Item 9A. Controls and Procedures
Item 9A. 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 as of December 31, 2020. The disclosure controls and procedures are designed to ensure that the information required to be disclosed in this report filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure.
Our principal executive and financial officers are responsible for establishing and maintaining adequate internal control over financial reporting, which is a process designed and put into effect to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Using the criteria established in the Internal Control — Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), Management has evaluated, assessed, and concluded that internal control over financial reporting is effective as of December 31, 2020.
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2020, there were no changes in internal control that have materially affected or are reasonably likely to materially affect internal control over financial reporting.
43
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Veeco Instruments Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Veeco Instruments Inc.’s and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedule II – valuation and qualifying accounts (collectively, the consolidated financial statements), and our report dated February 22, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Melville, New York
February 22, 2021
44
Table of Contents
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item that will appear under the headings “Governance,” “Executive Officers,” and “Delinquent Section 16(a) Reports” in the definitive proxy statement to be filed with the SEC relating to our 2021 Annual Meeting of Stockholders is incorporated herein by reference.
We have adopted a Code of Ethics for Senior Officers (the “Code”) which applies to our chief executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. A copy of the Code can be found on our website (www.veeco.com). We intend to disclose on our website the nature of any future amendments to and waivers of the Code that apply to the chief executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. We have also adopted a Code of Business Conduct which applies to all of our employees, including those listed above, as well as to our directors. A copy of the Code of Business Conduct can be found on our website (www.veeco.com). The website address above is intended to be an inactive, textual reference only. None of the material on this website is part of this report.
Item 11. Executive Compensation
Information required by this Item that will appear under the heading “Compensation” in the definitive proxy statement to be filed with the SEC relating to our 2021 Annual Meeting of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item that will appear under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the definitive proxy statement to be filed with the SEC relating to our 2021 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this Item that will appear under the headings “Certain Relationships and Related Transactions” and “Independence of Board” in the definitive proxy statement to be filed with the SEC relating to our 2021 Annual Meeting of Stockholders is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information required by this Item that will appear under the heading “Independent Auditor Fees and Other Matters” in the definitive proxy statement to be filed with the SEC relating to our 2021 Annual Meeting of Stockholders is incorporated herein by reference.
45
Table of Contents
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) (1) The Registrant’s financial statements together with a separate table of contents are annexed hereto
(2) Financial Statement Schedules are listed in the separate table of contents annexed hereto.
(3) Exhibits
Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.
Filed or
Exhibit
Incorporated by Reference
Furnished
Number
Exhibit Description
Form
Exhibit
Filing Date
Herewith
3.1
Amended and Restated Certificate of Incorporation of Veeco dated December 1, 1994, as amended June 2, 1997 and July 25, 1997.
10-Q
3.1
8/14/1997
3.2
Amendment to Certificate of Incorporation of Veeco dated May 29, 1998.
10-K
3.2
3/14/2001
3.3
Amendment to Certificate of Incorporation of Veeco dated May 5, 2000.
10-Q
3.1
8/14/2000
3.4
Amendment to Certificate of Incorporation of Veeco dated May 16, 2002 .
10-Q
3.1
10/26/2009
3.5
Amendment to Certificate of Incorporation of Veeco dated May 18, 2010.
10-K
3.8
2/24/2011
3.6
Sixth Amended and Restated Bylaws of Veeco effective January 22, 2021.
8-K
3.1
1/22/2021
3.7
Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of Veeco dated March 14, 2001.
10-Q
3.1
5/9/2001
4.1
Indenture, dated as of January 18, 2017, by and between Veeco Instruments Inc. and U.S. Bank National Association, as Trustee (relating to the 2.70% Convertible Notes due 2023).
8-K
4.1
1/18/2017
4.2
First Supplemental Indenture, dated as of January 18, 2017, by and between Veeco Instruments Inc. and U.S. Bank National Association, as Trustee (relating to the 2.70% Convertible Notes due 2023).
8-K
4.2
1/18/2017
4.3
Indenture, dated as of May 18, 2020, between Veeco Instruments Inc. and U.S. Bank National Association, as trustee.
8-K
4.1
5/18/2020
4.4
Form of 3.75% Convertible Senior Notes due 2027 .
8-K
4.2
5/18/2020
4.5
Indenture, dated as of November 17, 2020, between Veeco Instruments Inc. and U.S. Bank National Association, as trustee .
8-K
4.1
11/17/2020
4.6
Form of 3.50% Convertible Senior Notes due 2025 .
8-K
4.2
11/17/2020
4.7
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 .
10-K
4.3
2/21/2020
10.1*
Veeco Severance Benefits Policy, effective May 1, 2009.
10-K
10.1
X
10.2*
Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 14, 2010.
Def 14A
Appendix A
11/4/2013
46
Table of Contents
Filed or
Exhibit
Incorporated by Reference
Furnished
Number
Exhibit Description
Form
Exhibit
Filing Date
Herewith
10.3*
Veeco Amended and Restated 2010 Stock Incentive Plan, effective May 5, 2016.
S-8
10.1
6/2/2016
10.4*
Veeco Amended and Restated 2010 Stock Incentive Plan, effective March 3, 2017.
10-Q
10.1
11/3/2017
10.5*
Veeco Instruments Inc. 2019 Stock Incentive Plan.
S-8
10.1
5/7/2019
10.6*
Ultratech, Inc. 1993 Stock Option/Stock Issuance Plan (as Amended and Restated as of May 31, 2011).
S-8
10.1
5/26/2017
10.7*
Form of Capped Call Confirmation.
8-K
10.1
5/18/2020
10.8*
Exchange Agreement .
8-K
10.1
11/17/2020
10.9*
Form of Notice of Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective June 2016.
10-Q
10.1
11/1/2016
10.10*
Form of Notice of Critical Priorities Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective June 2016.
10-Q
10.2
11/1/2016
10.11*
Form of Notice of Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective March 2018.
10-Q
10.1
5/7/2018
10.12*
Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective March 2018.
10-Q
10.2
5/7/2018
10.13*
Form of Notice of Performance Restricted Stock Unit Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective March 2019 .
10-Q
10.1
5/7/2019
10.14*
Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective March 2019 (time-based version A) .
10-Q
10.2
5/7/2019
10.15*
Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective March 2019 (time-based version B) .
10-Q
10.3
5/7/2019
10.16*
Form of Notice of Performance Restricted Stock Unit Award and related terms and conditions pursuant to the Veeco 2019 Stock Incentive Plan, effective March 2020.
10-K
10.16
X
10.17*
Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2019 Stock Incentive Plan, effective March 2020.
10-K
10.17
X
10.18*
Veeco 2013 Inducement Stock Incentive Plan, effective September 26, 2013 .
10-Q
10.1
11/4/2013
10.19*
Veeco Instruments Inc. 2016 Employee Stock Purchase Plan.
S-8
10.9
6/2/2016
10.20*
First Amendment to Veeco Instruments Inc. 2016 Employee Stock Purchase Plan.
S-8
10.11
5/7/2019
10.21*
Form of Amended and Restated Indemnification Agreement entered into between Veeco and each of its directors and executive officers (August 2017).
10-Q
10.2
8/3/2017
47
Table of Contents
Filed or
Exhibit
Incorporated by Reference
Furnished
Number
Exhibit Description
Form
Exhibit
Filing Date
Herewith
10.22*
Veeco Amended and Restated Senior Executive Change in Control Policy, effective as of January 1, 2014.
10-K
10.22
2/28/2014
10.23*
Letter Agreement dated January 30, 2012 between Veeco and Dr. William J. Miller.
10-K
10.30
2/22/2012
10.24*
Letter Agreement dated August 29, 2018 between Veeco and Dr. William J. Miller.
8-K
10.2
9/4/2018
10.25*
Amendment dated March 22, 2019 to the Letter Agreement between Veeco and William J. Miller, Ph.D.
10-Q
10.4
5/7/2019
10.26*
Letter Agreement dated January 21, 2004 between Veeco and John P. Kiernan.
10-K
10.38
3/12/2004
10.27*
Amendment effective June 9, 2006 to Letter Agreement between Veeco and John P. Kiernan.
10-Q
10.3
8/4/2006
10.28*
Amendment effective December 31, 2008 to Letter Agreement between Veeco and John P. Kiernan.
10-K
10.40
3/2/2009
10.29*
Letter dated January 1, 2020 from Veeco to John P. Kiernan.
8-K
99.2
1/2/2020
10.30*
Letter Agreement dated March 20, 2019 between Veeco and Adrian Devasahayam.
10-K
10.30
X
10.31*
Letter Agreement dated August 4, 2017 between Veeco and Peter Porshnev.
10-K
10.31
X
10.32*
Letter Agreement dated March 9, 2020 between Veeco and Susan Wilkerson.
10-K
10.32
X
21.1
Subsidiaries of the Registrant.
X
23.1
Consent of KPMG LLP.
X
31.1
Certification of Chief Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.
X
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.
X
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
X
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
X
101.INS
XBRL Instance 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).
**
* Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a) (3) of Form 10-K.
** Filed herewith electronically
48
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 22, 2021.
Veeco Instruments Inc.
By:
/S/ WILLIAM J. MILLER, Ph.D.
William J. Miller, Ph.D.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on February 22, 2021.
Signature
Title
/s/ WILLIAM J. MILLER, Ph.D.
Chief Executive Officer and Director
William J. Miller, Ph.D.
(principal executive officer)
/s/ JOHN P. KIERNAN
Senior Vice President and Chief Financial Officer
John P. Kiernan
(principal financial & accounting officer)
/s/ RICHARD A. D’AMORE
Chairman
Richard A. D’Amore
/s/ KATHLEEN A. BAYLESS
Director
Kathleen A. Bayless
/s/ GORDON HUNTER
Director
Gordon Hunter
/s/ KEITH D. JACKSON
Director
Keith D. Jackson
/s/ MARY JANE RAYMOND
Director
Mary Jane Raymond
/s/ PETER J. SIMONE
Director
Peter J. Simone
/s/ THOMAS ST. DENNIS
Director
Thomas St. Dennis
49
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Index to Consolidated Financial Statements and Financial Statement Schedule
Page
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets at December 31, 2020 and 2019
F-4
Consolidated Statements of Operations for the years ended December 31, 2020, 2019, and 2018
F-5
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019, and 2018
F-6
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019, and 2018
F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
F-8
Notes to Consolidated Financial Statements
F-9
Schedule II—Valuation and Qualifying Accounts
S-1
F-1
Table of Contents
Report of Independent Registered Public Accounting F irm
To the Stockholders and Board of Directors
Veeco Instruments Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Veeco Instruments Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedule II – valuation and qualifying accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the value of excess and obsolete inventory
As discussed in Note 1 of the consolidated financial statements, the Company assesses the valuation of all inventories, including materials, work-in-process, and finished goods, each reporting period. Obsolete inventory or inventory in excess of the Company’s estimated usage requirement is written down to its estimated net realizable value if less than
F-2
Table of Contents
cost. Estimates of usage include the Company’s analysis of anticipated demand, possible alternative uses of its inventory, as well as other qualitative factors. As of December 31, 2020, the Company’s inventories totaled $145.9 million.
