Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16244
VEECO INSTRUMENTS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
11-2989601
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
Terminal DrivePlainview, New York
11803
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code:
(516) 677-0200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
VECO
The NASDAQ Global Select Market
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 ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 23, 2019, there were 48,903,027 shares of the registrant’s common stock outstanding.
INDEX
Safe Harbor Statement
1
PART I—FINANCIAL INFORMATION
4
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3. Quantitative and Qualitative Disclosures about Market Risk
32
Item 4. Controls and Procedures
33
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
35
SIGNATURES
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 three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, those set forth under the heading “Risk Factors” Part 1, Item 1A in our 2018 Form 10-K and Part 2, Item 1A in our quarterly report on Form 10-Q for the quarter ending June 30, 2019, and the following:
2
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.
3
Veeco Instruments Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
September 30,
December 31,
2019
2018
(unaudited)
Assets
Current assets:
Cash and cash equivalents
$
135,259
212,273
Restricted cash
687
809
Short-term investments
95,672
48,189
Accounts receivable, net
72,731
66,808
Contract assets
20,782
10,397
Inventories
135,190
156,311
Deferred cost of sales
2,198
3,072
Prepaid expenses and other current assets
23,762
22,221
Total current assets
486,281
520,080
Property, plant, and equipment, net
77,801
80,284
Operating lease right-of-use assets
10,472
—
Intangible assets, net
72,376
85,149
Goodwill
184,302
Deferred income taxes
1,872
1,869
Other assets
29,172
29,132
Total assets
862,276
900,816
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
34,702
39,611
Accrued expenses and other current liabilities
40,641
46,450
Customer deposits and deferred revenue
66,031
72,736
Income taxes payable
663
1,256
Total current liabilities
142,037
160,053
5,713
5,690
Long-term debt
296,810
287,392
Operating lease long-term liabilities
6,066
Other liabilities
9,180
9,906
Total liabilities
459,806
463,041
Stockholders' equity:
Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding.
Common stock, $0.01 par value; 120,000,000 shares authorized; 48,903,027 and 48,547,417 shares issued at September 30, 2019 and December 31, 2018, respectively; 48,903,027 and 48,024,685 shares outstanding at September 30, 2019 and December 31, 2018, respectively.
489
485
Additional paid-in capital
1,066,203
1,061,325
Accumulated deficit
(666,058)
(619,983)
Accumulated other comprehensive income
1,836
1,820
Treasury stock, at cost, 522,732 shares at December 31, 2018.
(5,872)
Total stockholders' equity
402,470
437,775
Total liabilities and stockholders' equity
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Three months ended September 30,
Nine months ended September 30,
Net sales
108,954
126,757
306,147
443,110
Cost of sales
66,731
80,372
192,924
284,651
Gross profit
42,223
46,385
113,223
158,459
Operating expenses, net:
Research and development
22,639
23,544
68,901
72,793
Selling, general, and administrative
20,962
20,186
60,620
70,842
Amortization of intangible assets
4,312
4,183
12,773
28,102
Restructuring
1,828
2,057
3,874
7,669
Acquisition costs
249
2,906
Asset impairment
252,343
Other, net
(153)
39
(232)
325
Total operating expenses, net
49,588
50,258
145,936
434,980
Operating income (loss)
(7,365)
(3,873)
(32,713)
(276,521)
Interest income
1,219
823
3,749
2,266
Interest expense
(5,549)
(5,602)
(16,491)
(16,113)
Income (loss) before income taxes
(11,695)
(8,652)
(45,455)
(290,368)
Income tax expense (benefit)
72
301
407
(27,954)
Net income (loss)
(11,767)
(8,953)
(45,862)
(262,414)
Income (loss) per common share:
Basic
(0.25)
(0.19)
(0.97)
(5.55)
Diluted
Weighted average number of shares:
47,489
46,982
47,361
47,283
5
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities
(38)
8
Foreign currency translation
(4)
Total other comprehensive income (loss), net of tax
(42)
16
Total comprehensive income (loss)
(11,809)
(45,846)
6
Consolidated Statements of Cash Flows
Cash Flows from Operating Activities
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
25,838
41,110
Non-cash interest expense
9,418
8,739
20
(28,872)
Share-based compensation expense
11,528
12,720
Changes in operating assets and liabilities:
Accounts receivable and contract assets
(16,308)
769
Inventories and deferred cost of sales
17,921
(17,748)
(1,276)
10,037
Accounts payable and accrued expenses
(16,000)
(4,006)
(6,705)
(47,589)
Income taxes receivable and payable, net
(593)
(3,552)
(986)
(915)
Net cash provided by (used in) operating activities
(23,005)
(39,378)
Cash Flows from Investing Activities
Acquisitions of businesses, net of cash acquired
(2,662)
Capital expenditures
(8,189)
(5,788)
Proceeds from the sale of investments
102,230
65,365
Payments for purchases of investments
(148,664)
(72,303)
Proceeds from held for sale assets
645
Net cash provided by (used in) investing activities
(53,978)
(15,388)
Cash Flows from Financing Activities
Cash withholdings for employee stock purchase plan
2,609
3,007
Taxes paid for restricted stock vestings
(2,771)
(3,029)
Purchases of common stock
(11,457)
Net cash provided by (used in) financing activities
(162)
(11,479)
Effect of exchange rate changes on cash and cash equivalents
9
Net increase (decrease) in cash, cash equivalents, and restricted cash
(77,136)
(66,249)
Cash, cash equivalents, and restricted cash - beginning of period
213,082
280,583
Cash, cash equivalents, and restricted cash - end of period
135,946
214,334
Supplemental Disclosure of Cash Flow Information
Interest paid
9,401
9,655
Income taxes paid
2,835
4,269
Non-cash operating and financing activities
Net transfer of inventory to property, plant and equipment
4,074
1,170
Right-of-use assets obtained in exchange for lease obligations
516
7
Notes to the Consolidated Financial Statements
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, 2018 (“2018 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.
