VEECO INSTRUMENTS INC, 10-K filed on 2/28/2014
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2013
Feb. 18, 2014
Jun. 28, 2013
Document and Entity Information
 
 
 
Entity Registrant Name
VEECO INSTRUMENTS INC 
 
 
Entity Central Index Key
0000103145 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2013 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 1,376,219,104 
Entity Common Stock, Shares Outstanding
 
39,846,244 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 210,799 
$ 384,557 
Short-term investments
281,538 
192,234 
Restricted cash
2,738 
2,017 
Accounts receivable, net
23,823 
63,169 
Inventories
59,726 
59,807 
Deferred cost of goods sold
724 
1,797 
Prepaid expenses and other current assets
22,579 
30,358 
Deferred income taxes
11,716 
10,545 
Total current assets
613,643 
744,484 
Property, plant and equipment at cost, net
89,139 
98,302 
Goodwill
91,348 
55,828 
Intangible assets, net
114,716 
20,974 
Other assets
38,726 
16,781 
Deferred income taxes
397 
935 
Total assets
947,969 
937,304 
Current liabilities:
 
 
Accounts payable
35,755 
26,087 
Accrued expenses and other current liabilities
51,084 
41,401 
Customer deposits and deferred revenue
34,754 
42,099 
Income taxes payable
6,149 
2,292 
Deferred income taxes
159 
140 
Current portion of long-term debt
290 
268 
Total current liabilities
128,191 
112,287 
Deferred income taxes
28,052 
7,137 
Long-term debt
1,847 
2,138 
Other liabilities
9,649 
4,530 
Total liabilities
167,739 
126,092 
Equity:
 
 
Preferred stock, 500,000 shares authorized; no shares issued and outstanding
   
   
Common stock; $.01 par value; authorized 120,000,000 shares; 39,666,195 shares issued and outstanding in 2013; and 39,328,503 shares issued and outstanding in 2012
397 
393 
Additional paid-in-capital
721,352 
708,723 
Retained earnings
53,860 
96,123 
Accumulated other comprehensive income
4,621 
5,973 
Total equity
780,230 
811,212 
Total liabilities and equity
$ 947,969 
$ 937,304 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2013
Dec. 31, 2012
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
39,666,195 
39,328,503 
Common stock, shares outstanding
39,666,195 
39,328,503 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Consolidated Statements of Operations
 
 
 
Net sales
$ 331,749 
$ 516,020 
$ 979,135 
Cost of sales
228,607 
300,887 
504,801 
Gross profit
103,142 
215,133 
474,334 
Operating expenses:
 
 
 
Selling, general and administrative
85,486 
73,110 
95,134 
Research and development
81,424 
95,153 
96,596 
Amortization
5,527 
4,908 
4,734 
Restructuring
1,485 
3,813 
1,288 
Asset impairment
1,220 
1,335 
584 
Total operating expenses
175,142 
178,319 
198,336 
Other, net
(1,017)
(398)
(261)
Changes in contingent consideration
829 
 
 
Operating income (loss)
(71,812)
37,212 
276,259 
Interest income
1,200 
2,476 
3,776 
Interest expense
(598)
(1,502)
(4,600)
Interest income (expense), net
602 
974 
(824)
Loss on extinguishment of debt
 
 
(3,349)
Income (loss) from continuing operations before income taxes
(71,210)
38,186 
272,086 
Income tax provision (benefit)
(28,947)
11,657 
81,584 
Income (loss) from continuing operations
(42,263)
26,529 
190,502 
Discontinued operations:
 
 
 
Income (loss) from discontinued operations before income taxes
 
6,269 
(91,885)
Income tax provision (benefit)
 
1,870 
(29,370)
Income (loss) from discontinued operations
 
4,399 
(62,515)
Net income (loss)
$ (42,263)
$ 30,928 
$ 127,987 
Basic:
 
 
 
Continuing operations (in dollars per share)
$ (1.09)
$ 0.69 
$ 4.80 
Discontinued operations (in dollars per share)
 
$ 0.11 
$ (1.57)
Income (loss) (in dollars per share)
$ (1.09)
$ 0.80 
$ 3.23 
Diluted :
 
 
 
Continuing operations (in dollars per share)
$ (1.09)
$ 0.68 
$ 4.63 
Discontinued operations (in dollars per share)
 
$ 0.11 
$ (1.52)
Income (loss) (in dollars per share)
$ (1.09)
$ 0.79 
$ 3.11 
Weighted average shares outstanding:
 
 
 
Basic (in shares)
38,807 
38,477 
39,658 
Diluted (in shares)
38,807 
39,051 
41,155 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
Net income (loss)
$ (42,263)
$ 30,928 
$ 127,987 
Available-for-sale securities
 
 
 
Unrealized gain (loss) on available-for-sale securities
34 
(118)
393 
Benefit (provision) for income taxes
11 
50 
(79)
Less: Reclassification adjustments for gains included in net income (loss)
(61)
(24)
(271)
Net unrealized gain (loss) on available-for-sale securities
(16)
(92)
43 
Minimum pension liability
 
 
 
Minimum pension liability
125 
(216)
(73)
Benefit (provision) for income taxes
(86)
79 
30 
Net minimum pension liability
39 
(137)
(43)
Foreign currency translation
 
 
 
Foreign currency translation
(1,322)
(1,071)
1,228 
Benefit (provision) for income taxes
(53)
683 
(434)
Net foreign currency translation
(1,375)
(388)
794 
Other comprehensive income (loss), net of tax
(1,352)
(617)
794 
Comprehensive income (loss)
$ (43,615)
$ 30,311 
$ 128,781 
Consolidated Statements of Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock
Treasury Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Balance at Dec. 31, 2009
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Treasury stock (in shares)
 
 
(1,118,600)
 
 
 
Balance at Dec. 31, 2010
$ 762,512 
$ 409 
$ (38,098)
$ 656,969 
$ 137,436 
$ 5,796 
Balance (in shares) at Dec. 31, 2010
 
40,337,950 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Exercise of stock options
10,714 
 
10,707 
 
 
Exercise of stock options (in shares)
 
688,105 
 
 
 
 
Equity-based compensation expense-continuing operations
12,807 
 
 
12,807 
 
 
Equity-based compensation expense-discontinued operations
689 
 
 
689 
 
 
Issuance, vesting and cancellation of restricted stock
(3,174)
 
(3,175)
 
 
Issuance, vesting and cancellation of restricted stock (in shares)
 
131,196 
 
 
 
 
Treasury stock
(162,077)
 
(162,077)
 
 
 
Treasury stock (in shares)
 
(4,160,228)
(4,160,228)
 
 
 
Debt Conversion
(32)
18 
 
(50)
 
 
Debt Conversion (in shares)
 
1,771,413 
 
 
 
 
Excess tax benefits from stock option exercises
10,406 
 
 
10,406 
 
 
Other comprehensive income (loss), net of tax
688 
 
 
 
(106)
794 
Net income (loss)
127,987 
 
 
 
127,987 
 
Balance at Dec. 31, 2011
760,520 
435 
(200,175)
688,353 
265,317 
6,590 
Balance (in shares) at Dec. 31, 2011
 
38,768,436 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Exercise of stock options
5,409 
 
5,405 
 
 
Exercise of stock options (in shares)
 
351,436 
 
 
 
 
Equity-based compensation expense-continuing operations
14,268 
 
 
14,268 
 
 
Issuance, vesting and cancellation of restricted stock
(1,725)
 
(1,732)
 
 
Issuance, vesting and cancellation of restricted stock (in shares)
 
208,631 
 
 
 
 
Treasury stock
 
(53)
200,175 
 
(200,122)
 
Debt Conversion
310 
 
 
310 
 
 
Excess tax benefits from stock option exercises
2,119 
 
 
2,119 
 
 
Other comprehensive income (loss), net of tax
(617)
 
 
 
 
(617)
Net income (loss)
30,928 
 
 
 
30,928 
 
Balance at Dec. 31, 2012
811,212 
393 
 
708,723 
96,123 
5,973 
Balance (in shares) at Dec. 31, 2012
 
39,328,503 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Exercise of stock options
2,199 
 
