			1,413
Other		(213		)	(68		)
Net cash provided by investing activities		6,729			28,122
Cash Flows from Financing Activities
Proceeds (tax withholdings) from stock option exercises		(22		)	45
Restricted stock tax withholdings		(27		)	(52		)
Purchases of common stock		(13,349		)	—
Repayments of long-term debt		(82		)	(76		)
Net cash used in financing activities		(13,480		)	(83		)
Effect of exchange rate changes on cash and cash equivalents		39			(15)
Net increase (decrease) in cash and cash equivalents		(25,510		)	32,312
Cash and cash equivalents - beginning of period		269,232			270,811
Cash and cash equivalents - end of period		$	243,722		$	303,123
Supplemental Disclosure of Cash Flow Information
Interest paid		$	39		$	36
Income taxes paid		966			544

 

See accompanying Notes to the Consolidated Financial Statements.

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(unaudited)

 

Note 1 - Basis of Presentation

 

The accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature. Certain amounts previously reported have been reclassified in the financial statements to conform to the current presentation.

 

Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2016 interim quarters end on April 3, July 3, and October 2, and the 2015 interim quarters ended on March 29, June 28, and September 27. These interim quarters are reported as March 31, June 30 and September 30 in Veeco’s interim consolidated financial statements.

 

Revenue recognition

 

Veeco recognizes revenue when all of the following criteria have been met: persuasive evidence of an arrangement exists with a customer; delivery of the specified products has occurred or services have been rendered; prices are contractually fixed or determinable; and collectability is reasonably assured. Revenue is recorded including shipping and handling costs and excluding applicable taxes related to sales.

 

Contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, maintenance, and service plans. Judgment is required to properly identify the accounting units of the multiple-element arrangements and to determine how the revenue should be allocated among the accounting units. Veeco also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single, multiple-element arrangement based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria have been met in order to recognize revenue in the appropriate accounting period.

 

When there are separate units of accounting, Veeco allocates revenue to each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or the best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Veeco uses BESP for the majority of the elements in its arrangements. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.

 

Veeco considers many facts when evaluating each of its sales arrangements to determine the timing of revenue recognition including its contractual obligations, the customer’s creditworthiness, and the nature of the customer’s post-delivery acceptance provisions. Veeco’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For the majority of the arrangements, a customer source inspection of the system is performed in Veeco’s facility or test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When Veeco objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery, revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date, subject to the retention amount constraint described below. For new products, new applications of existing products, or for products with substantive customer acceptance provisions

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

where Veeco cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue and the associated costs are deferred and fully recognized upon the receipt of final customer acceptance, assuming all other revenue recognition criteria have been met.

 

Veeco’s system sales arrangements, including certain upgrades, generally do not contain provisions for the right of return, forfeiture, refund, or other purchase price concessions. In the rare instances where such provisions are included, all revenue is deferred until such rights expire. The sales arrangements generally include installation. The installation process is not deemed essential to the functionality of the equipment since it is not complex; it does not require significant changes to the features or capabilities of the equipment or involve constructing elaborate interfaces or connections subsequent to factory acceptance. Veeco has a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage Veeco to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, installation is deemed to be inconsequential or perfunctory relative to the system sale as a whole, and as a result, installation service is not considered a separate element of the arrangement. As such, Veeco accrues the cost of the installation at the time of revenue recognition for the system.

 

In many cases Veeco’s products are sold with a billing retention, typically 10% of the sales price, which is payable by the customer when field acceptance provisions are completed. The amount of revenue recognized upon delivery of a system or upgrade, if any, is limited to the lower of i) the amount billed that is not contingent upon acceptance provisions or ii) the value of the arrangement consideration allocated to the delivered elements, if such sale is part of a multiple-element arrangement.

 

Veeco’s contractual terms with customers in Japan generally specify that title and risk and rewards of ownership transfer upon customer acceptance. A distributor is used for almost all sales to customers in Japan. Title passes to the distributor upon shipment; however, due to customary local business practices, the risk and rewards of ownership of the system transfers to the end-customers upon their acceptance. As a result, for customers in Japan, Veeco recognizes revenue upon receipt of written acceptance from the end customer.

