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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/03/20 Veeco Instruments Inc. 10-Q 6/30/20 75:9.6M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.20M
2: EX-10.2 Material Contract HTML 53K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 23K
13: R1 Document and Entity Information HTML 73K
14: R2 Consolidated Balance Sheets HTML 121K
15: R3 Consolidated Balance Sheets (Parenthetical) HTML 37K
16: R4 Consolidated Statements of Operations HTML 102K
17: R5 Consolidated Statements of Comprehensive Income HTML 44K
(Loss)
18: R6 Consolidated Statements of Cash Flows HTML 115K
19: R7 Basis of Presentation HTML 36K
20: R8 Income (Loss) Per Common Share HTML 72K
21: R9 Assets HTML 281K
22: R10 Liabilities HTML 158K
23: R11 Commitments and Contingencies HTML 47K
24: R12 Derivative Financial Instruments HTML 24K
25: R13 Equity HTML 214K
26: R14 Share-based Compensation HTML 76K
27: R15 Income Taxes HTML 44K
28: R16 Segment Reporting and Geographic Information HTML 82K
29: R17 Basis of Presentation (Policies) HTML 51K
30: R18 Income (Loss) Per Share (Tables) HTML 70K
31: R19 Assets (Tables) HTML 284K
32: R20 Liabilities (Tables) HTML 146K
33: R21 Commitments and Contingencies (Tables) HTML 40K
34: R22 Equity (Tables) HTML 215K
35: R23 Share-based Compensation (Tables) HTML 80K
36: R24 Income Taxes (Tables) HTML 38K
37: R25 Segment Reporting and Geographic Information HTML 125K
(Tables)
38: R26 Basis of Presentation - Fiscal Period (Details) HTML 22K
39: R27 Basis of Presentation - Revenue Recognition HTML 24K
(Details)
40: R28 Basis of Presentation - Recently Adopted HTML 39K
Accounting Standards (Details)
41: R29 Income (Loss) Per Share - Basic and Diluted HTML 50K
(Details)
42: R30 Income (Loss) Per Share - Shares Excluded from EPS HTML 30K
(Details)
43: R31 Assets - Fair Value (Details) HTML 68K
44: R32 Assets - Available-For-Sale Securities (Details) HTML 62K
45: R33 Assets - Accounts Receivable (Detail) HTML 27K
46: R34 Assets - Inventories (Details) HTML 30K
47: R35 Assets - Prepaid Expenses and Other Current Assets HTML 22K
(Details)
48: R36 Assets - Assets held for sale (Details) HTML 60K
49: R37 Assets - Property, Plant, and Equipment (Details) HTML 42K
50: R38 Assets - Intangible Assets (Details) HTML 44K
51: R39 Liabilities - Accrued Expenses and Other Current HTML 43K
Liabilities (Details)
52: R40 Liabilities - Warranty (Details) HTML 31K
53: R41 Liabilities - Restructuring Accruals (Details) HTML 31K
54: R42 Liabilities - Customer Deposits and Deferred HTML 31K
Revenue (Details)
55: R43 Liabilities - Performance Obligations Amount HTML 28K
(Details)
56: R44 Liabilities - Performance Obligations Timing HTML 31K
(Details)
57: R45 Liabilities - 2023 Convertible Senior Notes HTML 44K
(Details)
58: R46 Liabilities - 2027 Convertible Senior Notes HTML 69K
(Details)
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Amount (Details)
60: R48 Liabilities - Convertible Senior Notes - Interest HTML 43K
Expense (Details)
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(Details)
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64: R52 Commitments and Contingencies - Lease costs HTML 28K
(Details)
65: R53 Commitments and Contingencies - Purchase HTML 28K
Commitments and Bank Guarantees (Details)
66: R54 Commitments and Contingencies - Legal Proceedings HTML 24K
(Detail)
67: R55 Equity - Statement of Stockholders' Equity HTML 77K
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70: R58 Income Taxes (Details) HTML 34K
71: R59 Segment Reporting and Geographic Information HTML 51K
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73: XML IDEA XML File -- Filing Summary XML 130K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
(Mark One)
i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i June 30, 2020
OR
i ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number i 0-16244
i VEECO INSTRUMENTS INC.
(Exact Name of Registrant as Specified in Its Charter)
| | |
i Delaware |
| i 11-2989601 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| | |
i Terminal Drive | | i 11803 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code:
( i 516) i 677-0200
Securities registered pursuant to Section 12(b) of the Act:
| ||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
i Common Stock, par value $0.01 per share | i VECO | i The NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
i Large accelerated filer ☒ |
| |
| Accelerated filer ☐ |
Non-accelerated filer ☐ | | | | Smaller reporting company i ☐ |
| | | | Emerging growth company i ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i ☐ No ☒
As of July 29, 2020, there were i 49,619,080 shares of the registrant’s common stock outstanding.
VEECO INSTRUMENTS INC.
INDEX
Safe Harbor Statement
This quarterly report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing such forward-looking statements may be found in Part I - Items 1, 2, and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results.
In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events, including the potential impact of the COVID-19 pandemic on our business, and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.
