VEECO INSTRUMENTS INC, 10-Q filed on 11/4/2013
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 24, 2013
Document and Entity Information
 
 
Entity Registrant Name
VEECO INSTRUMENTS INC 
 
Entity Central Index Key
0000103145 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2012 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
No 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
39,246,279 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Condensed Consolidated Statements of Income
 
 
 
 
Net sales
$ 132,715 
$ 267,959 
$ 409,171 
$ 787,450 
Cost of sales
82,831 
143,025 
232,765 
396,204 
Gross profit
49,884 
124,934 
176,406 
391,246 
Operating expenses (income):
 
 
 
 
Selling, general and administrative
13,892 
23,569 
54,558 
73,966 
Research and development
25,775 
26,404 
72,991 
69,927 
Amortization
1,477 
1,277 
3,877 
3,519 
Restructuring
2,014 
 
2,077 
 
Other, net
(737)
(199)
(626)
(228)
Total operating expenses
42,421 
51,051 
132,877 
147,184 
Operating income
7,463 
73,883 
43,529 
244,062 
Interest income (expense), net
176 
244 
708 
(1,142)
Loss on extinguishment of debt
 
 
 
(3,349)
Income from continuing operations before income taxes
7,639 
74,127 
44,237 
239,571 
Income tax (benefit) provision
(59)
21,510 
9,066 
72,657 
Income from continuing operations
7,698 
52,617 
35,171 
166,914 
Discontinued operations:
 
 
 
 
Income (loss) from discontinued operations before income taxes
5,396 
(23,839)
6,534 
(91,574)
Income tax provision (benefit)
1,341 
(7,085)
1,722 
(32,371)
Income (loss) from discontinued operations
4,055 
(16,754)
4,812 
(59,203)
Net income
$ 11,753 
$ 35,863 
$ 39,983 
$ 107,711 
Basic:
 
 
 
 
Continuing operations (in dollars per share)
$ 0.20 
$ 1.34 
$ 0.92 
$ 4.16 
Discontinued operations (in dollars per share)
$ 0.10 
$ (0.43)
$ 0.12 
$ (1.48)
Income (in dollars per share)
$ 0.30 
$ 0.91 
$ 1.04 
$ 2.68 
Diluted :
 
 
 
 
Continuing operations (in dollars per share)
$ 0.20 
$ 1.31 
$ 0.90 
$ 3.98 
Discontinued operations (in dollars per share)
$ 0.10 
$ (0.41)
$ 0.13 
$ (1.41)
Income (in dollars per share)
$ 0.30 
$ 0.90 
$ 1.03 
$ 2.57 
Weighted average shares outstanding:
 
 
 
 
Basic (in shares)
38,577 
39,335 
38,402 
40,132 
Diluted (in shares)
39,169 
40,069 
39,006 
41,941 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Condensed Consolidated Statements of Comprehensive Income
 
 
 
 
Net income
$ 11,753 
$ 35,863 
$ 39,983 
$ 107,711 
Other comprehensive income (loss), net of tax
 
 
 
 
Unrealized gain (loss) on available-for-sale securities
108 
(76)
357 
Less: Reclassification adjustments for gains included in net income
(11)
(135)
(20)
(264)
Net unrealized gain (loss) on available-for-sale securities
97 
(127)
(96)
93 
Foreign currency translation
246 
70 
1,227 
Comprehensive income
$ 12,096 
$ 35,806 
$ 39,888 
$ 109,031 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 387,048 
$ 217,922 
Short-term investments
185,692 
273,591 
Restricted cash
852 
577 
Accounts receivable, net
60,320 
95,038 
Inventories
74,360 
113,434 
Prepaid expenses and other current assets
40,964 
40,756 
Assets of discontinued segment held for sale
 
2,341 
Deferred income taxes
8,974 
10,885 
Total current assets
758,210 
754,544 
Property, plant and equipment at cost, net
99,058 
86,067 
Goodwill
55,828 
55,828 
Intangible assets, net
22,006 
25,882 
Other assets
19,453 
13,742 
Total assets
954,555 
936,063 
Current liabilities:
 
 
Accounts payable
35,429 
40,398 
Accrued expenses and other current liabilities
87,318 
106,626 
Deferred revenue
5,716 
11,305 
Income taxes payable
1,096 
3,532 
Liabilities of discontinued segment held for sale
 
5,359 
Current portion of long-term debt
263 
248 
Total current liabilities
129,822 
167,468 
Deferred income taxes
5,023 
5,029 
Long-term debt
2,207 
2,406 
Other liabilities
303 
640 
Total liabilities
137,355 
175,543 
Equity:
 
 
Preferred stock, 500,000 shares authorized; no shares issued and outstanding
   
   
Common stock; $.01 par value; authorized 120,000,000 shares; 39,334,469 shares issued and outstanding in 2012; and 44,047,264 and 38,768,436 shares issued and outstanding in 2011
393 
435 
Additional paid-in-capital
705,134 
688,353 
Retained earnings
105,178 
265,317 
Accumulated other comprehensive income
6,495 
6,590 
Less: treasury stock, at cost; 5,278,828 shares in 2011
 
(200,175)
Total equity
817,200 
760,520 
Total liabilities and equity
$ 954,555 
$ 936,063 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2012
Dec. 31, 2011
Condensed Consolidated Balance Sheets
 
 
Preferred stock, shares authorized
500,000 
500,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, authorized shares
120,000,000 
120,000,000 
Common stock, shares issued
39,334,469 
44,047,264 
Common stock, shares outstanding
39,334,469 
38,768,436 
Treasury stock, shares
 
5,278,828 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Cash Flows from Operating Activities
 
 
Net income
$ 39,983 
$ 107,711 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
12,181 
9,291 
Amortization of debt discount
 
1,260 
Non-cash equity-based compensation
10,629 
9,472 
Loss on extinguishment of debt
 
3,349 
Deferred income taxes
278 
6,800 
Gain on disposal of segment
(4,112)
 
Excess tax benefits from stock option exercises
(2,211)
(8,601)
Other, net
10 
 
Non-cash items from discontinued operations
(904)
44,381 
Changes in operating assets and liabilities:
 
 
Accounts receivable
34,486 
36,222 
Transfers to restricted cash
(275)
 
