VEECO INSTRUMENTS INC - Quarter Report: 2017 September (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 September 30, 2017

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

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

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

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

 

Title of Class		Shares Outstanding
Common Stock		as of October 25, 2017
par value $0.01 per share		48,301,909

 

 

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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	26
Item 3. Quantitative and Qualitative Disclosures about Market Risk	35
Item 4. Controls and Procedures	35
PART II—OTHER INFORMATION	37
Item 1. Legal Proceedings	37
Item 1A. Risk Factors	37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3. Defaults Upon Senior Securities	37
Item 4. Mine Safety Disclosures	37
Item 5. Other Information	38
Item 6. Exhibits	39
SIGNATURES	40

 

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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 nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.

 

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

 

·                  Unfavorable market conditions may adversely affect our operating results;

 

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

 

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

 

·                  We operate in industries characterized by rapid technological change;

 

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

 

·                  We face significant competition;

 

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

 

·                  Our sales cycle is long and unpredictable;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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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;

 

·                  We have indebtedness in the form of convertible senior notes which could adversely affect our financial position, prevent us from implementing our strategy, and dilute the ownership interest of our existing shareholders;

 

·                  The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, could have a material effect on our reported financial results;

 

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

 

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

 

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

 

·                  We are subject to foreign currency exchange risks;

 

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

 

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

 

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

 

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

 

·                  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; and

 

·                  We may not be able to successfully integrate the business of Ultratech with our own or realize the anticipated benefits of the merger.

 

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

 

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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)

 

		September 30,			December 31,
		2017			2016
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	235,268		$	277,444
Short-term investments		85,853			66,787
Accounts receivable, net		113,795			58,020
Inventories		113,681			77,063
Deferred cost of sales		17,594			6,160
Prepaid expenses and other current assets		36,396			16,034
Total current assets		602,587			501,508
Property, plant and equipment, net		84,403			60,646
Intangible assets, net		383,596			58,378
Goodwill		308,529			114,908
Deferred income taxes		2,528			2,045
Other assets		25,263			21,047
Total assets		$	1,406,906		$	758,532
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	53,716		$	22,607
Accrued expenses and other current liabilities		65,728			33,201
Customer deposits and deferred revenue		107,636			85,022
Income taxes payable		4,171			2,311
Current portion of long-term debt		—			368
Total current liabilities		231,251			143,509
Deferred income taxes		46,268			13,199
Long-term debt		272,825			826
Other liabilities		11,033			6,403
Total liabilities		561,377			163,937
Stockholders’ equity:
Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.01 par value; 120,000,000 shares authorized; 48,294,284 and 40,714,790 shares issued at September 30, 2017 and December 31, 2016, respectively; 48,294,284 and 40,588,194 shares outstanding at September 30, 2017 and December 31, 2016, respectively.		483			407
Additional paid-in capital		1,050,994			763,303
Accumulated deficit		(207,760		)	(168,583		)
Accumulated other comprehensive income		1,812			1,777
Treasury stock, at cost, 126,596 shares at December 31, 2016.		—			(2,309		)
Total stockholders’ equity		845,529			594,595
Total liabilities and stockholders’ equity		$	1,406,906		$	758,532

 

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 September 30,						Nine months ended September 30,
		2017			2016			2017			2016
Net sales		$	131,872		$	85,482		$	341,324		$	238,842
Cost of sales		78,811			52,027			215,344			141,991
Gross profit		53,061			33,455			125,980			96,851
Operating expenses, net:
Research and development		24,061			19,892			57,669			63,545
Selling, general, and administrative		29,771			18,396			71,574			58,230
Amortization of intangible assets		12,500			5,261			21,722			15,785
Restructuring		5,010			1,798			9,605			3,993
Acquisition costs		783			—			16,277			—
Asset impairment		2			56,035			1,139			69,662
Other, net		(140		)	795			(228		)	884
Total operating expenses, net		71,987			102,177			177,758			212,099
Operating income (loss)		(18,926		)	(68,722		)	(51,778		)	(115,248		)
Interest income		357			283			1,933			879
Interest expense		(5,105		)	(23		)	(14,301		)	(166		)
Income (loss) before income taxes		(23,674		)	(68,462		)	(64,146		)	(114,535		)
Income tax expense (benefit)		(1,790		)	1,136			(24,969		)	2,677
Net income (loss)		$	(21,884	)	$	(69,598	)	$	(39,177	)	$	(117,212	)
Income (loss) per common share:
Basic		$	(0.47	)	$	(1.78	)	$	(0.91	)	$	(2.99	)
Diluted		$	(0.47	)	$	(1.78	)	$	(0.91	)	$	(2.99	)
Weighted average number of shares:
Basic		46,941			39,131			43,100			39,193
Diluted		46,941			39,131			43,100			39,193

