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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

(Mark One)

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

For the fiscal year ended December 31, 2015

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-16244

Commission file number 0-16244


VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

11-2989601

(State or Other Jurisdiction of Incorporation or Organization)

11-2989601
(I.R.S. Employer Identification No.)

Terminal Drive

 

Plainview, New York

11803

Terminal Drive
Plainview, New York

(Address of Principal Executive Offices)

11803
(Zip Code)

 

Registrant’s telephone number, including area code:

(516) 677-0200

 

Securities registered pursuant to Section 12(b) of the Act:

(Title of each class)
Common Stock, par value $0.01 per share

 

(Name of each exchange on which registered)

Common Stock, par value $0.01 per share

The NASDAQ Stock Market

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer ☐ 

Smaller reporting company ☐

 

 

Non-accelerated filer o  (Do not check if a smaller reporting company)

Smaller reportingEmerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No

 

The aggregate market value of the common stock held by non-affiliates of the registrant at June 26, 201529, 2018 (the last business day of the registrant’s most recently completed second quarter) was $1,202,150,344$682,511,019 based on the closing price of $29.81$14.25 on the NASDAQ Stock Market on that date.

 

The number of shares of each of the registrant’s classes of common stock outstanding on February 10, 201615, 2019 was 39,972,03148,038,565 shares of common stock, par value $0.01 per share.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the definitive Proxy Statement to be used in connection with the Registrant’s 20162019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.10-K.

 

 


Table of Contents

VEECO INSTRUMENTS INC.

INDEX

 



Table of Contents

VEECO INSTRUMENTS INC.

INDEX

 

PART I

3

 

 

Item 1. Business

3

 

 

Item 1A. Risk Factors

9

10

 

 

Item 1B. Unresolved Staff Comments

21

24

 

 

Item 2. Properties

22

24

 

 

Item 3. Legal Proceedings

22

25

 

 

Item 4. Mine Safety Disclosures

22

25

 

 

PART II

22

26

 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22

26

 

 

Stock Performance Graph

24

27

 

 

Item 6. Selected Financial Data

25

28

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

29

 

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

37

42

 

 

Item 8. Financial Statements and Supplementary Data

38

43

 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

38

43

 

 

Item 9A. Controls and Procedures

38

43

 

 

Item 9B. Other Information

40

46

 

 

PART III

40

46

 

 

Item 10. Directors, Executive Officers and Corporate Governance

40

46

 

 

Item 11. Executive Compensation

40

46

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

40

46

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

40

46

 

 

Item 14. Principal Accounting Fees and Services

40

46

 

 

PART IV

41

47

 

 

Item 15. Exhibits, Financial Statement Schedules

41

47

 

 

SIGNATURES

44

50

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This Annual Report on Form 10-K (“Form 10-K”) contains certain forward-looking information relating to Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “Registrant,” “we,” “our,” or “us,” unless the context indicates otherwise) that is based on the beliefs of, and assumptions made by, our management as well as information currently available to management. When used in this Form 10-K, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions relating to the future are intended to identify forward-looking information. Discussions containing such forward-looking statements may be found in Part I.I, Items 1 and 3, Part II, Items 7 and 7A hereof, as well as within this Form 10-K generally. This forward-looking information reflects our current views with respect to future events and is subject to certain risks, uncertainties, and assumptions, some of which are described under the caption “Risk Factors” in Part I, Item 1A, and elsewhere in this Form 10-K. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from the forward-looking information described in this Form 10-K as believed, anticipated, expected, estimated, targeted, planned, or similarly identified. We do not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.

 

PART I

Item 1. Business

 

We create process equipment that enables technologies for a cleanerBusiness Description and more productive world. We design, develop, manufacture, market, and support thin film equipment to meet the demands of key global trends such as improving energy efficiency, enhancing mobility, and increasing connectivity. Our equipment is used to make electronic devices which enable these trends, including light emitting diodes (“LEDs”), micro-electromechanical systems (“MEMS”), wireless devices, power electronics, hard disk drives (“HDDs”), and semiconductors. We may also license our technology to our customers or partners.Overview

 

We develop highly differentiated, “best-in-class” equipment for critical performance steps in thin film processing. Our products provide leading technology at low cost-of-ownership. Core competencies in advanced thin film technologies and decades of specialized process know-how help us stay at the forefront of these rapidly advancing industries.

Headquartered in Plainview, New York, we were organized as a Delaware corporation in 1989. We are a leading manufacturer of innovative semiconductor and thin film process equipment which solve an array of challenging materials engineering problems for our customers. Our broad collection of MOCVD (metal organic chemical vapor deposition), MBE (molecular beam epitaxy), lithography, laser annealing, ion beam, and single wafer etch and clean technologies play an integral role in the fabrication of advanced semiconductor devices including Light Emitting Diodes (“LEDs”) for solid-state lighting and display, lasers for communications and 3D sensing, and RF filters for mobile phones. We design our systems to optimize technical performance and productivity to achieve superior cost of ownership for our customers. Veeco holds technology leadership positions across our served markets. We have sales and service operations across the Asia-Pacific region, Europe, and North America to directly address our customers’ needs.

Business Overviewneeds and maximize our system uptime.

 

We are focused on:

 

·

Innovation by providing differentiated semiconductor and thin film process equipment to address our customers’ challenging materials engineering problems for current production requirements and next generation product development roadmaps; Investing in focused research and development in markets that we believe provide significant growth opportunities or are at an inflection point, including compound semiconductor, leading edge front-end semiconductor, and advanced packaging;

·Providing differentiated

·

Penetrating new markets by leveraging our sales channel and local process applications support teams to build strong strategic relationships with leading customers; Expanding our services portfolio to improve the performance of our systems, reduce our customers’ cost of ownership, and improve customer satisfaction; Cross-selling our diverse product portfolio across our broad customer base;

·

Improving profitability by optimizing manufacturing costs as we employ a combination of internal and outsourced manufacturing strategies to flex manufacturing capacity through industry investment cycles without compromising quality or performance.

Our products are purchased by semiconductor and thin film process equipment to address customers’ current production requirementscustomers in the following four markets: 1) Advanced Packaging, MEMS & RF Filters; 2) LED Lighting, Display & Compound Semiconductor; 3) Front-End Semiconductor; and next generation product development roadmaps;4) Scientific & Industrial.

 

·Investing to win through focused research and development in markets that we believe provide significant growth opportunities or are at an inflection point in process equipment requirements, including LED, power semiconductor devices, and advanced packaging technologies;

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·Leveraging our sales channel and local process applications support teams to build strong strategic relationships with technology leaders;Table of Contents

·Expanding our portfolio to improve the performance of our systems, including spare parts, upgrades, and consumables to drive growth, reduce our customers’ cost of ownership, and improve customer satisfaction;

·Cross-selling our product portfolio across our broad customer base and end markets to both maximize sales opportunities and diversify our business;

·Utilizing a combination of outsourced and internal manufacturing strategies to flex manufacturing capacity through industry investment cycles without compromising quality; and

·Pursuing partnerships and acquisitions to expand our product portfolio into adjacent markets and drive sales growth.

Markets

 

Our array of process equipment systems are used in the creationproduction of a broad range of microelectronic components, including LEDs, MEMS,micro-electro mechanical systems (“MEMS”), radio frequency (“RF”) filters and amplifiers, power semiconductors,electronics, thin film magnetic heads (“TFMHs”), laser diodes, 3D NAND, DRAM, logic, and compoundother semiconductor devices. OurMany of our systems are used to directly deposit precision materials critical to the operation of the device.  Some of our systems are involved in the precision removal of critical materials. Still other systems are used in the advanced packaging process flow of microelectronic components such as flip chip, Fan out Wafer Level Packaging (“FOWLP”), and other wafer level packaging approaches used in the modern integration of diverse semiconductor products, especially used in consumer electronics. Some of our customers who manufacture theseare interested in purchasing different types of systems from us for different applications in the same process line. In general, our customers purchase our systems to both produce current generation devices invest in our systemsvolume and to develop next generation products andwhich deliver more efficient, cost effective, and advanced technological solutions. We operate in aseveral highly cyclical business environment,environments, and our customers’ buying patterns are dependent upon industry trends. Ourtrends respective to that particular market. As our products are sold into multiple markets, and the following discussion focuses on the trends that most influence our business within each of those markets.

 

Lighting, DisplayAdvanced Packaging, MEMS & Power ElectronicsRF Filters

Advanced Packaging includes a portfolio of wafer-level assembly technologies that enable improved performance of electronic products, such as smartphones, high end servers, and graphical processors.

Demand for higher performance, increased functionality, smaller form factors, and lower power consumption in mobile devices, consumer electronics, and high performance computing is driving the adoption of advanced packaging technologies. Semiconductor Foundries (“Foundries”), Independent Device Manufacturers (“IDMs”), and Outsourced Semiconductor Assembly and Test (“OSATs”) companies are implementing multiple advanced packaging approaches including FOWLP, recently deployed in high-volume manufacturing, and copper-pillar to enable stacked memory devices. This increasing demand trend in Advanced Packaging is encouraging as our Lithography and Precision Surface Processing (“PSP”) wet etch and clean systems enable several process steps for Advanced Packaging.

MEMS devices are used for an increasing number of applications, including accelerometers for automobile airbags, pressure sensors for medical uses, and gyroscopes for a variety of consumer products, such as gaming consoles and mobile devices.

One of the fastest growing MEMS applications has been RF filters for mobile devices, driven by increasingly complex wireless standards, the proliferation of an increasing number of communication bands, the exponential growth of mobile data, and carrier aggregation. These trends are positive for us, particularly for our PSP products, where our technology is enabling some of the most challenging process steps, as well as our Ion Beam Etch (“IBE”) and MBE systems, which are used to create Bulk Acoustic Wave (“BAW”) and Surface Acoustic Wave (“SAW”) RF filters.

 

LED technologyLighting, Display & Compound Semiconductor

The LED industry has existed for more than 50 years; however, commercialexperienced multiple growth cycles brought on by the adoption of LEDs was limited to niche applications until the most recent decade. In the early 1990’s, researchers developed a process utilizingLED technology using Gallium Nitride (“GaN”) that created a low cost blue LED to produce white light. With that breakthrough, the LED industry started,light for consumer and the number of applications for LEDs began to expand.commercial applications. The first wave of LED growth occurred between 2003 and 2006was driven by mobile phones, which implemented the use of LED technology for display backlighting. The LED industry experienced its second period of rapid growth as LEDs were adopted for TV display backlighting. StartingThe adoption of LEDs for solid state, general lighting gave rise to a third wave of demand. Future growth is anticipated in 2009, LED producers, particularly in South Koreathe compound semiconductor market driven by optical communication and Taiwan, made significant investments in LED process equipment to capture share in these markets. industrial applications requiring laser diodes, 3D sensing and world facing vertical cavity surface emitting lasers (“VCSELs”), micro-LED displays, 5G RF infrastructure adoption, and power electronics.

Our metal organic chemical vapor deposition (“MOCVD”)MOCVD technology is at the core of the manufacturing process for GaN-based LEDs. Over the next coupleWe have benefited with each growth cycle, as LED producers invested in MOCVD process equipment to capture share in these markets. Demand for our equipment has historically been cyclical in nature, influenced by multiple factors, including: macroeconomic

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Table of years, our sales increased considerably driven in part by Chinese government subsidiesContents

conditions; prices for MOCVD equipment. Following this investment wave, there was an oversupply of MOCVD equipment,LED chips; supply and demand dynamics; competition; and our business went into a deep decline.

The adoption of LEDs for solid state lighting helped drive improvementscustomers’ manufacturing plans. Given the recent competitive trends in industry conditions in 2014. LED technology offered energy and cost savings opportunities in lighting, which played an important role inChina, the global shift toward energy efficiency initiatives. LEDs are up to 80% more efficient than traditional incandescent bulbs and up to 25% more efficient than compact fluorescent bulbs. LED penetration into the lighting market is growing, and for the first time, LED unit demand for general lighting surpassed demand for displayand backlighting in 2015. While LED industry conditions softened in the second half of 2015, due largely to weak TVmarkets have become commoditized and LED display backlighting demand, we do not expect to benefitsignificant revenue from the ongoing adoption of LED lighting over time.these markets going forward.

 

MOCVD technology is equallyalso important in the manufacturing of red, orange, and yellow (“ROY”) LEDs, which are used inincreasingly for fine-pitch digital signage and automotive lighting applications. For these LEDs,applications, our K475 MOCVD platformtechnology is used to deposit highly uniform Arsenic PhosphideArsenides and Phosphides (“AsP”As/P”) films which create amber and red hues. While ROYoutput colors.

The Display market refers to LEDs or micro LEDs used directly for displays. Our MOCVD systems are predicted to grow at a slower pace than LED units for general lighting, we expect to benefit from growth driven by increased adoption of LED technology for automobiles and outdoor display/signage applications. In addition to depositing the critical GaN layer with our MOCVD products, our Precision Surface Processing (“PSP”) products address multiple etch and clean steps requiredwell suited for the LED manufacturing process.display market.

 

Our products are also crucial inThe Compound Semiconductor market broadly refers to the manufacturingdeposition of GaN-on-SiliconGaN or As/P based thin film compounds on a variety of substrates including Silicon, Gallium Arsenide (“GaAs”), Indium Phosphide (“InP”), and Silicon Carbide (“SiC”) to enable a variety of power electronicelectronics, RF, and photonics devices.

Global demand is increasing for advanced power electronics with greater energy efficiency, a smaller footprints,form factor, ability to operate at higher operating temperatures, faster switching capabilities, and greater reliability. These devices support many needs,applications, including more efficient IT servers, electrical motors, faster charging stations for electric vehicles, wind turbines, and photovoltaic power inverters.

While silicon-based transistors are widely used in power electronic devices today, GaN-on-SiliconGaN based power electronics developed on MOCVD toolssystems can potentially deliver higher performance (e.g., smaller power supply form factors, higher efficiency, and faster switching speeds). These devices are ideal for applications such as IT servers, where heat generation is an ever-increasing problem as server banks become largerIn addition to depositing the critical GaN layer with our MOCVD products, our wet etch and where heat managementclean products address multiple etch and energy efficiency requirements continuesclean steps required to rise.manufacture these advanced power electronics devices. In 2015,recent years, global industry leaders in power electronics continued to focushave focused on research and development (“R&D”) programs to commercialize this new technology. DeviceWe anticipate device manufacturers will likely begin to transition from development to production of these devices over the next couple of years; we can benefit from this transition as our customers invest in process equipment to support this production ramp-up.

Advanced Packaging, MEMS &

Demand for RF power amplifiers in mobile devices drives the RF device portion of the Compound Semiconductor market. Our GaN and As/P technologies are used to deposit critical thin film layers for the production of RF amplifiers.  Our wet etch and clean systems are used for process steps such as metal lift off and photo resist strip for devices such as heterojunction bipolar transistors (“HBTs”) used in smartphones. We believe GaN and As/P based devices will enable the evolution of wireless technology to the fifth generation (“5G”). It is expected that the transition to 5G will take several years to become fully adopted.

 

Advanced Packaging includes a portfolioExamples of wafer-level assembly technologies that enable the miniaturizationimportant photonics devices are infrared LEDs and performance improvement of electronic products,VCSELs used for optical data communication, 3D sensing, and world facing applications (augmented reality and automotive light detection and ranging (“LIDAR”)). In addition to film deposition, photonics device manufacturers also employ cleaning and etching process steps supported by our wet etch and clean technologies.

Front-End Semiconductor

Front-End Semiconductor refers to early process steps where transistors are formed directly on silicon. There are many different process steps in forming integrated circuits, such as smartphones, smartwatches, tablets,Deposition, Etching, Masking, and laptops.Doping, where the microchips are created but still remain on the silicon wafer. Our PSPLaser Spike Annealing systems enable precision doping of materials at a controlled temperature in the semiconductor manufacturing process. Our IBE for front-end semiconductor has been demonstrated in Spin Torque Transfer Magnetic Random Access Memory (“STT-MRAM”) applications. STT-MRAM has many benefits over traditional random access memory such as its non-volatility, speed, endurance, and power consumption. Our Ion Beam Deposition (“IBD”) products have been gaining tractionadopted for the manufacturing of Extreme Ultraviolet (“EUV”) mask blanks. Our ability to precisely deposit high quality films with extremely low particulate levels make our IBD technology ideal for manufacturing defect-free EUV photomask blanks. The front-end semiconductor industry is in the rapidly growing areaprocess of Advanced Packaging. Demand for higher performance, increased functionality, smaller form factor, and lower power consumption in mobile devices, consumer electronics, and high performance computing is driving theadopting EUV lithography to meet leading edge device requirements. Future growth will depend on overall adoption of advanced packaging technology. Independent Device Manufacturers (“IDMs”)EUV lithography by IDMs and Outsourced Semiconductor Assembly and Test (“OSAT”) companies are implementing multiple advanced packaging approaches including Fan-Out Wafer Level Packaging (“FO-WLP”) and Through Silicon Via (“TSV”) to enable stacked memory, 2.5D, and 3D packaging devices.Foundries. Our

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MEMS devicesTable of Contents

inspection products are used for an increasing numbershape inspection of 3D topographies in memory and logic applications, including accelerometers for automobile airbags, pressure sensors for medical uses,which helps our customers improve their lithography and gyroscopes for a variety of consumer products, such as gaming consoles and mobile devices. One of the fastest growing MEMS applications has been RF filters for mobile devices, driven by increasingly complex wireless standards and the exponential growth of mobile data. In order to address these growing demands, a high-end smartphone can have as many as 60 discrete RF filters, a figure that has more than doubled in recent years. These trends are positive for us, particularly for our PSP products as well as our ion beam etch and Molecular Beam Epitaxy (“MBE”) products, which are used to create Bulk Acoustic Wave (“BAW”) and Surface Acoustic Wave (“SAW”) RF filters.deposition processes.

 

Data Storage

The Data Storage market involves the storage of data in electromagnetic or other forms for use by a computer or device, including HDDs used in large capacity storage applications. While HDDs face significant competition from flash memory, we believe that HDDs will continue to provide the best value for mass storage and will remain at the forefront of large capacity storage applications. This is especially true for data center applications where large volumes of data storage are required to serve an increasingly mobile population. The HDD manufacturing industry continues to optimize its existing manufacturing capacity to address demand. While we have seen signs of capacity constraints in some process areas and have experienced incremental orders for our equipment in 2015, future orders are likely to be focused on implementation of new technologies as opposed to capacity expansion. Future demand for our data storage systems is unclear and orders are expected to fluctuate from quarter to quarter. Our process knowledge and magnetic materials expertise from the Data Storage market positions us well for certain front-end semiconductor and MEMS opportunities, as thin film magnetic manufacturing methods become increasingly used in these markets.

Scientific & Industrial

 

The Scientific and Industrial markets includemarket includes advanced materials research and a broad range of manufacturing applications including laser diodes,high-power fiber lasers, infrared detectors, thin film magnetic heads on hard disk drives (“HDDs”), and optical coatings, and extreme ultraviolet (“EUV”) photomasks.coatings.

 

Our MBE systems are used by scientific research organizations and universities to drive new discoveries in the areas of materials science. MBE enables precise epitaxial crystal growth for a very wide variety of materials, which supports the development of new performance materials used for emerging technologies. MBE technology is also used in the manufacturing of specialized, lower volume products such as laser diodeshigh-power lasers and infrared sensors. Our toolsfully automated process equipment systems create highly uniform, Gallium-Arsenide (“GaAs”)and high purity GaAs or Indium-Phosphide (“InPh”)InP film layers, which are critical to the performance of these devices. Our PSP productswet etch and clean systems are also used toin the manufacture of infrared sensors.

 

Our Ion Beam Deposition, Ion Beam Etch, Physical Vapor Deposition (“IBD”PVD”), and lapping and dicing tools are used in data storage applications, including HDDs that will continue to provide significant value for mass storage and will remain an important part of large capacity storage applications. This is especially true for data center applications where large volumes of data storage are required to serve an increasingly mobile population. In addition, our IBD tools are used to produce high quality optical films for multiple applications including laser mirrors, optical filters, and anti-reflective coatings. Our tools deposit thin layers of advanced materials on various substrates to alter how light is reflected and transmitted. Our ability to precisely deposit high quality films with extremely low particulate levels make our ion beam deposition technology ideal for manufacturing defect-free EUV photomask blanks. The front-end semiconductor industry is expected to adopt EUV lithography to meet future device requirements. Future growth will depend on overall EUV production readiness.

System products

 

Our atomic layer deposition (“ALD”) systems are sold into a variety of Scientific & Industrial market applications including optical, semi/nano-electronics, MEMS, nanostructures, and biomedical.

System Products

Metal Organic Chemical Vapor Deposition Systems

 

We are the world’sa leading supplier of MOCVD systems. MOCVD production systems are used to make GaN-based devices (such as blue and green LEDs) and AsP-basedAs/P-based devices (such as ROY LEDs), which are used in television and computer display backlighting, general illumination, large area signage, specialty illumination, power electronics, and many other applications. Introduced in 2014, ourOur TurboDisc® EPIK™700 GaNEPIK® line of MOCVD systems enables cost per wafer savings for our customers with a combined advantage of best operating uptime, low maintenance costs, and best-in-class wafer uniformity and yield. In 2016, we introduced the TurboDisc K475i™ AsP MOCVD system, combines the industry’s highestwhich offers best-in-class productivity and best-in-class yields with low cost of ownership, further enabling lower manufacturing costs for LED general lighting applications. Our TurboDisc K475™ AsP MOCVD systems are also used to make ROY LEDs, infra-red LEDs, and high-efficiency triple junctionmulti-junction photovoltaic solar cells.cell applications. Our Propel™ PowerGaN™ MOCVD System (“Propel”) enables the development of highly-efficient GaN-based power electronic devices that have the potential to accelerate the industry’s transition from research and development to high volume production. The Propel system offers 200mm technology and incorporates single-wafer reactor technology for outstanding film uniformity, yield, and device performance.

 

Advanced Packaging Lithography

We have a leading position in the Advanced Packaging lithography equipment market. The Advanced Packaging market is driven by the need for improved performance, reduced power consumption, and the ability to image smaller geometries for mobile and automotive applications. These applications continue to demand increasingly complex packaging techniques from IDMs, Foundries, and OSATs. Our Advanced Packaging tools are designed to optimize productivity for leading-edge 200mm and 300mm Advanced Packaging applications by enabling extremely reliable, cost-effective, high-volume manufacturing solutions. Our best-in-class yield coupled with outstanding resolution and depth of focus addresses all leading edge requirements for Advanced Packaging applications such as redistribution layers (“RDLs”), Copper Pillar, Micro-Bump, FOWLP, interposers, and TSVs to provide the lowest cost of ownership in the industry.

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Precision Surface Processing Systems (Wet Etch and Clean)

 

In December 2014, we acquired Solid State Equipment LLC, a leading innovator inWe offer single wafer wet etch and clean, and surface preparation equipment targetingsystems which target high growth segments in advanced packaging, MEMS, LEDs, and compound semiconductor markets, which we renamed PSP. The two core platforms acquired are the WaferEtch™ and the WaferStorm™. The WaferEtch platform provides highly uniform, selective etching with onboard end point detection for improved process control and yield. The flagship of the WaferEtch platform, the TSV Revealer™, is specifically configured to address the requirements of TSV reveal, which is the process where the backside of a wafer is thinned to reveal the copper interconnects. The TSV Revealer offers a significant cost of ownership reduction compared with dry etch processing by replacing up to four separate process steps.markets. The WaferStorm platform is based on PSP’s unique soak and sprayImmJET™ technology, which provides improved performance at a lower cost of ownership than conventional wet bench-only or spray-only approaches. This highly flexible platform targets solvent based cleaning applications that require a significant level of control.process control and flexibility. The WaferEtch® platform provides highly uniform, selective etching with onboard end point detection for improved process control and yield in bumping applications. In addition, PSP has developed a state-of-the-art solution with the WaferEtch platform to address the requirements of TSV reveal, in which the backside of a wafer is thinned to reveal the copper interconnects. PSP’s TSV technology offers a significant cost of ownership reduction compared with dry etch processing by replacing up to four separate process steps.

 

Laser Annealing Systems

The progression of Moore’s law has led semiconductor manufacturers to implement a variety of material and process changes to overcome the technical hurdles related to shrinking of feature sizes in integrated circuits. Along with new materials and smaller dimensions have come new process challenges. One such challenge has been new constraints on thermal annealing processes. One example is the thermal annealing of dopants for activation, in order to form the transistor junction, critical to the function and performance of a complementary metal-oxide semiconductor (“CMOS”) logic integrated circuit. In this and other thermal process steps, traditional lamp-based annealing techniques have challenges meeting the thermal budget (time/temperature regime) required by new materials and designs. Our Laser Spike Annealing (“LSA”) systems meet the industry demand for millisecond time-scale annealing, heating the wafer up to temperatures just below the silicon melting point over a range of ultra-short timeframes (microseconds to milliseconds), enabling thermal annealing solutions at the 65nm technology node and below. This advanced annealing technology provides solutions to the difficult challenge of fabricating ultra-shallow junctions and highly activated source/drain contacts at these advanced logic nodes. In addition, our proprietary hardware design enables outstanding temperature uniformity across the wafer and die, by minimizing the pattern-density effect, thus reducing absorption variations.

We have also developed a next generation melt anneal technology (“MELT”) targeted for annealing advanced logic devices at 7nm and below. As FinFET devices scale below the 10nm node, achieving the performance targets has become a challenge. To continue the roadmap, the industry is looking at new materials and the use of thermal processes that require nanosecond time-scale thermal annealing with temperatures exceeding the melting point. To help address this concern we have developed a unique (and patented) approach to nanosecond-scale thermal annealing. Our design utilizes two lasers; a millisecond laser as a low thermal budget localized preheat and a nanosecond laser “on top” of the millisecond laser to raise the peak temperature to the melt temperature of the material being processed beyond silicon melt. Similar to LSA, the MELT system architecture is targeted to reduce pattern effects and increase the process window. It is believed that nanosecond annealing will be required to meet the device targets at 7nm and below; the initial application being explored by customers is contact annealing aimed to improve reduce source/drain contact resistance, which has become a performance bottleneck at the most advanced FinFET nodes, and as devices continue to scale, we see the application space for our melt product expanding.

Ion Beam Deposition and Etch and Deposition Systems

 

Our NEXUS® IBD systems utilizeuse ion beam technology to deposit precise layers of thin films. IBD systems deposit high purity thin film layers and provide maximumexcellent uniformity and repeatability. Our NEXUS Ion Beam Etch (“IBE”)IBE systems utilize a charged particle beam consisting of ions to etch precise, complex features. The NEXUS systems may be included on our cluster system platform to allow either parallel or sequential deposition/etch processes. These systems are used primarily by data storage, semiconductor, and telecommunications device manufacturers in the fabrication of discrete and integrated microelectronic devices.

 

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Our SPECTOR® Ion Beam Sputtering system was developed for high precision optical coatings and offers manufacturers state of the art optical thickness monitoring, improved productivity, and target material utilization, for cutting-edge optical interference coating applications. We also provide a broad array of ion beam sources. These technologies are applicable in the HDD industry as well as for optical coatings and other end markets. Our SPECTOR® systems offer manufacturers improvements in target material utilization, optical endpoint control, and process time for cutting-edge optical interference coating applications.

 

Molecular Beam Epitaxy Systems

 

MBEMolecular beam epitaxy is the process of precisely depositing epitaxially-aligned atomically-thin crystalline layers, or epilayers, of elemental materials onto a substrate in an ultra-high vacuum environment. We are thea leading supplier of MBE systems worldwide.

Our MBE systems, sources, and components are used to develop and manufacture critical epitaxial layerscompound semiconductor devices in a wide variety of applications such as solar cells,high-power fiber lasers, infrared detectors, mobile phones, radar systems, high efficiency solar cells, and displays.basic materials science research. For many compound semiconductors, MBE is the critical step of the fabrication process, ultimately determining device functionality and overall performance. We provideoffer a full complement of MBE systems and componentscustomized for the specific end application depositing on single 3” substrates up to fully automated production of wireless devices (e.g., power amplifiers, high electron mobility transistors, or hetero-junction bipolar transistors) and a broad array of research applications for new compound semiconductor materials. In 2013, we introduced the GENxplor™ R&D MBE System, the industry’s first fully-integrated MBE system for the compound semiconductor research and development market.systems that can deposit on seven 6” substrates simultaneously. The GENxplor® MBE system creates high quality epitaxial layers on substrates up to 3” in diameter and is ideal for cutting edgecutting-edge research on a wide variety of materials including gallium arsenide,GaAs, antimonides, nitrides, and oxides. Our GEN2000The GENxcel® and

GEN200® production MBE systems continuesystem extends the same performance of the GENxplor to set standards for volume production of MBE-based compound semiconductor devices.4” diameter substrates.

 

Other Deposition and Industrial Products3D Wafer Inspection Systems

 

We makeAs the semiconductor industry continues its pursuit of increased productivity and performance by shrinking device dimensions along Moore’s law, manufacturers are running into bottlenecks limited by fundamental materials properties and lithographic resolution. The industry has opted for 3D integration schemes to circumvent these limitations (e.g. Vertical NAND, HAR DRAM, Logic FinFET). The high volume manufacturing ramp of these 3D schemes requires low cost, high performance 3D wafer inspection systems. The Superfast 3D Wafer Inspection System is a broad arrayCoherent Gradient Sensing (“CGS”) based 3D wafer inspection system that enables the wafer fab to inspect the patterned wafer at key processing steps, enabling statistical process control as well as advanced process control (“APC”) for topography, displacement, and stress.

Atomic Layer Deposition and Other Deposition Systems

ALD is a thin-film deposition method in which a film is deposited on a substrate uniformly with precise control down to the atomic scale. Veeco offers a full suite of ALD systems for non-semiconductor front-end production applications across a wide range of markets and applications such as energy, optical, electronics, MEMS, nanostructures, and biomedical. Other deposition systems includinginclude Physical Vapor Deposition, Diamond LikeDiamond-Like Carbon Deposition, and Chemical Vapor Deposition Systems. In addition, our Optium® products generally are used in “back-end” applications in data storage fabrication facilities where TFMHs or “sliders” are fabricated. This equipment includes lapping tools, which enable precise material removal within three nanometers, which is necessary for advanced TFMHs. We also manufacture tools that slice and dice wafers into row bars and TFMHs.

 

Sales and Service

 

We sell our products and services worldwide primarily through various strategically located facilities in the United States, Europe, and the Asia-Pacific region. We believe that our customer service organization is a significant factor in our success. We provide service and support on a warranty, service contract, and an individual service-call basis. We believe that offering timely support creates stronger relationships with customers and provides us with a significant competitive advantage.customers. Revenue from the sales of parts, upgrades, service, and support represented approximately 22%28%, 25%27%, and 29%28% of our net sales for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, respectively. Parts and upgrade sales represented approximately 18%23%, 21%22%, and 23%22% of our net sales for those years, respectively, and service and support sales were 4%5%, 4%5%, and 6% respectively.

 

Customers

 

We sell our products to many of the world’s LED, MEMS, OSAT, HDD, and semiconductor manufacturers, as well as research centers and universities. We rely on certain principal customers for a significant portion of our sales. Sales to San’an Optoelectronics

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Focus Lighting Tech Co. and KAISTAR Lighting (Xiamen) Co. eachaccounted for more than 10% of our total net sales in 2018; sales to OSRAM Opto Semiconductors accounted for more than 10% of our total net sales for 2015; sales to HC SemiTek Corp.2017 and Seoul Viosys Co. each accounted for more than 10% of our total net sales in 2014; sales to HC SemiTek Corp. accounted for more than 10% of our total net sales in 2013.2016. If any principal customer discontinues its relationship with us or suffers economic difficulties, our business prospects, financial condition, and operating results could be materially and adversely affected.

 

Research and Development

 

Our research and development functions are continually focused on the timely creation of new products and enhancements to existing products, both of which are necessary to maintain our competitive position. We collaborate with our customers to align our technology and product roadmaps to customer requirements. Our research and development activities take place at our facilities in Fremont,San Jose, California; Waltham, Massachusetts; St. Paul, Minnesota; Somerset, New Jersey; Plainview, New York; Poughkeepsie, New York;Horsham, Pennsylvania; and Horsham, Pennsylvania.Singapore.

 

Our research and development expenses were approximately $78.5 million, $81.2 million, and $81.4 million, or approximately 16%, 21%, and 25% of net sales for the years ended December 31, 2015, 2014, and 2013, respectively. These expenses consisted primarily of salaries, project materials, and other product development and enhancement costs.

Suppliers

 

We outsource a portion of our manufacturingcertain functions to third parties, including the manufacture of all or substantially allseveral of our MOCVD systems, ion beam and other data storage systems, and ion sources. We primarilysystems. While we rely on several suppliersour outsourcing partners to perform their contracted functions, we maintain some level of internal manufacturing capability for the manufacturing of these systems. In addition, certainRefer to Item 1A, “Risk Factors,” for a description of the componentsrisks associated with our reliance on suppliers and sub-assemblies included in our products are obtained from a single source or a limited group of suppliers.outsourcing partners.

 

Backlog

 

Our backlog consists of orders for which we received a firm purchase order, a customer-confirmed shipment date within twelve months, and a deposit when required. Our backlog decreased to $186.0$288.3 million at December 31, 20152018 from $286.7

$334.3 million at December 31, 2014.2017. During 2015,the year ended December 31, 2018, we recordedincreased backlog adjustmentsby approximately $2.9 million relating to the adoption of ASC Topic 606, Revenue from Contracts with Customers, while adjusting for a decrease in backlog of approximately $7.7$6.0 million relating to orders that no longer met our bookings criteria.

 

Competition

 

In each of the markets that we serve, we face substantial competition from established competitors, some of which have greater financial, engineering, and marketing resources than us,we do, as well as from smaller competitors. In addition, many of our products face competition from alternative technologies, some of which are more established than those used in our products. Significant factors for customer selection of our tools include system performance, accuracy, repeatability, ease of use, reliability, cost of ownership, and technical service and support. None of our competitors compete with us across all of our product lines.

 

Our principal competitors include: Advanced Micro-Fabrication Equipment (AMEC); Aixtron; AMEC; Applied Materials; Canon Anelva; DCA Instruments;Canon; Grand Plastics Technology Corporation; LAM Research; Leybold Optics; Oerlikon; Orbotech; Oxford Instruments;Mattson Technology; Riber; Rudolph Technologies; Scientech; Taiyo Nippon Sanso;Screen Semiconductor Solutions; and Tang Optoelectronics Equipment Company (TOPEC).Shanghai Micro Electronics Equipment.

 

Intellectual Property

 

Our success depends in part on our proprietary technology. Althoughtechnology, and we attempt to protect our intellectual property rights through patents, copyrights, trade secrets, and other measures, there can be no assurance that we will be able to protect our technology adequately or that competitors will not be able to develop similar technology independently. We have over 300800 patents and pending applications in the United States and other countries and have additional applications pending for new inventions.countries.

 

We have patents and exclusive and non-exclusive licenses to patents owned by others covering certain of our products, which we believe provide us with a competitive advantage. We have a policy of seeking patents on inventions concerning new products and improvements as part of our ongoing research, development, and manufacturing activities. We believe that there is no single patent or exclusive or non-exclusive license to patents owned by others that is critical to our operations, as the success of our business depends primarily on the technical expertise, innovation, customer satisfaction, and experience of our employees. Refer to Item 1A, “Risk Factors,” for a description of risks associated with intellectual property.

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We also rely upon trade secret protection for our confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or that we can meaningfully protect our trade secrets. In addition, we cannot be certain that we will not be sued by third parties alleging that we have infringed their patents or other intellectual property rights. If any third party sues us, our business, results of operations, or financial condition could be materially adversely affected.

Employees

 

At December 31, 20152018 we had 7831,043 employees, of which there were 200302 in manufacturing and testing, 8695 in sales and marketing, 147221 in service and product support, 201281 in engineering and research and development, and 149144 in information technology, general administration, and finance. The success of our future operations depends on our ability to recruit and retain engineers, technicians, and other highly skilled professionals who are in considerable demand. We feel that we have adequate programs in place to attract, motivate, and retain our employees. We monitor industry practices to make sure that our compensation and employee benefits remain competitive. However, there can be no assurance that we will be successful in recruiting or retaining key personnel. We believe that our employee relations are good. Refer to Item 1A, “Risk Factors,” for a description of risks associated with employee retention and recruitment.

 

Financial Information About Segments and Geographic Areas

We operate as a single reportable segment and report our financial results in four geographic regions: the United States; China; Europe, Middle East, and Africa (“EMEA”); and the Rest of World (“ROW”). Refer to Note 18, “Segment Reporting and Geographic Information,” in the Notes to the Consolidated Financial Statements for financial data pertaining to our geographic operations.

Available Information

 

Our corporate website address is www.veeco.com. All filings we make with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, our proxy statements and any amendments thereto filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available for free in the Investor Relations section of our website as soon as reasonably practicable after they are filed with or furnished to the SEC. Our SEC filings are available to be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained for free on the SEC’s website at www.sec.gov. The reference to our website address does not constitute inclusion or incorporation by reference of the information contained on our website in this Form 10-K or other filings with the SEC, and the information contained on our website is not part of this document.

 

Item 1A. Risk Factors

 

Key Risk Factors That May Impact Future Results

 

Stockholders should carefully consider carefully the risk factors described below. Any of these factors, many of which are beyond our control, could materially and adversely affect our business, financial condition, operating results, cash flow, and stock price.

 

Unfavorable market conditions have adversely affected, and may continue to adversely affect, our operating results.

 

Conditions of the markets in which we operate are volatile and have deteriorated significantly in many of the countries and regions in which we do business and may remain or become further depressed in the future. We have experienced, and may in the future continue to experience, customer rescheduling and, to a lesser extent, cancellations of orderssignificant deterioration. Demand for our products.equipment and services can change depending on several factors, including the nature and timing of technology inflections, the emergence of new technologies and competitors, production capacity and end-user demand, international trade barriers, access to affordable capital, and general economic conditions (including a potentially prolonged U.S. government shutdown). Changing market conditions require that we continuously monitor and reassess our strategic resource allocation decisions. If we fail to properly adapt to changing business environments, we may lack the infrastructure and resources necessary to scale up our businesses to successfully compete during periods of growth, or we may incur excess fixed costs during periods of decreasing demand. Adverse market conditions relative to our products couldhave resulted in, and may continue to result in:

·

reduced demand for our products;

·

rescheduling and cancellations of orders for our products, resulting in negative backlog adjustments;

·

asset impairments, including the impairment of goodwill and other intangible assets;

·

increased price competition leading to lower margin for our products;

·

increased competition from sellers of used equipment or lower-priced alternatives to our products;

·

increased inventory obsolescence;

·

disruptions in our supply chain as we reduce our purchasing volumes and limit our contract manufacturing operations;

·

higher operating costs as a percentage of revenues; and

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·reduced demand for our products;

·rescheduling and cancellationsTable of orders for our products, resulting in negative backlog adjustments;Contents

·increased price competition leading to lower margin for our products;

·increased competition from sellers of used equipment or lower-priced alternatives to our products;

·increased inventory obsolescence;

·increased uncollectable amounts due from our customers resulting in increased reserves for doubtful accounts and write-offs of accounts receivable;

·disruptions in our supply chain as we reduce our purchasing volumes and limit our contract manufacturing operations; and

·higher operating costs as a percentage of revenues.

·

an increase in uncollectable amounts due from our customers resulting in increased reserves for doubtful accounts and write-offs of accounts receivable.

If the markets in which we participate failcontinue to experience a recoverydeteriorations or experience a further downturn,downturns, this could have a further negativenegatively impact on our sales and revenue generation, margins, and operating expenses, and profitability.

 

A reduction or eliminationWe are exposed to the risks of foreign government subsidies and economic incentives may adversely affect the future order rate for our MOCVD equipment.operating a global business.

 

We generateMost of our sales are to customers located outside of the United States, and we expect sales from non-U.S. markets to continue to represent a significant portion of our revenue in China. In recent years, the Chinese government has provided various incentives to encourage development of the LED industry, including subsidizing a significant portion of the purchase cost of MOCVD equipment. These subsidies have enabled and encouraged certain customers in this region to purchase more of our MOCVD equipment than these customers might have purchased without these subsidies. The availability of these subsidies has varied over time and may end at some pointsales in the future. A reduction or elimination of these incentives may result in a reduction in future orders for our MOCVD equipment in this region, which could materiallyOur non-U.S. sales and adversely affect our business, financial condition, and results of operations.  In addition, in an effort to promote Chinese competition, the Chinese government could impose restrictions on the receipt of these subsidies, including requirements that the purchased equipment be sourced locally.

A related risk is that many customers use or had planned to use Chinese government subsidies, in addition to other incentives from the Chinese government, to build new manufacturing facilities or to expand existing manufacturing facilities. Delays in the start-up of these facilities or the cancellation of construction plans altogether, together with other related issues pertaining to customer readiness, could adversely impact the timing of our revenue recognition, could result in order cancellations, a reduction in order backlog, and could have other negative effects on our business, financial condition, and results of operations.

The cyclicality of the industries we serve directly affects our business.

Our business depends in large part upon the capital expenditures of manufacturers in the LED, mobile communication, data storage, and other device markets. Weoperations are subject to risks inherent in conducting business outside the business cycles of these industries, the timing, length, and volatilityUnited States, many of which are difficult to predict. beyond our control including:

·

political and social attitudes, laws, rules, regulations, and policies within countries that favor local companies over U.S. companies, including government-supported efforts to promote the development and growth of local competitors;

·

global trade issues and uncertainties with respect to trade policies, including tariffs, trade sanctions, and international trade disputes, and the ability to obtain required import and export licenses;

·

differing legal systems and standards of trade which may not honor our intellectual property rights and which may place us at a competitive disadvantage;

·

pressures from foreign customers and foreign governments for us to increase our operations and sourcing in the foreign country;

·

multiple conflicting and changing governmental laws and regulations, including varying labor laws and tax regulations;

·

reliance on various information systems and information technology to conduct our business, making us vulnerable to additional cyberattacks by third parties or breaches due to employee error, misuse, or other causes, that could result in further business disruptions, loss of or damage to our intellectual property and confidential information (and that of our customers and other business partners), reputational harm, transaction errors, processing inefficiencies, or other adverse consequences;

·

regional economic downturns, varying foreign government support, and unstable political environments;

·

difficulties in managing a global enterprise, including staffing, managing distributors and representatives, and repatriating cash;

·

longer sales cycles and difficulties in collecting accounts receivable; and

·

different customs and ways of doing business.

These industries have historically been highly cyclical and have experienced significant economic downturns inchallenges, many of which are associated with sales into the last decade. As a capital equipment provider, our revenue depends in large part on the spending patterns of these customers, who often delay expenditures or cancel or reschedule orders in reaction to variations in their businesses or general economic conditions. In downturns, we must be able to quickly and effectively align our costs with prevailing market conditions, as well as motivate and retain key employees. However, because a portion of our costs are fixed, our ability to reduce expenses quickly in response to revenue shortfalls may be limited. Downturns in one or more of these industriesAsia-Pacific region, have had and will likelymay continue to have a material adverse effect on our business.