We identified the assessment of the value of excess and obsolete inventory as a critical audit matter. Subjective auditor judgment was required to evaluate the Company’s estimates of anticipated demand, which can be affected by market and economic conditions outside the Company’s control.
The primary procedures we performed to address this critical audit matter included the following. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s inventory valuation process. This included controls related to the development of estimates of anticipated demand of inventory. We evaluated current year estimates of anticipated demand used to assess the value of excess and obsolete inventory by comparing them to historical sales volumes and inspecting documentation when they differed significantly. For certain inventory items, we compared the prior year estimate of anticipated demand to actual results to assess the Company’s ability to accurately forecast.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Melville, New York
February 22, 2021
F-3
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
December 31,
December 31,
2020
2019
Assets
Current assets:
Cash and cash equivalents
$
129,625
$
129,294
Restricted cash
658
657
Short-term investments
189,771
115,252
Accounts receivable, net
79,991
45,666
Contract assets
21,246
25,351
Inventories
145,906
133,067
Deferred cost of sales
433
445
Prepaid expenses and other current assets
19,301
14,966
Assets held for sale
—
11,180
Total current assets
586,931
475,878
Property, plant, and equipment, net
65,271
75,711
Operating lease right-of-use assets
10,275
14,453
Intangible assets, net
46,185
61,518
Goodwill
181,943
181,943
Deferred income taxes
1,440
1,549
Other assets
6,019
7,036
Total assets
$
898,064
$
818,088
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
$
33,656
$
21,281
Accrued expenses and other current liabilities
44,876
41,243
Customer deposits and deferred revenue
67,235
54,870
Income taxes payable
914
830
Total current liabilities
146,681
118,224
Deferred income taxes
5,240
5,648
Long-term debt
321,115
300,068
Operating lease long-term liabilities
6,305
10,300
Other liabilities
10,349
9,336
Total liabilities
489,690
443,576
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; 49,723,751 shares issued and outstanding at December 31, 2020 and 48,994,346 shares issued and outstanding at December 31, 2019
497
490
Additional paid-in capital
1,113,352
1,071,058
Accumulated deficit
( 707,321 )
( 698,930 )
Accumulated other comprehensive income
1,846
1,894
Total stockholders' equity
408,374
374,512
Total liabilities and stockholders' equity
$
898,064
$
818,088
See accompanying Notes to the Consolidated Financial Statements.
F-4
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
For the year ended December 31,
2020
2019
2018
Net sales
$
454,163
$
419,349
$
542,082
Cost of sales
259,863
261,155
348,363
Gross profit
194,300
158,194
193,719
Operating expenses, net:
Research and development
78,994
90,557
97,755
Selling, general, and administrative
76,251
79,749
92,060
Amortization of intangible assets
15,333
17,085
32,351
Restructuring
1,097
6,403
8,556
Acquisition costs
—
—
2,959
Asset impairment
281
4,020
375,172
Other operating expense (income), net
( 221 )
( 42 )
368
Total operating expenses, net
171,735
197,772
609,221
Operating income (loss)
22,565
( 39,578 )
( 415,502 )
Interest income
1,551
4,680
3,186
Interest expense
( 24,739 )
( 22,085 )
( 21,518 )
Other income (expense), net
( 7,841 )
( 20,973 )
—
Income (loss) before income taxes
( 8,464 )
( 77,956 )
( 433,834 )
Income tax expense (benefit)
( 73 )
777
( 26,746 )
Net income (loss)
$
( 8,391 )
$
( 78,733 )
$
( 407,088 )
Income (loss) per common share:
Basic
$
( 0.17 )
$
( 1.66 )
$
( 8.63 )
Diluted
$
( 0.17 )
$
( 1.66 )
$
( 8.63 )
Weighted average number of shares:
Basic
48,362
47,482
47,151
Diluted
48,362
47,482
47,151
See accompanying Notes to the Consolidated Financial Statements.
F-5
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
For the year ended December 31,
2020
2019
2018
Net income (loss)
$
( 8,391 )
$
( 78,733 )
$
( 407,088 )
Other comprehensive income (loss), net of tax:
Available-for-sale securities:
Change in net unrealized gains or losses
( 53 )
49
11
Unrealized gain (loss) on available-for-sale securities
( 53 )
49
11
Currency translation adjustments:
Change in currency translation adjustments
5
( 19 )
5
Reclassification adjustments for net (gains) losses included in net income
—
44
( 8 )
Net changes related to currency translation adjustments
5
25
( 3 )
Total other comprehensive income (loss), net of tax
( 48 )
74
8
Total comprehensive income (loss)
$
( 8,439 )
$
( 78,659 )
$
( 407,080 )
See accompanying Notes to the Consolidated Financial Statements.
F-6
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
Accumulated
Additional
Other
Common Stock
Treasury Stock
Paid-in
Accumulated
Comprehensive
Shares
Amount
Shares
Amount
Capital
Deficit
Income
Total
Balance at December 31, 2017
48,229
$
482
85
$
( 1,284 )
$
1,051,953
$
( 212,870 )
$
1,812
$
840,093
Net loss
—
—
—
—
—
( 407,088 )
—
( 407,088 )
Other comprehensive income, net of tax
—
—
—
—
—
—
8
8
Share-based compensation expense
—
—
—
—
16,074
—
—
16,074
Net issuance under employee stock plans
318
3
( 512 )
6,721
( 6,702 )
( 25 )
—
( 3 )
Purchases of common stock
—
—
950
( 11,309 )
—
—
—
( 11,309 )
Balance at December 31, 2018
48,547
485
523
( 5,872 )
1,061,325
( 619,983 )
1,820
437,775
Net loss
—
—
—
—
—
( 78,733 )
—
( 78,733 )
Other comprehensive income, net of tax
—
—
—
—
—
—
74
74
Share-based compensation expense
—
—
—
—
15,270
—
—
15,270
Net issuance under employee stock plans
447
5
( 523 )
5,872
( 5,537 )
( 214 )
—
126
Balance at December 31, 2019
48,994
490
—
—
1,071,058
( 698,930 )
1,894
374,512
Net loss
—
—
—
—
—
( 8,391 )
—
( 8,391 )
Other comprehensive income, net of tax
—
—
—
—
—
—
( 48 )
( 48 )
Share-based compensation expense
—
—
—
—
12,703
—
—
12,703
Net issuance under employee stock plans
730
7
—
—
549
—
—
556
Extinguishment of equity component of repurchased/exchanged 2023 Notes
—
—
—
—
( 14,714 )
—
—
( 14,714 )
Equity component of 2025 Notes
—
—
—
—
20,706
—
—
20,706
Equity component of 2027 Notes
—
—
—
—
33,363
—
—
33,363
Purchase of capped calls
—
—
—
—
( 10,313 )
—
—
( 10,313 )
Balance at December 31, 2020
49,724
$
497
—
$
—
$
1,113,352
$
( 707,321 )
$
1,846
$
408,374
See accompanying Notes to the Consolidated Financial Statements.
F-7
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the year ended December 31,
2020
2019
2018
Cash Flows from Operating Activities
Net income (loss)
$
( 8,391 )
$
( 78,733 )
$
( 407,088 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
30,697
34,399
49,998
Non-cash interest expense
13,792
12,676
11,762
Deferred income taxes
( 299 )
360
( 27,620 )
Share-based compensation expense
12,703
15,270
16,074
Loss on extinguishment of debt
7,841
—
—
Asset impairment
281
4,020
375,172
Impairment of equity investments
—
20,973
—
Provision for bad debts
140
392
—
Changes in operating assets and liabilities:
Accounts receivable and contract assets
( 30,361 )
5,796
21,821
Inventories and deferred cost of sales
( 11,528 )
14,969
( 24,678 )
Prepaid expenses and other current assets
( 2,610 )
7,520
11,216
Accounts payable and accrued expenses
15,959
( 26,945 )
( 19,672 )
Customer deposits and deferred revenue
12,424
( 17,866 )
( 39,296 )
Income taxes receivable and payable, net
86
( 655 )
( 4,800 )
Other, net
2,287
408
( 627 )
Net cash provided by (used in) operating activities
43,021
( 7,416 )
( 37,738 )
Cash Flows from Investing Activities
Capital expenditures
( 6,802 )
( 10,873 )
( 12,654 )
Proceeds from the sale of investments
173,530
127,349
90,065
Payments for purchases of investments
( 248,023 )
( 192,988 )
( 93,046 )
Proceeds from held for sale assets, net of costs to sell
9,503
645
—
Acquisitions of businesses, net of cash acquired
—
—
( 2,662 )
Net cash provided by (used in) investing activities
( 71,792 )
( 75,867 )
( 18,297 )
Cash Flows from Financing Activities
Proceeds from issuance of 2025 Notes and 2027 Notes, net of issuance costs
120,095
—
—
Purchase of capped calls
( 10,313 )
—
—
Repurchase of 2023 Notes
( 81,240 )
—
—
Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan
2,878
3,106
3,064
Restricted stock tax withholdings
( 2,322 )
( 2,980 )
( 3,069 )
Purchases of common stock
—
—
( 11,457 )
Net cash provided by (used in) financing activities
29,098
126
( 11,462 )
Effect of exchange rate changes on cash and cash equivalents
5
26
( 4 )
Net increase (decrease) in cash, cash equivalents, and restricted cash
332
( 83,131 )
( 67,501 )
Cash, cash equivalents, and restricted cash - beginning of period
129,951
213,082
280,583
Cash, cash equivalents, and restricted cash - end of period
$
130,283
$
129,951
$
213,082
Supplemental Disclosure of Cash Flow Information
Interest paid
$
12,700
$
9,408
$
9,708
Income taxes paid
329
2,931
4,799
Non-cash operating and financing activities
Net transfer of property, plant and equipment to inventory
1,624
( 4,916 )
( 1,479 )
Right-of-use assets obtained in exchange for lease obligations
1,741
5,576
—
See accompanying Notes to the Consolidated Financial Statements.
F-8
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 — Significant Accounting Policies
(a) Description of Business
Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” or the “Company”) operates in a single segment: the development, manufacture, sales, and support of semiconductor and thin film process equipment primarily sold to make electronic devices.
(b) Basis of Presentation
The accompanying audited Consolidated Financial Statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Company reports interim quarters on a 13 -week basis ending on the last Sunday of each period, which is determined at the start of each year. The Company’s fourth quarter always ends on the last day of the calendar year, December 31. During 2020 the interim quarters ended on March 29, June 28, and September 27, and during 2019 the interim quarters ended on March 31, June 30, and September 29. The Company reports these interim quarters as March 31, June 30, and September 30 in its interim consolidated financial statements.
