VEECO INSTRUMENTS INC, 10-K filed on 2/24/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Feb. 17, 2015
Jun. 27, 2014
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, 2014 
 
 
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
 
 
$ 1,454,417,866 
Entity Common Stock, Shares Outstanding
 
40,361,759 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 270,811 
$ 210,799 
Short-term investments
120,572 
281,538 
Restricted cash
539 
2,738 
Accounts receivable, net
60,085 
23,823 
Inventories
61,471 
59,726 
Deferred cost of sales
5,076 
724 
Prepaid expenses and other current assets
23,132 
22,579 
Assets held for sale
6,000 
 
Deferred income taxes
7,976 
11,716 
Total current assets
555,662 
613,643 
Property, plant and equipment at cost, net
78,752 
89,139 
Goodwill
114,959 
91,348 
Deferred income taxes
1,180 
397 
Intangible assets, net
159,308 
114,716 
Other assets
19,594 
38,726 
Total assets
929,455 
947,969 
Current liabilities:
 
 
Accounts payable
18,111 
35,755 
Accrued expenses and other current liabilities
48,418 
51,084 
Customer deposits and deferred revenue
96,004 
34,754 
Income taxes payable
5,441 
6,149 
Deferred income taxes
120 
159 
Current portion of long-term debt
314 
290 
Total current liabilities
168,408 
128,191 
Deferred income taxes
16,397 
28,052 
Long-term debt
1,533 
1,847 
Other liabilities
4,185 
9,649 
Total liabilities
190,523 
167,739 
Stockholders' Equity:
 
 
Preferred stock, 500,000 shares authorized; no shares issued and outstanding
   
   
Common stock, $0.01 par value, 120,000,000 shares authorized; 40,360,069 and 39,666,195 shares issued and outstanding in 2014 and 2013, respectively
404 
397 
Additional paid-in capital
750,139 
721,352 
Retained earnings (accumulated deficit)
(13,080)
53,860 
Accumulated other comprehensive income
1,469 
4,621 
Total stockholders' equity
738,932 
780,230 
Total liabilities and stockholders' equity
$ 929,455 
$ 947,969 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2014
Dec. 31, 2013
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
40,360,069 
39,666,195 
Common stock, shares outstanding
40,360,069 
39,666,195 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Consolidated Statements of Operations
 
 
 
Net sales
$ 392,873 
$ 331,749 
$ 516,020 
Cost of sales
257,991 
228,607 
300,887 
Gross profit
134,882 
103,142 
215,133 
Operating expenses:
 
 
 
Selling, general and administrative
89,760 
85,486 
73,110 
Research and development
81,171 
81,424 
95,153 
Amortization
13,146 
5,527 
4,908 
Restructuring
4,394 
1,485 
3,813 
Asset impairment
58,170 
1,220 
1,335 
Changes in contingent consideration
(29,368)
829 
 
Other, net
(3,182)
(1,017)
(398)
Total operating expenses, net
214,091 
174,954 
177,921 
Operating income (loss)
(79,209)
(71,812)
37,212 
Interest income
1,570 
1,200 
2,476 
Interest expense
(715)
(598)
(1,502)
Income (loss) from continuing operations before income taxes
(78,354)
(71,210)
38,186 
Income tax provision (benefit)
(11,414)
(28,947)
11,657 
Income (loss) from continuing operations
(66,940)
(42,263)
26,529 
Discontinued operations:
 
 
 
Income from discontinued operations before income taxes
 
 
6,269 
Income tax provision
 
 
1,870 
Income from discontinued operations
 
 
4,399 
Net income (loss)
$ (66,940)
$ (42,263)
$ 30,928 
Basic income (loss) per common share:
 
 
 
Continuing operations (in dollars per share)
$ (1.70)
$ (1.09)
$ 0.69 
Discontinued operations (in dollars per share)
 
 
$ 0.11 
Net Income (loss) (in dollars per share)
$ (1.70)
$ (1.09)
$ 0.80 
Diluted income (loss) per common share:
 
 
 
Continuing operations (in dollars per share)
$ (1.70)
$ (1.09)
$ 0.68 
Discontinued operations (in dollars per share)
 
 
$ 0.11 
Net Income (loss) (in dollars per share)
$ (1.70)
$ (1.09)
$ 0.79 
Weighted average number of shares:
 
 
 
Basic (in shares)
39,350 
38,807 
38,477 
Diluted (in shares)
39,350 
38,807 
39,051 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
Net income (loss)
$ (66,940)
$ (42,263)
$ 30,928 
Other comprehensive income (loss), net of tax
 
 
 
Unrealized gain (loss) on available-for-sale securities
51 
34 
(118)
Benefit (provision) for income taxes
 
11 
50 
Less: Reclassification adjustments included in net income (loss)
(65)
(61)
(24)
Net unrealized loss on available-for-sale securities
(14)
(16)
(92)
Minimum pension liability
(145)
125 
(216)
Benefit (provision) for income taxes
 
(86)
79 
Net minimum pension liability
(145)
39 
(137)
Foreign currency translation
149 
(1,322)
(1,071)
Benefit (provision) for income taxes
 
(53)
683 
Less: Reclassification adjustments included in net income (loss)
(3,142)
 
 
Net foreign currency translation
(2,993)
(1,375)
(388)
Other comprehensive income (loss), net of tax
(3,152)
(1,352)
(617)
Comprehensive income (loss)
$ (70,092)
$ (43,615)
$ 30,311 
Consolidated Statements of Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Common Stock
Treasury Stock
Additional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive Income
Total
Balance at Dec. 31, 2011
$ 435 
$ (200,175)
$ 688,353 
$ 265,317 
$ 6,590 
$ 760,520 
Balance (in shares) at Dec. 31, 2011
38,768,000 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income (loss)
 
 
 
30,928 
 
30,928 
Other comprehensive loss, net of tax
 
 
 
 
(617)
(617)
Share-based compensation expense
 
 
14,268 
 
 
14,268 
Net issuance under employee stock plans
11 
 
5,792 
 
 
5,803 
Net issuance under employee stock plans (in shares)
560,000 
 
 
 
 
 
Change due to retirement of treasury stock
(53)
200,175 
 
(200,122)
 
 
Retirement of treasury stock (in shares)
 
5,278,828 
 
 
 
 
Prior period debt conversion adjustment
 
 
310 
 
 
310 
Balance at Dec. 31, 2012
393 
 
708,723 
96,123 
5,973 
811,212 
Balance (in shares) at Dec. 31, 2012
39,328,000 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income (loss)
 
 
 
(42,263)
 
(42,263)
Other comprehensive loss, net of tax
 
 
 
 
(1,352)
(1,352)
Share-based compensation expense
 
 
13,130 
 
 
13,130 
Net issuance under employee stock plans
 
(501)
 
 
(497)
Net issuance under employee stock plans (in shares)
338,000 
 
 
 
 
 
Balance at Dec. 31, 2013
397 
 
721,352 
53,860 
4,621 
780,230 
Balance (in shares) at Dec. 31, 2013
39,666,000 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income (loss)
 
 
 
(66,940)
 
(66,940)
Other comprehensive loss, net of tax
 
 
 
 
(3,152)
(3,152)
Share-based compensation expense
 
 
18,813 
 
 
18,813 
Net issuance under employee stock plans
 
9,974 
 
 
9,981 
Net issuance under employee stock plans (in shares)
694,000 
 
 
 
 
 
Balance at Dec. 31, 2014
$ 404 
 
$ 750,139 
$ (13,080)
$ 1,469 
$ 738,932 
Balance (in shares) at Dec. 31, 2014
40,360,000 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash Flows from Operating Activities
 
 
 
Net income (loss)
$ (66,940)
$ (42,263)
$ 30,928 
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
Depreciation and amortization
24,573 
18,425 
16,192 
Deferred income taxes
(11,330)
(12,264)
(340)
Share-based compensation expense
18,813 
13,130 
14,268 
Excess tax benefits from equity-based compensation
 