 

Veeco recognizes revenue related to maintenance and service contracts ratably over the applicable contract term. Veeco recognizes revenue from the sales of components, spare parts, and specified service engagements at the time of delivery in accordance with the terms of the applicable sales arrangement.

 

Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred, even if the related revenue is deferred in accordance with the above policy.

 

Recent accounting pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, as amended by ASU 2015-14, ASU 2016-08, and ASU 2016-10: Revenue from Contracts with Customers (the “Update”). The Update requires Veeco’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which Veeco expects to be entitled in exchange for those goods or services. The Update outlines a five-step model to make the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adopt the Update for reporting periods beginning after December 15, 2017. The Update provides for different transition alternatives. Veeco is evaluating the impact of adopting the Update on its consolidated financial statements and related financial statement disclosures and has not yet determined which method of adoption will be selected.

 

In January 2016, the FASB issued ASU 2016-01: Financial Instruments — Overall, which requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. Veeco is required to adopt this ASU beginning in the first quarter of fiscal year 2019; early adoption is permitted. Veeco does not expect this ASU will have a material impact on its consolidated financial statements.

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

In February 2016, the FASB issued ASU 2016-02: Leases, which generally requires Veeco’s operating lessee rights and obligations to be recognized as assets and liabilities in the Balance Sheet. In addition, interest on lease liabilities is to be recognized separately from the amortization of right-of-use assets in the Statement of Operations. Further, payments of the principal portion of lease liabilities are to be classified as financing activities while payments of interest on lease liabilities and variable lease payments are to be classified as operating activities in the Statement of Cash Flows. When the standard is adopted, Veeco will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early application permitted. Veeco is evaluating the impact of adopting the ASU on its consolidated financial statements.

 

Veeco is also evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on Veeco’s consolidated financial statements.

 

Change in Accounting Principle

 

In March 2016, the FASB issued ASU 2016-09 Stock Compensation: Improvements to Employee Share-Based Payment Accounting. Veeco has elected to early adopt the ASU. Prospectively, excess tax benefits and deficiencies will be recognized as income tax expense or benefit in the income statement in the reporting period incurred. In conjunction with adopting the ASU, Veeco has made an accounting policy election to account for forfeitures when they occur. The ASU transition guidance requires that this election be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the ASU is effective. Accordingly, Veeco recorded a $1.3 million charge to the opening accumulated deficit balance with a corresponding adjustment to additional paid-in capital, resulting in no impact to the opening balance of total stockholders’ equity. In addition, Veeco recorded additional deferred tax assets with an offsetting valuation allowance of $2.4 million.

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Note 2 - Income (Loss) Per Common Share

 

Basic income (loss) per common share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income per common share is calculated by dividing net income available to common stockholders by using the weighted average number of common shares and common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and non-participating restricted share awards and restricted share units is considered in diluted income per common share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share in the periods those performance targets have been achieved. The computations of basic and diluted income (loss) per common share for the three months ended March 31, 2016 and 2015 are as follows:

 

		Three months ended March 31,
		2016			2015
		(in thousands, except per share amounts)
Net income (loss)		$	(15,533	)	$	(19,110	)
Net income (loss) per common share:
Basic		$	(0.40	)	$	(0.48	)
Diluted		$	(0.40	)	$	(0.48	)
Basic weighted average shares outstanding		39,113			39,639
Diluted weighted average shares outstanding		39,113			39,639
Unvested participating shares excluded from basic weighted average shares outstanding since the securityholders are not obligated to fund losses		722			1,134
Shares excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive		66			178
Potentially dilutive non-participating shares excluded from the diluted calculation as their effect would be antidilutive		2,295			1,952

 

Note 3 - Assets

 

Investments and Assets held for sale

 

Marketable securities are generally classified as available-for-sale and reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income” in the Consolidated Balance Sheets. These securities may include U.S. treasuries, government agency securities, corporate debt, and commercial paper, all with maturities of greater than three months when purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other, net” in the Consolidated Statements of Operations.

 

Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. Veeco classifies certain assets based on the following fair value hierarchy:

 

Level 1:   Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Level 2:   Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

 

Level 3:   Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Veeco has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.