2,197 
 
 
Exercise of stock options (in shares)
 
149,170 
 
 
 
 
Equity-based compensation expense-continuing operations
13,130 
 
 
13,130 
 
 
Issuance, vesting and cancellation of restricted stock
(2,696)
 
(2,698)
 
 
Issuance, vesting and cancellation of restricted stock (in shares)
 
188,522 
 
 
 
 
Other comprehensive income (loss), net of tax
(1,352)
 
 
 
 
(1,352)
Net income (loss)
(42,263)
 
 
 
(42,263)
 
Balance at Dec. 31, 2013
$ 780,230 
$ 397 
 
$ 721,352 
$ 53,860 
$ 4,621 
Balance (in shares) at Dec. 31, 2013
 
39,666,195 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Cash Flows from Operating Activities
 
 
 
Net income (loss)
$ (42,263)
$ 30,928 
$ 127,987 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
18,425 
16,192 
12,892 
Amortization of debt discount
 
 
1,260 
Non-cash equity-based compensation
13,130 
14,268 
12,807 
Non-cash asset impairment
1,220 
1,335 
584 
Loss on extinguishment of debt
 
 
3,349 
Deferred income taxes
(12,264)
(340)
11,276 
Gain on disposal of segment
 
(4,112)
 
Gain on sale of lab tools
(767)
 
 
Excess tax benefits from stock option exercises
 
(2,119)
(10,406)
Changes in contingent consideration
829 
 
 
Other, net
1,971 
262 
(31)
Non-cash items from discontinued operations
 
(706)
44,381 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
38,844 
31,215 
56,843 
Inventories
2,753 
53,937 
(18,627)
Prepaid expenses and other current assets
842 
8,524 
(13,087)
Income taxes receivable
(12,604)
654 
(9,076)
Accounts payable
7,542 
(12,106)
8,098 
Accrued expenses, customer deposits, deferred revenue and other current liabilities
(17,329)
(34,227)
(72,723)
Income taxes payable
(130)
1,199 
(42,204)
Transfers to restricted cash
(721)
(1,440)
 
Other, net
1,249 
10,431 
2,119 
Discontinued operations
 
(1,932)
 
Net cash provided by (used in) operating activities
727 
111,963 
115,442 
Cash Flows from Investing Activities
 
 
 
Capital expenditures
(9,174)
(24,994)
(60,364)
Payments for net assets of businesses acquired
(71,488)
 
(28,273)
Payment for purchase of cost method investment
(2,391)
(10,341)
 
Transfers from (to) restricted cash related to discontinued operations
 
 
75,540 
Proceeds from short-term investments
499,645 
244,929 
707,649 
Payments for purchases of short-term investments
(589,099)
(165,080)
(588,453)
Proceeds from the sale of lab tools
4,440 
 
 
Other
11 
49 
195 
Proceeds from sale of assets from discontinued segment
 
3,758 
 
Net cash provided by (used in) investing activities
(168,056)
48,321 
106,294 
Cash Flows from Financing Activities
 
 
 
Proceeds from stock option exercises
2,199 
5,409 
10,714 
Contingent consideration payments
(5,000)
 
 
Restricted stock tax withholdings
(2,696)
(1,725)
(3,173)
Excess tax benefits from stock option exercises
 
2,119 
10,406 
Purchases of treasury stock
 
 
(162,077)
Repayments of long-term debt
(269)
(248)
(105,803)
Other
 
 
(2)
Net cash provided by (used in) financing activities
(5,766)
5,555 
(249,935)
Effect of exchange rate changes on cash and cash equivalents
(663)
796 
989 
Net increase (decrease) in cash and cash equivalents
(173,758)
166,635 
(27,210)
Cash and cash equivalents at beginning of period
384,557 
217,922 
245,132 
Cash and cash equivalents at end of period
210,799 
384,557 
217,922 
Supplemental disclosure of cash flow information
 
 
 
Interest paid
357 
209 
1,393 
Income taxes paid
8,001 
11,566 
89,745 
Non-cash investing and financing activities
 
 
 
Accrual of fair value of contingent consideration
33,539 
 
 
Merger consideration adjustment
$ 2,695 
 
 
Description of Business and Significant Accounting Policies
Description of Business and Significant Accounting Policies

1.  Description of Business and Significant Accounting Policies

 

Business

 

Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company” or “we”) creates process equipment solutions that enable technologies for a cleaner and more productive world. We design, manufacture and market equipment primarily sold to make light emitting diodes (“LED”s) and hard-disk drives, as well as for emerging applications such as concentrator photovoltaics, power semiconductors, wireless components, micro-electromechanical systems (“MEMS”), and other next-generation devices.

 

Our LED & Solar segment designs and manufactures metal organic chemical vapor deposition (“MOCVD”) and molecular beam epitaxy (“MBE”) systems as well as newly acquired atomic layer deposition (“ALD”) technology. Our MOCVD and MBE systems are sold to manufacturers of LEDs, wireless devices, power semiconductors, and concentrator photovoltaics, as well as for R&D applications. Our ALD technology is used by the manufacturers of OLED displays and has further applications in the semiconductor and solar markets.  In 2011 we discontinued the sale of our products related to Copper, Indium, Gallium, Selenide (“CIGS”) solar systems technology.

 

Our Data Storage segment designs and manufactures systems used to create thin film magnetic heads (“TFMH”s) that read and write data on hard disk drives. These include ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, chemical vapor deposition, and slicing, dicing and lapping systems. While our systems are primarily sold to hard drive customers, they also have applications in optical coatings, micro-electro mechanical systems (“MEMS”) and magnetic sensors, and extreme ultraviolet (“EUV”) lithography.

 

Basis of Presentation

 

We report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2013 interim quarter ends were March 31, June 30 and September 29. The 2012 interim quarter ends were 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 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.

 

Use of Estimates

 

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

 

Principles of Consolidation

 

The accompanying Consolidated Financial Statements include the accounts of Veeco and its subsidiaries. Intercompany items and transactions have been eliminated in consolidation.

 

Revenue Recognition

 

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

 

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

 

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

 

In Japan, where our contractual terms with customers generally specify title and risk and rewards of ownership transfer upon customer acceptance, revenue is recognized and the customer is billed upon the receipt of written customer acceptance. During the fourth quarter of fiscal 2013, we began using a distributor for almost all of our product and service sales to customers in Japan. Title and risk and rewards of ownership of our system sales still transfer to our end-customers upon their acceptance.  As such, there is no impact to our policy of recognizing revenue upon receipt of written acceptance from the end customer.

 

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

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash and certain highly liquid investments. Highly liquid investments with maturities of three months or less when purchased may be classified as cash equivalents. Such items may include liquid money market accounts, U.S. treasuries, government agency securities and corporate debt. The investments that are classified as cash equivalents are carried at cost, which approximates fair value.

 

Short-Term Investments

 

We determine the appropriate balance sheet classification of our investments at the time of purchase and evaluate the classification at each balance sheet date. As part of our cash management program, we maintain a portfolio of marketable securities which are classified as available-for-sale. These securities include U.S. treasuries and government agency securities with maturities of greater than three months when purchased. Securities classified as available-for-sale are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss) and reported in equity. Net realized gains and losses are included in net income (loss).

 

Accounts Receivable, Net

 

Accounts receivable are presented net of allowance for doubtful accounts of $2.4 million and $0.5 million as of December 31, 2013 and 2012, respectively. We evaluate the collectability of accounts receivable based on a combination of factors. In cases where we become aware of circumstances that may impair a customer’s ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the we reasonably believes will be collected. For all other customers, we recognize an allowance for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry conditions, the current business environment and its historical experience.

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of accounts receivable, short-term investments and cash and cash equivalents. We perform ongoing credit evaluations of our customers and, where appropriate, require that letters of credit be provided on certain foreign sales arrangements. We maintain allowances for potential credit losses and make investments with strong, higher credit quality issuers and continuously monitor the amount of credit exposure to any one issuer.

 

Inventories

 

Inventories are stated at the lower of cost (principally first-in, first-out method) or market.  On a quarterly basis, management assesses the valuation and recoverability of all inventories, classified as materials (which include raw materials, spare parts and service inventory), work-in-process and finished goods.