(c) Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, these estimates may ultimately differ from actual results. Significant items subject to such estimates and assumptions include: (i) stand-alone selling prices for the Company’s products and services; (ii) allowances for doubtful accounts; (iii) inventory obsolescence; (iv) the useful lives and expected future cash flows of property, plant, and equipment and identifiable intangible assets; (v) the fair value of the Company’s reporting unit and related goodwill; (vi) investment valuations and the valuation of derivatives, deferred tax assets, and assets acquired in business combinations; (vii) the recoverability of long-lived assets; (viii) liabilities for product warranty and legal contingencies; (ix) share-based compensation; (x) lease term and incremental borrowing rates used in determining operating lease assets and liabilities; and (xi) income tax uncertainties.
(d) Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period.
(e) Foreign Currencies
Assets and liabilities of the Company’s foreign subsidiaries that operate using functional currencies other than the U.S. dollar are translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using monthly average exchange rates. Adjustments arising from the translation of the foreign currency financial statements of the Company’s subsidiaries into U.S. dollars, including intercompany transactions of a long-term nature, are reported as currency translation adjustments in “Accumulated other comprehensive income” in the Consolidated Balance Sheets. Foreign currency transaction gains or losses are included in “Other operating expense (income), net” in the Consolidated Statements of Operations.
(f) Revenue Recognition
Revenue is recognized upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration the Company expects to receive in exchange for such product or service. The Company’s contracts with customers generally do not contain variable consideration. In the rare instances where variable
F-9
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 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, 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 performance period is one year or less.
F-10
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company has elected to treat shipping and handling costs as a fulfillment activity, and the Company includes such costs in “Cost of sales” in the Consolidated Statements of Operations 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.
(g) Warranty Costs
The Company typically provides standard warranty coverage on its systems for one year from the date of final acceptance by providing labor and parts necessary to repair the systems during the warranty period. The Company records the estimated warranty cost when revenue is recognized on the related system. Warranty cost is included in “Cost of sales” in the Consolidated Statements of Operations. The estimated warranty cost is based on the Company’s historical experience with its systems and regional labor costs. The Company calculates the average service hours by region and parts expense per system utilizing actual service records to determine the estimated warranty charge. The Company updates its warranty estimates on a quarterly basis when the actual product performance or field expense differs from original estimates.
(h) Shipping and Handling Costs
Shipping and handling costs are expenses incurred to move, package, and prepare the Company’s products for shipment and to move the products to a customer’s designated location. These costs are generally comprised of payments to third-party shippers. Shipping and handling costs are included in “Cost of sales” in the Consolidated Statements of Operations.
(i) Research and Development Costs
Research and development costs are expensed as incurred and include charges for the development of new technology and the transition of existing technology into new products or services.
(j) Advertising Expense
The cost of advertising is expensed as incurred and totaled $ 0.4 million, $ 0.5 million, and $ 0.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.
(k) Accounting for Share-based Compensation
Share-based awards exchanged for employee services are accounted for under the fair value method. Accordingly, share-based compensation cost is measured at the grant date based on the estimated fair value of the award. The expense for awards is recognized over the employee’s requisite service period (generally the vesting period of the award). The Company has elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.
In addition to stock options, restricted share awards (“RSAs”) and restricted stock units (“RSUs”) with time-based vesting, the Company grants performance share units and awards (“PSUs” and “PSAs”) that have either performance or market conditions. Compensation cost for PSUs and PSAs with performance conditions is recognized over the requisite service period based on the timing and expected level of achievement of the performance targets. A change in the assessment of performance attainment prior to the conclusion of the performance period is recognized in the period of the change in estimate. Compensation cost for PSUs and PSAs with market conditions is recognized over the requisite service period regardless of the expected level of achievement. For all PSUs and PSAs, the number of shares issued to the employee at the conclusion of the service period may vary from the original target based upon the level of attainment of the performance or market conditions.
F-11
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company uses the Black-Scholes option-pricing model to compute the estimated fair value of option awards and purchase rights under the Employee Stock Purchase Plan. The Company uses a Monte Carlo simulation to compute the estimated fair value of awards with market conditions. The Black-Scholes model and Monte Carlo simulation include assumptions regarding dividend yields, expected volatility, expected option term, and risk-free interest rates. See Note 14, “Stock Plans,” for additional information.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in income in the period that includes the enactment date.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”), which made broad and complex changes to the U.S. tax code. In response to the 2017 Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provided guidance on accounting for the tax effects of 2017 Tax Act, including addressing any uncertainty or diversity of view in applying ASC 740, Income Taxes (“ASC 740”), in the reporting period in which the 2017 Tax Act was enacted. In addition, SAB 118 provided a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting under ASC 740. During the year ended December 31, 2018, the Company finalized the accounting for the tax effects of 2017 Tax Act.
In January 2018, the FASB released guidance on the accounting for taxes under the global intangible low-taxed income (“GILTI”) provisions of the 2017 Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign operations. The Company has made a policy election to account for income taxes incurred under GILTI as a period cost.
(m) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments, derivative financial instruments used in hedging activities, and accounts receivable. The Company invests in a variety of financial instruments and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. Historically, the Company has not experienced any material credit losses on its investments.
The Company maintains an allowance reserve for potentially uncollectible accounts for estimated losses resulting from the inability of its customers to make required payments. The Company evaluates its allowance for doubtful accounts based on a combination of factors. In circumstances where specific invoices are deemed to be uncollectible, the Company provides a specific allowance for bad debt against the amount due to reduce the net recognized receivable to the amount reasonably expected to be collected. The Company also provides allowances based on its write-off history. Finally, the Company also considers its current expectations of future economic conditions, including the impact of COVID-19, when estimating its allowance for doubtful accounts. The allowance for doubtful accounts totaled $ 0.7 million and $ 0.6 million at December 31, 2020 and 2019, respectively.
To further mitigate the Company’s exposure to uncollectable accounts, the Company may request certain customers provide a negotiable irrevocable letter of credit drawn on a reputable financial institution. These irrevocable letters of credit are typically issued to mature between zero and 90 days from the date the documentation requirements are met, typically when a system ships or upon receipt of final acceptance from the customer. The Company, at its discretion, may monetize these letters of credit on a non-recourse basis after they become negotiable but before maturity. The fees
F-12
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
associated with the monetization are included in “Selling, general, and administrative” in the Consolidated Statements of Operations and were immaterial for the years ended December 31, 2020, 2019, and 2018.
(n) Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash equivalents, accounts receivable, accounts payable, and accrued expenses reflected in the consolidated financial statements approximate fair value due to their short-term maturities. The fair value of debt for footnote disclosure purposes, including current maturities, if any, is estimated using recently quoted market prices of the instrument, or if not available, a discounted cash flow analysis based on the estimated current incremental borrowing rates for similar types of instruments.
(o) Cash, Cash Equivalents, and Short-term Investments
All financial instruments purchased with an original maturity of three months or less at the time of purchase are considered cash equivalents. Such items may include liquid money market funds, certificate of deposit and time deposit accounts, U.S. treasuries, government agency securities, and corporate debt. Investments that are classified as cash equivalents are carried at cost, which approximates fair value. The Company’s cash and cash equivalents includes $ 86.2 million and $ 78.5 million of cash equivalents at December 31, 2020 and 2019, respectively.
A portion of the Company’s cash and cash equivalents is held by its subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. Approximately 31 % and 56 % of cash and cash equivalents were maintained outside the United States at December 31, 2020 and 2019, respectively.
Short-term investments consist of marketable debt securities, and are generally classified as available-for-sale for use in current operations, if required, and are reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income” on the Consolidated Balance Sheets. These securities can include U.S. treasuries, government agency securities, corporate debt, and commercial paper, all with maturities of greater than three months when purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other operating expense (income), net” in the Consolidated Statements of Operations. The specific identification method is used to determine the realized gains and losses on investments.
Non-marketable equity securities are equity securities without readily observable market prices and are included in “Other assets” in the Consolidated Balance Sheets. Non-marketable securities are measured at cost, adjusted for changes in observable prices minus impairment. Changes in fair value are included in “Other operating expense (income), net” in the Consolidated Statements of Operations.
(p) Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Each quarter the Company assesses the valuation and recoverability of all inventories: materials (raw materials, spare parts, and service inventory); work-in-process; and finished goods. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost. The Company evaluates usage requirements by analyzing historical usage, anticipated demand, alternative uses of materials, and other qualitative factors. Unanticipated changes in demand for the Company’s products may require a write down of inventory, which would be reflected in cost of sales in the period the revision is made. Inventory acquired as part of a business combination is recorded at fair value on the date of acquisition.
F-13
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(q) Business Combinations
The Company allocates the fair value of the purchase consideration of the Company’s acquisitions to the tangible assets, intangible assets, including in-process research and development (“IPR&D”), if any, and liabilities assumed, based on estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
(r) Goodwill and Indefinite-Lived Intangible Assets
Goodwill is an asset representing the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is measured as the excess of the consideration transferred over the net fair value of identifiable assets acquired and liabilities assumed. Intangible assets with indefinite useful lives are measured at their respective fair values on the acquisition date. Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development (“R&D”) efforts. If and when development is complete, the associated assets would be deemed long-lived and would then be amortized based on their respective estimated useful lives at that point in time. Goodwill and indefinite-lived intangibles are not amortized into results of operations but instead are evaluated for impairment. The Company performs the evaluation in the beginning of the fourth quarter of each year or more frequently if impairment indicators arise.
In testing goodwill for impairment, the Company may first perform a qualitative assessment of whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount, and, if so, the Company then quantitatively compares the fair value of the reporting unit to its carrying amount. If the fair value exceeds the carrying amount, goodwill is not impaired. If the carrying amount exceeds fair value, the Company then records an impairment loss equal to the difference, up to the carrying value of goodwill.
The Company determines the fair value of its reporting unit based on a reconciliation of the fair value of the reporting unit to the Company’s adjusted market capitalization. The adjusted market capitalization is calculated by multiplying the average share price of the Company’s common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium. The control premium is estimated using historical transactions in similar industries.
In testing indefinite-lived intangible assets for impairment, the Company may first perform a qualitative assessment of whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, and, if so, the Company then quantitatively compares the fair value of the indefinite-lived intangible asset to its carrying amount. The Company determines the fair value of its indefinite-lived intangible assets using a discounted cash flow method.
(s) Long-lived Assets
Long-lived 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 straight-lined if such pattern cannot be reliably determined.