International trade disputes could result in increases in tariffs and other trade restrictions and protectionist measures that could negatively impact our operations.

Particularly in light of the complex relationships among China, Taiwan, Korea, Japan, and the United States, there is risk that political and economic pressures may lead to additional international trade disruptions. Any such disruptions could adversely affect our operations and sales in the Asia-Pacific region and in other countries in which we operate. Tariffs, additional taxes, or trade barriers may increase our manufacturing costs, decrease margins, reduce the competitiveness of our products, and inhibit our ability to sell products or purchase necessary equipment and supplies, which could have a material adverse effect on our results of operations and financial condition. Foreign governments may require, in exchange for access to their markets, the use of local suppliers or the partnering with local companies for manufacturing and development purposes, which may necessitate the sharing of sensitive information and intellectual property rights. Foreign governments may provide special incentives to local customers to purchase from local competitors, even if their products

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are inferior. Many of these challenges are present in China, from which we have historically generated a significant portion of our revenue. These and other measures could adversely impact our revenues, margins, and financial condition.

Disruptions in our information technology systems or data security incidents could result in significant financial, legal, regulatory, business, and reputational harm to us.

We are increasingly dependent on information technology systems and infrastructure, including mobile technologies, to operate our business. In the ordinary course of our business, we collect, store, process and transmit significant amounts of sensitive information, including intellectual property, proprietary business information, personal information, and other confidential information, including that of our customers and other business partners. It is critical that we do so in a secure manner to maintain the confidentiality, integrity, and availability of this sensitive information. We have also outsourced elements of our operations (including elements of our information technology infrastructure) to third parties, and as a result, we manage a number of third-party vendors who have access to our computer networks and our confidential information.

All information systems are subject to disruption, breach, or failure. Potential vulnerabilities can be exploited from inadvertent or intentional actions of our employees, third-party vendors, business partners, or by malicious third parties. Attacks of this nature are increasing in their frequency, levels of persistence, sophistication, and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of expertise and motives (including industrial espionage), including organized criminal groups, nation states, and others. In addition to the extraction of sensitive information, attacks could include the deployment of harmful malware, ransomware, or other means which could affect service reliability and threaten the confidentiality, integrity, and availability of information. Significant disruptions in our, or our third-party vendors’, information technology systems or other data security incidents could adversely affect our business operations and result in the loss or misappropriation of, and unauthorized access to, sensitive information, which could result in financial, condition,legal, regulatory, business, and operating results. Alternatively, during periodsreputational harm to us.

On November 1, 2018, we announced the discovery of rapid growth,an attack on our computer system by what appears to be a highly-sophisticated actor. We notified law enforcement of the attack and retained forensic experts to assist with the investigation.  It currently remains unclear whether we mustwill be able to acquire and/determine the extent of the breach or develop sufficient manufacturing capacitythe potential impact on our operations. Also unclear is whether we will be able to meet customer demandidentify who is responsible for the attack, or whether we will be able to pursue legal action or other remedies. The attack, including the expenses incurred to address it, may have an adverse effect on our results of operations and attract, hire, assimilate,financial condition, may result in litigation, and retain a sufficient numbermay cause reputational harm. We are continuing to analyze the effects of qualified people. We cannot give assurancesthe incident, along with appropriate remediation to our information technology systems, and this analysis and the related remediation efforts could reveal that our net sales and operating results will not be adversely affected if our customers experience economic downturns or slowdowns in their businesses.other breaches have occurred. 

 

We operateWhile we are engaged in industries characterized by rapid technological change.remediation and have implemented, and are continuing to implement, security measures intended to protect our information technology systems and infrastructure, there can be no assurance that such remediation and security measures will successfully prevent further security incidents. Additional information technology system disruptions, whether from attacks on our technology environment or from computer viruses, natural disasters, terrorism, war or other causes, could result in a material disruption in our business operations, force us to incur significant costs and engage in litigation, harm our reputation, and subject us to liability under laws, regulations, and contractual obligations.

 

EachWe may be unable to effectively enforce and protect our intellectual property rights. 

Our success depends in part upon the protection of the industries in which we operate is subjectour intellectual property rights. We rely primarily on patent, copyright, trademark, and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods, to rapid technological change. Our abilityprotect our proprietary information, technologies, processes, and brand identity. We own various U.S. and international patents and have additional pending patent applications relating to remain competitive depends oncertain of our ability to enhance existing products and developtechnologies. The process of seeking patent protection is lengthy and manufacture new products in a timelyexpensive, and cost effective manner and to accurately predict technology transitions. Because new product development commitments must be made well in advance of sales, we must anticipate the future demand for products when selecting which development programs to fund and pursue. Our financial results depend to a great extent on the successful introduction of several new products, many of which require achieving increasingly stringent technical specifications. We cannot be certain that wepending or future applications will actually result in issued patents or that issued patents will be successful in selecting, developing, manufacturing, and marketing newof sufficient scope or strength to provide meaningful protection or commercial advantage. In addition, our intellectual property rights may be circumvented, invalidated, or rendered obsolete by the rapid pace of technological change, or through efforts by others to reverse engineer our products or new technologies or in enhancing existing products. Our performance may be adversely affected ifdesign around patents that we are unable to accurately predict evolving market trends and related customer needs and to effectively allocate our resources among new and existing products and technologies.

We are also exposed to potential risks associated with unexpected product performance issues. Our product designs and manufacturing processes are complex and could contain unexpected product defects, especially when products are first introduced. Unexpected product performance issues could result in significant costs and damages, including increased service and warranty expenses, the need to provide product replacements or modifications, reimbursement for damages caused by our products, product recalls, related litigation, and product write-offs and disposal costs. These costs could be substantial and our reputation could be harmed, resulting in reduced demand forown. Policing unauthorized use of our products and could have a negative effect ontechnologies is difficult and time consuming and the laws of other countries may not protect our business, financial condition, and results of operations.

We have a concentrated customer base, located primarily in a limited number of regions, which operate in highly concentrated industries.

Our customer base continues to be highly concentrated. Orders from a relatively limited number of customers have accounted for, and likely will continue to account for, a substantial portion ofproprietary rights as fully or as readily as U.S. laws. Given these limitations, our net sales, which may lead customers to demand pricing and other terms less favorable to us. Our five largest customers accounted for 55% of our total net sales in 2015. Customer consolidation activity involving some of our largest customers could result in an even greater concentration of our sales in the future. Management changes at key customer accounts could result in a loss of future sales due to vendor preferences or other reasons and may introduce new challenges in managing customer relationships.

If a principal customer discontinues its relationship with us or suffers economic setbacks, our business, financial condition, and operating results could be materially and adversely affected. Our ability to increase sales in the futuresuccess will depend in part upon our ability to obtain orders from new customers.innovate ahead of our competitors.

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In addition, our outsourcing strategy requires that we share certain portions of our technology with our outsourcing partners, which poses additional risks of infringement and trade secret misappropriation. Infringement of our rights by a third party, possibly for purposes of developing and selling competing products, could result in uncompensated lost market and revenue opportunities. Similar exposure could result in the event that former employees seek to compete with us through their unauthorized use of our intellectual property and proprietary information. We cannot be certain that the protective steps and measures we have taken will prevent the misappropriation or unauthorized use of our proprietary information and technologies, nor can we be ablecertain that applicable intellectual property laws, regulations, and policies will not be changed in a manner detrimental to do so. In addition, because a relatively small numberthe sale or use of large manufacturers, many of whom are our customers, dominateproducts.

Litigation has been required in the industries in which they operate, itpast, and may be especially difficult for usrequired in the future, to replace these customers if we lose their business. A significant portionenforce our intellectual property rights, protect our trade secrets, and to determine the validity and scope of orders in our backlog are orders from our principal customers.

In addition, a substantial investment is required by customers to install and integrate capital equipment into a production line.proprietary rights of others. As a result once a manufacturer has selected a particular vendor’s capital equipment,of any such litigation, we could lose our ability to enforce one or more patents, incur substantial costs, and jeopardize relationships with current or prospective customers or suppliers. Any action we take to enforce or defend our intellectual property rights could absorb significant management time and attention, and could otherwise negatively impact our operating results.

We may be subject to claims of intellectual property infringement by others.

We receive communications from time to time from other parties asserting the existence of patent or other rights which they believe cover certain of our products. We also periodically receive notice from customers who believe that we are required to indemnify them for damages they may incur related to infringement claims made against these customers by third parties. Our customary practice is to evaluate such assertions and to consider the manufacturer generally relies uponavailable alternatives, including whether to seek a license, if appropriate. However, we cannot ensure that equipment forlicenses can be obtained or, if obtained, will be on acceptable terms or that costly litigation or other administrative proceedings will not occur. If we are not able to resolve a claim, negotiate a settlement of the specific production line applicationmatter, obtain necessary licenses on commercially reasonable terms, or successfully prosecute and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, if a customer selects a competitor’s product over ours, wedefend our position, our business, financial condition, and results of operations could experience difficulty selling to that customer for a significant period of time.be materially and adversely affected.

 

Furthermore, we doThe price of our common shares is volatile, has declined significantly, and could further decline.

The stock market in general and the market for technology stocks in particular has experienced significant volatility. The trading price of our common shares has declined significantly, and could continue to decline independent of the overall market, and shareholders could lose all or a substantial part of their investment. The market price of our common shares could fluctuate significantly in response to several factors, including among others:

·

difficult macroeconomic conditions, international trade disputes, unfavorable geopolitical events, and general stock market uncertainties, such as those occasioned by a global liquidity crisis and a failure of large financial institutions;

·

the emergence of competitors and competing technologies;

·

receipt of large orders or cancellations of orders for our products;

·

issues associated with the performance and reliability of our products;

·

actual or anticipated variations in our results of operations;

·

announcements of financial developments or technological innovations;

·

our failure to meet the performance estimates of investment research analysts;

·

changes in recommendations and financial estimates by investment research analysts;

·

strategic transactions, such as acquisitions, divestitures, and spin-offs, and the results of our investment decisions;

·

the commencement of, and rulings on, litigation and legal proceedings;

·

the dilutive impact of our Convertible Senior Notes; and

·

the occurrence of major catastrophic events.

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As with many technology companies, the price of our common shares has fluctuated significantly in the past and is likely to be volatile in the future. Securities class action litigation is often brought against a company following periods of volatility in the market price of its securities. We have defended security class actions lawsuits in the past, and are currently defending such a lawsuit now. These lawsuits, if and when brought, can result in substantial costs and a diversion of management’s attention and resources, which can adversely affect our financial condition, results of operations, and liquidity.

We may be required to take additional impairment charges on assets.

We are required to assess goodwill and indefinite-lived intangible assets annually for impairment, or on an interim basis whenever certain events occur or circumstances change, such as an adverse change in business climate or a decline in the overall industry, that would more likely than not have long-term contracts withreduce the fair value below its carrying amount. We maintain a single reporting unit, and as such, if our customers. Asstock price decreases to the point where our fair value, as determined by our adjusted market capitalization, is less than the carrying value of our single reporting unit, this would also indicate a result, our agreements with our customers do not provide any assurance of future sales,potential impairment, and we are exposedmay be required to competitive price pressure on each new order we attempt to obtain. Our failure to obtain new sales orders from new or existing customers would have a negative impact onrecord an impairment charge in that period, which could adversely affect our results of operations. Such an impairment charge was taken by the Company during the fourth quarter of 2018, in the amount of $122.8 million.

 

Our customer base is also highly concentrated in terms of geography, and the majorityAs part of our saleslong term strategy, we may pursue future acquisitions of other companies or assets which could potentially increase our assets. We are required to customers locatedtest our long-lived assets, including acquired intangible assets and property, plant, and equipment, for recoverability and impairment whenever there are indicators of impairment such as an adverse change in a limited numberbusiness climate. Adverse changes in business conditions or worse-than-expected performance by these acquired companies could negatively impact our estimates of countries. In 2015, 51%future operations and result in impairment charges to these assets. For example, during the second quarter of 2018, we recorded an asset impairment charge of $252.3 million related to the intangible assets acquired as part of our total net sales were to customers located in China. Dependence upon sales emanating from a limited numberacquisition of regions increasesUltratech, Inc. If our risk of exposure to local difficultiesassets are further impaired, our financial condition and challenges, such as those associated with regional economic downturns, political instability, fluctuating currency exchange rates, natural disasters, social unrest, pandemics, terrorism, or acts of war. Our reliance upon customer demand arising primarily from a limited number of countries could materially adversely impact our future results of operations.operations could be materially and adversely affected.

 

We face significant competition.

 

We face significant competition throughout the world, which may increase as certain markets in which we operate continue to evolve. Some of our competitors have greater financial, engineering, manufacturing, and marketing resources than us. Other competitors are located in regions with lower labor costs and other reduced costs of operation. In addition, our ability to compete in foreign countries against local manufacturers may be hampered by nationalism, social attitudes, laws, regulations, and policies within such countries that favor local companies over U.S. companies or that are otherwise designed to promote the development and growth of local competitors. Furthermore, we face competition from smaller emerging equipment companies whose strategy is to provide a portion of the products and services we offer, with a focused approach on innovative technology for specialized markets. New product introductions or enhancements by us or our competitors could cause a decline in sales or loss of market acceptance of our existing or prior generation products. Increased competitive pressure could also lead to intensified price competition resulting in lower margins. Our failure to compete successfully with these other companies would seriously harm our business.

 

To remain competitive, we may enter into strategic alliances with customers, suppliers, and other third parties to explore new market opportunities and possible technological advancements. These alliances may require significant investments of capital and other resources and often involve the exchange of sensitive confidential information. The success of these alliances may depend on factors over which we have limited control and will likely require ongoing cooperation and good faith efforts from our strategic partners. Strategic alliances are inherently subject to significant risks, and the inability to effectively manage these risks could materially and adversely affect our business and operating results.

 

The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly.We operate in industries characterized by rapid technological change.

 

We derive a substantial portionEach of our net salesthe industries in any fiscal period from the sale of a relatively small number of high-priced systems. As a result, the timing of recognition of revenue for a single transaction could have a material effect on our sales and operating results for a particular fiscal period. As is typical in our industry, orders, shipments, and customer acceptances often occur during the last few weeks of a quarter. As a result, a delay of only a week or two can impact which period revenue is reported in and can cause volatility in our revenue for a given reporting period. Our quarterly

results have fluctuated significantly in the past, and we expect this trend to continue. If our orders, shipments, net sales, or operating results in a particular quarter do not meet expectations, our stock price may be adversely affected.

Our sales cycle is long and unpredictable.

Historically, we have experienced long and unpredictable sales cycles (the period between our initial contact with a potential customer and the time when we recognize revenue from that customer). Our sales cycle can exceed twelve months. The timing of an order often depends on the capital expenditure budget cycle of our customers, which is completely out of our control. In addition, the time it takes us to build a product to customer specifications typically ranges from three to six months. When coupled with the fluctuating amount of time required for shipment, installation, and final acceptance, our sales cycles often vary widely, and variations in length of this period can cause further fluctuations in our operating results. As a result of our lengthy sales cycle, we may incur significant research, development, selling, general, and/or administrative expenses before we generate revenues for these products. We may never generate the anticipated revenues if a customer cancels or changes plans. Variations in the length of our sales cycle could also cause our sales and, therefore, our cash flow and results of operations to fluctuate widely from period to period.

Our backlogoperate is subject to customer cancellation or modification which could result in decreased sales, increased inventory obsolescence, and/or liabilities to our suppliers for products no longer needed.

Customer purchase orders may be cancelled or rescheduled by the customer, sometimes with limited or no penalties, which may result in increased and/or unrecoverable costs for the Company. We adjust our backlog for such cancellations, contract modifications, and delivery delays that result in a delivery period in excess of one year, among other items. A downturn in one or more of our businesses could result in increases in order cancellations and/or postponements.

We write-off excess and obsolete inventory based on historical trends, future usage forecasts, and other factors including the consideration of the amount of backlog we have on hand. If our backlog is canceled or modified, our estimates of future product demand may prove to be inaccurate, in which case we may have understated the write-off required for excess and obsolete inventory. In the future, if we determine that our inventory is overvalued, we will be required to recognize such costs in our financial statements at the time of such determination. In addition, we place orders with our suppliers based on our customers’ orders. If our customers cancel their orders with us, we may not be able to cancel our orders with our suppliers or may be required to take a charge for these cancelled commitments to our suppliers. Any such charges could be material to our results of operations and financial condition.

rapid technological change. Our failure to estimate customer demand accurately could result in inventory obsolescence, liabilities to our suppliers for products no longer needed, and/or manufacturing interruptions or delays which could affect our ability to meet customer demand.

Our businessremain competitive depends on our ability to enhance existing products and develop and manufacture new products in a timely and cost effective manner and to accurately forecastpredict technology transitions. New product development commitments must be made well in advance of sales, and supply equipment, services,we must anticipate the future demand for products when selecting which development

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programs to fund and pursue. Our financial results depend on the successful introduction of new products, many of which require the achievement of increasingly stringent technical specifications. We may not be successful in selecting, developing, manufacturing, and marketing new products and new technologies or in enhancing our existing products. Our performance may be adversely affected if we are unable to accurately predict evolving market trends and related customer needs and to effectively allocate our resources among new and existing products that meetand technologies.

We are also exposed to potential risks associated with unexpected product performance issues. Our product designs and manufacturing processes are complex and could contain unexpected product defects, especially when products are first introduced. Unexpected product performance issues could result in significant costs and damages, including increased service and warranty expenses, the rapidly changing technicalneed to provide product replacements or modifications, reimbursement for damages caused by our products, product recalls, related litigation, product write-offs, and volume requirements of our customers, which depends in part on the timely delivery of parts, components, and subassemblies (collectively, “parts”) from suppliers. Uncertain worldwide economic conditions and market instabilities make it difficult for us (and our customersdisposal costs. These costs could be substantial and our suppliers) to accurately forecast future product demand. If actualreputation could be harmed, resulting in a reduced demand for our products is different than expected, we may purchase more/fewer parts than necessary or incur costs for canceling, postponing, or expediting delivery of parts. If we overestimate the demand for our products, excess inventory could result, which could be subject to heavy price discounting, which could become obsolete, and/or which could subject us to liabilities to our suppliers for products no longer needed. Similarly, we may be harmed in the event that our competitors overestimate the demand for their products and engage in heavy price discounting practices as a result. In addition, the volatility of demand for capital equipment increases capital, technical, and other risks for companies in our supply chain.

Furthermore, some key parts may be subject to long lead-times and/or obtainable only from a single supplier or limited group of suppliers, and some sourcing or subassembly is provided by suppliers located in countries other than the United States. We may experience significant interruptions of our manufacturing operations, delays in our ability to deliver products or services, increased costs, or customer order cancellations as a result of:

·the failure or inability of suppliers to timely deliver quality parts;

·volatility in the availability and cost of materials;

·difficulties or delays in obtaining required import or export approvals;

·information technology or infrastructure failures;

·natural disasters (such as earthquakes, tsunamis, floods, or storms); or

·other causes (such as regional economic downturns, pandemics, political instability, terrorism, or acts of war) that could result in delayed deliveries, manufacturing inefficiencies, increased costs, or order cancellations.

In addition, in the event of an unanticipated increase in demand for our products, our need to rapidly increase our business and manufacturing capacity may be limited by working capital constraints of our suppliers and may exacerbate any interruptions in our manufacturing operations and supply chain and the associated effect on our working capital. Any or all of these factors could materially and adversely affect our business, financial condition, and results of operations.

Our failure to successfully manage our outsourcing activities or failure of our outsourcing partners to perform as anticipated could adversely affect our results of operations and our ability to adapt to fluctuating order volumes.

To better align our costs with market conditions, increase the percentage of variable costs relative to total costs, and to increase productivity and operational efficiency, we have outsourced certain functions to third parties, including the manufacture of substantially all of our MOCVD systems, ion beam and other data storage systems, and ion sources. We rely heavily on our outsourcing partners to perform their contracted functions to allow us the flexibility to adapt to changing market conditions, including periods of significantly diminished order volumes. If our outsourcing partners do not perform as required, or if our outsourcing model does not allow us to realize the intended cost savings and flexibility, our results of operations (and those of our third party providers) may be adversely affected. Disputes and possibly litigation involving third party providers could result, and we could suffer damage to our reputation. Dependence on contract manufacturing and outsourcing may also adversely affect our ability to bring new products to market. Although we attempt to select reputable providers, it is possible that one or more of these providers could fail to perform as we expect. In addition, the role of third party providers has required and will continue to require us to implement changes to our existing operations and adopt new procedures and processes for retaining and managing these providers in order to realize operational efficiencies, assure quality, and protect our intellectual property. If we do not effectively manage our outsourcing strategy or if third party providers do not perform as anticipated, we may not realize the benefits of productivity improvements, and we may experience operational difficulties, increased costs, manufacturing and/or installation interruptions or delays, inefficiencies in the structure and/or operation of our supply chain, loss of intellectual property rights, quality issues, increased product time-to-market and/or inefficient allocation of human resources, any or all of which could materially and adversely affect our business, financial condition, and results of operations.

We rely on a limited number of suppliers, some of whom are our sole source for particular components.

We currently outsource certain functions to third parties, including the manufacture of substantially all of our MOCVD systems, ion beam and other data storage systems, and ion sources. We rely on a small number of suppliers for the manufacturing of these systems. While we maintain some level of internal manufacturing capability for these systems, the failure of our suppliers to meet their contractual obligations under our supply arrangements and our inability to make alternative arrangements or resume the manufacture of these systems ourselves could have a material adverse effect on our relationships with our customers and/or our business, financial condition, and results of operations.

In addition, certain of the components and sub-assemblies included in our products are obtained from a single source or a limited group of suppliers. Our 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 our business, financial condition, and results of operations.

Our inability to attract, retain, and motivate employees could have a material adverse effect on our business.

Our success depends upon our ability to attract, retain, and motivate employees, including those in executive, managerial, engineering, and marketing positions, as well as highly skilled and qualified technical personnel and personnel to implement and monitor our financial and managerial controls and reporting systems. Attracting, retaining, and motivating such qualified personnel may be difficult due to challenging industry conditions, competition for such personnel by other technology companies, consolidations and relocations of operations, and workforce reductions. We have entered into employment agreements with certain key personnel but our inability to attract, retain, and motivate key personnel could have a material adversenegative effect on our business, financial condition, and results of operations.

 

Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.

We have completed several significant acquisitions in the past, and we will consider acquisitions of, or investments in, other businesses in the future. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including, but not limited to:

·difficulties and increased costs in integrating the personnel, operations, technologies, and products of acquired companies;

·diversion of management’s attention while evaluating, pursuing, and integrating the business to be acquired;

·the inability to complete proposed transactions as anticipated, resulting in obligations to pay professional and other expenses, including any applicable termination fees;

·potential loss of key employees of acquired companies, especially if a relocation or change in responsibilities is involved;

·difficulties in managing geographically dispersed operations in a cost-effective manner;

·the unattainability of expected synergies;

·unknown, underestimated, and/or undisclosed commitments or liabilities;

·increased amortization expense relating to intangible assets; and

·other adverse effects on our business, including the potential impairment and write-down of amounts capitalized as intangible assets and goodwill as part of the acquisition, as a result of technological advancements or worse-than-expected performance by the acquired company.

Our inability to effectively manage these risks could materially and adversely affect our business, financial condition, and results of operations. In addition, if we issue equity securities to pay for an acquisition, the ownership percentage of our then-current shareholders would be reduced and the value of the shares held by these shareholders could be diluted, which could adversely affect the price of our stock. If we use cash to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or other purposes.

Timing of market adoption of LED technology for general lighting is uncertain.

Our future business prospects depend largely on the market adoption of products that incorporate our technologies. Potential barriers to such adoption include higher initial costs and customer familiarity with, and substantial investment and know-how in, existing technologies. These barriers apply to the adoption of LED technology for general illumination applications, including residential, commercial, and street lighting markets. While the use of LED technology for general lighting has grown in recent years, challenges remain and widespread adoption (and the related demand for our products) may not occur at currently projected rates. Furthermore, the adoption of, or changes in, government policies that discourage the use of traditional lighting technologies may impact LED adoption.

Our sales to manufacturers are highly dependent on sales of consumer electronics applications, which can experience significant volatility due to seasonal and other factors and materially adversely impact our future results of operations.factors.

 

The demand for LEDs, HDDs, semiconductors, and our other productsdevices is highly dependent on sales of consumer electronics, such as televisions, and computer monitors, computers, tablets, digital video recorders, camcorders, MP3/4 players, smartphones, cell phones, and other mobile devices. Manufacturers of LEDs are among our largest customers and account for a substantial portion of our revenue. Factors that could influence the levels of spending on consumer electronic products include consumer confidence, access to credit, volatility in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors have had and could continue to have a material adverse effect on the demand for our customers’ products and, in turn, on our customers’ demand for our products and services impacting our financial condition and results of operations.services. Furthermore, manufacturers of LEDs have in the past overestimated their potential for market share growth. If this growth is overestimated, we may experience cancellations of orders in backlog, rescheduling of customer deliveries, obsolete inventory, and/orand liabilities to our suppliers for products no longer needed.

 

In addition, the demand for some of our customers’ products can be even more volatile and unpredictable due to the possibility of competing technologies, such as flash memory as an alternative to HDDs. Unpredictable fluctuations in demand for our customers’ products or rapid shifts in demand from our customers’ products to alternative technologies could materially and adversely impact our future results of operations.

 

We have a concentrated customer base, located primarily in a limited number of regions, which operate in highly concentrated industries.

Our operating resultscustomer base continues to be highly concentrated. Orders from a relatively limited number of customers have been,accounted for, and maylikely will continue to be, adversely affected by tightening credit markets.

Asaccount for, a global company with worldwide operations, we are subject to volatility and adverse consequences associated with economic downturns in different parts of the world. In the event of a downturn, manysubstantial portion of our net sales, which may lead customers may delay or further reduce their purchasesto demand pricing and other terms less favorable to us. Customer consolidation activity involving some of our products and services. If negative conditions in the credit markets prevent ourlargest customers from obtaining credit or necessary financing, product orders in these channels may decrease, which could result in lower revenue.an even greater concentration of our sales in the future. Management changes at key customer accounts could result in a loss of future sales due to vendor preferences or other reasons and may introduce new challenges in managing customer relationships.

If a principal customer discontinues its relationship with us or suffers economic setbacks, our business, financial condition, and operating results could be materially and adversely affected. Our ability to increase sales in the future will depend in part upon our ability to obtain orders from new customers and we cannot be certain that we will be successful in these efforts. In addition, because a relatively small number of large manufacturers, many of whom are our customers, dominate the industries in which they operate, it may be especially difficult for us to replace these customers if we may experience cancellationslose their business. A significant portion of orders in our backlog rescheduling of customer deliveries, and pricing pressures. Ifare orders from our suppliers face challenges in obtaining credit, in selling their products, or otherwise in operating their businesses, they may become unable to continue to offer the materials we use to manufacture our products, which could impair our operations.principal customers.

 

In addition, we finance some of our sales through trade credit. In additiona substantial investment is required by customers to ongoing credit evaluations of our customers’ financial condition, we seekinstall and integrate capital equipment into a production line. As a result, once a manufacturer has selected a particular vendor to mitigate our credit risk by obtaining deposits and/or letters of credit on certain of our sales arrangements. We could suffer significant lossessupply capital equipment, the manufacturer will often attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, if a customer whose accounts receivable

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selects a competitor’s product over ours, we have not secured fails or is otherwise unablecould experience difficulty selling to pay us, or if financial institutions providing lettersthat customer for a significant period of credit become insolvent. A significant loss in collections on our accounts receivable would have a negative impact on our financial condition and results of operations.time.

 

WeFurthermore, we do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide assurance of future sales, and we are exposed to the risks of operating a global business, including the needcompetitive price pressures on new orders we attempt to obtain export licenses for certain of our shipments and political risks in the countries we operate.obtain.

 

MostOur customer base is also highly concentrated in terms of geography, and the majority of our sales are to customers located outsidein a limited number of countries. Dependence upon sales emanating from a limited number of regions increases our risk of exposure to local difficulties and challenges, such as those associated with regional economic downturns, political instability, trade wars and other trade disruptions, fluctuating currency exchange rates, natural disasters, social unrest, pandemics, terrorism, and acts of war. Our reliance upon customer demand arising primarily from a limited number of countries could materially and adversely impact our future results of operations.

The cyclicality of the United States.industries we serve directly affects our business.

Our business depends in large part upon the capital expenditures of manufacturers in the LED, smartphones, data storage, and other device markets. We expect sales from non-U.S. marketsare subject to continuethe business cycles of these industries, the timing, length, and volatility of which are difficult to representpredict. These industries have historically been highly cyclical and have experienced significant economic downturns in the last decade. As a significantcapital equipment provider, our revenue depends in large part on the spending patterns of these customers, who often delay expenditures or cancel or reschedule orders in reaction to variations in their businesses or general economic conditions. In downturns, we must be able to quickly and effectively align our costs with prevailing market conditions, as well as motivate and retain key employees. However, because a portion of our salescosts are fixed, our ability to reduce expenses quickly in the future. Our non-U.S. sales and operations are subjectresponse to risks inherent in conducting business outside the United States, many of which are outside our control, including:

·difficulties in managing a global enterprise, including staffing, managing distributors and representatives, and repatriating cash in a tax efficient manner;

·regional economic downturns, varying foreign government support, and unstable political environments;

·political and social attitudes, laws, rules, regulations, and policies within countries that favor local companies over U.S. companies, including government-supported efforts to promote the development and growth of local competitors;

·pressures from foreign customers and foreign governments for us to increase our operations and sourcing in the foreign country;

·longer sales cycles and difficulty in collecting accounts receivable;

·multiple, conflicting, and changing governmental laws and regulations, including varying labor laws, tax regulations, import/export controls, and other trade barriers;

·reliance on various information systems and information technology to conduct our business, whichrevenue shortfalls may be vulnerable to cyber-attacks by third partieslimited. Downturns in one or breached due to employee error, misuse or other causes that could result in business disruptions, lossmore of or damage to intellectual property, transaction errors, processing inefficiencies, or other adverse consequences should our security practicesthese industries have had, and procedures prove ineffective; and

·different customs and ways of doing business.

These challenges, many of which are associated with sales into the Asia-Pacific region, may continue and recur again in the future, which couldwill likely have, a material adverse effect on our business.business, financial condition, and operating results. Alternatively, during periods of rapid growth, we must be able to acquire and develop sufficient manufacturing capacity to meet customer demand and attract, hire, assimilate, and retain a sufficient number of qualified people. Our net sales and operating results may be negatively affected if our customers experience economic downturns or slowdowns in their businesses.

The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly.

We derive a substantial portion of our net sales in any fiscal period from the sale of a relatively small number of high-priced systems. As a result, the timing of recognition of revenue for a single transaction could have a material effect on our sales and operating results for a particular fiscal period. As is typical in our industry, orders, shipments, and customer acceptances often occur during the last few weeks of a quarter. As a result, a delay of only a week or two can impact which period revenue is reported and can cause volatility in our revenue for a given reporting period. Our quarterly results have fluctuated significantly in the past and we expect this trend to continue. If our orders, shipments, net sales, or operating results in a particular quarter do not meet expectations, our stock price may be adversely affected as well.

Our sales cycle is long and unpredictable.

Historically, we have experienced long and unpredictable sales cycles (the period between our initial contact with a potential customer and the time that we recognize revenue for resulting sales to that customer). Our sales cycle can exceed twelve months. The timing of an order often depends on our customer’s capital expenditure budget, over which we have no control. In addition, political instability, terrorism, actsthe time it takes us to build a product to customer specifications typically ranges from three to six months. When coupled with the fluctuating amount of war, tsunamis,time required for shipment, installation, and final acceptance, our sales cycles often vary widely, and these variations can cause fluctuations in our operating results. As a result of our lengthy sales cycles, we may incur significant research, development, selling, general, and administrative expenses before we generate revenue for these products. We may never generate the anticipated revenue if a customer cancels or epidemicsotherwise changes its purchase plans, which could have an adverse effect on our business.

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Our backlog is subject to customer cancellation or modification which could result in regions wheredecreased sales, increased inventory obsolescence, and liabilities to our suppliers for products no longer needed.

Customer purchase orders may be cancelled or rescheduled by the customer, sometimes with limited or no penalties, which may result in increased or unrecoverable costs for the Company. We adjust our backlog for such cancellations, contract modifications, and delivery delays that result in a delivery period in excess of one year, among other items. A downturn in one or more of our businesses could result in an increase in order cancellations and postponements.

We write-off excess and obsolete inventory based on historical trends, future usage forecasts, and other factors including the amount of backlog we operatehave on hand. If our backlog is canceled or modified, our estimates of future product demand may adversely affect or disruptprove to be inaccurate, in which case we may have understated the write-off required for excess and obsolete inventory. In the future, if we determine that our business andinventory is overvalued, we will be required to recognize associated costs in our financial statements at the time of such determination. In addition, we place orders with our suppliers based on our customers’ orders. If our customers cancel their orders with us, we may not be able to cancel our orders with our suppliers. Any such charges could be materially adverse to our results of operations.operations and financial condition.

 

Furthermore, productsWe may be unable to obtain required export licenses for the sale of our products.

Products which are either manufactured in the United States or based on U.S. technology are subject to the U.S. Export Administration Regulations (“EAR”) when exported to and re-exported from international jurisdictions, in addition to the local jurisdiction’s export regulations applicable to individual shipments. Currently, our MOCVD, depositionMBE, and certain other systems and certain of our other products are controlled for export under the EAR. Licenses or proper license exceptions may be required for the shipment of our products to certain customers or countries. Obtaining an export license or determining whether an export license exception exists often requires considerable effort by us and cooperation from the customer, and customer-facility readiness andwhich can add time to the order fulfillment process. While we have generally been successful in obtainingWe may be unable to obtain required export licenses in a timely manner, there can be no assurance that this will continue or that anunable to qualify for export license canexceptions and, as a result, we may be obtained in each instance where it is required. If an export license is required but cannot be obtained, then we will not be permittedunable to export the productproducts to the customer.our customers. The administrative processing, potential delay and risk of ultimately not obtaining anrequired export licenseapprovals pose a particular disadvantage to us relative to our non-U.S. competitors who are not required to comply with U.S. export controls. Non-compliance with the EAR or other applicable export regulations could result in a wide range of penalties including the denial of export privileges, fines, criminal penalties, and the seizure of commodities. In the event that anyan export regulatory body determines that any of our shipments violate applicable export regulations, we could be fined significant sums and/orand our export capabilities could be restricted, which could have a material adverse impact on our business.

 

WeOur operating results may be exposed to liabilities under the Foreign Corrupt Practices Act and any determination that we violated these or similar laws could have a material adverse effect on our business.adversely affected by tightening credit markets.

 

WeAs a global company with worldwide operations, we are subject to volatility and adverse consequences associated with economic downturns in different parts of the Foreign Corrupt Practices Act (“FCPA”) and other laws that prohibit improper payments or offersworld. In the event of payments to foreign government officials, as defined by the statute, for the purpose of obtaining or retaining business. In addition,a downturn, many of our customers have policies limitingmay delay or prohibiting usreduce their purchases of our products and services. If negative conditions in the credit markets prevent our customers from providing certain typesobtaining credit or amounts of entertainment, meals, or gifts to their employees. It is our policy to implement safeguards to discouragenecessary financing, product orders in these practices by our employees and representatives. However, our safeguardschannels may prove to be ineffective and our employees, consultants, sales agents, or distributors may engagedecrease, which could result in conduct for which we may be held responsible.lower revenue. In addition, we may acquireexperience cancellations of orders in backlog, rescheduling of customer deliveries, and attendant pricing pressures. If our suppliers face challenges in obtaining credit, in selling their products, or otherwise in operating their businesses, their ability to continue to supply materials to us may be negatively affected.

In addition, we finance some of our sales through trade credit. In addition to ongoing credit evaluations of our customers’ financial condition, we seek to mitigate our credit risk by obtaining deposits and letters of credit on certain of our sales arrangements. We could suffer significant losses if a companycustomer whose accounts receivable we have not secured fails or is otherwise unable to pay us, or if financial institutions providing letters of credit become insolvent. A loss in collections on our accounts receivable would have a negative impact on our financial condition and results of operations.

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Our failure to estimate customer demand accurately could result in inventory obsolescence, liabilities to our suppliers for products no longer needed, and manufacturing interruptions or delays which could affect our ability to meet customer demand.

The success of our business depends in part on our ability to accurately forecast and supply equipment and services that has engaged in unlawful conductmeet the rapidly changing technical and volume requirements of our customers. To meet these demands, we depend on the timely delivery of parts, components, and subassemblies from our suppliers. Uncertain worldwide economic conditions and market instabilities make it difficult for us (and our customers) to accurately forecast future product demand. If actual demand for our products is different than expected, we may purchase more or fewer parts than necessary or incur costs for canceling, postponing, or expediting delivery of parts. If we overestimate the demand for our products, excess inventory could result which could be subject to heavy price discounting, which could become obsolete, and which could subject us to liabilities to our suppliers for products no longer needed. Similarly, we may be harmed in the past,event that our competitors overestimate the demand for their products and be held responsibleengage in heavy price discounting practices as a result. In addition, the volatility of demand for this conduct through successor liability principles. Violations of the FCPA or similar laws or similar customer policies may resultcapital equipment poses risks for companies in severe criminal or civil sanctions or the loss of supplier privileges to a customer,our supply chain, including challenges associated with inventory management and wefluctuating working capital requirements.

Furthermore, certain key parts may be subject to long lead-times or may be obtainable only from a single supplier or limited group of suppliers, and some sourcing and assembly is provided by suppliers located in countries other liabilities,than the United States. We may experience significant interruptions in our manufacturing operations, delays in our ability to timely deliver products or services, increased costs, or customer order cancellations as a result of:

·

the failure or inability of our suppliers to timely deliver quality parts;

·

volatility in the availability and cost of materials;

·

difficulties or delays in obtaining required import or export approvals;

·

information technology or infrastructure failures;

·

natural disasters such as earthquakes, tsunamis, floods, or storms; or

·

other causes such as regional economic downturns, international trade disruptions, pandemics, political instability, terrorism, or acts of war, that could result in delayed deliveries, manufacturing inefficiencies, increased costs, or order cancellations.

In addition, in the event of an unanticipated increase in demand for our products, our need to rapidly increase our business and manufacturing capacity may be limited by working capital constraints of our suppliers, which may cause or exacerbate interruptions in our manufacturing and supply chain operations. Any or all of these factors could negativelymaterially and adversely affect our business, financial condition, and results of operations.

 

Our failure to successfully manage our outsourcing activities or failure of our outsourcing partners to perform as anticipated could adversely affect our results of operations.

To better align our costs with market conditions, increase the percentage of variable costs relative to total costs, and to increase productivity and operational efficiency, we have outsourced certain functions to third parties, including the manufacture of several of our systems. While we maintain some level of internal manufacturing capability for these systems, we rely on our outsourcing partners to perform their contracted functions to allow us flexibility to adapt to changing market conditions, including periods of significantly diminished order volumes. If our outsourcing partners do not perform as required, or if our outsourcing model does not allow us to realize the intended cost savings and flexibility, our results of operations (and those of our third party providers) may be adversely affected. Disputes and possibly litigation involving third party providers could result and we could suffer damage to our reputation. Dependence on contract manufacturing and outsourcing may also adversely affect our ability to bring new products to market. Although we attempt to select reputable providers, one or more of these providers could fail to perform as we expect. If we do not effectively manage our outsourcing strategy or if third party providers do not perform as anticipated, we may not realize the benefits of productivity improvements and we may experience operational difficulties, increased costs, manufacturing and installation interruptions or delays, inefficiencies in the structure and operation of our supply chain, loss of intellectual property rights,

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quality issues, increased product time-to-market, and an inefficient allocation of our human resources, any or all of which could materially and adversely affect our business, financial condition, and results of operations.

We rely on a limited number of suppliers, some of whom are our sole source for particular components.

Certain of the parts, components, and sub-assemblies included in our products are obtained from a single source or a limited group of suppliers. Our inability to develop alternative sources, as necessary, could result in a prolonged interruption in our ability to supply related products, a failure on our part to meet the demands our customers, and a significant increase in the price of related products, which could adversely affect our business, financial condition, and results of operations.

Our inability to attract, retain, and motivate employees could have a material adverse effect on our business.

Our success depends in part upon our ability to attract, retain, and motivate employees, including those in executive, managerial, engineering and marketing positions, as well as highly skilled and qualified technical personnel. Attracting, retaining, and motivating such qualified personnel may be difficult due to challenging industry conditions, competition for such personnel by other technology companies, consolidations and relocations of operations, and workforce reductions, and there can be no assurance that we will be successful in recruiting or retaining key personnel. We have entered into employment agreements with certain key personnel but our inability to attract, retain, and motivate key personnel could have a material adverse effect on our business, financial condition, and results of operations.

We are exposed to risks associated with business combinations, acquisitions, and strategic investments.

We have completed several significant acquisitions and investments in the past and we will consider new opportunities in the future. Acquisitions and investments involve numerous risks, many of which are unpredictable and beyond our control, including the following:

·

difficulties and increased costs in integrating the personnel, operations, technologies, and products of acquired companies;

·

diversion of management’s attention and disruption of ongoing businesses;

·

the inability to complete proposed transactions as anticipated, resulting in obligations to pay professional and other expenses, including any applicable termination fees;

·

potential loss of key employees of acquired companies, especially if a relocation or change in responsibilities is involved;

·

difficulties in managing geographically dispersed operations in a cost effective manner;

·

the failure to realize expected synergies;

·

unknown, underestimated, and undisclosed commitments or liabilities;

·

increased amortization expenses relating to intangible assets; and

·

other adverse effects on our business, including the potential impairment and write-down of amounts capitalized as intangible assets and goodwill as part of the acquisition, as a result of such matters as technological advancements or worse-than-expected performance by the acquired company.

In addition, if we issue equity securities to pay for an acquisition or investment, the ownership percentage of our then-current shareholders would be reduced and the value of the shares held by these shareholders could be diluted, which could adversely affect the price of our stock. If we use cash to pay for an acquisition or investment, the payment could significantly reduce the cash that would be available to fund our operations, pay our indebtedness, or be used for other purposes, which could have a negative effect on our business.