 
(2,119)
Provision (recovery) for bad debt
(1,814)
1,946 
198 
Impairment of long-lived assets
58,170 
1,220 
1,335 
Gain on sale of lab tools
(1,549)
(767)
 
Gain on disposal of segment
 
 
(4,112)
Gain on cumulative translation adjustment
(3,142)
 
 
Changes in contingent consideration
(29,368)
829 
 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(25,390)
36,898 
31,017 
Inventories and deferred cost of sales
6,513 
2,753 
53,937 
Prepaid expenses and other current assets
(2,245)
842 
8,524 
Accounts payable and accrued expenses
(5,534)
7,542 
(12,106)
Customer deposits and deferred revenue
55,536 
(17,329)
(34,227)
Income taxes receivable and payable, net
20,279 
(12,734)
1,853 
Other, net
5,497 
2,499 
9,253 
Discontinued operations
 
 
(2,638)
Net cash provided by operating activities
42,069 
727 
111,963 
Cash Flows from Investing Activities
 
 
 
Acquisition of business, net of cash acquired
(144,069)
(71,488)
 
Capital expenditures
(15,588)
(9,174)
(24,994)
Proceeds from the liquidation of investments
318,276 
499,645 
244,929 
Payments for purchases of investments
(157,737)
(589,099)
(165,080)
Payments for purchase of cost method investment
(2,388)
(2,391)
(10,341)
Proceeds from sale of assets from discontinued segment
 
 
3,758 
Proceeds from sale of lab tools
9,259 
4,440 
 
Other
350 
11 
49 
Net cash provided by (used in) investing activities
8,103 
(168,056)
48,321 
Cash Flows from Financing Activities
 
 
 
Proceeds from stock option exercises
12,056 
2,199 
5,409 
Restricted stock tax withholdings
(2,075)
(2,696)
(1,725)
Excess tax benefits from equity-based compensation
 
 
2,119 
Contingent consideration payments
 
(5,000)
 
Repayments of long-term debt
(290)
(269)
(248)
Net cash provided by (used in) financing activities
9,691 
(5,766)
5,555 
Effect of exchange rate changes on cash and cash equivalents
149 
(663)
796 
Net increase (decrease) in cash and cash equivalents
60,012 
(173,758)
166,635 
Cash and cash equivalents as of beginning of period
210,799 
384,557 
217,922 
Cash and cash equivalents as of end of period
270,811 
210,799 
384,557 
Supplemental disclosure of cash flow information
 
 
 
Interest paid
159 
357 
209 
Income taxes paid
$ 3,320 
$ 8,001 
$ 11,566 
Significant Accounting Policies
Significant Accounting Policies

Note 1 — Significant Accounting Policies

 

(a) Description of Business

 

Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” or the “Company”) operates in a single segment: the design, development, manufacture, and support of thin film process equipment primarily sold to make electronic devices including light emitting diodes (“LED”s), power electronics, wireless devices, hard disk drives, and semiconductors.

 

(b) Basis of Presentation

 

The accompanying audited Consolidated Financial Statements of the Company have been prepared in accordance with United States generally accepted accounting principles (GAAP). The Company reports interim quarters on a 13-week basis ending on the last Sunday of each period, which is determined at the start of each year. The Company’s fourth quarter always ends on the last day of the calendar year, December 31. During 2014 the interim quarters ended on March 30, June 29 and September 28, and during 2013 the interim quarters ended on March 31, June 30 and September 29. The Company reports these interim quarters as March 31, June 30 and September 30 in its interim consolidated financial statements.

 

(c) Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, these estimates may ultimately differ from actual results. Significant items subject to such estimates and assumptions include: (i) the best estimate of selling price for the Company’s products and services; (ii) allowances for doubtful accounts and inventory obsolescence; (iii) the useful lives and expected future cash flows of property, plant, and equipment and identifiable intangible assets; (iv) the fair value of the Company’s reporting units and related goodwill; (v) the fair value, less cost to sell, of assets held for sale; (vi) investment valuations and the valuation of derivatives, deferred tax assets, and assets acquired in business combinations; (vii) the recoverability of long lived assets; (viii) liabilities for product warranty and legal contingencies; (ix) share-based compensation; and (x) income tax uncertainties. Actual results could differ from those estimates.

 

(d) Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period.

 

(e) Foreign Currencies

 

Assets and liabilities of the Company’s foreign subsidiaries that operate using local functional currencies are translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using monthly average exchange rates. Adjustments arising from the translation of the foreign currency financial statements of the Company’s subsidiaries into U.S. dollars, including intercompany transactions of a long-term nature, are reported as currency translation adjustments in “Accumulated other comprehensive income” in the Consolidated Balance Sheets. Foreign currency transaction gains or losses are included in “Other, net” in the Consolidated Statements of Operations.

 

(f) Revenue Recognition

 

The Company recognizes revenue when all of the following criteria have been met: persuasive evidence of an arrangement exists with a customer; delivery of the specified products has occurred or services have been rendered; prices are contractually fixed or determinable; and collectability is reasonably assured. Revenue is recorded including shipping and handling costs and excluding applicable taxes related to sales. A significant portion of the Company’s 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, the arrangement is split into separate units of accounting if the individually delivered elements have value to the customer on a standalone basis. The Company also evaluates whether multiple transactions with the same customer or related parties should be considered part of a multiple element arrangement, based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another. When there are separate units of accounting, the Company allocates revenue to each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or the best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. The Company uses BESP for the majority of the elements in its arrangements.

 

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

 

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

 

In many cases the Company’s 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.

 

The Company’s contractual terms with customers in Japan generally specify that title and risk and rewards of ownership transfer upon customer acceptance. As a result, for customers in Japan, revenue is recognized upon the receipt of written customer acceptance. During the fourth quarter of fiscal 2013, the Company began using a distributor for almost all of its product and service sales to customers in Japan. Title passes to the distributor upon shipment, however, due to customary local business practices, the risk and rewards of ownership of the system transfers to the end-customers upon their acceptance. As such, the Company recognizes revenue upon receipt of written acceptance from the end customer.

 

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

 

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

 

(g) Warranty Costs

 

The Company typically provides standard warranty coverage on its systems for one year from the date of final acceptance by providing labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost when revenue is recognized on the related system. Warranty cost is included in “Cost of sales” in the Consolidated Statements of Operations. The estimated warranty cost is based on the Company’s historical experience with its systems and regional labor costs. The Company calculates the average service hours by region and parts expense per system utilizing actual service records to determine the estimated warranty charge. The Company updates its warranty estimates on a semiannual basis when the actual product performance and/or field expense differs from original estimates.

 

(h) Shipping and Handling Costs

 

Shipping and handling costs are expenses incurred to move, package and prepare the Company’s products for shipment and to move the products to a 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 the Consolidated Statements of Operations.

 

(i) Research and Development Costs

 

Research and development costs are expensed as incurred and include charges for the development of new technology and the transition of existing technology into new products or services.

 

(j) Advertising Expense

 

The cost of advertising is expensed as incurred and totaled $0.6 million, $0.5 million, and $0.8 million during 2014, 2013 and 2012, respectively.

 

(k) Accounting for Share-Based Compensation

 

Share-based awards exchanged for employee services are accounted for under the fair value method. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award. The expense for awards expected to vest is recognized over the employee’s requisite service period (generally the vesting period of the award). Awards expected to vest are estimated based on a combination of historical experience and future expectations.

 

The Company has 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.

 

The Company uses the Black-Scholes option-pricing model to compute the estimated fair value of option awards. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected option term, and risk-free interest rates. See Note 16, “Stock Plans,” for additional information.

 

In addition to stock options, restricted share awards (“RSAs”) and restricted stock units (“RSUs”) with time-based vesting, the Company issues performance share units and awards (“PSUs” and “PSAs”). Compensation cost for PSUs and PSAs is recognized over the requisite service period based on the timing and expected level of achievement of the performance targets. A change in the assessment of the probability of a performance condition being met is recognized in the period of the change in estimate. At the conclusion of the performance period, the applicable number of shares of RSAs, RSUs, or unrestricted shares granted may vary based on the level of achievement of the performance targets.