The risks and uncertainties of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “we,” “us,” and “our,” unless the context indicates otherwise) include, without limitation, those set forth under the heading “Risk Factors” Part 1, Item 1A in our 2019 Form 10-K, Part 2, Item 1A of our quarterly report on Form 10-Q for the quarter ended March 31, 2020, and Part 2, Item 1A in this quarterly report, and the following:
| ● | The unknown duration and economic, operational, and financial impacts of the COVID-19 pandemic and the actions taken or contemplated by governmental authorities or others in response to the pandemic on our business, employees, customers and suppliers, including, among others, (a) changes in customer demand for our products, (b) disruptions in our supply chain, particularly to the extent we rely on a single supplier for certain components, (c) financial challenges confronting major customers in light of reduced end-user demand for their products, (d) operational changes implemented by us, including remote working arrangements, which may put increased strain on our IT systems and create increased vulnerability to cybersecurity incidents, (e) increases in shipping, raw material or other costs, (f) competitive pricing pressures, and (g) prolonged measures to contain the spread of COVID-19 or the premature easing of government-imposed restrictions implemented to contain the spread of COVID-19; |
| ● | Unfavorable market conditions have adversely affected, and may continue to adversely affect, our operating results; |
| ● | We are exposed to the risks of operating a global business; |
| ● | Changes in U.S. trade policy and export controls and ongoing trade disputes between the U.S. and China have adversely affected, and may continue to adversely affect, our business, results of operations, and financial condition; |
| ● | Disruptions in our information technology systems or data security incidents could result in significant financial, legal, regulatory, business, and reputational harm to us; |
| ● | We may be unable to effectively enforce and protect our intellectual property rights; |
| ● | We may be subject to claims of intellectual property infringement by others; |
| ● | We face significant competition; |
| ● | We operate in industries characterized by rapid technological change; |
1
| ● | Certain of our sales are dependent on the demand for consumer electronics, which can experience significant volatility due to seasonal and other factors; |
| ● | We have a concentrated customer base, located primarily in a limited number of regions, which operates in highly concentrated industries; |
| ● | The cyclicality of the industries we serve directly affects our business; |
| ● | The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly; |
| ● | Our sales cycle is long and unpredictable; |
| ● | Our backlog is subject to customer cancellation or modification which could result in decreased sales, increased inventory obsolescence, and liabilities to our suppliers for products no longer needed; |
| ● | We may be unable to obtain required export licenses for the sale of our products; |
| ● | Our operating results may be adversely affected by tightening credit markets; |
| ● | Our failure to estimate customer demand accurately could result in inventory obsolescence, liabilities to our suppliers for products no longer needed, and manufacturing interruptions or delays which could affect our ability to meet customer demand; |
| ● | Our failure to successfully manage our outsourcing activities or failure of our outsourcing partners to perform as anticipated could adversely affect our results of operations; |
| ● | We rely on a limited number of suppliers, some of whom are our sole source for particular components; |
| ● | The price of our common shares is volatile and could decrease; |
| ● | We may be required to take impairment charges on assets; |
| ● | Our inability to attract, retain, and motivate employees could have a material adverse effect on our business; |
| ● | We are exposed to risks associated with business combinations, acquisitions, strategic investments and divestitures; |
| ● | We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act and any delays or difficulties in satisfying these requirements or negative reports concerning our internal controls could adversely affect our future results of operations and our stock price; |
| ● | Changes in accounting pronouncements or taxation rules or practices may adversely affect our financial results; |
| ● | Our income taxes may change; |
| ● | We have indebtedness in the form of convertible senior notes which could adversely affect our financial position, prevent us from implementing our strategy, and dilute the ownership interest of our existing shareholders; |
| ● | The accounting method for convertible debt securities that may be settled in cash, such as the 2023 and 2027 Notes, could have a material effect on our reported financial results; |
2
| ● | The effects of the capped call transactions that we entered in connection with the issuance of the convertible senior notes due 2027, as further discussed in “Risk Factors” in Part 2, Item 1A below; |
| ● | We are subject to foreign currency exchange risks; |
| ● | We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our Company by another company more difficult; |
| ● | We are exposed to various risks associated with global regulatory requirements; |
| ● | We may be exposed to liabilities under the Foreign Corrupt Practices Act and other similar laws; |
| ● | We are subject to risks of non-compliance with environmental, health, and safety regulations; and |
| ● | We have significant operations in locations which could be materially and adversely impacted in the event of a natural disaster, an act of terrorism, or other significant disruption. |
Consequently, such forward looking statements and estimates should be regarded solely as the current plans and beliefs of Veeco. We do not undertake any obligation to update any forward looking statements to reflect future events or circumstances after the date of such statements.
3
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Veeco Instruments Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
| | | | | | |
| | June 30, | | |||
|
| 2020 |
| 2019 | ||
| | (unaudited) | | | | |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | i 188,203 | | $ | i 129,294 |
Restricted cash | | | i 647 | | | i 657 |
Short-term investments | |
| i 112,279 | |
| i 115,252 |
Accounts receivable, net | |
| i 67,291 | |
| i 45,666 |
Contract assets | | | i 13,180 | | | i 25,351 |
Inventories | |
| i 136,555 | |
| i 133,067 |
Deferred cost of sales | |
| i 1,676 | |
| i 445 |
Prepaid expenses and other current assets | | | i 18,544 | | | i 14,966 |
Assets held for sale | | | — | | | i 11,180 |
Total current assets | |
| i 538,375 | |
| i 475,878 |
Property, plant, and equipment, net | |
| i 69,170 | |
| i 75,711 |
Operating lease right-of-use assets | | | i 12,981 | | | i 14,453 |
Intangible assets, net | | | i 53,846 | | | i 61,518 |
Goodwill | |
| i 181,943 | |
| i 181,943 |
Deferred income taxes | | | i 1,555 | | | i 1,549 |
Other assets | |
| i 7,200 | |
| i 7,036 |
Total assets | | $ | i 865,070 | | $ | i 818,088 |
| | | | | | |
Liabilities and stockholders' equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | i 25,973 | | $ | i 21,281 |
Accrued expenses and other current liabilities | |
| i 42,306 | |
| i 41,243 |
Customer deposits and deferred revenue | |
| i 58,281 | |
| i 54,870 |
Income taxes payable | |
| i 923 | |
| i 830 |
Total current liabilities | |
| i 127,483 | |
| i 118,224 |
Deferred income taxes | |
| i 5,844 | |
| i 5,648 |
Long-term debt | |
| i 317,314 | |
| i 300,068 |
Operating lease long-term liabilities | | | i 9,004 | | | i 10,300 |
Other liabilities | |
| i 10,094 | |
| i 9,336 |
Total liabilities | |
| i 469,739 | |
| i 443,576 |
Stockholders' equity: | | | | | | |
Preferred stock, $ i i 0.01 / par value; i i 500,000 / shares authorized; i i no / shares issued and outstanding. | |
| — | | | — |
Common stock, $ i i 0.01 / par value; i i 120,000,000 / shares authorized; i 49,618,908 shares issued and outstanding at June 30, 2020 and i 48,994,346 shares issued and outstanding at December 31, 2019 | |
| i 497 | |
| i 490 |
Additional paid-in capital | |
| i 1,100,716 | |
| i 1,071,058 |
Accumulated deficit | |
| ( i 707,799) | |
| ( i 698,930) |
Accumulated other comprehensive income | |
| i 1,917 | |
| i 1,894 |
Total stockholders' equity | |
| i 395,331 | |
| i 374,512 |
Total liabilities and stockholders' equity | | $ | i 865,070 | | $ | i 818,088 |
See accompanying Notes to the Consolidated Financial Statements.