 

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 September 30,						Nine months ended September 30,
		2017			2016			2017			2016
Net income (loss)		$	(21,884	)	$	(69,598	)	$	(39,177	)	$	(117,212	)
Other comprehensive income, net of tax
Unrealized gain (loss) on available-for-sale securities		70			(7		)	10			32
Minimum pension liability		—			866			—			866
Foreign currency translation		1			(7		)	25			20
Total other comprehensive income, net of tax		71			852			35			918
Comprehensive income (loss)		$	(21,813	)	$	(68,746	)	$	(39,142	)	$	(116,294	)

 

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)

 

		Nine months ended September 30,
		2017			2016
Cash Flows from Operating Activities
Net income (loss)		$	(39,177	)	$	(117,212	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		32,295			26,010
Non-cash interest expense		7,641			—
Deferred income taxes		(21,235		)	1,529
Share-based compensation expense		19,976			12,133
Asset impairment		1,139			69,662
Provision for bad debts		99			160
Changes in operating assets and liabilities:
Accounts receivable		(10,409		)	(1,184		)
Inventories and deferred cost of sales		9,486			(10,909		)
Prepaid expenses and other current assets		(331		)	3,661
Accounts payable and accrued expenses		3,165			(13,995		)
Customer deposits and deferred revenue		17,779			3,568
Income taxes receivable and payable, net		(16		)	—
Long-term income tax liability		(4,877		)	80
Other, net		(259		)	2,189
Net cash provided by (used in) operating activities		15,276			(24,308		)
Cash Flows from Investing Activities
Acquisitions of businesses, net of cash acquired		(399,478		)	—
Capital expenditures		(17,403		)	(10,717		)
Proceeds from the sale of investments		307,757			131,297
Payments for purchases of investments		(279,945		)	(78,376		)
Proceeds from held for sale assets		2,284			693
Other		—			(230		)
Net cash provided by (used in) investing activities		(386,785		)	42,667
Cash Flows from Financing Activities
Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan		2,546			1,192
Restricted stock tax withholdings		(7,797		)	(1,184		)
Purchases of common stock		—			(13,349		)
Proceeds from long-term debt borrowings		335,752			—
Principal payments on long-term debt		(1,193		)	(252		)
Net cash provided by (used in) financing activities		329,308			(13,593		)
Effect of exchange rate changes on cash and cash equivalents		25			20
Net increase (decrease) in cash and cash equivalents		(42,176		)	4,786
Cash and cash equivalents - beginning of period		277,444			269,232
		$	235,268		$	274,018
Supplemental Disclosure of Cash Flow Information
Interest paid		$	4,667		$	179
Income taxes paid		1,767			1,456
Non-cash operating and financing activities
Net transfer of inventory to property, plant and equipment		33			—

 

See accompanying Notes to the Consolidated Financial Statements

 

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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, 2016 (“2016 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature. Certain amounts previously reported have been reclassified in the financial statements to conform to the current presentation.

 

Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2017 interim quarters end on April 2, July 2, and October 1, and the 2016 interim quarters ended on April 3, July 3, and October 2. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.

 

Revenue recognition

 

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

 

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

 

When there are separate units of accounting, Veeco allocates revenue to each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or the best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Veeco uses BESP for the 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 certain contracts. For new products, new applications of existing products, or for products with substantive customer acceptance provisions 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 customer acceptance, assuming all other revenue recognition criteria have been met.