 

(l) Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in income in the period that includes the enactment date.

 

The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to uncertain tax positions in income tax expense. See Note 18, “Income Taxes,” for additional information.

 

(m) Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments, derivative financial instruments used in hedging activities, and accounts receivable. The Company invests in a variety of financial instruments and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. The Company has not experienced any material credit losses on its investments.

 

The Company maintains an allowance reserve for potentially uncollectible accounts for estimated losses resulting from the inability of its customers to make required payments. The Company evaluates its allowance for doubtful accounts based on a combination of factors. In circumstances where specific invoices are deemed to be uncollectible, the Company provides a specific allowance for bad debt against the amount due to reduce the net recognized receivable to the amount reasonably expected to be collected. The Company also provides allowances based on its write-off history. The allowance for doubtful accounts totaled $0.7 million and $2.4 million at December 31, 2014 and 2013, respectively.

 

To further mitigate the Company’s exposure to uncollectable accounts, the Company may request certain customers provide a negotiable irrevocable letter of credit drawn on a reputable financial institution. These irrevocable letters of credit are typically issued to mature between zero and 90 days from the date the documentation requirements are met, typically when a system ships or upon receipt of final acceptance from the customer. The Company, at its discretion, may monetize these letters of credit on a non-recourse basis after they become negotiable, but before maturity. The fees associates with the monetization are included in “Selling, general, and administrative” in the Consolidated Statements of Operations and were insignificant for the fiscal years ended December 31, 2014, 2013, and 2012.

 

(n) Fair Value of Financial Instruments

 

The carrying amounts of 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 debt for footnote disclosure purposes, including current maturities, is estimated using a discounted cash flow analysis based on the estimated current incremental borrowing rates for similar types of securities.

 

(o) Cash, Cash Equivalents, and Short-Term Investments

 

All financial instruments purchased with an original maturity of three months or less at the time of purchase are considered cash equivalents. Such items may include liquid money market accounts, U.S. treasuries, government agency securities, and corporate debt. Investments that are classified as cash equivalents are carried at cost, which approximates fair value.

 

A portion of the Company’s cash and cash equivalents is held by its subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which may not be the U.S. dollar. Approximately 81% and 71% of cash and cash equivalents were maintained outside the United States at December 31, 2014 and 2013, respectively.

 

Marketable securities are generally classified as available-for-sale for use in current operations, if required, and are reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income.” These securities can include U.S. treasuries, government agency securities, corporate debt, and commercial paper, all with maturities of greater than three months when purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other, net” in the Consolidated Statements of Operations. The specific identification method is used to determine the realized gains and losses on investments.

 

(p) Inventories

 

Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. The Company reviews and sets standard costs on a periodic basis at current manufacturing costs in order to approximate actual costs. The Company assesses the valuation of all inventories, including manufacturing raw materials, work-in-process, finished goods, and spare parts, each quarter. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated market value if less than cost. Estimates of market value include, but are not limited to, management’s forecasts related to the Company’s future manufacturing schedules, customer demand, technological and/or market obsolescence, general market conditions, possible alternative uses, and ultimate realization of excess inventory. If future customer demand or market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made. Inventory acquired as part of a business combination is recorded at fair value on the date of acquisition. See Note 5, “Business Combinations,” for additional information.

 

(q) Business Combinations

 

The Company allocates the fair value of the purchase consideration of the Company’s acquisitions to the tangible assets, intangible assets, including in-process research and development (“IPR&D”), if any, and liabilities assumed, based on estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is amortized over the asset’s estimated useful life. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred in “Selling, General, and Administrative” in the Consolidated Statements of Operations. See Note 5, “Business Combinations,” for additional information.

 

(r) Goodwill and Indefinite-Lived Intangibles

 

Goodwill is an asset representing the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is measured as the excess of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed. Intangible assets with indefinite useful lives are measured at their respective fair values as of the acquisition date. Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time. Goodwill and indefinite-lived intangibles are not amortized into results of operations but instead are evaluated for impairment. The Company performs the evaluation in the fourth quarter of each fiscal year or more frequently if impairment indicators arise.

 

The Company first performs a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount, and, if so, the Company then applies the two-step impairment test. The two-step impairment test first compares the fair value of the Company’s reporting units to their carrying amount. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying amount of the reporting unit exceeds its fair value, the Company determines the implied fair value of the reporting unit’s goodwill and, if the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference.

 

The Company determines the fair value of its reporting units based on income and/or market approaches. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenues and expenses, working capital requirements, residual growth rates, discount rates, and future economic and market conditions. The Company considers historical data, current internal estimates, and market growth trends when developing financial projections. Market participant assumption estimates consider the information being used internally for business planning purposes, however, actual future results may differ from those estimates. Changes in judgments on any of these factors could materially affect the estimated value of the reporting unit.

 

(s) Long-Lived Assets and Cost Method Investment

 

Definite-lived intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, and software licenses, and are initially recorded at fair value. Definite-lived intangibles are amortized over their estimated useful lives for periods up to 17 years, in a method reflecting the pattern in which the economic benefits are consumed, or straight-lined if such pattern cannot be reliably determined.

 

Property, plant and equipment are recorded at cost. Depreciation expense is calculated based on the estimated useful lives of the assets by using the straight-line method. Amortization of leasehold improvements is recognized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

 

Long-lived assets and cost method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, a recoverability test is performed utilizing undiscounted cash flows expected to be generated by that asset or asset group compared to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models or, when available, quoted market values and third-party appraisals.

 

(t) Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09: Revenue from Contracts with Customers. The amendments in this ASU require that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard outlines a five-step model to be used to make the revenue recognition determination and requires new financial statement disclosures. The standard is effective for interim and annual periods beginning after December 15, 2016 and allows entities to choose among different transition alternatives. The Company is evaluating the impact of adopting the standard on its consolidated financial statements and related financial statement disclosures, and has not yet determined which method of adoption will be selected.

 

The Company has evaluated other pronouncements recently issued but not yet adopted and does not believe the adoption of these pronouncements will have a material impact on the consolidated financial statements.

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

Note 2 — Income (Loss) Per Common Share

 

Basic income (loss) per common share is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted income per common share is calculated by dividing net income available to common stockholders by using the weighted average number of common shares and common share equivalents outstanding during the period. The computations of basic and diluted income (loss) per common share are as follows:

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

(in thousands, except per share amounts)

 

Net income (loss)

 

$

(66,940

)

$

(42,263

)

$

30,928

 

Net income (loss) per common share:

 

 

 

 

 

 

 

Basic

 

$

(1.70

)

$

(1.09

)

$

0.80

 

Diluted

 

$

(1.70

)

$

(1.09

)

$

0.79

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

39,350

 

38,807

 

38,477

 

Effect of potentially dilutive share-based awards

 

 

 

574

 

Diluted weighted average shares outstanding

 

39,350

 

38,807

 

39,051

 

 

For the year ended December 31, 2014 and 2013, 0.7 million and 0.6 million common equivalent shares, respectively, were excluded from the computation of diluted net loss per share as their effect would be anti-dilutive since the Company incurred a net loss. The dilutive effect of outstanding options and restricted stock units is reflected in diluted income per common share by application of the treasury stock method. For the years ended December 31, 2014, 2013, and 2012, respectively, approximately 1.6 million, 1.3 million and 1.3 million potentially dilutive securities underlying restricted stock awards, restricted stock units, and options to purchase common stock were excluded from the calculation since they would have had an antidilutive effect on diluted income per common share.

Fair Value Measurements
Fair Value Measurements

Note 3 — Fair Value Measurements

 

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

 

·

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

 

·

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

 

·

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

 

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

 

The following table presents the Company’s assets and (liabilities) that were measured at fair value on a recurring basis at December 31, 2014 and 2013:

 

 

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

U.S. treasuries

 

  $

81,527 

 

  $

 

  $

 

  $

81,527 

 

Corporate debt

 

 

39,045 

 

 

39,045 

 

Assets held for sale

 

 

6,000 

 

 

6,000 

 

 

 

 

December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

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

)

 

Highly liquid investments with maturities of three months or less are classified as cash equivalents and are carried at cost, which approximates fair value. All investments classified as available-for-sale are recorded at fair value within short-term investments in the Consolidated Balance Sheets. The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets. The Company’s investments classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency.