4
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Net sales | | $ | i 98,637 | | $ | i 97,822 | | $ | i 203,139 | | $ | i 197,193 | |
Cost of sales | |
| i 56,743 | |
| i 61,537 | |
| i 114,826 | |
| i 126,192 | |
Gross profit | |
| i 41,894 | | | i 36,285 | | | i 88,313 | | | i 71,001 | |
Operating expenses, net: | | | | | | | | | | | | | |
Research and development | |
| i 19,254 | |
| i 22,922 | |
| i 38,449 | |
| i 46,262 | |
Selling, general, and administrative | |
| i 17,818 | |
| i 19,757 | |
| i 36,123 | |
| i 39,660 | |
Amortization of intangible assets | |
| i 3,834 | |
| i 4,243 | |
| i 7,671 | |
| i 8,460 | |
Restructuring | |
| i 472 | |
| i 616 | |
| i 1,097 | |
| i 2,046 | |
Asset impairment | |
| i 281 | |
| — | |
| i 281 | |
| — | |
Other operating expense (income), net | | | ( i 174) | | | ( i 44) | | | ( i 283) | | | ( i 80) | |
Total operating expenses, net | | | i 41,485 | | | i 47,494 | | | i 83,338 | | | i 96,348 | |
Operating income (loss) | |
| i 409 | |
| ( i 11,209) | |
| i 4,975 | |
| ( i 25,347) | |
Interest income | |
| i 427 | |
| i 1,284 | |
| i 1,227 | |
| i 2,529 | |
Interest expense | |
| ( i 6,041) | |
| ( i 5,495) | |
| ( i 11,706) | |
| ( i 10,941) | |
Loss on extinguishment of debt | | | ( i 3,046) | | | — | | | ( i 3,046) | | | — | |
Income (loss) before income taxes | |
| ( i 8,251) | | | ( i 15,420) | | | ( i 8,550) | | | ( i 33,759) | |
Income tax expense (benefit) | |
| i 51 | |
| i 145 | |
| i 319 | |
| i 336 | |
Net income (loss) | | $ | ( i 8,302) | | $ | ( i 15,565) | | $ | ( i 8,869) | | $ | ( i 34,095) | |
| | | | | | | | | | | | | |
Income (loss) per common share: | | | | | | | | | | | | | |
Basic | | $ | ( i 0.17) | | $ | ( i 0.33) | | $ | ( i 0.18) | | $ | ( i 0.72) | |
Diluted | | $ | ( i 0.17) | | $ | ( i 0.33) | | $ | ( i 0.18) | | $ | ( i 0.72) | |
| | | | | | | | | | | | | |
Weighted average number of shares: | | | | | | | | | | | | | |
Basic | |
| i 48,109 | |
| i 47,112 | |
| i 48,147 | |
| i 47,145 | |
Diluted | |
| i 48,109 | |
| i 47,112 | |
| i 48,147 | |
| i 47,145 | |
See accompanying Notes to the Consolidated Financial Statements.
5
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Net income (loss) | | $ | ( i 8,302) | | $ | ( i 15,565) | | $ | ( i 8,869) | | $ | ( i 34,095) | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | |
Unrealized gain (loss) on available-for-sale securities | |
| ( i 148) | |
| i 18 | |
| i 53 | |
| i 45 | |
Foreign currency translation gain (loss) | | | i 18 | | | i 2 | | | ( i 30) | | | i 13 | |
Total other comprehensive income (loss), net of tax | |
| ( i 130) | |
| i 20 | |
| i 23 | |
| i 58 | |
| | | | | | | | | | | | | |
Total comprehensive income (loss) | | $ | ( i 8,432) | | $ | ( i 15,545) | | $ | ( i 8,846) | | $ | ( i 34,037) | |
See accompanying Notes to the Consolidated Financial Statements.