Inventories
40,271 
(32,639)
Prepaid expenses and other current assets
(219)
(32,645)
Accounts payable
(2,811)
12,494 
Accrued expenses, deferred profit and other current liabilities
(24,897)
(49,685)
Income taxes payable
(224)
(43,023)
Other, net
5,582 
(4,292)
Discontinued operations
(1,932)
 
Net cash provided by operating activities
105,835 
60,095 
Cash Flows from Investing Activities
 
 
Capital expenditures
(22,706)
(47,516)
Payments for net assets of businesses acquired
 
(28,273)
Payment for purchase of cost method investment
(10,341)
 
Transfers from restricted cash
 
53,216 
Proceeds from sales of short-term investments
176,303 
667,216 
Payments for purchases of short-term investments
(89,848)
(486,639)
Other
58 
110 
Proceeds from sale of assets from discontinued segment
3,758 
 
Net cash provided by investing activities
57,224 
158,114 
Cash Flows from Financing Activities
 
 
Proceeds from stock option exercises
5,370 
9,975 
Restricted stock tax withholdings
(1,418)
(2,919)
Excess tax benefits from stock option exercises
2,211 
8,601 
Purchases of treasury stock
 
(162,077)
Repayments of long-term debt
(184)
(105,745)
Net cash provided by (used in) financing activities
5,979 
(252,165)
Effect of exchange rate changes on cash and cash equivalents
88 
2,060 
Net increase (decrease) in cash and cash equivalents
169,126 
(31,896)
Cash and cash equivalents at beginning of period
217,922 
245,132 
Cash and cash equivalents at end of period
387,048 
213,236 
Non-cash investing and financing activities
 
 
Transfers from property, plant and equipment to inventory
$ 1,242 
 
Basis of Presentation
Basis of Presentation

Note 1—Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco”, the “Company”, “we”, “us”, and “our”, unless the context indicates otherwise) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three and nine months ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2011.

 

Consistent with prior years, we report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday of each period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2012 interim quarter ends are April 1, July 1 and September 30. The 2011 interim quarter ends were April 3, July 3 and October 2. For ease of reference, we report these interim quarter ends as March 31, June 30 and September 30 in our interim condensed consolidated financial statements. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to discontinued operations.

 

Accounting Review

 

During 2012, the Company commenced an internal investigation in response to information it received concerning certain issues, including contract documentation issues, related to a limited number of customer transactions in South Korea.  During the review of information in connection with the internal investigation, questions were raised that prompted the Company to conduct a comprehensive and extensive review of its revenue recognition accounting for certain multiple element arrangements.  The Company retained experienced counsel, assisted by an experienced outside accounting consulting firm, to oversee the accounting review undertaken by the Company.  The Company completed that review in October 2013.

 

The delay in filing our periodic reports began with an announcement, on November 15, 2012, regarding our accounting review of our application of accounting principles related to the Company’s sales of multiple element arrangements of Metal Organic Chemical Vapor Deposition (“MOCVD”) systems in certain transactions originating in 2009 and 2010.  We conducted examinations of our MOCVD transactions to determine whether the revenue and related expenses were recognized in the appropriate accounting period.  Subsequently, we expanded our accounting review to other relevant transactions of similar multiple element arrangements arising since 2009.  In the course of our accounting review, we have examined more than 100 multiple element arrangements.

 

The primary focus of the Company’s accounting review concerned whether the Company correctly interpreted and applied generally accepted accounting principles relating to revenue recognition for multiple element arrangements as set forth in Securities and Exchange Commission Staff Accounting Bulletin No. 104: Revenue Recognition, and ASC 605-25 - Revenue Recognition:  Multiple Element Arrangements (formerly known as EITF 00-21 and EITF 08-01), to certain sales of Veeco products.

 

We often enter into large orders with our customers consisting of several elements.  For accounting purposes, these are called multiple element arrangements, and can include systems, upgrades, spare parts, services, as well as certain other items.  Our accounting review examined the selected sales transactions to determine whether the Company appropriately: (1) identified all of the elements in its arrangements with customers; (2) determined the proper units of accounting as part of the arrangements; and (3) allocated the arrangements’ consideration to each of the units of accounting under the applicable accounting standards.  As a result of our accounting review we identified errors in the consolidated financial statements related to prior periods. The errors were primarily attributable to the misapplication of U.S. GAAP for recognizing revenue and related costs under multiple element arrangements and accounting for warranties. We assessed the materiality of these errors, both quantitatively and qualitatively, and concluded that these errors were not material, individually or in the aggregate, to our consolidated financial statements in this or any other prior periods.  During the course of our review, we identified net cumulative errors which overstated cumulative net income from continuing operations through December 31, 2011 by $0.6 million and net cumulative errors that understated net income from continuing operations in the six month period ended June 30, 2012 by $1.1 million. As a result, in the third quarter of 2012, we recorded adjustments to correct all prior periods resulting in an increase in revenues of $5.4 million and an increase in income from continuing operations of $0.5 million.

 

Notwithstanding the material weaknesses discussed in “Part I. Item 4. Controls and Procedures” and based upon the accounting review discussed above, our management has concluded that our consolidated financial statements are fairly stated in all material respects in accordance with U.S. GAAP for interim financial information.

 

Use of Estimates

 

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

 

Income Per Common Share

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic weighted average shares outstanding

 

38,577

 

39,335

 

38,402

 

40,132

 

Dilutive effect of stock options and restricted stock

 

592

 

734

 

604

 

983

 

Dilutive effect of convertible notes

 

 

 

 

826

 

Diluted weighted average shares outstanding

 

39,169

 

40,069

 

39,006

 

41,941

 

 

Basic income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted income per common share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period. Potentially dilutive securities attributable to outstanding stock options and restricted stock of approximately 1.1 million and 1.2 million common equivalent shares during the three and nine months ended September 30, 2012 and approximately 1.2 million and 0.6 million common equivalent shares during the three and nine months ended September 30, 2011 were excluded from the calculation of diluted net income per share because their effect on income per share was anti-dilutive.

 

During the second quarter of 2011, the entire outstanding principal balance of our convertible debt was converted, with the principal amount paid in cash and the conversion premium paid in shares. The convertible notes met the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, since we had settled the principal amount of the notes in cash. Using the treasury stock method, it was determined that the impact of the assumed conversion for the nine months ended September 30, 2011, had a dilutive effect of 0.8 million common equivalent shares.