 

The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015:

 

		Level 1			Level 2			Level 3			Total
		(in thousands)
March 31, 2016
Cash equivalents
Commercial paper		$	—		$	1,199		$	—		$	1,199
Total		—			1,199			—			1,199
Short-term investments
U.S. treasuries		92,765			—			—			92,765
Government agency securities		—			9,999			—			9,999
Corporate debt		—			2,215			—			2,215
Total		92,765			12,214			—			104,979
Other
Assets held for sale		—			4,983			—			4,983
Total		$	—		$	4,983		$	—		$	4,983
December 31, 2015
Cash equivalents
U.S. treasuries		$	9,999		$	—		$	—		$	9,999
Government agency securities		—			4,998			—			4,998
Commercial paper		—			2,999			—			2,999
Total		9,999			7,997			—			17,996
Short-term investments
U.S. treasuries		94,918			—			—			94,918
Government agency securities		—			12,988			—			12,988
Corporate debt		—			8,144			—			8,144
Total		94,918			21,132			—			116,050
Other
Assets held for sale		—			5,000			—			5,000
Total		$	—		$	5,000		$	—		$	5,000

 

There were no transfers between fair value measurement levels during the three months ended March 31, 2016.

 

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Notes to the Consolidated Financial Statements - continued

(unaudited)

 

At March 31, 2016 and December 31, 2015, the amortized cost and fair value of available-for-sale securities consist of:

 

					Gross			Gross
		Amortized			Unrealized			Unrealized			Estimated
		Cost			Gains			Losses			Fair Value
		(in thousands)
March 31, 2016
U.S. treasuries		$	92,749		$	16		$	—		$	92,765
Government agency securities		9,997			2			—			9,999
Corporate debt		2,215			—			—			2,215
Total		$	104,961		$	18		$	—		$	104,979
December 31, 2015
U.S. treasuries		$	94,935		$	6		$	(23	)	$	94,918
Government agency securities		12,985			3			—			12,988
Corporate debt		8,144			1			(1		)	8,144
Total		$	116,064		$	10		$	(24	)	$	116,050

 

There were no available-for-sale securities in a loss position at March 31, 2016. Available-for-sale securities in a loss position at December 31, 2015 consist of:

 

		December 31, 2015
					Gross
		Estimated			Unrealized
		Fair Value			Losses
		(in thousands)
U.S. treasuries		$	64,922		$	(23	)
Corporate debt		3,353			(1		)
Total		$	68,275		$	(24	)

 

At March 31, 2016 and December 31, 2015, there were no short-term investments that had been in a continuous loss position for more than 12 months.

 

The available-for-sale securities at March 31, 2016 all contractually mature in one year or less. Actual maturities may differ from contractual maturities. Veeco may sell these securities prior to maturity based on the needs of the business. In addition, borrowers may have the right to call or prepay obligations prior to scheduled maturities.

 

There were minimal realized gains for the three months ended March 31, 2016 and 2015. The cost of securities liquidated is based on specific identification.

 

Accounts receivable

 

Accounts receivable is presented net of an allowance for doubtful accounts of $0.4 million and $0.2 million at March 31, 2016 and December 31, 2015, respectively.

 

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Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventories at March 31, 2016 and December 31, 2015 consist of the following:

 

		March 31,			December 31,
		2016			2015
		(in thousands)
Materials		$	47,362		$	42,373
Work-in-process		23,332			30,327
Finished goods		6,511			4,769
Total		$	77,205		$	77,469

 

Prepaid expenses and other current assets

 

Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, and prepaid licenses. Veeco had deposits with its suppliers of $21.3 million and $14.6 million at March 31, 2016 and December 31, 2015, respectively.

 

Assets held for sale

 

Assets held for sale primarily consist of a vacant building and land which were designated as held for sale during 2014. The sale of these assets is expected to be completed within the next twelve months. The carrying value reflects Veeco’s estimate of fair value less costs to sell using the sales comparison market approach.

 

Property, plant, and equipment

 

Property, plant, and equipment at March 31, 2016 and December 31, 2015 consist of the following:

 

		March 31,			December 31,
		2016			2015
		(in thousands )
Land		$	9,592		$	9,592
Building and improvements		57,264			54,622
Machinery and equipment(1)		111,392			110,075
Leasehold improvements		5,565			5,554
Gross property, plant and equipment		183,813			179,843
Less: accumulated depreciation and amortization		103,588			100,253
Net property, plant, and equipment		$	80,225		$	79,590

 

(1) Machinery and equipment includes software, furniture and fixtures

 

For the three months ended March 31, 2016 and 2015, depreciation expense was $3.3 million and $2.8 million, respectively.