 

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

 

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

 

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

 

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

 

Recent accounting pronouncements

 

The FASB issued ASU 2014-09, as amended: Revenue from Contracts with Customers, which has been codified as Accounting Standards Codification 606 (“ASC 606”). ASC 606 requires the Company’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. ASC 606 outlines a five-step model to make the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adopt ASC 606 for reporting periods beginning after December 15, 2017. The Company is still completing its evaluation of the impact of adopting this standard; however, the Company currently expects the most significant financial statement impacts of adopting ASC 606 will be the elimination of the constraint on revenue associated with the billing retention related to the receipt of customer final acceptance as well as the identification of installation services as a performance obligation. The elimination of the constraint on revenue related to customer final acceptance, which is usually about 10 percent of a system sale, will generally be recognized at the time the Company transfers control of the system to the customer, which is earlier than under the Company’s current revenue recognition model for certain contracts that are subject to the billing retention constraint described above. The new performance obligation related to installation services under the new standard will generally be recognized as the installation services are performed, which is later than under the Company’s current revenue recognition model. Taken together, the Company currently believes there will be a net acceleration of a small percentage of its revenue under ASC 606 as compared to its current revenue recognition model. ASC 606 provides for different transition alternatives, and the Company is evaluating which method of adoption to select.

 

In January 2016, the FASB issued ASU 2016-01: Financial Instruments — Overall, which requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017; early adoption is permitted. The Company does not expect this ASU will have a material impact on the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02: Leases, which generally requires operating lessee rights and obligations to be recognized as assets and liabilities on the balance sheet. In addition, interest on lease liabilities is to be

 

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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, the Company will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early application permitted. The Company is evaluating the anticipated impact of adopting the ASU on the consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues, including debt prepayments or debt extinguishment costs. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017. This ASU will not have a material impact on the consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017. This ASU will not have a material impact on the consolidated financial statements.

 

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

 

Note 2 - Income (Loss) Per Common Share

 

The Company considers unvested share-based awards that have non-forfeitable rights to dividends prior to vesting to be participating shares, which are treated as a separate class of security from the Company’s common shares for calculating per share data. Therefore, the Company applies the two-class method when calculating income (loss) per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. However, since the holders of the participating shares are not obligated to fund losses, participating shares are excluded from the calculation of loss per share.

 

The dilutive effect of the Convertible Senior Notes on income (loss) per share is calculated using the treasury stock method since the Company has both the current intent and ability to settle the principal amount of the Convertible Senior Notes in cash. See Note 5, “Liabilities,” for additional information on the Convertible Senior Notes.

 

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period under the two-class method. Diluted income per share is calculated by dividing net income by the weighted average number of shares used to calculate basic income (loss) per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and non-participating share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share in the periods the performance targets have been achieved. The computations of basic and diluted income (loss) per share for the three and nine months ended September 30, 2017 and 2016 are as follows:

 

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		Three months ended September 30,						Nine months ended September 30,
		2017			2016			2017			2016
		(in thousands, except per share amounts)
Net income (loss)		$	(21,884	)	$	(69,598	)	$	(39,177	)	$	(117,212	)
Net income (loss) per common share:
Basic		$	(0.47	)	$	(1.78	)	$	(0.91	)	$	(2.99	)
Diluted		$	(0.47	)	$	(1.78	)	$	(0.91	)	$	(2.99	)
Basic weighted average shares outstanding		46,941			39,131			43,100			39,193
Effect of potentially dilutive share-based awards		—			—			—			—
Diluted weighted average shares outstanding		46,941			39,131			43,100			39,193
Unvested participating shares excluded from basic weighted average shares outstanding since the securityholders are not obligated to fund losses		166			469			166			469
Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive		220			140			275			45
Potentially dilutive non-participating shares excluded from the diluted calculation as their effect would be antidilutive		1,956			2,030			1,628			2,042
Maximum potential shares to be issued for settlement of Convertible Senior Notes excluded from the diluted calculation as their effect would be antidilutive		8,618			—			8,618			—

 

Note 3 — Business Combinations

 

Ultratech

 