 

Materials inventory is used primarily to support the installed tool base and spare parts sales and is reviewed for excess quantities or obsolescence by comparing on-hand balances to historical usage, and adjusted for current economic conditions and other qualitative factors. Historically, the variability of such estimates has been impacted by customer demand and tool utilization rates.

 

The work-in-process and finished goods inventory is principally used to support system sales and is reviewed for recoverability by considering whether on hand inventory would be utilized to fulfill the related backlog. As we typically receive deposits for our orders, the variability of this estimate is reduced as customers have a vested interest in the orders they place with us. Recoverability of such inventory is evaluated by monitoring customer demand, current sales trends and product gross margins.  Management also considers qualitative factors such as future product demand based on market outlook, which is based principally upon production requirements resulting from customer purchase orders received with a customer-confirmed shipment date within the next twelve months.  Historically, the variability of these estimates of future product demand has been impacted by backlog cancellations or modifications resulting from unanticipated changes in technology or customer demand.

 

Following identification of potential excess or obsolete inventory, management evaluates the need to write down inventory balances to its estimated market value, if less than its cost.  Inherent in the estimates of market value are management’s estimates related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses, and ultimate realization of potential excess inventory.  Unanticipated changes in demand for our products may require a write down of inventory that could materially affect our operating results.

 

Goodwill and Indefinite-Lived Intangibles

 

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.  We account for goodwill and intangible assets with indefinite useful lives in accordance with relevant accounting guidance related to goodwill and other intangible assets, which states that goodwill and intangible assets with indefinite useful lives should not be amortized, but instead tested for impairment at least annually at the reporting unit level.  Our policy is to perform this annual impairment test in the fourth quarter, using a measurement date of October 1st, of each fiscal year or more frequently if impairment indicators arise. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets.

 

The guidance provides an option for an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.

 

If we determine the two-step impairment test is necessary, we are required to determine if it is appropriate to use the operating segment, as defined under guidance for segment reporting, as the reporting unit, or one level below the operating segment, depending on whether certain criteria are met. We have identified five reporting units that are required to be reviewed for impairment. The five reporting units are aggregated into two segments: the VIBE and Mechanical reporting units which are reported in our Data Storage segment; and the MOCVD, MBE and ALD reporting units which are reported in our LED & Solar segment. In identifying the reporting units management considered the economic characteristics of operating segments including the products and services provided, production processes, types or classes of customer and product distribution.

 

If required, we perform this impairment test by first comparing the fair value of our reporting units to their respective carrying amount. When determining the estimated fair value of a reporting unit, we utilize a discounted future cash flow approach since reported quoted market prices are not available for our reporting units. Developing the estimate of the discounted future cash flow requires significant judgment and projections of future financial performance. The key assumptions used in developing the discounted future cash flows are the projection of future revenues and expenses, working capital requirements, residual growth rates and the weighted average cost of capital. In developing our financial projections, we consider historical data, current internal estimates and market growth trends. Changes to any of these assumptions could materially change the fair value of the reporting unit. We reconcile the aggregate fair value of our reporting units to our adjusted market capitalization as a supporting calculation. The adjusted market capitalization is calculated by multiplying the average share price of our common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium.

 

If the carrying value of the reporting units exceed the fair value we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any.

 

Definite-Lived Intangible and Long-Lived Assets

 

Definite-lived intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, software licenses and deferred financing costs. Purchased technology consists of the core proprietary manufacturing technologies associated with the products and offerings obtained through acquisition and are initially recorded at fair value. Customer-related intangible assets, patents, trademarks, covenants not-to-compete and software licenses that are obtained in an acquisition are initially recorded at fair value. Other software licenses and deferred financing costs are initially recorded at cost. Intangible assets with definitive useful lives are amortized using the straight-line method over their estimated useful lives for periods up to 17 years.

 

Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

 

Long-lived assets, such as property, plant, and equipment and intangible assets with definite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flow expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Accounting for Acquisitions

 

Our growth strategy has included the acquisition of businesses. The purchase price of these acquisitions has been determined after due diligence of the acquired business, market research, strategic planning, and the forecasting of expected future results and synergies. Estimated future results and expected synergies are subject to judgment as we integrate each acquisition and attempt to leverage resources.

 

The accounting for the acquisitions we have made requires that the assets and liabilities acquired, as well as any contingent consideration that may be part of the agreement, be recorded at their respective fair values at the date of acquisition. This requires management to make significant estimates in determining the fair values, especially with respect to intangible assets, including estimates of expected cash flows, expected cost savings and the appropriate weighted average cost of capital. As a result of these significant judgments to be made we often obtain the assistance of independent valuation firms. We complete these assessments as soon as practical after the closing dates. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Please see our footnote Business Combinations in these Notes to Consolidated Financial Statements.

 

Cost Method of Accounting for Investments

 

Investee companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, our share of the earnings or losses of such investee companies are not included in the Consolidated Balance Sheet or Statements of Operations. However, impairment charges are recognized in the Consolidated Statements of Operations. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded.

 

Fair Value of Financial Instruments

 

We believe the carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, reflected in the consolidated financial statements approximate fair value due to their short-term maturities. The fair value of our debt, including current maturities, is estimated using a discounted cash flow analysis, based on the estimated current incremental borrowing rates for similar types of securities.

 

Translation of Foreign Currencies

 

Certain of our international subsidiaries operate using local functional currencies. Foreign currency denominated assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and income and expense accounts and cash flow items are translated at average monthly exchange rates during the respective periods. Net exchange gains or losses resulting from the translation of foreign financial statements and the effect of exchange rates on intercompany transactions of a long-term investment nature are recorded as a separate component of equity in accumulated other comprehensive income. Any foreign currency gains or losses related to transactions are included in operating results.

 

Environmental Compliance and Remediation

 

Environmental compliance costs include ongoing maintenance, monitoring and similar costs. Such costs are expensed as incurred. Environmental remediation costs are accrued when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated.

 

Research and Development Costs

 

Research and development costs are charged to expense as incurred and include expenses for the development of new technology and the transition of technology into new products or services.

 

Warranty Costs

 

Our warranties are typically valid for one year from the date of final acceptance. We estimate the costs that may be incurred under the warranty that we provide for our products. We record a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Our warranty obligation is 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. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.

 

Income Taxes

 

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. The carrying value of our deferred tax assets is adjusted by a partial valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net deferred tax assets consist primarily of tax credit carry forwards and timing differences between the book and tax treatment of inventory, acquired intangible assets and other asset valuations. Realization of these net deferred tax assets is dependent upon our ability to generate future taxable income.

 

We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under the relevant accounting guidance, factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.

 

Relevant accounting guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under such guidance, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

 

Advertising Expense

 

The cost of advertising is expensed as of the first showing of each advertisement. We incurred $0.5 million, $0.8 million and $1.4 million in advertising expenses during 2013, 2012 and 2011, respectively.

 

Shipping and Handling Costs

 

Shipping and handling costs are costs that are incurred to move, package and prepare our products for shipment and then to move the products to the customer’s designated location. These costs are generally comprised of payments to third-party shippers. Shipping and handling costs are included in cost of sales in our Consolidated Statements of Operations.

 

Equity-Based Compensation

 

We grant equity-based awards, such as stock options and restricted stock or restricted stock units, to certain key employees to create a clear and meaningful alignment between compensation and shareholder return and to enable the employees to develop and maintain a stock ownership position.  While the majority of our equity awards feature time-based vesting, performance-based equity awards, which are awarded from time to time to certain of our key executives, vest as a function of performance, and may also be subject to the recipient’s continued employment which also acts as a significant retention incentive.

 

Equity-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as expense over the employee requisite service period. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in the model are assumptions related to risk-free interest rate, dividend yield, expected stock-price volatility and option life.

 

The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The dividend yield assumption is based on our historical and future expectation of dividend payouts. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on objective data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which results in more subjective accounting estimates.

 

We use an expected stock-price volatility assumption that is a combination of both historical volatility calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option and implied volatility which utilizes market data of actively traded options on our common stock, which are obtained from public data sources. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility and that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock.