 

A reconciliation of the amounts classified as Level 3 is as follows:

 

 

 

Contingent

 

 

 

Consideration

 

 

 

(in thousands)

 

Balance as of December 31, 2013

 

$

(29,368

)

Fair value adjustment

 

29,368

 

Balance as of December 31, 2014

 

$

 

 

The Company estimated the fair value of the contingent consideration by applying various probabilities and discount factors to each of the performance milestones. At December 31, 2013, contingent consideration consisted of $20.1 million and $9.3 million in current and noncurrent other liabilities, respectively, in the Consolidated Balance Sheets. During 2014, the Company determined that the agreed upon post-closing milestones were not met and reversed the fair value of the liability, which is included in “Changes in contingent consideration” in the Consolidated Statements of Operations. Refer to Note 5, “Business Combinations,” for additional information.

Investments
Investments

Note 4 — Investments

 

At December 31, 2014 and 2013 the amortized cost and fair value of marketable securities were as follows:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

(in thousands)

 

December 31, 2014

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

81,506

 

$

27

 

$

(6

)

$

81,527

 

Corporate debt

 

39,031

 

20

 

(6

)

39,045

 

Total available-for-sale securities

 

$

120,537

 

$

47

 

$

(12

)

$

120,572

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

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

 

 

Available-for-sale securities in a loss position at December 31, 2014 and 2013 were as follows:

 

 

 

 

December 31, 2014

 

 

December 31, 2013

 

 

 

 

Estimated

 

 

Gross

 

 

Estimated

 

 

Gross

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

 

(in thousands)

 

U.S. treasuries

 

$

35,001

 

$

(6

)

$

29,068

 

$

(1

)

Corporate debt

 

13,069

 

(6

)

37,654

 

(36

)

Total

 

$

48,070

 

$

(12

)

$

66,722

 

$

(37

)

 

As of December 31, 2014 and 2013, there were no short-term investments that had been in a continuous loss position for more than 12 months.

 

The contractual maturities of securities classified as available-for-sale at December 31, 2014 were as follows:

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

Estimated

 

 

 

 

Amortized

 

 

Fair

 

 

 

 

Cost

 

 

Value

 

 

 

 

(in thousands)

 

Due in one year or less

 

$

74,710 

 

$

74,718 

 

Due after one year through two years

 

45,827 

 

45,854 

 

Total

 

$

120,537 

 

$

120,572 

 

 

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Realized gains for the fiscal years ended December 31, 2014 and 2013 were $0.1 million in each period, and are included in “Other, net” in the Consolidated Statements of Operations. There were minimal realized gains for the year ended December 31, 2012 and no realized losses in any of the three years.

 

Restricted Cash

 

The total amount of restricted cash at December 31, 2014 and 2013 was $0.5 million and $2.7 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.

 

Cost Method Investment

 

The Company maintains certain investments in support of its strategic business objectives, including a non-marketable cost method investment. The Company’s ownership interest is less than 20% of the investee’s voting stock, and the Company does not exert significant influence, therefore the investment is recorded at cost. The carrying value of the investment was $19.4 million and $16.9 million at December 31, 2014 and 2013, respectively and is included in “Other assets” on the Consolidated Balance Sheet. The investment is subject to a periodic impairment review; however, there are no open-market valuations, and the impairment analysis requires significant judgment. The analysis includes assessments of the investee’s financial condition, the business outlook for its products and technology, its projected results and cash flow, the likelihood of obtaining subsequent rounds of financing, and the impact of any relevant contractual equity preferences held by the Company or others. Fair value of the investment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of the investment. No such events or circumstances are present.

Business Combinations
Business Combinations

Note 5 — Business Combinations

 

PSP

 

On December 4, 2014 the Company acquired 100% of Solid State Equipment, LLC (“SSEC”) and rebranded the business Veeco Precision Surface Processing (“PSP”). The results of PSP operations have been included in the consolidated financial statements since the date of acquisition. PSP designs and develops wafer wet processing capabilities. Target market applications include semiconductor advanced packaging (including 2.5D and 3D ICs), MEMS, compound semiconductor (rf, power electronics, LED and others), data storage, photomask, and flat panel displays. PSP further extends the Company’s penetration in the compound semiconductor and MEMS markets and represents the Company’s entry into the advanced packaging market.

 

The acquisition date fair value of the consideration totaled $145.5 million, net of cash acquired, which consisted of the following:

 

 

 

Acquisition Date

 

 

 

(December 4, 2014)

 

 

 

(in thousands)

 

Amount paid, net of cash acquired

 

$

145,382 

 

Working capital adjustment

 

88 

 

Acquisition date fair value

 

$

145,470 

 

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The Company utilized third-party valuations to estimate the fair value of certain of the acquired tangible and intangible assets. The values assigned to certain acquired assets and liabilities are preliminary and may be adjusted as further information becomes available during the allocation period of up to 12 months from the acquisition date.

 

 

 

Acquisition Date

 

 

 

(December 4, 2014)

 

 

 

(in thousands)

 

Accounts receivable

 

$

9,383 

 

Inventory

 

13,812 

 

Other current assets

 

463 

 

Property, plant, and equipment

 

6,912 

 

Intangible assets

 

79,810 

 

Total identifiable assets acquired

 

110,380 

 

 

 

 

 

Accounts payable and accrued expenses

 

6,473 

 

Customer deposits

 

6,039 

 

Deferred tax liability, net

 

2,705 

 

Other

 

1,089 

 

Total liabilities assumed

 

16,306 

 

 

 

 

 

Net identifiable assets acquired

 

94,074 

 

Goodwill

 

51,396 

 

Net assets acquired

 

$

145,470 

 

 

The gross contractual value of the acquired accounts receivable was approximately $10.5 million. The fair value of the accounts receivables as indicated above is the amount expected to be collected by the Company. Goodwill generated from the acquisition is primarily attributable to expected synergies from future growth and strategic advantages provided through the expansion of product offerings, as well as assembled workforce. Approximately 80% of the value of the goodwill is expected to be deductible for income tax purposes.

 

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

 

 

 

Acquisition Date

 

 

 

(December 4, 2014)

 

 

 

Amount

 

Useful life

 

 

 

(in thousands)

 

 

 

Technology

 

$

39,950 

 

 

10 years

 

Customer relationships

 

34,310 

 

 

14 years

 

Backlog

 

3,340 

 

 

6 months

 

Non-compete agreements

 

1,130 

 

 

2 years

 

Trademark and tradenames

 

1,080 

 

 

1 year

 

Intangible assets acquired

 

$

79,810 

 

 

 

 

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

 

During 2014, the Company recognized $3.2 million of acquisition related costs that are included in “Selling, general, and administrative” in the Consolidated Statements of Operations.

 

The amounts of revenue and income (loss) from continuing operations before income taxes of PSP included in the Company’s consolidated statement of operations from the acquisition date (December 4, 2014) to the period ending December 31, 2014 are as follows:

 

 

 

Total

 

 

 

(in thousands)

 

Revenue

 

$

7,906

 

Loss from operations before income taxes

 

$

(3,011

)

 

The following represents the unaudited pro forma Consolidated Statements of Operations as if PSP had been included in the Company’s consolidated results for the periods indicated. These amounts have been calculated after applying the Company’s accounting policies to material amounts and also adjusting the result of PSP to reflect the additional amortization and depreciation that would have been expensed assuming the fair value adjustments to the acquired assets had been applied on January 1, 2013:

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

Revenue

 

$

447,089

 

$

379,272

 

Loss from operations before income taxes

 

$

(68,715

)

$

(77,252

)

 

ALD

 

On October 1, 2013 the Company acquired 100% of the outstanding common shares and voting interest of Synos Technology, Inc. and rebranded the business Veeco ALD (“ALD”). The results of ALD operations have been included in the consolidated financial statements since the date of acquisition. ALD is an early stage manufacturer of fast array scanning atomic layer deposition (“FAST-ALD”) tools for the flexible organic light-emitting diode (“OLED”) and semiconductor markets.