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Discontinued Operations
Discontinued Operations

Note 2 — Discontinued Operations

 

Copper, Indium, Gallium, Selenide (“CIGS”) Solar Systems Business

 

On July 28, 2011, we announced a plan to discontinue our CIGS solar systems business. The action, which was completed on September 27, 2011, was in response to the dramatically reduced cost of mainstream solar technologies driven by significant reductions in prices, large industry investment, a lower than expected end market acceptance for CIGS technology and technical barriers in scaling CIGS. This business was previously included as part of our LED & Solar segment.

 

The results of operations for the CIGS solar systems business have been recorded as discontinued operations in the accompanying Condensed Consolidated Statements of Income for all periods presented. During the nine months ended September 30, 2011, total discontinued operations include charges totaling $69.8 million. These charges include an asset impairment charge totaling $6.2 million, a goodwill write-off of $10.8 million, an inventory write-off totaling $27.0 million, charges to settle contracts totaling $22.1 million, lease related charges totaling $1.4 million and personnel severance charges totaling $2.3 million. During the three months ended September 30, 2011, total discontinued operations include charges totaling $19.0 million. These charges include a goodwill write-off totaling $10.8 million, a charge to settle contracts totaling $11.0 million, lease related charges totaling $1.4 million and personnel severance charges totaling $2.3 million, partially offset by a $6.5 million recovery of cost relating to inventory written-off during the second quarter of 2011.

 

Metrology

 

On August 15, 2010, we signed a definitive agreement to sell our Metrology business to Bruker Corporation (“Bruker”) comprising our entire Metrology reporting segment for $229.4 million. Accordingly, Metrology’s operating results are accounted for as discontinued operations in determining the consolidated results of operations. The sale transaction closed on October 7, 2010, except for assets located in China due to local restrictions. Total proceeds, which included a working capital adjustment of $1 million, totaled $230.4 million of which $7.2 million relates to the assets in China. As part of our agreement with Bruker, $22.9 million of proceeds was held in escrow and was restricted from use for one year following the closing date of the transaction to secure certain specified losses in the event of breaches of representations, warranties and covenants we made in the stock purchase agreement and related documents. The restriction relating to the escrowed proceeds was released on October 6, 2011. As part of the sale we incurred transaction costs, which consisted of investment banking fees and legal fees, totaling $5.2 million. During the fourth quarter of 2010, we recognized a pre-tax gain on disposal of $156.3 million and a pre-tax deferred gain of $5.4 million related to the assets in China.  We recognized into income the pre-tax deferred gain of $5.4 million during the third quarter of 2012 related to the completion of the sale of the assets in China to Bruker.

 

Discontinued operations for the three and nine months ended September 30, 2012 include the realization of the $5.4 million 2010 deferred gain ($4.1 million net of taxes) relating to the net assets in China, which was finalized during the third quarter. The nine months ended September 30, 2012, also includes a $1.4 million gain ($1.1 million net of taxes) on the sale of assets of this discontinued segment that were previously held for sale and sold during the second quarter.

 

The following is a summary of the net assets sold as of the closing date on October 7, 2010 (in thousands):

 

 

 

October 7,

 

 

 

2010

 

Assets

 

 

 

Accounts receivable, net

 

$

21,866

 

Inventories

 

26,431

 

Property, plant and equipment at cost, net

 

13,408

 

Goodwill

 

7,419

 

Other assets

 

5,485

 

Assets of discontinued segment held for sale

 

$

74,609

 

 

 

 

 

Liabilities

 

 

 

Accounts payable

 

$

7,616

 

Accrued expenses and other current liabilities

 

5,284

 

Liabilities of discontinued segment held for sale

 

$

12,900

 

 

Summary information related to discontinued operations is as follows (in thousands):

 

 

 

Three months ended September 30, 2012

 

Three months ended September 30, 2011

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

Net sales

 

$

 

$

 

$

 

$

 

$

 

$

 

Net (loss) income from discontinued operations

 

$

(9

)

$

4,064

 

$

4,055

 

$

(16,366

)

$

(388

)

$

(16,754

)

 

 

 

Nine months ended September 30, 2012

 

Nine months ended September 30, 2011

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

Net sales

 

$

 

$

 

$

 

$

 

$

 

$

 

Net (loss) income from discontinued operations

 

$

(63

)

$

4,875

 

$

4,812

 

$

(58,268

)

$

(935

)

$

(59,203

)

 

Liabilities of discontinued segment held for sale, totaling $5.4 million, as of December 31, 2011, consisted of the deferred gain related to the net assets of the former Metrology business in China.

Equity
Equity

Note 3—Equity

 

Treasury Stock

 

On August 24, 2010, our Board of Directors authorized the repurchase of up to $200 million of our common stock. During the three months ended September 30, 2011, we purchased 3,994,940 shares for $154.3 million (including transaction costs) under the program at an average cost of $38.63 per share. During the nine months ended September 30, 2011, we purchased 4,160,228 shares for $162.1 million (including transaction costs) under the program at an average cost of $38.96 per share.  These stock repurchases are included as a reduction to Equity in the Condensed Consolidated Balance Sheet as of December 31, 2011. All funds for this repurchase program were exhausted as of August 19, 2011. Repurchases were made from time to time on the open market in accordance with applicable federal securities laws. During the nine months ended September 30, 2012, we cancelled and retired the 5,278,828 shares of treasury stock we purchased under the repurchase program. As a result of this transaction, we recorded a reduction in treasury stock of $200.2 million and a corresponding reduction of $200.1 million and $0.1 million in retained earnings and common stock, respectively.