 

Goodwill

 

There were no new acquisitions or impairments, and therefore no changes to goodwill during the three months ended March 31, 2016.

 

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Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Intangible assets

 

There were no significant new acquisitions and no impairments during the three months ended March 31, 2016. The components of purchased intangible assets at March 31, 2016 and December 31, 2015 consist of the following:

 

		March 31, 2016									December 31, 2015
					Accumulated									Accumulated
		Gross			Amortization						Gross			Amortization
		Carrying			and			Net			Carrying			and			Net
		Amount			Impairment			Amount			Amount			Impairment			Amount
		(in thousands)
Technology		$	222,358		$	124,021		$	98,337		$	222,358		$	120,496		$	101,862
Customer relationships		47,885			24,017			23,868			47,885			22,470			25,415
Trademarks and tradenames		2,730			1,975			755			2,730			1,937			793
Indefinite-lived trademark		2,900			—			2,900			2,900			—			2,900
Other		2,296			1,503			793			6,241			5,537			704
Total		$	278,169		$	151,516		$	126,653		$	282,114		$	150,440		$	131,674

 

Other intangible assets primarily consist of patents, licenses, and non-compete agreements.

 

Other assets

 

Veeco has an ownership interest of less than 20% in a non-marketable investment. Veeco does not exert significant influence over the investee and therefore the investment is carried at cost. There was no change to the $21.0 million carrying value of the investment during the three months ended March 31, 2016. The investment is included in “Other assets” on the Consolidated Balance Sheet. The investment is subject to a periodic impairment review; as there are no open-market valuations, the impairment analysis requires judgment. The analysis includes assessments of the investee’s financial condition, the business outlook for its products and technology, its projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by Veeco relative to other investors. Fair value of the investment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of the investment. No such events or circumstances are present.

 

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Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Note 4 - Liabilities

 

Accrued expenses and other current liabilities

 

The components of accrued expenses and other current liabilities at March 31, 2016 and December 31, 2015 consist of:

 

		March 31,			December 31,
		2016			2015
		(in thousands)
Payroll and related benefits		$	30,306		$	30,917
Warranty		7,104			8,159
Professional fees		2,378			2,224
Installation		1,373			1,110
Sales, use, and other taxes		1,264			1,132
Restructuring liability		437			824
Other		3,456			5,027
Total		$	46,318		$	49,393

 

Other liabilities include accruals for costs related to customer training, royalties, and travel.

 

Warranty

 

Warranties are typically valid for one year from the date of system final acceptance, and Veeco estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and are affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. Changes in product warranty reserves for the three months ended March 31, 2016 include:

 

		(in thousands)
Balance - December 31, 2015		$	8,159
Warranties issued		1,221
Consumption of reserves		(2,095		)
Changes in estimate		(181		)
Balance - March 31, 2016		$	7,104

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Restructuring accruals

 

During the three months ended March 31, 2016, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. Additional restructuring costs to be accrued for these activities are not expected to be significant.

 

		Personnel
		Severance and			Facility
		Related Costs			Closing Costs			Total
		(in thousands)
Balance - December 31, 2015		$	824		$	—		$	824
Provision		—			102			102
Changes in estimate		(2		)	—			(2		)
Payments		(385		)	(102		)	(487		)
Balance - March 31, 2016		$	437		$	—		$	437

 

Customer deposits

 

Customer deposits totaled $28.9 million and $28.2 million at March 31, 2016 and December 31, 2015, respectively.

 

Long-term debt

 

Debt consists of a mortgage note payable with a carrying value of $1.5 million at March 31, 2016 and December 31, 2015. The mortgage note payable is secured by certain land and buildings with a carrying value of $3.3 million at March 31, 2016 and December 31, 2015. One of the buildings is currently held for sale. The annual interest rate on the mortgage is 7.91%, and the final payment is due on January 1, 2020. Veeco estimated the mortgage fair value as $1.5 million and $1.6 million at March 31, 2016 and December 31, 2015, respectively, using a discounted cash flow model.