 

The expected option term, representing the period of time that options granted are expected to be outstanding, is estimated using a lattice-based model incorporating historical post vest exercise and employee termination behavior.

 

We estimate forfeitures using our historical experience, which is adjusted over the requisite service period based on the extent to which actual forfeitures differ or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change.

 

We settle the exercise of stock options with newly issued shares.

 

With respect to grants of performance based awards, we assess the probability that such performance criteria will be met in order to determine the compensation expense.  Consequently, the compensation expense is recognized straight-line over the vesting period. If that assessment of the probability of the performance condition being met changes, we would recognize the impact of the change in estimate in the period of the change. As with the use of any estimate, and due to the significant judgment used to derive those estimates, actual results may vary.

 

We have elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.

 

Negotiable Letters of Credit

 

For certain transactions, we request that our customers provide us with a negotiable irrevocable letter of credit drawn on a reputable financial institution. These irrevocable letters of credit are typically issued to mature, on average, for 0 to 90 days post documentation requirements, but occasionally for longer. For a fee, one of our banks confirms the reputation of the issuing institution and, at our option, monetizes these letters of credit on a non-recourse basis soon after they become negotiable. Once we monetize the letter of credit with the confirming bank, we have no further obligations or interest in the letter of credit and they are not included in our consolidated balance sheets. The fees that we pay are included in selling, general and administrative expense and are not material.

 

Recent Accounting Pronouncements

 

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists: In July 2013, the FASB issued ASU No. 2013-11. ASU 2013-11 requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the potential impact of this adoption on our consolidated financial statements.

 

Presentation of Financial Statements: In April 2013, the FASB issued ASU No. 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.” The objective of ASU 2013-07 is to clarify when an entity should apply the liquidation basis of accounting. The update provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements, absent any indications that liquidation is imminent.

 

Parent’s Accounting for the Cumulative Translation Adjustment: In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This new standard is intended to resolve diversity in practice regarding the release into net income of a cumulative translation adjustment (“CTA”) upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We currently anticipate that its adoption could have an impact on our consolidated financial statements, in the event of derecognition of a foreign subsidiary in 2014 or subsequently.  We cannot estimate the amount of CTA to be released into income from any potential derecognition.

 

Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date:  In February 2013, the FASB issued Accounting Standards Update No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date”.  ASU No. 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, ASU No. 2013-04 requires an entity to disclose the nature and amount of the obligation, as well as other information about the obligations. ASU No. 2013-04 is effective for interim and annual periods beginning after December 15, 2013 and is to be applied retrospectively. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

Income (Loss) Per Common Share
Income (Loss) Per Common Share

2.  Income (Loss) Per Common Share

 

The following table sets forth basic and diluted net income (loss) per common share and the basic weighted average shares outstanding and diluted weighted average shares outstanding (in thousands, except per share data):

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

Net income (loss)

 

$

(42,263

)

$

30,928

 

$

127,987

 

Net income (loss) per common share:

 

 

 

 

 

 

 

Basic

 

$

(1.09

)

$

0.80

 

$

3.23

 

Diluted

 

$

(1.09

)

$

0.79

 

$

3.11

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

38,807

 

38,477

 

39,658

 

Dilutive effect of stock options, restricted stock awards and units and convertible debt

 

 

574

 

1,497

 

Diluted weighted average shares outstanding

 

38,807

 

39,051

 

41,155

 

 

Basic income (loss) per common share is computed using the basic weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is computed using the basic weighted average number of common shares and common equivalent shares outstanding during the period. For the year ended December 31, 2013, the effect of approximately 0.6 million common equivalent shares were excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive due to the net loss sustained during the period. Potentially dilutive securities attributable to outstanding stock options and restricted stock of approximately 1.3 million, 1.3 million and 0.7 million common equivalent shares during the years ended December 31, 2013, 2012 and 2011 were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been 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 years ended December 31, 2011 had a dilutive effect of 0.6 million shares.

Discontinued Operations
Discontinued Operations

3.  Discontinued Operations

 

CIGS Solar Systems Business

 

On July 28, 2011, we announced a plan to discontinue our CIGS solar systems business. The results of operations for the CIGS solar systems business have been recorded as discontinued operations for all periods presented. During the year ended December 31, 2011, total discontinued operations related to the discontinued CIGS business include pre-tax 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.

 

Metrology

 

On August 15, 2010, we signed a definitive agreement to sell our Metrology business to Bruker. The results of operations for the Metrology business have been recorded as discontinued operations for all periods presented. 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. During 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 2012 related to the completion of the sale of the assets in China to Bruker. We also recognized 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 2012.

 

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

 

 

 

2012

 

2011

 

 

 

Solar

 

 

 

 

 

Solar

 

 

 

 

 

 

 

Systems

 

Metrology

 

Total

 

Systems

 

Metrology

 

Total

 

Net sales

 

$

 

$

 

$

 

$

 

$

 

$

 

Net income (loss) from discontinued operations

 

$

(62

)

$

4,461

 

$

4,399

 

$

(61,453

)

$

(1,062

)

$

(62,515

)

Fair Value Measurements
Fair Value Measurements

4.  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 December 31, 2013 and 2012 are as follows (in thousands):

 

 

 

December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

U.S. treasuries

 

$

130,977

 

$

 

$

 

$

130,977

 

Corporate debt

 

 

77,601

 

 

77,601

 

Government agency securities

 

 

61,013

 

 

61,013

 

Commercial paper

 

 

11,947

 

 

11,947

 

Derivative instrument

 

 

907

 

 

907

 

Contingent consideration

 

 

 

(29,368

)

(29,368

)

 

 

 

December 31, 2012 (1)

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

U.S. treasuries

 

$

278,698

 

$

 

$

 

$

278,698

 

Government agency securities

 

 

123,054

 

 

123,054

 

Derivative instrument

 

 

248

 

 

248

 

 

(1)         December 31, 2012 table has been conformed to present year presentation.

 

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

 

In determining the fair value of our investments and levels, through a third-party service provider, we use 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. We have a process in place for investment valuations to facilitate identification and resolution of potentially erroneous prices. We review the information provided by the third-party service provider to record the fair value of its portfolio.

 

Consistent with Level 1 measurement principles, U.S. treasuries are priced using active market prices of identical securities. Consistent with Level 2 measurement principles, corporate debt, government agency securities, commercial paper, and derivative instruments are priced with matrix pricing.

 

A reconciliation of the amount in Level 3 is as follows (in thousands):

 

 

 

Level 3

 

Balance at December 31, 2012

 

$

 

Addition of contingent consideration

 

(33,539

)

Payment on contingent consideration

 

5,000

 

Fair value adjustment of contingent consideration

 

(829

)

Balance at December 31, 2013

 

$

(29,368

)

 

We estimated the fair value of the contingent consideration by applying various probabilities and discount factors to each of the various performance milestones as further discussed in note Business Combinations. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The discount rates used ranged from 3.6% to 13.0% for the purchase order related contingent payments and from 15.5% to 30.5% for the revenue and gross margin related contingent payments. These rates were determined based on the nature of the milestone, the risks and uncertainties involved and the time period until the milestone was measured.

 

We measure certain assets for fair value on a non-recurring basis when there are indications of impairment.

 

In 2013 and 2012 we measured certain assets consistent with Level 3 measurement principles using an income approach based on a discounted cash flow model in order to determine the amount of impairment, if any. In 2013, we evaluated certain tangible assets in our LED & Solar segment for impairment. As a result of the evaluation we adjusted the carrying value by $0.9 million related to tools that we had previously used in our laboratories held in Property, plant and equipment which we are holding for sale and by $0.3 million related to an asset held in Other assets with $1.2 million of adjustments recorded as impairment in 2013. In 2012, we evaluated an asset in our Data Storage segment for impairment. As a result of the evaluation we adjusted the carrying value of the asset carried in Other assets from $1.4 million to $0.1 million with the $1.3 million adjustment recorded as impairment in 2012.