6
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| | | | | | | |
| | Six months ended June 30, | | ||||
|
| 2020 |
| 2019 |
| ||
Cash Flows from Operating Activities | | | | | | | |
Net income (loss) | | $ | ( i 8,869) | | $ | ( i 34,095) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
Depreciation and amortization | |
| i 15,372 | |
| i 17,315 | |
Non-cash interest expense | | | i 6,778 | | | i 6,219 | |
Deferred income taxes | |
| i 191 | |
| i 10 | |
Share-based compensation expense | |
| i 6,620 | |
| i 7,745 | |
Loss on extinguishment of debt | | | i 3,046 | | | — | |
Asset impairment | | | i 281 | | | — | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable and contract assets | |
| ( i 9,454) | |
| i 6,227 | |
Inventories and deferred cost of sales | |
| ( i 4,520) | |
| i 8,534 | |
Prepaid expenses and other current assets | |
| ( i 3,578) | |
| ( i 3,957) | |
Accounts payable and accrued expenses | |
| i 5,820 | |
| ( i 25,955) | |
Customer deposits and deferred revenue | |
| i 3,470 | |
| i 11,294 | |
Income taxes receivable and payable, net | |
| i 93 | |
| ( i 587) | |
Other, net | |
| i 2,300 | |
| ( i 891) | |
Net cash provided by (used in) operating activities | |
| i 17,550 | |
| ( i 8,141) | |
| | | | | | | |
Cash Flows from Investing Activities | | | | | | | |
Capital expenditures | |
| ( i 1,957) | |
| ( i 6,441) | |
Proceeds from the sale of investments | |
| i 103,630 | |
| i 40,500 | |
Payments for purchases of investments | |
| ( i 100,265) | |
| ( i 76,108) | |
Proceeds from held for sale assets, net of costs to sell | |
| i 9,503 | |
| — | |
Net cash provided by (used in) investing activities | | | i 10,911 | | | ( i 42,049) | |
| | | | | | | |
Cash Flows from Financing Activities | | | | | | | |
Proceeds from issuance of 2027 Notes, net of issuance costs | | | i 121,946 | | | — | |
Purchase of capped calls | | | ( i 10,313) | | | — | |
Repurchase of 2023 Notes | | | ( i 81,240) | | | — | |
Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan | |
| i 1,592 | |
| i 1,784 | |
Restricted stock tax withholdings | |
| ( i 1,518) | |
| ( i 2,241) | |
Net cash provided by (used in) financing activities | |
| i 30,467 | |
| ( i 457) | |
Effect of exchange rate changes on cash and cash equivalents | |
| ( i 29) | |
| i 13 | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | |
| i 58,899 | |
| ( i 50,634) | |
Cash, cash equivalents, and restricted cash - beginning of period | |
| i 129,951 | |
| i 213,082 | |
Cash, cash equivalents, and restricted cash - end of period | | $ | i 188,850 | | $ | i 162,448 | |
| | | | | | | |
Supplemental Disclosure of Cash Flow Information | | | | | | | |
Interest paid | | $ | i 5,508 | | $ | i 4,721 | |
Income taxes paid | | | i 66 | | | i 2,618 | |
Non-cash operating and financing activities | | | | | | | |
Net transfer of property, plant and equipment to inventory | | | i 526 | | | i 3,695 | |
Right-of-use assets obtained in exchange for lease obligations | | | i 913 | | | i 339 | |
See accompanying Notes to the Consolidated Financial Statements.
7
Note 1 — Basis of Presentation
iThe accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature.
iVeeco reports interim quarters on a i 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2020 interim quarters end on March 29, June 28, and September 27, and the 2019 interim quarters ended on March 31, June 30, and September 29. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.
/ iThe preparation of financial statements in conformity with U.S GAAP requires the Company’s 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, actual results may differ from these estimates. In particular, the COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Company’s business and markets, including the Company’s workforce and operations and the operations of the Company’s customers, suppliers, and business partners. The full extent to which the pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including sales, expenses, manufacturing, research and development costs, reserves and allowances, fair value measurements, and asset impairment charges, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
iRevenue Recognition
Revenue is recognized upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration the Company expects to receive in exchange for such product or service. The Company’s contracts with customers generally do not contain variable consideration. In the rare instances where variable consideration is included, the Company estimates the amount of variable consideration and determines what portion of that, if any, has a high probability of significant subsequent revenue reversal, and if so, that amount is excluded from the transaction price. The Company’s contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, installation, maintenance, and service plans. Judgment is required to properly identify the performance obligations within a contract and to determine how the revenue should be allocated among the performance obligations. The Company also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single contract based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another.
When there are separate units of accounting, the Company allocates revenue to each performance obligation on a relative stand-alone selling price basis. The stand-alone selling prices are determined based on the prices at which the Company separately sells the systems, upgrades, components, spare parts, installation, maintenance, and service plans. For items
/8
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
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, typically i 10% of the sales price, which is billed by the Company and payable by the customer when field acceptance provisions are completed. Revenue recognized in advance of the amount that has been billed is recorded as a contract asset on the Consolidated Balance Sheets.
The Company recognizes revenue related to maintenance and service contracts over time based upon the respective contract term. Installation revenue is recognized over time as the installation services are performed. The Company recognizes revenue from the sales of components, spare parts, and specified service engagements at a point in time, which is typically consistent with the time of delivery in accordance with the terms of the applicable sales arrangement.
The Company may receive customer deposits on system transactions. The timing of the transfer of goods or services related to the deposits is either at the discretion of the customer or expected to be within one year from the deposit receipt. As such, the Company does not adjust transaction prices for the time value of money. Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred since the expected amortization period is i one year or less.
The Company has elected to treat shipping and handling costs as a fulfillment activity, and the Company includes such costs in cost of services when the Company recognizes revenue for the related goods. Taxes assessed by governmental authorities that are collected by the Company from a customer are excluded from revenue.
iInventories
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
9
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
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.
iRecently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard 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. As permitted by ASU 2019-12, the Company i early- i adopted this standard in the second quarter of 2020, effective as of the beginning of fiscal year 2020. The adoption did not have a material impact on the Company’s consolidated financial statements as of the date of adoption.