On May 26, 2017, the Company completed its acquisition of Ultratech, Inc. (“Ultratech”).  Ultratech designs, manufactures, and markets lithography, laser annealing, and inspection equipment for manufacturers of semiconductor devices, including front-end semiconductor manufacturing and advanced packaging. Ultratech also designs, manufactures, and markets atomic layer deposition (“ALD”) equipment for scientific and industrial applications. Ultratech’s customers are primarily located throughout the United States, EMEA, China, Japan, Taiwan, Singapore, and Korea. With the addition of Ultratech, the Company establishes itself as a leading equipment supplier in the advanced packaging market, forming a strong technology portfolio to address critical advanced packaging applications. The results of Ultratech’s operations have been included in the consolidated financial statements since the date of acquisition.

 

Ultratech shareholders received (i) $21.75 per share in cash and (ii) 0.2675 of a share of Veeco common stock for each Ultratech common share outstanding on the acquisition date. In connection with the Company’s continued finalization of purchase accounting, during the three months ended September 30, 2017, the Company decreased the fair value of acquired inventory and property, plant and equipment by $4.1 million and $1.2 million, respectively, resulting in a corresponding increase in goodwill. The Company plans to finalize the purchase accounting within the measurement period, which may include additional adjustments to the fair values of assets acquired and liabilities assumed. The preliminary acquisition date fair value of the consideration totaled $633.4 million, net of cash acquired, which consisted of the following:

 

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		Acquisition Date
		(May 26, 2017)
		(in thousands)
Cash consideration, net of cash acquired		$	404,489
Equity consideration (7.2 million shares issued)		228,644
Replacement equity awards attributable to pre-acquisition service		228
Acquisition date fair value		$	633,361

 

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

 

		Acquisition Date
		(May 26, 2017)
		(in thousands)
Short-term investments		$	47,161
Accounts receivable		45,465
Inventory and deferred cost of sales		57,570
Prepaid expense and other current assets		7,217
Property, plant, and equipment		18,332
Intangible assets		346,940
Other assets		6,442
Total identifiable assets acquired		529,127
Accounts payable and accrued expenses		40,123
Customer deposits and deferred revenue		4,834
Deferred income taxes		32,478
Other liabilities		11,952
Total liabilities assumed		89,387
Net identifiable assets acquired		439,740
Goodwill		193,621
Net assets acquired		$	633,361

 

The gross contractual value of the acquired accounts receivable was approximately $46.0 million. The fair value of the accounts receivables is the amount expected to be collected by the Company. Goodwill generated from the acquisition is primarily attributable to expected synergies from future growth and strategic advantages provided through the expansion of product offerings as well as assembled workforce and is not expected to be deductible for income tax purposes.

 

The preliminary classes of intangible assets acquired and the estimated useful life of each class is presented in the table below:

 

		Acquisition Date
		(May 26, 2017)
		Amount			Useful life
		(in thousands)
Technology		$	158,390		8 years
Customer relationships		116,710			12 years
Backlog		3,080			6 months
In-process research and development		43,340			*
Trademark and tradenames		25,420			7 years
Intangible assets acquired		$	346,940

 

*In-process research and development will be amortized (or impaired) upon completion (or abandonment) of the development project.

 

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The Company determined the estimated fair value of the identifiable intangible assets based on various factors including: cost, discounted cash flow, income method, loss-of-revenue/income method, and relief-from-royalty method in determining the purchase price allocation.

 

In-process research and development (“IPR&D”) represents the estimated fair values of incomplete Ultratech research and development projects that had not reached the commercialization stage and meet the criteria for recognition as IPR&D as of the date of the acquisition. In the future, the fair value of each project at the acquisition date will be either amortized or impaired depending on whether the projects are completed or abandoned. The fair value of IPR&D was determined using an income approach and costs to complete the project and expected commercialization timelines are considered key assumptions. This valuation approach reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. The value of the IPR&D was determined to be $43.3 million, approximately half of which is related to Ultratech’s lithography technologies and one-third of which is related to Ultratech’s laser annealing technologies.

 

For the three and nine months ended September 30, 2017, acquisition related costs were approximately $0.8 million and $16.3 million, respectively, including non-cash charges of $4.2 million for the nine months ended September 30, 2017 related to accelerated share-based compensation for employee terminations.