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We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act and any delays or difficultydifficulties in satisfying these requirements or negative reports concerning our internal controls could adversely affect our future results of operations and our stock price.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report by management on the effectiveness of our internal control over financial reporting. Ongoing compliance with this requirement is complex, costly, time-consuming, and is subject to significant judgment. If our internal controls are ineffective or if our management does not timely assess the adequacy of such internal controls, our ability to file timely and accurate periodic reports may be impeded. Any delays in filing may cause us to face the following risks and concerns, among others:

·concern on the part of our customers, partners, investors, and employees about our financial condition and filing delay status, including the potential loss of business opportunities;

·significant time and expense required to complete delayed filings and the distraction of our senior management team and board of directors as we work to complete delayed filings;

·investigations by the SEC and other regulatory authorities of the Company and/or our management;

·limitations on our ability to raise capital;

·suspension or termination of our stock listing on The NASDAQ Stock Market and the removal of our stock as a component of certain stock market indices; and

·general reputational harm.

·

concern on the part of our customers, partners, investors, and employees about our financial condition and filing delay status, including the potential loss of business opportunities;

·

significant time and expense required to complete delayed filings and the distraction of our senior management team and board of directors as we work to complete delayed filings;

·

investigations by the SEC and other regulatory authorities of the Company and our management;

·

limitations on our ability to raise capital or possible violations of existing debt covenants;

·

suspension or termination of our stock listing on The NASDAQ Stock Market and the removal of our stock as a component of certain stock market indices; and

·

general reputational harm.

 

Any or all of the foregoing could result in the commencement of stockholder lawsuits against the Company. Any such litigation, as well as any proceedings that could arise as a result of a filing delay and the circumstances which gave rise to it, may be time consuming and expensive, may divert management attention from the conduct of our business, could have a material adverse effect on our business, financial condition, and results of operations, and may expose us to costly indemnification obligations to current or former officers, directors, or other personnel, regardless of the outcome of such matters, which may not be adequately covered by insurance.

 

Changes in accounting pronouncements or taxation rules or practices may adversely affect our financial results.

 

Changes in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results. New accounting pronouncements orand taxation rules can have a material impact on revenue recognition practices, effective tax rates, results of operations, and our financial condition. On December 22, 2017, President Trump signed into law the statute commonly referred to as the Tax Cuts and Jobs Act (“2017 Tax Act”), which made broad and complex changes to the U.S. tax code. This change could materially affect our financial position and tax attributes carryforward. In addition, varying interpretations of accounting pronouncements or taxation practices, have occurred and may occur in the future. New rules, changes to existing rules, or the questioning of our current or past practices such(such as those associated with our transfer pricing,pricing), may adversely affect our reported financial results.

 

Our income taxes canmay change.

 

We are subject to income tax on a jurisdictional or legal entity basis and significant judgment is required in certain instances to allocate our taxable income to a jurisdiction and to determine the related income tax expense and benefits. Losses in one jurisdiction generally may not be used to offset profits in other jurisdictions. As a result, changes in the mix of our earnings (or losses) between jurisdictions, among other factors, could alter our overall effective income tax rate, possibly resulting in significant tax rate increases.

 

We are regularly audited by various tax authorities. Income tax audit assessments or changes in tax laws, regulations, or other interpretations may result in increased tax provisions which could materially affect our operating results in the period or periods in which such determinations are made or changes occur.

 

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In addition, our effective tax rate could increase if we determine that it is no longer more likely than not that we are able to utilizerealize our remaining net deferred tax assets, if we are unable to generate sufficient future taxable income in certain jurisdictions, or if we are otherwise required to increase our valuation allowances against our deferred tax assets.

 

We have indebtedness in the form of convertible senior notes which could adversely affect our financial position, prevent us from implementing our strategy, and dilute the ownership interest of our existing shareholders.

In January of 2017, we issued $345 million of 2.70% Convertible Senior Notes due 2023 (“Convertible Senior Notes”). The Convertible Senior Notes are convertible into Company common stock at an initial conversion rate of 24.98 shares of Company common stock per $1,000 principal amount of the Convertible Senior Notes. The Company is obligated to repurchase the Convertible Senior Notes upon the occurrence of certain events described in the indenture relating to the Convertible Senior Notes. The degree to which we are leveraged could have negative consequences, including but not limited to the following:

·

we may be more vulnerable to economic downturns, less able to withstand competitive pressures, and less flexible in responding to changing business and economic conditions;

·

our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate, and other purposes may be limited;

·

a substantial portion of our cash flows from operations in the future may be required for the payment of the principal amount of our existing indebtedness when it becomes due; and

·

we may elect to make cash payments upon any conversion of the Convertible Senior Notes, which would reduce our cash on hand.

Our ability to meet our payment obligations under the Convertible Senior Notes depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. There can be no assurance that our business will generate cash flow from operations, or that additional capital will be available to us, in an amount sufficient for us to meet our debt payment obligations and to fund other liquidity needs. If we are unable to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we were unable to implement one or more of these alternatives, we may be requiredunable to take additional impairment chargesmeet our debt payment obligations, which could have a material adverse effect on assets.our business, results of operations, and financial condition.

 

WeFurthermore, if the Convertible Senior Notes are required to assess goodwill and indefinite-lived intangible assets annually for impairment, or on an interim basis, whenever certain events occur or circumstances change, such as an adverse change in business climate or a decline inconverted into shares of Company common stock, the overall industry, thatissuance of additional shares of Company common stock would more likely than not reducedilute the fair value below its carrying amount. We are also required to test our long-lived assets, including acquired intangible assets and property, plant, and equipment, for recoverability and impairment whenever there are indicators of impairment, such as an adverse change in business climate.

As partownership interest of our long-term strategy, we may pursue future acquisitions of other companies or assets whichexisting shareholders and could potentially increasehave a dilutive effect on our assets. Adverse changes in business conditions could materially impact our estimates of future operations and result in impairment chargesnet income per share to these assets. In the future, a significant decline inextent that the market price of our common stock

could indicate a decline exceeds the conversion price of the Convertible Senior Notes. In addition, any sales in the fair value of our reporting unit such that goodwill becomes impaired. If our assets were impaired, our financial condition and results of operations could be materially and adversely affected.

The pricepublic market of our common shares is volatile andstock issuable upon conversion of the Convertible Senior Notes could decline significantly.adversely affect prevailing market prices of our common stock.

 

The stock marketaccounting method for convertible debt securities that may be settled in generalcash, such as the Convertible Senior Notes, could have a material effect on our reported financial results.

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options (“ASC 470-20”), an entity must separately account for the liability and equity components of certain convertible debt instruments (such as the Convertible Senior Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Convertible Senior Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the marketvalue of the equity component would be treated as original issue discount for technology stockspurposes of accounting for the debt component of the Convertible Senior Notes. As a result, we will be required to record a greater amount of non-cash interest expense in particular has experienced volatility. If these industry-based market fluctuations continue,current periods presented as a result of the amortization of the discounted carrying value of the Convertible Senior Notes to their face amount over the term of the Convertible Senior Notes. We will report lower net income in our financial results because ASC 470-20 will require interest to include both the current period’s

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amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our financial results, the trading price of our common shares could decline significantly independentstock, and the trading price of the overall market, and shareholders could lose all or a substantial part of their investment. The market price of our common shares could fluctuate significantly in response to several factors, including, among others:Convertible Senior Notes.

 

·difficult macroeconomic conditions, unfavorable geopolitical events, and generalIn addition, under certain circumstances convertible debt instruments (such as the Convertible Senior Notes) that may be settled entirely or partly in cash can be accounted for utilizing the treasury stock market uncertainties, such as those occasioned by a global liquidity crisis and a failuremethod, the effect of large financial institutions;

·receiptwhich is that the shares issuable upon conversion of large orders or cancellations of orders for our products;

·issues associated with the performance and reliability of our products;

·actual or anticipated variations in our results of operations;

·announcements of financial developments or technological innovations;

·our failure to meet the performance estimates of investment research analysts;

·changes in recommendations and/or financial estimates by investment research analysts;

·strategic transactions, such as acquisitions, divestitures, or spin-offs; and

·the occurrence of major catastrophic events.

Significant price and value fluctuations have occurred with respect to our publicly traded securities and technology companies generally. The price of our common shares is likely to be volatileConvertible Senior Notes are not included in the future. Incalculation of diluted earnings per share except to the past, securities class action litigation often has been brought against a company following periodsextent that the conversion value of volatilitythe Convertible Senior Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in the market price of its securities. If similar litigation were pursued against us, it could result in substantial costs and a diversion of management’s attention and resources, which could materially and adversely affect our financial condition, results of operations, and liquidity.

The enforcement and protection of our intellectual property rights may be expensive and/or divert our limited resources.

Our success depends in part upon the protection of our intellectual property rights. We rely primarily on patent, copyright, trademark, and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary information, technologies, and processes. We own various U.S. and international patents and have additional pending patent applications relating to certain of our products and technologies. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that pending or future applications will actually result in issued patents or that issued patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage. In addition, our intellectual property rights may be circumvented, invalidated, or rendered obsolete by the rapid pace of technological change, or through efforts by others to reverse engineer our products or design around patents that we own. Given these limitations, our success will depend in part upon our ability to innovate ahead of our competitors.

Furthermore, policing unauthorized use of our products and technologies is difficult and time consuming, and the laws of other countries may less effectively protect our proprietary rights than U.S. laws. Our outsourcing strategy requires that we share certain portions of our technology with our outsourcing partners, which poses additional risks of infringement and trade secret misappropriation. Infringement of our rights by a third party, possibly for purposes of developing and selling competing products, could result in uncompensated lost market and revenue opportunities. Similar exposure could result in the event that former employees seek to compete with us through their unauthorized use of our intellectual property and proprietary information.shares, are issued. We cannot be certainsure that the steps we have takenaccounting standards in the future will preventcontinue to permit the misappropriation or unauthorized use of our proprietary information and technologies, particularly in foreign countries where the laws may not protect our proprietary intellectual property rights as fullytreasury stock method or as readily as U.S. laws. Further, we cannot be certain that

the laws and policies of any country, including the United States, with respect to intellectual property enforcement or licensing will not be changed in a way detrimental to the sale or use of our products or technology.

We may need to litigate to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of proprietary rights of others. As a result of any such litigation, we could lose our ability to enforce one or more patents, incur substantial unexpected costs, and jeopardize relationships with current or prospective customers or suppliers. Any action we take to enforce our intellectual property rights could be costly and could absorb significant management time and attention, which, in turn, could negatively impact our operating results. In addition, failure to protect our trademark rights could impair our brand identity.

We may be subject to claims of intellectual property infringement by others.

From time to time we have received communications from other parties asserting the existence of patent or other rights which they believe cover certain of our products. We also periodically receive notice from customers who believe that we are requiredwill continue to indemnify them for damages they may incur relatedexpect to infringement claims made against these customers by third parties. Our customary practice is to evaluate such assertions and to considersettle the available alternatives, including whether to seek a license, if appropriate. However, we cannot ensure that licenses can be obtained or, if obtained, will be on acceptable terms or that costly litigation or other administrative proceedings will not occur.principal balance in cash. If we are not ableunable to resolve a claim, negotiate a settlementuse the treasury stock method in accounting for the shares issuable upon conversion of the matter, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defendConvertible Senior Notes, our position, our business, financial condition, and results of operationsdiluted earnings per share could be materially and adversely affected.

 

We are subject to foreign currency exchange risks.

 

We are exposed to foreign currency exchange rate risks that are inherent in our anticipated sales, sales and purchase commitments, and assets and liabilities that are denominated in currencies other than the U.S. dollar. Although we attempt to mitigate our exposure to fluctuations in currency exchange rates, hedging activities may not always be available or adequate to mitigate the impact of our exchange rate exposure. Failure to sufficiently hedge or otherwise manage foreign currency risks properly could materially and adversely affect our financial condition, results of operations, and liquidity.

 

If we are subject to cyber-attacks weOur previously announced share repurchase program could incur substantial costsaffect the price of our common stock and if such attacks are successful, we could incur significant liabilities, reputational harm,increase volatility and disruptionmay be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock.

Repurchases pursuant to our operations.share repurchase program could affect our stock price and increase its volatility. The existence of a share repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. There can be no assurance that any share repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased shares of common stock. Although our share repurchase program is intended to enhance long term stockholder value, short term stock price fluctuations could reduce the program’s effectiveness. Furthermore, the program does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and may be suspended or discontinued at any time and any suspension or discontinuation could cause the market price of our stock to decline.

 

We manage, store, and transmit proprietary information and sensitive data relating to our operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate and/or compromise our confidential information (and/or third party confidential information), create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or our products, or that otherwise exploit any security vulnerabilities.

The costs to address the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential customers, impeding our sales, manufacturing, distribution, or other critical functions. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive data about us, our customers or other third parties, could expose us, our customers, or other third parties to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise harm our business.

We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our Company by another company more difficult.

 

We have adopted, and may in the future adopt, certain measures that may have the effect of delaying, deferring, or preventing a takeover or other change in control of our Company, any of which a holder of our common stock might not consider to be in the holder’s best interest. These measures include:

·“blank check” preferred stock;

·a classified board of directors; and

·certain other certificate of incorporation and bylaws provisions.

·

“blank check” preferred stock;

·

a classified board of directors; and

·

certain other certificate of incorporation and bylaws provisions.

 

Our board of directors has the authority to issue up to 500,000 shares of preferred stock and to fix the rights (including voting rights), preferences and privileges of these shares (“blank check” preferred). Such preferred stock may have rights, including economic rights, senior to our common stock. As a result, the issuance of the preferred stock could have a material adverse effect on the price of our common stock and could make it more difficult for a third party to acquire a majority of our outstanding common stock.

 

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Our board of directors is divided into three classes with each class serving a staggered three-year term. The existence of a classified board makes it more difficult for our shareholders to change the composition (and therefore the policies) of our board of directors, and therefore the Company’s policies, in a relatively short period of time.

 

We have adopted certain certificate of incorporation and bylaws provisions which have anti-takeover effects. These include: (a) requiring certain actions to be taken at a meeting of shareholders rather than by written consent, (b) requiring a super-majority of shareholders to approve certain amendments to our bylaws, (c) limiting the maximum number of directors, and (d) providing that directors may be removed only for “cause.” These measures and those described above may have the effect of delaying, deferring, or preventing a takeover or other change in control of our Company that a holder of our common stock might consider to be in the holder’s best interest.

 

In addition, we are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a Delaware corporation from engaging in any business combination, including mergers and asset sales, with an interested stockholder (generally, a 15% or greater stockholder) for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The operation of Section 203 may have anti-takeover effects, which could delay, defer, or prevent a takeover attempt that a holder of our common stock might consider to be in the holder’s best interest.

 

Despite the above measures, an activist shareholder could undertake action to implement governance, strategic, or other changes to the Company which a holder of our common stock might not consider to be in the holder’s best interest. Such activities could interfere with our ability to execute our strategic plans, be costly and time consuming, disrupt our operations, and divert the attention of management and our employees.

 

We are exposed to various risks associated with global regulatory requirements.

As a public company with global operations, we are subject to the laws of the United States and multiple foreign jurisdictions, and the rules and regulations of various governing bodies, which may differ among jurisdictions. We are required to comply with legal and regulatory requirements pertaining to such matters as privacy, labor laws, immigration, customs, trade, taxes, corporate governance, conflict minerals and other social responsibility legislation, and antitrust regulations, among others. These laws and regulations, which are ever-evolving and at times complex and inconsistent, impose costs on our business and divert management time and attention from revenue-generating activities. Changes to or ambiguities in these laws and regulations may create uncertainty regarding our compliance requirements. While we intend to invest the required resources to comply with these regulatory requirements, if we are found by a court or regulatory agency to have failed in these efforts, our business, financial condition, and results of operations could be adversely affected.

We may be exposed to liabilities under the Foreign Corrupt Practices Act and other similar laws.

We are subject to the Foreign Corrupt Practices Act of 1977 (“FCPA”) and other laws that prohibit improper payments or offers of payments to foreign government officials, as defined by the statute, for the purpose of obtaining or retaining business. In addition, many of our customers have policies limiting or prohibiting us from providing certain types or amounts of entertainment, meals, or gifts to their employees. It is our policy to implement safeguards to discourage these practices by our employees and representatives. However, our safeguards may prove to be ineffective and our employees, consultants, sales agents, or distributors may engage in conduct for which we may be held responsible. In addition, we may acquire a company that has engaged in unlawful conduct in the past, and be held responsible for this conduct through successor liability principles. Violations of the FCPA or similar laws or similar customer policies may result in severe criminal or civil sanctions or the loss of supplier privileges to a customer and we may be subject to other liabilities, which could negatively affect our business, financial condition, and results of operations.

We are subject to risks of non-compliance with environmental, health, and safety regulations.

 

We are subject to environmental, health, and safety regulations in connection with our business operations, including but not limited to regulations related to the development, manufacture and use of our products, recycling and disposal of related materials, and the operation and use of our facilities and real property. Failure or inability to comply with existing or future

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environmental and safety regulations, which vary from jurisdiction to jurisdiction, could result in significant remediation liabilities, the imposition of fines, and/orand the suspension or termination of research, development, or use of certain of our products, each of which could have a material adverse effect on our business, financial condition, and results of operations. In addition, some of our operations involve the storage, handling, and use of hazardous materials that may pose a risk of fire, explosion, or environmental release. Such events could result from acts of terrorism, natural disasters, or operational failures and may result in injury or loss of life to our employees and others, local environmental contamination, and property damage. These events might cause a temporary shutdown of an affected facility, or portion thereof, and we could be subject to penalties or claims as a result. Each of these events could have a material adverse effect on our business, financial condition, and results of operations.

 

Regulations related to conflict minerals will force us to incur additional expenses, may make our supply chain more complex, and may result in damage to our relationships with customers.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted requirements for companies that manufacture products that contain certain minerals and

metals, known as conflict minerals. These rules require public companies to perform diligence and to report annually to the SEC whether such minerals originate from the Democratic Republic of Congo and adjoining countries. The implementation of these requirements could adversely affect the sourcing, availability, and pricing of minerals we use in the manufacture of our products. In addition, we have incurred and will continue to incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals used in our products. Given the complexity of our supply chain, we may not be able to ascertain the origins of these minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. We may also face difficulties in satisfying customers who may require that our products be certified as conflict mineral free, which could harm our relationships with these customers and lead to a loss of revenue. These requirements could limit the pool of suppliers that can provide conflict-free minerals, and we may be unable to obtain conflict-free minerals at competitive prices, which could increase our costs and adversely affect our manufacturing operations and our profitability.

We have significant operations in locations which could be materially and adversely impacted in the event of a natural disaster, an act of terrorism, or other significant disruption.

 

Our operations in the United States, in the Asia-Pacific region, and in other areas could be subject to natural disasters or other significant disruptions, including earthquakes, tsunamis, fires, hurricanes, floods, water shortages, other extreme weather conditions, medical epidemics, power shortages and blackouts, telecommunications failures, and other natural and manmade disasters or disruptions. In the event of such a natural disaster or other disruption, we could experience disruptions or interruptions to our operations orand to the operations of our suppliers, distributors, resellers orand customers, destruction of facilities and/orand loss of life, all of which could materially increase our costs and expenses and materially and adversely affect our business, financial condition, and results of operations. In addition, various regions of the world in which we do business are subject to the threat of terrorism and acts of war. Any act of terrorism or war that affects the economy or the industries in which we operate could result in significant harm to us, including the loss of life and property, manufacturing and transportation delays, disruptions in our supply chain, the need to comply with enhanced security measures, and other increased costs.

 

Item 1B. Unresolved Staff Comments

 

None.

Item 2. Properties

 

Our corporate headquarters and principal research and development, manufacturing, and sales and service facilities are:

 

 

Approximate

 

 

 

 

Owned Facilities Location

    

Size (sq. ft.)Approximate

    

Mortgaged

Owned Facilities Location

 

Size (sq. ft.)

Use

Plainview, NY

 

80,000

 

No

Corporate Headquarters; R&D; Manufacturing; Sales & ServiceService; Administration

Somerset, NJ

 

80,000

 

NoR&D; Manufacturing; Sales & Service; Administration

St. Paul, MN

43,000

 

R&D; Manufacturing; Sales & ServiceService; Administration

Somerset, NJ

 

38,000

 

No

R&D; Sales & ServiceService; Administration

St. Paul, MN (1)

43,000

Yes

R&D; Manufacturing; Sales & Service

St. Paul, MN (1)

75,000

Yes

Assets held for sale

Yongin-city, South Korea

56,000

No

Sales & Service

Hyeongok-ri, South Korea

15,000

No

Building for sale

 

 

 

 

 

 

 

 

    

Approximate

    

    

    

Lease

Leased Facilities Location

 

Size (sq. ft.)

 

Use

 

Expires

San Jose, CA

 

100,000

 

R&D; Manufacturing; Sales & Service; Administration

 

2021

Somerset, NJ

 

57,000

 

Warehouse

 

2022

Horsham, PA

 

49,000

 

R&D; Manufacturing; Sales & Service; Administration

 

2024

Singapore

 

23,000

 

R&D; Manufacturing; Sales & Service; Administration

 

2023

Waltham, MA

 

19,000

 

R&D; Sales & Service; Administration

 

2023

Hsinchu City, Taiwan

 

13,000

 

Sales & Service; Administration

 

2020


 

(1) We consolidated our business into one building, leavingIn addition to the adjacent building held for sale.

 

 

Approximate

 

 

 

 

Leased Facilities Location

 

Size (sq. ft.)

 

Lease Expires

 

Use

Horsham, PA

 

48,900

 

2024

 

R&D; Manufacturing; Sales & Service

Somerset, NJ

 

14,000

 

2016

 

Warehouse

Poughkeepsie, NY

 

  9,400

 

2017

 

R&D and Manufacturing

Kingston, NY

 

44,000

 

2018

 

Manufacturing

Fremont, CA

 

17,100

 

2018

 

R&D; Manufacturing; Sales & Service

Shanghai, China

 

  9,900

 

2017

 

Sales & Service

Hsinchu City, Taiwan

 

13,000

 

2020

 

Sales & Service

Weabove, we lease a small office in Edina, MinnesotaMalta, New York for sales and service. Ourservice and our foreign sales and service subsidiaries lease office space in China, Germany, Japan, Malaysia, Philippines, Singapore, South Korea, Thailand, and the United Kingdom. OurWe believe our facilities are adequate to meet our current needs.

 

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Item 3. Legal Proceedings

 

On June 8, 2018, an Ultratech shareholder who received Veeco and certain other parties were namedstock as defendants inpart of the consideration for the Ultratech acquisition filed a lawsuit filed on April 25, 2013purported class action complaint in the Superior Court of the State of California, County of Sonoma. The plaintiffSanta Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the lawsuit, Patrick Colbus, sought unspecifiedsame court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and asserted claims that he suffered burnsfees under Sections 11, 12, and other injuries while cleaning a molecular beam epitaxy system alleged to have been manufactured by Veeco. The lawsuit alleged,15 of the Securities Act of 1933 for, among other things, thatalleged false/misleading statements in the molecular beam epitaxy system was defectiveregistration statement and thatprospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. The defendants filed a demurrer on January 10, 2019, asking the court to dismiss the consolidated complaint for failure to state a claim. The demurrer is scheduled to be heard by the court on March 15, 2019. Veeco failedbelieves this lawsuit is without merit and intends to adequately warnvigorously contest this matter.

On December 21, 2018, a purported Veeco stockholder filed a derivative action in the Superior Court of the potential risksState of California, County of Santa Clara, captioned Vladimir Gusinsky Revocable Trust v. Peeler, et al., Case No. 18CV339925, on behalf of nominal defendant Veeco. The complaint seeks to assert claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against current and former Veeco directors premised on purported misstatements and omissions in the system. Duringregistration statement relating to the first quarter of 2016,Ultratech acquisition. On January 2, 2019, the parties agreedcourt ordered this action stayed until the case management conference, which is scheduled for March 15, 2019. Veeco believes this lawsuit is without merit and intends to settle the lawsuit, without any admission of wrongdoing. The settlement amount is expected to be fully covered by our insurance and, as a result, is not expected to have a material impact on our financial condition or results of operations.vigorously contest this matter.

 

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

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

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PART II

 

Item 5.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is quoted on The NASDAQ Stock Market under the symbol “VECO.” The 2015 and 2014 high and low closing bid prices by quarter are as follows:

 

 

2015

 

2014

 

 

 

High

 

Low

 

High

 

Low

 

First Quarter

 

  $

35.12

 

  $

29.12

 

  $

43.30

 

  $

32.18

 

Second Quarter

 

31.89

 

28.25

 

43.63

 

30.75

 

Third Quarter

 

28.88

 

20.41

 

37.26

 

33.22

 

Fourth Quarter

 

21.83

 

18.02

 

37.72

 

30.61

 

On February 10, 2016, the closing bid price for our common stock on The NASDAQ Stock Market was $17.52 and we had 90 shareholders of record.

We have not paid dividends on our common stock. The Board of Directors will determine future dividend policy based on our consolidated results of operations, financial condition, capital requirements, and other circumstances.

 

Issuer Purchases of Equity Securities

 

ShareDuring fiscal years 2018, 2017, and 2016, we repurchased 1.0 million shares, 0.2 million shares, and 0.7 million shares of our common stock for $11.3 million, $3.0 million, and $13.1 million, respectively, through our share repurchase activity during the three months endedprograms. On December 31, 2015 is as follows:

Period

 

Total Number of
Shares Purchased

 

Average Price
Paid Per Share

 

Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs

 

Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under the
Plans or Programs

 

 

 

(in thousands, except average price paid per share)

 

September 28, 2015 — October 25, 2015

 

 

  $

 

 

  $

100,000

 

October 26, 2015 — November 29, 2015

 

314

 

19.19

 

314

 

93,979

 

November 30, 2015 — December 31, 2015

 

155

 

20.66

 

155

 

90,778

 

On October 28, 2015,11, 2017, our Board of Directors authorized a program to repurchase up to $100 million of ourthe Company’s outstanding common stock to be completed through December 11, 2019, after completion of the previous program on October 28, 2017. We did not purchase any shares during the fourth quarter of 2018. At December 31, 2015, $9.22018, $14.3 million of the $100 million had been utilized. Repurchases are expected tomay be made from time to time on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. The timing and amount of future repurchases, if any, will depend upon market conditions, SEC regulations, and other factors. The repurchases would be funded using available cash balances and cash generated from operations. The program does not obligate us to acquire any particular amount of common stock and may be modified or suspended at any time at our discretion.

26


Table of Contents

Stock Performance Graph

 

Picture 1

 

ASSUMES $100 INVESTED ON DEC. 31, 20102013

ASSUMES DIVIDENDS REINVESTED

FISCAL YEAR ENDING DEC. 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

2011

 

2012

 

2013

 

2014

 

2015

 

    

2013

    

2014

    

2015

    

2016

    

2017

    

2018

Veeco Instruments Inc.

 

100.00

 

48.42

 

68.65

 

76.61

 

81.19

 

47.86

 

 

100.00

 

105.99

 

62.47

 

88.57

 

45.12

 

22.52

S&P Smallcap 600

 

100.00

 

101.02

 

117.51

 

166.05

 

175.61

 

172.14

 

 

100.00

 

105.76

 

103.67

 

131.20

 

148.56

 

135.96

RDG MidCap Technology

 

100.00

 

82.95

 

88.61

 

129.62

 

124.14

 

111.39

 

 

100.00

 

93.93

 

84.05

 

83.59

 

87.28

 

79.60

27


Table of Contents

Item 6. Selected Financial Data

 

The information set forth below should be read in conjunction with the “Results of Operations” section included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

Year ended December 31,

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

(in thousands, except per share data)

Statement of Operations Data (1):

 

 

 

 

 

 

 

 

 

 

Net sales

 

  $ 

477,038

 

  $ 

392,873

 

  $ 

331,749

 

  $ 

516,020

 

  $ 

979,135

Operating income (loss)

 

(23,232)

 

(79,209)

 

(71,812)

 

37,212

 

276,259

Income (loss) from continuing operations, net of tax

 

(31,978)

 

(66,940)

 

(42,263)

 

26,529

 

190,502

Basic income (loss) per common share from continuing operations

 

(0.80)

 

(1.70)

 

(1.09)

 

0.69

 

4.80

Diluted income (loss) per common share from continuing operations

 

(0.80)

 

(1.70)

 

(1.09)

 

0.68

 

4.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2018

    

2017 (1)(2)

    

2016 (1)

    

2015 (1)

    

2014 (1)(3)

 

 

(in thousands, except per share data)

Statement of Operations Data:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Net sales

 

$

542,082

 

$

475,686

 

$

331,702

 

$

477,038

 

$

392,873

Operating income (loss)

 

 

(415,502)

 

 

(71,868)

 

 

(120,162)

 

 

(23,232)

 

 

(79,209)

Net Income (loss)

 

 

(407,088)

 

 

(51,396)

 

 

(122,027)

 

 

(31,978)

 

 

(66,940)

Basic income (loss) per common share

 

 

(8.63)

 

 

(1.16)

 

 

(3.10)

 

 

(0.80)

 

 

(1.70)

Diluted income (loss) per common share

 

 

(8.63)

 

 

(1.16)

 

 

(3.10)

 

 

(0.80)

 

 

(1.70)


(1)

Effective January 1, 2018, the Company adopted the new revenue accounting standard (“ASC 606”). The results of operations for 2017 and 2016 have been recast for the new standard, while prior years have not. Refer to Note 1, “Significant Accounting Policies” for additional information.

(2)

During the second quarter of 2017, the Company acquired Ultratech. The results of operations of Ultratech have been included in the consolidated financial statements since that date.

(3)

During the fourth quarter of 2014, the Company acquired PSP. The results of operations of PSP have been included in the consolidated financial statements since that date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

    

2018

    

2017 (1)

    

2016 (1)

    

2015 (1)

    

2014 (1)

 

 

(in thousands)

Balance Sheet Data:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Cash and cash equivalents

 

$

212,273

 

$

279,736

 

$

277,444

 

$

269,232

 

$

270,811

Short-term investments

 

 

48,189

 

 

47,780

 

 

66,787

 

 

116,050

 

 

120,572

Working capital

 

 

360,027

 

 

372,822

 

 

365,374

 

 

379,904

 

 

387,254

Total assets

 

 

900,816

 

 

1,387,475

 

 

763,988

 

 

890,789

 

 

929,455

Long-term debt (less current installments)

 

 

287,392

 

 

275,630

 

 

826

 

 

1,193

 

 

1,533

Total equity

 

 

437,775

 

 

840,093

 

 

601,704

 

 

714,615

 

 

738,932


(1)

Effective January 1, 2018, the Company adopted the new revenue accounting standard (“ASC 606”). The results of operations for 2017 and 2016 have been recast for the new standard, while prior years have not.  Refer to Note 1, “Significant Accounting Policies” for additional information.

 

(1) Information presented excludes the results

28


Table of our discontinued operations.Contents

 

 

December 31,

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

(in thousands)

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

269,232

 

  $ 

270,811

 

  $

210,799

 

  $ 

384,557

 

  $ 

217,922

Short-term investments

 

116,050

 

120,572

 

281,538

 

192,234

 

273,591

Working capital

 

379,904

 

387,254

 

485,452

 

632,197

 

587,076

Total assets

 

890,789

 

929,455

 

947,969

 

937,304

 

936,063

Long-term debt (less current installments)

 

1,193

 

1,533

 

1,847

 

2,138

 

2,406

Total equity

 

714,615

 

738,932

 

780,230

 

811,212

 

760,520

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Executive Summary

We are a leading manufacturer of innovative semiconductor and thin film process equipment. Our proven MOCVD, lithography, laser annealing, ion beam, and single wafer etch and clean technologies play an integral role in producing LEDs for solid-state lighting and displays, and in the fabrication of advanced semiconductor devices. With equipment designed to optimize performance, yield, and cost of ownership, we hold technology leadership positions in all these served markets.

 

We design, manufacture, andcategorize our revenue by the key market thin film process equipment aligned to meet the demands of key global trends such as energy conservation, mobility, and the ‘internet of things.’segments into which we sell. Our equipment is primarily used to make components for electronic devices including LEDs, displays, power electronics, wireless devices, smartphones, MEMS, and HDDs. We develop highly differentiated equipment for critical performance steps in thin film processing. Our products provide leading technology at low cost-of-ownership and high volume productivity. Core competencies in advanced thin film technologies, patent protection, and decades of specialized process know-how help us stay at the forefront of these rapidly advancing markets.

Our portfolio of technology solutions sell into four key market areas: Lighting, Display & Power Electronics;markets are: Advanced Packaging, MEMS & RF; Scientific & Industrial; and Data Storage.

A majority of our sales inRF Filters; LED Lighting, Display & Power Electronics were derived from customers who manufacture LEDs. Demand for LED manufacturing equipment fluctuates quarter-to-quarter depending on various factors, including but not limited to macroeconomic conditions, customer utilization rates, demand for TVsCompound Semiconductor; Front-End Semiconductor; and smartphones, and the rate of LED adoption for general lighting. Demand increased in 2014 and through the first half of 2015, supported by ongoing adoption of LED lighting for commercial and residential purposes. However, weak economic conditions in China and steep declines in LED demand for TV display backlighting resulted in LED unit oversupply through the second half of 2015. Accordingly, customers delayed their LED investment plans which adversely impacted our bookings, and we expect this will continue to negatively impact demand for our MOCVD equipment into 2016. While we have limited visibility to determine when demand for LED units will improve, industry analysts project LED lighting adoption will continue, and we believe this will require additional capacity purchases over the next several years as macroeconomic conditions improve. Our MOCVD architecture has been developed to support the most significant industry trends,

including developing mid-power LEDs, utilizing larger wafer sizes, and optimizing cost-of-ownership. Our latest generation MOCVD system, the TurboDisc® EPIK™ 700, continues to perform well against our expectations.Scientific & Industrial.

 

Sales intoin the Advanced Packaging, MEMS & RF Filter market were driven primarily by increasing contentLithography and PSP systems. Advanced Packaging opportunities remained soft in 2018 as mobile supply chains were dealing with excess capacity due to weak mobile device forecasts. While Advanced Packaging has typically been associated with logic devices, recent traction in DRAM packaging with our lithography systems has been encouraging. We remain well positioned for future growth in these markets, supported by trends such as mobile connectivity, automotive electronics, big data processing, and 5G infrastructure deployment, as well as the longer term growth of RF filtersFOWLP and MEMS sensorsother Advanced Packaging applications.

Sales in the LED Lighting, Display & Compound Semiconductor market were driven by the continued shipment of MOCVD systems to customers in China for mobile devicesgeneral lighting and automobiles. These trends are particularly positivebacklighting. However, orders for our PSP products, which representedLED systems have softened as customers digest recently added capacity for general lighting and backlighting. Additionally, a majoritymore competitive landscape has emerged in China, and as a result of this commoditization, we do not expect sales forin this market in 2015. PSP has continued to perform aheadbe a large portion of our expectations sincerevenue going forward. More recently, we acquired the businesshave seen an increase in December 2014. PSP provides single wafer wet etch, clean, and surface preparation equipment addressing multiple high growth markets, including advanced packaging, MEMS,demand in non general-lighting applications such as 3D sensors, VCSELs, laser diodes, and RF devices. Our broad portfolio of MOCVD and PSP technologies have been developed to support these significant industry trends. Our product mix in the LED market is shifting, and we expect to see an improvement in gross margins in 2019 as the lower gross margin business becomes a smaller portion of our overall business.

Sales in the Front-End Semiconductor market were primarily driven by Laser Annealing systems and IBE systems sold into STT-MRAM applications. We continue to build positive momentum in advanced packaging and received productionthe Front-End Semiconductor market with additional orders for FO-WLPour Low Defect Density Ion Beam Deposition (“LDD-IBD”) system for Extreme Ultraviolet (“EUV”) Mask Blank Production. We believe these orders reflect the ongoing adoption of EUV Lithography for advanced node, front-end semiconductor manufacturing. Additionally, we see strong interest from a semiconductor foundry customer. We expect to benefit as additional customers invest in FO-WLP technologies over the near to mid-term. We also expandedfor our customer engagements for 3D TSV applications,laser anneal systems, which represent future growth opportunities for us.are being qualified at an advanced node.

 

In 2015, we grew salesSales in the Scientific & Industrial market primarilywere supported by shipments of Ion Beam systems for data storage applications and optical coatings as a resultwell as shipments of growth in sales of our PSP products. We continueMBE systems to meet ongoing demanduniversities and laboratories. Demand for our SPECTOR ion beam depositionIon Beam products whichfor Data Storage is being driven by the requirements to improve areal density of magnetic heads for hard disk drive manufacturers as well as an overall projected volume increase of thin film magnetic heads. These two factors taken together are used by optical coating suppliersdriving additional capacity and equipment upgrades. While equipment demand from each individual market may fluctuate quarter to manufacture a variety of products including laser mirrors, optical fibers, and anti-reflective coatings. We also continued to win a sizable proportion ofquarter, the MBE research opportunities, supported by our GENXplor R&D product. Our systems enable universities and research consortia to conduct advanced materials research. The diverse customer base represented byhas historically provided a relatively stable revenue stream for the Industrial & Scientific markets support ongoing demand for our products; however, sales can be highly variable quarter-to-quarter.Company.

 

The mature Data Storage market is facing softening demand for personal computers in the near term and a shift from HDDs to solid state drives in the longer term. Accordingly, HDD industry customers are not expected to make significant investments in new capacity. This is consistent with recent experience that investments are being made to support technology buys on an “as-needed” basis. Orders are expected to continue to fluctuate quarter-to-quarter.

29


Table of Contents

Results of Operations

 

ResultsEffective January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The results of Operationsoperations for 2017 and 2016 have been recast for the new standard. Refer to Note 1, “Significant Accounting Policies” for additional information.

 

Years Ended December 31, 20152018 and 20142017

 

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 20152018 and 20142017 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

Change

 

 

For the year ended December 31,

 

Change

 

 

 

2015

 

 

2014

 

 

Period to Period

 

 

2018

 

2017

 

Period to Period

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Net sales

 

$

477,038

 

100.0

%

$

392,873

 

100.0

%

$

84,165

 

21.4

%

    

$

542,082

100

%  

$

475,686

100

%  

$

66,396

14

%

Cost of sales

 

299,797

 

62.8

%

257,991

 

65.7

%

41,806

 

16.2

%

 

 

348,363

64

%  

 

299,458

63

%  

 

48,905

16

%

Gross profit

 

177,241

 

37.2

%

134,882

 

34.3

%

42,359

 

31.4

%

 

 

193,719

36

%  

 

176,228

37

%  

 

17,491

10

%

Operating expenses, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

  

 

 

  

 

 

 

  

 

 

Research and development

 

 

97,755

18

%  

 

81,987

17

%  

 

15,768

19

%

Selling, general, and administrative

 

90,188

 

18.9

%

89,760

 

22.8

%

428

 

0.5

%

 

 

92,060

17

%  

 

100,250

21

%  

 

(8,190)

(8)

%

Research and development

 

78,543

 

16.5

%

81,171

 

20.7

%

(2,628

)

(3.2

)%

Amortization

 

27,634

 

5.8

%

13,146

 

3.3

%

14,488

 

110.2

%

Amortization of intangible assets

 

 

32,351

 6

%  

 

35,475

 7

%  

 

(3,124)

(9)

%

Restructuring

 

4,679

 

1.0

%

4,394

 

1.1

%

285

 

6.5

%

 

 

8,556

 2

%  

 

11,851

 2

%  

 

(3,295)

(28)

%

Acquisition costs

 

 

2,959

 1

%  

 

17,786

 4

%  

 

(14,827)

(83)

%

Asset impairment

 

126

 

0.0

%

58,170

 

14.8

%

(58,044

)

*

 

 

 

375,172

69

%  

 

1,139

 0

%  

 

374,033

*

 

Changes in contingent consideration

 

 

0.0

%

(29,368

)

(7.5

)%

29,368

 

*

 

Other, net

 

(697

)

(0.1

)%

(3,182

)

(0.8

)%

2,485

 

78.1

%

 

 

368

0

%  

 

(392)

(0)

%  

 

760

*

 

Total operating expenses, net

 

200,473

 

42.0

%

214,091

 

54.5

%

(13,618

)

(6.4

)%

 

 

609,221

112

%  

 

248,096

52

%  

 

361,125

146

%

Operating income (loss)

 

(23,232

)

(4.9

)%

(79,209

)

(20.2

)%

55,977

 

70.7

%

 

 

(415,502)

(77)

%  

 

(71,868)

(15)

%  

 

(343,634)

*

 

Interest income, net

 

586

 

0.1

%

855

 

0.2

%

(269

)

(31.5

)%

Interest income (expense), net

 

 

(18,332)

(3)

%  

 

(17,122)

(4)

%  

 

(1,210)

 7

%

Income (loss) before income taxes

 

(22,646

)

(4.7

)%

(78,354

)

(19.9

)%

55,708

 

71.1

%

 

 

(433,834)

(80)

%  

 

(88,990)

(19)

%  

 

(344,844)

*

 

Income tax expense (benefit)

 

9,332

 

2.0

%

(11,414

)

(2.9

)%

20,746

 

*

 

 

 

(26,746)

(5)

%  

 

(37,594)

(8)

%  

 

10,848

(29)

%

Net income (loss)

 

$

(31,978

)

(6.7

)%

$

(66,940

)

(17.0

)%

$

34,962

 

52.2

%

 

$

(407,088)

(75)

%  

$

(51,396)

(11)

%  

$

(355,692)

*

 


*

Not meaningful

 

* Not meaningful

Net Sales

 

The following is an analysis of sales by market and by region:

 

 

 

For the year ended December 31,

 

 

Change

 

 

 

 

2015

 

 

2014

 

 

Period to Period

 

 

 

 

(dollars in thousands)

 

Market Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lighting, Display & Power Electronics

 

 

$

291,133

 

61.0

%

$

278,551

 

70.9

%

$

12,582

 

4.5

%

Advanced Packaging, MEMS & RF

 

 

61,935

 

13.0

%

11,449

 

2.9

%

50,486

 

441.0

%

Scientific & Industrial

 

 

64,297

 

13.5

%

44,429

 

11.3

%

19,868

 

44.7

%

Data Storage

 

 

59,673

 

12.5

%

58,444

 

14.9

%

1,229

 

2.1

%

Total Sales

 

 

$

477,038

 

100.0

%

$

392,873

 

100.0

%

$

84,165

 

21.4

%

Regional Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

 

$

86,627

 

18.2

%

$

44,060

 

11.2

%

$

42,567

 

96.6

%

China

 

 

242,442

 

50.8

%

159,063

 

40.5

%

83,379

 

52.4

%

EMEA

 

 

64,019

 

13.4

%

35,644

 

9.1

%

28,375

 

79.6

%

Rest of World

 

 

83,950

 

17.6

%

154,106

 

39.2

%

(70,156

)

(45.5

)%

Total Sales

 

 

$

477,038

 

100.0

%

$

392,873

 

100.0

%

$

84,165

 

21.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

Change

 

 

 

2018

 

2017

 

Period to Period

 

 

 

(dollars in thousands)

 

Sales by market

   ��

 

  

  

    

 

  

  

    

 

  

  

 

Advanced Packaging, MEMS & RF Filters

 

$

90,775

17

%  

$

67,406

15

%  

$

23,369

35

%

LED Lighting, Display & Compound Semiconductor

 

 

249,974

46

%  

 

248,615

52

%  

 

1,359

 1

%

Front-End Semiconductor

 

 

62,582

12

%  

 

40,319

 8

%  

 

22,263

55

%

Scientific & Industrial

 

 

138,751

25

%  

 

119,346

25

%  

 

19,405

16

%

Total

 

$

542,082

100

%  

$

475,686

100

%  

$

66,396

14

%

Sales by geographic region

 

 

  

  

 

 

  

  

 

 

  

  

 

United States

 

$

125,659

23

%  

$

93,433

20

%  

$

32,226

34

%

China

 

 

194,032

36

%  

 

106,674

22

%  

 

87,358

82

%

EMEA

 

 

89,102

16

%  

 

72,979

15

%  

 

16,123

22

%

Rest of World

 

 

133,289

25

%  

 

202,600

43

%  

 

(69,311)

(34)

%

Total

 

$

542,082

100

%  

$

475,686

100

%  

$

66,396

14

%

 

30


Table of Contents

Total sales increased across all market categories for the year ended December 31, 2018 against the comparable prior year period, driven by additional sales from the Ultratech business acquired in 2015 from 2014May 2017, primarily due to an increase in the Advanced Packaging, MEMS & RF market which was primarily attributed to the PSP business acquired in December 2014. Sales increases were also realizedFilters market. Additionally, sales in the other three markets.Scientific & Industrial market were driven primarily by shipments of Ion Beam deposition systems for data storage applications as well as optical coatings. Pricing wasdid not have a significant driver ofimpact on the change in total sales. By region,geography, sales increased in China, EMEA, and the United States, partiallyChina, and EMEA regions, offset by declinesa decrease in the Rest of World region. The most significant increase occurred in the China region, which was largely attributable to the increased sales in the LED Lighting, Display & Compound Semiconductor and Front-End Semiconductor markets.  We do not expect significant new orders in China for the LED Lighting, Display & Compound Semiconductor market in the near future. Sales decreased in Rest of World principallydue to a reduction of sales in South Korea.the LED lighting, Display & Compound Semiconductor market in Malaysia. We believeexpect there will continue to be year-to-year variations in the geographicour future sales distribution of sales in the future.across markets and geographies.