Business Combinations
Business Combinations

5.  Business Combinations

 

On April 4, 2011, we purchased a privately-held company which supplies certain components to one of our businesses 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. We determined that this acquisition does not constitute a material business combination and therefore we have not included pro forma financial information in this report.

 

On October 1, 2013 (“the Acquisition Date”), Veeco acquired 100% of the outstanding common shares and voting interest of Synos Technology, Inc. (“Synos”). The results of Synos’ operations have been included in the consolidated financial statements since that date. Synos is an early stage manufacturer of fast array scanning atomic layer deposition (“FAST-ALD”) tools for OLED and other applications. As a result of the acquisition, the Company has entered the FAST-ALD market which is complimentary to the Company’s MOCVD LED offerings.

 

The Acquisition Date fair value of the consideration totaled $102.3 million, net of cash acquired, which consisted of the following (in thousands):

 

 

Acquisition Date

 

 

 

(October 1, 2013)

 

Cash (net of cash acquired)

 

$

71,488

 

Working capital adjustment

 

(2,695

)

Contingent consideration

 

33,539

 

Total

 

$

102,332

 

 

As part of Veeco’s acquisition of Synos, we may be obligated to pay to the selling shareholders of Synos certain contingent consideration. The aggregate fair value of the contingent consideration arrangement at the acquisition date was $33.5 million. The contingency arrangements are generally as follows:

·                  Up to $40.0 million based on defined milestones tied to the receipt of certain purchase orders from customers by certain dates through the first quarter of 2014. The Company determined the fair value of these contingent payments to be $24.3 million.  Of this amount, $5.0 million was earned and paid in the fourth quarter of 2013.  The second milestone pertaining to this contingency is to be measured by March 31, 2014 and could result in either no payment, a payment of $17.5 million or a payment of $35 million.  The difference between the amount earned and the fair value recorded will be recorded in the statement of operations for the period ended March 31, 2014.  The outcome is currently unknown.

·                  Up to $75.0 million based on defined milestones tied to meeting certain revenue and gross margin thresholds based on full year 2014 results. The Company has determined the fair value of these contingent payments to be $9.2 million. The fair value of this contingency will continued to be measured at each reporting period and changes in fair value will be recorded in the statement of operations.

 

We estimated the fair value of the contingent consideration by applying various probabilities and discount factors to each of the various performance milestones. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The discount rates used ranged from 3.6% to 13.0% for the purchase order related contingent payments and from 15.5% to 30.5% for the revenue and gross margin related contingent payments. These rates were determined based on the nature of the milestone, the risks and uncertainties involved and the time period until the milestone was measured. The determination of the various probabilities and discount factors are highly subjective and require significant judgment and are influenced by a number of factors, including the adoption of OLED technology and limited history.  While the use of OLED is expected to grow in the near future, it is difficult to predict the rate at which OLED will be adopted by the market and thus would impact the sales of our equipment.

 

As of December 31, 2013, the first milestone was achieved and we paid the former shareholders of Synos $5.0 million.  In addition, the recognized amount for the contingencies increased by $0.8 million as of December 31, 2013 as a result of changes in the fair value of contingent consideration.

 

The following table summarizes the estimated fair values of the assets acquired, net of the cash acquired, and liabilities assumed at the Acquisition Date. Veeco utilized third-party valuations of the tangible and intangible assets acquired as well as the contingent consideration. The amounts below are preliminary and are subject to change (in thousands):

 

 

 

Acquisition Date

 

 

 

(October 1, 2013)

 

Accounts receivable

 

$

1,523

 

Inventory

 

386

 

Other current assets

 

512

 

Property, plant, and equipment

 

1,917

 

Intangible assets

 

99,270

 

Total identifiable assets acquired

 

103,608

 

 

 

 

 

Current liabilities

 

4,370

 

Estimated deferred tax liability, net

 

32,426

 

Total liabilities assumed

 

36,796

 

Net identifiable assets acquired

 

66,812

 

Goodwill

 

35,520

 

Net assets acquired

 

$

102,332

 

 

The $35.5 million of goodwill was assigned to the LED & Solar segment. None of the goodwill is expected to be deductible for income tax purposes. As of December 31, 2013, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Synos.

 

The classes of intangible assets acquired and the estimated weighted-average useful life of each class is presented in the table below (in thousands):

 

 

 

Acquisition Date

 

 

 

(October 1, 2013)

 

 

 

Amount

 

Average useful life

 

Technology

 

$

73,160

 

14 years

 

In-process research and development

 

5,070

 

To be determined

 

Customer relationship

 

20,630

 

8 years

 

Trademark and trade name

 

140

 

1 year

 

Non-compete agreement

 

270

 

3 years

 

Intangible assets acquired

 

$

99,270

 

 

 

 

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

 

Technology is being amortized on an accelerated basis consistent with the timing of the cash flows it is expected to generate. Pursuant to the accounting guidance, acquired in-process research and development is not amortized until such time as it is completed or abandoned. Upon completion, we will amortize the acquired amount over its useful life. As noted earlier, the fair value of the acquired assets is provisional pending the final valuations for these assets.

 

We recognized $1.0 million of acquisition related costs that were expensed in 2013. These costs are included in the Consolidated Statements of Operations in the line item entitled “Selling, general and administrative.”

 

The amounts of revenue and income (loss) from continuing operations before income taxes of Synos included in the Company’s consolidated statement of operations from the acquisition date (October 1, 2013) to the period ending December 31, 2013 are as follows (in thousands):

 

Revenue

 

$

409

 

Income (loss) from continuing operations before income taxes

 

$

(6,480

)

 

The following represents the pro forma Consolidated Statements of Operations as if Synos had been included in our consolidated results (in thousands):

 

 

 

For the year ended December 31,

 

 

 

(unaudited)

 

 

 

2013

 

2012

 

Revenue

 

$

346,319

 

$

522,029

 

Income (loss) from continuing operations before income taxes

 

$

(60,983

)

$

16,840

 

 

These amounts have been calculated after applying our accounting policies to material amounts and also adjusting the results of Synos to reflect the additional amortization that would have been expensed assuming the fair value adjustments to intangible assets had been applied on January 1, 2012.

Balance Sheet Information
Balance Sheet Information

6.  Balance Sheet Information

 

Short-Term Investments

 

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

 

 

 

December 31, 2013

 

 

 

 

 

Gains in

 

Losses in

 

 

 

 

 

 

 

Accumulated

 

Accumulated

 

 

 

 

 

 

 

Other

 

Other

 

 

 

 

 

Amortized

 

Comprehensive

 

Comprehensive

 

Estimated

 

 

 

Cost

 

Income

 

Income

 

Fair Value

 

U.S. treasuries

 

$

130,956

 

$

22

 

$

(1

)

$

130,977

 

Government agency securities

 

61,004

 

9

 

 

61,013

 

Corporate debt

 

77,582

 

55

 

(36

)

77,601

 

Commercial paper

 

11,947

 

 

 

11,947

 

Total available-for-sale securities

 

$

281,489

 

$

86

 

$

(37

)

$

281,538

 

 

During the year ended December 31, 2013, sales and maturities of available-for-sale securities provided total proceeds of $499.6 million. The gross realized gains on these sales were $0.1 million for the year ended December 31, 2013. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification. The change in the net unrealized holding gain on available-for-sale securities was minimal for the year ended December 31, 2013, and has been included in accumulated other comprehensive income. The tax impact on the unrealized gains, which is excluded from the table above, was less than $0.1 million.

 

 

 

December 31, 2012

 

 

 

 

 

Gains in

 

Losses in

 

 

 

 

 

 

 

Accumulated

 

Accumulated

 

 

 

 

 

 

 

Other

 

Other

 

 

 

 

 

Amortized

 

Comprehensive

 

Comprehensive

 

Estimated

 

 

 

Cost

 

Income

 

Income

 

Fair Value

 

U.S. treasuries

 

$

184,102

 

$

76

 

$

 

$

184,178

 

Government agency securities

 

8,056

 

 

 

8,056

 

Total available-for-sale securities

 

$

192,158

 

$

76

 

$

 

$

192,234

 

 

During the year ended December 31, 2012, sales and maturities of available-for-sale securities provided total proceeds of $244.9 million. The gross realized gains on these sales were minimal for the year ended December 31, 2012. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification. The change in the net unrealized holding gain on available-for-sale securities amounted to $0.1 million for the year ended December 31, 2012, and has been included in accumulated other comprehensive income. The tax impact on the unrealized gains, which is excluded from the table above, was minimal.