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 2019 interim quarters end on March 31, June 30, and September 29, and the 2018 interim quarters ended on April 1, July 1, and September 30. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.
Revenue Recognition
Revenue is recognized upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration the Company expects to receive in exchange for such product or service. The Company’s contracts with customers generally do not contain variable consideration. In the rare instances where variable consideration is included, the Company estimates the amount of variable consideration and determines what portion of that, if any, has a high probability of significant subsequent revenue reversal, and if so, that amount is excluded from the transaction price. The Company’s contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, installation, maintenance, and service plans. Judgment is required to properly identify the performance obligations within a contract and to determine how the revenue should be allocated among the performance obligations. The Company also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single contract based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another.
When there are separate units of accounting, the Company allocates revenue to each performance obligation on a relative stand-alone selling price basis. The stand-alone selling prices are determined based on the prices at which the Company separately sells the systems, upgrades, components, spare parts, installation, maintenance, and service plans. For items that are not sold separately, the Company estimates stand-alone selling prices generally using an expected cost plus margin approach.
Most of the Company’s revenue is recognized at a point in time when the performance obligation is satisfied. The Company considers many facts when evaluating each of its sales arrangements to determine the timing of revenue recognition, including its contractual obligations and the nature of the customer’s post-delivery acceptance provisions. The Company’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For many of these arrangements, a customer source inspection of the system is performed in the Company’s facility, test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery, or other quality assurance testing is performed internally to ensure system functionality prior to shipment. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When the Company objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery either through customer testing or the Company’s historical experience of its tools meeting specifications, transfer of control of the product to the customer is considered to have occurred and revenue is recognized upon system
Notes to the Consolidated Financial Statements - continued
delivery since there is no substantive contingency remaining related to the acceptance provisions at that date. For new products, new applications of existing products, or for products with substantive customer acceptance provisions where the Company cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue and the associated costs are deferred. The Company recognizes such revenue and costs upon obtaining objective evidence that the acceptance provisions can be achieved, assuming all other revenue recognition criteria have been met.
In certain cases the Company’s contracts with customers contain a billing retention, typically 10% of the sales price, which is billed by the Company and payable by the customer when field acceptance provisions are completed. Revenue recognized in advance of the amount that has been billed is recorded as a contract asset on the Consolidated Balance Sheets.
The Company recognizes revenue related to maintenance and service contracts over time based upon the respective contract term. Installation revenue is recognized over time as the installation services are performed. The Company recognizes revenue from the sales of components, spare parts, and specified service engagements at a point in time, which is typically consistent with the time of delivery in accordance with the terms of the applicable sales arrangement.
The Company may receive customer deposits on system transactions. The timing of the transfer of goods or services related to the deposits is either at the discretion of the customer or expected to be within one year from the deposit receipt. As such, the Company does not adjust transaction prices for the time value of money. Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred since the expected amortization period is one year or less.
The Company has elected to treat shipping and handling costs as a fulfillment activity, and the Company includes such costs in cost of services when the Company recognizes revenue for the related goods. Taxes assessed by governmental authorities that are collected by the Company from a customer are excluded from revenue.
Leases
At contract inception, the Company determines if an arrangement is a lease, or contains a lease, of an identified asset for which the Company has the right to obtain substantially all of the economic benefits from its use and the right to direct its use. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, while lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. The implicit discount rate in the Company’s leases generally cannot readily be determined, and therefore the Company uses its incremental borrowing rate based on information available at lease commencement date in determining the present value of future payments. The Company has options to renew or terminate certain leases. These options are included in the determination of lease term when it is reasonably certain that the Company will exercise such options. The Company does not separate lease and non-lease components in determining ROU assets or lease liabilities for real estate leases. Additionally, the Company does not recognize ROU assets or lease liabilities for leases with original terms or renewals of one year or less.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02: Leases, which, along with subsequent ASUs related to this topic, has been codified as Accounting Standards Codification 842 (“ASC 842”). ASC 842 generally requires operating lessee rights and obligations to be recognized as assets and liabilities on the balance sheet. The new standard, which the Company adopted effective January 1, 2019, offers a transition option whereby companies can recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The Company has adopted using this transition method, and therefore prior period balances have not been
adjusted. In addition, ASC 842 provides for a number of optional exemptions in transition. The Company has elected certain exemptions whereby prior conclusions regarding lease identification, lease classification, and initial direct costs were not reassessed under the new standard. The adoption of the standard impacted the Company’s Consolidated Balance Sheets through the recognition of ROU assets and lease liabilities of approximately $14.2 million each as of January 1, 2019, but did not have an impact on the Consolidated Statements of Operations, Statements of Comprehensive Income, or Statements of Cash Flows.
Note 2 — Income (Loss) Per Common Share
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted income per share is calculated by dividing net income by the weighted average number of shares used to calculate basic income (loss) per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share in the periods the performance targets have been achieved. The computations of basic and diluted income (loss) per share for the three and nine months ended September 30, 2019 and 2018 are as follows:
Net income (loss) per common share:
Basic weighted average shares outstanding
Effect of potentially dilutive share-based awards
Diluted weighted average shares outstanding
Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive
403
302
17
Potentially dilutive shares excluded from the diluted calculation as their effect would be antidilutive
1,874
2,617
1,893
2,469
Maximum potential shares to be issued for settlement of the Convertible Senior Notes excluded from the diluted calculation as their effect would be antidilutive
8,618
Note 3 — Assets
Investments
Short-term investments 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.
10
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;
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 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 September 30, 2019 and December 31, 2018:
Level 1
Level 2
Level 3
Total
September 30, 2019
Cash equivalents
Certificate of deposits and time deposits
59,227
U.S. treasuries
24,958
Commercial paper
10,675
Corporate debt
3,001
84,185
13,676
97,861
81,727
5,006
8,939
13,945
December 31, 2018
65,571
3,990
69,561
37,184
8,516
2,489
11,005
There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2019.
11
At September 30, 2019 and December 31, 2018, the amortized cost and fair value of available-for-sale securities consist of:
Gross
Amortized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
81,733
(16)
5,007
(1)
8,940
95,680
(18)
37,191
(7)
8,525
(9)
48,205
Available-for-sale securities in a loss position at September 30, 2019 and December 31, 2018 consist of:
Commercial Paper
45,700
At September 30, 2019 and December 31, 2018, there were no short-term investments that had been in a continuous loss position for more than 12 months.
The maturities of securities classified as available-for-sale at September 30, 2019 were all due in one year or less. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were no realized gains or losses for the three and nine months ended September 30, 2019 and 2018.
Accounts Receivable
Accounts receivable is presented net of an allowance for doubtful accounts of $0.2 million and $0.3 million at September 30, 2019 and December 31, 2018, respectively.
12
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventories at September 30, 2019 and December 31, 2018 consist of the following:
Materials
78,430
90,816
Work-in-process
40,873
42,354
Finished goods
15,887
23,141
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 $13.0 million and $12.8 million at September 30, 2019 and December 31, 2018, respectively.
Property, Plant, and Equipment
Property, plant, and equipment at September 30, 2019 and December 31, 2018 consist of the following:
Land
5,061
5,669
Building and improvements
61,633
61,124
Machinery and equipment (1)
138,169
128,385
Leasehold improvements
6,755
9,033
Gross property, plant, and equipment
211,618
204,211
Less: accumulated depreciation and amortization
133,817
123,927
Net property, plant, and equipment
For the three and nine months ended September 30, 2019, depreciation expense was $4.2 million and $13.1 million, respectively, and $4.6 million and $13.0 million for the comparable 2018 periods.
Goodwill represents 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 nine months ended September 30, 2019.
Intangible Assets
Intangible assets consist of purchased technology, customer relationships, patents, trademarks and tradenames, and backlog, and are initially recorded at fair value. Long-lived intangible assets 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.
13
The components of purchased intangible assets were as follows:
Accumulated
Amortization
Carrying
and
Net
Amount
Impairment
Technology
350,928
309,651
41,277
337,218
290,808
46,410
Customer relationships
164,595
139,518
25,077
136,126
28,469
In-process R&D
13,710
10,530
3,180
Trademarks and tradenames
30,910
24,917
5,993
23,899
7,011
Other
3,686
3,657
29
3,607
79
550,119
477,743
464,970
Other intangible assets primarily consist of patents, licenses, and backlog.
Other Assets
The Company has a non-marketable investment in Kateeva, Inc. (“Kateeva”), with a carrying value of $21.0 million at September 30, 2019 and December 31, 2018. Additionally, the Company has a non-marketable investment in a separate entity, with a carrying value of $3.5 million at September 30, 2019 and December 31, 2018. The Company does not exert significant influence over these investments, and its ownership interest is less than 20%. Neither equity investment has a readily observable market price, and therefore the Company has elected to measure these investments at cost, adjusted for changes in observable market prices minus impairment. The investments are included in “Other assets” on the Consolidated Balance Sheets. There were no changes in observable market prices for either investment for the nine months ended September 30, 2019. These investments are subject to periodic impairment reviews; as there are no open-market valuations, the impairment analyses require judgment. The analyses include assessments of the companies’ financial condition, the business outlooks for their products and technologies, their projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by Veeco relative to other investors.
14
Note 4 — Liabilities
Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities at September 30, 2019 and December 31, 2018 consist of:
Payroll and related benefits
14,471
20,486
Warranty
7,552
7,852
Operating lease liabilities
4,730
Interest
1,992
4,321
Professional fees
2,794
2,897
Sales, use, and other taxes
1,497
2,670
Restructuring liability
1,617
2,213
5,988
6,011
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 nine months ended September 30, 2019 include:
Balance - December 31, 2018
Warranties issued
4,551
Consumption of reserves
(4,517)
Changes in estimate
(334)
Balance - September 30, 2019
Restructuring Accruals
During the second quarter of 2018, the Company initiated plans to further reduce excess capacity associated with the manufacture and support of the Company's advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into its San Jose, California facility. As a result of this and other cost saving initiatives, the Company announced headcount reductions of approximately 40 employees. During the nine months ended September 30, 2019, additional accruals were recognized and payments were made related to these restructuring initiatives.
15
The Company continued to record restructuring charges during the three and nine months ended September 30, 2019 as a result of the Company’s efforts to streamline operations, enhance efficiencies, and reduce costs. Changes in the restructuring accrual were as follows:
Personnel
Facility
Severance and
Related Costs
and Other
2,143
70
Provision
3,681
193
Payments
(4,207)
(263)
(4,470)
Customer Deposits and Deferred Revenue
Customer deposits totaled $31.6 million and $28.3 million at September 30, 2019 and December 31, 2018, respectively. Deferred revenue represents amounts billed, other than deposits, in excess of the revenue that can be recognized on a particular contract at the balance sheet date. Changes in deferred revenue were as follows:
44,415
Deferral of revenue
4,717
Recognition of previously deferred revenue
(14,744)
34,388
As of September 30, 2019, the Company has approximately $49.5 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 86% is expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.
Convertible Senior Notes
On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes (the “Convertible Senior Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The Convertible Senior Notes mature on January 15, 2023 (the “Maturity Date”), unless earlier purchased by the Company, redeemed, or converted.
The carrying value of the Convertible Senior Notes is as follows:
Principal amount
345,000
Unamortized debt discount
(43,780)
(52,336)
Unamortized transaction costs
(4,410)
(5,272)
Net carrying value
Total interest expense related to the Convertible Senior Notes is as follows:
Cash Interest Expense
Coupon interest expense
2,329
6,986
Non-Cash Interest Expense
Amortization of debt discount
2,697
8,556
7,940
Amortization of transaction costs
293
271
862
799
Total Interest Expense
5,528
5,297
16,404
15,725
The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $309.2 million at September 30, 2019.
Other Liabilities
As part of the acquisition of Ultratech, the Company assumed an executive non-qualified deferred compensation plan that allowed qualifying executives to defer cash compensation. The plan was frozen at the time of acquisition and no further contributions have been made. At September 30, 2019 and December 31, 2018, plan assets approximated $3.5 million and $3.2 million, respectively, representing the cash surrender value of life insurance policies and is included within “Other assets” in the Consolidated Balance Sheets, while plan liabilities approximated $3.0 million and $3.5 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities also included medical and dental benefits of $2.0 million and $2.2 million at September 30, 2019 and December 31, 2018, respectively, and asset retirement obligations of $3.2 million and income tax payables of $1.0 million at both September 30, 2019 and December 31, 2018.
Note 5 — Commitments and Contingencies
The Company’s operating leases primarily include real estate leases for properties used for manufacturing, R&D activities, sales and service, and administration, as well as certain equipment leases. Some leases may include options to renew for a period of up to 5 years, while others may include options to terminate the lease. The weighted average remaining lease term of the Company’s operating leases as of September 30, 2019 was 3 years, and the weighted average discount rate used in determining the present value of future lease payments was 6.0%.
Minimum lease commitments at September 30, 2019 for property and equipment under operating lease agreements are payable as follows:
Operating
Payments due by period:
1,302
2020
5,222
2021
2,548
2022
1,379
2023
865
Thereafter
551
Total future minimum lease payments
11,867
Less: Imputed interest
(1,071)
10,796
Reported as of September 30, 2019
Other current liabilities
Minimum lease commitments at December 31, 2018 for property and equipment under operating lease agreements were payable as follows:
5,143
5,056
2,432
1,812
1,066
548
16,057
Operating lease cost for the three and nine months ended September 30, 2019 were $1.3 million and $4.1 million, respectively. Variable lease cost for the three and nine months ended September 30, 2019 were $0.4 million and $1.4 million, respectively. Additionally, the Company has an immaterial amount of short term leases. Lease expense for the three and nine months ended September 30, 2018 was $1.7 million and $5.5 million, respectively. Operating cash outflows from operating leases for the nine months ended September 30, 2019 was $5.0 million.
Purchase Commitments
Veeco has purchase commitments of $76.3 million at September 30, 2019, substantially all of which become due within one year.
18
Bank Guarantees
Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At September 30, 2019, outstanding bank guarantees and letters of credit totaled $7.8 million, and unused bank guarantees and letters of credit of $66.4 million were available to be drawn upon.
Legal Proceedings
On June 8, 2018, an Ultratech shareholder who received Veeco stock as part of the consideration for the Ultratech acquisition filed a purported class action complaint in the Superior Court of the State of California, County of Santa Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the Securities Act of 1933 for, among other things, alleged false/misleading statements in the registration statement and prospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. Veeco is defending this matter vigorously.
On December 21, 2018, a purported Veeco stockholder filed a derivative action in the Superior Court of the State of California, County of Santa Clara, captioned Vladimir Gusinsky Revocable Trust v. Peeler, et al., Case No. 18CV339925, on behalf of nominal defendant Veeco. The complaint seeks to assert claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against current and former Veeco directors premised on purported misstatements and omissions in the registration statement relating to the Ultratech acquisition. Veeco is defending this matter vigorously.
The Company is involved in various other legal proceedings arising in the normal course of business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
Note 6 — Derivative Financial Instruments
The Company is exposed to financial market risks arising from changes in currency exchange rates. Changes in currency exchange rates could affect the Company’s foreign currency denominated monetary assets and liabilities and forecasted cash flows. The Company enters into monthly forward derivative contracts with the intent of mitigating a portion of this risk. The Company only uses derivative financial instruments in the context of hedging and not for speculative purposes and had not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other, net” in the Company’s Consolidated Statements of Operations. The Company executes derivative transactions with highly rated financial institutions to mitigate counterparty risk.
19
The Company did not have any outstanding derivative contracts at September 30, 2019 or December 31, 2018. Additionally, the Company did not have any gains or losses from currency exchange derivatives during the nine months ended September 30, 2019. The following table shows the gains and (losses) from currency exchange derivatives during the three and nine months ended September 30, 2018, which are included in “Other, net” in the Consolidated Statements of Operations, as well as the weighted average notional amount of derivatives outstanding for the period:
Three months ended September 30, 2018
Nine months ended September 30, 2018
Gains(Losses)
Weighted averagenotional amount
Foreign currency exchange forwards
132
4,448
348
2,869
Note 7 — Equity
Statement of Stockholders’ Equity
The following tables present the changes in Stockholders’ Equity:
Additional
Common Stock
Treasury Stock
Paid-in
Comprehensive
Shares
Capital
Deficit
Income
Balance at December 31, 2018
48,547
523
Net loss
(18,530)
Other comprehensive income, net of tax
38
3,157
Net issuance under employee stock plans
128
(523)
5,872
(6,303)
(213)
(642)
Balance at March 31, 2019
48,675
487
1,058,179
(638,726)
1,858
421,798
(15,565)
4,588
296
182
185
Balance at June 30, 2019
48,971
490
1,062,949
(654,291)
1,878
411,026
3,783
(68)
(529)
(530)
Balance at September 30, 2019
48,903
Balance at December 31, 2017
48,229
482
85
(1,284)
1,051,953
(212,870)
840,093
(15,827)
24
4,537
462
(115)
1,728
(2,159)
(426)
30
(444)
Balance at March 31, 2018
48,691
1,054,331
(228,697)
827,957
(237,634)
(24)
4,904
43
(57)
(1,273)
(408)
57
(865)
Balance at June 30, 2018
48,734
1,057,962
(466,331)
593,930
3,279
(101)
(23)
340
(508)
(169)
863
(10,000)
Balance at September 30, 2018
48,633
486
840
(9,660)
1,060,733
(475,284)
578,087
Accumulated Other Comprehensive Income (“AOCI”)
The following table presents the changes in the balances of each component of AOCI, net of tax:
Gains (Losses)
Foreign
on Available
Currency
for Sale
Translation
Securities
Other comprehensive income (loss)
1,844
(8)
There were minimal reclassifications from AOCI into net income for the three and nine months ended September 30, 2019 and 2018.
Note 8 — 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.
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Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018:
383
513
1,448
1,603
756
709
2,531
2,728
2,644
1,890
7,549
7,393
167
996
For the nine months ended September 30, 2019, equity activity related to stock options was as follows:
Weighted
Number of
Average
Exercise Price
1,222
34.80
Expired or forfeited
(69)
33.62
1,153
34.87
For the nine months ended September 30, 2019, equity activity related to non-vested restricted shares and performance shares was as follows:
Grant Date
2,218
20.74
Granted
1,048
11.41
Performance award adjustments
(25)
28.91
Vested
(721)
22.29
Forfeited
(176)
19.41
2,344
16.02
Note 9 — 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 carryforwards. Realization of net deferred tax assets is dependent on future taxable income. At September 30, 2019, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized.
At the end of each interim reporting period, the effective tax rate is aligned with 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. If necessary, the year-to-date tax benefit for interim period losses is limited to the amount that could be recognizable at the end of the fiscal year.
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Loss before income taxes and income tax expense (benefit) for the three and nine months ended September 30, 2019 and 2018 were as follows:
Loss before income taxes
The Company’s tax expense for the three months ended September 30, 2019 was $0.1 million, compared to $0.3 million for the comparable prior period. The 2019 tax expense included a $0.1 million expense related to the Company’s domestic operations and minimal expense related to the Company’s non-U.S. operations, compared to 2018 when the expense was mainly related to the Company’s non-U.S. operations. Although there was a domestic pre-tax loss for the three months ended September 30, 2019 and 2018, the Company did not provide a current tax benefit on domestic pre-tax losses, as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for the current period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.
The Company’s tax expense for the nine months ended September 30, 2019 was $0.4 million, compared to a tax benefit of $28.0 million for the comparable prior period. The 2019 tax expense included a $0.2 million expense related to the Company’s domestic operations, and $0.2 million expense related to the Company’s non-U.S. operations, compared to 2018 when the benefit included a $1.1 million benefit related to the Company’s domestic operations, and a $26.9 million benefit related to the Company’s non-U.S. operations. Although there was a domestic pre-tax loss for the nine months ended September 30, 2019 and 2018, the Company did not provide a current tax benefit on domestic pre-tax losses, as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for the current period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The non-U.S. tax expense for the nine months ended September 30, 2019 is primarily attributable to tax expense on non-U.S operation profits and foreign withholding taxes on unremitted earnings as of September 30, 2019, offset by a tax benefit related to the amortization of intangible assets.
The domestic tax benefit for the nine months ended September 30, 2018 is primarily attributable to refundable alternative minimum tax credits in accordance with the 2017 Tax Act, offset by the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The non-U.S. tax benefit for the nine months ended September 30, 2018 is primarily attributable to the deferred tax benefit recognized on the intangible asset impairment charge incurred during the period.
Note 10 — 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:
Advanced Packaging, MEMS & RF Filters
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. RF Filters refers to RF filters used in smartphones, tablets, and mobile devices.
23
LED Lighting, Display & Compound Semiconductor
LED Lighting refers to Light Emitting Diode (“LED”) and semiconductor illumination sources used in various applications including, but not limited to, displays such as backlights, general lighting, automotive running lights, and headlamps. Display refers to LEDs used for displays and Organic Light Emitting Diode (“OLED”) displays found in outdoor display/signage applications, TVs, smartphones, wearable devices, and tablets. Compound Semiconductor includes Photonics, Power Electronics, and Radio Frequency (“RF”) Devices. Photonics refers to laser diodes, Vertical Cavity Surface Emitting Lasers (“VCSEL”) in 3D sensing and communications, and various other optical devices. Power Electronics refers to semiconductor devices such as rectifiers, inverters, and converters for the control and conversion of electric power. RF devices refers to radio frequency emitting and receiving devices that enable wireless communications. Such devices include power amplifiers, switches, and transceivers for applications such as mobile (including handsets and base stations), defense, automobile, and the Internet of Things.
Front-End Semiconductor
Front-End Semiconductor refers to the early steps in the process of integrated circuit fabrication where the microchips are created but still remain on the silicon wafer. This category includes Laser Spike Anneal, Ion Beam etch for front-end semiconductor applications, and Ion Beam deposition for EUV mask blanks.
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 data storage and optical coatings: thin layers of material deposited on a lens or mirror that alters how light reflects and transmits.
Sales by end-market and geographic region for the three and nine months ended September 30, 2019 and 2018 were as follows:
Sales by end-market
11,381
24,562
50,951
76,473
24,020
58,864
47,263
236,597
33,578
13,476
80,703
41,085
39,975
29,855
127,230
88,955
Sales by geographic region
United States
27,915
28,861
100,014
85,555
China
17,034
39,200
46,846
185,050
EMEA(1)
19,128
30,685
49,280
71,836
Rest of World
44,877
28,011
110,007
100,669
For geographic reporting, sales are attributed to the location in which the customer facility is located.
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 are an innovative manufacturer of semiconductor process equipment. Our proven ion beam, laser annealing, lithography, MOCVD and single wafer etch & clean technologies play an integral role in the fabrication and packaging of advanced semiconductor devices. With equipment designed to optimize performance, yield and cost of ownership, Veeco holds leading technology positions in the markets we serve. To learn more about Veeco’s systems and service offerings, visit www.veeco.com.
We categorize our revenue by the key market segments into which we sell. Our four key markets are: Advanced Packaging, MEMS & RF Filters; LED Lighting, Display & Compound Semiconductor; Front-End Semiconductor; and Scientific & Industrial.
Sales of Lithography and PSP systems to Integrated Device Manufacturer (“IDM”) and Outsourced Semiconductor and Test (“OSAT”) customers in the Advanced Packaging, MEMS & RF Filter market remained soft in the third quarter. However, we remain well positioned for future growth in the advanced packaging market, supported by technology mega-trends such as mobile connectivity and 5G infrastructure, automotive electronics, and big data processing, as well as other Advanced Packaging applications. We are in the advanced stages of a product development initiative which improves the performance of our lithography systems to meet our customers’ next-generation requirements.
Sales in the LED Lighting, Display & Compound Semiconductor market also remained soft in the third quarter. We continue to work with our beta customer who recently received our advanced MOCVD system for ROY LEDs and other Photonics applications including VCSELs. We expect future business in this market to come from more applications in VCSELs, 3D sensors, laser diodes, and RF devices. Our broad portfolio of MOCVD and PSP technologies have been developed to support these emerging applications.
Sales in the Front-End Semiconductor market were driven by shipments of our laser annealing systems, as well as our Low-Defect-Density Ion Beam Deposition (“LDD-IBD”) system for Extreme Ultraviolet (“EUV”) Mask Blank production. We believe demand for these two product lines, driven by the development and release of advanced node semiconductors, will continue to provide future growth opportunities for us.
Sales in the Scientific & Industrial market were supported by shipments of Ion Beam systems for data storage applications as well as a variety of high-end optical coating applications. Demand for our Ion Beam products for Data Storage is being driven by the requirements to improve areal density of magnetic heads for hard disk drive manufacturers as well as an overall projected volume increase of thin film magnetic heads. These two factors taken together are driving additional capacity and equipment upgrades. The Scientific & Industrial market has historically provided a relatively stable revenue stream for the Company, however, in 2019 we have experienced growth in the Data Storage market.
Finally, we have been taking steps to reduce spending, focus our R&D investments to improve our ability to serve our customers, and rationalize investments in certain product lines. At the same time, we have been preparing for growth by investing in product lines that serve our existing markets, such as Laser Annealing, Advanced Packaging Lithography, and Ion Beam, while also investing in products to penetrate new markets, such as LDD-IBD for EUV mask blanks and MOCVD for the Photonics market including VCSELs.
Results of Operations
For the three months ended September 30, 2019 and 2018
The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2019 and 2018 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.
Three Months Ended September 30,
Change
Period to Period
(dollars in thousands)
100%
(17,803)
(14)%
61%
63%
(13,641)
(17)%
39%
37%
(4,162)
(9)%
21%
19%
(905)
(4)%
16%
776
4%
3%
129
2%
(229)
(11)%
-
(249)
*
(192)
46%
40%
(670)
(1)%
(7)%
(3)%
(3,492)
90%
Interest income (expense), net
(4,330)
(4,779)
449
(3,043)
35%
(2,814)
31%
Not meaningful
Net Sales
The following is an analysis of sales by market and by region:
Sales by market
10%
(13,181)
(54)%
22%
(34,844)
(59)%
11%
20,102
149%
24%
10,120
34%
25%
23%
(946)
(22,166)
(57)%
EMEA
18%
(11,557)
(38)%
41%
16,866
60%
Sales decreased for the three months ended September 30, 2019 against the comparable prior year period principally in the LED Lighting, Display & Compound Semiconductor and Advanced Packaging, MEMS & RF Filters markets, partially offset by increases in the Front-End Semiconductor and Scientific & Industrial markets. Pricing was not a
26
significant driver of the change in total sales. By geography, sales decreased in the China, EMEA, and United States regions, partially offset by an increase in the Rest of World region. The most significant decrease occurred in the China region, which was largely attributable to the decreased sales in the LED Lighting, Display & Compound Semiconductor market. We do not expect significant new orders for this market in this region in the near future. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies.
Gross Profit
In the third quarter of 2019, gross profit decreased compared to the third quarter of 2018 due to a decrease in sales volume, partially offset by increased gross margins. Gross margins increased principally due to product and region mix of sales in the periods.
Research and Development
The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses decreased slightly for the three months ended September 30, 2019 against the comparable prior period primarily related to personnel-related expenses and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs.
Selling, General, and Administrative
Selling, general, and administrative expenses increased slightly primarily related to personnel-related expenses.
Amortization Expense
Amortization expense remained consistent with the comparable prior year period.
Restructuring Expense
During the second quarter of 2018, we initiated plans to further reduce excess capacity associated with the manufacture and support of our advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into our San Jose, California facility. As a result of this and other cost saving initiatives, we announced headcount reductions of approximately 40 employees. During the three months ended September 30, 2019, additional accruals were recognized and payments were made related to these restructuring activities.
We continued to record restructuring charges in the third quarter of 2019 as a result of our efforts to streamline operations, enhance efficiencies, and reduce costs.
Acquisition Costs
Acquisition costs incurred during 2018 were non-recurring charges incurred in connection with the acquisition of the Ultratech business, as well as legal and professional fees incurred in connection with certain integration activities.
Interest Income (Expense)
We recorded net interest expense of $4.3 million for the three months ended September 30, 2019, compared to $4.8 million for the comparable prior year period. Included in interest expense for the three months ended September 30, 2019 and 2018 were non-cash charges of $3.2 million and $3.0 million, respectively, related to the amortization of debt discount and transaction costs of the Convertible Senior Notes.
27
Income Taxes
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 September 30, 2019 was $0.1 million compared to $0.3 million for the comparable prior period. The 2019 tax expense included an expense of $0.1 million related to our domestic operations and minimal expense related to our non-U.S. operations, compared to 2018 when the expense mainly related to our non-U.S. operations. Although there was a domestic pre-tax loss for the three months ended September 30, 2019 and 2018, we did not provide a current tax benefit on domestic pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for the current period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.
For the nine months ended September 30, 2019 and 2018
The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2019 and 2018 and the period-over-period dollar and percentage changes for those line items.
Nine Months Ended September 30,
(136,963)
(31)%
64%
(91,727)
(32)%
36%
(45,236)
(29)%
(3,892)
(5)%
20%
(10,222)
6%
(15,329)
(55)%
1%
(3,795)
(49)%
(2,906)
57%
(252,343)
(557)
48%
98%
(289,044)
(66)%
(62)%
243,808
(88)%
(12,742)
(13,847)
1,105
(8)%
(15)%
244,913
(84)%
(6)%
28,361
216,552
(83)%
28
17%
(25,522)
(33)%
15%
54%
(189,334)
(80)%
26%
9%
39,618
96%
42%
38,275
43%
33%
14,459
(138,204)
(75)%
(22,556)
9,338
Sales decreased for the nine months ended September 30, 2019 against the comparable prior year period principally in the LED Lighting, Display & Compound Semiconductor and Advanced Packaging, MEMS & RF Filters markets, partially offset by increases in the Front-End Semiconductor and Scientific & Industrial markets. Pricing was not a significant driver of the change in total sales. By geography, sales decreased in the China and EMEA regions, partially offset by increases in the United States and Rest of World regions. The most significant decrease occurred in the China region, which was largely attributable to the decreased sales in the LED Lighting, Display & Compound Semiconductor market. We do not expect significant new orders for this market in this region in the near future. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies.
In the nine months ended September 30, 2019, gross profit decreased compared to 2018 due to a decrease in sales volume, partially offset by increased gross margins. Gross margins increased principally due to product and region mix of sales in the periods.
The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses decreased for the nine months ended September 30, 2019 against the comparable prior period primarily related to personnel-related expenses and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs.
Selling, general, and administrative expenses decreased primarily related to personnel-related expenses and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs.
The decrease in amortization expense is a result of the impairment of intangible assets during the second quarter of 2018.
During the second quarter of 2018, we initiated plans to further reduce excess capacity associated with the manufacture and support of our advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into our San Jose, California facility. As a result of this and other cost saving initiatives, we announced headcount reductions of approximately 40 employees. During the nine months ended September 30, 2019, additional accruals were recognized and payments were made related to these restructuring activities.
We continued to record restructuring charges in 2019 as a result of our efforts to streamline operations, enhance efficiencies, and reduce costs.
During the second quarter of 2018, we lowered our projected results for the Ultratech asset group, which were significantly below the projected results at the time of the acquisition. The reduced projections were based on lower than expected unit volume of certain smartphones, which incorporate advanced packaging methods such as FOWLP, and a delay in the adoption of FOWLP advanced packaging by other electronics manufacturers, both of which slowed orders and reduced revenue projections for our advanced packaging lithography systems. In addition, there has been a delay in the build out of 28nm facilities by companies in China who were expected to purchase our LSA systems. Taken together, the reduced projections identified during the second quarter of 2018 required us to assess the Ultratech asset group for impairment. As a result of the analysis, during the second quarter of 2018 we recorded a $252.3 million non-cash intangible asset impairment charge.
We recorded net interest expense of $12.7 million for the nine months ended September 30, 2019, compared to $13.8 million for the comparable prior year period. Included in interest expense for the nine months ended September 30, 2019 and 2018 were non-cash charges of $9.4 million and $8.7 million, respectively, related to the amortization of debt discount and transaction costs of the Convertible Senior Notes.
Our tax expense for the nine months ended September 30, 2019 was $0.4 million compared to a tax benefit of $28.0 million for the comparable prior period. The 2019 tax expense included an expense of $0.2 million related to our domestic operations, and $0.2 million related to our non-U.S. operations, compared to 2018 when the benefit included a $1.1 million benefit related to our domestic operations, and a $26.9 million benefit related to our non-U.S. operations. Although there was a domestic pre-tax loss for the nine months ended September 30, 2019 and 2018, we did not provide a current tax benefit on domestic pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for the current period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The current period non-U.S. tax expense is primarily attributable to tax expense on non-U.S operation profits and foreign withholding taxes on unremitted earnings as of September 30, 2019, offset by a tax benefit related to the amortization of intangible assets.
The comparable period domestic tax benefit is primarily attributable to refundable alternative minimum tax credits in accordance with the 2017 Tax Act, offset by the tax amortization of indefinite-lived intangible assets that is not available
to offset U.S. deferred tax assets. The comparable period non-U.S. tax benefit is primarily attributable to the intangible asset impairment charge incurred during the period.
Liquidity and Capital Resources
Our cash and cash equivalents, restricted cash, and short-term investments are as follows:
231,618
261,271
At September 30, 2019 and December 31, 2018, cash and cash equivalents of $41.7 million and $66.9 million, respectively, were held outside the United States. As of September 30, 2019, we had $13.8 million of accumulated undistributed earnings generated by our non-U.S. subsidiaries for which the U.S. repatriation tax has been provided and did not require the use of cash due to the use of net operating loss carryforwards. Approximately $8.0 million of undistributed earnings will be subject to foreign withholding taxes if distributed back to the United States. 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 requirements, contractual obligations, and other cash flow needs for the next twelve months, including scheduled interest payments on our Convertible Senior Notes due 2023.
A summary of the cash flow activity for the nine months ended September 30, 2019 and 2018 is as follows:
Non-cash items:
Changes in operating assets and liabilities
(23,947)
(63,004)
Net cash used in operating activities was $23.0 million for the nine months ended September 30, 2019 and was due to the net loss of $45.9 million plus adjustments for non-cash items of $46.8 million, offset by a decrease in cash flow from changes in operating assets and liabilities of $23.9 million. The changes in operating assets and liabilities were largely attributable to increases in accounts receivable and decreases in accounts payable, accrued expenses, and deferred revenue, partially offset by decreases in inventory.
31
Changes in investments, net
(46,434)
(6,938)
The cash used in investing activities during the nine months ended September 30, 2019 was primarily attributable to net changes in investments as well as capital expenditures.
Settlement of equity awards, net of withholding taxes
(22)
The cash used in financing activities for the nine months ended September 30, 2019 was related to the net cash used to settle taxes related to employee equity programs.
On January 10, 2017, we issued $345.0 million of 2.70% convertible senior unsecured notes (the “Convertible Senior Notes”). We received net proceeds, after deducting underwriting discounts and fees and expenses payable by us, of approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The Convertible Senior Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted. We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on this debt.
Contractual Obligations and Commitments
We have commitments under certain contractual arrangements to make future payments for goods and services. These contractual arrangements secure the rights to various assets and services to be used in the future in the normal course of business. We expect to fund these contractual arrangements with cash generated from operations in the normal course of business.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, expenses, and results of operations, liquidity, capital expenditures or capital resources other than bank guarantees and purchase commitments disclosed in the preceding footnotes.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates primarily relates to our investment portfolio. We centrally manage our investment portfolios considering investment opportunities and risks, tax consequences, and overall
financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately $95.7 million at September 30, 2019. These securities are subject to interest rate risk and, based on our investment portfolio at September 30, 2019, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of $0.3 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.
Currency Exchange Risk
We conduct business on a worldwide basis and, as such, a portion of our revenues, earnings, and net investments in foreign affiliates is exposed to changes in currency exchange rates. The economic impact of currency exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions, and other factors. These changes, if material, could cause us to adjust our financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.
Changes in currency exchange rates could affect our foreign currency denominated monetary assets and liabilities and forecasted cash flows. We enter into monthly forward derivative contracts with the intent of mitigating a portion of this risk. We only use derivative financial instruments in the context of hedging and not for speculative purposes and had not designated our foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other, net” in our Consolidated Statements of Operations. We execute derivative transactions with highly rated financial institutions to mitigate counterparty risk.
Our net sales to customers located outside of the United States represented approximately 75% and 67% of our total net sales for the three and nine months ended September 30, 2019, respectively, and 77% and 81% for the comparable 2018 periods. We expect that net sales to customers outside the United States will continue to represent a large percentage of our total net sales. Our sales denominated in currencies other than the U.S. dollar represented 3% and 4% of total net sales in the three and nine months ended September 30, 2019, and 2% and 1% for the comparable 2018 periods.
A 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of operations since most of our sales outside the United States are denominated in U.S. dollars.
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 as of September 30, 2019. 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 quarter ended September 30, 2019, there were no changes in internal control that have materially affected or are reasonably likely to materially affect internal control over financial reporting.
On June 8, 2018, an Ultratech shareholder who received Veeco stock as part of the consideration for the Ultratech acquisition filed a purported class action complaint in the Superior Court of the State of California, County of Santa
Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the Securities Act of 1933 for, among other things, alleged false/misleading statements in the registration statement and prospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. Veeco is defending this matter vigorously.
Information regarding risk factors appears in the Safe Harbor Statement at the beginning of this quarterly report on Form 10-Q, in Part I — Item 1A of our 2018 Form 10-K, and Part 2, Item 1A of our quarterly report on Form 10-Q for the quarter ending June 30, 2019. There have been no material changes from the risk factors previously disclosed.
On December 11, 2017, Veeco’s Board of Directors authorized a program to repurchase up to $100 million of the Company’s outstanding common stock to be completed through December 11, 2019. We did not purchase any shares during the third quarter of 2019. At September 30, 2019, $14.3 million of the $100 million had been utilized. 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.
None.
Not Applicable.
Unless otherwise indicated, each of the following exhibits has been filed with the Securities and Exchange Commission by Veeco under File No. 0-16244.
Exhibit
Incorporated by Reference
Filed orFurnished
Number
Exhibit Description
Form
Filing Date
Herewith
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 Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
**
101.XSD
XBRL Schema.
101.PRE
XBRL Presentation.
101.CAL
XBRL Calculation.
101.DEF
XBRL Definition.
101.LAB
XBRL Label.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith
** Filed herewith electronically
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 November 4, 2019.
Veeco Instruments Inc.
By:
/S/ WILLIAM J. MILLER, Ph.D.
William J. Miller, Ph.D.
Chief Executive Officer
/s/ SHUBHAM MAHESHWARI
Shubham Maheshwari
Executive Vice President, Chief Financial Officer, and Chief Operating Officer