 

Between 2015 and 2014, ordersGross Profit

In 2018, gross margins decreased $125.6 million, or 25%,compared to $384.4 million. The decrease is primarily attributable2017 due to a 57% decreaseshift in orders in the Lighting, Display & Power Electronics as well as a 31% decrease in Data Storage. The pronounced decline in orders and the corresponding drawdown on backlog is driven by weaknessour product mix in the LED market which isthat we saw in the first half of 2018, while gross profit increased due to lower demand for LED TV display backlightingan increase in sales volume, including the acquisition of Ultratech.

Research and an economic slowdownDevelopment

The markets we serve are characterized by continuous technological development and product innovation, and we invest in China. Asvarious research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses increased in 2018 compared to 2017 primarily as a result LED manufacturers delayed their MOCVD equipment investments, which impacted ourof the addition of a full year ordersof the acquired Ultratech research and development related projects.

Selling, General, and Administrative

Selling, general, and administrative expenses decreased in 2018 compared to 2017,as increases due to the addition of the acquired Ultratech related selling, general, and administrative costs for a full year were offset by reductions to personnel-related expenses, including a reduction in incentive compensation, and professional fees as a result of our initiative to enhance efficiency and reduce costs.

On November 1, 2018, we announced an attack on our computer systems. Upon learning of the attack, forensic experts were promptly engaged to assist with the investigation. We also notified law enforcement of the incident.

The investigation, which has largely been completed, determined that our computer systems were accessed by what appears to be a highly-sophisticated actor at various times over a period of years. It appears that proprietary and confidential information of the Company and certain personal information of our employees was accessed and may have been compromised as a result of the incident. Based on the evidence available at this time, the extent and impact of the compromise cannot be determined. We notified employees of this incident. We are continuing to analyze the incident, along with appropriate remediation of our computer systems. That analysis and the related remediation efforts could ultimately reveal that additional information was revealed or compromised.

Based on the evidence available at this time, we do not know if or when we will be able to determine the potential impact to us, whether we will be able to identify who is responsible for this attack, or whether we will be able to pursue legal action or other remedies to protect any compromised information or recover damages related to the attack. This attack, including the expenses incurred to address it, may have an adverse effect on our results of operations and/or financial condition. In addition, this attack may have caused the loss or misuse of proprietary and confidential information of us or others, result in litigation and potential liability, damage our reputation, and/or otherwise harm our business.

We take the security of our information, and that relating to our employees, customers, and trading partners, very seriously and have taken steps to prevent a similar incident from occurring in the Lighting, Display & Power Electronics market. The uncertainty around LED unit demandfuture. We are continuing to cooperate fully with the investigation by law enforcement.

31


Table of Contents

Amortization Expense

Amortization expense decreased slightly in 2018 compared to 2017, as increases in amortization expense as a result of the additional intangibles acquired as part of the acquisition of Ultratech were offset by the lower amortization resulting from the impairment of intangible assets of $252.3 million during the second quarter of 2018. We expect to see a decrease in amortization expense in future years as a result of this impairment.

Restructuring Expense

During 2017, we initiated certain restructuring activities related to our efforts to streamline operations, enhance efficiencies, and the Chinese economy hasreduce costs, and we reduced our abilityinvestments in certain technology development. In addition, during 2017, we began the Ultratech acquisition integration process to forecast near-term orders within the Lighting, Display & Power Electronics market. We also expect Data Storage demand to be weak as customers continue to only make select technology purchases.

One of the performance measures we use as a leading indicator of the business is the book-to-bill ratio. The ratio is defined as orders recordedenhance efficiencies, resulting in a given period divided by revenue recognizedreductions in the same period. A ratio greater than one indicates we are adding orders faster than we are recognizing revenue. In 2015, the ratio was 0.8, a reduction compared to 2014, when it was 1.3. Our backlog at December 31, 2015 was $186.0 million, which was lower than the ending backlog at December 31, 2014 of $286.7 million.headcount and other facility costs. During the year ended December 31, 2015,2018, additional accruals were recognized and payments were made related to these restructuring initiatives.

During the second quarter of 2018, we recorded backlog adjustmentsinitiated plans to further reduce excess capacity associated with the manufacture and support of our advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into our San Jose, California facility. As a result of this and other cost saving initiatives, we announced headcount reductions of approximately $7.740 employees and recorded restructuring charges related to these actions of $2.8 million relating to orders that no longer met our bookings criteria. For certain sales arrangements, we require a deposit for a portion of the sales price prior to manufacturing a system for a customer. Atyear ended December 31, 20152018, consisting principally of personnel severance and 2014, we had customer depositsrelated costs. We expect the consolidation to be completed in the first quarter of $28.2 million2019, and $73.0 million, respectively.expect to incur immaterial additional restructuring costs as this initiative is completed.

 

Gross ProfitDuring the third quarter of 2018, we initiated additional restructuring activities to further reduce costs, including headcount reductions impacting approximately 35 employees, and recorded restructuring charges related to these actions of $1.2 million, consisting principally of personnel severance and related costs. This initiative was completed by the end of 2018, and we expect it to provide approximately $5 million in annualized savings. Restructuring expense for the year ended December 31, 2018 included non-cash charges of $1.2 million related to accelerated share-based compensation for employee terminations, compared to $1.9 million for the comparable prior year period.

Acquisition Costs

 

Gross margins increased from the prior year primarily due to our acquisition of PSP in 2015, which contributed to an increase in sales volume and an improved product mix, as well as negatively impacting 2014 gross margin for an inventory fair value step-up that was recordedAcquisition costs are non-recurring charges incurred in connection with the purchase accounting. Products sold into our Scientific & Industrial markets improved margins acquisition of the Ultratech business,as well. Finally, $4.6well as legal and professional fees incurred in connection with certain integration activities. Acquisition costs included $4.2 million of customer deposits were forfeited and recognized into revenue and gross profit in 2015, favorably impacting gross margin.non-cash charges related to accelerated share-based compensation for employee terminations for the year ended December 31, 2017.

Selling, general, and administrative

 

Selling, general, and administrative expenses remained relatively consistent in 2015 as compared to 2014. Increases related to a full year of expenses associated with our PSP business which was acquired in December of 2014 were offset by decreases in third party professional fees and personnel related expenses.Asset Impairment

 

ResearchDuring the second quarter of 2018, we lowered our projected results for the Ultratech asset group, which were significantly below the projected results at the time of the acquisition. The reduced projections were based on lower than expected unit volume of certain smartphones, which incorporate advanced packaging methods such as FOWLP, and developmenta delay in the adoption of FOWLP advanced packaging by other electronics manufacturers, both of which slowed orders and reduced revenue projections for our advanced packaging lithography systems. In addition, there has been a delay in the build out of 28nm facilities by companies in China who were expected to purchase our LSA systems. Taken together, the reduced projections identified during the second quarter of 2018 required us to assess the Ultratech asset group for impairment. As a result of the analysis, during the second quarter of 2018 we recorded a $252.3 million non-cash intangible asset impairment charge.

32


 

We focus our research and development on areas we anticipate to be high-growth. Research and development expenses decreased due to reductions in personnel-related expenses largely related to the 2015 restructuring, which included closing the Hyeongok-ri, South Korea facility and reducing the workforce, including 23 employees whose positions were eliminated. We also continue to selectively fund product development activities, which has resulted in reductions in spending for project materials, and, in 2015, we received a small amountTable of research and development funding from a collaborative arrangement. These reductions were partially offset by an increase in spendingContents

Additionally, as a result of a full year of expenses associated with our PSP business.

Amortization expense

The increase in amortization expense is related to the $79.8 million in amortizable intangible assets acquired as part of our acquisition of PSP in December 2014.

Restructuring expense

In 2015, we announced the closing of our Hyeongok-ri, South Korea facility and reduced the workforce, including 23 employees whose positions were eliminated, resulting in additional restructuring costs. And in an effort to better align our cost structure with the recently observed weakness in the LED market, we reduced spending primarily through the reduction of 16 employees and 12 temporary staff toward the end of 2015. During 2014, we announced the closing of our Ft. Collins, Colorado and Camarillo, California facilities. Business activities formally conducted at these sites have been transferred to our Plainview, New York facility.

Asset impairment

Limited asset impairment charges were observed in 2015. During 2014, based on a combination of factors, including our determination that incumbent deposition technology for flexible OLED display encapsulation had progressed to satisfy current market requirements, we believed that there were sufficient indicators that required an interim asset impairment analysis on our Atomic Layer Deposition (“ALD”) business. As a result of our analysis, we 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. In addition, during 2014, we recognized $4.3 million of asset impairments on tangible assets held for sale, including certain lab tools and a vacant building and land.

Changes in Contingent Consideration

Includedsignificant decline in our agreement to acquire ALD instock price during the fourth quarter of 2013 were performance milestones that could trigger contingent payments2018, we concluded it was appropriate to perform an interim goodwill impairment test as of the end of the fourth quarter. The fair value of our reporting unit was determined using an adjusted market capitalization approach, which is calculated by multiplying our stock price by the number of outstanding shares and adding a control premium. The fair value of our reporting unit was determined to be below the carrying value, and we recorded an impairment charge equal to the original selling shareholders. excess of carrying value over fair value, or $122.8 million, for the year ended December 31, 2018. The valuation of goodwill will continue to be subject to changes in our market capitalization and observable market control premiums. This analysis is sensitive to changes in our stock price and absent other qualitative factors, we may be required to record additional goodwill impairment charges in future periods if the stock price declines and remains depressed for an extended period of time.   

Interest Income (Expense)

For the year ended December 31, 2018, we recorded net interest expense of $18.3 million, compared to $17.1 million for the comparable prior period. The increase in net interest expense is primarily attributable to the Convertible Senior Notes issued in January 2017 that were outstanding for the full period in 2018, compared to a partial period in 2017. Included in interest expense for the year ended December 31, 2018 and 2017 were non-cash charges of $11.8 million and $10.4 million, respectively, related to the amortization of debt discount and transaction costs of the Convertible Senior Notes.

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”), which made broad and complex changes to the U.S. tax code. In response to the 2017 Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provided guidance on accounting for the tax effects of the 2017 Tax Act, including addressing any uncertainty or diversity of view in applying ASC 740, Income Taxes (“ASC 740”), in the reporting period in which the 2017 Tax Act was enacted. In addition, SAB 118 provided a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting under ASC 740.

During the year ended December 31, 2013,2017, we recorded an $11.3 million income tax benefit related to the first milestone was achieved,re-measurement of our deferred tax assets and liabilities at the reduced rate of 21 percent and a reduction in our U.S. valuation allowance attributable to indefinite lived intangible assets becoming a source of future taxable income for certain deferred tax assets that are expected to have an indefinite life due to the 2017 Tax Act. During the year ended December 31, 2018, we paidfinalized the former shareholders $5.0 million and increasedaccounting for the estimated fair valuetax effects of the remaining contingent payments by $0.8 million. During 2014, we determined that all of the remaining performance milestones were not met, reversed the fair value of the liability,2017 Tax Act based on legislative updates currently available and recorded a non-cash gainan additional income tax benefit of $29.4 million.

Other, net

During 2014, we completed our plan to liquidate our subsidiary$1.7 million for alternative minimum tax credits that became refundable in Japan, since we moved to a distributor model to serve our customersaccordance with the 2017 Tax Act. We also reported an increase in that region. Asdeferred tax assets of $6.8 million as a result of the liquidation, we reclassifiedadjustments to tax attributes utilized for one-time transition tax, which was offset by a cumulative translation gain of $3.1 million from Other Comprehensive Income to “Other, net” on the Consolidated Statements of Operations.

Income Taxesfull valuation allowance.

 

The 20152018 income tax expensebenefit of $26.7 million is comprised of: (i) a $25.2 million income tax benefit related to the impairment of two components: (i) $1.8certain intangible assets during the year, (ii) a $1.7 million income tax benefit recorded in connection with the 2017 Tax Act, (iii) a $0.4 million income tax expense related primarily to U.S. tax amortization of the Company’sour indefinite-lived intangible assets that is not available to offset existing deferred tax assets, and related valuation allowance andas well as state and local income taxes, and (ii) $7.5(iv) a $0.2 million in tax expense relating to our profitable foreign operations. The 2014 income tax benefit included $13.4 millionfrom non-U.S. operations and non-U.S. withholding taxes recorded as we now expect to repatriate certain foreign earnings as a result of changes in tax benefits relatinglaws under the 2017 Tax Act.  

The 2017 income tax benefit of $37.6 million is comprised of: (i) a $25.3 million income tax benefit related to our domestic operations offset by $2.0 million in tax expense relating to our foreign operations. Our 2015 effective tax rate is different thanlosses incurred during the statutory rate primarily due to our inability to recognize our U.S.year ended December 31, 2017, as the deferred tax assetsliability created by the issuance of the Convertible Senior Notes and recorded as a component of APIC is treated as a source of income in fiscal 2017, (ii) a $11.3 million income tax benefit recorded in connection with the 2017 Tax Act, and (iii) a $1.0 million income tax benefit from non-U.S. operations primarily attributable to a reduction in uncertain tax positions and the recognition of a deferred tax asset for certain non-U.S. net operating losses generated in prior years that have become realizable on a more-likely-than-not basis, with respectoffset by tax expense attributed to current year pre-tax U.S. operating losses. Our 2014 effective tax rate is lower than the statutory rate primarily relatedprofitable non-U.S. operations, as well as withholding

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Table of Contents

taxes recorded as we now expect to a $4.9 million tax benefit associated with our successful negotiation of an incentive tax rate in one of ourrepatriate certain foreign subsidiaries, a $2.3 million reversal of uncertain tax positionsearnings as a result of concludingchanges in tax laws under the 2010 IRS examination, and the recognition of only a portion of our U.S. deferred tax assets on a more-likely-than-not basis with respect to current year pre-tax operating losses. We maintain a valuation allowance on our U.S. deferred tax assets.2017 Tax Act.

 

Years Ended December 31, 20142017 and 20132016

 

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for fiscal 20142017 and 20132016 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.

 

 

 

For the year ended December 31,

 

Change

 

 

 

2014

 

2013

 

Period to Period

 

 

 

(dollars in thousands)

 

Net sales

 

$

392,873

 

100.0%

 

$

331,749

 

100.0%

 

$

61,124

 

18.4%

 

Cost of sales

 

257,991

 

65.7%

 

228,607

 

68.9%

 

29,384

 

12.9%

 

Gross profit

 

134,882

 

34.3%

 

103,142

 

31.1%

 

31,740

 

30.8%

 

Operating expenses, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

 

89,760

 

22.8%

 

85,486

 

25.8%

 

4,274

 

5.0%

 

Research and development

 

81,171

 

20.7%

 

81,424

 

24.5%

 

(253

)

(0.3)%

 

Amortization

 

13,146

 

3.3%

 

5,527

 

1.7%

 

7,619

 

137.9%

 

Restructuring

 

4,394

 

1.1%

 

1,485

 

0.4%

 

2,909

 

195.9%

 

Asset impairment

 

58,170

 

14.8%

 

1,220

 

0.4%

 

56,950

 

*

 

Changes in contingent consideration

 

(29,368

)

(7.5)%

 

829

 

0.2%

 

(30,197

)

*

 

Other, net

 

(3,182

)

(0.8)%

 

(1,017

)

(0.3)%

 

(2,165

)

212.9%

 

Total operating expenses, net

 

214,091

 

54.5% 

 

174,954

 

52.7%

 

39,137

 

22.4%

 

Operating income (loss)

 

(79,209

)

(20.2)%

 

(71,812

)

(21.6)%

 

(7,397

)

10.3%

 

Interest income (expense), net

 

855

 

0.2% 

 

602

 

0.2%

 

253

 

42.0%

 

Income (loss) before income taxes

 

(78,354

)

(19.9)%

 

(71,210

)

(21.5)%

 

(7,144

)

10.0%

 

Income tax provision (benefit)

 

(11,414

)

(2.9)%

 

(28,947

)

(8.7)%

 

17,533

 

(60.6)%

 

Income (loss) from continuing operations

 

$

(66,940

)

(17.0)%

 

$

(42,263

)

(12.7)%

 

$

(24,677

)

58.4%

 

* Not Meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Change

 

 

 

2017

 

2016

 

Period to Period

 

 

 

(dollars in thousands)

 

Net sales

    

$

475,686

100

$

331,702

100

$

143,984

43

%

Cost of sales

 

 

299,458

63

%

 

198,604

60

%

 

100,854

51

%

Gross profit

 

 

176,228

37

%

 

133,098

40

%

 

43,130

32

%

Operating expenses, net:

 

 

  

  

 

 

  

  

 

 

  

 

 

Research and development

 

 

81,987

17

%

 

81,016

24

%

 

971

 1

%

Selling, general, and administrative

 

 

100,250

21

%

 

77,642

23

%

 

22,608

29

%

Amortization of intangible assets

 

 

35,475

 7

%

 

19,219

 6

%

 

16,256

85

%

Restructuring

 

 

11,851

 2

%

 

5,640

 2

%

 

6,211

110

%

Acquisition costs

 

 

17,786

 4

%

 

 —

0

%

 

17,786

*

 

Asset impairment

 

 

1,139

0

%

 

69,520

21

%

 

(68,381)

(98)

%

Other, net

 

 

(392)

0

%

 

223

0

%

 

(615)

*

 

Total operating expenses, net

 

 

248,096

52

%

 

253,260

76

%

 

(5,164)

(2)

%

Operating income (loss)

 

 

(71,868)

(15)

%

 

(120,162)

(36)

%

 

48,294

(40)

%

Interest income (expense), net

 

 

(17,122)

(4)

%

 

958

 0

%

 

(18,080)

*

 

Income (loss) before income taxes

 

 

(88,990)

(19)

%

 

(119,204)

(36)

%

 

30,214

(25)

%

Income tax expense (benefit)

 

 

(37,594)

(8)

%

 

2,823

 1

%

 

(40,417)

*

 

Net income (loss)

 

$

(51,396)

(11)

%

$

(122,027)

(37)

%

$

70,631

(58)

%


*

Not Meaningful

Net Sales

 

The following is an analysis of sales by market and by region:

 

 

 

For the year ended December 31,

 

Change

 

 

 

2014

 

2013

 

Period to Period

 

 

 

(dollars in thousands)

 

Market Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

Lighting, Display & Power Electronics

 

$

278,551

 

70.9%

 

$

216,852

 

65.4%

 

$

61,699

 

28.5

%

Advanced Packaging, MEMS & RF

 

11,449

 

2.9%

 

12,804

 

3.9%

 

(1,355

)

(10.6

)%

Scientific & Industrial

 

44,429

 

11.3%

 

49,170

 

14.8%

 

(4,741

)

(9.6

)%

Data Storage

 

58,444

 

14.9%

 

52,923

 

15.9%

 

5,521

 

10.4

%

Total Sales

 

$

392,873

 

100.0%

 

$

331,749

 

100.0%

 

$

61,124

 

18.4

%

Regional Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

44,060

 

11.2%

 

$

57,609

 

17.4%

 

$

(13,549

)

(23.5

)%

China

 

159,063

 

40.5%

 

149,050

 

44.9%

 

10,013

 

6.7

%

EMEA

 

35,644

 

9.1%

 

21,941

 

6.6%

 

13,703

 

62.5

%

Rest of World

 

154,106

 

39.2%

 

103,149

 

31.1%

 

50,957

 

49.4

%

Total Sales

 

$

392,873

 

100.0%

 

$

331,749

 

100.0%

 

$

61,124

 

18.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

Change

 

 

 

2017

 

2016

 

Period to Period

 

 

 

(dollars in thousands)

 

Sales by market

    

 

  

  

    

 

  

  

    

 

  

  

 

Advanced Packaging, MEMS & RF Filters

 

$

67,406

15

%  

$

67,484

20

%  

$

(78)

(0)

%

LED Lighting, Display & Compound Semiconductor

 

 

248,615

52

%  

 

145,701

44

%  

 

102,914

71

%

Front-End Semiconductor

 

 

40,319

 8

%  

 

8,427

 3

%  

 

31,892

378

%

Scientific & Industrial

 

 

119,346

25

%  

 

110,090

33

%  

 

9,256

 8

%

Total

 

$

475,686

100

%  

$

331,702

100

%  

$

143,984

43

%

Sales by geographic region

 

 

  

  

 

 

  

  

 

 

  

  

 

United States

 

$

93,433

20

%  

$

85,582

26

%  

$

7,851

 9

%

China

 

 

106,674

22

%  

 

84,604

26

%  

 

22,070

26

%

EMEA

 

 

72,979

15

%  

 

84,181

25

%  

 

(11,202)

(13)

%

Rest of World

 

 

202,600

43

%  

 

77,335

23

%  

 

125,265

162

%

Total

 

$

475,686

100

%  

$

331,702

100

%  

$

143,984

43

%

 

34


Table of Contents

Total sales increased in 20142017 from 2013 primarily2016 due to an increaseincreased sales in the volumeLED Lighting, Display & Compound Semiconductor, Front-End Semiconductor, and Scientific & Industrial markets, driven by LED industry conditions, as well as additional sales of MOCVD systems, largely due to customers increasing their manufacturing capacity.approximately $65.3 million from the Ultratech business acquired in May 2017, primarily in the Front-End Semiconductor and Advanced Packaging, MEMS & RF Filters markets. Pricing was not a significant driver of the change in total sales. TotalBy geography, sales also increased as a result of our acquisition of PSP, which contributed $7.9 million to 2014 results. The increase in sales was partially offset by a decline in volume of our systems sold to data storage customers, primarily due to our customers’ unwillingness to make technology investments given the overcapacity in the HDD industry. By region, sales decreased in the United States, in 2014 primarily due to a decrease in purchases by our data storage customers. In China, and Rest of World regions, offset by a slight decrease in the EMEA region. The most significant increase occurred in the Rest of World region, which was attributable to the increased sales in the LED Lighting, Display & Compound Semiconductor market in Malaysia, as well as additional sales from the Ultratech business acquired in May 2017. Sales into Malaysia for the year ended December 31, 2017 was approximately $77.2 million, compared to $6.2 million for the year ended December 31, 2016. Sales in China increased as a result of MOCVDprincipally due to increased sales growth. In EMEA, sales increased as a result of growth in both MOCVD and ion beam and other Data Storage system sales.the LED Lighting, Display & Compound Semiconductor market. We believeexpect there will continue to be year-to-year variations in the geographicour future sales distribution of sales in the future.across markets and geographies.

 

Between 2014 and 2013, total orders increased $178.8 million, or 54%, to $510.0 million. The increase is primarily attributable to a 74% increase in orders of our MOCVD systems largely as customers in China, Europe, and South Korea begin to add manufacturing capacity. Ion beam and other Data Storage orders increased 5% between 2014 and 2013, but given the slow growth and overcapacity in the HDD industry, we expect demand to be weak as customers continue to only make select technology purchases.Gross Profit

 

In 2014,2017, gross profit increased compared to 2016 due to an increase in sales volume, including the book-to-bill ratio was 1.3, an improvement over 2013, when it was 1.0. Our backlog at December 31, 2014 was $286.7 million, which was higher than the ending backlog at December 31, 2013 of $143.3 million. At December 31, 2014, $23.4 million of the backlog was from our acquisition of PSP. During the year ended December 31, 2014 we recorded backlog adjustments of approximately $1.6 million relating to orders that no longer met our bookings criteria. For certain sales arrangements we require a deposit for a portion of the sales price prior to manufacturing a system for a customer. At December 31, 2014 and 2013, we had customer deposits of $73.0 million and $27.5 million, respectively.

Gross Profit

Gross margins increased from the prior year primarily due to higher MOCVD sales volume, a favorable mix of products, and favorable warranty and service spending. This wasUltratech, partially offset by our acquisitiondecreased gross margins. Gross margins decreased principally due to the sale of PSP, whereby we wrote up existing inventory on the date of acquisition tothat included a fair value unfavorable overhead rates, primarily drivenstep-up that was recorded in 2017 in connection with the purchase accounting relating to the Ultratech acquisition.

Research and Development

The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses remained relatively flat in 2017 compared to 2016, as the addition of the acquired Ultratech related research and development projects was offset by our ALD business,decision to reduce investments in certain technology, as well as decreases in other personnel-related expenses and declines in margins fromprofessional fees, as a result of our ion beaminitiative to streamline operations, enhance efficiency, and other data storage system sales that resulted from reduced sales volume, higher inventory reserves, and unfavorable overhead rates.reduce costs.

 

Selling, general,General, and administrativeAdministrative

 

Selling, general, and administrative expenses increased primarily due to an increase in personnel and personnel-related expenses, including an increase in share-based compensationthe addition of $3.5 million as well as additional costs from our ALD

business, which wasthe acquired in the fourth quarter of 2013. Our acquisition of PSP in the fourth quarter of 2014 also contributed to the increase inUltratech related selling, general, and administrative expenses, including $3.2 million of acquisition related costs. Partially offsetting the increase in selling, general, and administrative expense was a reduction in third party professional fees associated with an accounting review, which was completed in the fourth quarter of 2013.

Research and development

We continue to invest in research and development of new products and enhancements to existing products and spent $81.2 million and $81.4 million in 2014 and 2013, respectively. In 2014, we spent additional amounts on our ALD technology as compared with 2013, offset by a reduction in spending in our other product lines. We continue to focus our research and development expenses on projects in areas we anticipate to be high-growth. We selectively funded these product development activities which resulted in lower professional consulting expense,costs, as well as reduced spending for project materialsincreased professional and personnel and personnel-related costs.

Amortization expenselegal fees.

 

Amortization Expense

The increase in amortization expense increased primarily due tois a result of the additional amortization associated with intangible assetsintangibles acquired as part of ourthe acquisition of ALD duringUltratech, offset by the fourth quarterlower amortization resulting from the impairment of 2013. We expect to incur additional amortization expensethe certain technology assets in 2015 the prior yearas a result ofwell as certain other intangible assets acquiredbecoming fully amortized during 2016.

Restructuring Expense

During 2016, we undertook restructuring activities as part of our initiative to streamline operations, enhance efficiencies, and reduce costs, as well as reducing future investments in certain technology development, which together impacted approximately 75 employees. These activities were substantially completed in 2017. In addition, during 2017, we began the acquisition integration process to enhance efficiencies, resulting in additional employee terminations and other facility closing costs. Restructuring expense for the year ended December 31, 2017 included non-cash charges of PSP during the fourth quarter of 2014, partially offset by the elimination of amortization of certain ALD intangible assets that have been either impaired or fully amortized in the fourth quarter of 2014.$1.9 million related to accelerated share-based compensation for employee terminations.

 

Restructuring expenseAcquisition Costs

Acquisition costs are non-recurring charges incurred in connection with the acquisition of the Ultratech business, which included $4.2 million of non-cash charges related to accelerated share-based compensation for employee terminations for the year ended December 31, 2017.

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Asset Impairment

 

During 2014, we announced the closing of our Ft. Collins, Colorado and Camarillo, California facilities. Business activities formally conducted at these sites have been transferred to our Plainview, New York facility. In addition, we responded to the challenging business environment we were facing, particularly for sales to customers in the data storage industry, and reduced headcount by approximately 90 employees. As a result of these actions, we recorded $4.4 million in personnel severance and related costs and facility closing costs.

During 2013, we recorded $1.5 million in personnel severance and related costs principally resulting from the transition from a direct sales presence in Japan to a distributor model and the consolidation of certain sales and administrative functions.

Asset impairment

During 2014, based on a combination of factors, including our determination that incumbent deposition technology for flexible OLED display encapsulation had progressed to satisfy current market requirements, we believed that there were sufficient indicators that required an interim asset impairment analysis on our ALD business. As a result of our analysis,2016, we recorded non-cash impairment charges of $28.0$57.6 million relatedrelating to goodwill and $25.9our decision to reduce investments in certain technologies, $5.7 million relatedrelating 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. In addition, during 2014, we recognized $4.3 millionour assessments of asset impairments on tangiblethe fair market value of assets held for sale, includingand $6.2 million relating to the disposal of certain lab tools and a vacant building and land. During 2013, we recognized asset impairment charges of $1.2 million on tangible assets held for sale, including certain lab tools.equipment.

 

Changes in Contingent ConsiderationInterest Income (Expense)

 

Included in our agreement to acquire ALD in the fourth quarter of 2013 were performance milestones that could trigger contingent payments to the original selling shareholders. DuringFor the year ended December 31, 2013,2017, we recorded net interest expense of $17.1 million, including non-cash interest expense of $10.4 million, compared with net interest income of $1.0 million in the first milestone was achieved, and we paidprior year period. The change primarily relates to the former shareholders $5.0Convertible Senior Notes issued in January 2017.

Income Taxes

The 2017 income tax benefit of $37.6 million and increasedis comprised of: (i) a $25.3 million income tax benefit related to domestic losses incurred during the estimated fair valueyear ended December 31, 2017, as the deferred tax liability created by the issuance of the remaining contingent payments by $0.8 million. During 2014, we determined that all of the remaining performance milestones were not met, reversed the fair value of the liability,Convertible Senior Notes and recorded as a non-cash gaincomponent of $29.4 million.

Other, net

During 2014, we completed our plan to liquidate our subsidiaryAPIC is treated as a source of income in Japan, since we movedfiscal 2017, (ii) a $11.3 million income tax benefit recorded in connection with the 2017 Tax Act, and (iii) a $1.0 million income tax benefit from non-U.S. operations primarily attributable to a distributor modelreduction in uncertain tax positions and the recognition of a deferred tax asset for certain non-U.S. net operating losses generated in prior years that have become realizable on a more-likely-than-not basis, offset by tax expense attributed to serve our customers in that region. Asthe profitable non-U.S. operations, as well as withholding taxes recorded as we now expect to repatriate certain foreign earnings as a result of changes in tax laws under the liquidation, we reclassified a cumulative translation gain of $3.1 million from Other Comprehensive Income to “Other, net” on the Consolidated Statements of Operations.

Income Taxes2017 Tax Act.

 

The 2014 net benefit for2016 income taxes includedtax expense of $2.8 million is comprised of: (i) a $13.4 million tax benefit relating to our domestic operations offset by a $2.0$1.9 million tax expense relatingrelated primarily to U.S. tax amortization of our foreign operations. The 2013 net benefit forindefinite-lived intangible assets that is not available to offset existing deferred tax assets and related valuation allowance, as well as state and local income taxes, included(ii) a $32.4 million benefit relating to our domestic operations offset by a $3.5 million expense relating to our foreign operations. Our 2014 effective tax rate is lower than the statutory rate primarily related to a $4.9$0.4 million tax benefit associated with the termination of a pension plan, and (iii) a $1.3 million net tax expense related primarily to our successful negotiation of an incentiveprofitable foreign operations. The current period non-U.S. tax rate in one of our foreign subsidiaries, a $2.3 million reversal of uncertain tax positions as a result of concludingexpense is attributable to the 2010 IRS examination, and the recognition of only a portion of our U.S. deferred tax assets on a more-likely-than-not basis with respect to current year pre-tax operating losses. We maintain a valuation allowance on our U.S. deferred tax assets.profitable non-U.S. operations.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents, restricted cash, and short-term investments and restricted cash are as follows:

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

 

2015

 

 

 

2014

 

    

2018

    

2017

 

(in thousands)

 

 

(in thousands)

Cash and cash equivalents

 

$

269,232

 

$

270,811

 

 

$

212,273

 

$

279,736

Restricted cash

 

 

809

 

 

847

Short-term investments

 

116,050

 

120,572

 

 

 

48,189

 

 

47,780

Restricted cash

 

 

539

 

Total

 

$

385,282

 

$

391,922

 

 

$

261,271

 

$

328,363

 

A portion of our cash and cash equivalents is held by our subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. At December 31, 20152018 and 2014,2017, cash and cash equivalents of $135.3$66.9 million and $220.5$214.3 million, respectively, were held outside the United States. In order to fund continued international growth, it isAs of December 31, 2018, we had $43.3 million of accumulated undistributed earnings generated by our current intention to permanently reinvestnon-U.S. subsidiaries for which the cashU.S. repatriation tax has been provided and cash equivalent balances held in Singapore, China, Taiwan, South Korea, Malaysia and Netherlands, and our current forecasts dodid not require repatriationthe use of these fundscash due to the use of net operating loss carryforwards. Approximately $8.1 million of undistributed earnings would be subject to foreign withholding taxes if distributed back to the United States. AtAs of December 31, 2015,2018, we had $109.6have accrued $0.6 million in cash held outsideof withholding tax related to the undistributed earnings as we are no longer asserting permanent reinvestment. During the year ended December 31, 2018, we distributed approximately $123.3 million of earnings generated by our non-U.S. subsidiaries back to the United States on whichStates. As of December 31, 2018, we may have accrued, and subsequently paid in January 2019, approximately $1.9 million of withholding tax related to pay significant U.S. income taxes to repatriate. Additionally, local government regulations may restrict our ability to move cash balances under certain circumstances. We currently do not expect such regulations and restrictions to impact our ability to make acquisitions, pay vendors, or conduct operations.distributions made in 2018. We believe that our projected cash flow from operations, combined with our cash and short term investments, will be sufficient to meet our projected

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working capital requirements, contractual obligations, and other cash flow needs for the next twelve months.months, including scheduled interest payments on our Convertible Senior Notes due 2023.

 

At December 31, 2015 and 2014, all of our short-term investments were held in the United States. At December 31, 2014, the restricted cash was located in Germany to serve as collateral for bank guarantees that provided financial assurance that we would fulfill certain customer or lease obligations. This cash was held in custody by the issuing bank and was restricted as to withdrawal or use while the related bank guarantees were outstanding.

A summary of the cash flow activity for the year ended December 31, 20152018 and 20142017 is as follows:

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

    

For the year ended December 31,

 

 

2015

 

 

 

2014

 

    

2018

    

2017

 

(in thousands)

 

 

(in thousands)

Net income (loss)

 

$

(31,978

)

$

(66,940

)

 

$

(407,088)

 

$

(51,396)

Non-cash items:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

39,850

 

24,573

 

 

 

49,998

 

 

50,095

Non-cash interest expense

 

 

11,762

 

 

10,446

Deferred income taxes

 

2,648

 

(11,330

)

 

 

(27,620)

 

 

(35,363)

Share-based compensation expense

 

17,986

 

18,813

 

 

 

16,074

 

 

24,396

Asset impairment

 

126

 

58,170

 

 

 

375,172

 

 

1,139

Change in contingent consideration

 

 

(29,368

)

Other

 

(1,218

)

(6,505

)

Provision for bad debts

 

 

 —

 

 

99

Changes in operating assets and liabilities

 

(11,625

)

54,656

 

 

 

(56,036)

 

 

35,577

Net cash provided by operating activities

 

$

15,789

 

$

42,069

 

Net cash provided by (used in) operating activities

 

$

(37,738)

 

$

34,993

 

Net cash provided byused in operating activities was $15.8$37.7 million in 2015for the year ended December 31, 2018 and was due to the net loss of $32.0$407.1 million plus adjustments for non-cash items of $59.4 million, offset by a decline in cash flow from operating activities due to changes in operating assets and liabilities of $11.6$56.0 million, partially offset by adjustments for non-cash items of $425.4 million. The changes in operating assets and liabilities was largely attributable to an increasedecreases in inventoryaccounts payable and a decrease inaccrued expenses, customer deposits and deferred revenue, offset by a decrease in accounts receivable and an increase in inventories, partially offset by decreases in accounts payablereceivable, net of contract assets, deferred cost of sales, and accrued expenses.prepaid expenses and other current assets. Our changing market and geography focus may impact the future timing of cash flows from operations, as we expect more of our revenues to be derived from markets where customer deposits are not commonly required, as well as geographies where extended payment terms are commonly used.

 

Net cash provided by operationsoperating activities was $42.1$35.0 million in 2014for the year ended December 31, 2017 and was due to the net loss of $66.9$51.4 million offset by adjustments for non-cash items of $54.3$50.8 million and an increase in cash flow from operating activities due to changes in operating assets and liabilities of $54.7$35.6 million. The changes in operating assets and liabilities, wasexcluding the assets and liabilities assumed from Ultratech, were largely attributable to an increaseincreases in accounts payable and accrued expenses and customer deposits and deferred revenue, decreases in accounts receivable and income taxes payable, net,contract assets and inventory and deferred cost of sales, partially offset by an increaseincreases in accounts receivable.prepaid expenses and other current assets.

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

For the year ended December 31,

 

 

2015

 

 

 

2014

 

    

2018

    

2017

 

(in thousands)

 

 

(in thousands)

Acquisitions of businesses, net of cash acquired

 

$

(68

)

 

 

$

(144,069

)

 

$

(2,662)

 

$

(401,828)

Capital expenditures

 

(13,887

)

 

 

(15,588

)

 

 

(12,654)

 

 

(24,272)

Changes in investments, net

 

4,403

 

 

 

160,539

 

 

 

(2,981)

 

 

65,980

Proceeds from sale of lab tools

 

3,068

 

 

 

9,259

 

Other

 

(594

)

 

 

(2,038

)

Proceeds from held for sale assets

 

 

 —

 

 

2,284

Net cash provided by (used in) investing activities

 

$

(7,078

)

 

 

$

8,103

 

 

$

(18,297)

 

$

(357,836)

 

The net cash used byin investing activities during the year ended December 31, 2018 was attributable to capital expenditures, net change in investments, and net cash used in the final payout related to the acquisition of Ultratech. The net cash used in investing activities in 20152017 was primarily attributable to the net cash used in the acquisition of Ultratech as well as capital expenditures, as we made certain investments in our facilities in 2017 in an effort to streamline

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operations, enhance efficiencies, and reduce costs. This net cash used in investing activities was partially offset by the net sales of marketable securities and sales of lab tools. The cash provided by investing activitieschanges in 2014 was primarily attributable to net sales of marketable securities and sales of lab tools, partially offset by our purchase of PSP, net of cash acquired, and other capital expenditures. Refer to Note 5, “Business Combinations” for additional information on the acquisition of PSP.investments.

 

Cash Flows from Financing Activities

 

 

 

 

For the year ended December 31,

 

 

 

 

2015

 

 

 

2014

 

 

 

(in thousands)

 

Settlement of equity awards, net of withholding taxes

 

$

(982

)

$

9,981

 

Purchases of common stock

 

(8,907

)

 

Repayments of long-term debt

 

(314

)

(290

)

Net cash provided by (used in) financing activities

 

$

(10,203

)

$

9,691

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

    

2018

    

2017

 

 

(in thousands)

Settlement of equity awards, net of withholding taxes

 

$

(5)

 

$

(5,749)

Purchases of common stock

 

 

(11,457)

 

 

(2,869)

Proceeds from long-term debt borrowings

 

 

 —

 

 

335,752

Repayments of long-term debt

 

 

 —

 

 

(1,194)

Net cash provided by (used in) financing activities

 

$

(11,462)

 

$

325,940

The net cash used in financing activities for 2015the year ended December 31, 2018 was primarily related to the share repurchase program which commenced in November 2015. During 2014,program. The cash provided by financing activities for 2017 was primarily attributablerelated to the net cash proceeds received from settlementthe issuance of equity awards related to employee share-based compensation programs.the Convertible Senior Notes in January 2017.

 

Convertible Senior Notes

On January 10, 2017, we issued $345.0 million of 2.70% Convertible Senior Notes. We received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The Convertible Senior Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted. We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on this debt.

Business Combination

On May 26, 2017, the Company acquired 100% of Ultratech, Inc., a leading supplier of lithography, laser-processing, and inspection systems used to manufacture semiconductor devices and LEDs. The results of Ultratech’s operations have been included in the consolidated financial statements since the date of acquisition.

Contractual Obligations and Commitments

 

We have commitments under certain contractual arrangements to make future payments for goods and services. These contractual arrangements secure the rights to various assets and services to be used in the future in the normal course of business. We expect to fund these contractual arrangements with cash generated from operations in the normal course of business. In addition, we have bank guarantees and letters of credit issued by a financial institution on our behalf as needed. At December 31, 2018, outstanding bank guarantees and letters of credit totaled $6.8 million and unused bank guarantees and letters of credit of $58.9 million were available to be drawn upon.

 

The following table summarizes our contractual arrangements at December 31, 20152018 and the timing and effect that those commitments are expected to have on our liquidity and cash flow in future periods. The effect of unrecognized tax

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benefits, which total $5.3$1.5 million at December 31, 2015,2018, have been excluded from the table since we are unable to reasonably estimate the period of potential cash settlement, if any, with the respective tax authorities.