 

Note 5 - Commitments and Contingencies

 

Minimum lease commitments

 

At March 31, 2016, Veeco’s total future minimum lease payments under non-cancelable operating leases have not changed significantly from the disclosure in the 2015 Form 10-K.

 

Purchase commitments

 

Veeco has purchase commitments of $81.8 million at March 31, 2016, substantially all of which become due within one year.

 

Bank guarantees

 

Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At March 31, 2016, outstanding bank guarantees and letters of credit totaled $3.7 million, and unused bank guarantees and letters of credit of $61.9 million were available to be drawn upon.

 

Legal proceedings

 

Veeco and certain other parties were named as defendants in a lawsuit filed on April 25, 2013 in the Superior Court of California, County of Sonoma. The plaintiff in the lawsuit, Patrick Colbus, sought unspecified damages and asserted claims that he suffered burns and other injuries while cleaning a molecular beam epitaxy system alleged to have been

 

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Notes to the Consolidated Financial Statements - continued

(unaudited)

 

manufactured by Veeco. The lawsuit alleged, among other things, that the molecular beam epitaxy system was defective and that Veeco failed to adequately warn of the potential risks of the system. During the three months ended March 31, 2016, the parties agreed to settle the lawsuit, without any admission of wrongdoing. The settlement amount is expected to be fully covered by Veeco’s insurance and, as a result, is not expected to have a material impact on Veeco’s financial condition or results of operations.

 

Veeco is involved in various other legal proceedings arising in the normal course of business. Veeco does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

 

Note 6 - Equity

 

Accumulated Other Comprehensive Income (“AOCI”)

 

The following table presents the changes in the balances of each component of AOCI, net of tax:

 

								Unrealized
		Foreign Currency			Minimum Pension			Gains (Losses) on Available for Sale
		Translation			Liability			Securities			Total
		(in thousands)
Balance - December 31, 2015		$	2,246		$	(866	)	$	(32	)	$	1,348
Other comprehensive income, before taxes		39			—			32			71
Benefit (expense) for income taxes		—			—			18			18
Other comprehensive income, net of tax		39			—			50			89
Balance - March 31, 2016		$	2,285		$	(866	)	$	18		$	1,437

 

There were minimal reclassifications from AOCI into net income for the three months ended March 31, 2016.

 

Note 7 - Share-based compensation

 

Restricted share awards are issued to employees that are subject to specified restrictions and a risk of forfeiture. The restrictions typically lapse over one to five years and may entitle holders to dividends and voting rights. Other types of share-based compensation include performance share awards, performance share units, and restricted share units (collectively with restricted share awards, “restricted shares”), as well as options to purchase common stock.

 

Veeco adopted ASU 2016-09 Stock Compensation: Improvements to Employee Share-Based Payment Accounting in the first quarter of fiscal 2016. As a result, beginning in 2016, excess tax benefits and deficiencies are recognized as income tax expense or benefit in the income statement in the reporting period incurred. In conjunction with adopting the ASU, Veeco made an accounting policy election to account for forfeitures when they occur.

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015:

 

		Three months ended March 31,
		2016			2015
		(in thousands)
Cost of sales		$	546		$	601
Selling, general, and administrative		2,743			2,798
Research and development		1,099			599
Total		$	4,388		$	3,998

 

For the three months ended March 31, 2016, equity activity related to stock options was as follows:

 

		Number of		Weighted Average
		Shares		Exercise Price
		(in thousands)
Balance - December 31, 2015		2,064		$	32.91
Granted		—		—
Exercised		(13	)	12.00
Expired or forfeited		(32	)	35.43
Balance - March 31, 2016		2,019		$	33.00

 

For the three months ended March 31, 2016, equity activity related to restricted shares was as follows:

 

				Weighted Average
		Number of		Grant Date
		Shares		Fair Value
		(in thousands)
Balance - December 31, 2015		1,398		$	31.97
Granted		49		19.54
Released		(7	)	31.19
Forfeited		(13	)	32.36
Balance - March 31, 2016		1,427		$	31.55

 

Note 8 - Income Taxes

 

Income taxes are estimated for each of the jurisdictions in which Veeco operates. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carry forwards. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. Realization of net deferred tax assets is dependent on future taxable income.

 

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