 

The amounts of revenue and income (loss) from operations before income taxes of Ultratech included in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2017 are as follows:

 

		Three months ended September 30, 2017			Nine months ended September 30, 2017
		(in thousands)
Revenue		$	21,236		$	45,286
Loss from operations before income taxes		$	(21,556	)	$	(44,374	)

 

Loss from operations before income taxes of Ultratech for the three month period ended September 30, 2017 of $21.6 million includes acquisition costs of $0.8 million, release of inventory fair value step-up related to purchase accounting of $1.9 million, amortization expense on intangible assets of $9.6 million, and restructuring charges of $2.1 million. Loss from operations before income taxes of Ultratech for the nine month period ended September 30, 2017 of $44.4 million includes acquisition costs of $16.3 million, release of inventory fair value step-up related to purchase accounting of $9.2 million, amortization expense on intangible assets of $13.1 million, and restructuring charges of $3.3 million.

 

The following table presents unaudited pro forma financial information as if the acquisition of Ultratech had occurred on January 1, 2016:

 

		Three months ended September 30,						Nine months ended September 30,
		2017			2016			2017			2016
		(in thousands, except per share amounts)
Revenue		$	131,872		$	134,093		$	412,066		$	381,586
Loss from operations		(14,957		)	(74,197		)	(45,309		)	(187,499		)
Diluted earnings per share		$	(0.40	)	$	(1.67	)	$	(1.01	)	$	(4.34	)

 

The pro-forma results were calculated by combining the unaudited results of the Company with the stand-alone unaudited results of Ultratech for the pre-acquisition period, and adjusting for the following:

 

(i)                                   Additional amortization expense related to identified intangibles valued as part of the purchase price allocation that would have been incurred starting on January 1, 2016.

 

(ii)                                Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred starting on January 1, 2016.

 

(iii)                             All acquisition related costs incurred by the Company as well as by Ultratech pre-acquisition have been removed from their respective periods and included in the three months ended March 31, 2016, as such expenses would have been incurred in the first quarter following the acquisition.

 

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(iv)                            All amortization of inventory step-up has been removed from their respective periods and recorded in the first two quarters of 2016, as such costs would have been incurred as the corresponding inventory was sold.

 

(v)                               Additional interest expense related to the Convertible Senior Notes (see Note 5, “Liabilities”) as if they had been issued on January 1, 2016.

 

(vi)                            Income tax expense (benefit) was adjusted for the impact of the above adjustments for each period.

 

Note 4 - Assets

 

Investments

 

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

 

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

 

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

 

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

 

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

 

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

 

The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016:

 

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		Level 1			Level 2			Level 3			Total
		(in thousands)
September 30, 2017
Cash equivalents
Corporate debt		$	—		$	1,500		$	—		$	1,500
Total		$	—		$	1,500		$	—		$	1,500
Short-term investments
U.S. treasuries		$	58,806		$	—		$	—		$	58,806
Corporate debt		—			10,911			—			10,911
Commercial paper		—			16,136			—			16,136
Total		$	58,806		$	27,047		$	—		$	85,853
December 31, 2016
Cash equivalents
Corporate debt		$	—		$	1,501		$	—		$	1,501
Total		$	—		$	1,501		$	—		$	1,501
Short-term investments
U.S. treasuries		$	40,008		$	—		$	—		$	40,008
Government agency securities		—			10,012			—			10,012
Corporate debt		—			13,773			—			13,773
Commercial paper		—			2,994			—			2,994
Total		$	40,008		$	26,779		$	—		$	66,787

 

There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2017.