 

 

 

 

Payments due by period

 

 

 

 

 

Less than

 

1 – 3

 

3 – 5

 

More than

 

 

 

 

Total

 

1 year

 

years

 

years

 

5 years

 

 

 

(in thousands)

 

Long-term debt

 

$

1,533

 

$

340

 

$

766

 

$

427

 

$

 

Interest on debt

 

259

 

109

 

132

 

18

 

 

Operating leases

 

8,074

 

2,154

 

2,688

 

1,063

 

2,169

 

Bank guarantees

 

2,925

 

2,925

 

 

 

 

Purchase commitments(1)

 

92,694

 

92,694

 

 

 

 

Total

 

$

105,485

 

$

98,222

 

$

3,586

 

$

1,508

 

$

2,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

 

 

 

 

Less than

 

1 – 3

 

3 – 5

 

More than

 

    

Total

    

1 year

    

years

    

years

    

5 years

 

 

  (in thousands)

Principal payments on long-term debt

 

$

345,000

 

$

 —

 

$

 —

 

$

345,000

 

$

 —

Cash interest on debt

 

 

37,648

 

 

9,315

 

 

18,630

 

 

9,703

 

 

 —

Operating leases

 

 

16,057

 

 

5,143

 

 

7,488

 

 

2,878

 

 

548

Purchase commitments(1)

 

 

91,466

 

 

91,466

 

 

 —

 

 

 —

 

 

 —

Total

 

$

490,171

 

$

105,924

 

$

26,118

 

$

357,581

 

$

548


(1)Purchase commitments are primarily for inventory used in manufacturing our products. We generally do not enter  into purchase commitments extending beyond one year. We have $14.6 million of offsetting supplier deposits against these purchase commitments as of December 31, 2015.

(1)

Purchase commitments are generally for inventory used in the manufacturing of our products. We generally do not enter into purchase commitments extending beyond one year. At December 31, 2018, we have $12.8 million of offsetting supplier deposits that will be applied against these purchase commitments.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, expenses, results of operations, liquidity, capital expenditures, or capital resources other than operating leases, bank guarantees, and purchase commitments disclosedreflected in the preceding “Contractual Obligations and Commitments” table.

 

Application of Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requirerequires a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate our estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates.

 

We consider the following significant accounting policies to be critical because of their complexity and the high degree of judgment involved in implementing them.

Revenue Recognition

 

We recognize revenue when persuasive evidenceadopted ASC 606 as of an arrangement exists, delivery has occurred or services have been rendered,January 1, 2018, using the selling pricefull retrospective method. Refer to Note 1, “Significant Accounting Policies,” for additional information.

Revenue is fixed or determinable, collectability is reasonably assured, and, for system sales, we have received customer acceptance or we have otherwise objectively demonstrated thatrecognized upon the delivered system meets alltransfer of control of the agreed-topromised product or service to the customer specifications. Each sales arrangement mayin an amount that reflects the consideration we expect to receive in exchange for such product or service. Our contracts with customers generally do not contain commercial termsvariable consideration. In the rare instances where variable consideration is included, we estimate the amount of variable consideration and determine what portion of that, differif any, has a high probability of significant subsequent revenue reversal, and if so, that amount is excluded from other arrangements. In addition, wethe transaction price. Our contracts with customers frequently enter into contracts that contain multiple deliverables.deliverables, such as systems, upgrades, components, spare parts, installation, maintenance, and service plans. Judgment is required to properly identify the accounting units of the multiple deliverable transactionsperformance obligations within a contract and to determine how the manner in which revenue should be allocated among the accounting units. Moreover, judgment is usedperformance obligations. We also evaluate whether multiple transactions with the same customer or related parties should be considered part of a single contract 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 interpreting the commercial terms and determining when all criteria have been met in order to recognize revenue in the appropriate accounting period. The maximum revenue we recognize on a delivered element is limited to the amount that is not contingent upon the deliverycontemplation of additional items. While changes in the allocationone another.

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Table of the estimated sales price between theContents

When there are separate units of accounting, willwe allocate revenue to each performance obligation on a relative stand-alone selling price basis. The stand-alone selling prices are determined based on the prices at which we separately sell the systems, upgrades, components, spare parts, installation, maintenance, and service plans. For items that are not affectsold separately, we estimate stand-alone selling prices generally using an expected cost plus margin approach.

Most of our revenue is recognized at a point in time when the amountperformance obligation is satisfied. We consider many facts when evaluating each of total revenue recognized for a particularour sales arrangement, any material changes in these allocations could impactarrangements to determine the timing of revenue recognition, which couldincluding our contractual obligations 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 many of these arrangements, a customer source inspection of the system is performed in our facility, test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery, or other quality assurance testing is performed internally to ensure system functionality prior to shipment. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When we objectively demonstrate that the criteria specified in the contractual acceptance provisions are achieved prior to delivery either through customer testing or our historical experience of our tools meeting specifications, transfer of control of the product to the customer is considered to have a material effect on our financial conditionoccurred and results of operations. We generally recognize revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date. 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. We recognize such revenue and costs upon obtaining objective evidence that the acceptance provisions can be achieved, assuming all other revenue recognition criteria have been met.

In certain cases our contracts with customers contain a billing retention, typically 10% of the sales price, which is billed by us and payable by the customer when field acceptance provisions are completed. Revenue recognized in advance of components and spare parts upon shipment. the amount that has been billed is recorded as a contract asset on the Consolidated Balance Sheets.

We generally recognize revenue related to maintenance and service contracts ratably over time based upon the respective contract term. Installation revenue is recognized over time as the installation services are performed. We recognize revenue from the sales of components, spare parts, and specified service engagements at a point in time, which is typically consistent with the time of delivery in accordance with the terms of the applicable contract term. See Note 1, “Significant Accounting Policies,” insales arrangement.

We may receive customer deposits on system transactions. The timing of the Notestransfer of goods or services related to the Consolidated Financial Statementsdeposits is either at the discretion of the customer or expected to be within one year from the deposit receipt. As such, we do not adjust transaction prices for the time value of money. Incremental direct costs incurred related to the acquisition of a description of our revenue recognition policy.customer contract, such as sales commissions, are expensed as incurred since the expected amortization period is one year or less.

   

Inventory ValuationWe have elected to treat shipping and handling costs as a fulfillment activity, and we include such costs in cost of services when we recognize revenue for the related goods. Taxes assessed by governmental authorities that are collected by us from a customer are excluded from revenue.

 

Inventory Valuation

Inventories are stated at the lower of cost or net realizable value, using standard costs that approximate actual costswith cost determined on a first-in, first-out basis. Each quarter we assess the valuation and recoverability of all inventories: materials (raw materials, spare parts, and service inventory); work-in-process; and finished goods. Obsolete inventory or inventory in excess of our estimated usage requirements is written down to its estimated net realizable value if less than cost. We evaluate usage requirements by analyzing historical and anticipated demand, and anticipated demand is estimated based upon current economic conditions, utilization requirements related to current backlog, current sales trends, and other qualitative factors. Unanticipated changes in demand for our products may require a write down of inventory that could materially affect our operating results.

 

Warranty Costs

40


 

Our warranties are typically valid for one year from the dateTable of final acceptance. We estimate the costs that may be incurred under the warranty we provide and 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.Contents

Goodwill and Intangible Assets

 

Goodwill is tested for impairment at least annually in the beginning of the fourth quarter of our fiscal year. We may first perform a qualitative assessment of whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount, and, if so, we then apply the two-step impairment test. The two-step impairment test first comparesquantitatively compare the fair value of our reporting unit to its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired and we are not required to perform further testing.impaired. If the carrying amount of the reporting unit exceeds its fair value, we determine the implied fair value of the goodwill and if the carrying amount of the goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.difference, up to the carrying value of goodwill.

 

We determine the fair value of our reporting unit based on a reconciliation of the aggregate fair value of our reporting unit to our adjusted market capitalization. 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. The control premium is estimated using historical transactions in similar industries.

The carrying values of long-lived assets, including identifiable intangible assets, 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 on a quarterly basis. The facts and circumstances considered includetest is performed utilizing undiscounted cash flows expected to be generated by that asset or asset group compared to its carrying amount. If the recoverabilitycarrying amount of the cost of other intangible assets from futurelong-lived asset or asset group is not recoverable on an undiscounted cash flowsflow basis, impairment is recognized to be derived from the use ofextent the asset.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. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude of any impairment.

 

Intangible assets with finite useful lives, including purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete,backlog, and software licenses, are subject to amortization over the expected period of economic benefit to us. We evaluate whether events or circumstances have occurred that warrant a revision to the remaining useful lives of intangible assets. In cases where a revision is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the revised remaining useful life.

 

Accounting for Business Combinations

The allocationIntangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the purchase price for acquisitions requires extensive use of accounting estimatesassociated R&D efforts. If and judgments to allocatewhen development is complete, the purchase price to the identifiable tangibleassociated assets would be deemed long-lived and intangible assets acquired, including in-process research and development, and liabilities assumedwould then be amortized based on their respective fair values. The estimates we make include expected cash flows, expected cost savings, andestimated useful lives at that point in time. Indefinite-lived intangible assets are tested for impairment at least annually in the appropriate weighted average cost of capital. We complete these assessments as soon as practical after the acquisition closing dates. Any excessbeginning of the purchase price overfourth quarter of our fiscal year. In testing indefinite-lived intangible assets for impairment, we may first perform a qualitative assessment of whether it is more likely than not that the estimated fair valuesvalue of the identifiable netindefinite-lived intangible asset is less than its carrying amount, and, if so, we then quantitatively compare the fair value of the indefinite-lived intangible asset to its carrying amount. We determine the fair value of our indefinite-lived intangible assets acquired is recorded as goodwill.using a discounted cash flow method.

 

Fair Value of Financial Instruments

The measurement of fair value for our financial instruments is based on the authoritative guidance which establishes a fair value hierarchy that is based on three levels of inputs and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 3, “Fair Value Measurements,” in the Notes to the Consolidated Financial Statements for additional information.

Income Taxes

 

We estimate our income taxes in each of the jurisdictions in which we operate. Deferred income taxes reflect the net tax effect of temporary differences between the asset and liability balances recognized for financial reporting purposes and the balances used for income tax purposes, as well as the tax effect of carry forwards. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Realization of our net deferred tax assets is dependent on future taxable income.

 

We recognize the effect of income tax positions for only those positions which are estimated to more likely than not be sustained if challenged. We reflect changes in recognition or measurement in the period in which our change in judgment occurs. We record interest and penalties related to uncertain tax positions in income tax expense. Income taxes related to the global intangible low-taxed income (“GILTI”) rules are expensed as incurred.

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Recent Accounting Pronouncements

 

We early adoptedIn February 2016, the FASB issued ASU 2016-02: Leases, which, along with subsequent ASUs related to this topic, has been codified as Accounting Standards UpdateCodification 842 (“ASU”ASC 842”) No. 2015-17: Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring that deferred income tax. ASC 842 generally requires operating lessee rights and obligations to be recognized as assets and liabilities and assets be classified as noncurrent in our consolidatedon the balance sheet. In accordance withThe new standard, which is effective for us on January 1, 2019, offers a transition option whereby companies can recognize a cumulative-effect adjustment to the ASU’s transition requirements, we chose to apply the amendments in the update prospectively beginning with our 2015 fiscal year. As such, prior periods have not been retrospectively adjusted. The adoptionopening balance of this ASU did not have a material impact on the consolidated financial statements.

Accounting for Share-Based Compensation

We account for stock-based awards granted to employees for services based on the fair value of those awards. We use the Black-Scholes option-pricing model to compute the estimated fair value of option awards. The Black-Scholes model includes assumptions regarding expected volatility, expected term, and risk-free interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on market and other conditions outside of our control. As a result, if other assumptions had been used, stock-based compensation expense could have been materially affected. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially affected in future years.

We have granted performance share awards to senior executives where the number and, in some instances, the timing of the vesting of restricted shares ultimately received by the senior executives depends on our performance, as measured against specified targets. We reevaluate the expected target achievement each reporting period until the conclusion of the performance period and recognize the impact of any change in estimateretained earnings in the period of change. 

adoption rather than in the earliest period presented. We estimate forfeituresplan to adopt using this transition method. In addition, ASC 842 provides for a number of share based awards using our historical experience, which is adjusted overoptional exemptions in transition. We expect to elect certain exemptions whereby prior conclusions regarding lease identification, lease classification, and initial direct costs are not required to be reassessed under the requisite service period based on actual forfeitures.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, as since amended by ASU 2015-14: Revenue from Contractsnew standard. We also plan to elect allowable policies whereby we will not separate lease and non-lease components, and we will not recognize an asset or liability for leases with Customers (the “Update”). The Update requires our revenue recognition to depict the transferoriginal terms or renewals of promised goodsone year or services to customers in an amount that reflects the consideration to whichless. Upon adoption, we expect to be entitled in exchange for those goods or services. The Update outlines a five-step modelrecognize an operating lease liability ranging from $12 million to make$16 million based on the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adoptpresent value of remaining minimum rental payments on existing leases, with corresponding assets of approximately the Update for reporting periods beginning after December 15, 2017. The ASU provides for different transition alternatives. We are evaluating the impact of adopting the Update on our consolidated financial statements and related financial statement disclosures and have not yet determined which method of adoption will be selected.same amount.

 

We have evaluatedare also evaluating other pronouncements recently issued but not yet adopted, and we do not believe theadopted. The adoption of these pronouncements willis not expected to have a material impact on theour consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rate Risk

 

Our exposure to market rate risk for changes in interest rates primarily relates to our investment portfolio. We centrally manage our investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately $116.1$48.2 million at December 31, 2015.2018. These securities are subject to interest rate risk and, based on our investment portfolio at December 31, 2015,2018, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of $0.3$0.2 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.

 

Currency Exchange Risk

 

We conduct business on a worldwide basis and, as such, a portion of our revenues, earnings, and net investments in foreign affiliates is exposed to changes in currency exchange rates. The economic impact of currency exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions, and other factors. These changes, if material, could cause us to adjust our financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.

 

In the past,From time to time, we have managedmanage our risks and exposures to currency exchange rates through the use of derivative financial instruments (e.g., forward contracts). We onlymainly use derivative financial instruments in the context of hedging and generally do not use them for speculative purposes. We did not enter into any derivative transactions in 2015. During 2014fiscal 2018, 2017, and 2016 we did not designate our foreign exchange derivatives as hedges. Accordingly, all foreign exchange derivatives wereare recorded in our Consolidated Balance Sheets at fair value and changes in fair value from these contracts wereare recorded in “Other, net” in our Consolidated Statements of Operations.

 

Our net sales to customers located outside of the United States represented approximately 82%77%, 89%80%, and 83%74% of our total net sales in 2015, 2014,2018, 2017, and 2013,2016, respectively. We expect that net sales to customers outside the United States will continue to represent a large percentage of our total net sales. Our net sales denominated in currencies other than the U.S. dollar represented approximately 2%1%, 8%1%, and 4%, of total net sales in 2015, 2014,2018, 2017, and 2013,2016, respectively.

A 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of operations since most of our sales outside the United States are denominated in U.S. dollars.

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Item 8. Financial Statements and Supplementary Data

 

Our Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule filed as part of this Form 10-K.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.Disclosure

 

None.

 

Item 9A. Controls and Procedures

 

Management’s Report on Internal Control Overover Financial Reporting

 

Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective as of December 31, 2015.2018. The disclosure controls and procedures are designed to ensure that the information required to be disclosed in this report filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure.

 

Our principal executive and financial officers are responsible for establishing and maintaining adequate internal control over financial reporting, which is a process designed and put into effect to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Using the criteria established in the Internal Control Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), Management has evaluated, assessed, and concluded that internal control over financial reporting is effective as of December 31, 2015.2018.

 

KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting.

 

Changes in Internal Control Overover Financial Reporting

 

During the quarter ended December 31, 2015,2018, there were no changes in internal control that have materially affected or are reasonably likely to materially affect internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

 

TheTo the Stockholders and Board of Directors and Stockholders of

Veeco Instruments Inc.:

 

Opinion on Internal Control Over Financial Reporting

We have audited Veeco InstrumentInstruments Inc.’s and subsidiaries (the Company) internal control over financial reporting as of December 31, 2015,2018, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Veeco Instrument Inc.’sCommission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement Schedule II — Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated February 25, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become

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inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Veeco Instruments Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Veeco Instrument’s Inc. and subsidiaries as of December 31, 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and our report dated February 25, 2016 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

 

Melville, New York

February 25, 20162019

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Item 9B. Other Information

 

None.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Information required by this Item that will appear under the headings Governance,“Governance,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive proxy statement to be filed with the SEC relating to our 20162019 Annual Meeting of Stockholders is incorporated herein by reference.

 

We have adopted a Code of Ethics for Senior Officers (the “Code”) which applies to our chief executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. A copy of the Code can be found on our website (www.veeco.com). We intend to disclose on our website the nature of any future amendments to and waivers of the Code that apply to the chief executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. We have also adopted a Code of Business Conduct which applies to all of our employees, including those listed above, as well as to our directors. A copy of the Code of Business Conduct can be found on our website (www.veeco.com). The website address above is intended to be an inactive, textual reference only. None of the material on this website is part of this report.

 

Item 11. Executive Compensation

 

Information required by this Item that will appear under the heading “Compensation” in the definitive proxy statement to be filed with the SEC relating to our 20162019 Annual Meeting of Stockholders is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Information required by this Item that will appear under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the definitive proxy statement to be filed with the SEC relating to our 20162019 Annual Meeting of Stockholders is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.Independence

 

Information required by this Item that will appear under the headings Certain“Certain Relationships and Related Transactions” and “Independence of Board” in the definitive proxy statement to be filed with the SEC relating to our 20162019 Annual Meeting of Stockholders is incorporated herein by reference.

 

Item 14. Principal Accounting Fees and Services.Services

 

Information required by this Item that will appear under the heading “Proposal 65 — Ratification of Appointment of KPMG” in the definitive proxy statement to be filed with the SEC relating to our 20162019 Annual Meeting of Stockholders is incorporated herein by reference.

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules.Schedules

 

(a)   (1)  The Registrant’s financial statements together with a separate table of contents are annexed hereto

(2)  Financial Statement Schedules are listed in the separate table of contents annexed hereto.

(3)  Exhibits

 

Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.

 

 

 

 

 

 

 

 

Filed or

Exhibit

 

 

Incorporated by Reference

 

Furnished

Number

Exhibit Description

 

Form

Exhibit

Filing Date

 

Herewith

2.1

Securities Purchase Agreement, dated December 4, 2014, by and among Solid State Equipment Holdings LLC, certain securityholders thereof, Veeco Instruments Inc. and certain other parties thereto.

 

10-K

2.1

2/24/2015

 

 

2.2

Agreement and Plan of Merger, dated September 18, 2013, by and among Veeco, Veeco Wyoming Inc., Synos Technology, Inc., certain stockholders of Synos Technology, Inc., and Shareholder Representative Services LLC.

 

10-K

2.1

2/28/2014

 

 

3.1

Amended and Restated Certificate of Incorporation of Veeco dated December 1, 1994, as amended June 2, 1997 and July 25, 1997.

 

10-Q

3.1

8/14/1997

 

 

3.2

Amendment to Certificate of Incorporation of Veeco dated May 29, 1998.

 

10-K

3.2

3/14/2001

 

 

3.3

Amendment to Certificate of Incorporation of Veeco dated May 5, 2000.

 

10-Q

3.1

8/14/2000

 

 

3.4

Amendment to Certificate of Incorporation of Veeco dated May 16, 2002.

 

10-Q

3.1

10/26/2009

 

 

3.5

Amendment to Certificate of Incorporation of Veeco dated May 14, 2010.

 

10-K

3.8

2/24/2011

 

 

3.6

Fourth Amended and Restated Bylaws of Veeco, effective October 23, 2008.

 

8-K

3.1

10/27/2008

 

 

3.7

Amendment No. 1 to the Fourth Amended and Restated Bylaws of Veeco effective May 20, 2010.

 

8-K

3.1

5/26/2010

 

 

3.8

Amendment No. 2 to the Fourth Amended and Restated Bylaws of Veeco effective October 20, 2011.

 

8-K

3.1

10/24/2011

 

 

3.9

Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of Veeco.

 

10-Q

3.1

5/9/2001

 

 

10.1

Loan Agreement dated as of December 15, 1999 between Applied Epi, Inc. and Jackson National Life Insurance Company.

 

10-Q

10.2

11/14/2001

 

 

10.2

Promissory Note dated as of December 15, 1999 issued by Applied Epi, Inc. to Jackson National Life Insurance Company.

 

10-Q

10.3

11/14/2001

 

 

10.3

Amendment to Loan Documents effective as of September 17, 2001 between Applied Epi, Inc. and Jackson National Life Insurance Company (executed in June 2002).

 

10-Q

10.2

8/14/2002

 

 

10.4*

Veeco Amended and Restated 2000 Stock Incentive Plan, effective July 20, 2006.

 

10-Q

10.4

8/4/2006

 

 

10.5*

Amendment No. 1 effective April 18, 2007 (ratified by the Board August 7, 2007) to Veeco Amended and Restated 2000 Stock Incentive Plan.

 

10-Q

10.1

8/7/2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Filed or

Exhibit

 

 

 

Incorporated by Reference

 

Furnished

Number

    

Exhibit Description

    

Form

    

Exhibit

    

Filing Date

    

Herewith

3.1

 

Amended and Restated Certificate of Incorporation of Veeco dated December 1, 1994, as amended June 2, 1997 and July 25, 1997.

 

10-Q

 

3.1

 

8/14/1997

 

 

3.2

 

Amendment to Certificate of Incorporation of Veeco dated May 29, 1998.

 

10-K

 

3.2

 

3/14/2001

 

 

3.3

 

Amendment to Certificate of Incorporation of Veeco dated May 5, 2000.

 

10-Q

 

3.1

 

8/14/2000

 

 

3.4

 

Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of Veeco dated March 14, 2001.

 

10-Q

 

3.1

 

5/9/2001

 

 

3.5

 

Amendment to Certificate of Incorporation of Veeco dated May 16, 2002.

 

10-Q

 

3.1

 

10/26/2009

 

 

3.6

 

Amendment to Certificate of Incorporation of Veeco dated May 18, 2010.

 

10-K

 

3.8

 

2/24/2011

 

 

3.7

 

Fifth Amended and Restated Bylaws of Veeco effective February 5, 2016.

 

8-K

 

3.1

 

2/10/2016

 

 

4.1

 

Indenture, dated as of January 18, 2017, by and between Veeco Instruments Inc. and U.S. Bank National Association, as Trustee (relating to the 2.70% Convertible Notes due 2023).

 

8-K

 

4.1

 

1/18/2017

 

 

4.2

 

First Supplemental Indenture, dated as of January 18, 2017, by and between Veeco Instruments Inc. and U.S. Bank National Association, as Trustee (relating to the 2.70% Convertible Notes due 2023).

 

8-K

 

4.2

 

1/18/2017

 

 

10.1*

 

 

Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 14, 2010.

 

Def 14A

 

Appendix A

 

11/4/2013

 

 

10.2*

 

Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 5, 2016.

 

S-8

 

10.1

 

6/2/2016

 

 

10.3

 

Veeco Amended and Restated 2010 Stock Incentive Plan, effective March 3, 2017.

 

10-Q

 

10.1

 

11/3/2017

 

 

10.4

 

Ultratech, Inc. 1993 Stock Option/Stock Issuance Plan (as Amended and Restated as of May 31, 2011).

 

S-8

 

10.1

 

5/26/2017

 

 

10.5*

 

Form of Notice of Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective June 2015.

 

10-Q

 

10.1

 

8/3/2015

 

 

10.6*

 

Form of Notice of Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective June 2016.

 

10-Q

 

10.1

 

11/1/2016

 

 

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Filed or

Exhibit

 

 

Incorporated by Reference

 

Furnished

Number

Exhibit Description

 

Form

Exhibit

Filing Date

 

Herewith

10.6*

Amendment No. 2 dated January 22, 2009 to Veeco Amended and Restated 2000 Stock Incentive Plan.

 

10-K

10.41

3/2/2009

 

 

10.7*

Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 14, 2010.

 

Def 14A

Appendix A

11/4/2013

 

 

10.8*

Form of Notice of Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective June 2015.

 

10-Q

10.1

8/3/2015

 

 

10.9*

Veeco 2013 Inducement Stock Incentive Plan, effective September 26, 2013.

 

10-Q

10.1

11/4/2013

 

 

10.10*

Form of 2013 Inducement Stock Incentive Plan Stock Option Agreement.

 

10-Q

10.2

11/4/2013

 

 

10.11*

Form of 2013 Inducement Stock Incentive Plan Restricted Stock Unit Agreement.

 

10-Q

10.3

11/4/2013

 

 

10.12*

Form of Indemnification Agreement entered into between Veeco and each of its directors and executive officers.

 

8-K

10.1

10/23/2006

 

 

10.13*

Veeco Amended and Restated Senior Executive Change in Control Policy, effective as of January 1, 2014.

 

10-K

10.22

2/28/2014

 

 

10.14*

Employment Agreement effective as of July 1, 2007 between Veeco and John R. Peeler.

 

10-Q

10.3

8/7/2007

 

 

10.15*

Amendment effective December 31, 2008 to Employment Agreement between Veeco and John R. Peeler.

 

10-K

10.38

3/2/2009

 

 

10.16*

Second Amendment effective June 11, 2010 to Employment Agreement between Veeco and John R. Peeler.

 

10-Q

10.1

7/29/2010

 

 

10.17*

Third Amendment effective April 27, 2012 to Employment Agreement between Veeco and John R. Peeler.

 

10-Q

10.2

5/9/2012

 

 

10.18*

Amendment dated June 12, 2014 to Employment Agreement between Veeco and John R. Peeler.

 

10-Q

10.3

7/31/2014

 

 

10.19*

Letter Agreement dated April 8, 2014 between Veeco and Shubham Maheshwari.

 

10-Q

10.1

7/31/2014

 

 

10.20*

Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller.

 

10-K

10.3

2/22/2012

 

 

10.21*

Letter dated December 22, 2015 from Veeco to Dr. William J. Miller.

 

 

 

 

 

X

10.22*

Letter Agreement dated January 21, 2004 between Veeco and John P. Kiernan.

 

10-K

10.38

3/12/2004

 

 

10.23*

Amendment effective June 9, 2006 to Letter Agreement between Veeco and John P. Kiernan.

 

10-Q

10.3

8/4/2006

 

 

10.24*

Amendment effective December 31, 2008 to Letter Agreement between Veeco and John P. Kiernan.

 

10-K

10.40

3/2/2009

 

 

10.25*

Letter Agreement effective as of June 19, 2009 between Veeco and John P. Kiernan.

 

10-Q

10.2

7/30/2009

 

 

16.1

Letter to the Securities and Exchange Commission from Ernst & Young LLP, dated March 19, 2015.

 

8-K

16.1

3/19/2015

 

 

21.1

Subsidiaries of the Registrant.

 

 

 

 

 

X

23.1

Consent of KPMG LLP.

 

 

 

 

 

X

23.2

Consent of Ernst & Young LLP.

 

 

 

 

 

X

31.1

Certification of Chief Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Filed or

Exhibit

 

 

 

Incorporated by Reference

 

Furnished

Number

    

Exhibit Description

    

Form

    

Exhibit

    

Filing Date

    

Herewith

10.7*

 

Form of Notice of Critical Priorities Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective June 2016.

 

10-Q

 

10.2

 

11/1/2016

 

 

10.8*

 

Form of Notice of Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective March 2018.

 

10-Q

 

10.1

 

5/7/2018

 

 

10.9*

 

Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective March 2018.

 

10-Q

 

10.2

 

5/7/2018

 

 

10.10*

 

Veeco 2013 Inducement Stock Incentive Plan, effective September 26, 2013

 

10-Q

 

10.1

 

11/4/2013

 

 

10.11*

 

Veeco Instruments Inc. 2016 Employee Stock Purchase Plan.

 

S-8

 

10.9

 

6/2/2016

 

 

10.12

 

Form of Amended and Restated Indemnification Agreement entered into between Veeco and each of its directors and executive officers (August 2017).

 

10-Q

 

10.2

 

8/3/2017

 

 

10.13*

 

 

Veeco Amended and Restated Senior Executive Change in Control Policy, effective as of January 1, 2014.

 

10-K

 

10.22

 

2/28/2014

 

 

10.14*

 

Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller.

 

10-K

 

10.30

 

2/22/2012

 

 

10.15*

 

Letter Agreement dated August 29, 2018 between Veeco and Dr. William J. Miller. 

 

8-K

 

10.2

 

9/4/2018

 

 

10.16*

 

Employment Agreement effective as of July 1, 2007 between Veeco and John R. Peeler.

 

10-Q

 

10.3

 

8/7/2007

 

 

10.17*

 

Amendment effective December 31, 2008 to Employment Agreement between Veeco and John R. Peeler.

 

10-K

 

10.38

 

3/2/2009

 

 

10.18*

 

Second Amendment effective June 11, 2010 to Employment Agreement between Veeco and John R. Peeler.

 

10-Q

 

10.1

 

7/29/2010

 

 

10.19*

 

Third Amendment effective April 25, 2012 to Employment Agreement between Veeco and John R. Peeler.

 

10-Q

 

10.2

 

5/9/2012

 

 

10.20*

 

Amendment dated June 12, 2014 to Employment Agreement between Veeco and John R. Peeler.

 

10-Q

 

10.3

 

7/31/2014

 

 

10.21*

 

Amendment dated June 12, 2017 to Employment Agreement between Veeco and John R. Peeler.

 

10-Q

 

10.1

 

8/3/2017

 

 

10.22*

 

Amendment dated August 29, 2018 to Employment Agreement between Veeco and John R. Peeler.

 

8-K

 

10.1

 

9/4/2018

 

 

10.23*

 

Letter Agreement dated April 8, 2014 between Veeco and Shubham Maheshwari.

 

10-Q

 

10.1

 

7/31/2014

 

 

10.24*

 

Letter Agreement dated August 29, 2018 between Veeco and Shubham Maheshwari.

 

8-K

 

10.3

 

9/4/2018

 

 

10.25*

 

Letter Agreement dated January 21, 2004 between Veeco and John P. Kiernan.

 

10-K

 

10.38

 

3/12/2004

 

 

10.26*

 

Amendment effective June 9, 2006 to Letter Agreement between Veeco and John P. Kiernan.

 

10-Q

 

10.3

 

8/4/2006

 

 

10.27*

 

Amendment effective December 31, 2008 to Letter Agreement between Veeco and John P. Kiernan.

 

10-K

 

10.40

 

3/2/2009

 

 

21.1

 

Subsidiaries of the Registrant.

 

 

 

 

 

 

 

*

48


Table of Contents

 

 

 

 

 

 

 

Filed or

Exhibit

 

 

Incorporated by Reference

 

Furnished

Number

Exhibit Description

 

Form

Exhibit

Filing Date

 

Herewith

Filed or

31.2Exhibit

Incorporated by Reference

Furnished

Number

Exhibit Description

Form

Exhibit

Filing Date

Herewith

23.1

Consent of KPMG LLP.

*

31.1

Certification of Chief FinancialExecutive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.

 

 

 

 

 

X

*

31.2

Certification of Chief Financial Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of theSecurities and Exchange Act of 1934.

*

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

 

 

 

 

 

X

*

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

 

 

 

 

 

X

*

101.INS

XBRL Instance.

 

 

 

 

 

**

101.XSD

XBRL Schema.

 

 

 

 

 

**

101.PRE

XBRL Presentation.

 

 

 

 

 

**

101.CAL

XBRL Calculation.

 

 

 

 

 

**

101.DEF

XBRL Definition.

 

 

 

 

 

**

101.LAB

XBRL Label.

 

 

 

 

 

**


*    Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a) (3) of Form 10-K.

**  Filed herewith electronically

49


Table of Contents

SIGNATURES

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 25, 2016.2019.

 

 

Veeco Instruments Inc.

 

 

 

 

By:

/S/ JOHN R. PEELER

WILLIAM J. MILLER, Ph.D.

 

 

John R. PeelerWilliam J. Miller, Ph.D.

Chairman and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on February 25, 2016.2019.

 

Signature

Title

 /s/ JOHN R. PEELER

 

Chairman and Chief Executive Officer

John R. PeelerSignature

Title

/s/ WILLIAM J. MILLER, Ph.D.

Chief Executive Officer and Director

William J. Miller, Ph.D.

 

(principal executive officer)

 

 

 

 /s//s/ SHUBHAM MAHESHWARI

 

Executive Vice President, Chief Financial Officer, and Chief FinancialOperating Officer

Shubham Maheshwari

 

(principal financial officer)

 

 

 

/s/ JOHN P. KIERNAN

 

Senior Vice President, Finance, Chief Accounting Officer,

 /s/ JOHN P. KIERNAN

Corporate Controller and Treasurer

John P. Kiernan

 

(principal accounting officer)

 

 

 

 /s/ EDWARD H. BRAUN/s/ JOHN R. PEELER

 

DirectorExecutive Chairman

Edward H. BraunJohn R. Peeler

 

 

 

 

 

 /s//s/ KATHLEEN A. BAYLESS

Director

Kathleen A. Bayless

/s/ RICHARD A. D’AMORE

 

Director

Richard A. D’Amore

 

 

 

 

 

 /s//s/ GORDON HUNTER

 

Director

Gordon Hunter

 

 

 

 

 

 /s//s/ KEITH D. JACKSON

 

Director

Keith D. Jackson

 

 

 

 

 

 /s/ ROGER D. MCDANIEL

Director

Roger D. McDaniel

 /s//s/ PETER J. SIMONE

 

Director

Peter J. Simone

 

 

 

 

 

 /s/ SUSAN WANG/s/ THOMAS ST. DENNIS

 

Director

Susan WangThomas St. Dennis

 

 

 

44


50



Veeco Instruments Inc. and Subsidiaries

 

Index to Consolidated Financial Statements and Financial Statement Schedule

 

 

F-1


F-1



Report of  Independent  Registered  Public  Accounting  Firm

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TheTo the Stockholders and Board of Directors and Stockholders of

Veeco Instruments Inc.:

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheetsheets of Veeco Instruments Inc. and subsidiaries (the Company) as of December 31, 2015,2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the year then ended.years in the three-year period ended December 31, 2018, and the related notes and financial statement Schedule II — Valuation and Qualifying Accounts (collectively, the consolidated financial statements). In connection with our audit ofopinion, the consolidated financial statements wepresent fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles

We also have audited, Schedule II – Valuationin accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and Qualifying Accounts. our report dated February 25, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has retrospectively adopted the new revenue recognition standard, ASC Topic 606, Revenue from Contracts with Customers, as of January 1, 2018.

Basis for Opinion

These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion,presentation of the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Veeco Instruments Inc. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Veeco Instrument Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Melville, New York
February 25, 2016

F-2



Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Veeco Instruments Inc.

We have audited the accompanying consolidated balance sheet of Veeco Instruments Inc. (the “Company”) as of December 31, 2014 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the years ended December 31, 2014 and 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Veeco Instruments Inc. at December 31, 2014, and the consolidated results of its operations and its cash flows for each of the years ended December 31, 2014 and 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNGKPMG LLP

 

Jericho, New York
February 24, 2015We have served as the Company’s auditor since 2015.

 

F-3Melville, New York

February 25, 2019


F-2



Veeco Instruments Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

December 31,

 

December 31,

 

December 31,

 

 

2015

 

2014

    

2018

    

2017

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

269,232

 

$

270,811

 

 

$

212,273

 

$

279,736

Restricted cash

 

 

809

 

 

847

Short-term investments

 

116,050

 

120,572

 

 

 

48,189

 

 

47,780

Restricted cash

 

 

539

 

Accounts receivable, net

 

49,524

 

60,085

 

 

 

66,808

 

 

98,866

Contract assets

 

 

10,397

 

 

160

Inventories

 

77,469

 

61,471

 

 

 

156,311

 

 

120,266

Deferred cost of sales

 

2,100

 

5,076

 

 

 

3,072

 

 

15,994

Prepaid expenses and other current assets

 

22,760

 

23,132

 

 

 

22,221

 

 

33,437

Assets held for sale

 

5,000

 

6,000

 

Deferred income taxes

 

 

7,976

 

Total current assets

 

542,135

 

555,662

 

 

 

520,080

 

 

597,086

Property, plant and equipment, net

 

79,590

 

78,752

 

Property, plant, and equipment, net

 

 

80,284

 

 

85,058

Intangible assets, net

 

131,674

 

159,308

 

 

 

85,149

 

 

369,843

Goodwill

 

114,908

 

114,959

 

 

 

184,302

 

 

307,131

Deferred income taxes

 

1,384

 

1,180

 

 

 

1,869

 

 

3,047

Other assets

 

21,098

 

19,594

 

 

 

29,132

 

 

25,310

Total assets

 

$

890,789

 

$

929,455

 

 

$

900,816

 

$

1,387,475

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

30,074

 

$

18,111

 

 

$

39,611

 

$

50,318

Accrued expenses and other current liabilities

 

49,393

 

48,418

 

 

 

46,450

 

 

58,068

Customer deposits and deferred revenue

 

76,216

 

96,004

 

 

 

72,736

 

 

112,032

Income taxes payable

 

6,208

 

5,441

 

 

 

1,256

 

 

3,846

Deferred income taxes

 

 

120

 

Current portion of long-term debt

 

340

 

314

 

Total current liabilities

 

162,231

 

168,408

 

 

 

160,053

 

 

224,264

Deferred income taxes

 

11,211

 

16,397

 

 

 

5,690

 

 

36,845

Long-term debt

 

1,193

 

1,533

 

 

 

287,392

 

 

275,630

Other liabilities

 

1,539

 

4,185

 

 

 

9,906

 

 

10,643

Total liabilities

 

176,174

 

190,523

 

 

 

463,041

 

 

547,382

Stockholders’ equity:

 

 

 

 

 

Preferred stock, 500,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock, $0.01 par value; 120,000,000 shares authorized; 40,995,694 shares issued and 40,526,902 shares outstanding at December 31, 2015; and 40,360,069 shares issued and outstanding at December 31, 2014

 

410

 

404

 

Stockholders' equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding.

 

 

 —

 

 

 —

Common stock, $0.01 par value; 120,000,000 shares authorized; 48,547,417 and 48,229,251 shares issued at December 31, 2018 and December 31, 2017, respectively; 48,024,685 and 48,144,416 shares outstanding at December 31, 2018 and December 31, 2017, respectively.

 

 

485

 

 

482

Additional paid-in capital

 

767,137

 

750,139

 

 

 

1,061,325

 

 

1,051,953

Accumulated deficit

 

(45,058

)

 

(13,080

)

 

 

(619,983)

 

 

(212,870)

Accumulated other comprehensive income

 

1,348

 

1,469

 

 

 

1,820

 

 

1,812

Treasury stock, at cost, 468,792 shares at December 31, 2015

 

(9,222

)

 

 

Total stockholders’ equity

 

714,615

 

738,932

 

Total liabilities and stockholders’ equity

 

$

890,789

 

$

929,455

 

Treasury stock, at cost, 522,732 and 84,835 shares at December 31, 2018 and December 31, 2017, respectively.

 

 

(5,872)

 

 

(1,284)

Total stockholders' equity

 

 

437,775

 

 

840,093

Total liabilities and stockholders' equity

 

$

900,816

 

$

1,387,475

 

See accompanying Notes to the Consolidated Financial Statements.

F-3


Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

    

2018

    

2017

    

2016

Net sales

 

$

542,082

 

$

475,686

 

$

331,702

Cost of sales

 

 

348,363

 

 

299,458

 

 

198,604

Gross profit

 

 

193,719

 

 

176,228

 

 

133,098

Operating expenses, net:

 

 

 

 

 

 

 

 

 

Research and development

 

 

97,755

 

 

81,987

 

 

81,016

Selling, general, and administrative

 

 

92,060

 

 

100,250

 

 

77,642

Amortization of intangible assets

 

 

32,351

 

 

35,475

 

 

19,219

Restructuring

 

 

8,556

 

 

11,851

 

 

5,640

Acquisition costs

 

 

2,959

 

 

17,786

 

 

 —

Asset impairment

 

 

375,172

 

 

1,139

 

 

69,520

Other, net

 

 

368

 

 

(392)

 

 

223

Total operating expenses, net

 

 

609,221

 

 

248,096

 

 

253,260

Operating income (loss)

 

 

(415,502)

 

 

(71,868)

 

 

(120,162)

Interest income

 

 

3,186

 

 

2,335

 

 

1,180

Interest expense

 

 

(21,518)

 

 

(19,457)

 

 

(222)

Income (loss) before income taxes

 

 

(433,834)

 

 

(88,990)

 

 

(119,204)

Income tax expense (benefit)

 

 

(26,746)

 

 

(37,594)

 

 

2,823

Net income (loss)

 

$

(407,088)

 

$

(51,396)

 

$

(122,027)

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(8.63)

 

$

(1.16)

 

$

(3.10)

Diluted

 

$

(8.63)

 

$

(1.16)

 

$

(3.10)

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

Basic

 

 

47,151

 

 

44,174

 

 

39,340

Diluted

 

 

47,151

 

 

44,174

 

 

39,340

 

See accompanying Notes to the Consolidated Financial Statements.

 

F-4


F-4



Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of OperationsComprehensive Income (Loss)

(in thousands, except per share amounts)thousands)

 

 

 

 

For the year ended December 31,

 

 

 

2015

 

2014

 

2013

Net sales

 

$

477,038

 

 

$

392,873

 

 

$

331,749

 

Cost of sales

 

299,797

 

 

257,991

 

 

228,607

 

Gross profit

 

177,241

 

 

134,882

 

 

103,142

 

Operating expenses, net:

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

 

90,188

 

 

89,760

 

 

85,486

 

Research and development

 

78,543

 

 

81,171

 

 

81,424

 

Amortization of intangible assets

 

27,634

 

 

13,146

 

 

5,527

 

Restructuring

 

4,679

 

 

4,394

 

 

1,485

 

Asset impairment

 

126

 

 

58,170

 

 

1,220

 

Changes in contingent consideration

 

 

 

(29,368

)

 

829

 

Other, net

 

(697

)

 

(3,182

)

 

(1,017

)

Total operating expenses, net

 

200,473

 

 

214,091

 

 

174,954

 

Operating income (loss)

 

(23,232

)

 

(79,209

)

 

(71,812

)

Interest income

 

1,050

 

 

1,570

 

 

1,200

 

Interest expense

 

(464

)

 

(715

)

 

(598

)

Income (loss) before income taxes

 

(22,646

)

 

(78,354

)

 

(71,210

)

Income tax expense (benefit)

 

9,332

 

 

(11,414

)

 

(28,947

)

Net income (loss)

 

$

(31,978

)

 

$

(66,940

)

 

$

(42,263

)

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.80

)

 

$

(1.70

)

 

$

(1.09

)

Diluted

 

$

(0.80

)

 

$

(1.70

)

 

$

(1.09

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

Basic

 

39,742

 

 

39,350

 

 

38,807

 

Diluted

 

39,742

 

 

39,350

 

 

38,807

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

    

2018

    

2017

    

2016

Net income (loss)

 

$

(407,088)

 

$

(51,396)

 

$

(122,027)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Change in net unrealized gains or losses

 

 

11

 

 

(7)

 

 

(6)

Reclassification adjustments for net (gains) losses included in net income

 

 

 —

 

 

 —

 

 

18

Unrealized gain (loss) on available-for-sale securities

 

 

11

 

 

(7)

 

 

12

Minimum pension liability:

 

 

 

 

 

 

 

 

 

Reclassification adjustments for net (gains) losses included in net income

 

 

 —

 

 

 —

 

 

866

Net changes related to minimum pension liability

 

 

 —

 

 

 —

 

 

866

Currency translation adjustments:

 

 

 

 

 

 

 

 

 

Change in currency translation adjustments

 

 

 5

 

 

42

 

 

(19)

Reclassification adjustments for net (gains) losses included in net income

 

 

(8)

 

 

 —

 

 

(430)

Net changes related to currency translation adjustments

 

 

(3)

 

 

42

 

 

(449)

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss), net of tax

 

 

 8

 

 

35

 

 

429

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

(407,080)

 

$

(51,361)

 

$

(121,598)

 

See accompanying Notes to the Consolidated Financial Statements.