 

Available-for-sale securities in a loss position at December 31, 2013 are as follows (in thousands):

 

 

 

Less than 12 months

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Fair value

 

Losses

 

Fair value

 

Losses

 

Corporate debt

 

$

37,654

 

$

(36

)

$

37,654

 

$

(36

)

U.S. treasuries

 

29,068

 

(1

)

29,068

 

(1

)

Total

 

$

66,722

 

$

(37

)

$

66,722

 

$

(37

)

 

As of December 31, 2013 we had $66.7 million in short-term investments that had an aggregate unrealized fair value loss of less than $0.1 million none of which had been in an unrealized loss position for 12 months or longer. As of December 31, 2012 we did not hold any short-term investments that were in a loss position.

 

Contractual maturities of available-for-sale securities as of December 31, 2013 are as follows (in thousands):

 

 

 

Estimated

 

 

 

Fair Value

 

Due in one year or less

 

$

196,015

 

Due in 1–2 years

 

64,156

 

Due in 2–3 years

 

21,367

 

Total investments in securities

 

$

281,538

 

 

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 December 31, 2013 and 2012, restricted cash consisted of $2.7 million and $2.0 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 $2.4 million and $0.5 million as of December 31, 2013 and 2012, respectively.

 

Inventories (in thousands)

 

 

 

December 31,

 

 

 

2013

 

2012

 

Materials

 

$

34,301

 

$

36,523

 

Work in process

 

12,900

 

13,363

 

Finished goods

 

12,525

 

9,921

 

 

 

$

59,726

 

$

59,807

 

 

Property, Plant and Equipment (in thousands)

 

 

 

December 31,

 

Estimated

 

 

 

2013

 

2012

 

Useful Lives

 

Land

 

$

12,535

 

$

12,535

 

 

 

Building and improvements

 

52,050

 

49,498

 

10-40 years

 

Machinery and equipment

 

110,228

 

110,150

 

3-10 years

 

Leasehold improvements

 

5,888

 

5,677

 

3-7 years

 

Gross property, plant and equipment at cost

 

180,701

 

177,860

 

 

 

Less: accumulated depreciation and amortization

 

91,562

 

79,558

 

 

 

Net property, plant and equipment

 

$

89,139

 

$

98,302

 

 

 

 

For the years ended December 31, 2013, 2012 and 2011, depreciation expense was $12.9 million, $11.3 million and $8.2 million, respectively.

 

As of December 31, 2013, we had $7.2 million of tools that we previously used in our laboratories carried in machinery and equipment which we are holding for sale. These tools are the same type of tools we sell to our customers in the ordinary course of our business. In addition, during the year ended December 31, 2013, we converted and sold $3.7 million of tools that we had previously used in our laboratories as Veeco Certified Equipment at an aggregate selling price of $7.4 million which is included in revenue. During 2013, we recorded asset impairment charges in LED & Solar of $0.9 million related to certain tools used in our laboratories carried in machinery and equipment which we are holding for sale.

 

Goodwill and Indefinite-Lived Intangible Assets

 

In accordance with the relevant accounting guidance related to goodwill and other intangible assets, we conducted our annual impairment test of goodwill and indefinite-lived intangible assets during the fourth quarters of 2013 and 2012, using October 1st as our measurement date as described in our footnote Description of Business and Significant Accounting Policies. Based upon the results of the qualitative assessment we determined that it was not more likely than not that goodwill or our indefinite-lived intangible assets were impaired. Therefore, we determined that no impairment of goodwill and indefinite-lived intangible asset existed as of October 1, 2013. In 2012, we determined not to perform the optional qualitative assessment and performed our step 1 assessment utilizing discounted future cash flows and a reconciliation to our market capitalization. Based on our assessment we determined that there was no impairment of our goodwill or our indefinite-lived assets as of October 1, 2012.

 

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

 

 

 

December 31,

 

 

 

2013

 

2012

 

Beginning balance

 

$

55,828

 

$

55,828

 

Acquisition (see Business Combinations)

 

35,520

 

 

Ending balance

 

$

91,348

 

$

55,828

 

 

Intangible Assets

 

As of December 31, 2013, we had $8.0 million of indefinite-lived intangible assets consisting of trademarks, tradenames and in-process research and development (“IPR&D”). Pursuant to acquisition guidance, IPR&D is carried as an indefinite lived intangible until abandonment or completion. As of December 31, 2012, we had $2.9 million of indefinite-lived intangible assets consisting of trademarks and tradenames. These intangibles are included in the accompanying Consolidated Balance Sheets in the caption intangible assets, net.

 

 

 

December 31, 2013

 

December 31, 2012

 

 

 

 

 

Other

 

Total

 

 

 

Other

 

Total

 

 

 

Purchased

 

intangible

 

intangible

 

Purchased

 

intangible

 

intangible

 

(in thousands)

 

technology

 

assets

 

assets

 

technology

 

assets

 

assets

 

Gross intangible assets

 

$

187,478

 

$

40,675

 

$

228,153

 

$

109,248

 

$

19,635

 

$

128,883

 

Less accumulated amortization

 

(97,524

)

(15,913

)

(113,437

)

(93,436

)

(14,473

)

(107,909

)

Intangible assets, net

 

$

89,954

 

$

24,762

 

$

114,716

 

$

15,812

 

$

5,162

 

$

20,974

 

 

The estimated aggregate amortization expense for intangible assets with definite useful lives for each of the next five fiscal years is as follows (in thousands):

 

2014

 

$

11,569

 

2015

 

19,376

 

2016

 

18,498

 

2017

 

15,876

 

2018

 

12,244

 

 

Other Assets

 

 

 

December 31,

 

(in thousands)

 

2013

 

2012

 

Cost method investment

 

$

16,884

 

$

14,494

 

Income taxes receivable

 

21,128

 

 

Other

 

714

 

2,287

 

 

 

$

38,726

 

$

16,781

 

 

Cost Method Investment

 

On September 28, 2010, we completed a $3 million investment in a rapidly developing organic light emitting diode (also known as OLED) equipment company (the “Investment”). We invested an additional $10.3 million and $1.2 million in the Investment during 2012 and 2011, respectively. In 2013, we invested an additional $2.4 million in the Investment in the form of bridge notes bearing 4% interest. The bridge notes are payable in equity at the time of a liquidity event or a qualifying equity investment round, otherwise they are payable in cash in June 2014.  As of December 31, 2013, we have a 15.4% ownership of the preferred shares, and effectively hold a 11.0% ownership interest of the total company. Since we do not exert significant influence on the Investment, this investment is treated under the cost method in accordance with applicable accounting guidance. This investment is recorded in other assets in our Consolidated Balance Sheets as of December 31, 2013 and 2012.

 

Accrued Expenses and Other Current Liabilities

 

 

 

December 31,

 

(in thousands)

 

2013

 

2012

 

Payroll and related benefits

 

$

11,020

 

$

14,581

 

Sales, use and other taxes

 

5,402

 

6,480

 

Contingent consideration

 

20,098

 

 

Warranty

 

5,662

 

4,942

 

Restructuring liability

 

533

 

1,875

 

Other

 

8,369

 

13,523

 

 

 

$

51,084

 

$

41,401

 

 

Customer deposits and deferred revenue

 

As of December 31, 2013 and 2012, we had customer deposits of $27.5 million and $32.7 million, respectively recorded as a component of customer deposits and deferred revenue.