Property, plant, and equipment are recorded at cost. Depreciation expense is calculated based on the estimated useful lives of the assets by using the straight-line method. Amortization of leasehold improvements is recognized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
F-14
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, a recoverability test is performed utilizing undiscounted cash flows expected to be generated by that asset or asset group compared to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models or, when available, quoted market values and third-party appraisals.
(t) Leases
Upon the adoption of ASC Topic 842, Leases (“ASC 842”) as of January 1, 2019, the Company determines at contract inception 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.
(u) Recently Adopted Accounting Standards
The Company adopted ASC Topic 842, Leases (“ASC 842”), as of January 1, 2019. ASC 842 generally requires operating lessee rights and obligations to be recognized as assets and liabilities on the balance sheet. The new standard 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.
The Company adopted ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes in the second quarter of 2020, effective as of the beginning of fiscal year 2020. This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the general principles and simplifying several aspects of ASC 740, Income Taxes, including, but not limited to, requirements related to the following: a) exception to the incremental approach for intraperiod tax allocation; b) the tax basis step-up in goodwill obtained in a transaction that is not a business combination; c) ownership changes in investments - changes from a subsidiary to an equity method investment; d) separate financial statements of entities not subject to tax; e) interim-period accounting for enacted changes in tax law; and f) the year-to-date loss limitation in interim-period tax accounting. The adoption did not have a material impact on the Company’s consolidated financial statements as of the date of adoption.
(v) Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06: Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
F-15
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
and Contracts in an Entity’s Own Equity . This standard simplifies the accounting for convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature, as well as convertible instruments with a beneficial conversion feature. As a result, entities will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce non-cash interest expense for entities that have issued a convertible instrument that was within the scope of those models before the adoption of ASU 2020-06. Additionally, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share, and precludes the use of the treasury stock method for certain debt instruments. The provisions of ASU 2020-06 are applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. An entity should adopt the provisions at the beginning of its annual fiscal year. The Company is evaluating the impact of ASU 2020-06 on its consolidated financial statements.
The Company is evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on our consolidated financial statements.
Note 2 — Income (Loss) Per 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 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 non-participating share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share in the periods the performance targets have been achieved, or would have been achieved if the reporting date was the end of the contingency period.
The computations of basic and diluted income (loss) per share for the years ended December 31, 2020, 2019, and 2018 are as follows:
For the year ended December 31,
2020
2019
2018
(in thousands, except per share amounts)
Net income (loss)
$
( 8,391 )
$
( 78,733 )
$
( 407,088 )
Net income (loss) per common share:
Basic
$
( 0.17 )
$
( 1.66 )
$
( 8.63 )
Diluted
$
( 0.17 )
$
( 1.66 )
$
( 8.63 )
Basic weighted average shares outstanding
48,362
47,482
47,151
Effect of potentially dilutive share-based awards
—
—
—
Diluted weighted average shares outstanding
48,362
47,482
47,151
Common share equivalents excluded from the diluted weighted average shares outstanding since the Company incurred a net loss and their effect would be antidilutive
947
531
28
Potentially dilutive shares excluded from the diluted calculation as their effect would be antidilutive
923
1,689
2,474
Maximum potential shares to be issued for settlement of the 2023, 2025, and 2027 Notes excluded from the diluted calculation as their effect would be antidilutive
17,753
8,618
8,618
F-16
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 3 — Fair Value Measurements
Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy:
● Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
● Level 2: Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
● Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions or estimation methodologies could have a significant effect on the estimated fair value amounts.
The following table presents the Company’s assets that were measured at fair value on a recurring basis at December 31, 2020 and 2019:
Level 1
Level 2
Level 3
Total
(in thousands)
December 31, 2020
Cash equivalents
Certificate of deposits and time deposits
$
59,168
$
—
$
—
$
59,168
Commercial paper
—
2,000
—
2,000
U.S. treasuries
24,997
—
—
24,997
Total
$
84,165
$
2,000
$
—
$
86,165
Short-term investments
U.S. treasuries
$
149,219
$
—
$
—
$
149,219
Corporate debt
—
32,554
—
32,554
Commercial paper
—
7,998
—
7,998
Total
$
149,219
$
40,552
$
—
$
189,771
December 31, 2019
Cash equivalents
Certificate of deposits and time deposits
$
67,009
$
—
$
—
$
67,009
Commercial paper
—
10,484
—
10,484
Corporate debt
—
1,000
—
1,000
Total
$
67,009
$
11,484
$
—
$
78,493
Short-term investments
U.S. treasuries
$
105,130
$
—
$
—
$
105,130
Government agency securities
—
1,139
—
1,139
Corporate debt
—
6,002
—
6,002
Commercial paper
—
2,981
—
2,981
Total
$
105,130
$
10,122
$
—
$
115,252
F-17
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets, as well as certificates of deposits and time deposits that are classified as Level 1 due to their short-term nature. The Company’s investments classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes, or alternative pricing sources with reasonable levels of price transparency.
Note 4 — Investments
At December 31, 2020 and 2019 the amortized cost and fair value of marketable securities, which are included in “Short-term investments” on the Consolidated Balance Sheets, were as follows:
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(in thousands)
December 31, 2020
U.S. treasuries
$
149,206
$
14
$
( 1 )
$
149,219
Corporate debt
32,588
—
( 34 )
32,554
Commercial paper
7,997
1
—
7,998
Total
$
189,791
$
15
$
( 35 )
$
189,771
December 31, 2019
U.S. treasuries
$
105,096
$
38
$
( 4 )
$
105,130
Government agency securities
1,139
—
—
1,139
Corporate debt
6,003
—
( 1 )
6,002
Commercial paper
2,981
—
—
2,981
Total
$
115,219
$
38
$
( 5 )
$
115,252
Available-for-sale securities in a loss position at December 31, 2020 and 2019 were as follows:
December 31, 2020
December 31, 2019
Gross
Gross
Estimated
Unrealized
Estimated
Unrealized
Fair Value
Losses
Fair Value
Losses
(in thousands)
U.S. treasuries
$
19,991
$
( 1 )
$
22,943
$
( 4 )
Corporate debt
32,554
( 34 )
6,002
( 1 )
Total
$
52,545
$
( 35 )
$
28,945
$
( 5 )
At December 31, 2020 and 2019, there were no short-term investments that had been in a continuous loss position for more than 12 months.
The maturities of securities classified as available-for-sale at December 31, 2020 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. The realized gains or losses for the years ended December 31, 2020, 2019, and 2018 were immaterial.
Other Investments
Veeco has an ownership interest of less than 20 % in a non-marketable investment, Kateeva, Inc. (“Kateeva”), over which Veeco does not exert significant influence. Additionally, the Company has a separate, non-marketable investment in another entity, with a carrying value of $ 3.0 million at December 31, 2020. The Company does not exert significant influence over this investment and its ownership interest is also less than 20 %. Neither equity investment has a readily
F-18
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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. These investments are subject to periodic impairment reviews which require judgment. The analyses include assessments of the companies’ financial condition, the business outlooks for their products and technologies, their projected results and cash flows, 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. During the quarter ended December 31, 2019, the Company identified impairment indicators on the Company’s investment in Kateeva, and as a result of a valuation analysis, concluded that its investment in Kateeva is fully impaired, and recorded a non-cash impairment charge of $ 21.0 million, included in “Other income (expense), net” in the Consolidated Statements of Operations. There were no impairment charges recorded for either investment for the years ended December 31, 2020 or 2018.
Note 5 — Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventories consist of the following:
December 31,
December 31,
2020
2019
(in thousands)
Materials
$
82,679
$
82,155
Work-in-process
53,979
42,575
Finished goods
9,248
8,337
Total
$
145,906
$
133,067
Note 6 — Property, Plant, and Equipment
Property, plant, and equipment, net, consist of the following:
December 31,
December 31,
2020
2019
Average Useful Life
(in thousands)
Land
$
5,061
$
5,061
N/A
Building and improvements
62,865
61,884
10 – 40 years
Machinery and equipment (1)
140,493
137,692
3 – 10 years
Leasehold improvements
6,671
6,703
3 – 7 years
Gross property, plant, and equipment
215,090
211,340
Less: accumulated depreciation and amortization
149,819
135,629
Net property, plant, and equipment
$
65,271
$
75,711
(1) Machinery and equipment also includes software, furniture, and fixtures
Depreciation expense was $ 15.4 million, $ 17.3 million, and $ 17.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. During the year ended December 31, 2019, the Company classified vacant land in St. Paul, Minnesota as held for sale, and subsequently sold the land for approximately $ 0.6 million, which approximated its carrying value.
F-19
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 7 — Goodwill and Intangible Assets
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The following table presents the changes in goodwill balances during the years indicated:
Gross carrying
Accumulated
amount
impairment
Net amount
(in thousands)
Balance at December 31, 2018
$
430,331
$
246,029
$
184,302
Allocated to Assets held for sale
—
2,359
( 2,359 )
Balance at December 31, 2019 and 2020
430,331
248,388
181,943
The Company performs its annual goodwill impairment test at the beginning of the fourth quarter each year. As the Company maintains a single goodwill reporting unit, it determines the fair value of its reporting unit based upon the Company’s adjusted market capitalization. The annual test performed at the beginning of the fourth quarter of fiscal 2018, 2019, and 2020 did not result in any potential impairment as the fair value of the reporting unit was determined to exceed the carrying amount of the reporting unit.
As a result of a significant decline in the Company’s stock price during the fourth quarter of 2018, the Company concluded it was appropriate to perform an interim goodwill impairment test as of the end of fiscal 2018. The fair value of its reporting unit, as calculated using the adjusted market capitalization approach, was determined to be below the carrying value of the reporting unit, and the Company recorded an impairment charge equal to the excess of carrying value over fair value, or $ 122.8 million, for the year ended December 31, 2018. The impairment charge is included in “Asset impairment” in the Consolidated Statements of Operations. The valuation of goodwill will continue to be subject to changes in the Company’s market capitalization and observable market control premiums. This analysis is sensitive to changes in the Company’s stock price and absent other qualitative factors, the Company may be required to record additional goodwill impairment charges in future periods if the stock price declines and remains depressed for an extended period of time.
The components of purchased intangible assets were as follows:
December 31, 2020
December 31, 2019
Average
Accumulated
Accumulated
Remaining
Gross
Amortization
Gross
Amortization
Amortization
Carrying
and
Net
Carrying
and
Net
Period
Amount
Impairment
Amount
Amount
Impairment
Amount
(in years)
(in thousands)
Technology
4.6
$
327,908
$
302,358
$
25,550
$
327,908
$
291,766
$
36,142
Customer relationships
8.2
146,465
130,131
16,334
146,465
126,764
19,701
Trademarks and tradenames
3.5
30,910
26,614
4,296
30,910
25,256
5,654
Other
0.8
3,686
3,681
5
3,686
3,665
21
Total
5.8
$
508,969
$
462,784
$
46,185
$
508,969
$
447,451
$
61,518
Other intangible assets primarily consist of patents, licenses, and backlog.
During the second quarter of 2018, the Company lowered its projected results for the Ultratech asset group. The reduced projections were based on lower than expected unit volume of certain smartphones, which incorporate advanced packaging methods such as fan-out wafer level packaging (“FOWLP”), and a delay in the adoption of FOWLP advanced packaging by other electronics manufacturers, both of which slowed orders and reduced revenue projections for the Company’s advanced packaging lithography systems. In addition, there had been a delay in the build out of 28nm facilities by companies in China who were expected to purchase the Company’s laser spike anneal systems. Taken
F-20
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
together, the reduced projections identified during the second quarter of 2018 required the Company to assess the Ultratech asset group for impairment. As a result of the analysis, which included projected cash flows that required the use of unobservable inputs, the Company recorded non-cash impairment charges of $ 216.4 million and $ 35.9 million related to definite-lived intangible assets and in-process research and development assets, respectively, during the second quarter of 2018. The impairment charge is included in “Asset impairment” in the Consolidated Statement of Operations. Subsequently, certain in-process research and development projects were completed and moved to the “Technology” line in the above table.
Based on the intangible assets recorded at December 31, 2020, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense, is expected to be as follows:
Amortization
(in thousands)
2021
$
12,280
2022
10,018
2023
8,347
2024
6,708
2025
3,136
Thereafter
5,696
Total
$
46,185
Note 8 — Accrued Expenses and Other Liabilities
The components of accrued expenses and other current liabilities were as follows:
December 31,
December 31,
2020
2019
(in thousands)
Payroll and related benefits
$
26,630
$
15,174
Warranty
5,058
7,067
Operating lease liabilities
4,148
4,196
Interest
2,574
4,321
Professional fees
1,112
2,443
Sales, use, and other taxes
2,658
811
Restructuring liability
279
2,841
Other
2,417
4,390
Total
$
44,876
$
41,243
Customer deposits and deferred revenue
Customer deposits totaled $ 49.3 million and $ 26.6 million at December 31, 2020 and 2019, respectively, which are included in “Customer deposits and deferred revenue” in the Consolidated Balance Sheets. Deferred revenue represents amounts billed, other than deposits, in excess of the revenue that can be recognized on a particular contract at the balance sheet date. Changes in deferred revenue were as follows:
(in thousands)
Balance - December 31, 2019
$
28,249
Deferral of revenue
9,955
Recognition of previously deferred revenue
( 20,219 )
Balance - December 31, 2020
$
17,985
F-21
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
As of December 31, 2020, the Company has approximately $ 27.9 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 56 % 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.
Other liabilities
As part of a prior acquisition, 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 December 31, 2020 and 2019, plan assets approximated $ 2.4 million and $ 2.7 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 $ 2.5 million and $ 3.1 million, respectively and is included within “Other liabilities” in the Consolidated Balance Sheets. At December 31, 2020 and 2019, other liabilities also included (i) asset retirement obligations of $ 2.7 million and $ 3.2 million, respectively; (ii) income tax payables of $ 1.4 million and $ 1.0 million, respectively; and (iii) medical and dental benefits for former executives of $ 1.9 million and $ 2.0 million, respectively. Additionally, as a result of the Coronavirus, Aid, Relief, and Economic Security Act, the Company has accrued for and deferred the deposit and payment of its share of social security taxes, resulting in a liability of $ 3.6 million at December 31, 2020, of which $ 1.8 million is included within “Accrued expenses and other current liabilities”, and $ 1.8 million is included within “Other liabilities” in the Consolidated Balance Sheets.
Note 9 — Restructuring Charges
During the second quarter of 2018, the Company initiated plans to 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.
In the second half of 2019, the Company executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate its resources to the Company’s highest priority projects. In addition, the Company delayered the organization. Collectively, these actions impacted approximately 60 employees. During the year ended December 31, 2020, additional accruals were recognized and payments were made related to these restructuring initiatives, which are largely completed at December 31, 2020.
F-22
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table shows the amounts incurred and paid for restructuring activities during the years ended December 31, 2020, 2019, and 2018 and the remaining accrued balance of restructuring costs at December 31, 2020, which is included in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheets:
Personnel
Facility
Severance and
Related Costs
Related Costs
and Other
Total
(in thousands)
Balance - December 31, 2017
$
1,520
$
—
$
1,520
Provision
4,681
2,714
7,395
Payments
( 4,058 )
( 2,644 )
( 6,702 )
Balance - December 31, 2018
2,143
70
2,213
Provision
5,803
203
6,006
Payments
( 5,105 )
( 273 )
( 5,378 )
Balance - December 31, 2019
2,841
—
2,841
Provision
1,097
—
1,097
Payments
( 3,659 )
—
( 3,659 )
Balance - December 31, 2020
$
279
$
—
$
279
Restructuring expense for the years ended December 31, 2019 and 2018 included non-cash charges of $ 0.4 million and $ 1.2 million, respectively, which are excluded from the table above, related to accelerated share-based compensation for employee terminations.
Note 10 — Commitments and Contingencies
Warranty
Changes in the Company’s product warranty reserves were as follows:
December 31,
2020
2019
2018
(in thousands)
Balance, beginning of the year
$
7,067
$
7,852
$
6,532
Warranties issued
4,626
5,865
6,737
Consumption of reserves
( 6,691 )
( 6,242 )
( 6,573 )
Changes in estimate
56
( 408 )
1,156
Balance, end of the year
$
5,058
$
7,067
$
7,852
Minimum Lease Commitments
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 December 31, 2020 was 3 years , and the weighted average discount rate used in determining the present value of future lease payments was 6.1 % .
F-23
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table provides the maturities of lease liabilities at December 31, 2020:
Operating
Leases
(in thousands)
Payments due by period:
2021
$
4,671
2022
4,690
2023
1,306
2024
631
2025
66
Thereafter
—
Total future minimum lease payments
11,364
Less: Imputed interest
( 911 )
Total
$
10,453
Reported as of December 31, 2020
Accrued expenses and other current liabilities
$
4,148
Operating lease long-term liabilities
6,305
Total
$
10,453
Operating lease cost for the years ended December 31, 2020 and 2019 was $ 5.4 million and $ 5.5 million, respectively. Variable lease cost for both years ended December 31, 2020 and 2019 was $ 1.7 million. Additionally, the Company has an immaterial amount of short-term leases. Lease expense was $ 7.1 million, $ 7.2 million, and $ 6.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. In addition, the Company is obligated under such leases for certain other expenses, including real estate taxes and insurance. Operating cash outflows from operating leases for the year ended December 31, 2020, 2019, and 2018 were $ 6.9 million, $ 7.2 million, and $ 6.3 million, respectively.
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.
F-24
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company is involved in various other legal proceedings arising in the normal course of business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
Concentrations of Credit Risk
The Company depends on purchases from its ten largest customers, which accounted for 62 % and 67 % of net accounts receivable at December 31, 2020 and 2019, respectively.
Customers who accounted for more than 10% of net accounts receivable or net sales are as follows:
Accounts Receivable
Net Sales
December 31,
For the Year Ended December 31,
Customer
2020
2019
2020
2019
2018
Customer A
*
16
%
13
%
11
%
*
Customer B
*
21
%
*
*
*
Customer C
*
*
*
*
12
%
*
Less than 10% of aggregate accounts receivable or net sales
The Company manufactures and sells its products to companies in different geographic locations. Refer to Note 18, “Segment Reporting and Geographic Information,” for additional information. In certain instances, the Company requires deposits from its customers for a portion of the sales price in advance of shipment and performs periodic credit evaluations on its customers. Where appropriate, the Company requires letters of credit on certain non-U.S. sales arrangements. Receivables generally are due within 30 to 90 days from the date of invoice. In some geographies, receivables may be payable up to 150 days from the date of the invoice.
Receivable Purchase Agreement
In December 2020, the Company entered into a receivable purchase agreement with a financial institution to sell certain of its trade receivables from customers without recourse, up to $ 15.0 million at any point in time. Pursuant to this agreement, the Company sold $ 11.6 million of receivables during the year ended December 31, 2020, of which approximately $ 5.9 million remained outstanding at December 31, 2020, and therefore $ 9.1 million is available under the agreement for additional sales of receivables as of December 31, 2020. The net sale of accounts receivable under the agreement is reflected as a reduction of accounts receivable in the Company’s Consolidated Balance Sheet at the time of sale and any fees for the sale of trade receivables were not material for the periods presented.
Suppliers
The Company outsources certain functions to third parties, including the manufacture of several of its systems. While the Company relies on its outsourcing partners to perform their contracted functions, the Company maintains some level of internal manufacturing capability for these systems. In addition, certain of the components and sub-assemblies included in the Company’s products are obtained from a single source or a limited group of suppliers. The failure of the Company’s present outsourcing partners and suppliers to meet their contractual obligations and the Company’s inability to make alternative arrangements or resume the manufacture of these systems could have a material adverse effect on the Company’s revenues, profitability, cash flows, and relationships with its customers.
The Company had deposits with its suppliers of $ 7.2 million and $ 5.9 million at December 31, 2020 and 2019, respectively, that were included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets.
F-25
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Purchase Commitments
The Company had purchase commitments of $ 126.4 million at December 31, 2020, substantially all of which will come due within one year. Purchase commitments are primarily for inventory used in manufacturing products and are partially offset by existing deposits with suppliers.
Bank Guarantees
The Company has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At December 31, 2020, outstanding bank guarantees and letters of credit totaled $ 9.5 million and unused bank guarantees and letters of credit of $ 23.2 million were available to be drawn upon.
Note 11 — Debt
Convertible Senior Notes
2023 Notes
On January 10, 2017, the Company issued $ 345.0 million of 2.70 % convertible senior unsecured notes due 2023 (the “2023 Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $ 335.8 million. The 2023 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 2023 Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted.
On May 18, 2020, in connection with the completion of a private offering of $ 125.0 million aggregate principal amount of 3.75 % convertible senior notes due 2027 described below, the Company repurchased and retired approximately $ 88.3 million in aggregate principal amount of its outstanding 2023 Notes, with a carrying amount of $ 78.1 million, for approximately $ 81.2 million of cash. The Company accounted for the partial settlement of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $ 3.0 million for the year ended December 31, 2020, which is included in “Other income (expense), net” in the Consolidated Statements of Operations, as well as a reduction of additional paid-in capital of $ 0.1 million for the repurchase of the conversion feature.
Additionally, on November 11, 2020, the Company entered into a privately negotiated exchange agreement with a holder of its outstanding 2023 Notes, under which the Company agreed to retire $ 125.0 million in aggregate original principal amount of the 2023 Notes, with a carrying amount of $ 113.1 million, in exchange for the issuance of $ 132.5 million in aggregate principal amount of new 3.50 % convertible senior notes due 2025 described below, which had a fair value that approximated the principal amount of notes issued. The Company accounted for the partial settlement of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $ 4.8 million for the year ended December 31, 2020, which is included in “Other income (expense), net” in the Consolidated Statements of Operations, as well as a reduction of additional paid-in capital of $ 14.6 million for the exchange of the conversion feature.
2025 Notes
On November 17, 2020, as part of the privately negotiated exchange agreement described above, the Company issued $ 132.5 million of 3.50 % convertible senior notes due 2025 (the “2025 Notes”). The 2025 Notes bear interest at a rate of 3.50 % per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2021. The 2025 Notes mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2027 Notes
On May 18, 2020, the Company completed a private offering of $ 125.0 million of 3.75 % convertible senior notes due 2027 (the “2027 Notes”). The Company received net proceeds of approximately $ 121.9 million, after deducting underwriting discounts and fees and expenses payable by the Company. Additionally, the Company used approximately $ 10.3 million of cash to purchase capped calls, discussed below. The 2027 Notes bear interest at a rate of 3.75 % per year, payable semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2020. The 2027 Notes mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted.
The 2023 Notes, 2025 Notes, and 2027 Notes (collectively, the “Notes”) are unsecured obligations of Veeco and rank senior in right of payment to any of Veeco’s subordinated indebtedness; equal in right of payment to all of Veeco’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Veeco’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Veeco’s subsidiaries.
The Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rates are 24.9800 , 41.6667 , and 71.5372 shares of the Company’s common stock per $1,000 principal amount of the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, representing initial effective conversion prices of $ 40.03 , $ 24.00 , and $ 13.98 per share of common stock, respectively. The conversion rates may be subject to adjustment upon the occurrence of certain specified events.
Holders may convert all or any portion of their notes, in multiples of one thousand dollar principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 15, 2022 with respect to the 2023 Notes, October 15, 2024 with respect to the 2025 Notes, and October 1, 2027 with respect to the 2027 Notes, only under the following circumstances:
(i) During any calendar quarter (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day;
(ii) During the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per one thousand dollar principal amount of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of Veeco’s common stock and the conversion rate on each such trading day;
(iii) If the Company calls any or all of applicable series of the Notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
(iv) Upon the occurrence of specified corporate events.
Holders may convert their notes at any time, regardless of the foregoing circumstances, on or after October 15, 2022 with respect to the 2023 Notes, October 15, 2024 with respect to the 2025 Notes, and October 1, 2026 with respect to the 2027 Notes, until the close of business on the business day immediately preceding the respective maturity date.
Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion options, the Company segregated the liability component of the instruments from the equity components. The liability components were measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Notes. The calculation of the fair value of the debt components required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the Notes at a discount rate equal to the estimated borrowing rate for similar non-convertible debt, or 7.0 % , 8.0 % , and 9.1 % with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively. The excess of the aggregate face values of the Notes over the estimated fair values of the liability components of $ 72.5 million, $ 21.0 million, and $ 34.2 million with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, were recognized as debt discounts and recorded as an increase to additional paid-in capital and will be amortized over the expected lives of the Notes using the effective interest rate method. Amortization of the debt discounts are recognized as non-cash interest expense.
The transaction costs of $ 9.2 million, $ 1.9 million, and $ 3.1 million incurred in connection with the issuance of the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected terms of the Notes. Transaction costs allocated to the equity component of $ 1.9 million, $ 0.3 million, and $ 0.8 million with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, reduced the value of the equity components recognized in stockholders' equity.
In connection with the offering of the 2027 Notes, on May 13, 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”), pursuant to capped call confirmations, covering the total principal amount of the 2027 Notes for an aggregate premium of $ 10.3 million. The Capped Call Transactions are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of the 2027 Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted 2027 Notes, as the case may be, with such reduction and/or offset subject to a cap based on the capped price of the Capped Call Transactions. The Capped Call Transactions exercise price is equal to the initial conversion price of the 2027 Notes, and the capped price of the Capped Call Transactions is approximately $ 18.46 per share and is subject to certain adjustments under the terms of the capped call confirmations.
The Capped Call Transactions are separate transactions entered into by the Company with the capped call counterparties, are not part of the terms of the 2027 Notes and do not change the holders’ rights under the 2027 Notes. Holders of the 2027 Notes do not have any rights with respect to the Capped Call Transactions. The cost of the Capped Call Transactions is not expected to be tax-deductible as the Company did not elect to integrate the Capped Call Transactions into the 2027 Notes for tax purposes. The Company used a portion of the net proceeds from the offering of the 2027 Notes to pay for the Capped Call Transactions, and the cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the accompanying consolidated financial statements.
The carrying values of the Notes are as follows:
December 31, 2020
December 31, 2019
2023 Notes
2025 Notes
2027 Notes
Total
2023 Notes
(in thousands)
Principal amount
$
131,695
$
132,500
$
125,000
$
389,195
$
345,000
Unamortized debt discount/transaction costs
( 11,925 )
( 22,097 )
( 34,058 )
( 68,080 )
( 44,932 )
Net carrying value
$
119,770
$
110,403
$
90,942
$
321,115
$
300,068
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Total interest expense related to the Notes is as follows:
For the year ended December 31,
2020
2019
2018
(in thousands)
Cash Interest Expense
Coupon interest expense - 2023 Notes
$
7,390
$
9,315
$
9,315
Coupon interest expense - 2025 Notes
554
—
—
Coupon interest expense - 2027 Notes
2,904
—
—
Non-cash Interest Expense
Amortization of debt discount/transaction costs- 2023 Notes
10,887
12,676
11,762
Amortization of debt discount/transaction costs- 2025 Notes
546
—
—
Amortization of debt discount/transaction costs- 2027 Notes
2,359
—
—
Total Interest Expense
$
24,640
$
21,991
$
21,077
The Company determined the Notes are Level 2 liabilities in the fair value hierarchy and estimated their fair values as $ 125.4 million, $ 140.2 million, and $ 180.9 million at December 31, 2020 for the 2023 Notes, 2025 Notes, and 2027 Notes, respectively.
Note 12 — 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 sometimes enters into monthly forward derivative contracts with the intent of mitigating a portion of this risk. The Company only used derivative financial instruments in the context of hedging and not for speculative purposes and had not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts were recorded as “Other operating expense (income), net” in the Company’s Consolidated Statements of Operations. The Company executed derivative transactions with highly rated financial institutions to mitigate counterparty risk.
The Company did not have any outstanding derivative contracts at December 31, 2020 and 2019. The following table shows the gains and (losses) from currency exchange derivatives during the year ended December 31, 2018, which is included in “Other operating expense (income), net” in the Consolidated Statement of Operations as well as the weighted average notional amount of derivatives outstanding:
Year ended December 31,
2018
Gains (losses)
Weighted average notional amount
(in thousands)
Foreign currency exchange forwards
$
327
$
2,869
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 13 — Stockholders’ Equity
Accumulated Other Comprehensive Income (“AOCI”)
The following table presents the changes in the balances of each component of AOCI, net of tax:
Unrealized
Gains (Losses)
Foreign
on Available
Currency
for Sale
Translation
Securities
Total
(in thousands)
Balance - December 31, 2017
$
1,839
$
( 27 )
$
1,812
Other comprehensive income (loss)
( 3 )
11
8
Balance - December 31, 2018
1,836
( 16 )
1,820
Other comprehensive income (loss)
25
49
74
Balance - December 31, 2019
1,861
33
1,894
Other comprehensive income (loss)
5
( 53 )
( 48 )
Balance - December 31, 2020
$
1,866
$
( 20 )
$
1,846
The Company did not allocate additional tax expense (benefit) to other comprehensive income (loss) for all years presented as the Company is in a full valuation allowance position such that a deferred tax asset related to amounts recognized in other comprehensive income is not regarded as realizable on a more-likely-than-not basis.
Preferred Stock
The Board of Directors has authority under the Company’s Certificate of Incorporation to issue shares of preferred stock, par value $ 0.01 , with voting and economic rights to be determined by the Board of Directors. As of December 31, 2020, no preferred shares have been issued.
Treasury Stock
On December 11, 2017, the Company’s Board of Directors authorized a program to repurchase up to $ 100 million of the Company’s common stock to be completed through December 11, 2019. At the end of the program, $ 14.3 million of the $ 100 million had been utilized.
The Company records treasury stock purchases under the cost method using the first-in, first-out (“FIFO”) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid-in capital. If the Company reissues treasury stock at an amount below its acquisition cost and if additional paid-in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is charged to accumulated deficit.
Note 14 — Stock Plans
Share-based incentive awards are provided to employees under the terms of the Company’s equity incentive compensation plans (the “Plans”), which are administered by the Compensation Committee of the Board of Directors. The 2019 Plan originated as the 2010 Stock Incentive Plan and was originally approved by the Company’s shareholders in May 2010. This Plan was subsequently amended, as approved by shareholders, in 2013, 2016, and 2019 (at which time the Plan was renamed the 2019 Stock Incentive Plan (as amended to date, the “2019 Plan”). The Company’s employees, non-employee directors, and consultants are eligible to receive awards under the 2019 Plan, which can include non-qualified stock options, incentive stock options, RSAs, RSUs, PSAs, PSUs, share appreciation rights,
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
dividend equivalent rights, or any combination thereof. The Company settles awards under the Plans with newly issued shares or with shares held in treasury.
In 2013, the Board of Directors granted equity awards to certain employees under the Company’s 2013 Inducement Stock Incentive Plan (the “Inducement Plan”). The Company issued 124,500 stock option shares and 87,000 RSUs under this plan. Stock options under this plan vest over a three year period and have a 10-year term, and RSUs under this plan vest over a two or four year period. At December 31, 2013, the Inducement Plan was merged into the 2019 Plan and is considered an inactive plan with no further shares available for grant. At December 31, 2020, there are 2,000 option shares and no RSUs outstanding under the Inducement Plan.
The Company is authorized to issue up to 13.3 million shares under the 2019 Plan. Option awards are granted with an exercise price equal to the closing price of the Company’s common stock on the trading day prior to the date of grant; option awards generally vest over a three year period and have a seven or ten year term. RSAs and RSUs generally vest over one to five years . Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 2019 Plan. At December 31, 2020, there are 0.7 million option shares and 0.8 million RSUs and PSUs outstanding under the 2019 Plan.
The Company is authorized to issue up to 1.5 million shares under the approved 2016 employee stock purchase plan (“ESPP”), including additional shares authorized under a plan amendment approved by shareholders in 2019. Under the ESPP, substantially all employees in the U.S. may purchase the Company’s common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of the Company’s common stock at the beginning or end of each six-month offer period, as defined in the ESPP, and subject to certain limits. The ESPP was approved by the Company’s shareholders.
During 2017, in connection with an acquisition, the Company assumed certain restricted stock units (the “Assumed RSUs”) available and outstanding under the assumed plan (the “Assumed Plan”). The Assumed RSUs remain subject to the terms set forth in the award agreement governing the award and the Assumed Plan, except that the Assumed RSUs relate to shares of Company common stock and the number of restricted stock units was adjusted pursuant to the terms of the acquisition to reflect the difference in the value of a share of Company common stock and a share of the acquired company’s common stock prior to closing the acquisition. The Assumed RSUs were converted into 338,144 restricted stock units of the Company and generally vest over 50 months . After the acquisition and notwithstanding any other provisions of the Assumed Plan, no further grants will be made under the Assumed Plan, and the Company is solely maintaining the Assumed Plan with respect to the Assumed RSUs. At December 31, 2020, there are 4,030 RSUs outstanding under the Assumed Plan.
Shares Reserved for Future Issuance
At December 31, 2020, the Company has 5.1 million shares reserved to cover exercises of outstanding stock options, vesting of RSUs, and additional grants under the 2019 Plan. At December 31, 2020, the Company has 0.3 million shares reserved to cover future issuances under the ESPP Plan.
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Share-Based Compensation
The Company recognized share-based compensation in the following line items in the Consolidated Statements of Operations for the periods indicated:
For the year ended December 31,
2020
2019
2018
(in thousands)
Cost of sales
$
1,870
$
1,903
$
1,885
Research and development
2,900
3,340
3,611
Selling, general, and administrative
7,933
9,630
9,417
Restructuring
—
397
1,161
Total
$
12,703
$
15,270
$
16,074
The Company did not realize any tax benefits associated with share-based compensation for the years ended December 31, 2020, 2019, and 2018 due to the full valuation allowance on its U.S. deferred tax assets. See Note 17, “Income Taxes” for additional information. The Company capitalized an immaterial amount of share-based compensation into inventory for the years ended December 31, 2020, 2019, and 2018.
Unrecognized share-based compensation costs at December 31, 2020 are summarized below:
Unrecognized
Weighted
Share-Based
Average Period
Compensation
Expected to be
Costs
Recognized
(in thousands)
(in years)
Restricted stock units
$
1,325
2.0
Restricted stock awards
10,709
2.0
Performance share units
3,269
1.6
Total unrecognized share-based compensation cost
$
15,303
1.9
Stock Option Awards
Stock options are awards issued to employees that entitle the holder to purchase shares of the Company’s stock at a fixed price. The following table summarizes the equity activity related to stock options:
Weighted
Number of
Average
Shares
Exercise Price
(in thousands)
Balance - December 31, 2017
1,394
$
34.97
Expired or forfeited
( 172 )
36.21
Balance - December 31, 2018
1,222
34.80
Expired or forfeited
( 103 )
33.97
Balance - December 31, 2019
1,119
34.88
Expired or forfeited
( 389 )
34.15
Balance - December 31, 2020
730
35.26
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table summarizes stock option information at December 31, 2020:
Options Outstanding and Exercisable
Weighted
Aggregate
Average
Weighted
Intrinsic
Remaining
Average
Range of Exercise Prices
Shares
Value
Contractual Life
Exercise Price
(in thousands)
(in thousands)
(in years)
$ 20.00 - $ 30.00
16
$
—
2.1
$
28.68
$ 30.01 - $ 40.00
600
—
1.5
32.34
$ 40.01 - $ 50.00
5
—
0.3
47.95
$ 50.01 - $ 60.00
109
—
0.4
51.69
730
$
—
1.4
35.26
There were no unvested options outstanding as of December 31, 2020. Additionally, there were no options exercised for the years ended December 31, 2020, 2019, or 2018.
RSAs, RSUs, PSAs, PSUs
RSAs are stock awards issued to employees and directors that are subject to specified restrictions and a risk of forfeiture. RSUs are stock awards issued to employees that entitle the holder to receive shares of common stock as the awards vest. PSAs and PSUs are awards that result in an issuance of shares of common stock to employees if certain performance or market conditions are achieved. All of these awards typically vest over one to four years and vesting is subject to the employee's continued service with the Company and, in the case of performance awards, meeting certain performance or market conditions. The fair value of the awards is determined and fixed based on the closing price of the Company’s common stock on the trading day prior to the date of grant, or, in the case of performance awards with market conditions, fair value is determined using a Monte Carlo simulation.
The following table summarizes the equity activity of non-vested restricted shares and performance shares:
Weighted
Average
Number of
Grant Date
Shares
Fair Value
(in thousands)
Balance - December 31, 2017
1,880
$
25.41
Granted
1,257
17.37
Performance award adjustments
( 5 )
32.67
Vested
( 523 )
26.39
Forfeited
( 391 )
24.66
Balance - December 31, 2018
2,218
20.74
Granted
1,107
11.53
Performance award adjustments
( 25 )
28.91
Vested
( 768 )
21.77
Forfeited
( 275 )
18.48
Balance - December 31, 2019
2,257
16.20
Granted
1,054
9.53
Performance award adjustments
( 51 )
30.94
Vested
( 798 )
16.01
Forfeited
( 422 )
14.87
Balance - December 31, 2020
2,040
12.73
The total fair value of shares that vested during the years ended December 31, 2020, 2019, and 2018 was $ 9.0 million, $ 8.8 million, and $ 9.1 million, respectively. For performance awards, the final number of shares earned will vary
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
depending on the achievement of the actual results relative to the performance or market conditions. Each performance award is included in the table above at the grant date target share amount until the end of the performance period if not previously forfeited.
The fair value of performance awards with market conditions is estimated on the date of grant using a Monte Carlo simulation. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive these awards. The weighted average fair value and the assumptions used in calculating such values during fiscal years 2020, 2019, and 2018 for performance awards with market conditions were based on estimates at the date of grant as follows:
Year ended December 31,
2020
2019
2018
Weighted average fair value
$
10.59
$
16.45
$
15.58
Dividend yield
0
%
0
%
0
%
Expected volatility factor (1)
60.27
%
53
%
49
%
Risk-free interest rate (2)
0.54
%
2.37
%
2.88
%
Expected life (in years) (3)
3.0
2.8
3.0
(1) Expected volatility is measured using historical daily price changes of the Company’s stock over the respective expected term.
(2) The risk-free rate for periods within the contractual term is based on the U.S. Treasury yield curve in effect at the time of grant.
(3) The expected life is the number of years the Company estimates that the awards will be outstanding prior to exercise.
Employee Stock Purchase Plan
For the years ended December 31, 2020, 2019, and 2018 the Company received cash proceeds of $ 2.9 million, $ 3.1 million, and $ 3.1 million, and issued shares of 254,703 , 395,941 , and 332,096 , respectively, under the ESPP Plan. The weighted average estimated values of employee purchase rights as well as the weighted average assumptions that were used in calculating such values during fiscal years 2020, 2019, and 2018 were based on estimates at the date of grant as follows:
Year ended December 31,
2020
2019
2018
Weighted average fair value
$
4.81
$
2.96
$
4.94
Dividend yield
0
%
0
%
0
%
Expected volatility factor (1)
70
%
60
%
62
%
Risk-free interest rate (2)
0.95
%
2.41
%
1.81
%
Expected life (in years) (3)
0.5
0.5
0.5
(1) Expected volatility is measured using historical daily price changes of the Company’s stock over the respective expected term.
(2) The risk-free rate for periods within the contractual term is based on the U.S. Treasury yield curve in effect at the time of grant.
(3) The expected life is the number of years the Company estimates that the purchase rights will be outstanding prior to exercise.
Note 15 — Retirement Plans
The Company maintains a defined contribution plan for the benefit of its U.S. employees. The plan is intended to be tax qualified and contains a qualified cash or deferred arrangement as described under Section 401(k) of the Internal Revenue Code. Eligible participants may elect to contribute a percentage of their base compensation, and the Company may make matching contributions, generally equal to fifty cents for every dollar employees contribute, up to the lesser of three percent of the employee’s eligible compensation or three percent of the maximum the employee is permitted to contribute under then current Internal Revenue Code limitations. Generally, the plan calls for vesting in the Company contributions over the initial five years of a participant’s employment. The Company provided employer contributions
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
associated with this plan of approximately $ 2.4 million, $ 2.4 million, and $ 2.0 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Note 16 — Dispositions
In the fourth quarter of 2019, the Company determined that one of its non-core product lines (the “disposal group”) met the held for sale criteria, and as such, the related assets are presented as “Assets held for sale” on the Consolidated Balance Sheet as of December 31, 2019. During the second quarter of 2020, the Company completed the sale of this product line for approximately $ 11.4 million, with approximately 85 % of the transaction price received upon closing, and 15 % held in escrow for a period of 18 months and included within “Prepaid expenses and other current assets” in the Consolidated Balance Sheet as of December 31, 2020. Long-lived assets and definite-lived intangible assets were not depreciated or amortized while classified as held for sale. The sale of this disposal group did not represent a strategic shift that will have a material effect on the Company’s operations and financial results, nor is it considered a component of the Company, and as such it did not meet the criteria to be reported as discontinued operations.
For the year ended December 31, 2019, the Company recorded a non-cash impairment charge on these assets held for sale of $ 4.0 million, included in “Asset impairment” in the Consolidated Statements of Operations, in order to measure the disposal group at the lower of its carrying value or fair value less costs to sell, which resulted in a corresponding held for sale valuation allowance on its assets held for sale in the Consolidated Balance Sheet. During the second quarter of 2020, the Company recorded additional impairment charges of $ 0.3 million related to the finalization of the sale of this disposal group.
The major classes of assets that were sold are as follows:
Net assets sold:
(in thousands)
Inventories
$
6,311
Property, plant, and equipment, net
372
Intangible assets, net
6,546
Goodwill
2,359
Deferred revenue
( 59 )
Total net assets sold
$
15,529
Net proceeds after costs to sell
( 11,228 )
Total impairment on sale of disposal group
$
4,301
Note 17 — Income Taxes
The amounts of income (loss) before income taxes attributable to domestic and foreign operations were as follows:
Year ended December 31,
2020
2019
2018
(in thousands)
Domestic
$
( 10,292 )
$
( 78,486 )
$
( 286,561 )
Foreign
1,828
530
( 147,273 )
Total
$
( 8,464 )
$
( 77,956 )
$
( 433,834 )
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Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Significant components of the expense (benefit) for income taxes consisted of the following:
Year ended December 31,
2020
2019
2018
(in thousands)
Current:
Federal
$
—
$
—
$
( 1,682 )
Foreign
22
304
2,518
State and local
204
113
38
Total current expense (benefit) for income taxes
226
417
874
Deferred:
Federal
136
162
205
Foreign
( 320 )
116
( 27,932 )
State and local
( 115 )
82
107
Total deferred expense (benefit) for income taxes
( 299 )
360
( 27,620 )
Total expense (benefit) for income taxes
$
( 73 )
$
777
$
( 26,746 )
The income tax expense was reconciled to the tax expense computed at the U.S. federal statutory tax rate as follows:
Year ended December 31,
2020
2019
2018
(in thousands)
Income tax expense (benefit) at U.S. statutory rates
$
( 1,777 )
$
( 16,396 )
$
( 91,105 )
State taxes, net of U.S. federal impact
( 121 )
( 835 )
( 2,848 )
Effect of international operations
( 131 )
785
11,847
Research and development tax credit
726
( 1,692 )
( 2,230 )
Net change in valuation allowance
388
15,098
7,747
Change in accrual for unrecognized tax benefits
( 6 )
1,232
2,868
Share-based compensation
2,248
1,947
1,848
Effect of 2017 Tax Act
—
—
( 1,690 )
Asset impairment
728
495
46,872
Partial extinguishment of 2023 Notes
( 2,292 )
—
—
Other
164
143
( 55 )
Total expense (benefit) for income taxes
$
( 73 )
$
777
$
( 26,746 )
F-36
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Deferred income taxes reflect the effect of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The tax effects of the temporary differences were as follows:
December 31,
2020
2019
(in thousands)
Deferred tax assets:
Inventory valuation
$
10,949
$
11,170
Net operating losses
51,260
63,342
Credit carry forwards
54,160
55,103
Warranty and installation accruals
1,045
1,391
Share-based compensation
4,587
6,296
Customer deposits and deferred revenue
10,982
5,986
Operating leases
2,281
3,181
Other
4,741
3,501
Total deferred tax assets
140,005
149,970
Valuation allowance
( 118,443 )
( 130,053 )
Net deferred tax assets
21,562
19,917
Deferred tax liabilities:
Purchased intangible assets
7,227
9,345
Convertible Senior Notes
13,674
8,831
Operating leases
2,241
3,172
Depreciation
2,220
2,668
Total deferred tax liabilities
25,362
24,016
Net deferred taxes
$
( 3,800 )
$
( 4,099 )
The Company is no longer permanently reinvesting future earnings from certain foreign jurisdictions and has accrued for foreign tax withholdings of $ 0.7 million on its unremitted earnings as of December 31, 2020.
At December 31, 2020, the Company had U.S. federal NOL carryforwards of approximately $ 219.3 million, of which $ 6.9 million has an indefinite carryforward period, with the remaining expiring in varying amounts between 2034 and 2037, if not utilized. At December 31, 2020, the Company had U.S. federal research and development credits of $ 28.8 million that will expire between 2021 and 2040. The Company also has $ 9.4 million of foreign tax credits that expire in 2027. Additionally, the Company has state and local NOL carryforwards of approximately $ 122.7 million (a net deferred tax asset of $ 7.7 million, net of federal tax benefits and before the valuation allowance) that will expire between 2021 and 2040. Finally, the Company has state credits of $ 28.4 million, some of which are indefinite and others that will expire between 2024 and 2035.
The Company makes assessments to estimate if sufficient taxable income will be generated in the future to use existing deferred tax assets. As of December 31, 2020, the Company continued to have a cumulative three year loss with respect to its U.S. operations. As such, the Company maintains a valuation allowance against its U.S. deferred tax assets. During 2020, the Company’s valuation allowance decreased by approximately $ 11.6 million.
F-37
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
A roll-forward of the Company’s uncertain tax positions for all U.S. federal, state, and foreign tax jurisdictions was as follows:
December 31,
2020
2019
2018
(in thousands)
Balance at beginning of year
$
12,369
$
11,137
$
8,269
Additions for tax positions related to current year
1,217
3,075
2,154
Additions for tax positions related to prior years
47
21
1,721
Reductions for tax positions related to prior years
( 1,166 )
( 1,814 )
( 934 )
Reductions due to the lapse of the statute of limitations
—
—
( 26 )
Settlements
( 104 )
( 50 )
( 47 )
Balance at end of year
$
12,363
$
12,369
$
11,137
If the amount of unrecognized tax benefits at December 31, 2020 were recognized, the Company’s income tax provision would decrease by $ 1.4 million. The gross amount of interest and penalties accrued in income tax payable in the Consolidated Balance Sheets was approximately $ 0.4 million at both December 31, 2020 and 2019.
The Company, or one of its subsidiaries, files income tax returns in the United States federal jurisdiction, and various state, local, and foreign jurisdictions. All material consolidated federal income tax matters have been concluded for years through 2017 subject to subsequent utilization of NOLs generated in such years. All material state and local income tax matters have been reviewed through 2012. The majority of the Company’s foreign jurisdictions have been reviewed through 2015. The Company’s major foreign jurisdictions’ statutes of limitation remain open with respect to the tax years 2015 through 2019 for China, Germany, and Singapore, and 2019 for Taiwan. The Company does not anticipate that its uncertain tax position will change significantly within the next twelve months subject to the completion of the ongoing tax audits and any resultant settlement.
Note 18 — Segment Reporting and Geographic Information
The Company operates and measures its results in one operating segment and therefore has one reportable segment: the development, manufacture, sales, and support of semiconductor and thin film process equipment primarily sold to make electronic devices. The Company’s Chief Operating Decision Maker, the Chief Executive Officer, evaluates performance of the Company and makes decisions regarding the allocation of resources based on total Company results.
In order to align with the Company’s evolving strategy, the Company now categorizes its sales into the following four end-markets: 1) Semiconductor; 2) Compound Semiconductor; 3) Data Storage; and 4) Scientific & Other.
Prior period sales have been reclassified to the new end-markets for comparative purposes. Sales by end-market is as follows:
For the year ended December 31,
2020
2019
2018
(in thousands)
Sales by end-market
Semiconductor
$
165,909
$
175,608
$
137,797
Compound Semiconductor
107,922
85,877
260,323
Data Storage
123,288
84,075
69,141
Scientific & Other
57,044
73,789
74,821
Total
$
454,163
$
419,349
$
542,082
The Company’s significant operations outside the United States include sales and service offices in China, Europe, and Rest of APAC. For geographic reporting, sales are attributed to the location in which the customer facility is located.
F-38
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Sales and long-lived tangible assets by geographic region are as follows:
Net Sales to Unaffiliated Customers
Long-lived Tangible Assets
2020
2019
2018
2020
2019
2018
(in thousands)
United States
$
145,353
$
126,160
$
125,659
$
64,967
$
75,187
$
78,503
EMEA (1)
73,124
57,351
89,102
120
143
205
China
57,589
71,078
194,032
84
130
81
Rest of APAC
177,569
164,363
131,519
100
251
1,495
Rest of World
528
397
1,770
—
—
—
Total
$
454,163
$
419,349
$
542,082
$
65,271
$
75,711
$
80,284
(1) EMEA consists of Europe, the Middle East, and Africa
Note 19 — Selected Quarterly Financial Information (unaudited)
The following table presents selected unaudited financial data for each fiscal quarter of 2020 and 2019. Although unaudited, this information has been prepared on a basis consistent with the Company’s audited Consolidated Financial Statements and, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are considered necessary for a fair presentation of this information in accordance with GAAP. Such quarterly results are not necessarily indicative of future results of operations.
Fiscal 2020
Fiscal 2019
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
(in thousands, except per share amounts)
Net sales
$
104,502
$
98,637
$
112,078
$
138,946
$
99,371
$
97,822
$
108,954
$
113,202
Gross profit
46,419
41,894
49,142
56,845
34,716
36,285
42,223
44,970
Net income (loss)
( 567 )
( 8,302 )
580
( 102 )
( 18,530 )
( 15,565 )
( 11,767 )
( 32,871 )
Basic income (loss) per common share
( 0.01 )
( 0.17 )
0.01
( 0.00 )
( 0.40 )
( 0.33 )
( 0.25 )
( 0.69 )
Diluted income (loss) per common share
( 0.01 )
( 0.17 )
0.01
( 0.00 )
( 0.40 )
( 0.33 )
( 0.25 )
( 0.69 )
As discussed in Note 11, “Debt”, the Company accounted for the partial settlements of the 2023 Notes in the second quarter and fourth quarter of 2020 as extinguishments, and as such, recorded losses on extinguishment of approximately $ 3.0 million and $ 4.8 million for the second and fourth quarter, respectively, which were included in “Other income (expense), net” in the Consolidated Statements of Operations. Refer to Note 11, “Debt” for additional information.
During the fourth quarter of 2019, the Company recorded a non-cash impairment charge of $ 21.0 million related to its equity investment in Kateeva which is included in “Other income (expense), net” in the Consolidated Statements of Operations, as well as a non-cash impairment charge of $ 4.0 million related to the classification of a disposal group as held for sale which is included in “Asset impairment” in the Consolidated Statements of Operations. Refer to Note 4, “Investments,” and Note 16, “Dispositions,” for additional information.
F-39
Table of Contents
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note 20 — Subsequent Event
On February 18, 2021, the Company entered into a lease agreement through 2037 for a new manufacturing facility in San Jose, California in order to expand its manufacturing capabilities to meet growing demand for its advanced laser annealing technology that serves the world’s leading semiconductor technology companies. With the transition to the new facility, the Company will remain in the Silicon Valley area in close proximity to leading U.S. semiconductor companies. The lease agreement contains two renewal options for a period of three years each, and has various escalation and abatement clauses, with annual base rent payable of between $ 2.0 million and $ 3.7 million through the initial lease period as well as certain other expenses, including maintenance, real estate taxes, and insurance. In addition, the lease agreement includes a tenant improvement allowance of $ 6.8 million to be used for the initial build-out.
F-40
Table of Contents
Schedule II — Valuation and Qualifying Accounts
Additions
Charged
Balance at
(Credited)
Charged to
Balance at
Beginning
to Costs and
Other
End of
Deducted from asset accounts:
of Period
Expenses
Accounts
Deductions
Period
(in thousands)
Year ended December 31, 2020
Allowance for doubtful accounts
$
602
$
140
$
—
$
( 6 )
$
736
Valuation allowance in net deferred tax assets
130,053
513
—
( 12,123 )
118,443
$
130,655
$
653
$
—
$
( 12,129 )
$
119,179
Year ended December 31, 2019
Allowance for doubtful accounts
$
270
$
392
$
—
$
( 60 )
$
602
Valuation allowance in net deferred tax assets
114,955
15,098
—
—
130,053
$
115,225
$
15,490
$
—
$
( 60 )
$
130,655
Year ended December 31, 2018
Allowance for doubtful accounts
$
270
$
—
$
—
$
—
$
270
Valuation allowance in net deferred tax assets
100,456
14,499
—
—
114,955
$
100,726
$
14,499
$
—
$
—
$
115,225
S-1