 

F-5


F-5



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)Stockholders' Equity

(in thousands)

 

 

 

 

For the year ended December 31,

 

 

 

2015

 

2014

 

2013

Net income (loss)

 

$

(31,978

)

 

$

(66,940

)

 

$

(42,263

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities

 

(49

)

 

51

 

 

34

 

Benefit (expense) for income taxes

 

 

 

 

 

11

 

Reclassifications from AOCI into net income

 

 

 

(65

)

 

(61

)

Net unrealized loss on available-for-sale securities

 

(49

)

 

(14

)

 

(16

)

 

 

 

 

 

 

 

 

 

 

Minimum pension liability

 

15

 

 

(145

)

 

125

 

Benefit (expense) for income taxes

 

 

 

 

 

(86

)

Net minimum pension liability

 

15

 

 

(145

)

 

39

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(87

)

 

149

 

 

(1,322

)

Benefit (expense) for income taxes

 

 

 

 

 

(53

)

Reclassifications from AOCI into net income

 

 

 

(3,142

)

 

 

Net foreign currency translation

 

(87

)

 

(2,993

)

 

(1,375

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

(121

)

 

(3,152

)

 

(1,352

)

Comprehensive income (loss)

 

$

(32,099

)

 

$

(70,092

)

 

$

(43,615

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

 

 

 

    

 

 

    

 

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Accumulated

 

Comprehensive

 

 

 

 

Shares

 

Amount

 

Shares

    

Amount

 

Capital

 

Deficit

 

Income

 

Total

Balance at December 31, 2015

 

40,996

 

 

410

 

 

469

 

 

(9,222)

 

 

767,137

 

 

(45,058)

 

 

1,348

 

$

714,615

Cumulative effect of change in accounting principle - adoption of ASU 2016-09

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,315

 

 

(1,315)

 

 

 —

 

 

 —

Cumulative effect of change in accounting principle - adoption of ASC 606

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,926

 

 

 —

 

 

6,926

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(122,027)

 

 

 —

 

 

(122,027)

Other comprehensive loss, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

429

 

 

429

Share-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

15,741

 

 

 —

 

 

 —

 

 

15,741

Net issuance under employee stock plans

 

(281)

 

 

(3)

 

 

(1,072)

 

 

19,948

 

 

(20,890)

 

 

 —

 

 

 —

 

 

(945)

Purchases of common stock

 

 —

 

 

 —

 

 

730

 

 

(13,035)

 

 

 —

 

 

 —

 

 

 —

 

 

(13,035)

Balance at December 31, 2016

 

40,715

 

 

407

 

 

127

 

 

(2,309)

 

 

763,303

 

 

(161,474)

 

 

1,777

 

 

601,704

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(51,396)

 

 

 —

 

 

(51,396)

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

35

 

 

35

Share-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

24,396

 

 

 —

 

 

 —

 

 

24,396

Net issuance under employee stock plans

 

313

 

 

 3

 

 

(245)

 

 

4,043

 

 

(9,795)

 

 

 —

 

 

 —

 

 

(5,749)

Stock issuance for business acquisition

 

7,201

 

 

72

 

 

 —

 

 

 —

 

 

228,800

 

 

 —

 

 

 —

 

 

228,872

Convertible Senior Notes, equity component

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

45,249

 

 

 —

 

 

 —

 

 

45,249

Purchases of common stock

 

 —

 

 

 —

 

 

203

 

 

(3,018)

 

 

 —

 

 

 —

 

 

 —

 

 

(3,018)

Balance at December 31, 2017

 

48,229

 

 

482

 

 

85

 

 

(1,284)

 

 

1,051,953

 

 

(212,870)

 

 

1,812

 

 

840,093

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(407,088)

 

 

 —

 

 

(407,088)

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 8

 

 

 8

Share-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

16,074

 

 

 —

 

 

 —

 

 

16,074

Net issuance under employee stock plans

 

318

 

 

 3

 

 

(512)

 

 

6,721

 

 

(6,702)

 

 

(25)

 

 

 —

 

 

(3)

Purchases of common stock

 

 —

 

 

 —

 

 

950

 

 

(11,309)

 

 

 —

 

 

 —

 

 

 —

 

 

(11,309)

Balance at December 31, 2018

 

48,547

 

$

485

 

 

523

 

$

(5,872)

 

$

1,061,325

 

$

(619,983)

 

$

1,820

 

$

437,775

 

See accompanying Notes to the Consolidated Financial Statements.

 

F-6


F-6



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Stockholders’ EquityCash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Earnings

 

Other

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Paid-in

 

(Accumulated

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit)

 

Income

 

Total

 

Balance at December 31, 2012

 

39,328

 

$

393

 

 

$

 

$

708,723

 

$

96,123

 

$

5,973

 

$

811,212

 

Net 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

 

338

 

4

 

 

 

(501

)

 

 

(497

)

Balance at December 31, 2013

 

39,666

 

397

 

 

 

721,352

 

53,860

 

4,621

 

780,230

 

Net 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

 

694

 

7

 

 

 

9,974

 

 

 

9,981

 

Balance at December 31, 2014

 

40,360

 

404

 

 

 

750,139

 

(13,080

)

1,469

 

738,932

 

Net loss

 

 

 

 

 

 

(31,978

)

 

(31,978

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

(121

)

(121

)

Share-based compensation expense

 

 

 

 

 

17,986

 

 

 

17,986

 

Net issuance under employee stock plans

 

636

 

6

 

 

 

(988

)

 

 

(982

)

Purchases of common stock

 

 

 

469

 

(9,222

)

 

 

 

(9,222

)

Balance at December 31, 2015

 

40,996

 

$

410

 

469

 

$

(9,222

)

$

767,137

 

$

(45,058

)

$

1,348

 

$

714,615

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended  December 31,

 

    

2018

    

2017

    

2016

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(407,088)

 

$

(51,396)

 

$

(122,027)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

49,998

 

 

50,095

 

 

32,650

Non-cash interest expense

 

 

11,762

 

 

10,446

 

 

 —

Deferred income taxes

 

 

(27,620)

 

 

(35,363)

 

 

997

Share-based compensation expense

 

 

16,074

 

 

24,396

 

 

15,741

Asset impairment

 

 

375,172

 

 

1,139

 

 

69,520

Provision for bad debts

 

 

 —

 

 

99

 

 

171

Gain on cumulative translation adjustment

 

 

 —

 

 

 —

 

 

(430)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable and contract assets

 

 

21,821

 

 

10,240

 

 

(8,880)

Inventories and deferred cost of sales

 

 

(24,678)

 

 

6,244

 

 

(6,106)

Prepaid expenses and other current assets

 

 

11,216

 

 

(10,204)

 

 

6,726

Accounts payable and accrued expenses

 

 

(19,672)

 

 

11,308

 

 

(24,474)

Customer deposits and deferred revenue

 

 

(39,296)

 

 

22,446

 

 

9,770

Income taxes receivable and payable, net

 

 

(4,800)

 

 

775

 

 

547

Long-term income tax liability

 

 

 —

 

 

(4,877)

 

 

 —

Other, net

 

 

(627)

 

 

(355)

 

 

1,951

Net cash provided by (used in) operating activities

 

 

(37,738)

 

 

34,993

 

 

(23,844)

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

Acquisitions of businesses, net of cash acquired

 

 

(2,662)

 

 

(401,828)

 

 

 —

Capital expenditures

 

 

(12,654)

 

 

(24,272)

 

 

(11,479)

Proceeds from the sale of investments

 

 

90,065

 

 

348,927

 

 

152,301

Payments for purchases of investments

 

 

(93,046)

 

 

(282,947)

 

 

(103,394)

Proceeds from held for sale assets

 

 

 —

 

 

2,284

 

 

9,512

Other

 

 

 —

 

 

 —

 

 

(230)

Net cash provided by (used in) investing activities

 

 

(18,297)

 

 

(357,836)

 

 

46,710

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan

 

 

3,064

 

 

2,992

 

 

1,656

Restricted stock tax withholdings

 

 

(3,069)

 

 

(8,741)

 

 

(2,601)

Purchases of common stock

 

 

(11,457)

 

 

(2,869)

 

 

(13,349)

Proceeds from long-term debt borrowings

 

 

 —

 

 

335,752

 

 

 —

Principal payments on long-term debt

 

 

 —

 

 

(1,194)

 

 

(340)

Net cash provided by (used in) financing activities

 

 

(11,462)

 

 

325,940

 

 

(14,634)

Effect of exchange rate changes on cash and cash equivalents

 

 

(4)

 

 

42

 

 

(20)

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

(67,501)

 

 

3,139

 

 

8,212

Cash, cash equivalents, and restricted cash - beginning of period

 

 

280,583

 

 

277,444

 

 

269,232

Cash, cash equivalents, and restricted cash - end of period

 

$

213,082

 

$

280,583

 

$

277,444

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

 

Interest paid

 

$

9,708

 

$

4,675

 

$

225

Income taxes paid

 

 

4,799

 

 

1,939

 

 

1,669

Non-cash operating and financing activities

 

 

 

 

 

 

 

 

 

Net transfer of inventory to property, plant and equipment

 

 

1,479

 

 

(97)

 

 

1,827

 

See accompanying Notes to the Consolidated Financial Statements.

 

F-7


F-7



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

For the year ended December 31,

 

 

 

2015

 

2014

 

2013

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(31,978

)

 

$

(66,940

)

 

$

(42,263

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

39,850

 

 

24,573

 

 

18,425

 

Deferred income taxes

 

2,648

 

 

(11,330

)

 

(12,264

)

Share-based compensation expense

 

17,986

 

 

18,813

 

 

13,130

 

Provision (recovery) for bad debts

 

43

 

 

(1,814

)

 

1,946

 

Asset impairment

 

126

 

 

58,170

 

 

1,220

 

Gain on sale of lab tools

 

(1,261

)

 

(1,549

)

 

(767

)

Gain on cumulative translation adjustment

 

 

 

(3,142

)

 

 

Change in contingent consideration

 

 

 

(29,368

)

 

829

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

10,715

 

 

(25,390

)

 

36,898

 

Inventory and deferred cost of sales

 

(12,312

)

 

6,513

 

 

2,753

 

Prepaid expenses and other current assets

 

(39

)

 

(2,245

)

 

842

 

Accounts payable and accrued expenses

 

9,470

 

 

(5,534

)

 

7,542

 

Customer deposits and deferred revenue

 

(20,738

)

 

55,536

 

 

(17,329

)

Income taxes receivable and payable, net

 

759

 

 

20,279

 

 

(12,734

)

Other, net

 

520

 

 

5,497

 

 

2,499

 

Net cash provided by operating activities

 

15,789

 

 

42,069

 

 

727

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

Acquisitions of businesses, net of cash acquired

 

(68

)

 

(144,069

)

 

(71,488

)

Capital expenditures

 

(13,887

)

 

(15,588

)

 

(9,174

)

Proceeds from the liquidation of investments

 

88,647

 

 

318,276

 

 

499,645

 

Payments for purchases of investments

 

(84,244

)

 

(157,737

)

 

(589,099

)

Payment for purchase of cost method investment

 

(1,594

)

 

(2,388

)

 

(2,391

)

Proceeds from sale of lab tools

 

3,068

 

 

9,259

 

 

4,440

 

Other

 

1,000

 

 

350

 

 

11

 

Net cash provided by (used in) investing activities

 

(7,078

)

 

8,103

 

 

(168,056

)

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

2,233

 

 

12,056

 

 

2,199

 

Restricted stock tax withholdings

 

(3,215

)

 

(2,075

)

 

(2,696

)

Contingent consideration payments

 

 

 

 

 

(5,000

)

Purchases of common stock

 

(8,907

)

 

 

 

 

Repayments of long-term debt

 

(314

)

 

(290

)

 

(269

)

Net cash provided by (used in) financing activities

 

(10,203

)

 

9,691

 

 

(5,766

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(87

)

 

149

 

 

(663

)

Net increase (decrease) in cash and cash equivalents

 

(1,579

)

 

60,012

 

 

(173,758

)

Cash and cash equivalents - beginning of period

 

270,811

 

 

210,799

 

 

384,557

 

Cash and cash equivalents - end of period

 

$

269,232

 

 

$

270,811

 

 

$

210,799

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

 

Interest paid

 

$

485

 

 

$

159

 

 

$

357

 

Income taxes paid

 

7,091

 

 

3,320

 

 

8,001

 

See accompanying Notes to the Consolidated Financial Statements.

F-8



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

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, sales, and support of semiconductor and thin film process equipment primarily sold to make electronic devices including light emitting diodes (“LEDs”), power electronics, wireless devices, hard disk drives, and semiconductors.devices.

 

(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)(“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 20152018 the interim quarters ended on March 29, June 28April 1, July 1, and September 27,30, and during 20142017 the interim quarters ended on March 30, June 29April 2, July 2, and September 28.October 1. 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 ofstand-alone selling priceprices for the Company’s products and services; (ii) allowances for doubtful accounts; (iii) inventory obsolescence; (iv) the useful lives and expected future cash flows of property, plant, and equipment and identifiable intangible assets; (v) the fair value of the Company’s reporting unit and related goodwill; (vi) the fair value, less cost to sell, of assets held for sale; (vii) investment valuations and the valuation of derivatives, deferred tax assets, and assets acquired in business combinations; (viii)(vii) the recoverability of long-lived assets; (ix)(viii) liabilities for product warranty and legal contingencies; (x)(ix) share-based compensation; and (xi)(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 other than the U.S. dollar 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-9(f) Revenue Recognition

Revenue is recognized upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration the Company expects to receive in exchange for such product or service. The Company’s contracts with customers generally do not contain variable consideration. In the rare instances where variable consideration is included, the Company estimates the amount of variable consideration and determines what portion of that, if any, has a high probability of significant subsequent revenue reversal, and if so, that amount is excluded from the


F-8



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

(f) Revenue Recognition

transaction price. 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.

ContractsCompany’s contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, installation, maintenance, and service plans. Judgment is required to properly identify the accounting units of the multiple-element arrangementsperformance obligations within a contract and to determine how the revenue should be allocated among the accounting units.performance obligations. The Company also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single multiple-element arrangementcontract based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria have been met in order to recognize revenue in the appropriate accounting period.

   

When there are separate units of accounting, the Company allocates revenue to each elementperformance obligation on a relative stand-alone selling price basis. The stand-alone selling prices are determined based on the followingprices at which the Company separately sells the systems, upgrades, components, spare parts, installation, maintenance, and service plans. For items that are not sold separately, the Company estimates stand-alone 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 majorityprices generally using an expected cost plus margin approach.

Most of the elementsCompany’s revenue is recognized at a point in its arrangements. The maximum revenue recognized on a delivered elementtime when the performance obligation is limited to the amount that is not contingent upon the delivery of additional items.

satisfied. 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 majoritymany of thethese 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.delivery, or other quality assurance testing is performed internally to ensure system functionality prior to shipment. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When the Company objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery either through customer testing or the Company’s historical experience of its tools meeting specifications, transfer of control of the product to the customer is considered to have occurred and 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.date. 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 deferreddeferred. The Company recognizes such revenue and fully recognizedcosts upon obtaining objective evidence that the receipt of final customer acceptance provisions can be achieved, assuming all other revenue recognition criteria have been met.

   

The Company’s system sales arrangements, includingIn 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; it does not require significant changes to the features or capabilities of the equipment or involve constructing elaborate interfaces or connections subsequent to factory acceptance. 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.

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Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

In many cases the Company’s products are soldcontracts with customers contain a billing retention, typically 10% of the sales price, which is billed by the Company and payable by the customer when field acceptance provisions are completed. The amountRevenue recognized in advance of revenue recognized upon delivery of a system or upgrade, if any, is limited to the lower of i) the amount that has been billed that is not contingent upon acceptance provisions or ii)recorded as a contract asset on 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. A distributor is used for almost all 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.Consolidated Balance Sheets.

   

The Company recognizes revenue related to maintenance and service contracts ratably over time based upon the applicablerespective contract term. Installation revenue is recognized over time as the installation services are performed. The Company recognizes revenue from the sales of components, spare parts, and specified service engagements at a point in time, which is typically consistent with the time of delivery in accordance with the terms of the applicable sales arrangement.

   

The Company may receive customer deposits on system transactions. The timing of the transfer of goods or services related to the deposits is either at the discretion of the customer or expected to be within one year from the deposit receipt. As such, the Company does not adjust transaction prices for the time value of money. Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred even ifsince the expected amortization period is one year or less.

F-9


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The Company has elected to treat shipping and handling costs as a fulfillment activity, and the Company includes such costs in cost of services when the Company recognizes revenue for the related revenue is deferred in accordance withgoods. Taxes assessed by governmental authorities that are collected by the above policy.Company from a customer are excluded from revenue.

 

(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 semiannualquarterly 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 $0.9 million, $0.6$0.9 million, and $0.5$0.8 million for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, 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).

F-11



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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 15, “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 issuesgrants performance share units and awards (“PSUs” and “PSAs”). that have either performance or market conditions. Compensation cost for PSUs and PSAs with performance conditions 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 performance attainment prior to the probabilityconclusion of athe performance condition being metperiod is recognized in the period of the change in estimate. AtCompensation cost for PSUs and PSAs with market conditions is recognized over the requisite service period regardless of the expected level of achievement. For all PSUs and PSAs, the number of shares issued to the employee at the conclusion of the performanceservice period the number of shares granted may vary from the original target based onupon the level of achievementattainment of the performance targets.or market conditions.

 

F-10


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The Company uses the Black-Scholes option-pricing model to compute the estimated fair value of option awards and purchase rights under the Employee Stock Purchase Plan. The Company uses a Monte Carlo simulation to compute the estimated fair value of awards with market conditions. The Black-Scholes model and Monte Carlo simulation include assumptions regarding dividend yields, expected volatility, expected option term, and risk-free interest rates. See Note 15, “Stock Plans,” for additional information.

See Note 1(t), “Recently Adopted Accounting Standards,” for additional information concerning the Company’s adoption of Accounting Standards Update (“ASU”) 2016-09: Stock Compensation: Improvements to Employee Share-Based Payment Accounting.

(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 recognizesOn December 22, 2017, the effectU.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”), which made broad and complex changes to the U.S. tax code. In response to the 2017 Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provided guidance on accounting for the tax effects of income tax positions only if those positions are more likely than not to be sustained. Changes2017 Tax Act, including addressing any uncertainty or diversity of view in recognition or measurement are reflectedapplying ASC 740, Income Taxes (“ASC 740”), in the reporting period in which the change2017 Tax Act was enacted. In addition, SAB 118 provided a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting under ASC 740. During the year ended December 31, 2018, the Company finalized the accounting for the tax effects of 2017 Tax Act.

In January 2018, the FASB released guidance on the accounting for taxes under the global intangible low-taxed income (“GILTI”) provisions of the 2017 Tax Act. The GILTI provisions impose a tax on foreign income in judgment occurs.excess of a deemed return on tangible assets of foreign operations. The Company records interest and penalties relatedhas made a policy election to uncertain tax positions inaccount for income tax expense. See Note 17, “Income Taxes,” for additional information.taxes incurred under GILTI as a period cost.

 

(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 $0.2 million and $0.7$0.3 million at December 31, 20152018 and 2014, respectively.2017.

 

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,

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Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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

F-12



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

associated with the monetization are included in “Selling, general, and administrative” in the Consolidated Statements of Operations and were insignificantimmaterial for the years ended December 31, 2015, 2014,2018, 2017, and 2013.2016.

 

(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, if any, is estimated using recently quoted market prices of the instrument, or if not available, a discounted cash flow analysis based on the estimated current incremental borrowing rates for similar types of securities.instruments.

 

(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 funds, certificate of deposit and time deposit 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. At December 31, 2015 theThe Company’s cash and cash equivalents include $18.0includes $69.6 million and $76.7 million of cash equivalents. There were no cash equivalents at December 31, 2014.2018 and 2017, respectively.

 

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 is typically the U.S. dollar. Approximately 50%32% and 81%77% of cash and cash equivalents were maintained outside the United States at December 31, 20152018 and 2014,2017, respectively.

 

Marketable debt 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.

 

Non-marketable equity securities are equity securities without readily observable market prices and are included in “Other assets” in the Consolidated Balance Sheets. Non-marketable securities are measured at cost, adjusted for changes in observable prices minus impairment. Changes in fair value are included in “Other, net” in the Consolidated Statements of Operations.

(p) Inventories

 

Inventories are stated at the lower of cost or net realizable value, 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. TheEach quarter the Company assesses the valuation of all inventories, including manufacturing rawinventories: materials work-in-process, finished goods, and(raw materials, spare parts, each quarter.and service inventory); work-in-process; and finished goods. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost. Estimates of net realizable 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 the 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.

 

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Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(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

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Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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.incurred. See Note 5, “Business Combinations,” for additional information.

 

(r) Goodwill and Indefinite-Lived IntangiblesIntangible Assets

 

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 fair value 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 on 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 long-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 beginning of the fourth quarter of each year or more frequently if impairment indicators arise.

 

TheIn testing goodwill for impairment, the Company may first perform a qualitative assessment of whether it is more likely than not that the 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 firstquantitatively compares the fair value of the Company’s reporting unit to its carrying amount. If the fair value exceeds the carrying amount, goodwill is not impaired, and the Company is not required to perform further testing.impaired. If the carrying amount exceeds fair value, the Company determines the implied fair value of the goodwill and, if the carrying amount of the goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference.difference, up to the carrying value of goodwill.

 

The Company determines the fair value of its reporting unit based on a reconciliation of the aggregate fair value of the reporting unit to the Company’s adjusted market capitalization. The adjusted market capitalization is calculated by multiplying the average share price of the Company’s 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. The control premium is estimated using historical transactions in similar industries.

 

In testing indefinite-lived intangible assets for impairment, the Company may first perform a qualitative assessment of whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, and, if so, the Company then quantitatively compares the fair value of the indefinite-lived intangible asset to its carrying amount. The Company determines the fair value of its indefinite-lived intangible assets using a discounted cash flow method.

(s) Long-Lived Assets and Cost Method Investment

 

Long-lived intangible assets consist of purchased technology, customer-related intangible assets,customer relationships, patents, trademarks covenants not-to-compete, and software licensestradenames, and backlog and are initially recorded at fair value. Long-lived intangiblesintangible assets are amortized over their estimated useful lives 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

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Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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, 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) Recently Adopted Accounting Standards

F-The Company adopted ASC Topic 606, 14Revenue from Contracts with Customers (“ASC 606”), as of January 1, 2018, using the full retrospective method. All amounts and disclosures set forth in this Form 10-K reflect these changes. The most significant financial statement impacts of adopting ASC 606 are the elimination of the constraint on revenue associated with the billing retention related to the receipt of customer final acceptance and the identification of installation services as a performance obligation. The elimination of the constraint on revenue related to customer final acceptance, which is usually about 10 percent of a system sale, is now generally recognized at the time the Company transfers control of the system to the customer, which is earlier than under the Company’s previous revenue recognition model for certain contracts that were subject to the billing constraint. The performance obligation related to installation services is now recognized as the installation services are performed, which is later than the Company’s previous revenue recognition model.

The Company applied ASC 606 retrospectively and elected to use the disclosure exemption in the transition guidance under which the Company does not disclose prior period information regarding the amount of the transaction price allocated to remaining performance obligations. The cumulative effect of the adoption was recognized as a decrease to Accumulated deficit of $6.9 million on January 1, 2016. The following tables summarize the impact of adoption on the Company’s previously reported financial position and results of operations:


 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

As reported

    

Adjustments

    

As adjusted

 

 

 (in thousands)

Balance Sheet

 

 

 

 

 

 

 

Contract assets

 

$

$

160

$

160

Deferred cost of sales

 

 

16,060

 

(66)

 

15,994

Deferred income taxes

 

 

2,953

 

94

 

3,047

Accrued expenses and other current liabilities

 

 

60,339

 

(2,271)

 

58,068

Customer deposits and deferred revenue

 

 

108,953

 

3,079

 

112,032

Additional paid-in capital

 

 

1,053,079

 

(1,126)

 

1,051,953

Accumulated deficit

 

 

(213,376)

 

506

 

(212,870)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2017

 

2016

 

    

As reported

    

Adjustments

    

As adjusted

    

As reported

    

Adjustments

    

As adjusted

 

(in thousands, except per share amounts)

Statement of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

484,756

 

$

(9,070)

 

$

475,686

 

$

332,451

 

$

(749)

 

$

331,702

Cost of sales

 

 

300,438

 

 

(980)

 

 

299,458

 

 

199,593

 

 

(989)

 

 

198,604

Income tax expense (benefit)

 

 

(36,107)

 

 

(1,487)

 

 

(37,594)

 

 

2,766

 

 

57

 

 

2,823

Net income (loss)

 

 

(44,793)

 

 

(6,603)

 

 

(51,396)

 

 

(122,210)

 

 

183

 

 

(122,027)

Diluted earnings (loss) per share

 

 

(1.01)

 

 

(0.15)

 

 

(1.16)

 

 

(3.11)

 

 

0.01

 

 

(3.10)

The Company’s adoption of the standard had no impact to cash provided by or used in operating, investing, or financing activities on the Consolidated Statements of Cash Flows.

F-14



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

(t) Recent Accounting Pronouncements

 

The FASB issued Company adopted ASU 2016-01, Accounting Standards Update Financial Instruments – Overall(“ASU”)  No. 2014-09,, as amended byof January 1, 2018. This ASU 2015-14: Revenue from Contracts with Customers (the “Update”). The Update requires the Company’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expectscertain equity investments to be entitledmeasured at fair value, with changes in exchange for those goods or services. The Update outlines a five-step model to make the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adopt the Update for reporting periods beginning after December 15, 2017. The Update provides for different transition alternatives.fair value recognized in net income. The Company is evaluatingmeasures equity investments without readily observable market prices at cost, adjusted for changes in observable prices minus impairment. Changes in measurement are included in “Other, net” in the impactConsolidated Statements of adopting the Update on its consolidated financial statements and related financial statement disclosures andOperations. This ASU has not yet determined which method of adoption will be selected.

The Company has evaluated other pronouncements issued but not yet adopted and does not believe the adoption of these pronouncements will havehad a material impact on the consolidated financial statements.statements upon adoption, and the Company will monitor its equity investments each reporting period for changes in observable market prices, if any, which may be material in future periods.

 

The Company early adopted ASU 2016-09: Stock Compensation: Improvements to Employee Share-Based Payment Accounting, as of January 1, 2016. This ASU No. 2015-17: Balance Sheet Classificationsimplifies several aspects of Deferred Taxesthe accounting for share-based payments. Beginning in 2016, excess tax benefits and deficiencies are recognized as income tax expense or benefit in the income statement in the reporting period incurred. The Company also made an accounting policy election to account for forfeitures when they occur. The ASU transition guidance requires that this election be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the ASU is adopted. Accordingly, the Company recorded a $1.3 million charge to the opening accumulated deficit balance as of January 1, 2016, with a corresponding adjustment to additional paid-in capital, resulting in no impact to the opening balance of total stockholders’ equity. In addition, the Company recorded additional deferred tax assets with an equally offsetting valuation allowance of $2.4 million.

(u) Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02: Leases, which, simplifies the presentation of deferred income taxes by requiring that deferred income taxalong with subsequent ASUs related to this topic, has been codified as Accounting Standards Codification 842 (“ASC 842”). ASC 842 generally requires operating lessee rights and obligations to be recognized as assets and liabilities and assets be classified as noncurrent inon the balance sheet. In accordance with the ASU’s transition requirements,The new standard, which is effective for the Company choseon January 1, 2019, offers a transition option whereby companies can recognize a cumulative-effect adjustment to apply the amendmentsopening balance of retained earnings in the update prospectively beginningperiod of adoption rather than in the earliest period presented. The Company plans to adopt using this transition method. In addition, ASC 842 provides for a number of optional exemptions in transition. The Company expects to elect certain exemptions whereby prior conclusions regarding lease identification, lease classification, and initial direct costs are not required to be reassessed under the new standard. The Company also plans to elect allowable policies whereby the Company will not separate lease and non-lease components, and the Company will not recognize an asset or liability for leases with original terms or renewals of one year or less. Upon adoption, the 2015 fiscal year. As such, prior periods haveCompany expects to recognize an operating lease liability ranging from $12 million to $16 million based on the present value of remaining minimum rental payments on existing leases, with corresponding assets of approximately the same amount.

The Company is also evaluating other pronouncements recently issued but not been retrospectively adjusted.yet adopted. The adoption of this ASU didthese pronouncements is not expected to have a material impact on the our consolidated financial statements.

 

Note 2 — Income (Loss) Per Common Share

The Company considers unvested share-based awards that have non-forfeitable rights to dividends prior to vesting to be participating shares, which are treated as a separate class of security from the Company’s common shares for calculating per share data. Therefore, the Company applies the two-class method when calculating income (loss) per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. However, since the holders of the participating shares are not obligated to fund losses, participating shares are excluded from the calculation of loss per share.

 

Basic income (loss) per common share is calculated by dividing net income (loss) available to common stockholders by the weighted-averageweighted average number of common shares outstanding during the period.period under the two-class method. Diluted income (loss) per common share is calculated by dividing net income available

F-15


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to common stockholders Consolidated Financial Statements (Continued)

by usingthe weighted average number of shares used to calculate basic income per share plus the weighted average number of common shares and common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and non-participating share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share in the periods the performance targets have been achieved. The computations of basic and diluted income (loss) per common share are as follows:

 

 

 

For the year ended December 31,

 

 

 

 

2015

 

 

2014

 

 

2013

 

 

 

(in thousands, except per share amounts)

 

Net income (loss)

 

$

(31,978

)

 

$

(66,940

)

 

$

(42,263

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.80

)

 

$

(1.70

)

 

$

(1.09

)

Diluted

 

$

(0.80

)

 

$

(1.70

)

 

$

(1.09

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

39,742

 

 

39,350

 

 

38,807

 

Effect of potentially dilutive share-based awards

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

39,742

 

 

39,350

 

 

38,807

 

For the years ended December 31, 2015, 2014, and 2013, 1.2 million, 0.7 million and 0.6 million common equivalent shares, respectively, were excluded from the computation of net loss per share since the Company incurred a net loss.  In addition, for the years ended December 31, 2015, 2014,2018, 2017, and 2013, respectively, 2.1 million, 1.6 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 (loss) per common share.2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

    

2018

    

2017

    

2016

 

 

(in thousands, except per share amounts)

Net income (loss)

 

$

(407,088)

 

$

(51,396)

 

$

(122,027)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(8.63)

 

$

(1.16)

 

$

(3.10)

Diluted

 

$

(8.63)

 

$

(1.16)

 

$

(3.10)

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

47,151

 

 

44,174

 

 

39,340

Effect of potentially dilutive share-based awards

 

 

 —

 

 

 —

 

 

 —

Diluted weighted average shares outstanding

 

 

47,151

 

 

44,174

 

 

39,340

 

 

 

 

 

 

 

 

 

 

Unvested participating shares excluded from basic weighted average shares outstanding since the securityholders are not obligated to fund losses

 

 

20

 

 

72

 

 

312

Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive

 

 

28

 

 

239

 

 

107

Potentially dilutive non-participating shares excluded from the diluted calculation as their effect would be antidilutive

 

 

2,474

 

 

1,744

 

 

1,896

Maximum potential shares to be issued for settlement of the Convertible Senior Notes excluded from the diluted calculation as their effect would be antidilutive

 

 

8,618

 

 

8,618

 

 

 —

 

F-15



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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 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 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.

·

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.

 

F-16


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The following table presents the Company’s assets that were measured at fair value on a recurring basis at December 31, 20152018 and 2014:2017:

 

 

 

Level 1

 

 

 

Level 2

 

 

 

Level 3

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

    

Level 1

    

Level 2

    

Level 3

    

Total

December 31, 2015

 

 

 

 

 

 

 

 

 

 

(in thousands)

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposits and time deposits

 

$

65,571

 

$

 —

 

$

 —

 

$

65,571

U.S. treasuries

 

$

9,999

 

$

 

$

 

$

9,999

 

 

 

3,990

 

 

 —

 

 

 —

 

 

3,990

Government agency securities

 

 

4,998

 

 

4,998

 

Commercial paper

 

 

2,999

 

 

2,999

 

Total

 

$

9,999

 

$

7,997

 

$

 

$

17,996

 

 

$

69,561

 

$

 —

 

$

 —

 

$

69,561

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

94,918

 

$

 

$

 

$

94,918

 

 

$

37,184

 

$

 —

 

$

 —

 

$

37,184

Government agency securities

 

 

12,988

 

 

12,988

 

Corporate debt

 

 

8,144

 

 

8,144

 

 

 

 —

 

 

8,516

 

 

 —

 

 

8,516

Total

 

$

94,918

 

$

21,132

 

$

 

$

116,050

 

Other

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 

$

5,000

 

$

 

$

5,000

 

Commercial paper

 

 

 —

 

 

2,489

 

 

 —

 

 

2,489

Total

 

$

 

$

5,000

 

$

 

$

5,000

 

 

$

37,184

 

$

11,005

 

$

 —

 

$

48,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposits and time deposits

 

$

64,249

 

$

 —

 

$

 —

 

$

64,249

U.S. treasuries

 

 

12,490

 

 

 —

 

 

 —

 

 

12,490

Total

 

$

76,739

 

$

 —

 

$

 —

 

$

76,739

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

81,527

 

$

 

$

 

$

81,527

 

 

$

33,895

 

$

 —

 

$

 —

 

$

33,895

Corporate debt

 

 

39,045

 

 

39,045

 

 

 

 —

 

 

10,886

 

 

 —

 

 

10,886

Commercial paper

 

 

 —

 

 

2,999

 

 

 —

 

 

2,999

Total

 

$

81,527

 

$

39,045

 

$

 

$

120,572

 

 

$

33,895

 

$

13,885

 

$

 —

 

$

47,780

Other

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 

$

6,000

 

$

 

$

6,000

 

Total

 

$

 

$

6,000

 

$

 

$

6,000

 

 

The above table includes highly liquid investments with maturities of three months or less which are classified as cashequivalents and are carried at cost, which approximates fair value. All investments classified as available-for-sale are

F-16



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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.

 

Note 4 — Investments

 

At December 31, 20152018 and 20142017 the amortized cost and fair value of marketable securities were as follows:

 

 

 

 

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Amortized

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Estimated

 

 

 

 

 

Cost

 

 

 

Gains

 

 

 

Losses

 

 

 

Fair Value

 

 

 

 

 

(in thousands)

 

December 31, 2015

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

94,935

 

$

6

 

$

(23

)

$

94,918

 

Government agency securities

 

12,985

 

3

 

 

12,988

 

Corporate debt

 

8,144

 

1

 

(1

)

8,144

 

Total available-for-sale securities

 

$

116,064

 

$

10

 

$

(24

)

$

116,050

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

(in thousands)

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

37,191

 

$

 —

 

$

(7)

 

$

37,184

Corporate debt

 

 

8,525

 

 

 —

 

 

(9)

 

 

8,516

Commercial paper

 

 

2,489

 

 

 —

 

 

 —

 

 

2,489

Total

 

$

48,205

 

$

 —

 

$

(16)

 

$

48,189

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

33,914

 

$

 —

 

$

(19)

 

$

33,895

Corporate debt

 

 

10,894

 

 

 —

 

 

(8)

 

 

10,886

Commercial paper

 

 

2,999

 

 

 —

 

 

 —

 

 

2,999

Total

 

$

47,807

 

$

 —

 

$

(27)

 

$

47,780

 

F-17


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Available-for-sale securities in a loss position at December 31, 20152018 and 20142017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

December 31, 2014

 

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

Gross

 

 

 

 

 

Gross

 

    

 

 

    

Gross

    

 

    

Gross

 

 

Estimated

 

 

Unrealized

 

 

Estimated

 

 

Unrealized

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

 

Fair Value

 

 

 

Losses

 

 

 

Fair Value

 

 

 

Losses

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

(in thousands)

 

 

(in thousands)

U.S. treasuries

 

$

64,922

 

$

(23

)

$

35,001

 

$

(6

)

 

$

37,184

 

$

(7)

 

$

33,895

 

$

(19)

Corporate debt

 

3,353

 

(1

)

13,069

 

(6

)

 

 

8,516

 

 

(9)

 

 

10,886

 

 

(8)

Total

 

$

68,275

 

$

(24

)

$

48,070

 

$

(12

)

 

$

45,700

 

$

(16)

 

$

44,781

 

$

(27)

 

At December 31, 20152018 and 2014,2017, there were no short-term investments that had been in a continuous loss position for more than 12 months.

 

The maturities of securities classified as available-for-sale at December 31, 20152018 were all due in one year or less. 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. There were minimalThe realized gains or losses for the years ended December 31, 2015, 2014,2018, 2017, and 2013, which2016 were included in “Other, net” in the Consolidated Statements of Operations. There were no realized losses in any of the three years. immaterial.

 

Restricted CashOther Investments

 

The Company did not have any restricted cash at December 31, 2015. At December 31, 2014 the restricted cash balance was $0.5 million, which served as collateral for bank guarantees that provide financial assurance that the Company willfulfill 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.

F-17



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Cost Method Investment

The Company has an ownership interest of less than 20% in a non-marketable investment.investment, Kateeva, Inc. (“Kateeva”), over which Veeco does not exert significant influence. The carrying value of the investment was $21.0 million at December 31, 2018 and 2017. Additionally, during the year ended December 31, 2018, the Company made a separate non-marketable investment of $3.5 million in another entity. The Company does not exert significant influence over the investeethis investment and its ownership interest is less than 20%. Neither equity investment has a readily observable market price, and therefore the investment is carriedCompany has elected to measure these investments at cost. Additionalcost, adjusted for changes in observable market prices minus impairment. The investments of $1.6 million were made during the year ended December 31, 2015, increasing the carrying value of the investment from $19.4 million at December 31, 2014 to $21.0 million at December 31, 2015. The Company’s ownership interest and participating rights have not substantively changed. Therefore, the Company continues to carry the investment at cost. The investment isare included in “Other assets” on the Consolidated Balance Sheet. TheSheets. There were no changes in observable market prices for either investment isfor the year ended December 31, 2018. These investments are subject to a periodic impairment review;reviews; as there are no open-market valuations, the impairment analysis requiresanalyses require judgment. The analysis includesanalyses include assessments of the investee’scompanies’ financial condition, the business outlookoutlooks for itstheir products and technology, itstechnologies, their projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by the CompanyVeeco relative to other investors. Fair value ofThere were no impairment charges recorded for either investment for the investment is not estimated unless there are identified eventsyears ended December 31, 2018, 2017, 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.2016.

 

Note 5 — Business Combinations

 

PSPUltratech

 

On December 4, 2014May 26, 2017, the Company acquired 100%completed its acquisition of Solid State Equipment, LLCUltratech, Inc. (“SSEC”Ultratech”). Ultratech develops, manufactures, sells, and rebrandedsupports lithography, laser annealing, and inspection equipment for manufacturers of semiconductor devices, including front-end semiconductor manufacturing and advanced packaging. Ultratech also develops, manufactures, sells, and supports ALD equipment for scientific and industrial applications. Ultratech’s customers are primarily located throughout the business Veeco Precision Surface Processing (“PSP”).United States, Europe, China, Japan, Taiwan, Singapore, and Korea. The results of PSPUltratech’s 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), micro-electromechanical systems (“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.

 

F-18


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Ultratech shareholders received (i) $21.75 per share in cash and (ii) 0.2675 of a share of Veeco common stock for each Ultratech common share outstanding on the acquisition date. The acquisition date fair value of the consideration totaled $145.5$633.4 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

 

 

 

 

 

    

Acquisition Date

 

 

(May 26, 2017)

 

 

(in thousands)

Cash consideration, net of cash acquired of $229.4 million

 

$

404,490

Equity consideration (7.2 million shares issued)

 

 

228,643

Replacement equity awards attributable to pre-acquisition service

 

 

228

Acquisition date fair value

 

$

633,361

 

F-18



TableApproximately $2.7 million of Contents

Veeco Instruments Inc.the cash merger consideration is included in “Accrued expenses and Subsidiaries

Notesother current liabilities” on the Consolidated Balance Sheets as of December 31, 2017 related to Consolidated Financial Statements (Continued)

shareholder appraisal proceedings that were subsequently settled and paid during 2018.

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:date:

 

 

Acquisition Date

 

(December 4, 2014)

 

 

 

 

 

(in thousands)

 

    

Acquisition Date

 

(May 26, 2017)

 

(in thousands)

Short-term investments

 

$

47,161

Accounts receivable

 

$

9,383

 

 

 

45,465

Inventory

 

13,812

 

Other current assets

 

463

 

Inventories

 

 

59,100

Deferred cost of sales

 

 

242

Prepaid expense and other current assets

 

 

7,217

Property, plant, and equipment

 

6,912

 

 

 

18,152

Intangible assets

 

79,810

 

 

 

346,940

Other assets

 

 

6,442

Total identifiable assets acquired

 

110,380

 

 

 

530,719

 

 

 

 

 

 

Accounts payable and accrued expenses

 

6,473

 

Customer deposits

 

6,039

 

Deferred tax liability, net

 

2,705

 

Other

 

1,089

 

Accounts payable

 

 

24,291

Accrued expenses and other current liabilities

 

 

16,356

Customer deposits and deferred revenue

 

 

4,834

Deferred income taxes

 

 

32,478

Other liabilities

 

 

11,622

Total liabilities assumed

 

16,306

 

 

 

89,581

 

 

 

 

 

 

Net identifiable assets acquired

 

94,074

 

 

 

441,138

Goodwill

 

51,396

 

 

 

192,223

Net assets acquired

 

$

145,470

 

 

$

633,361

 

The gross contractual value of the acquired accounts receivable was approximately $10.5$46.0 million. The fair value of the accounts receivables 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 goodwillworkforce and is not expected to be deductible for income tax purposes.