Balance Sheet Information
Balance Sheet Information

Note 4—Balance Sheet Information

 

Short-Term Investments

 

Available-for-sale securities consist of the following (in thousands):

 

 

 

September 30, 2012

 

 

 

Amortized
Cost

 

Gains in
Accumulated
Other
Comprehensive
Income

 

Losses in
Accumulated
Other
Comprehensive
Income

 

Estimated
Fair Value

 

Treasury bills

 

$

117,872

 

$

54

 

$

 

$

117,926

 

Government Agency Securities

 

39,559

 

4

 

(1

)

39,562

 

FDIC guaranteed corporate debt

 

28,198

 

6

 

 

28,204

 

Total available-for-sale securities

 

$

185,629

 

$

64

 

$

(1

)

$

185,692

 

 

 

 

December 31, 2011

 

 

 

Amortized
Cost

 

Gains in
Accumulated
Other
Comprehensive
Income

 

Losses in
Accumulated
Other
Comprehensive
Income

 

Estimated
Fair Value

 

Treasury bills

 

$

70,147

 

$

46

 

$

(1

)

$

70,192

 

Government agency securities

 

88,585

 

62

 

(6

)

88,641

 

FDIC guaranteed corporate debt

 

114,640

 

125

 

(7

)

114,758

 

Total available-for-sale securities

 

$

273,372

 

$

233

 

$

(14

)

$

273,591

 

 

During the three and nine months ended September 30, 2012, available-for-sale securities were sold for total proceeds of $76.8 million and $176.3 million, respectively. The gross realized gains and losses on these sales were minimal for the three and nine months ended September 30, 2012. During the three months ended September 30, 2012, minimal net unrealized holding gains on available-for-sale securities have been included in accumulated other comprehensive income. During the nine months ended September 30, 2012, net unrealized holding losses on available-for-sale securities of $0.2 million have been included in accumulated other comprehensive income. During the three and nine months ended September 30, 2011, available-for-sale securities were sold for total proceeds of $292.9 million and $667.2 million, respectively. The gross realized gains on these sales were $0.2 million and $0.4 million for the three and nine months ended September 30, 2011, respectively. Net unrealized holding (losses) gains on available-for-sale securities amounting to $(0.1) million and $0.1 million for the three and nine months ended September 30, 2011, respectively, have been included in accumulated other comprehensive income. For purpose of determining gross realized gains and losses for the current and prior year periods, the cost of securities sold is based on specific identification.

 

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

 

 

 

September 30, 2012

 

 

 

Less than 12 months

 

Total

 

 

 

Fair value

 

Gross Unrealized
Losses

 

Fair value

 

Gross
Unrealized
Losses

 

Government agency securities

 

$

18,519

 

$

(1

)

$

18,519

 

$

(1

)

Total

 

$

18,519

 

$

(1

)

$

18,519

 

$

(1

)

 

 

 

December 31, 2011

 

 

 

Less than 12 months

 

Total

 

 

 

Fair value

 

Gross Unrealized
Losses

 

Fair value

 

Gross
Unrealized
Losses

 

Government agency securities

 

$

20,497

 

$

(6

)

$

20,497

 

$

(6

)

FDIC guaranteed corporate debt

 

8,033

 

(7

)

8,033

 

(7

)

Treasury bills

 

5,024

 

(1

)

5,024

 

(1

)

Total

 

$

33,554

 

$

(14

)

$

33,554

 

$

(14

)

 

We did not hold any short-term investments that have been in an unrealized loss position for 12 months or longer for the periods noted in the tables above.

 

The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss was considered to be temporary or other-than-temporary and therefore impaired include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition and near-term prospects of the investee; and whether it is more likely than not that the Company will be required to sell the security prior to recovery. The Company believes the gross unrealized losses on the Company’s short-term investments as of September 30, 2012 and December 31, 2011 were temporary in nature and therefore did not recognize any impairment. For investments that were in an unrealized loss position, we held the securities through maturity.

 

Contractual maturities of available-for-sale debt securities at September 30, 2012, are as follows (in thousands):

 

 

 

Estimated Fair Value

 

Due in one year or less

 

$

107,269

 

Due in 1–2 years

 

78,423

 

Total investments in debt securities

 

$

185,692

 

 

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

 

Restricted Cash

 

As of September 30, 2012 and December 31, 2011, restricted cash consisted of $0.9 million and $0.6 million, respectively, which serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations. This cash is held in custody by the issuing bank and is restricted as to withdrawal or use while the related bank guarantees are outstanding.

 

Accounts Receivable, Net

 

Accounts receivable are shown net of the allowance for doubtful accounts of $0.5 million as of September 30, 2012 and December 31, 2011.

 

Inventories

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Materials

 

$

44,475

 

$

57,169

 

Work in process

 

23,780

 

20,118

 

Finished goods

 

6,105

 

36,147

 

 

 

$

74,360

 

$

113,434

 

 

Cost Method Investment

 

During the three months ended September 30, 2012, we completed an additional investment in a rapidly developing organic light emitting diode (“OLED”) equipment company (the “Investment”). Veeco has invested in this company’s Round D funding extension totaling $10.3 million, resulting in an 15.3% ownership of the preferred shares, and 12.0% ownership of the company. Since we do not exercise significant influence on the Investment, this investment is treated under the cost method in accordance with applicable accounting guidance. The fair value of this investment is not estimated because there are no identified events or changes in circumstances that may indicate an other-than-temporary decline in the fair value of the investment, and we are exempt from estimating interim fair values because the investment does not meet the definition of a publicly traded company. This investment is recorded in other assets in our Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011. The total recorded investment as of September 30, 2012 and December 31, 2011 is $14.5 million and $4.2 million, respectively.  In 2013, we invested an additional $1.6 million in the Investment.

 

Accrued Warranty

 

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

 

 

 

September 30,

 

 

 

2012

 

2011

 

Balance as of the beginning of period

 

$

8,731

 

$

8,266

 

Warranties issued during the period

 

2,486

 

5,988

 

Settlements made during the period

 

(6,389

)

(6,523

)

Changes in estimate during the period

 

1,418

 

1,259

 

Balance as of the end of period

 

$

6,246

 

$

8,990

 

 

In the current year’s presentation we no longer include certain accrued installation costs in the accrued warranty balance; therefore, in order to conform the balance to current year presentation, we have reclassified $1.047 million and $0.972 million in 2012 and 2011, respectively, of the beginning balance of accrued warranty to accrued installation which, along with accrued warranty, is also a component of accrued expenses and other current liabilities.