 

Accrued Warranty

 

Typically, we provide our customers a one year manufacturer’s warranty from the date of final acceptance on the products they purchase from us. We estimate the costs that may be incurred under the warranty we provide for our products and recognize 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. Changes in our warranty liability during the year are as follows:

 

 

 

December 31,

 

 

 

2013

 

2012

 

Balance as of the beginning of year

 

$

4,942

 

$

8,731

 

Warranties issued during the year

 

5,291

 

3,563

 

Settlements made during the year

 

(5,580

)

(7,060

)

Changes in estimate during the period

 

1,009

 

(292

)

Balance as of the end of year

 

$

5,662

 

$

4,942

 

 

Other Liabilities

 

 

 

December 31,

 

(in thousands)

 

2013

 

2012

 

Contingent consideration

 

$

9,270

 

$

 

Income taxes payable

 

 

3,986

 

Other

 

379

 

544

 

 

 

$

9,649

 

$

4,530

 

 

Accumulated Other Comprehensive Income

 

The components of accumulated other comprehensive income are:

 

As of December 31, 2013

 

Gross

 

Taxes

 

Net

 

Translation adjustments

 

$

5,718

 

$

(392

)

$

5,326

 

Minimum pension liability

 

(1,160

)

424

 

(736

)

Unrealized gain on available-for-sale securities

 

49

 

(18

)

31

 

Accumulated other comprehensive income

 

$

4,607

 

$

14

 

$

4,621

 

 

As of December 31, 2012

 

Gross

 

Taxes

 

Net

 

Translation adjustments

 

$

7,040

 

$

(339

)

$

6,701

 

Minimum pension liability

 

(1,285

)

510

 

(775

)

Unrealized gain on available-for-sale securities

 

76

 

(29

)

47

 

Accumulated other comprehensive income

 

$

5,831

 

$

142

 

$

5,973

 

Debt
Debt

7.  Debt

 

Long-Term Debt

 

Long-term debt as of December 31, 2013, consists of a mortgage note payable, which is secured by certain land and buildings with carrying amounts aggregating approximately $4.7 million and $4.8 million as of December 31, 2013 and December 31, 2012, respectively. The mortgage note payable ($2.1 million as of December 31, 2013 and $2.4 million as of December 31, 2012) bears interest at an annual rate of 7.91%, with the final payment due on January 1, 2020. We estimate the fair market value of this note as of December 31, 2013 and 2012 was approximately $2.3 million and $2.6 million, respectively.

 

Maturity of Long-Term Debt

 

Long-term debt matures as follows (in thousands):

 

2014

 

$

290

 

2015

 

314

 

2016

 

340

 

2017

 

368

 

2018

 

398

 

Thereafter

 

427

 

 

 

2,137

 

Less current portion

 

290

 

 

 

$

1,847

 

 

Convertible Notes

 

In 2011, we retired our convertible notes which were initially convertible into 36.7277 shares of common stock per $1,000 principal amount of notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for Veeco’s common stock on April 16, 2007). We paid interest on these notes on April 15 and October 15 of each year. The notes were unsecured and were effectively subordinated to all of our senior and secured indebtedness and to all indebtedness and other liabilities of our subsidiaries.

 

During the first quarter of 2011, at the option of the holders, $7.5 million of 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.

 

Certain accounting guidance requires a portion of convertible debt to be allocated to equity. This guidance requires issuers of convertible debt that can be settled in cash to separately account for (i.e. bifurcate) a portion of the debt associated with the conversion feature and reclassify this portion to equity. The liability portion, which represents the fair value of the debt without the conversion feature, is accreted to its face value over the life of the debt using the effective interest method by amortizing the discount between the face amount and the fair value. The amortization is recorded as interest expense. Our convertible notes were subject to this accounting guidance. This additional interest expense did not require the use of cash.

 

The components of interest expense recorded on the notes were as follows (in thousands):

 

 

 

For the year ended

 

 

 

December 31,

 

 

 

2011

 

Contractual interest

 

$

2,025

 

Accretion of the discount on the notes

 

1,260

 

Total interest expense on the notes

 

$

3,285

 

Effective interest rate

 

6.7

%

Equity Compensation Plans and Equity
Equity Compensation Plans and Equity

8.  Equity Compensation Plans and Equity

 

Stock Option and Restricted Stock Plans

 

We have several stock option and restricted stock plans. In connection with our acquisition of Synos Technology, Inc. on October 1, 2013, the Board of Directors granted equity awards to the Synos employees. Pursuant to Nasdaq Listing Rules, the equity awards were granted under our 2013 Inducement Stock Incentive Plan (the “Inducement Plan”), which the Board of Directors adopted to facilitate the granting of equity awards as an inducement to these employees to commence employment with us. We issued 124,500 stock options and 87,000 restricted stock units under this plan. The stock options will vest over a three year period and have a 10-year term and the restricted stock units will vest over a two or four year period. As of December 31, 2013, the Inducement Plan was effectively merged into the 2010 Stock Incentive Plan (as amended to date, the “2010 Plan”), and is therefore considered an inactive plan with no further shares available for future grant. As of December 31, 2013, there are 124,500 options outstanding under the Inducement Plan.

 

On April 1, 2010, our Board of Directors, and on May 14, 2010, our shareholders, approved the 2010 Plan. The 2010 Plan replaced the 2000 Stock Incentive Plan, as amended (the “2000 Plan”), as the Company’s active stock plan. Our employees, directors and consultants are eligible to receive awards under the 2010 Plan. The 2010 Plan permits the granting of a variety of awards, including both non-qualified and incentive stock options, share appreciation rights, restricted shares, restricted share units and dividend equivalent rights. We are authorized to issue up to 6,750,000 shares under the 2010 Plan, including an additional 3,250,000 shares (including up to 2,995,000 shares of Common Stock available for issuance under the 2010 Plan and up to 255,000 shares underlying awards granted under the Inducement Plan) that were approved by the shareholders on December 10, 2013. Option awards are generally granted with an exercise price equal to the closing price of our stock on the trading day prior to the date of grant; those option awards generally vest over a 3 year period and have a 7 or 10-year term. Restricted share awards generally vest over 1-5 years. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 2010 Plan. As of December 31, 2013, there are 1,746,092 options outstanding under the 2010 Plan.

 

The 2000 Plan was approved by our Board of Directors and shareholders in May 2000. The 2000 Plan provides for the grant to officers and key employees of stock awards, either in the form of options to purchase shares of our common stock or restricted stock awards. Stock awards granted pursuant to the 2000 Plan expire after seven years and generally vest over a two-year to five-year period following the grant date. In addition, the 2000 Plan provides for automatic annual grants of restricted stock to each member of our Board of Directors who is not an employee. As of December 31, 2013, there are 727,552 options outstanding under the 2000 Plan.

 

Equity-Based Compensation Expense, Stock Option and Restricted Stock Activity

 

Equity-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period.  We recorded equity compensation expense of $13.1 million, $14.3 million and $12.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. We did not capitalize any equity compensation in the years ended December 31, 2013, 2012 and 2011.

 

During the year ended December 31, 2011, we discontinued our CIGS solar systems business and as a result the equity-based compensation expense related to each CIGS solar systems business employee has been classified as discontinued operations in determining the consolidated results of operations for the years ended December 31, 2011. For the year ended December 31, 2011 discontinued operations included compensation expense of $0.7 million.

 

As of December 31, 2013, the total unrecognized compensation cost related to nonvested stock awards and option awards expected to vest is $33.2 million and $12.3 million, respectively, and the related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 3.1 years and 2.2 years for the nonvested stock awards and for option awards, respectively.

 

The fair value of each option granted during the years ended December 31, 2013, 2012 and 2011, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

For the year ended December 31,

 

 

 

2013

 

2012

 

2011

 

Weighted-average expected stock-price volatility

 

48

%

59

%

55

%

Weighted-average expected option life

 

5 years

 

5 years

 

4 years

 

Average risk-free interest rate

 

1.27

%

0.70

%

1.40

%

Average dividend yield

 

0

%

0

%

0

%

 

A summary of our restricted stock awards including restricted stock units as of December 31, 2013 is presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

 

 

(000’s)

 

Fair Value

 

Nonvested as of December 31, 2012

 

693

 

$

36.11

 

Granted

 

798

 

33.16

 

Vested

 

(207

)

32.44

 

Forfeited (including cancelled awards)

 

(126

)

34.33

 

Nonvested as of December 31, 2013

 

1,158

 

$

34.93

 

 

During the year ended December 31, 2013, we granted 797,583 shares of restricted common stock and restricted stock units to key employees, which generally vest over a four year period. Included in this grant were 16,165 shares of restricted common stock granted to the non-employee members of the Board of Directors, which vest over the lesser of one year or at the time of the next annual meeting. The vested shares include the impact of 71,342 shares of restricted stock which were cancelled in 2013 due to employees electing to receive fewer shares in lieu of paying withholding taxes. The total fair value of shares that vested during the years ended December 31, 2013, 2012 and 2011 was $7.9 million, $5.4 million and $9.7 million, respectively.