 

During 2015, the Company finalized the purchase accounting, including taxes

F-19


Table of Contents

Veeco Instruments Inc. and the working capital adjustment under the purchase agreement. Based on the final adjustments, net working capital increased $0.7 million, goodwill decreased $0.1 million, deferred tax liabilities decreased $0.2 million, and a lease-related asset retirement obligation of $0.8 million was recognized.Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

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

 

 

 

 

 

 

 

 

Acquisition Date 

 

 

Acquisition Date

 

(December 4, 2014)

 

 

(May 26, 2017)

 

Amount

 

Useful life

 

    

Amount

    

Useful life

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Technology

 

$

39,950

 

10 years

 

 

$

158,390

 

 9

years

Customer relationships

 

34,310

 

14 years

 

 

 

116,710

 

12

years

Backlog

 

3,340

 

6 months

 

 

 

3,080

 

 6

months

Non-compete agreements

 

1,130

 

2 years

 

In-process research and development

 

 

43,340

 

*

 

Trademark and tradenames

 

1,080

 

1 year

 

 

 

25,420

 

 7

years

Intangible assets acquired

 

$

79,810

 

 

 

 

$

346,940

 

 

 


*In-process research and development will be amortized (or impaired) upon completion (or abandonment) of the development project.

 

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.

 

F-19



Table of Contents

Veeco Instruments Inc.In-process research and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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 followingdevelopment (“IPR&D”) represents the unaudited pro forma Consolidated Statementsestimated fair values of Operationsincomplete Ultratech research and development projects that had not reached the commercialization stage and met the criteria for recognition 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 resultsIPR&D as 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, and ALD has been integrated into the Company’s single operating segment.acquisition. The ALD business includes early stage manufacturing 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 IPR&D was determined using an income approach and costs to complete the consideration totaled $102.3 million, net of cash acquired, which consisted ofproject and expected commercialization timelines are considered key assumptions. This valuation approach reflected 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 fairpresent value of the remaining contingent paymentsprojected cash flows that were expected to be generated by $0.8 million. During 2014, the Company determined that allIPR&D less charges representing the contribution of the remaining performance milestones were not met, reversed the fairother assets to those cash flows. The value of the liability,IPR&D was determined to be $43.3 million, approximately half of which was related to Ultratech’s lithography technologies and recorded a non-cash gainone-third 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 reducedrelated 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

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Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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.Ultratech’s laser annealing technologies.

 

During the fourthsecond quarter of 2014,2018, the Company lowered its projected results for the Ultratech asset group and determined that while its ALD technology was successfully demonstratedthe revised projections were significantly lower than projected results 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 bookingstime of the acquisition and cash flowsthat these revised projections required the Company in December 2014 to assess its ALD businessthe Ultratech asset group for impairment, which in 2014 was its own reporting unit. 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.impairment. See Note 6, “Goodwill and Intangible Assets,” for additional information.

 

F-21

For the year ended December 31, 2018 and 2017, acquisition related costs were approximately $3.0 million and $17.8 million, respectively, including non-cash charges of $4.2 million related to accelerated share-based compensation for employee terminations for the year ended December 31, 2017.

The amounts of net sales and income (loss) from operations before income taxes of Ultratech included in the Company’s Consolidated Statement of Operations for the year ended December 31, 2017 are as follows:


 

 

 

 

 

    

Year ended

 

 

December 31, 2017

 

 

(in thousands)

Net sales

 

$

65,280

Loss before income taxes

 

$

(62,284)

Loss before income taxes of Ultratech for the year ended December 31, 2017 of $62.3 million includes acquisition costs of $17.8 million, release of inventory fair value step-up related to purchase accounting of $9.6 million, amortization expense on intangible assets of $23.9 million, and restructuring charges of $3.3 million.

F-20



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

During 2013,

The following table presents unaudited pro forma financial information as if the Company recognized $1.0 millionacquisition of acquisition related costs that are included in “Selling, general, and administrative” in the Consolidated Statements of Operations.Ultratech had occurred on January 1, 2016:

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

    

2017

    

2016

 

(in thousands, except per share amounts)

Net sales

 

$

546,428

 

$

525,752

Loss before income taxes

 

 

(90,000)

 

 

(217,783)

Diluted earnings per share

 

$

(1.38)

 

$

(4.67)

 

The following representspro-forma results were calculated by combining the audited results of the Company with the stand-alone unaudited pro forma Consolidated Statementsresults of Operations as if ALD had been included in the Company’s consolidated resultsUltratech for the periods indicated. These amounts have been calculated after applyingpre-acquisition period, and adjusting for 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.following:

 

 

 

December 31,

 

 

 

2013

 

 

 

(in thousands)

 

Revenue

 

$

346,319

 

Loss from operations before income taxes

 

$

(60,983

)

(i)

Additional amortization expense related to identified intangible assets valued as part of the purchase price allocation that would have been incurred starting on January 1, 2016.

(ii)

Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred starting on January 1, 2016.

(iii)

All acquisition related costs incurred by the Company as well as by Ultratech pre-acquisition have been removed from the year ended December 31, 2017 and included in the year ended December 31, 2016, as such expenses would have been incurred in the first quarter following the acquisition.

(iv)

All amortization of inventory step-up has been removed from the year ended December 31, 2017 and recorded in the year ended December 31, 2016, as such costs would have been incurred as the corresponding inventory was sold.

(v)

Additional interest expense related to the Convertible Senior Notes (see Note 12, “Debt”) as if they had been issued on January 1, 2016.

(vi)

Income tax expense (benefit) was adjusted for the impact of the above adjustments for each period.

(vii)

All shares issued in connection with the acquisition were considered outstanding as of January 1, 2016 for purposes of calculating diluted earnings per share.

 

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 intangiblefuture economic benefits arising from assets acquired less liabilities assumed in eacha business combination.combination that are not individually identified and separately recognized. The following table presents the changes in goodwill balances during the years indicated:

 

 

 

Gross carrying

 

Accumulated

 

 

 

 

 

 

 

amount

 

 

 

impairment

 

 

 

Net amount

 

 

 

(in thousands)

 

Balance at December 31, 2013

 

$

186,589

 

$

95,241

 

$

91,348

 

Acquisition

 

51,396

 

 

51,396

 

Purchase price adjustments

 

173

 

 

173

 

Impairments

 

 

27,958

 

(27,958

)

Balance at December 31, 2014

 

238,158

 

123,199

 

114,959

 

Purchase price adjustments

 

(51

)

 

(51

)

Balance at December 31, 2015

 

$

238,107

 

$

123,199

 

$

114,908

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross carrying

    

Accumulated

    

 

 

 

amount

 

impairment

 

Net amount

 

    

(in thousands)

Balance at December 31, 2016

 

$

238,108

 

$

123,200

 

$

114,908

Acquisition

 

 

192,223

 

 

 —

 

 

192,223

Balance at December 31, 2017

 

 

430,331

 

 

123,200

 

 

307,131

Impairment

 

 

 —

 

 

122,829

 

 

(122,829)

Balance at December 31, 2018

 

$

430,331

 

$

246,029

 

$

184,302

 

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

The Company performedperforms its annual goodwill impairment test duringat the year ended December 31, 2015. Thebeginning of the fourth quarter each year. As the Company maintains a single goodwill reporting unit, it determines the fair value of the Company’sits reporting unit exceededbased upon the carrying amount

F-21


Table of Contents

Veeco Instruments Inc. and therefore goodwill was not impaired. InSubsidiaries

Notes to Consolidated Financial Statements (Continued)

Company’s adjusted market capitalization. The adjusted market capitalization is calculated by multiplying the future, a significant decline in the marketaverage share price of the Company’s common stock could indicatefor the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a declinecontrol premium. The control premium is estimated using historical transactions in similar industries. The annual test performed at the beginning of the fourth quarter of fiscal 2017 and 2018 did not result in any potential impairment as the fair value of the Company’s reporting unit such that goodwill becomes impaired.was determined to exceed the carrying amount of the reporting unit.

 

During 2014,As a result of a significant decline in the Company’s stock price during the fourth quarter, the Company successfully demonstrated its FAST-ALD technology for flexible OLED encapsulation. But, subsequentconcluded it was appropriate to the Company’s annualperform an interim goodwill impairment test in 2014, as of the incumbent deposition technology had progressed to satisfy current market requirements, which required an additional impairment test to be performed inend of the fourth quarter of 2014. After estimating thequarter. The fair value of significant tangibleits reporting unit, as calculated using the adjusted market capitalization approach noted above, was determined to be below the carrying value of the reporting unit, and intangible long-lived assets related to the ALD business, the Company recorded non-cashan impairment charge equal to the excess of carrying value over fair value, or $122.8 million, for the year ended December 31, 2018. The impairment charge is included in “Asset impairment” in the Consolidated Statements of Operations. The valuation of goodwill will continue to be subject to changes in the Company’s market capitalization and observable market control premiums. This analysis is sensitive to changes in the Company’s stock price and absent other qualitative factors, the Company may be required to record additional goodwill impairment charges in future periods if the stock price declines and remains depressed for an extended period 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.

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Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)time. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

December 31, 2017

 

 

 

 

December 31, 2015

 

 

 

December 31, 2014

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

Average

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Accumulated

 

 

 

 

Average Remaining

 

Gross

 

Amortization

 

 

 

Gross

 

Amortization

 

 

 

    

Remaining

    

Gross

    

Amortization

    

 

    

Gross

    

Amortization

    

 

 

Amortization

 

Carrying

 

and

 

Net

 

Carrying

 

and

 

Net

 

 

Amortization

 

Carrying

 

and

 

Net

 

Carrying

 

and

 

Net

 

Period

 

 

 

Amount

 

 

 

Impairment

 

 

 

Amount

 

 

 

Amount

 

 

 

Impairment

 

 

 

Amount

 

 

Period

 

Amount

 

Impairment

 

Amount

 

Amount

 

Impairment

 

Amount

 

(in years)

 

(in thousands)

 

 

(in years)

 

(in thousands)

Technology

 

8.7

 

$

222,358

 

$

120,496

 

$

101,862

 

$

222,358

 

$

106,342

 

$

116,016

 

 

6.4

 

$

337,218

 

$

290,808

 

$

46,410

 

$

307,588

 

$

133,121

 

$

174,467

Customer relationships

 

12.9

 

47,885

 

22,470

 

25,415

 

69,350

 

35,549

 

33,801

 

 

10.2

 

 

164,595

 

 

136,126

 

 

28,469

 

 

164,595

 

 

39,336

 

 

125,259

In-process R&D

 

 —

 

 

13,710

 

 

10,530

 

 

3,180

 

 

43,340

 

 

 —

 

 

43,340

Trademarks and tradenames

 

5.3

 

2,730

 

1,937

 

793

 

3,050

 

1,096

 

1,954

 

 

5.4

 

 

30,910

 

 

23,899

 

 

7,011

 

 

30,910

 

 

4,321

 

 

26,589

Indefinite-lived trademark

 

 

2,900

 

 

2,900

 

2,900

 

 

2,900

 

IPR&D

 

 

 

 

 

5,070

 

5,070

 

 

Other

 

1.8

 

6,241

 

5,537

 

704

 

5,485

 

848

 

4,637

 

 

1.3

 

 

3,686

 

 

3,607

 

 

79

 

 

3,686

 

 

3,498

 

 

188

Total

 

9.4

 

$

282,114

 

$

150,440

 

$

131,674

 

$

308,213

 

$

148,905

 

$

159,308

 

 

7.3

 

$

550,119

 

$

464,970

 

$

85,149

 

$

550,119

 

$

180,276

 

$

369,843

 

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

 

ForDuring the years ended December 31, 2015, 2014,second quarter of 2018, the Company lowered its projected results for the Ultratech asset group, which were significantly below the projected results at the time of the acquisition. The reduced projections were based on lower than expected unit volume of certain smartphones, which incorporate advanced packaging methods such as fan-out wafer level packaging (“FOWLP”), and 2013, amortization expensea delay in the adoption of FOWLP advanced packaging by other electronics manufacturers, both of which slowed orders and reduced revenue projections for the Company’s advanced packaging lithography systems. In addition, there has been a delay in the build out of 28nm facilities by companies in China who were expected to purchase the Company’s Laser Spike Anneal systems. Taken together, the reduced projections identified during the second quarter of 2018 required the Company to assess the Ultratech asset group for impairment. As a result of the analysis, which included projected cash flows that required the use of unobservable inputs, the Company recorded non-cash impairment charges of $216.4 million and $35.9 million related to definite-lived intangible assets and in-process research and development assets, respectively, during the second quarter of 2018. The impairment charge is included in “Asset impairment” in the Consolidated Statement of Operations. Subsequently, certain in-process research and development projects were completed and moved to the “Technology” line in the above table.

During 2016, the Company decided to reduce future investments in certain technologies and, as a result, recorded a non-cash impairment charge of $54.3 million for the related intangible purchased technology. The impairment charge was

F-22


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

based on projected cash flows that required the use of unobservable inputs and was $27.6 million, $13.1 million, and $5.5 million, respectively. recorded in “Asset impairment” in the Consolidated Statements of Operations.

Based on the intangible assets recorded at December 31, 2015,2018, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense, excluding in-process R&D, is expected to be as follows:

 

 

 

Amortization

 

 

 

 

 

(in thousands)

 

 

Amortization

2016

 

$

20,816

 

2017

 

17,976

 

2018

 

16,399

 

    

(in thousands)

2019

 

15,165

 

 

$

16,820

2020

 

14,112

 

 

 

15,894

2021

 

 

12,772

2022

 

 

10,438

2023

 

 

8,675

Thereafter

 

44,306

 

 

 

17,370

Total

 

$

128,774

 

 

$

81,969

 

Note 7 — Inventories

 

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

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

 

2015

 

 

 

2014

 

    

2018

    

2017

 

(in thousands)

 

 

(in thousands)

Materials

 

$

42,373

 

$

30,319

 

 

$

90,816

 

$

59,919

Work-in-process

 

30,327

 

25,096

 

 

 

42,354

 

 

37,222

Finished goods

 

4,769

 

6,056

 

 

 

23,141

 

 

23,125

Total

 

$

77,469

 

$

61,471

 

 

$

156,311

 

$

120,266

 

F-23



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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

 

Property and equipment, net, consist of the following:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

Average

 

 

December 31,

 

 

 

 

2015

 

 

 

2014

 

 

 

Useful Life

 

    

2018

    

2017

    

Average Useful Life

 

(in thousands)

 

 

 

 

(in thousands)

 

 

Land

 

$

9,592

 

$

9,392

 

N/A

 

 

$

5,669

 

$

5,669

 

N/A

Building and improvements

 

54,622

 

51,979

 

10 – 40 years

 

 

 

61,124

 

 

54,449

 

10 – 40 years

Machinery and equipment

 

110,075

 

104,815

 

3 – 10 years

 

Machinery and equipment (1)

 

 

128,385

 

 

126,829

 

3 – 10 years

Leasehold improvements

 

5,554

 

4,356

 

3 – 7 years

 

 

 

9,033

 

 

10,073

 

3 – 7 years

Gross property, plant and equipment

 

179,843

 

170,542

 

 

 

Gross property, plant, and equipment

 

 

204,211

 

 

197,020

 

 

Less: accumulated depreciation and amortization

 

100,253

 

91,790

 

 

 

 

 

123,927

 

 

111,962

 

 

Net property, plant, and equipment

 

$

79,590

 

$

78,752

 

 

 

 

$

80,284

 

$

85,058

 

 


(1)

Machinery and equipment also includes software, furniture, and fixtures

 

Depreciation expense was $12.2$17.6 million, $11.4$14.6 million, and $12.9$13.4 million for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, respectively. During 2016, the Company decided to reduce future investments in certain technologies and, as a result, recorded an impairment charge of $3.3 million of property, plant, and equipment.

 

Assets Held for Sale

F-23


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

At December 31, 2015, assets held for sale consist

As part of a vacant building and land which were designated as held for sale during 2014. The carrying value reflects the Company’s estimateefforts to reduce costs, enhance efficiency, and streamline operations, the Company removed certain lab equipment that is no longer required and recorded a non-cash impairment charge of fair value less costs to sell using the sales comparison market approach.

During$6.2 million for the year ended December 31, 2014,2016. Additionally, as part of that initiative, the Company classified property, plant, and equipment with a carrying value of $9.5 millionlisted its two facilities in South Korea for sale. When each facility was reclassified as assets held for sale. Using Level 2 measurement principles,sale, the Company determined that the carrying costvalues of these assetsthe buildings exceeded thetheir fair market value,values, less cost to sell, and recorded net impairment charges of $4.5 million for the year ended December 31, 2016. Both facilities were sold before the end of 2016 at prices that approximated the revised carrying values.

Finally, during the year ended December 31, 2016, the Company recorded an impairment charge of approximately $3.5 million, which consisted of $1.6$1.2 million related to an owned property in St. Paul, Minnesota. The property was sold during 2017, resulting in an additional impairment charge of $0.7 million for the Company’s researchyear ended December 31, 2017.There were no assets held for sale as of December 31, 2018 and demonstration labs in Asia and $1.9 million related to a vacant building and land. These amounts2017. All impairment charges were includedrecorded 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.

 

During the year ended December 31, 2015, the Company sold its assets previously held for sale related to its research and demonstration labs in Asia for $1.0 million, which was the carrying value for the assets. The Company continues to actively market the remaining assets held for sale.

Note 9 — Accrued Expenses and Other Liabilities

 

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

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

December 31,

 

 

2015

 

 

 

2014

 

 

 

 

    

2018

    

2017

 

(in thousands)

 

 

 

 

(in thousands)

Payroll and related benefits

 

$

30,917

 

$

26,605

 

 

 

 

 

$

20,486

 

$

32,996

Warranty

 

8,159

 

5,411

 

 

 

 

 

7,852

 

 

6,532

Interest

 

 

4,321

 

 

4,430

Professional fees

 

 

2,897

 

 

3,942

Merger consideration payable

 

 

 —

 

 

2,662

Sales, use, and other taxes

 

1,132

 

1,776

 

 

 

 

 

 

2,670

 

 

2,144

Restructuring liability

 

824

 

1,428

 

 

 

 

 

2,213

 

 

1,520

Other

 

8,361

 

13,198

 

 

 

 

 

 

6,011

 

 

3,842

Total

 

$

49,393

 

$

48,418

 

 

 

 

$

46,450

 

$

58,068

 

F-24Customer deposits and deferred revenue

Customer deposits totaled $28.3 million and $41.5 million at December 31, 2018 and 2017, respectively, which are included in “Customer deposits and deferred revenue” in the Consolidated Balance Sheets. Deferred revenue represents amounts billed, other than deposits, in excess of the revenue that can be recognized on a particular contract at the balance sheet date. Changes in deferred revenue were as follows:


 

 

 

 

 

 

(in thousands)

Balance - December 31, 2017

 

$

70,536

Deferral of revenue

 

 

10,251

Recognition of previously deferred revenue

 

 

(36,372)

Balance - December 31, 2018

 

$

44,415

As of December 31, 2018, the Company has approximately $74.0 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 67% is expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

F-24



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Other liabilities

 

Customer depositsAs part of the acquisition of Ultratech, the Company assumed an executive non-qualified deferred compensation plan that allowed qualifying executives to defer cash compensation. The plan was frozen at the time of acquisition and deferred revenue

Customer deposits totaled $28.2no further contributions have been made. At December 31, 2018 and 2017, plan assets approximated $3.2 million and $73.0$3.4 million, respectively, representing the cash surrender value of life insurance policies and is included within “Other assets” in the Consolidated Balance Sheets, while plan liabilities approximated $3.5 million and $4.7 million, respectively and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities also included asset retirement obligations of $3.2 million and $3.3 million at December 31, 20152018 and 2014,2017, respectively, which are included in “Customer depositsmedical and deferred revenue” in the Consolidated Balance Sheets.dental benefits for former executives of $2.2 million at both December 31, 2018 and 2017, and income tax payables of $1.0 million at December 31, 2018.

 

Note 10 — Restructuring Charges

 

During 2013,2017, the Company recorded $1.5 millioninitiated certain restructuring activities related to the Company’s efforts to streamline operations, enhance efficiencies, and reduce costs, as well as reduce the Company’s investments in personnel severancecertain technology development. In addition, during 2017, the Company began the Ultratech acquisition integration process to enhance efficiencies, resulting in reductions in headcount and other facility costs. During the year ended December 31, 2018, additional accruals were recognized and payments were made related costs resulting from theto these 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.initiatives.

 

During 2014,the second quarter of 2018, the Company initiated plans to further reduce excess capacity associated with the manufacture and support of the Company’s advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into its San Jose, California facility. As a result of this and other cost saving initiatives, the Company announced the closingheadcount reductions 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 93approximately 40 employees of their termination from the Company and recorded $4.0restructuring charges related to these actions of $2.8 million for the year ended December 31, 2018, consisting principally of personnel severance and related costs. TheseThe Company expects the consolidation to be completed in the first quarter of 2019, and expects to incur immaterial additional restructuring costs as this initiative is completed.

During the third quarter of 2018, the Company initiated additional restructuring activities to further reduce costs, including headcount reductions impacting approximately 35 employees and recorded restructuring charges related to these actions were substantially complete atof $1.2 million, consisting principally of personnel severance and related costs. This initiative was completed by the end of 2014.2018. Restructuring expense for the year ended December 31, 2018 included non-cash charges of $1.2 million related to accelerated share-based compensation for employee terminations, compared to $1.9 million for the comparable prior year period.

 

During 2015, additional charges

F-25


Table of $2.7 million were recognizedContents

Veeco Instruments Inc. and payments made relatedSubsidiaries

Notes to the 2014 closing of the Ft. Collins, Colorado and Camarillo, California facilities. In 2015, the Company announced the closing of its Hyeongok-ri, South Korea facility and reduced the workforce, including 23 employees whose positions were eliminated, resulting in additional restructuring costs of $1.1 million. And in an effort to better align the Company’s cost structure with the recently observed weakness in the LED market, the Company incurred $0.9 million to reduce spending primarily through the reduction of 16 employees and 12 temporary staff.Consolidated Financial Statements (Continued)

 

Additional restructuring costs to be accrued for these activities are not expected to be significant.

The following table shows the amounts incurred and paid for restructuring activities during the years ended December 31, 2015, 2014,2018, 2017, and 20132016 and the remaining accrued balance of restructuring costs at December 31, 2015,2018, which is included in Accrued“Accrued expenses and other current liabilitiesliabilities” in the Consolidated Balance Sheets:Sheets:

 

 

Personnel

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and

 

 

Facility

 

 

 

 

    

Personnel

    

Facility

    

 

 

 

 

Related Costs

 

 

 

Closing Costs

 

 

 

Total

 

 

Severance and

 

Related Costs

 

 

 

 

(in thousands)

 

 

Related Costs

 

and Other

 

Total

Balance at December 31, 2012

 

$

1,875

 

$

 

$

1,875

 

 

(in thousands)

Balance - December 31, 2015

 

$

824

 

$

 —

 

$

824

Provision

 

 

4,544

 

 

1,098

 

 

5,642

Changes in estimate

 

 

(2)

 

 

 —

 

 

(2)

Payments

 

 

(3,570)

 

 

(1,098)

 

 

(4,668)

Balance - December 31, 2016

 

 

1,796

 

 

 —

 

 

1,796

Provision

 

1,485

 

 

1,485

 

 

 

4,714

 

 

5,257

 

 

9,971

Payments

 

(2,827

)

 

(2,827

)

 

 

(4,990)

 

 

(5,257)

 

 

(10,247)

Balance at December 31, 2013

 

533

 

 

533

 

Balance - December 31, 2017

 

 

1,520

 

 

 —

 

 

1,520

Provision

 

4,012

 

382

 

4,394

 

 

 

4,681

 

 

2,714

 

 

7,395

Payments

 

(3,117

)

(382

)

(3,499

)

 

 

(4,058)

 

 

(2,644)

 

 

(6,702)

Balance at December 31, 2014

 

1,428

 

 

1,428

 

Provision

 

3,513

 

1,166

 

4,679

 

Payments

 

(4,117

)

(1,166

)

(5,283

)

Balance at December 31, 2015

 

$

824

 

$

 

$

824

 

Balance - December 31, 2018

 

$

2,143

 

$

70

 

$

2,213

 

F-25



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Note 11 — Commitments and Contingencies

 

Warranty

 

Warranties areThe Company typically validprovides standard warranty coverage on its systems for one year from the date of system final acceptance by providing labor and parts necessary to repair 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 failuressystems during the warranty period. Unforeseen component failuresThe 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 quarterly basis when the actual product performance or exceptional component performance can also result in changes to warranty costs.field expense differs from original estimates.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

December 31,

 

 

2015

 

 

 

2014

 

 

 

2013

 

 

2018

 

2017

    

2016

 

(in thousands)

 

 

 

(in thousands)

Balance, beginning of the year

 

$

5,411

 

$

5,662

 

$

4,942

 

 

$

6,532

 

$

4,217

 

$

8,159

Addition for new warranties issued

 

7,873

 

3,484

 

5,291

 

Addition from PSP acquisition

 

 

809

 

 

Settlements

 

(3,551

)

(3,802

)

(5,580

)

Warranties issued

 

 

6,737

 

 

5,817

 

 

3,916

Addition from Ultratech acquisition

 

 

 —

 

 

1,889

 

 

 —

Consumption of reserves

 

 

(6,573)

 

 

(6,330)

 

 

(6,433)

Changes in estimate

 

(1,574

)

(742

)

1,009

 

 

 

1,156

 

 

939

 

 

(1,425)

Balance, end of the year

 

$

8,159

 

$

5,411

 

$

5,662

 

 

$

7,852

 

$

6,532

 

$

4,217

 

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Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Minimum Lease Commitments

 

Minimum lease commitments at December 31, 20152018 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows:

 

 

 

 

 

Operating

 

Operating

 

    

Leases

 

Leases

 

 

(in thousands)

Payments due by period:

 

(in thousands)

 

 

 

2016

 

$

2,154

 

2017

 

1,677

 

2018

 

1,011

 

2019

 

529

 

 

$

5,143

2020

 

534

 

 

 

5,056

2021

 

 

2,432

2022

 

 

1,812

2023

 

 

1,066

Thereafter

 

2,169

 

 

 

548

Total

 

$

8,074

 

 

$

16,057

 

Lease expense was $2.3$6.3 million, $2.3$5.3 million, and $2.9$2.5 million for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, respectively. In addition, the Company is obligated under such leases for certain other expenses, including real estate taxes and insurance.

 

Legal Proceedings

 

On June 8, 2018, an Ultratech shareholder who received Veeco and certain other parties were namedstock as defendants inpart of the consideration for the Ultratech acquisition filed a lawsuit filed on April 25, 2013purported class action complaint in the Superior Court of the State of California, County of Sonoma. The plaintiffSanta Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the lawsuit, Patrick Colbus, sought unspecifiedsame court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and asserted claims that he suffered burnsfees under Sections 11, 12, and other injuries while cleaning a molecular beam epitaxy system alleged to have been manufactured by Veeco. The lawsuit alleged,15 of the Securities Act of 1933 for, among other things, thatalleged false/misleading statements in the molecular beam epitaxy system was defectiveregistration statement and thatprospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. The defendants filed a demurrer on January 10, 2019, asking the court to dismiss the consolidated complaint for failure to state a claim. The demurrer is scheduled to be heard by the court on March 15, 2019. Veeco failedbelieves this lawsuit is without merit and intends to adequately warnvigorously contest this matter.

On December 21, 2018, a purported Veeco stockholder filed a derivative action in the Superior Court of the potential risksState of California, County of Santa Clara, captioned Vladimir Gusinsky Revocable Trust v. Peeler, et al., Case No. 18CV339925, on behalf of nominal defendant Veeco. The complaint seeks to assert claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against current and former Veeco directors premised on purported misstatements and omissions in the system. Duringregistration statement relating to the first quarter of 2016,Ultratech acquisition. On January 2, 2019, the partiesagreedcourt ordered this action stayed until the case management conference, which is scheduled for March 15, 2019. Veeco believes this lawsuit is without merit and intends to settle the lawsuit, without any admission of wrongdoing. The settlement amount is expected to be fully covered

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Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

by Veeco’s insurance and, as a result, is not expected to have a material impact on the Company’s financial condition or results of operations.vigorously contest this matter.

 

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.

 

F-27


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Concentrations of Credit Risk

 

The Company depends on purchases from its ten largest customers, which accounted for 75%61% and 65%67% of net accounts receivable at December 31, 20152018 and 2014,2017, respectively.

 

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

 

 

Accounts Receivable

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts Receivable

 

Net Sales 

 

 

Year ended December 31,

 

For the Year Ended December 31,

 

December 31,

 

For the Year Ended December 31,

 

Customer

 

2015

 

2014

 

2015

 

2014

 

2013

    

2018

    

2017

    

2018

    

2017

    

2016

 

Customer A

 

*

 

*

 

*

 

15%

 

*

 

*

 

24

%  

*

 

21

%  

14

%

Customer B

 

*

 

20%

 

*

 

11%

 

14%

 

22

%  

*

 

*

 

*

 

*

 

Customer C

 

23%

 

13%

 

*

 

*

 

*

 

*

 

*

 

12

%  

*

 

*

 

Customer D

 

*

 

*

 

20%

 

*

 

*

Customer E

 

*

 

*

 

12%

 

*

 

*


*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 18, “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 to 90 days from the date of invoice.

 

Receivable Purchase Agreement

In December 2017, the Company entered into a Receivable Purchase Agreement with a financial institution to sell certain of its trade receivables from customers without recourse, up to $23.0 million at any point in time for a term of one year. Pursuant to this agreement, the Company sold $15.0 million of Receivables during the year ended December 31, 2017 and maintained $8.0 million available under the agreement for additional sales of Receivables as of December 31, 2017. No sales were made under this agreement in 2018, and the agreement was terminated in 2018. The net sale of accounts receivable, balanceunder the agreement is concentratedreflected as a reduction of accounts receivable in the following geographic locations:Company’s Consolidated Balance Sheet at the time of sale and any fees for the sale of trade receivables were not material for the periods presented.

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

2014

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

United States

 

 

$

14,471

 

 

 

$

13,139

 

China

 

 

10,629

 

 

 

17,911

 

EMEA(1)

 

 

7,766

 

 

 

4,760

 

Rest of World

 

 

16,658

 

 

 

24,275

 

Total

 

 

 

$

49,524

 

 

 

$

60,085

 

(1) Europe, Middle East, and Africa

Suppliers

 

The Company outsources certain functions to third parties, including the manufacture of all or substantially allseveral of its MOCVD systems, ion beam and other data storage systems, and ion sources. Thesystems. While the Company primarily relies on several suppliers for the manufacturing of these systems, butits outsourcing partners to perform their contracted functions, the Company does maintain a minimummaintains some 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

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Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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 failure of the Company’s present outsourcing partners and suppliers to meet their contractual obligations and the Company’s inability to developmake alternative sources, if necessary,arrangements or resume the manufacture of these systems could result inhave a prolonged interruption in supply or a significant increase in the price of one or more components, which could adversely affectmaterial adverse effect on the Company’s operating results.revenues, profitability, cash flows, and relationships with its customers.

 

The Company had deposits with its suppliers of $14.6$12.8 million and $12.7$7.6 million at December 31, 20152018 and 2014,2017, respectively, that were included in “Prepaid“Prepaid expenses and other current assets” on the Consolidated Balance Sheets.

 

Purchase Commitments

 

The Company had purchase commitments of $92.7$91.5 million at December 31, 2015,2018, substantially all of which will come due within one year. Purchase commitments are primarily for inventory used in manufacturing products and are partially offset by existing deposits with suppliers.

 

F-28


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Bank Guarantees

 

The Company has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At December 31, 2015,2018, outstanding bank guarantees and letters of credit totaled $2.9$6.8 million and unused bank guarantees and letters of credit of $62.6 $58.9million were available to be drawn upon.

 

Other

On November 1, 2018, the Company announced an attack on its computer systems. Upon learning of the attack, forensic experts were promptly engaged to assist with the investigation. The Company also notified law enforcement of the incident.

The investigation, which has largely been completed, determined that the Company’s computer systems were accessed by what appears to be a highly-sophisticated actor at various times over a period of years. It appears that proprietary and confidential information of the Company and certain personal information of the Company’s employees was accessed and may have been compromised as a result of the incident. Based on the evidence available at this time, the extent and impact of the compromise cannot be determined. The Company notified employees of this incident. The Company is continuing to analyze the incident, along with appropriate remediation of the Company’s computer systems. That analysis and the related remediation efforts could ultimately reveal that additional information was revealed or compromised.

Based on the evidence available at this time, the Company does not know if or when it will be able to determine the potential impact to the Company, whether it will be able to identify who is responsible for this attack or whether it will be able to pursue legal action or other remedies to protect any compromised information or recover damages related to the attack. This attack, including the expenses incurred to address it, may have an adverse effect on the Company’s results of operations and/or financial condition. In addition, this attack may have caused the loss or misuse of proprietary and confidential information of the Company or others, result in litigation and potential liability, damage the Company’s reputation and/or otherwise harm its business.

Note 12 — Debt

 

Debt consistsConvertible Senior Notes

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

The Convertible Senior Notes are unsecured obligations of Veeco and rank senior in right of payment to any of Veeco’s subordinated indebtedness; equal in right of payment to all of Veeco’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Veeco’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Veeco’s subsidiaries.

The Convertible Senior Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is 24.9800 shares of the Company’s common stock per $1,000 principal amount of Convertible Senior Notes, representing an initial effective conversion price of $40.03 per share of common stock. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the

F-29


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

indenture governing the Convertible Senior Notes, dated January 18, 2017 between the Company and U.S. Bank National Association, as trustee, but will not be adjusted for accrued but unpaid interest.

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

(i)

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

(ii)

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

(iii)

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

(iv)

Upon the occurrence of specified corporate events.

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

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

The transaction costs of $9.2 million incurred in connection with athe issuance of the Convertible Senior Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected term of the Convertible Senior Notes. Transaction costs allocated to the equity component of $1.9 million reduced the value of the equity component recognized in stockholders' equity.

F-30


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The carrying value of $1.5 million and $1.8 million at December 31, 2015 and 2014, respectively. The mortgage note payablethe Convertible Senior Notes is secured by certain land and buildings with a carrying value of $3.3 million at December 31, 2015 and 2014. One ofas follows:

 

 

 

 

 

 

 

 

 

December 31,

 

    

2018

    

2017

 

 

(in thousands)

Principal amount

 

$

345,000

 

$

345,000

Unamortized debt discount

 

 

(52,336)

 

 

(63,022)

Unamortized transaction costs

 

 

(5,272)

 

 

(6,348)

Net carrying value

 

$

287,392

 

$

275,630

Total interest expense related to the buildingsConvertible Senior Notes 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. as follows:

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

2018

 

2017

 

 

(in thousands)

Cash Interest Expense

 

 

  

 

 

  

Coupon interest expense

 

$

9,315

 

$

8,901

Non-Cash Interest Expense

 

 

  

 

 

  

Amortization of debt discount

 

 

10,686

 

 

9,490

Amortization of transaction costs

 

 

1,076

 

 

956

Total Interest Expense

 

$

21,077

 

$

19,347

The Company determined the mortgageConvertible Senior Notes is a Level 32 liability in the fair-valuefair value hierarchy and estimated its fair value as $1.6 million and $2.0$255.3 million at December 31, 2015 and 2014, respectively, using a discounted cash flow model. Payments due under the note are as follows:2018.

 

 

 

 

Total

 

 

 

 

(in thousands)

 

2016

 

 

$

340

 

2017

 

 

368

 

2018

 

 

398

 

2019

 

 

427

 

Total

 

 

1,533

 

Less current portion

 

 

340

 

Total (less current maturities)

 

 

$

1,193

 

Note 13 — 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. We did not enter into any derivative transactions in 2015. In the past, theThe Company entered into monthly forward derivative contracts with the intent of mitigating a portion of this risk. The Company only used derivative financial instruments in the context of hedging and not for speculative purposes and had not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts were recorded as “Other, net” in the Company’s Consolidated Statements of Operations. The fair value of these contracts was included in “Prepaid

F-28



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

expenses and other current assets” in the Company’s Consolidated Balance Sheets. The Company executed derivative transactions with highly rated financial institutions to mitigate counterparty risk.

 

The Company did not have any outstanding derivative contracts at December 31, 2015 and 2014.2018. A summary of the foreign exchange derivatives outstanding on December 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Fair Value

    

Maturity Dates

    

Notional Amount

 

 

(in thousands)

Foreign currency exchange forwards

 

$

 —

 

January 2018

 

$

622

F-31


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The following table shows the gains and (losses) from currency exchange derivatives during the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, which are included in “Other, net” in the Consolidated Statements of Operations:Operations as well as the weighted average notional amount of derivatives outstanding for each period:

 

 

 

 

Year ended December 31,

 

 

 

 

2015

 

 

 

2014

 

 

 

2013

 

 

 

 

(in thousands)

 

Foreign currency exchange forwards

 

 

$

 

 

 

$

(89

)

 

 

$

248

 

Foreign currency collar

 

 

 

 

 

(457

)

 

 

906

 

Total

 

 

$

 

 

 

$

(546

)

 

 

$

1,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2018

 

2017

 

2016

 

 

 

Gains (losses)

 

Weighted average notional amount

 

 

Gains (losses)

 

Weighted average notional amount

 

 

Gains (losses)

 

Weighted average notional amount

 

 

(in thousands)

Foreign currency exchange forwards

 

$

327

 

2,869

 

$

(6)

 

314

 

$

219

 

7,175

 

Note 14 — 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 (expense) 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

 

Other comprehensive income (loss)

 

 

(87

)

 

 

15

 

 

 

(49

)

 

 

(121

)

Balance at December 31, 2015

 

 

$

2,246

 

 

 

$

(866

)

 

 

$

(32

)

 

 

$

1,348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

Gains (Losses)

 

 

 

 

 

Foreign

 

Minimum

 

on Available

 

 

 

 

 

Currency

 

Pension

 

for Sale 

 

 

 

 

    

Translation

    

Liability

    

Securities

    

Total

 

 

(in thousands)

Balance - December 31, 2015

 

$

2,246

 

$

(866)

 

$

(32)

 

$

1,348

Other comprehensive income (loss), before reclassifications

 

 

(19)

 

 

 —

 

 

(6)

 

 

(25)

Amounts reclassified from AOCI

 

 

(430)

 

 

866

 

 

18

 

 

454

Other comprehensive income (loss)

 

 

(449)

 

 

866

 

 

12

 

 

429

Balance - December 31, 2016

 

 

1,797

 

 

 —

 

 

(20)

 

 

1,777

Other comprehensive income (loss)

 

 

42

 

 

 —

 

 

(7)

 

 

35

Balance - December 31, 2017

 

 

1,839

 

 

 —

 

 

(27)

 

 

1,812

Other comprehensive income (loss)

 

 

(3)

 

 

 —

 

 

11

 

 

 8

Balance - December 31, 2018

 

$

1,836

 

$

 —

 

$

(16)

 

$

1,820

 

The Company did not allocate additional tax expense (benefit) to other comprehensive income in 2015 or 2014(loss) for all years presented as the Company is in a full valuation allowance position such that a deferred tax asset related to amounts recognized in other comprehensive income is not regarded as realizable on a more-likely-than-not basis.

 

During 2015, there were minimal realized gains2016, the Company finalized the process to terminate a defined benefit plan. As a result, the Company reclassified the minimum pension liability of $0.9 million, net of a tax benefit of $0.4 million, from Accumulated Other Comprehensive Income“Accumulated other comprehensive income” in the Consolidated Balance Sheets to “Other, net” onin the Consolidated Statements of Operations.

During 2014, Additionally, the Company completed its plan to liquidate one of its subsidiarysubsidiaries in Japan, since the Company moved to a distributor model to serve its customers in that region.Korea. As a result of thethis liquidation, a cumulative translation gain of $3.1$0.4 million was reclassified from Other Comprehensive Income“Accumulated other comprehensive income” to “Other, net” onin the Consolidated Statements of Operations.

 

F-29



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Preferred Stock

 

The Board of Directors has authority under the Company’s Certificate of Incorporation to issue shares of preferred stock, par value $0.01, with voting and economic rights to be determined by the Board of Directors. As of December 31, 2018, no preferred shares have been issued.

 

F-32


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Treasury Stock

 

OnThe share repurchase program authorized by the Company’s Board of Directors in October 2015 expired on October 28, 2015,2017. On December 11, 2017, the Company’s Board of Directors authorized thea new program to repurchase of up to $100 million of the Company’s outstanding common stock to be completed overthrough December 11, 2019. At December 31, 2018, $14.3 million of the next two years.$100 million had been utilized. Repurchases are expected to be made from time to time onin the open market or in privately negotiated transactions in accordance with applicable federal securities laws.    During 2015 the Company purchased 0.5 million shares for $9.2 million, $0.3 million of which had not been cash settled at December 31, 2015 and is included in “Accrued expenses and other current liabilities” on the Consolidated Balance Sheet.  At December 31, 2015, $90.8 million remains available for future stock repurchases under this program.

 

The Company records treasury stock purchases under the cost method using the first-in, first-out (FIFO)(“FIFO”) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid inpaid-in capital. If the Company reissues treasury stock at an amount below its acquisition cost and if additional paid inpaid-in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained earnings.charged to accumulated deficit.

 

Note 15 — 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 2010 Plan was approved by the Company’s shareholders. The Company’s employees, non-employee directors, and consultants are eligible to receive awards under the 2010 Stock Incentive Plan (as amended to date, the “2010 Plan”), which can include non-qualified stock options, incentive stock options, restricted share awards (“RSAs”), restricted share units (“RSUs”), performance share awards (“PSAs”), performance share units (“PSUs”), share appreciation rights, dividend equivalent rights, or any combination thereof. The Company settles awards under the Plans with newly issued shares or with shares held in treasury. All Plans, with the exception of acquired companies’ stock plans, have been approved by the Company’s shareholders.

 

TheIn 2013, the Board of Directors granted equity awards to certain employees in connection with the Company’s 2013 acquisition of ALD. 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 stockStock options willunder this plan vest over a three year period and have a 10-year term, and the RSUs willunder this plan vest over a two or four year period. At 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. At December 31, 2015,2018, there are 88,2002,000 option shares and 27,700no RSUs outstanding under the Inducement Plan.

 

The Company is authorized to issue up to 6.810.6 million shares under the 2010 Plan, including additional shares authorized under a 2013 plan amendmentamendments approved by shareholders.shareholders in 2016 and 2013. 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. At December 31, 2015,2018, there are 1.81.2 million option shares and 0.50.9 million RSUs and PSUs outstanding under the 2010 Plan.

 

F-30During 2016, the Company’s Board of Directors approved the 2016 Employee Stock Purchase Plan (“ESPP”). The Company is authorized to issue up to 750,000 shares under the ESPP. Under the ESPP, substantially all employees in the U.S. may purchase the Company’s common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of the Company’s common stock at the beginning or end of each six-month Offer Period, as defined in the ESPP, and subject to certain limits. The ESPP was approved by the Company’s shareholders.

During 2017, in connection with the acquisition of Ultratech, the Company assumed certain restricted stock units (the “Assumed RSUs”) available and outstanding under the Ultratech, Inc. 1993 Stock Option/Stock Issuance Plan, as amended (the “Ultratech Plan”). The Assumed RSUs remain subject to the terms set forth in the award agreement governing the award and the Ultratech Plan, except that the Assumed RSUs relate to shares of Company common stock and the number of restricted stock units was adjusted pursuant to the terms of the acquisition to reflect the difference in


F-33



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

the value of a share of Company common stock and a share of Ultratech common stock prior to closing the acquisition. The 2000 Plan was approved byAssumed RSUs were converted into 338,144 restricted stock units of 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 yearsCompany and generally vest over a two50 months. After the acquisition and notwithstanding any other provisions of the Ultratech Plan, no further grants will be made under the Ultratech Plan, and the Company is solely maintaining the Ultratech Plan with respect to five year period.the Assumed RSUs. At December 31, 2015,2018, there are 0.2 million option shares30,200 RSUs outstanding under the 2000Ultratech Plan.

 

Shares Reserved for Future Issuance

 

At December 31, 2015,2018, the Company has 3.94.5 million shares reserved to cover exercises of outstanding stock options, vesting of RSUs, and additional grants under the 2010 Plan.At December 31, 2018, the Company has 0.2 million shares reserved to cover future issuances under the ESPP 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,

 

 

 

 

 

 

2015

 

 

 

2014

 

 

 

2013

 

 

 

 

 

 

(in thousands)

 

 

Cost of sales

 

 

 

$

2,495

 

 

 

$

2,456

 

 

 

$

1,446

 

 

Selling, general, and administrative

 

 

 

11,474

 

 

 

11,859

 

 

 

8,339

 

 

Research and development

 

 

 

4,031

 

 

 

4,498

 

 

 

3,347

 

 

Share-based compensation expense, before tax

 

 

 

18,000

 

 

 

18,813

 

 

 

13,132

 

 

Income tax benefit(1)

 

 

 

(6,048

)

 

 

(6,011

)

 

 

(4,367

)

 

Net share-based compensation expense

 

 

 

$

11,952

 

 

 

$

12,802

 

 

 

$

8,765

 

 

 

 

(1) The income tax benefit presented for 2015 and 2014 has not been realized in the Consolidated Statements of Operations due to the Company’s full valuation allowance.

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

    

2018

    

2017

    

2016

 

 

(in thousands)

Cost of sales

 

$

1,885

 

$

2,505

 

$

1,956

Research and development

 

 

3,611

 

 

2,957

 

 

3,324

Selling, general, and administrative

 

 

9,417

 

 

12,851

 

 

10,433

Restructuring

 

 

1,161

 

 

1,880

 

 

 —

Acquisition costs

 

 

 —

 

 

4,203

 

 

 —

Total

 

$

16,074

 

$

24,396

 

$

15,713

 

The Company did not realize any tax benefits associated with share-based compensation for the years ended December 31, 2018, 2017, and 2016 due to the full valuation allowance on its U.S. deferred tax assets. See Note 17, “Income Taxes” for additional information. The Company capitalized an insignificantimmaterial amount of share-based compensation into inventory for the years ended December 31, 2015, 2014,2018, 2017, and 2013.2016.

 

Unrecognized share-based compensation costs at December 31, 20152018 are summarized below:

 

 

 

 

 

 

 

 

Unrecognized

 

Weighted

 

    

Unrecognized

    

Weighted

 

 

Share-Based

 

Average Period

 

 

Share-Based

 

Average Period

 

 

Compensation

 

Expected to be

 

 

Compensation

 

Expected to be

 

 

 

Costs

 

 

 

Recognized

 

 

Costs

 

Recognized

 

 

(in thousands)

 

(in years)

 

 

(in thousands)

(in years)

Stock option awards

 

 

$

4,252

 

1.3

 

 

$

 —

 

 —

Restricted stock units

 

 

5,581

 

2.0

 

 

 

2,466

 

2.4

Restricted stock awards

 

 

21,523

 

2.8

 

 

 

19,663

 

2.6

Performance share units

 

 

5,912

 

3.1

 

 

 

7,356

 

2.4

Total unrecognized share-based compensation cost

 

 

$

37,268

 

2.6

 

 

$

29,485

 

2.5

 

F-31


F-34



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

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, 2015,2018, options outstanding that have vested and are expected to vest wereare as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

Weighted

 

 

Number

 

Weighted

 

Average

 

Aggregate

 

 

Number

 

Weighted

 

Average

 

Aggregate

of

 

Average

 

Remaining

 

Intrinsic

 

 

of

 

Average

 

Remaining

 

Intrinsic

Shares

 

Exercise Price

 

Contractual Life

 

Value

 

    

Shares

    

Exercise Price

    

Contractual Life

    

Value

 

(in thousands)

 

 

 

 

 

(in years)

 

 

(in thousands)

 

 

(in thousands)

 

 

(in years)

 

(in thousands)

Vested

 

1,609

 

 

$

32.95

 

 

5.3

 

 

$

1,671

 

 

1,222

 

$

34.80

 

3.0

 

 —

Expected to vest

 

435

 

 

32.75

 

 

6.6

 

 

 

 

 —

 

 

 —

 

 —

 

 —

Total

 

2,044

 

 

$

32.91

 

 

5.6

 

 

$

1,671

 

 

1,222

 

 

34.80

 

3.0

 

 —

 

Outstanding options expected to vest are net of estimated future forfeitures. The aggregate intrinsic value represents the difference between the option exercise price and $20.56,$7.41, the closing price of the Company’s common stock on December 31, 2015,2018, the last trading day of the Company’s fiscal year as reported on Thethe NASDAQ Stock Market.

 

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

 

 

 

 

Weighted

 

 

 

 

 

 

 

Number of

 

Average

 

 

 

 

Weighted 

 

Shares

 

Exercise Price

 

 

Number of

 

Average

 

 

(in thousands)

 

 

 

    

Shares

    

Exercise Price

Outstanding at December 31, 2012

 

 

2,322

 

$

28.63

 

 

(in thousands)

 

 

 

Balance - December 31, 2015

 

2,064

 

$

32.91

Granted

 

 

539

 

32.68

 

 

 —

 

 

 —

Exercised

 

 

(149

)

 

14.74

 

 

(194)

 

 

12.18

Expired or forfeited

 

 

(114

)

 

35.22

 

 

(294)

 

 

34.44

Outstanding at December 31, 2013

 

 

2,598

 

$

29.98

 

Balance - December 31, 2016

 

1,576

 

 

35.18

Granted

 

 

509

 

33.05

 

 

 —

 

 

 —

Exercised

 

 

(561

)

 

23.88

 

 

(18)

 

 

30.03

Expired or forfeited

 

 

(155

)

 

36.22

 

 

(164)

 

 

37.47

Outstanding at December 31, 2014

 

 

2,391

 

$

31.65

 

Balance - December 31, 2017

 

1,394

 

 

34.97

Granted

 

 

17

 

30.22

 

 

 —

 

 

 —

Exercised

 

 

(192

)

 

12.95

 

 

 —

 

 

 —

Expired or forfeited

 

 

(152

)

 

38.15

 

 

(172)

 

 

36.21

Outstanding at December 31, 2015

 

 

2,064

 

$

32.91

 

Balance - December 31, 2018

 

1,222

 

 

34.80

 

The following table summarizes stock option information at December 31, 2015:2018:

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Range of

 

 

 

 

Aggregate

 

Average

 

Weighted

 

 

 

 

Aggregate

 

Average

 

Weighted

 

Exercise

 

 

 

 

Intrinsic

 

Remaining

 

Average

 

 

 

 

Intrinsic

 

Remaining

 

Average

 

Prices

 

Shares

 

Value

 

Contractual Life

 

Exercise Price

 

Shares

 

Value

 

Contractual Life

 

Exercise Price

 

 

 

(in thousands)

 

(in thousands)

 

(in years)

 

 

 

(in thousands)

 

(in thousands)

 

(in years)

 

 

 

 

$8.82 – $20.80

 

 

199

 

 

$

1,671

 

 

0.5

 

 

$

12.15

 

 

199

 

 

$

1,671

 

 

0.5

 

 

$

12.15

 

$24.40 – $36.97

 

 

1,497

 

 

 

 

6.2

 

 

32.55

 

 

1,088

 

 

 

 

6.1

 

 

32.69

 

$37.22 – $51.70

 

 

368

 

 

 

 

5.9

 

 

45.57

 

 

322

 

 

 

 

5.7

 

 

46.65

 

 

 

 

2,064

 

 

$

1,671

 

 

5.6

 

 

$

32.91

 

 

1,609

 

 

$

1,671

 

 

5.3

 

 

$

32.95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

Options Exercisable

 

    

 

    

 

 

    

Weighted

    

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

Aggregate

 

Average

 

Weighted

 

 

 

Aggregate

 

Average

 

Weighted

 

 

 

 

Intrinsic

 

Remaining

 

Average

 

 

 

Intrinsic

 

Remaining

 

Average

Range of Exercise Prices

 

Shares

 

Value

 

Contractual Life

 

Exercise Price

 

Shares

 

Value

 

Contractual Life

 

Exercise Price

 

 

(in thousands)

 

(in thousands)

 

(in years)

 

 

 

(in thousands)

 

(in thousands)

 

(in years)

 

 

 

$20.00 - $30.00

 

25

 

$

 —

 

3.6

 

$

28.13

 

25

 

$

 —

 

3.6

 

$

28.13

$30.01 - $40.00

 

1,058

 

 

 —

 

3.1

 

 

32.81

 

1,058

 

 

 —

 

3.1

 

 

32.81

$40.01 - $50.00

 

12

 

 

 —

 

1.7

 

 

45.57

 

12

 

 

 —

 

1.7

 

 

45.57

$50.01 - $60.00

 

127

 

 

 —

 

2.4

 

 

51.70

 

127

 

 

 —

 

2.4

 

 

51.70

 

 

1,222

 

$

 —

 

3.0

 

 

34.80

 

1,222

 

$

 —

 

3.0

 

 

34.80

 

F-32


F-35



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model.

Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards. The weighted average estimated values of employee stock option grants as well as the weighted average assumptions that were used in calculating such values during fiscal years 2015, 2014, and 2013 were based on estimates at the date of grant as follows:

 

 

Year ended December 31,

 

 

 

2015

 

2014

 

2013

 

Weighted average fair value

 

  $

 10.58

 

  $

 11.58

 

  $

 13.47

 

Dividend yield

 

0%

 

0%

 

0%

 

Expected volatility factor(1)

 

44%

 

44%

 

49%

 

Risk-free interest rate(2)

 

1.18%

 

1.19%

 

1.27%

 

Expected life (in years)(3)

 

3.9

 

3.9

 

4.5

 

(1)

Expected volatility is measured using historical daily price changes of the Company’s stock over the respective expected term of the options and the implied volatility derived from the market prices of the Company’s traded options.

(2)

The risk-free rate for periods within the contractual term of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant.

(3)

The expected life is the number of years the Company estimates that options will be outstanding prior to exercise. The Company’s computation of expected life was determined using a lattice-based model incorporating historical post vest exercise and employee termination behavior.

The following table summarizes information on options exercised for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

2015

 

2014

 

2013

 

    

2018

    

2017

    

2016

 

(in thousands)

 

 

(in thousands)

Cash received from options exercised

 

  $

2,233

 

  $

12,056

 

  $

2,199

 

 

$

 —

 

$

431

 

$

494

Intrinsic value of options exercised

 

  $

2,089

 

  $

8,390

 

  $

2,509

 

 

$

 —

 

$

51

 

$

1,165

 

RSAs, RSUs, PSAs, PSUs

 

RSAs are stock awards issued to employees that are subject to specified restrictions and a risk of forfeiture. RSUs are stock awards issued to employees that entitle the holder to receive shares of common stock as the awards vest. PSAs and PSUs are awards that result in a payment to a grantee inan issuance of shares of common stock to employees if certain performance goals and vesting criteriaor market conditions are achieved. RSAs, RSUs, PSAs, and PSUsAll of these awards typically vest over one to five years and vesting is subject to the grantee’semployee's continued service with the Company.Company and, in the case of performance awards, meeting certain performance or market conditions. The fair value of the awards is determined and fixed based on the closing price of the Company’s common stock on the trading day prior to the date of grant.grant, or, in the case of performance awards with market conditions, fair value is determined using a Monte Carlo simulation.

 

F-33



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The following table summarizes the equity activity of RSAs, RSUs, PSAs,non-vested restricted shares and PSUs under the Plans:performance shares:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

 

 

(in thousands)

 

 

 

Outstanding at December 31, 2012

 

 

693

 

 

$

36.11

 

Granted

 

 

798

 

 

33.16

 

Released

 

 

(207

)

 

32.44

 

Forfeited

 

 

(126

)

 

34.33

 

Outstanding at December 31, 2013

 

 

1,158

 

 

$

34.93

 

Granted

 

 

395

 

 

34.18

 

Released

 

 

(183

)

 

38.65

 

Forfeited

 

 

(133

)

 

33.66

 

Outstanding at December 31, 2014

 

 

1,237

 

 

$

34.27

 

Granted

 

 

672

 

 

30.33

 

Released

 

 

(389

)

 

35.65

 

Forfeited

 

 

(122

)

 

34.46

 

Outstanding at December 31, 2015

 

 

1,398

 

 

$

31.97

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

Average

 

 

Number of

 

Grant Date

 

 

Shares

 

Fair Value

 

 

(in thousands)

 

 

 

Balance -  December 31, 2015

 

1,398

 

$

31.97

Granted

 

1,166

 

 

17.59

Vested

 

(349)

 

 

32.73

Forfeited

 

(266)

 

 

27.31

Balance -  December 31, 2016

 

1,949

 

 

23.85

Granted

 

674

 

 

29.22

Performance award adjustments

 

(25)

 

 

20.95

Assumed from Ultratech

 

338

 

 

31.75

Vested

 

(831)

 

 

27.67

Forfeited

 

(225)

 

 

26.29

Balance -  December 31, 2017

 

1,880

 

 

25.41

Granted

 

1,257

 

 

17.37

Performance award adjustments

 

(5)

 

 

32.67

Vested

 

(523)

 

 

26.39

Forfeited

 

(391)

 

 

24.66

Balance -  December 31, 2018

 

2,218

 

 

20.74

 

While attainment percentages vary depending on achievement of results relative to targets, each PSA and PSU is included in the table above at the grant date target amount until the end of the performance period. Released shares include the impact of restricted stock shares that were cancelled due to elections by employees to cover withholding taxes with such shares. The total fair value of shares that vested during the years ended December 31, 2015, 2014,2018, 2017, and 20132016 was $9.6$9.1 million, $6.2$22.3 million, and $7.9$7.5 million, respectively. For performance awards, the final number of shares earned will vary depending on the achievement of the actual results relative to the performance or market conditions. Each performance award is included in the table above at the grant date target share amount until the end of the performance period if not previously forfeited.

 

The fair value of performance awards with market conditions is estimated on the date of grant using a Monte Carlo simulation. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive these awards. The weighted average fair value and the assumptions used in calculating such

F-36


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

values during fiscal year 2018 for performance awards with market conditions were based on estimates at the date of grant as follows:

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2018

 

Weighted average fair value

 

$

15.58

 

Dividend yield

 

 

 0

%

Expected volatility factor(1)

 

 

49

%

Risk-free interest rate(2)

 

 

2.88

%

Expected life (in years)(3)

 

 

3.0

 


(1)

Expected volatility is measured using historical daily price changes of the Company’s stock over the respective expected term.

(2)

The risk-free rate for periods within the contractual term is based on the U.S. Treasury yield curve in effect at the time of grant.

(3)

The expected life is the number of years the Company estimates that the awards will be outstanding prior to exercise.

Employee Stock Purchase Plan

For the years ended December 31, 2018, 2017, and 2016 the Company received cash proceeds of $3.1 million, $2.6 million, and $1.2 million, and issued shares of 332,096, 163,000, and 83,000, respectively, under the ESPP Plan. The weighted average estimated values of employee purchase rights as well as the weighted average assumptions that were used in calculating such values during fiscal years 2018, 2017, and 2016 were based on estimates at the date of grant as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2018

    

2017

    

2016

 

Weighted average fair value

 

$

4.94

 

$

7.09

 

$

4.45

 

Dividend yield

 

 

 0

%  

 

 0

%  

 

 0

%

Expected volatility factor(1)

 

 

62

%  

 

36

%  

 

43

%

Risk-free interest rate(2)

 

 

1.81

%  

 

0.99

%  

 

0.35

%

Expected life (in years)(3)

 

 

0.5

 

 

0.5

 

 

0.5

 


(1)

Expected volatility is measured using historical daily price changes of the Company’s stock over the respective expected term.

(2)

The risk-free rate for periods within the contractual term is based on the U.S. Treasury yield curve in effect at the time of grant.

(3)

The expected life is the number of years the Company estimates that the purchase rights will be outstanding prior to exercise.

Note 16 — Retirement Plans

 

The Company maintains a defined contribution plan for the benefit of its U.S. employees. The plan is intended to be tax qualified and contains a qualified cash or deferred arrangement as described under Section 401(k) of the Internal Revenue Code. Eligible participants may elect to contribute a percentage of their base compensation, and the Company may make matching contributions, generally equal to fifty cents for every dollar employees contribute, up to the lesser of three percent of the employee’s eligible compensation or three percent of the maximum the employee is permitted to contribute under then current Internal Revenue Code limitations. Generally, the plan calls for vesting in the Company contributions over the initial five years of a participant’s employment. In addition, the Company assumed Ultratech’s 401(k) plan as a result of the merger, and Ultratech’s plan was merged into the Company’s existing plan effective January 1, 2018. The Company recognized costsprovided employer contributions associated with these plans of approximately $2.5$3.0 million, $1.9$2.7 million, and $2.3$2.6 million for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, respectively.

 

In the year 2000,During 2016, the Company acquiredfinalized the process to terminate a defined benefit plan thatit had acquired in the year 2000. The plan had been frozen as of September 30, 1991, and no further benefits havehad been accrued by participants since that date. All participants are fully vested in their respective benefits. The plan year end is September 30 and is subject to the provisions of the Employee Retirement Income Security Act of 1974. At September 30, 2015, the plan had $1.6 million in assets and $2.0 million in benefit obligations. Accordingly, the Company has recorded a $0.4 million pension liability. The Company has begun the process to terminate the plan. In connection with the plan termination, responsibility for the payment of benefits under the plan will bewas transferred to an insurance company that will provide an identical benefit to plan participants undercompany. As a group annuity contract.result, the Company reclassified the minimum pension liability of $0.9 million,net of a tax

F-37


 

F-34



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

benefit of $0.4 million, from “Accumulated other comprehensive income” in the Consolidated Balance Sheets to “Other, net” in the Consolidated Statements of Operations.

 

Note 17 — Income Taxes

 

The amounts of income (loss) before income taxes attributable to domestic and foreign operations were as follows:

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

2015

 

2014

 

2013

    

2018

    

2017

    

2016

 

 

 

(in thousands)

 

 

 

 

(in thousands)

Domestic

 

$

(53,553

)

 

$

(95,195

)

 

$

(84,942

)

 

$

(286,561)

 

$

(101,573)

 

$

(123,089)

Foreign

 

30,907

 

16,841

 

13,732

 

 

 

(147,273)

 

 

12,583

 

 

3,885

Total

 

$

(22,646

)

 

$

(78,354

)

 

$

(71,210

)

 

$

(433,834)

 

$

(88,990)

 

$

(119,204)

 

Significant components of the expense (benefit) for income taxes consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

2015

 

2014

 

2013

    

2018

    

2017

    

2016

 

 

 

(in thousands)

 

 

 

 

(in thousands)

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

139

 

$

(2,464

)

 

$

(21,022

)

 

$

(1,682)

 

$

 —

 

$

 —

Foreign

 

6,952

 

2,325

 

3,921

 

 

 

2,518

 

 

(2,246)

 

 

1,937

State and local

 

(407

)

 

55

 

148

 

 

 

38

 

 

15

 

 

(111)

Total current expense (benefit) for income taxes

 

6,684

 

(84

)

 

(16,953

)

 

 

874

 

 

(2,231)

 

 

1,826

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

2,104

 

(11,230

)

 

(11,589

)

 

 

205

 

 

(35,912)

 

 

1,459

Foreign

 

516

 

(291

)

 

(462

)

 

 

(27,932)

 

 

1,291

 

 

(589)

State and local

 

28

 

191

 

57

 

 

 

107

 

 

(742)

 

 

127

Total deferred expense (benefit) for income taxes

 

2,648

 

(11,330

)

 

(11,994

)

 

 

(27,620)

 

 

(35,363)

 

 

997

Total expense (benefit) for income taxes

 

$

9,332

 

$

(11,414

)

 

$

(28,947

)

 

$

(26,746)

 

$

(37,594)

 

$

2,823

 

The income tax expense was reconciled to the tax expense computed at the U.S. federal statutory tax rate as follows:

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

2015

 

2014

 

2013

    

2018

    

2017

    

2016

 

 

 

(in thousands)

 

 

 

 

(in thousands)

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

 

$

(7,926

)

 

$

(27,424

)

 

$

(24,923

)

 

$

(91,105)

 

$

(31,147)

 

$

(41,722)

State taxes, net of U.S. federal impact

 

(1,607

)

 

(662

)

 

(1,554

)

 

 

(2,848)

 

 

(2,523)

 

 

(1,963)

Effect of international operations

 

(7,659

)

 

(6,160

)

 

(4,275

)

 

 

11,847

 

 

10,158

 

 

8,798

Domestic production activities deduction

 

 

 

1,554

 

Research and development tax credit

 

(1,628

)

 

(1,935

)

 

(3,151

)

 

 

(2,230)

 

 

620

 

 

(801)

Net change in valuation allowance

 

23,655

 

27,156

 

2,420

 

 

 

7,747

 

 

1,883

 

 

50,544

Change in accrual for unrecognized tax benefits

 

4,876

 

(1,940

)

 

577

 

 

 

2,868

 

 

(4,772)

 

 

(1,700)

Goodwill impairment

 

 

9,786

 

 

Change in contingent consideration

 

 

(10,279

)

 

290

 

Worthless stock deduction

 

(2,069

)

 

 

 

Change in entity tax status

 

904

 

 

 

Subsidiary liquidation

 

 

 —

 

 

 —

 

 

(12,435)

Share-based compensation

 

 

1,848

 

 

99

 

 

2,133

Effect of 2017 Tax Act

 

 

(1,690)

 

 

(11,344)

 

 

 —

Asset impairment

 

 

46,872

 

 

 —

 

 

 —

Other

 

786

 

44

 

115

 

 

 

(55)

 

 

(568)

 

 

(31)

Total expense (benefit) for income taxes

 

$

9,332

 

$

(11,414

)

 

$

(28,947

)

 

$

(26,746)

 

$

(37,594)

 

$

2,823

 

F-35The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with SAB 118, which provided SEC staff guidance for the application of ASC 740 in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s 2017 financial results included provisional amounts for specific


F-38



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

income tax effects of the 2017 Tax Act for which the accounting under ASC 740 was incomplete but for which a reasonable estimate could be determined. During the year ended December 31, 2018, the Company finalized the accounting for the tax effects of 2017 Tax Act based on legislative updates currently available and recorded an additional income tax benefit of $1.7 million for alternative minimum tax credits that became refundable in accordance with the 2017 Tax Act. The Company also reported an increase in deferred tax assets of $6.8 million as a result of adjustments to tax attributes utilized for one-time transition tax, which was offset by a full valuation allowance.

The most significant impacts of the 2017 Tax Act on the Company’s federal income taxes for the year ended December 31, 2017 were as follows:

Reduction of the U.S. Corporate Income Tax Rate

 

The Company hasmeasures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were re-measured as of December 22, 2017 to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent. The Company recorded an income tax benefit of $4.8 million for the year ended December 31, 2017, as the net deferred tax assets were reduced by $25.6 million with a corresponding valuation allowance reduction of $30.4 million.

One-Time Transition Tax on Foreign Earnings

As of December 31, 2017, the Company had $180.1 million of foreign earnings that was subject to the one-time transition tax. The Company used its 2017 and carryforward net operating losses to offset the impact of the transition tax. As the Company maintains a full valuation allowance against its U.S. deferred tax assets, the Company did not recorded excessrecord an income tax benefitsexpense related to share-based compensation since fiscalthe transition tax for the year 2013 due to the U.S. net operating losses. Atended December 31, 2015, excess2017.

Valuation Allowance

The 2017 Tax Act modified the Net Operating Loss ("NOL") provisions to provide for an indefinite carryforward of NOLs arising in tax benefits were $0.5 million.years beginning after December 31, 2017. The 2017 Tax Act also limits the amount of NOL deductions that can be used in any one year to 80 percent of the taxpayer’s taxable income, effective with respect to NOLs arising in tax years beginning after December 31, 2017. The Company will record this amountrecognized an income tax benefit of $6.5 million for the year ended December 31, 2017 related to “Additional paid-in capital” when the excess tax benefits are utilized and reducea reduction in the Company’s current taxes payable.valuation allowance as a result of the Company scheduling out the reversals of its net deferred tax assets which resulted in tax amortization on indefinite-lived intangible assets becoming available to offset existing deferred tax assets that are now expected to have an indefinite life.

F-39


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

Deferred income taxes reflect the effect of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The tax effects of the temporary differences were as follows:

 

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

2015

 

2014

    

2018

    

2017

 

(in thousands)

 

 

(in thousands)

Deferred tax assets:

 

 

 

 

 

 

 

 

 

 

 

Inventory valuation

 

$

6,334

 

$

8,244

 

 

$

8,943

 

$

8,007

Net operating losses and credit carry forwards

 

53,918

 

39,750

 

Net operating losses

 

 

67,787

 

 

73,458

Credit carry forwards

 

 

52,592

 

 

34,966

Warranty and installation accruals

 

3,022

 

2,452

 

 

 

1,695

 

 

1,690

Share-based compensation

 

12,461

 

11,794

 

 

 

6,981

 

 

7,385

Other

 

5,787

 

2,647

 

 

 

2,182

 

 

1,832

Total deferred tax assets

 

81,522

 

64,887

 

 

 

140,180

 

 

127,338

Valuation allowance

 

(56,273

)

 

(34,909

)

 

 

(114,955)

 

 

(100,456)

Net deferred tax assets

 

25,249

 

29,978

 

 

 

25,225

 

 

26,882

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

 

 

 

Purchased intangible assets

 

32,550

 

34,018

 

 

 

15,401

 

 

45,807

Undistributed earnings

 

618

 

1,047

 

Convertible Senior Notes

 

 

11,265

 

 

13,534

Depreciation

 

1,908

 

2,274

 

 

 

2,380

 

 

1,339

Total deferred tax liabilities

 

35,076

 

37,339

 

 

 

29,046

 

 

60,680

Net deferred taxes

 

$

(9,827

)

 

$

(7,361

)

 

$

(3,821)

 

$

(33,798)

 

The Company did not record a provisionis no longer permanently reinvesting future earnings from certain foreign jurisdictions and has accrued for U.S. federal income taxes or any additional withholding taxesforeign tax withholdings of $0.6 million on its unremitted earnings in foreign subsidiaries in the amountas of $100.1 million at December 31, 2015, as such amount is permanently reinvested. It is not practicable to determine the hypothetical amount of tax associated with such unremitted earnings if the Company were to assume they were remitted to the U.S. For financial reporting purposes, these balances are determined as amounts that exceed the tax basis of such investments. The Company has provided U.S. federal income taxes and additional withholding taxes on foreign earnings that are anticipated to be remitted.2018.

 

At December 31, 20152018, the Company had U.S. federal net operating lossNOL carryforwards of approximately $87.8$281.4 million, that will expireof which $16.0 million has an indefinite carryforward period, with the remaining expiring in varying amounts between 20312024 and 2035,2037, if not utilized. In connection with the Ultratech acquisition, $119.0 million of historical NOL carryforwards were acquired, which are subject to an annual limitation. The Company has $3.5 million of capital loss carryforwards that expire in 2021. At December 31, 20152018, the Company had U.S. foreign tax credit carryforwards of $7.5 million that will expire between 2023 and 2025 and U.S. federal research and development credits of $11.0$28.3 million that will expire between 20312019 and 2035.2038. The Ultratech acquisition resulted in the carryover of $11.4 million of research and development credit carryforwards, which are subject to an annual limitation. The Company also has $9.4 million of foreign tax credits that expire in 2027. Additionally, the Company has state and local net operating lossNOL carryforwards of approximately $57.8$147.6 million (a net deferred tax asset of $2.8$9.0 million, net of federal tax benefits and before the valuation allowance) that will expire between 20162019 and 2036. In addition,2038. Finally, the Company has state credits of $9.4$27.4 million, some of which are indefinite and others that will expire between 20162019 and 2030.2033.

 

The Company makes assessments to estimate if sufficient taxable income will be generated in the future to use existing deferred tax assets. The Company’sAs of December 31, 2018, the Company continued to have a cumulative three year loss inwith respect to its domestic operations led toU.S. operations. As such, the Company has recorded a full valuation allowance against the Company’sits U.S. deferred tax assets in fiscal year 2014, becauseassets. During 2018, the Company could not conclude that such amounts are realizable on a more-likely-than-not basis. As the cumulative three year loss continued in 2015, the Company increased theCompany’s valuation allowance increased by approximately $21.4$14.5 million, during the period ended December 31, 2015.including an increase of $6.8 million as a result of adjustments to tax attributes utilized for one-time transition tax.

 

F-36


F-40



Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

The Company may amortize indefinite-lived intangible assets for tax purposes, which are not amortizable for financial reporting purposes. The deferred tax liability at December 31, 2015 includes $11.2 million relating to the tax effect of differences between financial reporting and tax bases of intangible assets that are not expected to reverse within the Company’s net operating loss carryforward period.

A roll-forward of the Company’s uncertain tax positions for all U.S. federal, state, and foreign tax jurisdictions was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

 

2015

 

 

 

2014

 

 

 

2013

 

    

2018

    

2017

    

2016

 

 

(in thousands)

 

 

(in thousands)

Balance at beginning of year

 

 

$

4,276

 

 

 

$

6,228

 

 

 

$

5,818

 

 

$

8,269

 

$

7,452

 

$

9,152

Additions for tax positions related to current year

 

 

5,596

 

 

 

244

 

 

 

324

 

 

 

2,154

 

 

511

 

 

1,038

Additions for tax positions related to prior years

 

 

143

 

 

 

199

 

 

 

477

 

 

 

1,721

 

 

 3

 

 

233

Reductions for tax positions related to prior years

 

 

 

 

 

(2,345

)

 

 

(224

)

 

 

(934)

 

 

(4,877)

 

 

(2,826)

Reductions due to the lapse of the applicable statute of limitations

 

 

(642

)

 

 

(38

)

 

 

 

Reductions due to the lapse of the statute of limitations

 

 

(26)

 

 

(122)

 

 

(39)

Settlements

 

 

(221

)

 

 

(12

)

 

 

(167

)

 

 

(47)

 

 

(287)

 

 

(106)

Additions for business combination

 

 

 —

 

 

5,589

 

 

 —

Balance at end of year

 

 

$

9,152

 

 

 

$

4,276

 

 

 

$

6,228

 

 

$

11,137

 

$

8,269

 

$

7,452

 

If the amount of unrecognized tax benefits at December 31, 20152018 were recognized, the Company’s income tax provision would decrease by $5.1$1.5 million. The year to date change of $4.9 million primarily relates to the Company’s Development and Expansion Incentive tax rewards with the Singapore Economic Development Board. The gross amount of interest and penalties accrued in income tax payable in the Consolidated Balance Sheets was approximately $0.2 million and $0.3 million at both December 31, 20152018 and 2014, respectively.2017.

 

The Company, or one of its subsidiaries, files income tax returns in the United States federal jurisdiction, and various state, local, and foreign jurisdictions. All material consolidated federal income tax matters have been concluded for years through 20102015 subject to subsequent utilization of net operating lossesNOLs generated in such years. The Company’s U.S. federal tax returns from 2011 through 2013 were examined and are currently under joint committee review. All material state and local income tax matters have been reviewed through 2009.2012. The majority of the Company’s foreign jurisdictions have been reviewed through 2010. Substantially all of the2015. The Company’s major foreign jurisdictions’ statutes of limitation remain open with respect to the tax years from 20102017 for China, 2015 through 2015. It is reasonably possible2017 for Germany and Singapore, and 2017 for Taiwan. The Company does not anticipate that its uncertain tax position will change significantly within the next twelve months the Company’s uncertain tax position will be reduced by approximately $2.0 million relatedsubject to the completion of the ongoing tax audits in various tax jurisdictions.and any resultant settlement.

 

Note 18 — Segment Reporting and Geographic Information

 

The Company operates and measures its results in one operating segment and therefore has one reportable segment: the design, development, manufacture, sales, and support of semiconductor and thin film process equipment primarily sold to make electronic devices. The Company’s Chief Operating Decision Maker, the Chief Executive Officer, evaluates performance of the Company and makes decisions regarding the allocation of resources based on total Company results.

 

Sales by market is as follows:

 

 

 

 

Year ended December 31,

 

 

 

 

2015

 

 

 

2014

 

 

 

2013

 

 

 

 

(in thousands)

 

Lighting, Display & Power Electronics

 

 

$

291,133

 

 

 

$

278,551

 

 

 

$

216,852

 

Advanced Packaging, MEMS & RF

 

 

61,935

 

 

 

11,449

 

 

 

12,804

 

Scientific & Industrial

 

 

64,297

 

 

 

44,429

 

 

 

49,170

 

Data Storage

 

 

59,673

 

 

 

58,444

 

 

 

52,923

 

Total

 

 

$

477,038

 

 

 

$

392,873

 

 

 

$

331,749

 

F-37


 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

    

2018

    

2017

    

2016

 

 

(in thousands)

Sales by end-market

 

 

 

 

 

 

 

 

 

Advanced Packaging, MEMS & RF Filters

 

$

90,775

 

$

67,406

 

$

67,484

LED Lighting, Display & Compound Semiconductor

 

 

249,974

 

 

248,615

 

 

145,701

Front-End Semiconductor

 

 

62,582

 

 

40,319

 

 

8,427

Scientific & Industrial

 

 

138,751

 

 

119,346

 

 

110,090

Total

 

$

542,082

 

$

475,686

 

$

331,702


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

The Company’s significant operations outside the United States include sales and service offices in China, Europe, and Rest of World. For geographic reporting, sales are attributed to the location in which the customer facility is located.

 

F-41


Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Sales and long-lived tangible assets by geographic region are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales to Unaffiliated Customers

 

Long-Lived Tangible Assets

 

Net Sales to Unaffiliated Customers

 

Long-lived Tangible Assets

 

 

2015

 

 

 

2014

 

 

 

2013

 

 

 

2015

 

 

 

2014

 

 

 

2013

 

    

2018

    

2017

    

2016

    

2018

    

2017

    

2016

 

 

(in thousands)

 

 

(in thousands)

United States

 

 

$

86,627

 

 

 

$

44,060

 

 

 

$

57,609

 

 

 

$

64,951

 

 

 

$

63,349

 

 

 

$

66,002

 

 

$

125,659

 

$

93,433

 

$

85,582

 

$

78,503

 

$

81,046

 

$

60,012

China

 

 

242,442

 

 

 

159,063

 

 

 

149,050

 

 

 

422

 

 

 

621

 

 

 

1,895

 

 

 

194,032

 

 

106,674

 

 

84,604

 

 

81

 

 

64

 

 

219

EMEA

 

 

64,019

 

 

 

35,644

 

 

 

21,941

 

 

 

96

 

 

 

78

 

 

 

95

 

EMEA(1)

 

 

89,102

 

 

72,979

 

 

84,181

 

 

205

 

 

231

 

 

93

Rest of World

 

 

83,950

 

 

 

154,106

 

 

 

103,149

 

 

 

14,121

 

 

 

14,704

 

 

 

21,147

 

 

 

133,289

 

 

202,600

 

 

77,335

 

 

1,495

 

 

3,717

 

 

322

Total Sales

 

 

$

477,038

 

 

 

$

392,873

 

 

 

$

331,749

 

 

 

$

79,590

 

 

 

$

78,752

 

 

 

$

89,139

 

Total

 

$

542,082

 

$

475,686

 

$

331,702

 

$

80,284

 

$

85,058

 

$

60,646


(1)

EMEA consists of Europe, the Middle East, and Africa

 

Note 19 Selected Quarterly Financial Information (unaudited)

 

The following table presents selected unaudited financial data for each fiscal quarter of 20152018 and 2014.2017. Although unaudited, this information has been prepared on a basis consistent with the Company’s audited Consolidated Financial Statements and, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are considered necessary for a fair presentation of this information in accordance with GAAP. Such quarterly results are not necessarily indicative of future results of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2015

 

Fiscal 2014

 

Fiscal 2018

 

Fiscal 2017

 

Q1

 

Q2

 

Q3

 

Q4

 

Q1

 

Q2

 

Q3

 

Q4

 

    

Q1

    

Q2

    

Q3

    

Q4

    

Q1

    

Q2

    

Q3

    

Q4

 

(in thousands, except per share amounts)

 

 

(in thousands, except per share amounts)

Net sales

 

 $

98,341

 

 $

131,410

 

 $

140,744

 

 $

106,543

 

 $

90,841

 

 $

95,122

 

 $

93,341

 

 $

113,569

 

 

$

158,574

 

$

157,779

 

$

126,757

 

$

98,972

 

$

94,499

 

$

112,218

 

$

129,308

 

$

139,661

Gross profit

 

35,136

 

49,069

 

54,250

 

38,786

 

33,777

 

30,673

 

32,558

 

37,874

 

 

 

56,680

 

 

55,395

 

 

46,385

 

 

35,259

 

 

34,500

 

 

35,847

 

 

50,529

 

 

55,352

Net income (loss)

 

(19,110)

 

(8,386)

 

5,306

 

(9,788)

 

19,160

 

(15,211)

 

(13,977)

 

(56,912)

 

 

 

(15,827)

 

 

(237,634)

 

 

(8,953)

 

 

(144,674)

 

 

1,640

 

 

(20,817)

 

 

(23,740)

 

 

(8,479)

Basic income (loss) per common share

 

(0.48)

 

(0.21)

 

0.13

 

(0.25)

 

0.49

 

(0.39)

 

(0.35)

 

(1.44)

 

 

 

(0.34)

 

 

(5.02)

 

 

(0.19)

 

 

(3.11)

 

 

0.04

 

 

(0.49)

 

 

(0.51)

 

 

(0.18)

Diluted income (loss) per common share

 

(0.48)

 

(0.21)

 

0.13

 

(0.25)

 

0.48

 

(0.39)

 

(0.35)

 

(1.44)

 

 

 

(0.34)

 

 

(5.02)

 

 

(0.19)

 

 

(3.11)

 

 

0.04

 

 

(0.49)

 

 

(0.51)

 

 

(0.18)

 

Impairment ChargeAcquisition of Ultratech

 

During the second quarter of 2017, the Company acquired Ultratech. The results of operations of Ultratech have been included in the consolidated financial statements since the date of acquisition. Refer to Note 5, “Business Combinations,” for additional information.

Asset Impairments

During the second quarter of 2018, the Company recorded non-cash impairment charges related to the Ultratech asset group of $216.4 million and $35.9 million for definite-lived intangible assets and in-process research and development assets, respectively. Additionally, during the fourth quarter of 2014,2018, the Company recorded a non-cash assetgoodwill impairment charge of $53.9 million related to its ALD business. $122.8 million. Refer to Note 6, “Goodwill and Intangible Assets,” for additional information.

 

Acquisition of PSP

F-42


 

During the fourth quarter of 2014, the Company acquired PSP. The results of operations of PSP have been included in the consolidated financial statements since that date. Refer to Note 5, “Business Combinations,” for additional information.

Change in Contingent Consideration

During the first quarter of 2014, the Company recorded a non-cash gain of $29.4 million related to a change in the Company’s assessment of potential future payments related to its ALD business. Refer to Note 5, “Business Combinations,” for additional information.

F-38



Table of Contents

 

Schedule II — Valuation and Qualifying Accounts

 

 

 

 

Additions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charged

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

 

 

 

 

 

Balance at

 

(Credited)

 

Charged to

 

 

 

Balance at

 

 

 

 

 

Charged

 

 

 

 

 

 

 

 

 

 

Beginning

 

to Costs and

 

Other

 

 

 

End of

 

    

Balance at

    

(Credited)

    

Charged to

    

 

 

    

Balance at

Description

 

of Period

 

Expenses

 

Accounts

 

Deductions

 

Period

 

 

Beginning

 

 to Costs and

 

Other

 

 

 

 

End of

Deducted from asset accounts:

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

of Period

 

Expenses

 

Accounts

 

Deductions

 

Period

Year ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Year ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

731

 

$

43

 

$

 

$

(568

)

$

206

 

 

$

270

 

$

 —

 

$

 —

 

$

 —

 

$

270

Valuation allowance in net deferred tax assets

 

34,909

 

23,655

 

(2,291

)

 

56,273

 

 

 

100,456

 

 

14,499

 

 

 —

 

 

 —

 

 

114,955

 

$

35,640

 

$

23,698

 

$

(2,291

)

$

(568

)

$

56,479

 

 

$

100,726

 

$

14,499

 

$

 —

 

$

 —

 

$

115,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

2,438

 

$

(1,814

)

$

325

 

$

(218

)

$

731

 

 

$

286

 

$

99

 

$

 —

 

$

(115)

 

$

270

Valuation allowance in net deferred tax assets

 

7,753

 

27,156

 

 

 

34,909

 

 

 

104,744

 

 

(49,589)

 

 

45,301

 

 

 —

 

 

100,456

 

$

10,191

 

$

25,342

 

$

325

 

$

(218

)

$

35,640

 

 

$

105,030

 

$

(49,490)

 

$

45,301

 

$

(115)

 

$

100,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

492

 

$

1,946

 

$

 

$

 

$

2,438

 

 

$

206

 

$

171

 

$

 —

 

$

(91)

 

$

286

Valuation allowance in net deferred tax assets

 

4,708

 

2,420

 

625

 

 

7,753

 

 

 

54,200

 

 

50,544

 

 

 —

 

 

 —

 

 

104,744

 

$

5,200

 

$

4,366

 

$

625

 

$

 

$

10,191

 

 

$

54,406

 

$

50,715

 

$

 —

 

$

(91)

 

$

105,030

 

S-1

S-1