Segment Information
Segment Information

Note 5—Segment Information

 

We have four identified reporting units that we aggregate into two reportable segments: the VIBE and Mechanical reporting units which are reported in our Data Storage segment; and the MOCVD and MBE reporting units are reported in our LED and Solar segment.  We manage the business, review operating results and assess performance, as well as allocate resources, based upon our reporting units that reflect the market focus of each business. The LED & Solar segment consists of metal organic chemical vapor deposition (“MOCVD”) systems, molecular beam epitaxy (“MBE”) systems, thermal deposition sources and other types of deposition systems. These systems are primarily sold to customers in the LED and solar industries, as well as to scientific research customers. This segment has product development and marketing sites in Somerset, New Jersey, Poughkeepsie, New York, and St. Paul, Minnesota. During 2011 we discontinued our CIGS solar systems business, located in Tewksbury, Massachusetts and Clifton Park, New York. The Data Storage segment consists of the ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, and dicing and slicing products sold primarily to customers in the data storage industry. This segment has product development and marketing sites in Plainview, New York, Ft. Collins, Colorado and Camarillo, California.

 

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

 

The following tables present certain data pertaining to our reportable product segments and a reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes for the three and nine months ended September 30, 2012 and 2011, respectively, and goodwill and total assets as of September 30, 2012 and December 31, 2011 (in thousands):

 

 

 

LED & 
Solar

 

Data
Storage

 

Unallocated
Corporate

 

Total

 

Three months ended September 30, 2012

 

 

 

 

 

 

 

 

 

Net sales

 

$

98,905

 

$

33,810

 

$

 

$

132,715

 

Segment profit

 

$

9,461

 

$

4,278

 

$

480

 

$

14,219

 

Interest, net

 

 

 

176

 

176

 

Amortization

 

(1,154

)

(323

)

 

(1,477

)

Equity-based compensation

 

(1,914

)

(763

)

(588

)

(3,265

)

Restructuring

 

(660

)

(1,296

)

(58

)

(2,014

)

Income (loss) from continuing operations before income taxes

 

$

5,733

 

$

1,896

 

$

10

 

$

7,639

 

Three months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

233,864

 

$

34,095

 

$

 

$

267,959

 

Segment profit (loss)

 

$

72,819

 

$

7,877

 

$

(2,581

)

$

78,115

 

Interest, net

 

 

 

244

 

244

 

Amortization

 

(924

)

(353

)

 

(1,277

)

Equity-based compensation

 

(996

)

(339

)

(1,620

)

(2,955

)

Income (loss) from continuing operations before income taxes

 

$

70,899

 

$

7,185

 

$

(3,957

)

$

74,127

 

 

 

 

LED &

 

Data

 

Unallocated

 

 

 

 

 

Solar

 

Storage

 

Corporate

 

Total

 

Nine months ended September 30, 2012

 

 

 

 

 

 

 

 

 

Net sales

 

$

281,257

 

$

127,914

 

$

 

$

409,171

 

Segment profit (loss)

 

$

36,534

 

$

25,367

 

$

(2,009

)

$

59,892

 

Interest, net

 

 

 

708

 

708

 

Amortization

 

(2,878

)

(999

)

 

(3,877

)

Equity-based compensation

 

(4,016

)

(1,614

)

(4,779

)

(10,409

)

Restructuring

 

(718

)

(1,301

)

(58

)

(2,077

)

Income (loss) from continuing operations before income taxes

 

$

28,922

 

$

21,453

 

$

(6,138

)

$

44,237

 

Nine months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

667,697

 

$

119,753

 

$

 

$

787,450

 

Segment profit (loss)

 

$

232,848

 

$

33,158

 

$

(8,953

)

$

257,053

 

Interest, net

 

 

 

(1,142

)

(1,142

)

Amortization

 

(2,364

)

(1,072

)

(83

)

(3,519

)

Equity-based compensation

 

(2,567

)

(999

)

(5,906

)

(9,472

)

Loss on extinguishment of debt

 

 

 

(3,349

)

(3,349

)

Income (loss) from continuing operations before income taxes

 

$

227,917

 

$

31,087

 

$

(19,433

)

$

239,571

 

 

 

 

LED &

 

Data

 

Unallocated

 

 

 

 

 

Solar

 

Storage

 

Corporate

 

Total

 

As of September 30, 2012

 

 

 

 

 

 

 

 

 

Goodwill

 

$

55,828

 

$

 

$

 

$

55,828

 

Total assets

 

$

280,220

 

$

50,397

 

$

623,938

 

$

954,555

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

 

 

 

 

Goodwill

 

$

55,828

 

$

 

$

 

$

55,828

 

Total assets

 

$

319,457

 

$

57,203

 

$

559,403

 

$

936,063

 

 

As of September 30, 2012 and December 31, 2011 corporate total assets were comprised principally of cash and cash equivalents and short-term investments.

Debt
Debt

Note 6—Debt

 

Mortgage Payable

 

We have a mortgage payable, with approximately $2.5 million outstanding as of September 30, 2012. The mortgage accrues interest at an annual rate of 7.91%, and the final payment is due on January 1, 2020. The fair value of the mortgage as of September 30, 2012 was approximately $2.7 million.

 

Convertible Notes

 

During the first quarter of 2011, at the option of the holders, $7.5 million of our convertible notes were tendered for conversion at a price of $45.95 per share in a net share settlement. We paid the principal amount of $7.5 million in cash and issued 111,318 shares of our common stock. We recorded a loss on extinguishment totaling $0.3 million related to these transactions.

 

During the second quarter of 2011, we issued a notice of redemption on the remaining outstanding principal balance of notes outstanding. As a result, at the option of the holders, the notes were tendered for conversion at a price of $50.59 per share, calculated as defined in the indenture relating to the notes, in a net share settlement. As a result, we paid the principal amount of $98.1 million in cash and issued 1,660,095 shares of our common stock. We recorded a loss on extinguishment totaling $3.0 million related to these transactions.