 

At September 30, 2017 and December 31, 2016, 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)
September 30, 2017
U.S. treasuries		$	58,816		$	3		$	(13	)	$	58,806
Corporate debt		10,912			1			(2		)	10,911
Commercial paper		16,135			1			—			16,136
Total		$	85,863		$	5		$	(15	)	$	85,853
December 31, 2016
U.S. treasuries		$	40,013		$	—		$	(5	)	$	40,008
Government agency securities		10,020			—			(8		)	10,012
Corporate debt		13,780			—			(7		)	13,773
Commercial paper		2,994			—			—			2,994
Total		$	66,807		$	—		$	(20	)	$	66,787

 

Available-for-sale securities in a loss position at September 30, 2017 and December 31, 2016 consist of:

 

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		September 30, 2017						December 31, 2016
					Gross						Gross
		Estimated			Unrealized			Estimated			Unrealized
		Fair Value			Losses			Fair Value			Losses
		(in thousands)
U.S. treasuries		$	41,864		$	(13	)	$	20,002		$	(5	)
Government agency securities		—			—			10,012			(8		)
Corporate debt		7,909			(2		)	13,774			(7		)
Total		$	49,773		$	(15	)	$	43,788		$	(20	)

 

At September 30, 2017 and December 31, 2016, 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 September 30, 2017 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 and nine months ended September 30, 2017 and no realized gains for the three and nine months ended September 30, 2016. The cost of securities liquidated is based on specific identification.

 

Accounts receivable

 

Accounts receivable is presented net of an allowance for doubtful accounts of $0.3 million at September 30, 2017 and December 31, 2016.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventories at September 30, 2017 and December 31, 2016 consist of the following:

 

		September 30,			December 31,
		2017			2016
		(in thousands)
Materials		$	59,767		$	46,457
Work-in-process		37,884			25,250
Finished goods		16,030			5,356
Total		$	113,681		$	77,063

 

Prepaid expenses and other current assets

 

Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, and prepaid licenses. Veeco had deposits with its suppliers of $6.7 million and $7.8 million at September 30, 2017 and December 31, 2016, respectively. Additionally, included within prepaid expenses and other current assets at September 30, 2017 was a non-trade receivable of approximately $12.8 million.

 

Property, plant, and equipment

 

Property, plant, and equipment at September 30, 2017 and December 31, 2016 consist of the following:

 

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		September 30,			December 31,
		2017			2016
		(in thousands)
Land		$	5,669		$	5,669
Building and improvements		50,367			50,814
Machinery and equipment(1)		126,631			99,370
Leasehold improvements		10,471			3,652
Gross property, plant and equipment		193,138			159,505
Less: accumulated depreciation and amortization		108,735			98,859
Net property, plant, and equipment		$	84,403		$	60,646

 

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

 

For the three and nine months ended September 30, 2017, depreciation expense was $4.2 million and $10.6 million, respectively, and $3.5 million and $10.2 million for the comparable 2016 periods.

 

Goodwill

 

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The following table presents the changes in goodwill balances for the nine months ended September 30, 2017:

 

		Gross carrying			Accumulated
		amount			impairment			Net amount
		(in thousands)
Balance at December 31, 2016		$	238,108		$	123,200		$	114,908
Acquisition		193,621			—			193,621
Balance at September 30, 2017		$	431,729		$	123,200		$	308,529

 

Intangible assets

 

Intangible assets consist of purchased technology, customer-related intangible assets, in-process research and development, trademarks (both long-lived and indefinite-lived), patents, backlog, and licenses and are initially recorded at fair value. Long-lived intangibles are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line basis if such pattern cannot be reliably determined.

 

The components of purchased intangible assets were as follows:

 

				September 30, 2017									December 31, 2016
		Weighted					Accumulated									Accumulated
		Average Remaining		Gross			Amortization						Gross			Amortization
		Amortization		Carrying			and			Net			Carrying			and			Net
		Period		Amount			Impairment			Amount			Amount			Impairment			Amount
		(in years)		(in thousands)
Technology		7.5		$	307,588		$	125,154		$	182,434		$	149,198		$	113,904		$	35,294
Customer relationships		11.6		164,595			35,653			128,942			47,885			28,659			19,226
In-process R&D		—		43,340			—			43,340			—			—			—
Trademarks and tradenames		6.6		28,010			3,272			24,738			2,590			1,948			642
Indefinite-lived trademark		—		2,900			—			2,900			2,900			—			2,900
Other		0.5		3,686			2,444			1,242			2,026			1,710			316
Total		9.0		$	550,119		$	166,523		$	383,596		$	204,599		$	146,221		$	58,378

 

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