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.

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.

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	)

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.

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.

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