VEECO INSTRUMENTS INC - Quarter Report: 2017 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, 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 April 26, 2017
par value $0.01 per share		40,578,119

 

 

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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	23
Item 3. Quantitative and Qualitative Disclosures about Market Risk	29
Item 4. Controls and Procedures	29
PART II—OTHER INFORMATION	30
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3. Defaults Upon Senior Securities	31
Item 4. Mine Safety Disclosures	31
Item 5. Other Information	31
Item 6. Exhibits	32
SIGNATURES	33

 

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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, 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;

 

·                 If we are unable to complete our contemplated acquisition of Ultratech, Inc., our expected financial results and the market value of our common stock could be adversely affected; and

 

·                 Even if the Ultratech merger is consummated, 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)

 

		March 31,			December 31,
		2017			2016
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	423,661		$	277,444
Short-term investments		258,196			66,787
Accounts receivable, net		51,433			58,020
Inventories		64,697			77,063
Deferred cost of sales		4,684			6,160
Prepaid expenses and other current assets		19,777			16,034
Total current assets		822,448			501,508
Property, plant and equipment, net		63,684			60,646
Intangible assets, net		55,511			58,378
Goodwill		114,908			114,908
Deferred income taxes		4,044			2,045
Other assets		21,047			21,047
Total assets		$	1,081,642		$	758,532
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	30,732		$	22,607
Accrued expenses and other current liabilities		28,480			33,201
Customer deposits and deferred revenue		70,785			85,022
Income taxes payable		2,441			2,311
Current portion of long-term debt		375			368
Total current liabilities		132,813			143,509
Deferred income taxes		14,063			13,199
Long-term debt		268,098			826
Other liabilities		1,652			6,403
Total liabilities		416,626			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; 40,644,117 and 40,714,790 shares issued at March 31, 2017 and December 31, 2016, respectively; 40,568,473 and 40,588,194 shares outstanding at March 31, 2017 and December 31, 2016, respectively.		406			407
Additional paid-in capital		831,761			763,303
Accumulated deficit		(167,489		)	(168,583		)
Accumulated other comprehensive income		1,678			1,777
Treasury stock, at cost, 75,644 shares at March 31, 2017; 126,596 shares at December 31, 2016.		(1,340		)	(2,309		)
Total stockholders’ equity		665,016			594,595
Total liabilities and stockholders’ equity		$	1,081,642		$	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 March 31,
		2017			2016
Net sales		$	94,386		$	78,011
Cost of sales		60,186			46,055
Gross profit		34,200			31,956
Operating expenses, net:
Research and development		14,989			22,110
Selling, general, and administrative		20,466			19,839
Amortization of intangible assets		2,867			5,251
Restructuring		1,338			100
Asset impairment		463			—
Other, net		(78		)	(71		)
Total operating expenses, net		40,045			47,229
Operating income (loss)		(5,845		)	(15,273		)
Interest income		793			306
Interest expense		(4,135		)	(38		)
Income (loss) before income taxes		(9,187		)	(15,005		)
Income tax expense (benefit)		(10,282		)	528
Net income (loss)		$	1,095		$	(15,533	)
Income (loss) per common share:
Basic		$	0.03		$	(0.40	)
Diluted		$	0.03		$	(0.40	)
Weighted average number of shares:
Basic		39,619			39,113
Diluted		40,140			39,113

 

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,
		2017			2016
Net income (loss)		$	1,095		$	(15,533	)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available-for-sale securities		(114		)	50
Foreign currency translation		15			39
Total other comprehensive income (loss), net of tax		(99		)	89
Total comprehensive income (loss)		$	996		$	(15,444	)

 

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,
		2017			2016
Cash Flows from Operating Activities
Net income (loss)		$	1,095		(15,533		)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		5,799			8,593
Non-cash interest expense		2,185			—
Deferred income taxes		(6,001		)	465
Share-based compensation expense		4,186			4,388
Asset impairment		463			—
Provision for bad debts		92			160
Changes in operating assets and liabilities:
Accounts receivable		6,495			(6,958		)
Inventories and deferred cost of sales		13,761			1,274
Prepaid expenses and other current assets		(3,743		)	(6,660		)
Accounts payable and accrued expenses		642			(2,210		)
Customer deposits and deferred revenue		(14,238		)	(1,510		)
Income taxes receivable and payable, net		130			(893		)
Long-term income tax liability		(4,877		)	—
Other, net		343			86
Net cash provided by (used in) operating activities		6,332			(18,798		)
Cash Flows from Investing Activities
Capital expenditures		(4,187		)	(3,988		)
Proceeds from the sale of investments		27,411			10,930
Payments for purchases of investments		(219,141		)	—
Other		—			(213		)
Net cash provided by (used in) investing activities		(195,917		)	6,729
Cash Flows from Financing Activities
Proceeds (tax withholdings) from stock option exercises and employee stock purchase plan		585			(22		)
Restricted stock tax withholdings		(461		)	(27		)
Purchases of common stock		—			(13,349		)
Proceeds from long-term debt borrowings		335,752			—
Principal payments on long-term debt		(89		)	(82		)
Net cash provided by (used in) financing activities		335,787			(13,480		)
Effect of exchange rate changes on cash and cash equivalents		15			39
Net increase in cash and cash equivalents		146,217			(25,510		)
Cash and cash equivalents - beginning of period		277,444			269,232
Cash and cash equivalents - end of period		$	423,661		$	243,722
Supplemental Disclosure of Cash Flow Information
Interest paid		$	31		$	39
Income taxes paid		672			966
Non-cash operating and financing activities
Net transfer of inventory to property, plant and equipment		81			—

 

See accompanying Notes to the Consolidated Financial Statements.

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(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, 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 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.

 

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 many 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, but can adopt early for annual periods beginning after December 15, 2016. The Company is still completing its evaluation of the impact of adopting this standard; however, the Company currently expects the most significant financial statement impacts of adopting ASC 606 will be the elimination of the constraint on revenue associated with the billing retention related to the receipt of customer final acceptance as well as the identification of installation services as a performance obligation. The elimination of the constraint on revenue related to customer final acceptance, which is usually about 10 percent of a system sale, will generally be recognized at the time the Company transfers control of the system to the customer, which is earlier than under the Company’s current revenue recognition model. 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

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

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 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. The Company is evaluating the anticipated effect the ASU will have on the consolidated financial statements.

 

The Company is also evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on 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 4, “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 months ended March 31, 2017 and 2016 are as follows:

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

 

 

		Three months ended March 31,
		2017			2016
		(in thousands, except per share amounts)
Net income (loss)		$	1,095		$	(15,533	)
Net income (loss) per common share:
Basic		$	0.03		$	(0.40	)
Diluted		$	0.03		$	(0.40	)
Basic weighted average shares outstanding		39,619			39,113
Effect of potentially dilutive share-based awards		521			—
Diluted weighted average shares outstanding		40,140			39,113
Unvested participating shares excluded from basic weighted average shares outstanding since the securityholders are not obligated to fund losses		N/A			722
Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive		N/A			66
Potentially dilutive non-participating shares excluded from the diluted calculation as their effect would be antidilutive		1,499			2,295
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			N/A

 

Note 3 - 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 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;

 

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.

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

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, 2017 and December 31, 2016:

 

		Level 1			Level 2			Level 3			Total
		(in thousands)
March 31, 2017
Cash equivalents
U.S. treasuries		$	79,962		$	—		$	—		$	79,962
Government agency securities		—			9,997			—			9,997
Corporate debt		—			2,401			—			2,401
Commercial paper		—			8,994			—			8,994
Total		$	79,962		$	21,392		$	—		$	101,354
Short-term investments
U.S. treasuries		$	180,013		$	—		$	—		$	180,013
Government agency securities		—			29,998			—			29,998
Corporate debt		—			30,242			—			30,242
Commercial paper		—			17,943			—			17,943
Total		$	180,013		$	78,183		$	—		$	258,196
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 months ended March 31, 2017.

 

At March 31, 2017 and December 31, 2016, the amortized cost and fair value of available-for-sale securities consist of:

 

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Notes to the Consolidated Financial Statements - continued

(unaudited)

 

					Gross			Gross
		Amortized			Unrealized			Unrealized			Estimated
		Cost			Gains			Losses			Fair Value
		(in thousands)
March 31, 2017
U.S. treasuries		$	180,101		$	—		$	(88	)	$	180,013
Government agency securities		30,021			—			(23		)	29,998
Corporate debt		30,265			—			(23		)	30,242
Commercial paper		17,943			—			—			17,943
Total		$	258,330		$	—		$	(134	)	$	258,196
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
Commerical Paper		2,994			—			—			2,994
Total		$	66,807		$	—		$	(20	)	$	66,787

 

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

 

		March 31, 2017						December 31, 2016
					Gross						Gross
		Estimated			Unrealized			Estimated			Unrealized
		Fair Value			Losses			Fair Value			Losses
		(in thousands)
U.S. treasuries		$	180,013		$	(88	)	$	20,002		$	(5	)
Government agency securities		29,998			(23		)	10,012			(8		)
Corporate debt		29,041			(23		)	13,774			(7		)
Total		$	239,052		$	(134	)	$	43,788		$	(20	)

 

At March 31, 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 March 31, 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 no realized gains for the three months ended March 31, 2017 and 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 both March 31, 2017 and December 31, 2016.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value using standard costs that approximate actual costs on a first-in, first-out basis. Inventories at March 31, 2017 and December 31, 2016 consist of the following:

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

		March 31,			December 31,
		2017			2016
		(in thousands)
Materials		$	42,165		$	46,457
Work-in-process		20,992			25,250
Finished goods		1,540			5,356
Total		$	64,697		$	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 $7.9 million and $7.8 million at March 31, 2017 and December 31, 2016, respectively.

 

Property, plant, and equipment

 

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

 

		March 31,			December 31,
		2017			2016
		(in thousands)
Land		$	5,669		$	5,669
Building and improvements		51,102			50,814
Machinery and equipment(1)		104,222			99,370
Leasehold improvements		3,884			3,652
Gross property, plant and equipment		164,877			159,505
Less: accumulated depreciation and amortization		101,193			98,859
Net property, plant and equipment		$	63,684		$	60,646

 

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

 

For the three months ended March 31, 2017 and 2016, depreciation expense was $2.9 million and $3.3 million, respectively.

 

Goodwill

 

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. There were no changes to goodwill during the three months ended March 31, 2017.

 

Intangible assets

 

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

 

The components of purchased intangible assets were as follows:

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

		March 31, 2017									December 31, 2016
					Accumulated									Accumulated
		Gross			Amortization						Gross			Amortization
		Carrying			and			Net			Carrying			and			Net
		Amount			Impairment			Amount			Amount			Impairment			Amount
		(in thousands)
Technology		$	149,198		$	115,454		$	33,744		$	149,198		$	113,904		$	35,294
Customer relationships		47,885			29,909			17,976			47,885			28,659			19,226
Trademarks and tradenames		2,590			1,986			604			2,590			1,948			642
Indefinite-lived trademark		2,900			—			2,900			2,900			—			2,900
Other		748			461			287			2,026			1,710			316
Total		$	203,321		$	147,810		$	55,511		$	204,599		$	146,221		$	58,378

 

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, Kateeva, Inc. (“Kateeva”). Veeco does not exert significant influence over Kateeva and therefore the investment is carried at cost. There was no change to the $21.0 million carrying value of the investment during the three months ended March 31, 2017. 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 Kateeva’s financial condition, the business outlook for its products and technology, its projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by Veeco relative to other investors. Fair value of the investment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of the investment. No such events or circumstances are present.

 

Note 4 - Liabilities

 

Accrued expenses and other current liabilities

 

The components of accrued expenses and other current liabilities at March 31, 2017 and December 31, 2016 consist of:

 

		March 31,			December 31,
		2017			2016
		(in thousands)
Payroll and related benefits		$	13,538		$	18,780
Warranty		4,209			4,217
Professional fees		2,806			1,827
Installation		1,411			1,382
Sales, use, and other taxes		436			1,282
Restructuring liability		1,219			1,796
Interest		1,915			—
Other		2,946			3,917
Total		$	28,480		$	33,201

 

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

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

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, 2017 include:

 

		(in thousands)
Balance - December 31, 2016		$	4,217
Warranties issued		973
Consumption of reserves		(1,327		)
Changes in estimate		346
Balance - March 31, 2017		$	4,209

 

Restructuring accruals

 

During the three months ended March 31, 2017, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. During the second and third quarters of 2016, the Company undertook  restructuring activities as part of its initiative to streamline operations, enhance efficiency, and reduce costs. As a result of these actions, the Company notified approximately 50 employees of their termination from the Company. In addition, during the third quarter of 2016, the Company decided to significantly reduce future investments in its Atomic Layer Deposition (“ALD”) technology development, which impacts approximately 25 additional employees. Over the next few quarters, the Company expects to incur additional restructuring costs of $2 to $4 million as it finalizes all of these activities.

 

		Personnel
		Severance and			Facility
		Related Costs			Related Costs			Total
		(in thousands)
Balance - December 31, 2016		$	1,796		$	—		$	1,796
Provision		661			677			1,338
Payments		(1,238		)	(677		)	(1,915		)
Balance - March 31, 2017		$	1,219		$	—		$	1,219

 

Customer deposits

 

Customer deposits totaled $21.5 million and $22.2 million at March 31, 2017 and December 31, 2016, respectively.

 

Convertible Senior Notes

 

On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes (the “Convertible Senior Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The Convertible Senior Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted.

 

The Convertible Senior Notes are unsecured obligations of Veeco and rank senior in right of payment to any of Veeco’s subordinated indebtedness; equal in right of payment to all of Veeco’s unsecured indebtedness that is not subordinated;

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

effectively subordinated in right of payment to any of Veeco’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Veeco’s subsidiaries.

 

The Convertible Senior Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is 24.9800 shares of the Company’s common stock per $1,000 principal amount of Convertible Senior Notes, representing an initial effective conversion price of $40.03 per share of common stock. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the indenture governing the Convertible Senior Notes, dated January 18, 2017 between the Company and U.S. Bank National Association, as trustee (the “Indenture”), but will not be adjusted for accrued but unpaid interest.

 

Holders may convert all or any portion of their notes, in multiples of one thousand dollar principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 15, 2022 only under the following circumstances:

 

(i)                         During any calendar quarter (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

 

(ii)                      During the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per one thousand dollar principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Veeco’s common stock and the conversion rate on each such trading day;

 

(iii)                   If the Company calls any or all of the Convertible Senior Notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or

 

(iv)                  Upon the occurrence of specified corporate events.

 

On or after October 15, 2022, until the close of business on the business day immediately preceding the Maturity Date, holders may convert their notes at any time, regardless of the foregoing circumstances.

 

Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion option, the Company segregated the liability component of the instrument from the equity component. The liability component was measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Convertible Senior Notes. The calculation of the fair value of the debt component required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the Convertible Senior Notes at a discount rate of 7.00%, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the aggregate face value of the Convertible Senior Notes over the estimated fair value of the liability component of $72.5 million was recognized as a debt discount which will be amortized over the expected life of the Convertible Senior Notes using the effective interest rate method. Amortization of the debt discount is recognized as non-cash interest expense.

 

The transaction costs of $9.2 million incurred in connection with the issuance of the Convertible Senior Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected term of the Convertible Senior Notes. Transaction costs allocated to the equity component reduced the value of the equity component recognized in stockholders’ equity.

 

The carrying value of the Convertible Senior Notes is as follows:

 

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

		March 31,
		2017
		(in thousands)
Principal amount		$	345,000
Unamortized debt discount		(70,527		)
Unamortized transaction costs		(7,104		)
Net carrying value		$	267,369

 

Total interest expense related to the Convertible Senior Notes is as follows:

 

		Three months ended March 31,
		2017
		(in thousands)
Cash Interest Expense
Coupon interest expense		$	1,915
Non-Cash Interest Expense
Amortization of debt discount		1,985
Amortization of transaction costs		200
Total Interest Expense		$	4,100

 

The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $361.3 million at March 31, 2017.

 

Mortgage Payable

 

Included within long-term debt is a mortgage note payable that has a carrying value of $1.1 million and $1.2 million at March 31, 2017 and December 31, 2016, respectively, and is secured by certain land and buildings with a carrying value of $3.0 million at March 31, 2017 and December 31, 2016. The annual interest rate on the mortgage is 7.91%, and the final payment is due on January 1, 2020. The Company determined the mortgage is a Level 3 liability in the fair-value hierarchy and estimated its fair value as $1.1 million and $1.2 million at March 31, 2017 and December 31, 2016, respectively, using a discounted cash flow model.

 

Other Liabilities

 

Other liabilities primarily consist of income taxes payable and other liabilities not expected to be paid within one year. Non-current income taxes payable were $4.9 million at December 31, 2016. There were no non-current income taxes payable at March 31, 2017.

 

Note 5 - Commitments and Contingencies

 

Minimum lease commitments

 

At March 31, 2017, Veeco’s total future minimum lease payments under non-cancelable operating leases have not changed significantly from the disclosure in the 2016 Form 10-K.

 

17