Fair Value Measurements
Fair Value Measurements

Note 7—Fair Value Measurements

 

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

 

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

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

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

 

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

 

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

 

The major categories of assets and liabilities measured on a recurring basis, at fair value, as of September 30, 2012 and December 31, 2011, are as follows (in millions):

 

 

 

September 30, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Treasury bills

 

$

246.3

 

$

 

$

 

$

246.3

 

Government agency securities

 

 

117.9

 

 

117.9

 

FDIC guaranteed corporate debt

 

 

28.2

 

 

28.2

 

Total

 

$

246.3

 

$

146.1

 

$

 

$

392.4

 

 

 

 

December 31, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Treasury bills

 

$

90.2

 

$

 

$

 

$

90.2

 

FDIC guaranteed corporate debt

 

 

114.8

 

 

114.8

 

Government agency securities

 

 

169.8

 

 

169.8

 

Money market instruments

 

 

0.2

 

 

0.2

 

Total

 

$

90.2

 

$

284.8

 

$

 

$

375.0

 

 

The classification in the fair value table as of December 31, 2011 has been revised to conform to current period classifications due to an immaterial error related to previously disclosed fair value hierarchy tables.

 

Consistent with Level 1 measurement principles, Treasury bills are priced using active market prices of identical securities. Consistent with Level 2 measurement principles, Federal Deposit Insurance Corporation (“FDIC”) guaranteed corporate debt and Government agency securities are priced with matrix pricing.

 

Highly liquid investments with maturities of three months or less when purchased may be classified as cash equivalents. Such items may include liquid money market accounts, treasury bills, government agency securities and corporate debt. The investments that are classified as cash equivalents are carried as cost, which approximates fair value.  Accordingly, no gains or losses (realized/unrealized) have been recorded for cash equivalents.  All investments classified as available-for-sale are recorded at fair value within short-term investments in the Condensed Consolidated Balance Sheets.

 

In determining the fair value of its investments and levels, the Company uses pricing information from pricing services that value securities based on quoted market prices in active markets and matrix pricing. Matrix pricing is a mathematical valuation technique that does not rely exclusively on quoted prices of specific investments, but on the investment’s relationship to other benchmarked quoted securities. The Company has a challenge process in place for investment valuations to facilitate identification and resolution of potentially erroneous prices. The Company reviews the information provided by the third-party service provider to record the fair value of its portfolio.

 

All investments valued using quoted prices in active markets to determine fair value are classified as Level 1, while those valued with matrix pricing are classified as Level 2.

Derivative Financial Instruments
Derivative Financial Instruments

Note 8 — Derivative Financial Instruments

 

We use derivative financial instruments to minimize the impact of foreign exchange rate changes on earnings and cash flows. In the normal course of business, our operations are exposed to fluctuations in foreign exchange rates. In order to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known foreign currency exposures, we enter into monthly forward contracts. We do not use derivative financial instruments for trading or speculative purposes. Our forward contracts are not expected to subject us to material risks due to exchange rate movements because gains and losses on these contracts are intended to offset exchange gains and losses on the underlying assets and liabilities. We have not designated these economic hedges as accounting hedges pursuant to the accounting guidance. The forward contracts are marked-to-market through earnings. We conduct our derivative transactions with highly rated financial institutions in an effort to mitigate any material counterparty risk.

 

The aggregate foreign currency exchange gain included in determining the condensed consolidated results of operations was minimal during the three months ended September 30, 2012, the aggregate foreign currency exchange loss included in determining the condensed consolidated results of operations was approximately $0.3 million during the nine months ended September 30, 2012 and $0.2 million and $0.7 million during the three and nine months ended September 30, 2011, respectively. Included in the aggregate foreign currency exchange gains were minimal losses related to forward contracts during the three months ended September 30, 2012, included in the aggregate foreign currency exchange losses were losses (gains) related to forward contracts of $0.1 million during the nine months ended September 30, 2012, and $0.3 million and ($0.5) million during the three and nine months ended September 30, 2011 respectively. These amounts were recognized and are included in Other, net in the accompanying Condensed Consolidated Statements of Income.

 

As of September 30, 2012 there was a minimal loss related to forward contracts, which is included in accrued expenses and other current liabilities. As of December 31, 2011 there were no outstanding contracts or settlements. As of September 30, 2012, the monthly forward contracts outstanding with a notional amount of $3.7 million settled in October 2012.

 

The weighted average notional amount of derivative contracts outstanding during the three and nine months ended September 30, 2012 was approximately $2.2 million and $2.4 million, respectively.

Business Combination
Business Combination

Note 9 — Business Combination

 

On April 4, 2011, we purchased a privately-held company, which supplies certain components to our business, for $28.3 million in cash. As a result of this purchase, we acquired $16.4 million of definite-lived intangibles, of which $13.6 million related to core technology, and $14.7 million of goodwill. The financial results of this acquisition are included in our LED & Solar segment as of the acquisition date.

Commitments, Contingencies and Other Matters
Commitments, Contingencies and Other Matters

Note 10—Commitments, Contingencies and Other Matters

 

Restructuring and Other Charges

 

During the three months ended September 30, 2012, we took measures to improve profitability, including a reduction of discretionary expenses, realignment of our senior management team and consolidation of certain sales, business and administrative functions. As a result of these actions, we recorded a restructuring charge of $2.0 million.

 

Restructuring for the three and nine months ended September 30, 2012 is as follows (in thousands):

 

 

 

Three months
ended

 

Nine months
ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2012

 

Personnel severance and related costs

 

$

1,642

 

$

1,705

 

Equity compensation and related costs

 

220

 

220

 

Other associated costs

 

152

 

152

 

 

 

$

2,014

 

$

2,077

 

 

Personnel Severance and Related Costs

 

During the three and nine months ended September 30, 2012, we recorded $1.6 million and 1.7 million, respectively, in personnel severance and related costs resulting from a headcount reduction of approximately 23 employees. This reduction in workforce included executives, management, administration, sales and service personnel and manufacturing employees companywide.

 

Equity Compensation Costs

 

During the three months ended September 30, 2012, we recorded $0.2 million in equity compensation costs resulting from the acceleration and modification of certain awards associated with the realignment of our senior management team.

 

Restructuring Liability

 

The following is a reconciliation of the restructuring liability through September 30, 2012 (in thousands):

 

 

 

LED & Solar

 

Data Storage

 

Unallocated
Corporate

 

Total

 

Short-term liability

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2012

 

$

534

 

$

128

 

$

294

 

$

956

 

2012 Restructuring

 

561

 

983

 

56

 

1,600

 

Short-term/long-term reclassification

 

 

 

 

 

2012 Cash payments

 

(546

)

(137

)

(273

)

(956

)

Balance as of September 30, 2012

 

$

549

 

$

974

 

$

77

 

$

1,600

 

 

The balance of the short-term liability will be paid over the next 12 months.