 

The acquisition date fair value of the consideration totaled $102.3 million, net of cash acquired, which consisted of the following:

 

 

 

Acquisition Date

 

 

 

(October 1, 2013)

 

 

 

(in thousands)

 

Cash (net of cash acquired)

 

$

71,488

 

Contingent consideration

 

33,539

 

Working capital adjustment

 

(2,695

)

Acquisition date fair value

 

$

102,332

 

 

The acquisition agreement included performance milestones that could trigger contingent payments to the original selling shareholders. During the year ended December 31, 2013, the first milestone was achieved, and the Company paid the former shareholders $5.0 million and increased the estimated fair value of the remaining contingent payments by $0.8 million. During 2014, the Company determined that all of the remaining performance milestones were not met, reversed the fair value of the liability, and recorded a non-cash gain of $29.4 million, which is included in “Changes in contingent consideration” in the Consolidated Statements of Operations.

 

During 2014, the Company finalized the working capital adjustment under the purchase agreement. Based on the final adjustment, the working capital adjustment was reduced to $1.3 million. As a result, a $1.4 million adjustment was made that increased goodwill by $0.2 million and reduced accrued expenses by $1.2 million for the relief of a potential liability that the former shareholders have retained. During 2014, the Company received payment of the $1.3 million working capital adjustment from the former shareholders, which is included in “Acquisitions of business, net of cash acquired” within the Cash Provided by Investing Activities in the Consolidated Statements of Cash Flows.

 

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the acquisition date. The Company utilized third-party valuations to estimate the fair value of the acquired tangible and intangible assets as well as the contingent consideration:

 

 

 

Acquisition Date

 

 

 

(October 1, 2013)

 

 

 

(in thousands)

 

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 goodwill is not deductible for income tax purposes.

 

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

 

 

 

Acquisition Date

 

 

 

(October 1, 2013)

 

 

 

Amount

 

Uuseful life

 

 

 

(in thousands)

 

 

 

Technology

 

$

73,160 

 

14 years

 

Customer relationships

 

20,630 

 

8 years

 

In-process research and development

 

5,070 

 

To be determined

Trademarks and trade names

 

140 

 

1 year

 

Non-compete agreement

 

270 

 

3 years

 

Intangible assets acquired

 

$

99,270 

 

 

 

 

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

 

During the fourth quarter of 2014, the Company determined that, while its ALD technology was successfully demonstrated at its key OLED display customer, it was unlikely to be adopted in the near-term for flexible OLED applications. The significant reduction in near-term forecasted bookings and cash flows required the Company to assess its ALD reporting unit for impairment. As a result, the Company recorded a non-cash impairment charge of $53.9 million related to goodwill and other long-lived assets for ALD. See Note 6, “Goodwill and Intangible Assets,” for additional information.

 

During 2013, the Company recognized $1.0 million of acquisition related costs that are included in “Selling, general, and administrative” in the Consolidated Statements of Operations.

 

The following represents the pro forma Consolidated Statements of Operations as if Veeco ALD had been included in the Company’s consolidated results for the periods indicated:

 

 

 

December 31,

 

 

 

2013

 

2012

 

 

 

(in thousands)

 

Revenue

 

  $

346,319 

 

  $

522,029 

 

Income (loss) from operations before income taxes

 

  $

(60,983)

 

  $

16,840 

 

 

These amounts have been calculated after applying the Company’s accounting policies to material amounts and also adjusting the result of ALD to reflect the additional amortization that would have been expensed assuming the fair value adjustments to the acquired assets had been applied on January 1, 2012.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

Note 6 — Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed in each business combination. The following table presents the changes in goodwill balances during the fiscal years indicated:

 

 

 

Gross

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Net

 

 

 

Amount

 

Impairment

 

Amount

 

 

 

(in thousands)

 

As of December 31, 2012

 

$

151,069

 

$

95,241

 

$

55,828

 

Acquisition

 

35,520

 

 

35,520

 

As of December 31, 2013

 

186,589

 

95,241

 

91,348

 

Acquisition

 

51,396

 

 

51,396

 

Purchase price adjustments

 

173

 

 

173

 

Impairments

 

 

27,958

 

(27,958

)

As of December 31, 2014

 

$

238,158

 

$

123,199

 

$

114,959

 

 

Additions to the gross goodwill balance during the years ended December 31, 2014 and 2013 resulted from the acquisition of privately-held businesses as described further in Note 5, “Business Combinations.”

 

The Company performed its annual goodwill impairment test in the fourth quarter. The reporting units’ fair value exceeded their respective carrying amount and therefore goodwill within these reporting units was not impaired. The fair value of each reporting unit was determined using an income approach to determine the present value of expected future cash flows.

 

During 2014, the Company successfully demonstrated its FAST-ALD technology for flexible OLED encapsulation. But subsequent to the Company’s annual goodwill impairment test, the Company determined that the incumbent deposition technology had progressed to satisfy current market requirements. The carrying amount of the ALD reporting unit was determined to exceed its fair value, and therefore the fair value of the reporting unit’s goodwill was estimated. An impairment loss was recognized equal to the excess of the carrying amount of the reporting unit’s goodwill over its implied fair value. As part of its valuation to determine the total impairment charge, the Company also estimated the fair value of significant tangible and intangible long-lived assets within the ALD reporting unit. These tangible and intangible long-lived assets were valued using appropriate valuation techniques for assets of their nature, including income and market approaches. As a result of the impairment analysis, the Company recorded non-cash impairment charges of $28.0 million related to goodwill and $25.9 million related to other long-lived assets, including $17.4 million related to customer relationships, $4.8 million related to in-process research and development, and $3.6 million related to certain tangible assets.

 

The components of purchased intangible assets as of the dates indicated below were as follows:

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

Weighted

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

 

Average Remaining

 

Gross

 

Amortization 

 

 

 

Gross

 

Amortization

 

 

 

 

 

Amortization

 

Carrying

 

and

 

Net

 

Carrying

 

and

 

Net

 

 

 

Period

 

Amount

 

Impairment

 

Amount

 

Amount

 

Impairment

 

Amount

 

 

 

(in years)

 

(in thousands)

 

Technology

 

9.6

 

$

222,358 

 

$

106,342 

 

$

116,016 

 

$

182,408 

 

$

97,524 

 

$

84,884 

 

Customer relationships

 

13.9

 

69,350 

 

35,549 

 

33,801 

 

35,040 

 

14,721 

 

20,319 

 

Trademarks and tradenames

 

3.5

 

3,050 

 

1,096 

 

1,954 

 

1,970 

 

763 

 

1,207 

 

Indefinite-lived trademark

 

 

2,900 

 

 

2,900 

 

2,900 

 

 

2,900 

 

IPR&D

 

 

5,070 

 

5,070 

 

 

5,070 

 

 

5,070 

 

Other

 

1.1

 

5,485 

 

848 

 

4,637 

 

765 

 

429 

 

336 

 

Total

 

10.2

 

$

308,213 

 

$

148,905 

 

$

159,308 

 

$

228,153 

 

$

113,437 

 

$

114,716 

 

 

Other intangible assets primarily consist of patents, licenses, customer backlog, and non-compete agreements.