 

A summary of our stock option plans as of the year ended December 31, 2013 is presented below:

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

Weighted-

 

 

 

Remaining

 

 

 

 

 

Average

 

Aggregate

 

Contractual

 

 

 

Shares

 

Exercise

 

Intrinsic

 

Life

 

 

 

(000’s)

 

Price

 

Value (000’s)

 

(in years)

 

Outstanding as of December 31, 2012

 

2,322

 

$

28.63

 

 

 

 

 

Granted

 

539

 

32.68

 

 

 

 

 

Exercised

 

(149

)

14.74

 

 

 

 

 

Forfeited (including cancelled options)

 

(114

)

35.22

 

 

 

 

 

Outstanding as of December 31, 2013

 

2,598

 

$

29.98

 

$

14,277

 

6.5

 

Options exercisable as of December 31, 2013

 

1,567

 

$

27.19

 

$

13,208

 

4.7

 

 

The weighted-average grant date fair value of stock options granted for the years ended December 31, 2013, 2012 and 2011 was $13.47, $15.56 and $21.90 per option, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2013, 2012 and 2011 was $2.5 million, $6.8 million and $22.8 million, respectively.

 

The following table summarizes information about stock options outstanding as of December 31, 2013:

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

Number

 

Weighted-Average

 

Weighted-

 

Number

 

Weighted-

 

 

 

Outstanding at

 

Remaining

 

Average

 

Exercisable at

 

Average

 

 

 

December 31,

 

Contractual Life

 

Exercise

 

December 31,

 

Exercise

 

Range of Exercise Prices

 

2013 (000s)

 

(in years)

 

Price

 

2013 (000s)

 

Price

 

$8.82 - 16.37

 

432

 

2.4

 

$

10.98

 

432

 

$

10.98

 

17.48 - 26.69

 

296

 

2.2

 

19.85

 

278

 

19.55

 

28.60 - 42.96

 

1,601

 

8.2

 

33.43

 

674

 

34.27

 

44.09 - 51.70

 

269

 

7.4

 

51.02

 

183

 

50.96

 

 

 

2,598

 

6.5

 

$

29.98

 

1,567

 

$

27.19

 

 

Shares Reserved for Future Issuance

 

As of December 31, 2013, we have 5,856,268 shares reserved for future issuance upon exercise of stock options and grants of restricted stock.

 

Preferred Stock

 

Our Board of Directors has authority under our Certificate of Incorporation to issue shares of preferred stock with voting and economic rights to be determined by the Board of Directors.

 

Treasury Stock

 

On August 24, 2010, our Board of Directors authorized the repurchase of up to $200 million of our common stock. 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 2011, we purchased 4,160,228 shares for $162 million (including transaction costs) under the program at an average cost of $38.96 per share. During 2010, we purchased 1,118,600 shares for $38 million (including transaction costs) under the program at an average cost of $34.06 per share. This stock repurchase is included as treasury stock in the Consolidated Balance Sheet as of December 31, 2011. During the year ended December 31, 2012, we cancelled and retired the 5,278,828 shares of treasury stock we purchased under this 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.

 

Income Taxes
Income Taxes

9.  Income Taxes

 

Our income (loss) from continuing operations before income taxes in the accompanying Consolidated Statements of Operations consists of (in thousands):

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

Domestic

 

$

(84,942

)

$

5,811

 

$

230,204

 

Foreign

 

13,732

 

32,375

 

41,882

 

 

 

$

(71,210

)

$

38,186

 

$

272,086

 

 

Significant components of the provision (benefit) for income taxes from continuing operations are presented below (in thousands):

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

Current:

 

 

 

 

 

 

 

Federal

 

$

(21,022

)

$

2,515

 

$

59,921

 

Foreign

 

3,921

 

7,576

 

10,714

 

State and local

 

148

 

(317

)

805

 

Total current provision (benefit) for income taxes

 

(16,953

)

9,774

 

71,440

 

Deferred:

 

 

 

 

 

 

 

Federal

 

(11,589

)

(482

)

10,454

 

Foreign

 

(462

)

727

 

(1,073

)

State and local

 

57

 

1,638

 

763

 

Total deferred provision (benefit) for income taxes

 

(11,994

)

1,883

 

10,144

 

Total provision (benefit) for income taxes

 

$

(28,947

)

$

11,657

 

$

81,584

 

 

The following is a reconciliation of the income tax provision (benefit) computed using the Federal statutory rate to our actual income tax provision (in thousands):

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

Income tax provision (benefit) at U.S. statutory rates

 

$

(24,923

)

$

13,366

 

$

95,231

 

State income tax expense (benefit), net of federal impact

 

(1,554

)

(89

)

1,616

 

Nondeductible expenses

 

195

 

622

 

(749

)

Domestic production activities deduction

 

1,554

 

(489

)

(4,581

)

Nondeductible compensation

 

11

 

205

 

841

 

Research and development tax credit

 

(3,151

)

(3,013

)

(4,675

)

Net change in valuation allowance

 

2,420

 

2,943

 

121

 

Change in accrual for unrecognized tax benefits

 

577

 

533

 

824

 

Foreign tax rate differential

 

(4,275

)

(2,387

)

(5,225

)

Other

 

199

 

(34

)

(1,819

)

Total provision (benefit) for income taxes

 

$

(28,947

)

$

11,657

 

$

81,584

 

 

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, and this legislation retroactively extended the research and development tax credit for 2 years, from January 1, 2012 through December 31, 2013. Income tax benefit for 2013 includes $1.9 million for the entire benefit of the research and development tax credit attributable to 2012.

 

During the fourth quarter of 2012, we determined that we may not meet the criteria required to receive a certain incentive tax rate pursuant to a negotiated tax holiday in one foreign jurisdiction. Although we are continuing to negotiate the criteria for the incentive, for financial reporting purposes we have recorded additional tax provisions of $0.9 million and $4.0 million in 2013 and 2012, respectively, totaling $4.9 million which represents the cumulative effect of calculating the tax provision using the incentive tax rate as compared to the foreign country’s statutory rate. If we successfully renegotiate the incentive criteria, this additional tax provision could be reversed as a future benefit in the period in which the successful negotiations are finalized.

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

On October 1, 2013, we acquired 100% of Synos’s total outstanding stock. In connection with the acquisition, we recorded a $32.4 million deferred tax liability related to the difference between the financial reporting amount and the tax basis of the assets acquired.

 

During 2012, we recorded a current tax benefit of $2.1 million related to equity-based compensation which was a credit to additional paid in capital. We did not record any tax benefits related to equity-based compensation during 2013.  We will credit $0.5 million to additional paid-in capital when the research and development credits are realized for financial reporting purposes.

 

Significant components of our deferred tax assets and liabilities are as follows (in thousands):

 

 

 

December 31,

 

 

 

2013

 

2012

 

Deferred tax assets:

 

 

 

 

 

Inventory valuation

 

$

6,983

 

$

6,386

 

Domestic net operating loss carry forwards

 

5,585

 

1,144

 

Tax credit carry forwards

 

12,566

 

4,145

 

Foreign net operating loss carry forwards

 

821

 

 

Warranty and installation accruals

 

3,002

 

2,174

 

Equity compensation

 

10,638

 

9,114

 

Other accruals

 

2,556

 

3,270

 

Other

 

1,160

 

760

 

Total deferred tax assets

 

43,311

 

26,993

 

Valuation allowance

 

(7,753

)

(4,708

)

Net deferred tax assets

 

35,558

 

22,285

 

 

 

 

 

 

 

Deferred tax liabilities: