Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2016

 

OR

 

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

 

For the transition period from           to          

 

Commission File Number:  0-16244

 


 

VEECO INSTRUMENTS INC.

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

Terminal Drive
Plainview, New York

(Address of principal executive offices)

 

11803
(Zip Code)

 

(516) 677-0200

(Registrant’s telephone number, including area code)

 

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

o  (Do not check if a smaller reporting company)

Smaller reporting company

¨

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Title of Class

 

Shares Outstanding

Common Stock

 

as of July 21, 2016

par value $0.01 per share

 

40,638,047

 

 

 



Table of Contents

 

VEECO INSTRUMENTS INC.

 

INDEX

 

Safe Harbor Statement

1

 

 

PART I—FINANCIAL INFORMATION

3

 

 

Item 1. Financial Statements

3

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

29

 

 

Item 4. Controls and Procedures

29

 

 

PART II—OTHER INFORMATION

30

 

 

Item 1. Legal Proceedings

30

 

 

Item 1A. Risk Factors

30

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

Item 3. Defaults Upon Senior Securities

30

 

 

Item 4. Mine Safety Disclosures

30

 

 

Item 5. Other Information

30

 

 

Item 6. Exhibits

31

 

 

SIGNATURES

32

 



Table of Contents

 

Safe Harbor Statement

 

This quarterly report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing such forward-looking statements may be found in Part I - Items 1, 2, and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results.

 

In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.

 

The risks and uncertainties of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “we,” “us,” and “our,” unless the context indicates otherwise) include, without limitation, the following:

 

·                  Unfavorable market conditions may adversely affect our operating results;

 

·                  A reduction or elimination of foreign government subsidies and economic incentives may adversely affect the future order rate for our MOCVD equipment;

 

·                  The cyclicality of the industries we serve directly affects our business;

 

·                  We operate in industries characterized by rapid technological change;

 

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

 

·                  We face significant competition;

 

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

 

·                  Our sales cycle is long and unpredictable;

 

·                  Our backlog 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;

 

·                  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 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;

 

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

 

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

 

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

 

·                  Timing of market adoption of LED technology for general lighting is uncertain;

 

·                  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;

 

1



Table of Contents

 

·                  Our operating results have been, and may continue to be, adversely affected by tightening credit markets;

 

·                  We are exposed to the risks of operating a global business, including the need to obtain export licenses for certain of our shipments and political risks in the countries we operate;

 

·                  We 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;

 

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

 

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

 

·                  Our income taxes can change;

 

·                  We may be required to take additional impairment charges on assets;

 

·                  The price of our common shares is volatile and could decline significantly;

 

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

 

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

 

·                  We are subject to foreign currency exchange risks;

 

·                  If we are subject to cyber-attacks we could incur substantial costs and, if such attacks are successful, we could incur significant liabilities, reputational harm, and disruption to our operations;

 

·                  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 are subject to risks of non-compliance with environmental, health, and safety regulations;

 

·                  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; and

 

·                  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.

 

Consequently, such forward looking statements and estimates should be regarded solely as the current plans and beliefs of Veeco. We do not undertake any obligation to update any forward looking statements to reflect future events or circumstances after the date of such statements.

 

2



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Veeco Instruments Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

257,641

 

$

269,232

 

Short-term investments

 

73,211

 

116,050

 

Accounts receivable, net

 

41,695

 

49,524

 

Inventories

 

90,771

 

77,469

 

Deferred cost of sales

 

2,590

 

2,100

 

Prepaid expenses and other current assets

 

20,356

 

22,760

 

Assets held for sale

 

11,177

 

5,000

 

Total current assets

 

497,441

 

542,135

 

Property, plant and equipment, net

 

62,981

 

79,590

 

Intangible assets, net

 

121,380

 

131,674

 

Goodwill

 

114,908

 

114,908

 

Deferred income taxes

 

1,384

 

1,384

 

Other assets

 

21,056

 

21,098

 

Total assets

 

$

819,150

 

$

890,789

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

34,883

 

$

30,074

 

Accrued expenses and other current liabilities

 

35,113

 

49,393

 

Customer deposits and deferred revenue

 

65,753

 

76,216

 

Income taxes payable

 

654

 

6,208

 

Current portion of long-term debt

 

354

 

340

 

Total current liabilities

 

136,757

 

162,231

 

Deferred income taxes

 

13,014

 

11,211

 

Long-term debt

 

1,013

 

1,193

 

Other liabilities

 

6,141

 

1,539

 

Total liabilities

 

156,925

 

176,174

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value; 120,000,000 shares authorized; 40,926,048 shares issued and 40,638,047 shares outstanding at June 30, 2016; 40,995,694 shares issued and 40,526,902 shares outstanding at December 31, 2015.

 

409

 

410

 

Additional paid-in capital

 

759,572

 

767,137

 

Accumulated deficit

 

(93,987

)

(45,058

)

Accumulated other comprehensive income

 

1,414

 

1,348

 

Treasury stock, at cost, 288,001 shares at June 30, 2016; 468,792 shares at December 31, 2015.

 

(5,183

)

(9,222

)

Total stockholders’ equity

 

662,225

 

714,615

 

Total liabilities and stockholders’ equity

 

$

819,150

 

$

890,789

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

3



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net sales

 

$

75,348

 

$

131,410

 

$

153,359

 

$

229,751

 

Cost of sales

 

43,909

 

82,341

 

89,964

 

145,545

 

Gross profit

 

31,439

 

49,069

 

63,395

 

84,206

 

Operating expenses, net:

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

 

19,995

 

24,365

 

39,834

 

47,247

 

Research and development

 

21,543

 

20,119

 

43,653

 

38,704

 

Amortization of intangible assets

 

5,273

 

7,979

 

10,524

 

15,941

 

Restructuring

 

2,095

 

683

 

2,195

 

3,040

 

Asset impairment

 

13,627

 

 

13,627

 

126

 

Other, net

 

159

 

(51

)

88

 

(1,002

)

Total operating expenses, net

 

62,692

 

53,095

 

109,921

 

104,056

 

Operating income (loss)

 

(31,253

)

(4,026

)

(46,526

)

(19,850

)

Interest income

 

290

 

243

 

596

 

530

 

Interest expense

 

(105

)

(124

)

(143

)

(250

)

Income (loss) before income taxes

 

(31,068

)

(3,907

)

(46,073

)

(19,570

)

Income tax expense

 

1,014

 

4,479

 

1,542

 

7,926

 

Net income (loss)

 

$

(32,082

)

$

(8,386

)

$

(47,615

)

$

(27,496

)

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.82

)

$

(0.21

)

$

(1.22

)

$

(0.69

)

Diluted

 

$

(0.82

)

$

(0.21

)

$

(1.22

)

$

(0.69

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

Basic

 

38,965

 

39,693

 

39,035

 

39,666

 

Diluted

 

38,965

 

39,693

 

39,035

 

39,666

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

4



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net income (loss)

 

$

(32,082

)

$

(8,386

)

$

(47,615

)

$

(27,496

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

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

 

(11

)

(7

)

39

 

26

 

Reclassifications from AOCI into net income

 

 

(1

)

 

(1

)

Foreign currency translation

 

(12

)

(15

)

27

 

(30

)

Total other comprehensive income, net of tax

 

(23

)

(23

)

66

 

(5

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(32,105

)

$

(8,409

)

$

(47,549

)

$

(27,501

)

 

See accompanying Notes to the Consolidated Financial Statements.

 

5



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six months ended June 30,

 

 

 

2016

 

2015

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income (loss)

 

$

(47,615

)

$

(27,496

)

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

 

 

 

 

 

Depreciation and amortization

 

17,291

 

21,725

 

Deferred income taxes

 

1,821

 

879

 

Share-based compensation expense

 

8,390

 

8,919

 

Asset impairment

 

13,627

 

126

 

Gain on sale of lab tools

 

 

(179

)

Provision for bad debts

 

160

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

7,584

 

(22,709

)

Inventories and deferred cost of sales

 

(14,577

)

(21,269

)

Prepaid expenses and other current assets

 

2,404

 

(2,844

)

Accounts payable and accrued expenses

 

(9,156

)

19,041

 

Customer deposits and deferred revenue

 

(10,378

)

31,599

 

Income taxes receivable and payable, net

 

(1,091

)

2,309

 

Other, net

 

409

 

1,860

 

Net cash provided by (used in) operating activities

 

(31,131

)

11,961

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures

 

(9,179

)

(7,530

)

Proceeds from the liquidation of investments

 

78,145

 

50,147

 

Payments for purchases of investments

 

(35,533

)

(11,998

)

Proceeds from sale of lab tools

 

 

1,533

 

Other

 

(213

)

(865

)

Net cash provided by investing activities

 

33,220

 

31,287

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds from stock option exercises

 

473

 

1,157

 

Restricted stock tax withholdings

 

(665

)

(1,180

)

Purchases of common stock

 

(13,349

)

 

Repayments of long-term debt

 

(166

)

(153

)

Net cash used in financing activities

 

(13,707

)

(176

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

27

 

(30

)

Net increase (decrease) in cash and cash equivalents

 

(11,591

)

43,042

 

Cash and cash equivalents - beginning of period

 

269,232

 

270,811

 

Cash and cash equivalents - end of period

 

$

257,641

 

$

313,853

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Interest paid

 

$

103

 

$

71

 

Income taxes paid

 

1,284

 

2,625

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

6



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(unaudited)

 

Note 1 - Basis of Presentation

 

The accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature. Certain amounts previously reported have been reclassified in the financial statements to conform to the current presentation.

 

Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2016 interim quarters end on April 3, July 3, and October 2, and the 2015 interim quarters ended on March 29, June 28, and September 27. These interim quarters are reported as March 31, June 30 and September 30 in Veeco’s interim consolidated financial statements.

 

Revenue recognition

 

Veeco 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.

 

Contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, maintenance, and service plans. Judgment is required to properly identify the accounting units of the multiple-element arrangements and to determine how the revenue should be allocated among the accounting units. Veeco also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single, multiple-element arrangement based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another. 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, Veeco allocates revenue to each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or the best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Veeco uses BESP for the majority of the elements in its arrangements. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.

 

Veeco 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. Veeco’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For the majority of the arrangements, a customer source inspection of the system is performed in Veeco’s facility or test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When Veeco objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery, revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date, subject to the retention amount constraint described below. For new products, new applications of existing products, or for products with substantive customer acceptance provisions

 

7



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

where Veeco cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue and the associated costs are deferred and fully recognized upon the receipt of final customer acceptance, assuming all other revenue recognition criteria have been met.

 

Veeco’s system sales arrangements, including certain upgrades, generally do not contain provisions for the right of return, forfeiture, refund, or other purchase price concessions. 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. Veeco has a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage Veeco 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, Veeco accrues the cost of the installation at the time of revenue recognition for the system.

 

In many cases Veeco’s products are sold with a billing retention, typically 10% of the sales price, which is payable by the customer when field acceptance provisions are completed. The amount of revenue recognized upon delivery of a system or upgrade, if any, is limited to the lower of i) the amount billed that is not contingent upon acceptance provisions or ii) the value of the arrangement consideration allocated to the delivered elements, if such sale is part of a multiple-element arrangement.

 

Veeco’s contractual terms with customers in Japan generally specify that title and risk and rewards of ownership transfer upon 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 a result, for customers in Japan, Veeco recognizes revenue upon receipt of written acceptance from the end customer.

 

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

 

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

 

Recent accounting pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, as amended: Revenue from Contracts with Customers (the “Update”). The Update requires Veeco’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which Veeco expects to be entitled 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. Veeco is evaluating the impact of adopting the Update on its consolidated financial statements and related financial statement disclosures and has not yet determined which method of adoption will be selected.

 

In January 2016, the FASB issued ASU 2016-01: Financial Instruments — Overall, which requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017; early adoption is permitted. Veeco does not expect this ASU will have a material impact on its consolidated financial statements.

 

8



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

In February 2016, the FASB issued ASU 2016-02: Leases, which generally requires Veeco’s operating lessee rights and obligations to be recognized as assets and liabilities on the Balance Sheet. In addition, interest on lease liabilities is to be recognized separately from the amortization of right-of-use assets in the Statement of Operations. Further, payments of the principal portion of lease liabilities are to be classified as financing activities while payments of interest on lease liabilities and variable lease payments are to be classified as operating activities in the Statement of Cash Flows. When the standard is adopted, Veeco will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early application permitted. Veeco is evaluating the impact of adopting the ASU on its consolidated financial statements.

 

Veeco is also evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on Veeco’s consolidated financial statements.

 

Change in Accounting Principle

 

In March 2016, the FASB issued ASU 2016-09 Stock Compensation: Improvements to Employee Share-Based Payment Accounting. Veeco adopted the ASU during the first quarter of 2016. 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. In conjunction with adopting the ASU, Veeco has 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 effective. Accordingly, Veeco recorded a $1.3 million charge to the opening accumulated deficit balance with a corresponding adjustment to additional paid-in capital, resulting in no impact to the opening balance of total stockholders’ equity. In addition, Veeco recorded additional deferred tax assets with an offsetting valuation allowance of $2.4 million.

 

9



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Note 2 - Income (Loss) Per Common Share

 

Basic income (loss) per common share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income per common share is calculated by dividing net income available to common stockholders by 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 restricted share awards and restricted share units is considered in diluted income per common 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 for the three and six months ended June 30, 2016 and 2015 are as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

Net income (loss)

 

$

(32,082

)

$

(8,386

)

$

(47,615

)

$

(27,496

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.82

)

$

(0.21

)

$

(1.22

)

$

(0.69

)

Diluted

 

$

(0.82

)

$

(0.21

)

$

(1.22

)

$

(0.69

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

38,965

 

39,693

 

39,035

 

39,666

 

Diluted weighted average shares outstanding

 

38,965

 

39,693

 

39,035

 

39,666

 

 

 

 

 

 

 

 

 

 

 

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

 

659

 

1,097

 

691

 

1,120

 

 

 

 

 

 

 

 

 

 

 

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

 

34

 

169

 

50

 

174

 

 

 

 

 

 

 

 

 

 

 

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

 

2,425

 

1,976

 

2,350

 

1,964

 

 

Note 3 - Assets

 

Investments and Assets held for sale

 

Marketable securities are generally classified as available-for-sale and 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” in the Consolidated Balance Sheets. These securities may 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.

 

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. Veeco classifies certain assets 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;

 

10



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

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

 

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

 

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

 

The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

June 30, 2016

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

62,750

 

$

 

$

 

$

62,750

 

Government agency securities

 

 

9,262

 

 

9,262

 

Commercial paper

 

 

1,199

 

 

1,199

 

Total

 

$

62,750

 

$

10,461

 

$

 

$

73,211

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

9,999

 

$

 

$

 

$

9,999

 

Government agency securities

 

 

4,998

 

 

4,998

 

Commercial paper

 

 

2,999

 

 

2,999

 

Total

 

9,999

 

7,997

 

 

17,996

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

94,918

 

 

 

94,918

 

Government agency securities

 

 

12,988

 

 

12,988

 

Corporate debt

 

 

8,144

 

 

8,144

 

Total

 

$

94,918

 

$

21,132

 

$

 

$

116,050

 

 

There were no transfers between fair value measurement levels during the three and six months ended June 30, 2016.

 

11



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

At June 30, 2016 and December 31, 2015, the amortized cost and fair value of available-for-sale securities consist of:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(in thousands)

 

June 30, 2016

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

62,743

 

$

7

 

$

 

$

62,750

 

Government agency securities

 

9,262

 

 

 

9,262

 

Commercial paper

 

1,199

 

 

 

1,199

 

Total

 

$

73,204

 

$

7

 

$

 

$

73,211

 

 

 

 

 

 

 

 

 

 

 

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

 

$

116,064

 

$

10

 

$

(24

)

$

116,050

 

 

There were no available-for-sale securities in a loss position at June 30, 2016. Available-for-sale securities in a loss position at December 31, 2015 consist of:

 

 

 

December 31, 2015

 

 

 

 

 

Gross

 

 

 

Estimated

 

Unrealized

 

 

 

Fair Value

 

Losses

 

 

 

(in thousands)

 

U.S. treasuries

 

$

64,922

 

$

(23

)

Corporate debt

 

3,353

 

(1

)

Total

 

$

68,275

 

$

(24

)

 

At December 31, 2015, there were no short-term investments that had been in a continuous loss position for more than 12 months.

 

The available-for-sale securities at June 30, 2016 all contractually mature in one year or less. Actual maturities may differ from contractual maturities. Veeco may sell these securities prior to maturity based on the needs of the business. In addition, borrowers may have the right to call or prepay obligations prior to scheduled maturities.

 

There were minimal realized gains for the three and six months ended June 30, 2016 and 2015. The cost of securities liquidated is based on specific identification.

 

Accounts receivable

 

Accounts receivable is presented net of an allowance for doubtful accounts of $0.4 million and $0.2 million at June 30, 2016 and December 31, 2015, respectively.

 

12



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventories at June 30, 2016 and December 31, 2015 consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Materials

 

$

51,962

 

$

42,373

 

Work-in-process

 

32,130

 

30,327

 

Finished goods

 

6,679

 

4,769

 

Total

 

$

90,771

 

$

77,469

 

 

Prepaid expenses and other current assets

 

Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, and prepaid licenses. Veeco had deposits with its suppliers of $11.1 million and $14.6 million at June 30, 2016 and December 31, 2015, respectively.

 

Assets held for sale

 

During the second quarter of 2016, the Company undertook initiatives to reduce costs, enhance efficiency and streamline operations.  As part of that initiative, the Company listed its facility in Yongin-city, South Korea for sale and received an offer from a potential buyer for the Company’s building in Hyeongok-ri, South Korea.  In addition, the Company continues to market one of its properties in St. Paul, Minnesota. During the second quarter of 2016, the Company evaluated the market conditions for all of its assets held for sale and determined that the carrying value of the assets exceeded their fair market value, less cost to sell.  As a result, the Company recorded an impairment charge of approximately $7.5 million.  The carrying value of assets held for sale reflects Veeco’s estimate of fair value less costs to sell using the sales comparison market approach.

 

Property, plant, and equipment

 

Property, plant, and equipment at June 30, 2016 and December 31, 2015 consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Land

 

$

5,061

 

$

9,592

 

Building and improvements

 

46,772

 

54,622

 

Machinery and equipment(1)

 

101,448

 

110,075

 

Leasehold improvements

 

5,514

 

5,554

 

Gross property, plant and equipment

 

158,795

 

179,843

 

Less: accumulated depreciation and amortization

 

95,814

 

100,253

 

Net property, plant, and equipment

 

$

62,981

 

$

79,590

 

 


(1) Machinery and equipment also includes software, furniture and fixtures

 

For the three and six months ended June 30, 2016, depreciation expense was $3.4 million and $6.8 million, respectively, and $3.0 million and $5.8 million for the comparable 2015 periods. As part of the Company’s efforts to reduce costs, enhance efficiency and streamline operations, the Company removed certain lab equipment that is no longer required and

 

13



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

recorded a non-cash impairment charge of $6.1 million. In addition, during the second quarter of 2016, land and buildings with a pre-impairment net carrying value of $13.7 million were classified as assets held for sale on the Consolidated Balance Sheets.

 

Goodwill

 

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. There were no changes to goodwill during the six months ended June 30, 2016.

 

Intangible assets

 

Long-lived intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, and software licenses and are initially recorded at fair value. Long-lived intangibles are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line basis if such pattern cannot be reliably determined. The components of purchased intangible assets at June 30, 2016 and December 31, 2015 consist of the following:

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

 

 

Gross

 

Amortization

 

 

 

 

 

Carrying

 

and

 

Net

 

Carrying

 

and

 

Net

 

 

 

Amount

 

Impairment

 

Amount

 

Amount

 

Impairment

 

Amount

 

 

 

(in thousands)

 

Technology

 

$

222,358

 

$

127,531

 

$

94,827

 

$

222,358

 

$

120,496

 

$

101,862

 

Customer relationships

 

47,885

 

25,564

 

22,321

 

47,885

 

22,470

 

25,415

 

Trademarks and tradenames

 

2,730

 

2,013

 

717

 

2,730

 

1,937

 

793

 

Indefinite-lived trademark

 

2,900

 

 

2,900

 

2,900

 

 

2,900

 

Other

 

2,296

 

1,681

 

615

 

6,241

 

5,537

 

704

 

Total

 

$

278,169

 

$

156,789

 

$

121,380

 

$

282,114

 

$

150,440

 

$

131,674

 

 

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

 

Other assets

 

Veeco has an ownership interest of less than 20% in a non-marketable investment. Veeco does not exert significant influence over the investee and therefore the investment is carried at cost. There was no change to the $21.0 million carrying value of the investment during the six months ended June 30, 2016. The investment is included in “Other assets” on the Consolidated Balance Sheet. The investment is subject to a periodic impairment review; as there are no open-market valuations, the impairment analysis requires judgment. The analysis includes assessments of the investee’s financial condition, the business outlook for its products and technology, its projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by Veeco relative to other investors. Fair value of the investment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of the investment. No such events or circumstances are present.

 

14



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Note 4 - Liabilities

 

Accrued expenses and other current liabilities

 

The components of accrued expenses and other current liabilities at June 30, 2016 and December 31, 2015 consist of:

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Payroll and related benefits

 

$

20,642

 

$

30,917

 

Warranty

 

5,087

 

8,159

 

Professional fees

 

2,245

 

2,224

 

Installation

 

1,559

 

1,110

 

Sales, use, and other taxes

 

628

 

1,132

 

Restructuring liability

 

1,365

 

824

 

Other

 

3,587

 

5,027

 

Total

 

$

35,113

 

$

49,393

 

 

Other liabilities include accruals for costs related to customer training, royalties, and travel.

 

Warranty

 

Warranties are typically valid for one year from the date of system final acceptance, and Veeco 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 are affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. Changes in product warranty reserves for the six months ended June 30, 2016 include:

 

 

 

(in thousands)

 

Balance - December 31, 2015

 

$

8,159

 

Warranties issued

 

2,140

 

Consumption of reserves

 

(4,424

)

Changes in estimate

 

(788

)

Balance - June 30, 2016

 

$

5,087

 

 

15



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Restructuring accruals

 

During the six months ended June 30, 2016, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. In addition, the Company undertook additional restructuring activities as part of its initiative to reduce costs, enhance efficiency, and streamline operations. As a result of these actions, during the second quarter of 2016, the Company notified approximately 40 employees of their termination from the Company and recorded restructuring charges related to these actions of $2.0 million, consisting of personnel severance and related costs. The Company expects to incur additional restructuring costs over the next few quarters of $5 to $8 million related to ongoing restructuring activities.

 

 

 

Personnel

 

 

 

 

 

 

 

Severance and

 

Facility

 

 

 

 

 

Related Costs

 

Closing Costs

 

Total

 

 

 

(in thousands)

 

Balance - December 31, 2015

 

$

824

 

$

 

$

824

 

Provision

 

2,018

 

179

 

2,197

 

Changes in estimate

 

(2

)

 

(2

)

Payments

 

(1,475

)

(179

)

(1,654

)

Balance - June 30, 2016

 

$

1,365

 

$

 

$

1,365

 

 

Customer deposits

 

Customer deposits totaled $17.9 million and $28.2 million at June 30, 2016 and December 31, 2015, respectively.

 

Long-term debt

 

Debt consists of a mortgage note payable with a carrying value of $1.4 million and $1.5 million at June 30, 2016 and December 31, 2015, respectively. The mortgage note payable is secured by certain land and buildings. One of the buildings is currently held for sale. The annual interest rate on the mortgage is 7.91%, and the final payment is due on January 1, 2020. Veeco estimated the mortgage fair value as $1.4 million and $1.6 million at June 30, 2016 and December 31, 2015, respectively, using a discounted cash flow model.

 

Other Liabilities

 

Other liabilities primarily consist of income taxes payable and other liabilities not expected to be paid within one year. Non-current income taxes payable were $4.5 million and $0.0 million at June 30, 2016 and December 31, 2015, respectively.

 

Note 5 - Commitments and Contingencies

 

Minimum lease commitments

 

At June 30, 2016, Veeco’s total future minimum lease payments under non-cancelable operating leases have not changed significantly from the disclosure in the 2015 Form 10-K.

 

Purchase commitments

 

Veeco has purchase commitments of $50.3 million at June 30, 2016, substantially all of which become due within one year.

 

16



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Bank guarantees

 

Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At June 30, 2016, outstanding bank guarantees and letters of credit totaled $4.7 million, and unused bank guarantees and letters of credit of $60.5 million were available to be drawn upon.

 

Legal proceedings

 

Veeco and certain other parties were named as defendants in a lawsuit filed on April 25, 2013 in the Superior Court of California, County of Sonoma. The plaintiff in the lawsuit, Patrick Colbus, sought unspecified damages and asserted claims that he suffered burns and other injuries while cleaning a molecular beam epitaxy system alleged to have been manufactured by Veeco. The lawsuit alleged, among other things, that the molecular beam epitaxy system was defective and that Veeco failed to adequately warn of the potential risks of the system. During the six months ended June 30, 2016, the parties agreed to settle the lawsuit, without any admission of wrongdoing. The settlement amount was fully covered by Veeco’s insurance.

 

Veeco is involved in various other legal proceedings arising in the normal course of business. Veeco 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.

 

Note 6 - Equity

 

Accumulated Other Comprehensive Income (“AOCI”)

 

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

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

Foreign Currency

 

Minimum Pension

 

Gains (Losses) on
Available for Sale

 

 

 

 

 

Translation

 

Liability

 

Securities

 

Total

 

 

 

(in thousands)

 

Balance - December 31, 2015

 

$

2,246

 

$

(866

)

$

(32

)

$

1,348

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, before taxes

 

27

 

 

21

 

48

 

Benefit (expense) for income taxes

 

 

 

18

 

18

 

Other comprehensive income, net of tax

 

27

 

 

39

 

66

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2016

 

$

2,273

 

$

(866

)

$

7

 

$

1,414

 

 

There were minimal reclassifications from AOCI into net income for the six months ended June 30, 2016.

 

Note 7 - Share-based compensation

 

Restricted share awards are issued to employees that are subject to specified restrictions and a risk of forfeiture. The restrictions typically lapse over one to five years and may entitle holders to dividends and voting rights. Other types of share-based compensation include performance share awards, performance share units, and restricted share units (collectively with restricted share awards, “restricted shares”), as well as options to purchase common stock.

 

17



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

486

 

$

713

 

$

1,032

 

$

1,314

 

Selling, general, and administrative

 

2,576

 

3,112

 

5,319

 

5,910

 

Research and development

 

940

 

1,096

 

2,039

 

1,695

 

Total

 

$

4,002

 

$

4,921

 

$

8,390

 

$

8,919

 

 

For the six months ended June 30, 2016, equity activity related to stock options was as follows:

 

 

 

Number of

 

Weighted
Average

 

 

 

Shares

 

Exercise Price

 

 

 

(in thousands)

 

 

 

Balance - December 31, 2015

 

2,064

 

$

32.91

 

Granted

 

 

 

Exercised

 

(193

)

12.12

 

Expired or forfeited

 

(52

)

32.79

 

Balance - June 30, 2016

 

1,819

 

$

35.12

 

 

For the six months ended June 30, 2016, equity activity related to restricted shares and performance shares was as follows:

 

 

 

 

 

Weighted
Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

 

 

(in thousands)

 

 

 

Balance - December 31, 2015

 

1,398

 

$

31.97

 

Granted

 

1,131

 

16.93

 

Released

 

(136

)

32.61

 

Forfeited

 

(40

)

32.69

 

Balance - June 30, 2016

 

2,353

 

$

24.68

 

 

Note 8 - Income Taxes

 

Income taxes are estimated for each of the jurisdictions in which the Company operates.  Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carry forwards.  A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized.  Realization of net deferred tax assets is dependent on future taxable income.

 

At the end of each interim reporting period, the effective tax rate is aligned to expectations for the full year.  This estimate is used to determine the income tax provision on a year-to-date basis and may change in subsequent interim periods. Loss before income taxes and income tax expense for the three and six months ended June 30, 2016 and 2015 were as follows:

 

18



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

 

 

 

 

Loss before income taxes

 

$

(31,068

)

$

(3,907

)

$

(46,073

)

$

(19,570

)

Income tax expense

 

$

1,014

 

$

4,479

 

$

1,542

 

$

7,926

 

 

For the three months ended June 30, 2016, the $1.0 million net expense for income taxes included $0.5 million relating to Veeco’s U.S. operations and $0.5 million relating to Veeco’s non-U.S. operations. For the six months ended June 30, 2016, the $1.5 million net expense for income taxes included $0.9 million relating to Veeco’s U.S. operations and $0.6 million relating to Veeco’s non-U.S. operations.  For three and six months ended June 30, 2016, Veeco did not provide a current tax benefit on U.S. pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The U.S. tax expense is primarily related to U.S. tax amortization expense of indefinite-lived intangible assets that is not available to offset existing deferred tax assets.

 

For three and six months ended June 30, 2015, Veeco did not provide a current tax benefit on its U.S. pre-tax losses as the amounts were not realizable on a more-likely-than-not basis. The U.S. tax expense is primarily related to withholding taxes and is also related to U.S. tax amortization expense of indefinite-lived intangible assets that is not available to offset existing deferred tax assets.

 

Note 9 - Segment Reporting and Geographic Information

 

Veeco operates and measures its results in one operating segment and therefore has one reportable segment: the design, development, manufacture, and support of thin film process equipment primarily sold to make electronic devices.

 

Veeco categorizes its sales into the following four end-markets:

 

Lighting, Display & Power Electronics

 

Lighting refers to Light Emitting Diode (“LED”); semiconductor illumination sources used in various applications including backlights, general lighting, automotive running lights, and head lamps. Display refers to LED displays including outdoor display/signage applications. Power Electronics refers to GaN-on-Silicon semiconductor devices such as rectifiers, inverters, and converters for the control and conversion of electric power.

 

Advanced Packaging, MEMS & RF

 

Advanced Packaging includes a portfolio of wafer-level assembly technologies that enable the miniaturization and performance improvement of electronic products, such as smartphones, smartwatches, tablets, and laptops. Micro-Electro Mechanical Systems (“MEMS”) includes tiny mechanical devices such as sensors, switches, mirrors, and actuators embedded in semiconductor chips used in vehicles, smartphones, tablets, and games. Radio Frequency (“RF”) includes semiconductor devices that make use of radio waves (RF fields) for wireless broadcasting and/or communications.

 

Scientific & Industrial

 

Scientific refers to advanced materials research at university research institutions, industry research institutions, industry consortiums, and government research agencies. Industrial refers to large-scale product manufacturing applications including optical coatings: thin layers of material deposited on a lens or mirror that alters how light reflects and transmits; extreme ultraviolet (“EUV”) photomask: an opaque plate that allows light to shine through in a defined pattern for use in photolithography; front end semiconductor: early steps in the process of integrated circuit fabrication where the microchips are created but still remain on the silicon wafer; and high power lasers such as fiber lasers used for industrial materials processing.

 

19



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

 

Data Storage

 

The Data Storage end-market refers to the archiving of data in electromagnetic or other forms for use by a computer or device, including hard disk drives used in large capacity storage applications.

 

Sales by end-market and geographic region for the three and six months ended June 30, 2016 and 2015 were as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

 

 

 

 

Sales by end-market

 

 

 

 

 

 

 

 

 

Lighting, Display & Power Electronics

 

$

24,762

 

$

82,122

 

$

47,705

 

$

146,450

 

Advanced Packaging, MEMS & RF

 

17,045

 

13,840

 

40,308

 

27,005

 

Scientific & Industrial

 

19,827

 

17,960

 

34,737

 

31,595

 

Data Storage

 

13,714

 

17,488

 

30,609

 

24,701

 

Total

 

$

75,348

 

$

131,410

 

$

153,359

 

$

229,751

 

Sales by geographic region

 

 

 

 

 

 

 

 

 

United States

 

$

20,734

 

$

19,632

 

$

47,446

 

$

47,601

 

China

 

24,582

 

66,437

 

33,383

 

110,718

 

EMEA(1)

 

14,834

 

21,990

 

42,296

 

30,314

 

Rest of World

 

15,198

 

23,351

 

30,234

 

41,118

 

Total

 

$

75,348

 

$

131,410

 

$

153,359

 

$

229,751

 

 


(1) EMEA consists of Europe, the Middle East, and Africa

 

For geographic reporting, sales are attributed to the location in which the customer facility is located.

 

20



Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement Regarding Forward Looking Statements

 

Our discussion below constitutes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made.

 

Executive Summary

 

We create process equipment that enables technologies for a cleaner, more productive and connected world. We design, develop, manufacture, market, and service thin film process 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 develop highly differentiated, “best-in-class” equipment for critical performance steps in thin film processing. Our products provide leading technology solutions with competitive 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.

 

Our solutions sell into four key end-markets: Lighting, Display & Power Electronics; Advanced Packaging, MEMS & RF; Scientific & Industrial; and Data Storage.

 

Sales in the Lighting, Display & Power Electronics markets were primarily driven by LED demand for general lighting, signage, and automotive applications. Over the past few quarters, LED chip manufacturers have faced an oversupply of LED units driven by weak demand for TV display backlighting. While we have limited long-term visibility, we are seeing some positive indications that industry conditions are improving. As a result, we believe demand for metal organic chemical vapor deposition (“MOCVD”) should increase from current levels in the near term. Our broad portfolio of MOCVD technologies has been developed to support the most significant industry trends, including developing mid-power LEDs, utilizing larger wafer sizes, and optimizing cost-of-ownership. We continue to enhance our MOCVD portfolio and recently introduced the TurboDisc K475i™ Arsenic-Phosphide (“AsP”) MOCVD system for existing and emerging applications such as red-orange-yellow LEDs, laser diodes, and high-efficiency triple junction photovoltaic solar cells.

 

The mobility trend continues to drive sales in the Advanced Packaging, MEMS & RF markets. RF applications represented the largest portion of sales in these markets as customers made investments to support next generation mobile devices. We continue to make positive progress in advanced packaging with our Precision Surface Processing (“PSP”) product family.  Our versatile PSP product architecture is well suited for a multitude of advanced packaging process schemes, including WLFO (wafer level fan out) and 3D TSV (thru silicon via) applications.

 

Sales in the Scientific & Industrial market were comprised of a broad range of customers, spanning multiple product lines. Our molecular beam epitaxy (“MBE”) products represented the largest component of these sales as we continue to win a majority of research opportunities, supported by our GENXplor R&D product. Our MBE systems enable universities and research consortia to conduct advanced materials research. Our MBE systems are also used for production applications, such as fiber lasers, where high volume throughput and low cost of ownership are required. We continue to meet ongoing demand for our SPECTOR ion beam deposition products which are used by optical coating suppliers to manufacture a variety of products including laser mirrors, optical fibers, and anti-reflective coatings. The diverse customer base represented by the Industrial & Scientific markets support ongoing demand for our products; however, sales can be highly variable quarter to quarter.

 

21



Table of Contents

 

The Data Storage market contributed positively to sales in the first half of fiscal 2016 as disk drive manufacturers made incremental investments to upgrade their installed base.  However, this mature 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, our customers in the HDD industry are not expected to make significant investments in new capacity. This is consistent with recent experience that investments are being made on an “as-needed” basis. Orders are expected to continue to fluctuate from quarter to quarter.

 

Results of Operations

 

For the three months ended June 30, 2016 and 2015

 

The following table presents operating results as a percentage of net sales, as well as period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment.

 

 

 

Three months ended June 30,

 

Change

 

 

 

2016

 

2015

 

Period to Period

 

 

 

(dollars in thousands)

 

Net sales

 

$

75,348

 

100

%

$

131,410

 

100

%

$

(56,062

)

(43

)%

Cost of sales

 

43,909

 

58

%

82,341

 

63

%

(38,432

)

(47

)%

Gross profit

 

31,439

 

42

%

49,069

 

37

%

(17,630

)

(36

)%

Operating expenses, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

 

19,995

 

27

%

24,365

 

19

%

(4,370

)

(18

)%

Research and development

 

21,543

 

29

%

20,119

 

15

%

1,424

 

7

%

Amortization

 

5,273

 

7

%

7,979

 

6

%

(2,706

)

(34

)%

Restructuring

 

2,095

 

3

%

683

 

1

%

1,412

 

*

 

Asset impairment

 

13,627

 

18

%

 

0

%

13,627

 

*

 

Other, net

 

159

 

0

%

(51

)

(0

)%

210

 

*

 

Total operating expenses, net

 

62,692

 

83

%

53,095

 

40

%

9,597

 

18

%

Operating income (loss)

 

(31,253

)

(41

)%

(4,026

)

(3

)%

(27,227

)

676

%

Interest income, net

 

185

 

0

%

119

 

0

%

66

 

55

%

Income (loss) before income taxes

 

(31,068

)

(41

)%

(3,907

)

(3

)%

(27,161

)

695

%

Income tax expense

 

1,014

 

1

%

4,479

 

3

%

(3,465

)

(77

)%

Net income (loss)

 

$

(32,082

)

(43

)%

$

(8,386

)

(6

)%

$

(23,696

)

283

%

 


* Not meaningful

 

22



Table of Contents

 

Net Sales

 

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

 

 

 

Three months ended June 30,

 

Change

 

 

 

2016

 

2015

 

Period to Period

 

 

 

(dollars in thousands)

 

Sales by market

 

 

 

 

 

 

 

 

 

 

 

 

 

Lighting, Display & Power Electronics

 

$

24,762

 

33

%

$

82,122

 

62

%

$

(57,360

)

(70

)%

Advanced Packaging, MEMS & RF

 

17,045

 

23

%

13,840

 

11

%

3,205

 

23

%

Scientific & Industrial

 

19,827

 

26

%

17,960

 

14

%

1,867

 

10

%

Data Storage

 

13,714

 

18

%

17,488

 

13

%

(3,774

)

(22

)%

Total

 

$

75,348

 

100

%

$

131,410

 

100

%

$

(56,062

)

(43

)%

Sales by geographic region

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

20,734

 

27

%

$

19,632

 

15

%

$

1,102

 

6

%

China

 

24,582

 

33

%

66,437

 

50

%

(41,855

)

(63

)%

EMEA

 

14,834

 

20

%

21,990

 

17

%

(7,156

)

(33

)%

Rest of World

 

15,198

 

20

%

23,351

 

18

%

(8,153

)

(35

)%

Total

 

$

75,348

 

100

%

$

131,410

 

100

%

$

(56,062

)

(43

)%

 


* Not meaningful

 

The sales decline is primarily due to reduced sales into the Lighting, Display & Power Electronics market driven by an oversupply of LED units in the market.  By geography, sales decreased in China, EMEA and Rest of World.  We believe there will continue to be variations in our future sales distribution across markets and geographies.

 

Bookings decreased to $67.7 million for the three months ended June 30, 2016 and were $123.8 million for the comparable prior year period. The uncertainty around the market demand and supply balance for LED units and the Chinese economy continue to negatively impact our orders within the Lighting, Display & Power Electronics market. While there may continue to be quarter-to-quarter variations, we also expect Data Storage demand to generally be weak as customers make limited 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 recorded in a given period divided by revenue recognized in the same period. For the three months ended June 30, 2016, the book-to-bill ratio was slightly below 0.9. Our backlog decreased from $169.3 million at March 31, 2016 to $144.2 million at June 30, 2016, which includes a backlog adjustment of approximately $17 million relating to a partial cancellation of a prior period sales order.

 

Gross Profit

 

In the second quarter of 2016, gross profit decreased compared to 2015 due to a sharp decline in sales volume, partially offset by improved gross margins. Gross margins increased despite the decline in overall sales volume principally due to a favorable mix of products sold in the period and from the benefits associated with ongoing cost reduction activities.

 

Selling, general, and administrative expenses

 

Selling, general, and administrative expenses decreased primarily due to reductions in incentive compensation and sales commissions as a result of the decline in our financial performance.

 

23



Table of Contents

 

Research and development expenses

 

Research and development expenses increased due to the additional use of third party contractors to accelerate the development of products for the Lighting, Display & Power Electronics market, personnel-related expenses, and depreciation of research and development-related property, plant, and equipment, which was partially offset by decreased incentive compensation.

 

Amortization expense

 

The decrease in amortization expense is a result of certain intangible assets becoming fully amortized, including the backlog and trademark/tradename assets associated with the December 2014 Precision Surface Processing (“PSP”) acquisition.

 

Restructuring expense

 

The restructuring expense in the second quarter of 2016 was primarily the result of our efforts to enhance efficiency and streamline operations.  We eliminated approximately 40 positions, most of which were in the administrative and field service functions.  We expect to incur additional restructuring costs over the next few quarters of $5 to $8 million related to these ongoing restructuring activities.  The restructuring expense in the second quarter of 2015 was primarily related to the closure of our Ft. Collins, Colorado; Camarillo, California; and Hyeongok-ri, South Korea facilities.

 

Asset impairment expense

 

During the second quarter of 2016, we evaluated the market conditions for all of our assets held for sale and determined that the carrying value of the assets exceeded their fair market value, less cost to sell.  As a result, we recorded a non-cash impairment charge of approximately $7.5 million.  Additionally, we removed certain lab equipment that was no longer required and recorded a non-cash impairment charge of $6.1 million.

 

Income tax expense

 

At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods.

 

Our tax expense for the three months ended June 30, 2016 was $1.0 million compared to a $4.5 million expense for the three months ended June 30, 2015. The 2016 tax expense included $0.5 million relating to our U.S. operations and $0.5 million relating to our non-U.S. operations, compared to 2015 when our expense included $3.3 million related to U.S. operations and $1.2 million related to non-U.S. operations.  The decrease in our expense in 2016 was primarily related to a significant reduction in our withholding taxes included in our U.S. tax expense as well as reduced pretax income from our non-U.S. operations resulting in a lower non-U.S. tax expense.

 

24



Table of Contents

 

For the six months ended June 30, 2016 and 2015

 

The following table presents operating results as a percentage of net sales, as well as period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment.

 

 

 

Six months ended June 30,

 

Change

 

 

 

2016

 

2015

 

Period to Period

 

 

 

(dollars in thousands)

 

Net sales

 

$

153,359

 

100

%

$

229,751

 

100

%

$

(76,392

)

(33

)%

Cost of sales

 

89,964

 

59

%

145,545

 

63

%

(55,581

)

(38

)%

Gross profit

 

63,395

 

41

%

84,206

 

37

%

(20,811

)

(25

)%

Operating expenses, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

 

39,834

 

26

%

47,247

 

21

%

(7,413

)

(16

)%

Research and development

 

43,653

 

28

%

38,704

 

17

%

4,949

 

13

%

Amortization

 

10,524

 

7

%

15,941

 

7

%

(5,417

)

(34

)%

Restructuring

 

2,195

 

1

%

3,040

 

1

%

(845

)

(28

)%

Asset impairment

 

13,627

 

9

%

126

 

0

%

13,501

 

*

 

Other, net

 

88

 

0

%

(1,002

)

0

%

1,090

 

*

 

Total operating expenses, net

 

109,921

 

72

%

104,056

 

45

%

5,865

 

6

%

Operating income (loss)

 

(46,526

)

(30

)%

(19,850

)

(9

)%

(26,676

)

134

%

Interest income (expense), net

 

453

 

0

%

280

 

0

%

173

 

62

%

Income (loss) before income taxes

 

(46,073

)

(30

)%

(19,570

)

(9

)%

(26,503

)

135

%

Income tax provision (benefit)

 

1,542

 

1

%

7,926

 

3

%

(6,384

)

81

%

Income (loss) from continuing operations

 

$

(47,615

)

(31

)%

$

(27,496

)

(12

)%

$

(20,119

)

73

%

 


* Not Meaningful

 

Net Sales

 

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

 

 

 

Six months ended June 30,

 

Change

 

 

 

2016

 

2015

 

Period to Period

 

 

 

(dollars in thousands)

 

Market Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

Lighting, Display & Power Electronics

 

$

47,705

 

31

%

$

146,450

 

63

%

$

(98,745

)

(67

)%

Advanced Packaging, MEMS & RF

 

40,308

 

26

%

27,005

 

12

%

13,303

 

49

%

Scientific & Industrial

 

34,737

 

23

%

31,595

 

14

%

3,142

 

10

%

Data Storage

 

30,609

 

20

%

24,701

 

11

%

5,908

 

24

%

Total Sales

 

$

153,359

 

100

%

$

229,751

 

100

%

$

(76,392

)

(33

)%

Regional Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

47,446

 

30

%

$

47,601

 

21

%

$

(155

)

(0

)%

China

 

33,383

 

22

%

110,718

 

48

%

(77,335

)

(70

)%

EMEA

 

42,296

 

28

%

30,314

 

13

%

11,982

 

40

%

Rest of World

 

30,234

 

20

%

41,118

 

18

%

(10,884

)

(26

)%

Total Sales

 

$

153,359

 

100

%

$

229,751

 

100

%

$

(76,392

)

(33

)%

 

The sales decline is primarily due to reduced sales into the Lighting, Display & Power Electronics market driven by an oversupply of LED units in the market. The decrease is partially offset by increased sales into our other markets, primarily in the Advanced Packaging, MEMS & RF and Data Storage. By geography, sales decreased in all regions, except EMEA.  The significant decline in China is principally due to the decline in sales into the Lighting, Display & Power Electronics market. We believe there will continue to be variations in our future sales distribution across markets and geographies.

 

25



Table of Contents

 

Bookings decreased to $129.3 million for the six months ended June 30, 2016 and were $225.6 million for the comparable prior year period. The uncertainty around the market demand and supply balance for LED units and the Chinese economy continue to negatively impact our orders within the Lighting, Display & Power Electronics market. While there may continue to be quarter-to-quarter variations, we also expect Data Storage demand to generally be weak as customers make limited technology purchases.

 

For the six months ended June 30, 2016, the book-to-bill ratio was slightly below 0.8. Our backlog decreased from $186.0 million at December 31, 2015 to $144.2 million at June 30, 2016, which includes a backlog adjustment of approximately $17 million relating to a partial cancellation of a prior period sales order.

 

Gross Profit

 

For the six months ended June 30, 2016, gross profit decreased compared to 2015 due to a sharp decline in sales volume, partially offset by improved gross margins. Gross margins increased despite the decline in overall sales volume principally due to a favorable mix of products sold in the period and from the benefits associated with ongoing cost reduction activities.

 

Selling, general, and administrative expenses

 

Selling, general, and administrative expenses decreased primarily due to reductions in incentive compensation and sales commissions as a result of the decline in our financial performance.

 

Research and development expenses

 

Research and development expenses increased due to the additional use of third party contractors to accelerate the development of products for the Lighting, Display & Power Electronics market, personnel-related expenses, and depreciation of research and development-related property, plant, and equipment, partially offset by decreased incentive compensation.

 

Amortization expense

 

The decrease in amortization expense is a result of certain intangible assets becoming fully amortized in the prior year, including the backlog and trademark/tradename assets associated with the December 2014 PSP acquisition.

 

Restructuring expense

 

For the six months ended June 30, 2016, we recorded restructuring expense as a result of our efforts to enhance efficiency and streamline operations. We eliminated approximately 40 positions, most of which were in the administrative and field service functions, and recorded personnel severance costs of $2.0 million.  We expect to incur additional restructuring costs over the next few quarters of $5 to $8 million related to these ongoing restructuring activities.  For the six months ended June 30, 2015, we recorded restructuring expenses associated with our plan to lower our spending on our ALD flexible OLED technology and to refocus research and development efforts on other opportunities as well as our closure of our Ft. Collins, Colorado; Camarillo, California; and Hyeongok-ri, South Korea facilities.

 

Asset Impairment expense

 

During the second quarter of 2016, we evaluated the market conditions for all of our assets held for sale and determined that the carrying value of the assets exceeded their fair market value, less cost to sell.  As a result, we recorded a non-cash impairment charge of approximately $7.5 million.  Additionally, we removed certain lab equipment that was no longer required and recorded a non-cash impairment charge of $6.1 million.

 

26



Table of Contents

 

Income tax expense

 

At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods.

 

Our tax expense for the six months ended June 30, 2016 was $1.5 million compared to a $7.9 million expense for the six months ended June 30, 2015. The 2016 tax expense included $0.9 million relating to our U.S. operations and $0.6 million relating to our non-U.S. operations, compared to 2015 when our expense included $5.3 million related to U.S. operations and $2.6 million related to non-U.S. operations.  The decrease in our expense in 2016 was primarily related to a significant reduction in our withholding taxes included in our U.S. tax expense as well as reduced pretax income from our non-U.S. operations resulting in a lower non-U.S. tax expense.

 

Liquidity and Capital Resources

 

We believe that our projected cash flow from operations, combined with our cash and short term investments, will be sufficient to meet our projected working capital, contractual obligations, and other cash flow needs for the next twelve months. Our cash and cash equivalents as well as short-term investments at June 30, 2016 and December 31, 2015 were:

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

257,641

 

$

269,232

 

Short-term investments

 

73,211

 

116,050

 

Total

 

$

330,852

 

$

385,282

 

 

At June 30, 2016 and December 31, 2015, cash and cash equivalents of $146.2 million and $135.3 million, respectively, were held outside the United States. It is our current intention to permanently reinvest the cash and cash equivalent balances held in Singapore, China, Taiwan, South Korea, and Malaysia, and our current forecasts do not require repatriation of the funds back to the United States. At June 30, 2016, we had $105.7 million in cash held outside the United States on which we may have to pay significant U.S. income taxes to repatriate. Additionally, local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances. We currently do not expect such regulations and restrictions to impact our ability to pay vendors, conduct operations throughout our global organization, or make acquisitions.

 

Cash Flows from Operating Activities

 

 

 

Six months ended June 30,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Net income (loss)

 

$

(47,615

)

$

(27,496

)

Non-cash items:

 

 

 

 

 

Depreciation and amortization

 

17,291

 

21,725

 

Deferred income taxes

 

1,821

 

879

 

Share-based compensation expense

 

8,390

 

8,919

 

Asset impairment

 

13,627

 

126

 

Other

 

160

 

(179

)

Changes in operating assets and liabilities

 

(24,805

)

7,987

 

Net cash provided by (used in) operating activities

 

$

(31,131

)

$

11,961

 

 

Cash used in operating activities for the six months ended June 30, 2016 reflects net income adjusted for the effect of non-cash charges and changes in working capital components. Non-cash charges included depreciation, amortization, share-based compensation expense, asset impairment, and deferred taxes. Cash from operating activities was negatively

 

27



Table of Contents

 

impacted by changes in inventory and deferred cost of sales, accounts payable and accrued expenses, and customer deposits and deferred revenue, partially offset by changes in accounts receivable and prepaid expenses and other current assets.

 

Cash Flows from Investing Activities

 

 

 

Six months ended June 30,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Capital expenditures

 

$

(9,179

)

$

(7,530

)

Changes in investments, net

 

42,612

 

38,149

 

Proceeds from sale of lab tools

 

 

1,533

 

Other

 

(213

)

(865

)

Net cash provided by investing activities

 

$

33,220

 

$

31,287

 

 

Cash provided by investing activities during the six months ended June 30, 2016 is primarily attributed to net liquidations of short-term investments, offset by capital expenditures. As part of our efforts to reduce costs, enhance efficiency and streamline operations, we are making certain investments in our facilities to support the consolidation activities and we expect to incur additional capital expenditures of $6 to $9 million over the next few quarters.

 

Cash Flows from Financing Activities

 

 

 

Six months ended June 30,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Settlement of equity awards, net of withholding taxes

 

$

(192

)

$

(23

)

Purchases of common stock

 

(13,349

)

 

Repayments of long-term debt

 

(166

)

(153

)

Net cash used in financing activities

 

$

(13,707

)

$

(176

)

 

Cash flows used in financing activities during the six months ended June 30, 2016 is primarily a result of our purchases of common shares as part of the share buyback program initiated during the fourth quarter of 2015.

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

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, results of operations, liquidity, capital expenditures or capital resources other than operating leases, bank guarantees, and purchase commitments disclosed in the preceding footnotes.

 

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.

 

28



Table of Contents

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rate Risk

 

Our exposure to interest rate changes primarily relates to our investment portfolio. We centrally manage our investment portfolio considering investment opportunities and risks, tax consequences, and overall financing strategies. Our short term investment portfolio includes fixed income securities with a fair value of $73.2 million at June 30, 2016. These securities are subject to interest rate risk; a 100 basis point increase in interest rates would result in a decrease in the fair value of the June 30, 2016 investment portfolio of $0.1 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we would not realize the losses in the Consolidated Statements of Operations unless the individual fixed income securities are sold prior to maturity or a loss position is determined to be other-than-temporary.

 

Currency Exchange Risk

 

We conduct business on a worldwide basis exposing a portion of our revenues, operating costs, and net investments in foreign affiliates 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.

 

We may manage our risks and exposures to currency exchange rates through the use of derivative financial instruments. We only use derivative financial instruments in the context of hedging and do not use them for speculative purposes. During the six months ended June 30, 2016 and 2015, we did not own any derivatives.

 

Our net sales to customers located outside of the United States represented approximately 73% and 70% of our total net sales for the three and six months ended June 30, 2016, respectively and 85% and 79% for the comparable 2015 periods. We expect that net sales to customers outside the United States will continue to represent a large percentage of our total sales. Our sales denominated in currencies other than the U.S. dollar represented 3% and 4% of total net sales in the three and six months ended June 30, 2016, respectively, and 2% and 3% for the comparable 2015 periods.

 

A 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of operations.

 

Item 4. Controls and Procedures

 

Management’s Report on Internal Control Over Financial Reporting

 

Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective at June 30, 2016. 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.

 

Changes in Internal Control Over Financial Reporting

 

During the three months ended June 30, 2016, there were no changes in internal control that have materially affected or are reasonably likely to materially affect internal control over financial reporting.

 

29



Table of Contents

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Information regarding legal proceedings appears in the Commitments and Contingencies Note to the Consolidated Financial Statements in this quarterly report on Form 10-Q and in Part I — Item 3 of our 2015 Form 10-K.

 

Item 1A. Risk Factors

 

Information regarding risk factors appears in the Safe Harbor Statement at the beginning of this quarterly report on Form 10-Q and in Part I — Item 1A of our 2015 Form 10-K. There have been no material changes from the risk factors previously disclosed in our 2015 Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On October 28, 2015, our Board of Directors authorized a program to repurchase up to $100 million of our common stock to be completed through October 28, 2017. At March 31, 2016, $22.3 million of the $100 million had been utilized. No repurchases occurred during the second quarter of 2016. Repurchases may 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.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

30



Table of Contents

 

Item 6. Exhibits

 

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

 

Number

 

Description

 

Incorporated by Reference to the
Following Document:

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.

 

*

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities 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.

 

*

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.

 

*

101.INS

 

XBRL Instance

 

**

101.SCH

 

XBRL Schema

 

**

101.PRE

 

XBRL Presentation

 

**

101.CAL

 

XBRL Calculation

 

**

101.DEF

 

XBRL Definition

 

**

101.LAB

 

XBRL Label

 

**

 


*                                         Filed herewith

**                                  Filed herewith electronically

 

31



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 1, 2016.

 

 

Veeco Instruments Inc.

 

 

 

 

By:

/S/ JOHN R. PEELER

 

 

John R. Peeler

 

 

Chairman and Chief Executive Officer

 

 

 

 

By:

/s/ SHUBHAM MAHESHWARI

 

 

Shubham Maheshwari

 

 

Executive Vice President and Chief Financial Officer

 

32