 

For the fiscal years ended December 31, 2014, 2013, and 2012, amortization expense for intangible assets was $13.1 million, $5.5 million, and $4.9 million, respectively. Based on the intangible assets recorded as of December 31, 2014, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:

 

 

 

 

Amortization

 

 

 

 

(in thousands)

 

2015

 

 

$

27,003 

 

2016

 

 

20,969 

 

2017

 

 

18,100 

 

2018

 

 

16,492 

 

2019

 

 

15,235 

 

Thereafter

 

 

58,609 

 

Total

 

 

$

156,408 

 

 

Inventories
Inventories

Note 7 — Inventories

 

Inventories are stated at the lower of cost or market using standard costs that approximate actual costs on a first-in, first-out basis. Inventories consist of the following:

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

Materials

 

$

30,319 

 

$

34,301 

 

Work-in-process

 

25,096 

 

12,900 

 

Finished goods

 

6,056 

 

12,525 

 

Total

 

$

61,471 

 

$

59,726 

 

 

Property, Plant, and Equipment
Property, Plant, and Equipment

Note 8 — Property, Plant, and Equipment and Assets Held for Sale

 

Property and equipment, net, consist of the following:

 

 

 

 

December 31,

 

 

Average

 

 

 

 

2014

 

2013

 

 

Useful Life

 

 

 

(in thousands)

 

 

 

 

Land

 

$

9,392 

 

$

12,535 

 

 

 

Building and improvements

 

51,979 

 

52,050 

 

10 – 40 years

 

Machinery and equipment

 

104,815 

 

110,228 

 

3 – 10 years

 

Leasehold improvements

 

4,356 

 

5,888 

 

3 – 7 years

 

Gross property,plant and equipment

 

170,542 

 

180,701 

 

 

 

Less: accumulated depreciation and amortization

 

91,790 

 

91,562 

 

 

 

Net property, plant, and equipment

 

$

78,752 

 

$

89,139 

 

 

 

 

Depreciation expense was $11.4 million, $12.9 million, and $11.3 million for the years ended December 31, 2014, 2013, and 2012, respectively.

 

Lab Tools

 

At December 31, 2014 and 2013, the carrying value of systems that had previously been used in the Company’s laboratories as Veeco Certified Equipment was approximately $1.3 million and $7.2 million, respectively, and was included in “Property, plant, and equipment, net” in the Consolidated Balance Sheets. These systems are being held for sale and are the same types of tools that the Company sells to its customers in the ordinary course of business. During the years ended December 31, 2014 and 2013, the Company had aggregate sales of $8.9 million and $7.4 million, respectively, of these tools with associated costs of $7.4 million and $3.7 million, respectively, which was included in “Net sales” and “Cost of sales” in the Consolidated Statements of Operations. During the years ended December 31, 2014 and 2013, the Company evaluated certain systems and reduced the carrying value of these systems that were held for sale by $0.1 million and $0.9 million, respectively, which was included in “Asset impairment” in the Consolidated Statements of Operations.

 

Assets Held for Sale

 

During the year ended December 31, 2014, the Company classified property, plant, and equipment with a carrying value of $9.5 million as assets held for sale. Using Level 2 measurement principles, the Company determined that the carrying cost of these assets exceeded the fair market value, less cost to sell, and recorded an impairment charge of approximately $3.5 million, which consisted of $1.6 million related to the Company’s research and demonstration labs in Asia and $1.9 million related to a vacant building and land. These amounts were included in “Asset impairment” in the Consolidated Statements of Operations. The net $6.0 million carrying value of these assets are included in “Assets held for sale” in the Consolidated Balance Sheet. During the year ended December 31, 2014, the Company recognized additional asset impairment charges of $0.7 million relating to assets that were abandoned during the year, which was included in “Asset impairment” in the Consolidated Statements of Operations.

Accrued Expenses and Other Liabilities
Accrued Expenses and Other Liabilities

Note 9 — Accrued Expenses and Other Liabilities

 

The components of accrued expenses and other current liabilities as of the dates indicated were as follows:

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

Payroll and related benefits

 

$

26,605 

 

$

11,020 

 

Sales, use, and other taxes

 

1,776 

 

5,402 

 

Contingent consideration

 

 

20,098 

 

Warranty

 

5,411 

 

5,662 

 

Restructuring liability

 

1,428 

 

533 

 

Other

 

13,198 

 

8,369 

 

Total

 

$

48,418 

 

$

51,084 

 

 

Customer deposits and deferred revenue

 

Customer deposits totaled $73.0 million and $27.5 million at December 31, 2014 and 2013, respectively, which are included in “Customer deposits and deferred revenue” in the Consolidated Balance Sheets.

Discontinued Operations
Discontinued Operations

Note 10 — Discontinued Operations

 

CIGS Solar Systems Business

 

During 2011, the Company announced a plan to discontinue its CIGS solar systems business and reflected the results of operations for the CIGS solar systems business as discontinued operations.

 

Metrology

 

During 2010, the Company completed the sale of its Metrology business, except for assets located in China due to local restrictions. The Company reflected the results of operations for the Metrology business as discontinued operations and recognized a pre-tax deferred gain of $5.4 million during 2012 related to the completion of the sale of the assets in China. The Company 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:

 

 

 

 

2012

 

 

 

Solar

 

 

 

 

 

 

 

 

 

 

Systems

 

 

Metrology

 

 

Total

 

 

 

(in thousands)

 

Net sales

 

$

 

 

$

 

 

$

 

Net income (loss) from discontinued operations

 

$

(62

)

 

$

4,461

 

 

$

4,399

 

 

Restructuring Charges
Restructuring Charges

Note 11 — Restructuring Charges

 

Beginning in 2011 and in response to challenging business conditions, the Company initiated activities to reduce and contain spending, including reducing its workforce, consultants, and discretionary expenses.

 

During 2012, the Company recorded $3.8 million in personnel severance and related costs resulting from a headcount reduction of 52 employees. These reductions in workforce included executives, management, administration, sales and service, and manufacturing employees companywide. This consolidation was substantially complete at the end of 2012.

 

During 2013, the Company recorded $1.5 million in personnel severance and related costs resulting from the restructuring of one of its international sales offices and the consolidation of certain sales and administrative functions. This consolidation was substantially complete at the end of 2013.

 

During 2014, the Company announced the closing of its Ft. Collins, Colorado and Camarillo, California facilities. Business activities formally conducted at these sites have been transferred to the Company’s Plainview, New York facility, and the Company recorded $0.4 million of facility closing costs. The Company also took additional measures to improve profitability in the challenging business environment and notified 93 employees of their termination from the Company and recorded $4.0 million of personnel severance and related costs. These actions were substantially complete at the end of 2014. The total remaining amount expected to be incurred related to facility closing costs is approximately $0.5 million.

 

The following table shows the amounts incurred and paid for restructuring activities during the years ended December 31, 2014, 2013, and 2012 and the remaining accrued balance of restructuring costs as of December 31, 2014, which is included in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheets:

 

 

 

Personnel

 

 

 

 

 

 

 

 

 

Severance and

 

 

Facility

 

 

 

 

 

 

 

Related Costs

 

 

Closing Costs

 

 

Total

 

 

 

(in thousands)

 

Balance at December 31, 2012

 

$

1,875

 

 

$

 

 

$

1,875

 

Provision

 

1,485

 

 

 

 

1,485

 

Payments

 

(2,827

)

 

 

 

(2,827

)

Balance at December 31, 2013

 

533

 

 

 

 

533

 

Provision

 

4,012

 

 

382

 

 

4,394

 

Payments

 

(3,117

)

 

(382

)

 

(3,499

)

Balance at December 31, 2014

 

$

1,428

 

 

$

 

 

$

1,428

 

 

Commitments and Contingencies
Commitments and Contingencies

Note 12 — Commitments and Contingencies

 

Warranty

 

Warranties are typically valid for one year from the date of system final acceptance, and the Company estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and 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.

 

Changes in the Company’s product warranty reserves were as follows:

 

 

 

 

December 31,

 

 

 

 

2014

 

 

2013

 

 

 

(in thousands)

 

Balance, beginning of the year

 

$

5,662

 

 

$

4,942

 

Addition for new warranties issued

 

3,484

 

 

5,291

 

Addition from PSP acquisition

 

809

 

 

 

Settlements

 

(3,802

)

 

(5,580

)

Changes in estimate

 

(742

)

 

1,009

 

Balance, end of the year

 

$

5,411

 

 

$

5,662

 

 

Minimum Lease Commitments

 

Minimum lease commitments at December 31, 2014 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows:

 

 

 

Operating

 

 

 

 

Leases

 

Payments due by period:

 

 

(in thousands)

 

2015

 

$

2,322 

 

2016

 

2,423 

 

2017

 

1,993 

 

2018

 

1,224 

 

2019

 

526 

 

Thereafter

 

2,700 

 

Total

 

$

11,188 

 

 

Rent expense was $2.3 million, $2.9 million, and $3.5 million in 2014, 2013 and 2012, respectively. In addition, the Company is obligated under such leases for certain other expenses, including real estate taxes and insurance.

 

Environmental Remediation

 

The Company is aware that petroleum hydrocarbon contamination has been detected in the soil at the site of a facility formerly leased by the Company in Santa Barbara, California. The Company has been indemnified for any liabilities that may be incurred which arise from environmental contamination at the site. Even without consideration of such indemnification, the Company does not believe that any material loss or expense is probable in connection with any such liabilities. The former owner of the land and building in Santa Barbara, California in which the Company’s former Metrology operations were located (which business was sold to Bruker Corporation (“Bruker”) on October 7, 2010), has disclosed that there are hazardous substances present in the ground under the building. Management believes that the comprehensive indemnification clause that was part of the purchase contract relating to the purchase of such land provides adequate protection against any environmental issues that may arise. The Company has provided Bruker with similar indemnification as part of the sale.

 

Legal Proceedings

 

Veeco and certain other parties were named as defendants in a lawsuit filed on April 25, 2013 in the Superior Court of California, County of Sonoma. The plaintiff in the lawsuit, Patrick Colbus, seeks unspecified damages and asserts claims that he suffered burns and other injuries while he was cleaning a molecular beam epitaxy system alleged to have been manufactured by Veeco. The lawsuit alleges, among other things, that the molecular beam epitaxy system was defective and that Veeco failed to adequately warn of the potential risks of the system. The Company believes this lawsuit is without merit and intends to defend vigorously against the claims. The Company is unable to predict the outcome of this action or to reasonably estimate the possible loss or range of loss, if any, arising from the claims asserted therein. The Company believes that, in the event of any recovery by the plaintiff from Veeco, such recovery would be fully covered by insurance.

 

The Company is involved in various other legal proceedings arising in the normal course of business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

 

Concentrations of Credit Risk

 

The Company depends on purchases from its ten largest customers, which accounted for 65% and 69% of total accounts receivable as of December 31, 2014 and 2013, respectively.

 

Customers who accounted for more than 10% of aggregate accounts receivable or net sales are as follows:

 

 

 

Accounts Receivable

 

Net Sales for the Year Ended

 

 

 

Year ended December 31,

 

December 31,

 

Customer

 

2014

 

2013

 

2014

 

2013

 

2012

 

Customer A

 

 

*

 

 

*

 

 

15%

 

 

*

 

 

*

 

Customer B

 

 

20%

 

 

10%

 

 

11%

 

 

14%

 

 

*

 

Customer C

 

 

13%

 

 

11%

 

 

*

 

 

*

 

 

*

 

Customer D

 

 

*

 

 

23%

 

 

*

 

 

*

 

 

14%

 

 

* Less than 10% of aggregate accounts receivable or net sales.

 

The Company manufactures and sells its products to companies in different geographic locations. Refer to Note 19, “Segment Reporting and Geographic Information,” for additional information. In certain instances, the Company requires deposits from its customers for a portion of the sales price in advance of shipment and performs periodic credit evaluations on its customers. Where appropriate, the Company requires letters of credit on certain non-U.S. sales arrangements. Receivables generally are due within 30 – 90 days from the date of invoice. The net accounts receivable balance is concentrated in the following geographic locations:

 

 

 

 

December 31,

 

 

 

 

2014

 

 

2013

 

 

 

(in thousands)

 

China

 

$

17,911 

 

 

$

4,130 

 

Korea

 

8,118 

 

 

2,411 

 

Thailand

 

6,324 

 

 

2,041 

 

Taiwan

 

5,838 

 

 

427 

 

Other

 

3,986 

 

 

4,890 

 

Asia Pacific

 

42,177 

 

 

13,899 

 

United States

 

13,139 

 

 

8,369 

 

EMEA and other

 

4,769 

 

 

1,555 

 

Total

 

$

60,085 

 

 

$

23,823 

 

 

Suppliers

 

The Company outsources certain functions to third parties, including the manufacture of all or substantially all of its MOCVD systems, ion beam and other data storage systems, and ion sources. The Company primarily relies on several suppliers for the manufacturing of these systems, but the Company does maintain a minimum level of internal manufacturing capability for these systems. The failure of the Company’s present suppliers to meet their contractual obligations under its supply arrangements and the Company’s inability to make alternative arrangements or resume the manufacture of these systems could have a material adverse effect on the Company’s revenues, profitability, cash flows and relationships with its customers.

 

In addition, certain of the components and sub-assemblies included in the Company’s products are obtained from a single source or a limited group of suppliers. The Company’s inability to develop alternative sources, if necessary, could result in a prolonged interruption in supply or a significant increase in the price of one or more components, which could adversely affect the Company’s operating results.

 

The Company had deposits with its suppliers of $12.7 million and $9.4 million at December 31, 2014 and 2013, respectively, that were included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets.

 

Purchase Commitments

 

The Company had purchase commitments of $112.4 million at December 31, 2014, all of which will come due within one year.

 

Bank Guarantees

 

The Company has bank guarantees issued by a financial institution on its behalf as needed. At December 31, 2014, outstanding bank guarantees totaled $45 million, of which $0.5 million is collateralized against cash that is restricted from use. As of December 31, 2014, the Company had $26 million of unused lines of credit available, which can be drawn upon to cover performance bonds required by customers.

Debt
Debt

Note 13 — Debt

 

Debt consists of a mortgage note payable with a carrying value of $1.8 million and $2.1 million as of December 31, 2014 and 2013, respectively. The mortgage note payable is secured by certain land and buildings with a carrying value of $3.3 million and $4.7 million as of December 31, 2014 and 2013, respectively. One of the buildings is currently held for sale. The annual interest rate on the mortgage is 7.91%, and the final payment is due on January 1, 2020. The Company determined the mortgage is a Level 3 liability in the fair-value hierarchy and estimated its fair value as $2.0 million and $2.3 million at December 31, 2014 and 2013, respectively, using a discounted cash flow model. Payments due under the note are as follows:

 

 

 

 

Total

 

 

 

(in thousands)

 

2015

 

$

314 

 

2016

 

340 

 

2017

 

368 

 

2018

 

398 

 

2019

 

427 

 

Total

 

1,847 

 

Less current portion

 

314 

 

Total (less current maturities)

 

$

1,533 

 

 

Derivative Financial Instruments
Derivative Financial Instruments

Note 14 — Derivative Financial Instruments

 

The Company is exposed to financial market risks arising from changes in currency exchange rates. Changes in currency exchange rate changes could affect the Company’s foreign currency denominated monetary assets and liabilities and forecasted cash flows. The Company enters into monthly forward derivative contracts with the intent of mitigating a portion of this risk. The Company only uses derivative financial instruments in the context of hedging and not for speculative purposes and has not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other, net” in the Company’s Consolidated Statements of Operations. The fair value of these contracts is included in “Prepaid expenses and other current assets” in the Company’s Consolidated Balance Sheets. The Company executes derivative transactions with highly rated financial institutions to mitigate counterparty risk.

 

The Company did not have any outstanding derivative contracts at December 31, 2014. A summary of the foreign exchange derivatives outstanding on December 31, 2013 is as follows:

 

 

 

Fair

 

Maturity

 

Notional

 

 

 

 

Value

 

Dates

 

Amount

 

 

 

(in thousands)

 

December 31, 2013

 

 

 

 

 

 

 

Foreign currency exchange forwards

 

$

 

January 2014

 

$

4,700 

 

Foreign currency collar

 

906 

 

October 2014

 

34,069 

 

Total

 

$

907 

 

 

 

$

38,769 

 

 

The following table shows the gains and (losses) from currency exchange derivatives during the years ended December 31, 2014, 2013, and 2012, which are included in “Other, net” in the Consolidated Statements of Operations:

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

(in thousands)

 

Foreign currency exchange forwards

 

$

(89

)

$

248

 

$

333

 

Foreign currency collar

 

(457

)

906

 

 

 

 

$

(546

)

$

1,154

 

$

333

 

 

Stockholders' Equity
Stockholders' Equity

Note 15 — Stockholders’ Equity

 

Accumulated Other Comprehensive Income

 

The following table presents the changes in the balances of each component of AOCI, net of tax:

 

 

 

 

Foreign

 

 

Minimum

 

 

Unrealized

 

 

 

 

 

 

 

Currency

 

 

Pension

 

 

Gains (losses) on

 

 

 

 

 

 

 

Translation

 

 

Liability

 

 

AFS Securities

 

 

Total

 

 

 

(in thousands)

 

Balance at December 31, 2012

 

$

6,701

 

$

(775

)

$

47

 

$

5,973

 

Other comprehensive income (loss) before reclassifications

 

(1,322

)

125

 

34

 

(1,163

)

Benefit (provision) for income taxes

 

(53

)

(86

)

11

 

(128

)

Amounts reclassified from AOCI

 

 

 

(61

)

(61

)

Other comprehensive income (loss)

 

(1,375

)

39

 

(16

)

(1,352

)

Balance at December 31, 2013

 

5,326

 

(736

)

31

 

4,621

 

Other comprehensive income (loss) before reclassifications

 

149

 

(145

)

51

 

55

 

Amounts reclassified from AOCI

 

(3,142

)

 

(65

)

(3,207

)

Other comprehensive income (loss)

 

(2,993

)

(145

)

(14

)

(3,152

)

Balance at December 31, 2014

 

$

2,333

 

$

(881

)

$

17

 

$

1,469

 

 

During the 2014, the Company completed its plan to liquidate its subsidiary in Japan, since the Company moved to a distributor model to serve its customers in that region. As a result of the liquidation, a cumulative translation gain of $3.1 million was reclassified from Other Comprehensive Income to “Other, net” on the Consolidated Statements of Operations.

 

Preferred Stock

 

The Board of Directors has authority under the Company’s 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, the Board of Directors authorized the repurchase of up to $200 million of the Company’s common stock. All funds for this repurchase program were exhausted during fiscal year 2011, and during fiscal year 2012, the Company cancelled and retired the 5,278,828 shares of treasury stock previously purchased. During 2012 the Company 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.

Stock Plans
Stock Plans

Note 16 — Stock Plans

 

Share-based incentive awards are provided to employees under the terms of the Company’s equity incentive compensation plans (the “Plans”). During 2010 the Company’s Board of Directors approved the 2010 Stock Incentive Plan (as amended to date, the “2010 Plan”), which replaced the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The Plans are administered by the Compensation Committee of the Board of Directors. The Company’s employees, non-employee directors, and consultants are eligible to receive awards under the 2010 Plan, which can include non-qualified stock options, incentive stock options, restricted share awards (“RSAs”), restricted share units (“RSUs”), share appreciation rights, dividend equivalent rights or any combination thereof. The Company typically settles awards under the Plans with newly issued shares. All Plans, with the exception of acquired companies’ stock plans, have been approved by the Company’s shareholders.

 

The Board of Directors granted equity awards to certain employees in connection with the Company’s acquisition of ALD during fiscal year 2013 (Refer to Note 5, “Business Combinations” for additional information on the acquisition). The equity awards were granted under the Company’s 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 the Company. The Company issued 124,500 stock option shares and 87,000 RSUs under this plan. The stock options will vest over a three year period and have a 10-year term, and the RSUs will vest over a two or four year period. As of December 31, 2013, the Inducement Plan was merged into the 2010 Plan and is considered an inactive plan with no further shares available for grant. As of December 31, 2014, there are 124,500 option shares and 82,700 RSUs outstanding under the Inducement Plan.

 

The Company is authorized to issue up to 6.8 million shares under the 2010 Plan, including additional shares authorized under a 2013 plan amendment approved by shareholders. Option awards are generally granted with an exercise price equal to the closing price of the Company’s common stock on the trading day prior to the date of grant; option awards generally vest over a three year period and have a seven or ten year term. RSAs and RSUs generally vest over one to five 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, 2014, there are 1.9 million option shares and 0.4 million RSUs outstanding under the 2010 Plan.

 

The 2000 Plan was approved by the Company’s Board of Directors and shareholders in fiscal year 2000 and was replaced by the 2010 Plan. Therefore, no additional awards are made under this plan. Stock awards granted pursuant to the 2000 Plan expire after seven years and generally vest over a two to five year period. As of December 31, 2014, there are 0.4 million option shares outstanding under the 2000 Plan.

 

Shares Reserved for Future Issuance

 

At December 31, 2014, the Company has 4.9 million shares reserved to cover exercises of outstanding stock options, vesting of RSUs, and additional grants under the 2010 Plan.

 

Share-Based Compensation

 

The Company recognized share-based compensation in the following line items in the Consolidated Statements of Operations for the periods indicated:

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

(in thousands)

 

 

 

Cost of sales

 

$

2,456

 

$

1,446

 

$

1,467

 

Selling, general, and administrative

 

11,859

 

8,339

 

9,677

 

Research and development

 

4,498

 

3,347

 

2,709

 

Share-based compensation expense before tax

 

18,813

 

13,132

 

13,853

 

Income tax benefit

 

(6,011

)

(4,367

)

(4,849

)

Net share-based compensation expense

 

$

12,802

 

$

8,765

 

$

9,004

 

 

The Company capitalized an insignificant amount of share-based compensation into inventory for the years ended December 31, 2014, 2013, and 2012.

 

The following table summarizes information about unrecognized share-based compensation costs at December 31, 2014:

 

 

 

Unrecognized

 

Weighted

 

 

 

Share-Based

 

Average Period

 

 

 

Compensation

 

Expected to be

 

 

 

Costs

 

Recognized

 

 

 

(in thousands)

 

(in years)

 

Stock option awards

 

$

9,939 

 

2.0 

 

Restricted stock units

 

9,980 

 

2.5 

 

Restricted stock awards

 

17,501 

 

2.8 

 

Performance share units

 

2,855 

 

3.3 

 

Performance share awards

 

152 

 

0.4 

 

Total unrecognized share-based compensation cost

 

$

40,427 

 

2.5 

 

 

Stock Option Awards

 

Stock options are awards issued to employees that entitle the holder to purchase shares of the Company’s stock at a fixed price. At December 31, 2014, options outstanding that have vested and are expected to vest were as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Number

 

Weighted

 

Average

 

Aggregate

 

 

 

of

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise Price

 

Contractual Life

 

Value

 

 

 

(in thousands)

 

 

 

(in years)

 

(in thousands)

 

Vested

 

1,409 

 

$

30.76 

 

5.2 

 

$

10,127 

 

Expected to vest

 

903 

 

$

32.93 

 

7.7 

 

2,091 

 

Total

 

2,312 

 

$

31.61 

 

6.2 

 

$

12,218 

 

 

Outstanding options expected to vest are net of estimated future forfeitures. The aggregate intrinsic value represents the difference between the option exercise price and $34.88, the closing price of the Company’s common stock on December 31, 2014, the last trading day of the Company’s fiscal year as reported on The NASDAQ Stock Market for all in-the-money options.

 

Additional information with respect to stock option activity was as follows:

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

 

 

Shares

 

Exercise Price

 

 

 

(in thousands)

 

 

 

Outstanding at December 31, 2011

 

2,106

 

$

25.58

 

Granted

 

704

 

32.55

 

Exercised

 

(351

)

15.39

 

Expired or forfeited

 

(137

)

35.88