 

The following is a reconciliation of the restructuring liability through December 31, 2011 (in thousands):

 

 

 

LED & Solar

 

Data Storage

 

Unallocated
Corporate

 

Total

 

Short-term liability

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2011

 

$

 

$

178

 

$

536

 

$

714

 

2011 Restructuring

 

672

 

51

 

311

 

1,034

 

Short-term/long-term reclassification

 

 

58

 

 

58

 

2011 Cash payments

 

(138

)

(159

)

(553

)

(850

)

Balance as of December 31, 2011

 

$

534

 

$

128

 

$

294

 

$

956

 

 

 

 

 

 

 

 

 

 

 

Long-term liability

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2011

 

$

 

$

58

 

$

 

$

58

 

Short-term/long-term reclassification

 

 

(58

)

 

(58

)

Balance as of December 31, 2011

 

$

 

$

 

$

 

$

 

Subsequent Events
Subsequent Events

Note 11—Subsequent Events

 

Notice of potential de-listing: During our internal control evaluation and accounting review, we were unable to timely file our periodic statements with the SEC and, as of the date of this report on Form 10-Q, have yet to become current with all our required filings. We have been notified by The NASDAQ Stock Market that our common stock listing will be suspended if we have not filed all of our outstanding periodic reports with the SEC on or before November 4, 2013. If our stock is delisted, then it will no longer be traded on the NASDAQ Global Select Market, however, it would continue to trade in the over-the-counter market, which may have an adverse effect on the trading price of our stock.

 

Veeco and certain other parties were named as defendants in a lawsuit filed on April 25, 2013 in the Superior Court of California, County of Sonoma.  The plaintiff in the lawsuit, Patrick Colbus, seeks unspecified damages and asserts claims that he suffered burns and other injuries while he was cleaning a molecular beam epitaxy system alleged to have been manufactured by Veeco.  The lawsuit alleges, among other things, that the molecular beam epitaxy system was defective and that Veeco failed to adequately warn of the potential risks of the system.  Veeco believes this lawsuit is without merit and intends to defend vigorously against the claims and Veeco maintains insurance which may apply to this matter. Because the Company believes that this potential loss is not probable or estimable, it has not recorded any reserves related to this legal matter.

 

Acquisition of Synos Technology, Inc. (“Synos”): On October 1, 2013, we acquired Synos, which designs and manufactures Fast Array Scanning™ Atomic Layer Deposition systems (“ALD”) that are enabling the production of flexible organic light-emitting diode (otherwise known as OLED) displays for mobile devices. The initial purchase price is $70 million. The agreement also includes an earn-out feature that would require an additional payment of up to $115 million if future performance milestones are achieved prior to December 31, 2014. With the earn-out feature, the total maximum potential purchase price is $185 million. Synos is headquartered in Fremont, California and has approximately 50 employees. Preliminary purchase accounting allocations for Synos are not yet available.

Basis of Presentation (Policies)

Use of Estimates

 

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

Income Per Common Share

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic weighted average shares outstanding

 

38,577

 

39,335

 

38,402

 

40,132

 

Dilutive effect of stock options and restricted stock

 

592

 

734

 

604

 

983

 

Dilutive effect of convertible notes

 

 

 

 

826

 

Diluted weighted average shares outstanding

 

39,169

 

40,069

 

39,006

 

41,941

 

 

Basic income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted income per common share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period. Potentially dilutive securities attributable to outstanding stock options and restricted stock of approximately 1.1 million and 1.2 million common equivalent shares during the three and nine months ended September 30, 2012 and approximately 1.2 million and 0.6 million common equivalent shares during the three and nine months ended September 30, 2011 were excluded from the calculation of diluted net income per share because their effect on income per share was anti-dilutive.

 

During the second quarter of 2011, the entire outstanding principal balance of our convertible debt was converted, with the principal amount paid in cash and the conversion premium paid in shares. The convertible notes met the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, since we had settled the principal amount of the notes in cash. Using the treasury stock method, it was determined that the impact of the assumed conversion for the nine months ended September 30, 2011, had a dilutive effect of 0.8 million common equivalent shares.

Revenue Recognition

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Basis of Presentation (Tables)
Reconciliation of basic weighted average shares outstanding and diluted weighted average shares outstanding

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic weighted average shares outstanding

 

38,577

 

39,335

 

38,402

 

40,132

 

Dilutive effect of stock options and restricted stock

 

592

 

734

 

604

 

983

 

Dilutive effect of convertible notes

 

 

 

 

826

 

Diluted weighted average shares outstanding

 

39,169

 

40,069

 

39,006

 

41,941

 

Discontinued Operations (Tables)
Summary of information related to discontinued operations

 

The following is a summary of the net assets sold as of the closing date on October 7, 2010 (in thousands):

 

 

 

October 7,

 

 

 

2010

 

Assets

 

 

 

Accounts receivable, net

 

$

21,866

 

Inventories

 

26,431

 

Property, plant and equipment at cost, net

 

13,408

 

Goodwill

 

7,419

 

Other assets

 

5,485

 

Assets of discontinued segment held for sale

 

$

74,609

 

 

 

 

 

Liabilities

 

 

 

Accounts payable

 

$

7,616

 

Accrued expenses and other current liabilities

 

5,284

 

Liabilities of discontinued segment held for sale

 

$

12,900

 

 

Summary information related to discontinued operations is as follows (in thousands):

 

 

 

Three months ended September 30, 2012

 

Three months ended September 30, 2011

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

Net sales

 

$

 

$

 

$

 

$

 

$

 

$

 

Net (loss) income from discontinued operations

 

$

(9

)

$

4,064

 

$

4,055

 

$

(16,366

)

$

(388

)

$

(16,754

)

 

 

 

Nine months ended September 30, 2012

 

Nine months ended September 30, 2011

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

Net sales

 

$

 

$

 

$

 

$

 

$

 

$

 

Net (loss) income from discontinued operations

 

$

(63

)

$

4,875

 

$

4,812

 

$

(58,268

)

$

(935

)

$

(59,203

)

Balance Sheet Information (Tables)

 

Available-for-sale securities consist of the following (in thousands):

 

 

 

September 30, 2012

 

 

 

Amortized
Cost

 

Gains in
Accumulated
Other
Comprehensive
Income

 

Losses in
Accumulated
Other
Comprehensive
Income

 

Estimated
Fair Value

 

Treasury bills

 

$

117,872

 

$

54

 

$

 

$

117,926

 

Government Agency Securities

 

39,559

 

4

 

(1

)

39,562

 

FDIC guaranteed corporate debt

 

28,198

 

6

 

 

28,204

 

Total available-for-sale securities

 

$

185,629

 

$

64

 

$

(1

)

$

185,692

 

 

 

 

December 31, 2011

 

 

 

Amortized
Cost

 

Gains in
Accumulated
Other
Comprehensive
Income

 

Losses in
Accumulated
Other
Comprehensive
Income

 

Estimated
Fair Value

 

Treasury bills

 

$

70,147

 

$

46

 

$

(1

)

$

70,192

 

Government agency securities

 

88,585

 

62

 

(6

)

88,641

 

FDIC guaranteed corporate debt

 

114,640

 

125

 

(7

)

114,758

 

Total available-for-sale securities

 

$

273,372

 

$

233

 

$

(14

)

$

273,591

 

 

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

 

 

 

September 30, 2012

 

 

 

Less than 12 months

 

Total

 

 

 

Fair value

 

Gross Unrealized
Losses

 

Fair value

 

Gross
Unrealized
Losses

 

Government agency securities

 

$

18,519

 

$

(1

)

$

18,519

 

$

(1

)

Total

 

$

18,519

 

$

(1

)

$

18,519

 

$

(1

)

 

 

 

December 31, 2011

 

 

 

Less than 12 months

 

Total

 

 

 

Fair value

 

Gross Unrealized
Losses

 

Fair value

 

Gross
Unrealized
Losses

 

Government agency securities

 

$

20,497

 

$

(6

)

$

20,497

 

$

(6

)

FDIC guaranteed corporate debt

 

8,033

 

(7

)

8,033

 

(7

)

Treasury bills

 

5,024

 

(1

)

5,024

 

(1

)

Total

 

$

33,554

 

$

(14

)

$

33,554

 

$

(14

)

 

Contractual maturities of available-for-sale debt securities at September 30, 2012, are as follows (in thousands):

 

 

 

Estimated Fair Value

 

Due in one year or less

 

$

107,269

 

Due in 1–2 years

 

78,423

 

Total investments in debt securities

 

$

185,692

 

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Materials

 

$

44,475

 

$

57,169

 

Work in process

 

23,780

 

20,118

 

Finished goods

 

6,105

 

36,147

 

 

 

$

74,360

 

$

113,434

 

Changes in our warranty liability during the period are as follows (in thousands):

 

 

 

September 30,

 

 

 

2012

 

2011

 

Balance as of the beginning of period

 

$

8,731

 

$

8,266

 

Warranties issued during the period

 

2,486

 

5,988

 

Settlements made during the period

 

(6,389

)

(6,523

)

Changes in estimate during the period

 

1,418

 

1,259

 

Balance as of the end of period

 

$

6,246

 

$

8,990

 

Segment Information (Tables)

 

The following tables present certain data pertaining to our reportable product segments and a reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes for the three and nine months ended September 30, 2012 and 2011, respectively, and goodwill and total assets as of September 30, 2012 and December 31, 2011 (in thousands):

 

 

 

LED & 
Solar

 

Data
Storage

 

Unallocated
Corporate

 

Total

 

Three months ended September 30, 2012

 

 

 

 

 

 

 

 

 

Net sales

 

$

98,905

 

$

33,810

 

$

 

$

132,715

 

Segment profit

 

$

9,461

 

$

4,278

 

$

480

 

$

14,219

 

Interest, net

 

 

 

176

 

176

 

Amortization

 

(1,154

)

(323

)

 

(1,477

)

Equity-based compensation

 

(1,914

)

(763

)

(588

)

(3,265

)

Restructuring

 

(660

)

(1,296

)

(58

)

(2,014

)

Income (loss) from continuing operations before income taxes

 

$

5,733

 

$

1,896

 

$

10

 

$

7,639

 

Three months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

233,864

 

$

34,095

 

$

 

$

267,959

 

Segment profit (loss)

 

$

72,819

 

$

7,877

 

$

(2,581

)

$

78,115

 

Interest, net

 

 

 

244

 

244

 

Amortization

 

(924

)

(353

)

 

(1,277

)

Equity-based compensation

 

(996

)

(339

)

(1,620

)

(2,955

)

Income (loss) from continuing operations before income taxes

 

$

70,899

 

$

7,185

 

$

(3,957

)

$

74,127

 

 

 

 

LED &

 

Data

 

Unallocated

 

 

 

 

 

Solar

 

Storage

 

Corporate

 

Total

 

Nine months ended September 30, 2012

 

 

 

 

 

 

 

 

 

Net sales

 

$

281,257

 

$

127,914

 

$

 

$

409,171

 

Segment profit (loss)

 

$

36,534

 

$

25,367

 

$

(2,009

)

$

59,892

 

Interest, net

 

 

 

708

 

708

 

Amortization

 

(2,878

)

(999

)

 

(3,877

)

Equity-based compensation

 

(4,016

)

(1,614

)

(4,779

)

(10,409

)

Restructuring

 

(718

)

(1,301

)

(58

)

(2,077

)

Income (loss) from continuing operations before income taxes

 

$

28,922

 

$

21,453

 

$

(6,138

)

$

44,237

 

Nine months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

667,697

 

$

119,753

 

$

 

$

787,450

 

Segment profit (loss)

 

$

232,848

 

$

33,158

 

$

(8,953

)

$

257,053

 

Interest, net

 

 

 

(1,142

)

(1,142

)

Amortization

 

(2,364

)

(1,072

)

(83

)

(3,519

)

Equity-based compensation

 

(2,567

)

(999

)

(5,906

)

(9,472

)

Loss on extinguishment of debt

 

 

 

(3,349

)

(3,349

)

Income (loss) from continuing operations before income taxes

 

$

227,917

 

$

31,087

 

$