/
iNote 2 — Income (Loss) Per Common Share
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted income per share is calculated by dividing net income by the weighted average number of shares used to calculate basic income (loss) per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share if 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 three and six months ended June 30, 2020 and 2019 are as follows:
i
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in thousands, except per share amounts) | | ||||||||||
Net income (loss) | | $ | ( i 8,302) | | $ | ( i 15,565) | | $ | ( i 8,869) | | $ | ( i 34,095) | |
Net income (loss) per common share: | | | | | | | | | | | | | |
Basic | | $ | ( i 0.17) | | $ | ( i 0.33) | | $ | ( i 0.18) | | $ | ( i 0.72) | |
Diluted | | $ | ( i 0.17) | | $ | ( i 0.33) | | $ | ( i 0.18) | | $ | ( i 0.72) | |
| | | | | | | | | | | | | |
Basic weighted average shares outstanding | |
| i 48,109 | |
| i 47,112 | |
| i 48,147 | |
| i 47,145 | |
Effect of potentially dilutive share-based awards | |
| — | |
| — | |
| — | |
| — | |
Diluted weighted average shares outstanding | |
| i 48,109 | |
| i 47,112 | |
| i 48,147 | |
| i 47,145 | |
| | | | | | | | | | | | | |
Common share equivalents excluded from the diluted weighted average shares outstanding since the Company incurred a net loss and their effect would be antidilutive | | | i 712 | | | i 498 | | | i 671 | | | i 344 | |
Potentially dilutive shares excluded from the diluted calculation as their effect would be antidilutive | | | i 1,194 | | | i 1,903 | | | i 1,132 | | | i 1,933 | |
Maximum potential shares to be issued for settlement of the 2023 and 2027 Notes excluded from the diluted calculation as their effect would be antidilutive | | | i 15,354 | | | i 8,618 | | | i 15,354 | | | i 8,618 | |
/
10
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
Note 3 — Assets
Investments
Short-term investments are generally classified as available-for-sale and reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income” in the Consolidated Balance Sheets. These securities may include U.S. treasuries, government agency securities, corporate debt, and commercial paper, all with maturities of greater than three months when purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other, net” in the Consolidated Statements of Operations.
Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. Veeco classifies certain assets based on the following fair value hierarchy:
Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Veeco has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions or estimation methodologies could have a significant effect on the estimated fair value amounts.
11
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019:
i
| | | | | | | | | | | | |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | (in thousands) | ||||||||||
| | | | | | | | | | | | |
Cash equivalents | | | | | | | | | | | | |
Certificate of deposits and time deposits | | $ | i 94,303 | | $ | — | | $ | — | | $ | i 94,303 |
Government money market fund | | | i 48,172 | | | — | | | — | | | i 48,172 |
Commercial paper | | | — | | | i 5,999 | | | — | | | i 5,999 |
Total | | $ | i 142,475 | | $ | i 5,999 | | $ | — | | $ | i 148,474 |
Short-term investments | | | | | | | | | | | | |
U.S. treasuries | | $ | i 77,746 | | $ | — | | $ | — | | $ | i 77,746 |
Government agency securities | | | — | | | i 5,995 | | | — | | | i 5,995 |
Corporate debt | | | — | | | i 12,078 | | | — | | | i 12,078 |
Commercial paper | | | — | | | i 16,460 | | | — | | | i 16,460 |
Total | | $ | i 77,746 | | $ | i 34,533 | | $ | — | | $ | i 112,279 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash equivalents | | | | | | | | | | | | |
Certificate of deposits and time deposits | | $ | i 67,009 | | $ | — | | $ | — | | $ | i 67,009 |
Commercial paper | | | — | | | i 10,484 | | | — | | | i 10,484 |
Corporate debt | | | — | | | i 1,000 | | | — | | | i 1,000 |
Total | | $ | i 67,009 | | $ | i 11,484 | | $ | — | | $ | i 78,493 |
Short-term investments | | | | | | | | | | | | |
U.S. treasuries | | $ | i 105,130 | | $ | — | | $ | — | | $ | i 105,130 |
Government agency securities | | | — | | | i 1,139 | | | — | | | i 1,139 |
Corporate debt | | | — | | | i 6,002 | | | — | | | i 6,002 |
Commercial paper | | | — | | | i 2,981 | | | — | | | i 2,981 |
Total | | $ | i 105,130 | | $ | i 10,122 | | $ | — | | $ | i 115,252 |
There were i no transfers between fair value measurement levels during the six months ended June 30, 2020.
12
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
At June 30, 2020 and December 31, 2019, the amortized cost and fair value of available-for-sale securities consist of:
i
| | | | | | | | | | | | |
|
| | |
| Gross |
| Gross |
| | |||
| | Amortized | | Unrealized | | Unrealized | | Estimated | ||||
| | Cost | | Gains | | Losses | | Fair Value | ||||
| | (in thousands) | ||||||||||
| | | | | | | | | | | | |
U.S. treasuries | | $ | i 77,692 | | $ | i 58 | | $ | ( i 4) | | $ | i 77,746 |
Government agency securities | | | i 5,971 | | | i 24 | | | — | | | i 5,995 |
Corporate debt | | | i 12,069 | | | i 13 | | | ( i 4) | | | i 12,078 |
Commercial paper | | | i 16,459 | | | i 1 | | | — | | | i 16,460 |
Total | | $ | i 112,191 | | $ | i 96 | | $ | ( i 8) | | $ | i 112,279 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
U.S. treasuries | | $ | i 105,096 | | $ | i 38 | | $ | ( i 4) | | $ | i 105,130 |
Government agency securities | | | i 1,139 | | | — | | | — | | | i 1,139 |
Corporate debt | |
| i 6,003 | |
| — | |
| ( i 1) | |
| i 6,002 |
Commercial paper | | | i 2,981 | | | — | | | — | | | i 2,981 |
Total | | $ | i 115,219 | | $ | i 38 | | $ | ( i 5) | | $ | i 115,252 |
Available-for-sale securities in a loss position at June 30, 2020 and December 31, 2019 consist of:
i
| | | | | | | | | | | | |
| | | ||||||||||
|
| | |
| Gross |
| |
| Gross | |||
| | Estimated | | Unrealized | | Estimated | | Unrealized | ||||
| | Fair Value | | Losses | | Fair Value | | Losses | ||||
| | | (in thousands) | |||||||||
U.S. treasuries | | $ | i 55,320 | | $ | ( i 4) | | $ | i 22,943 | | $ | ( i 4) |
Corporate debt | |
| i 4,040 | |
| ( i 4) | |
| i 6,002 | |
| ( i 1) |
Total | | $ | i 59,360 | | $ | ( i 8) | | $ | i 28,945 | | $ | ( i 5) |
At June 30, 2020 and December 31, 2019, there were i i 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 June 30, 2020 were all due in one year or less, and an allowance for credit loss is considered unnecessary. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were i i no / realized gains or losses for the six months ended June 30, 2020 and 2019.
Accounts Receivable
Accounts receivable is presented net of an allowance for doubtful accounts of $ i i i 0.6 / / million at June 30, 2020 and December 31, 2019. The Company considered its current expectations of future economic conditions, including the impact of COVID-19, when estimating its allowance for doubtful accounts. As a result of this assessment, i no increase to the Company’s allowance for doubtful accounts was deemed necessary.
13
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
Inventories
Inventories at June 30, 2020 and December 31, 2019 consist of the following:
i
| | | | | | |
| | June 30, | | |||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Materials | | $ | i 76,977 | | $ | i 82,155 |
Work-in-process | |
| i 52,380 | |
| i 42,575 |
Finished goods | |
| i 7,198 | |
| i 8,337 |
Total | | $ | i 136,555 | | $ | i 133,067 |
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, and prepaid licenses. Veeco had deposits with its suppliers of $ i 5.2 million and $ i 5.9 million at June 30, 2020 and December 31, 2019, respectively.
Assets Held for Sale
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 were presented as “Assets held for sale” on the Consolidated Balance Sheets as of December 31, 2019. During the three months ended June 30, 2020, the Company completed the sale of this product line for approximately $ i 11.4 million, with approximately i 85% of the transaction price received upon closing, and i 15% held in escrow for a period of i 18 months and included within “Other Assets” in the Consolidated Balance Sheets. 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 does 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 $ i 4.0 million 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 three and six months ended June 30, 2020, the Company recorded additional impairment charges of $ i i 0.3 / million related to the finalization of the sale of this disposal group. The major classes of assets and liabilities that were sold are as follows:
i
| | | |
| | | |
Net assets sold: |
| (in thousands) | |
Inventories | | $ | i 6,311 |
Property, plant, and equipment, net | | | i 372 |
Intangible assets, net | | | i 6,546 |
Goodwill | | | i 2,359 |
Deferred revenue | | | ( i 59) |
Total net assets sold | | $ | i 15,529 |
Net proceeds after costs to sell | | | ( i 11,228) |
Total loss on sale of disposal group | | $ | i 4,301 |
14
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
Property, Plant, and Equipment
Property, plant, and equipment at June 30, 2020 and December 31, 2019 consist of the following:
i
| | | | | | |
| | June 30, | | |||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Land | | $ | i 5,061 | | $ | i 5,061 |
Building and improvements | |
| i 62,732 | |
| i 61,884 |
Machinery and equipment (1) | |
| i 137,192 | |
| i 137,692 |
Leasehold improvements | |
| i 6,795 | |
| i 6,703 |
Gross property, plant, and equipment | |
| i 211,780 | |
| i 211,340 |
Less: accumulated depreciation and amortization | |
| i 142,610 | |
| i 135,629 |
Net property, plant, and equipment | | $ | i 69,170 | | $ | i 75,711 |
| (1) | Machinery and equipment also includes software, furniture and fixtures |
/For the three and six months ended June 30, 2020, depreciation expense was $ i 3.8 million and $ i 7.7 million, respectively, and $ i 4.3 million and $ i 8.9 million for the comparable 2019 periods.
Goodwill
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The Company continues to assess potential triggering events related to the value of its goodwill, including the COVID-19 pandemic, and concluded that there were no indicators of impairment during the six months ended June 30, 2020.
Intangible Assets
Intangible assets consist of purchased technology, customer relationships, patents, trademarks and tradenames, and backlog, and are initially recorded at fair value. Long-lived intangible assets are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line basis if such pattern cannot be reliably determined. The Company continues to assess potential triggering events related to the value of its intangible assets, including the COVID-19 pandemic, and concluded that there were no indicators of impairment during the six months ended June 30, 2020.
The components of purchased intangible assets were as follows:
i
| | | | | | | | | | | | | | | | | | |
| | | ||||||||||||||||
| | | | | Accumulated | | | | | | | | Accumulated | | | | ||
|
| Gross |
| Amortization |
| |
| Gross |
| Amortization |
| | ||||||
| | Carrying | | and | | Net | | Carrying | | and | | Net | ||||||
| | Amount | | Impairment | | Amount | | Amount | | Impairment | | Amount | ||||||
| | (in thousands) | ||||||||||||||||
Technology | | $ | i 327,908 | | $ | i 297,062 | | $ | i 30,846 | | $ | i 327,908 | | $ | i 291,766 | | $ | i 36,142 |
Customer relationships | | | i 146,465 | | | i 128,448 | | | i 18,017 | | | i 146,465 | | | i 126,764 | | | i 19,701 |
Trademarks and tradenames | | | i 30,910 | | | i 25,935 | | | i 4,975 | | | i 30,910 | | | i 25,256 | | | i 5,654 |
Other | |
| i 3,686 | |
| i 3,678 | |
| i 8 | |
| i 3,686 | |
| i 3,665 | |
| i 21 |
Total | | $ | i 508,969 | | $ | i 455,123 | | $ | i 53,846 | | $ | i 508,969 | | $ | i 447,451 | | $ | i 61,518 |
Other intangible assets primarily consist of patents, licenses, and backlog.
15
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
| | | |
iNote 4 — Liabilities
Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities at June 30, 2020 and December 31, 2019 consist of:
i
| | | | | | |
| | June 30, | | |||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Payroll and related benefits | | $ | i 21,267 | | $ | i 15,174 |
Warranty | | | i 5,518 | | | i 7,067 |
Operating lease liabilities | | | i 4,104 | | | i 4,196 |
Interest | | | i 3,750 | | | i 4,321 |
Professional fees | | | i 1,171 | | | i 2,443 |
Sales, use, and other taxes | |
| i 2,533 | |
| i 811 |
Restructuring liability | |
| i 1,233 | |
| i 2,841 |
Other | |
| i 2,730 | |
| i 4,390 |
Total | | $ | i 42,306 | | $ | i 41,243 |
Warranty
Warranties are typically valid for i one year from the date of system final acceptance, and Veeco estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and are affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. Changes in product warranty reserves for the six months ended June 30, 2020 include:
i
| | | |
| | | (in thousands) |
Balance - December 31, 2019 | | $ | i 7,067 |
Warranties issued | |
| i 1,614 |
Consumption of reserves | |
| ( i 3,280) |
Changes in estimate | |
| i 117 |
Balance - June 30, 2020 | | $ | i 5,518 |
Restructuring Accruals
The Company continued to record restructuring charges during the year ended December 31, 2019 as a result of its efforts to further streamline operations, enhance efficiencies, and reduce costs. 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 i 60 employees. During the six months ended June 30, 2020, additional accruals were recognized and payments were made related to these restructuring initiatives.
The following table shows the amounts incurred and paid for restructuring activities during the six months ended June 30, 2020, and the remaining accrued balance of restructuring costs at June 30, 2020, which is included in “Accrued
/16
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
expenses and other current liabilities” in the Consolidated Balance Sheets, and principally consists of personnel severance and related costs:
i
| | | |
|
| | |
| | | |
| | | |
| | (in thousands) | |
Balance - December 31, 2019 | | $ | i 2,841 |
Provision | | | i 1,097 |
Payments | | | ( i 2,705) |
Balance - June 30, 2020 | | $ | i 1,233 |
Customer Deposits and Deferred Revenue
Customer deposits totaled $ i 39.9 million and $ i 26.6 million at June 30, 2020 and December 31, 2019, respectively. Deferred revenue represents amounts billed, other than deposits, in excess of the revenue that can be recognized on a particular contract at the balance sheet date. Changes in deferred revenue were as follows:
i
| | | |
| | (in thousands) | |
Balance - December 31, 2019 |
| $ | i 28,249 |
Deferral of revenue | |
| i 6,180 |
Recognition of previously deferred revenue | |
| ( i 16,054) |
Balance - June 30, 2020 |
| $ | i 18,375 |
As of June 30, 2020, the Company has approximately $ i 25.0 million of remaining performance obligations on contracts with an original estimated duration of i one year or more, of which approximately i 81% is expected to be recognized within i 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 i one year or less.
Convertible Senior Notes
2023 Notes
On January 10, 2017, the Company issued $ i 345.0 million of i 2.70% convertible senior unsecured notes (the “2023 Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $ i 335.8 million. The 2023 Notes bear interest at a rate of i 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 $ i 125 million aggregate principal amount of i 3.75% convertible senior notes described below, the Company repurchased and retired approximately $ i 88.3 million in aggregate principal amount of its outstanding 2023 Notes, with a carrying amount of $ i 78.1 million, for approximately $ i 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 $ i 3.0 million for the three and six months ended June 30, 2020.
2027 Notes
On May 18, 2020, the Company completed a private offering of $ i 125.0 million of i 3.75% convertible senior notes (the “2027 Notes”). The Company received net proceeds of approximately $ i 121.9 million, after deducting underwriting discounts and fees and expenses payable by the Company. Additionally, the Company used approximately $ i 10.3 million of cash to purchase the capped calls, discussed below. The 2027 Notes bear interest at a rate of i 3.75% per year, payable
17
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
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 (the “Maturity Date”), unless earlier purchased by the Company, redeemed, or converted.
The 2027 Notes are unsecured obligations of the Company and rank senior in right of payment to any of the Company’s subordinated indebtedness; equal in right of payment to all of the Company’s unsecured indebtedness that is not subordinated (including the Company’s unsecured trade payables and the 2023 Notes); effectively subordinated in right of payment to any of the Company’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 the Company’s subsidiaries.
The 2027 Notes are convertible at the option of the holders upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is i 71.5372 shares of the Company’s common stock per $1,000 principal amount of 2027 Notes, representing an initial effective conversion price of $ i 13.98 per share of common stock. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the indenture governing the 2027 Notes, but will not be adjusted for accrued but unpaid interest.
Holders may convert all or any portion of their notes, in multiples of $ i 1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 1, 2026 only under the following circumstances:
| (i) | During any calendar quarter commencing after the calendar quarter ending September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least i 20 trading days (whether or not consecutive) during a period of i 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to i 130% of the conversion price on each applicable trading day; |
| (ii) | During the i five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per i one thousand dollar principal amount of 2027 Notes for each trading day of the measurement period was less than i 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day; |
| (iii) | If the Company calls any or all of the 2027 Notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or |
| (iv) | Upon the occurrence of specified corporate events. |
On or after October 1, 2026, until the close of business on the business day immediately preceding the Maturity Date, holders may convert their notes at any time, regardless of the foregoing circumstances.
Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion option, the Company segregated the liability component of the instrument from the equity component. The liability component was measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the 2027 Notes. The calculation of the fair value of the debt component required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and industry high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the 2027 Notes at a discount rate of i 9.10%, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the aggregate face value of the 2027 Notes over the estimated fair value of the liability component of $ i 34.2 million was recognized as a debt discount and recorded as an increase to additional paid-in capital and will be amortized over the expected life of the 2027 Notes using the effective interest rate method. Amortization of the debt discount is recognized as non-cash interest expense.
18
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
The transaction costs of $ i 3.1 million incurred in connection with the issuance of the 2027 Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected term of the 2027 Notes. Transaction costs allocated to the equity component of $ i 0.8 million reduced the value of the equity component 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 $ i 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 $ i 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 will not change the holders’ rights under the 2027 Notes. Holders of the 2027 Notes will 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 respective convertible notes for tax purposes. 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 value of the 2023 Notes and 2027 Notes are as follows:
i
| | | | | | | | | | | | | | | | | | |
| | | | | ||||||||||||||
| | | 2023 Notes | | | 2027 Notes | | | Total | | | 2023 Notes | | | 2027 Notes | | | Total |
| | | (in thousands) | |||||||||||||||
Principal amount | | $ | i 256,695 | | $ | i 125,000 | | $ | i 381,695 | | $ | i 345,000 | | $ | — | | $ | i 345,000 |
Unamortized debt discount | |
| ( i 25,816) | |
| ( i 33,773) | |
| ( i 59,589) | |
| ( i 40,820) | |
| — | |
| ( i 40,820) |
Unamortized transaction costs | |
| ( i 2,601) | |
| ( i 2,191) | |
| ( i 4,792) | |
| ( i 4,112) | |
| — | |
| ( i 4,112) |
Net carrying value | | $ | i 228,278 | | $ | i 89,036 | | $ | i 317,314 | | $ | i 300,068 | | $ | — | | $ | i 300,068 |
Total interest expense related to the 2023 Notes and 2027 Notes is as follows:
i
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||
|
| (in thousands) | | ||||||||||
Cash Interest Expense |
| |
| | |
| | |
| | |
| |
Coupon interest expense - 2023 Notes | | $ | i 2,070 | | $ | i 2,329 | | $ | i 4,399 | | $ | i 4,658 | |
Coupon interest expense - 2027 Notes | | | i 573 | | | — | | | i 573 | | | — | |
Non-cash Interest Expense | |
|
| |
|
| |
|
| |
|
| |
Amortization of debt discount - 2023 Notes | |
| i 2,729 | |
| i 2,851 | |
| i 5,746 | |
| i 5,650 | |
Amortization of debt discount - 2027 Notes | | | i 425 | | | — | | | i 425 | | | — | |
Amortization of transaction costs - 2023 Notes | | | i 275 | | | i 287 | |
| i 579 | |
| i 569 | |
Amortization of transaction costs - 2027 Notes | |
| i 28 | |
| — | |
| i 28 | |
| — | |
Total Interest Expense | | $ | i 6,100 | | $ | i 5,467 | | $ | i 11,750 | | $ | i 10,877 | |
19
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
The Company determined the 2023 Notes and 2027 Notes are Level 2 liabilities in the fair value hierarchy and had an estimated fair value at June 30, 2020 of $ i 235.4 million and $ i 141.5 million, respectively.
Other Liabilities
As part of the acquisition of Ultratech, the Company assumed an executive non-qualified deferred compensation plan that allowed qualifying executives to defer cash compensation. The plan was frozen at the time of acquisition and i no further contributions have been made. At June 30, 2020 and December 31, 2019, plan assets approximated $ i 2.1 million and $ i 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 $ i 2.2 million and $ i 3.1 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities at both June 30, 2020 and December 31, 2019 also included medical and dental benefits for former executives of $ i i 2.0 / million, asset retirement obligations of $ i i 3.2 / million, and income tax payables of $ i 1.4 and $ i 1.0 million, respectively. Additionally, as a result of the Coronavirus, Aid, Relief, and Economic Security Act, the Company has accrued for and defered the deposit and payment of its share of social security taxes, resulting in a liability of $ i 1.4 million at June 30, 2020, which is included within “Other liabilities” in the Consolidated Balance Sheets.
iNote 5 — Commitments and Contingencies
Leases
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 i 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 June 30, 2020 was i 2.9 years, and the weighted average discount rate used in determining the present value of future lease payments was i 6.0%.
iThe following table provides the maturities of lease liabilities at June 30, 2020:
| | | |
| | Operating | |
|
| Leases | |
| | (in thousands) | |
Payments due by period: | | | |
2020 | | $ | i 2,295 |
2021 | | | i 5,211 |
2022 | | | i 4,976 |
2023 | | | i 1,337 |
2024 | | | i 551 |
Thereafter | | | — |
Total future minimum lease payments | | | i 14,370 |
Less: Imputed interest | | | ( i 1,262) |
Total | | $ | i 13,108 |
| | | |
Reported as of June 30, 2020 | | | |
Accrued expenses and other current liabilities | | $ | i 4,104 |
Operating lease long-term liabilities | | | i 9,004 |
Total | | $ | i 13,108 |
Operating lease cost for both the three months ended June 30, 2020 and 2019 was $ i i 1.4 / million. Operating lease cost for the six months ended June 30, 2020 and 2019 was $ i 2.7 and $ i 2.8 million, respectively. Variable lease cost for the three
/20
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
and six months ended June 30, 2020 was $ i 0.4 and $ i 0.9 million, respectively, and $ i 0.4 and $ i 1.0 million for the comparable 2019 periods. Additionally, the Company has an immaterial amount of short-term leases. Operating cash outflows from operating leases for the six months ended June 30, 2020 and 2019 were $ i i 3.5 / million and $ i 3.7 million, respectively.
Purchase Commitments
Veeco has purchase commitments of $ i 86.3 million at June 30, 2020, substantially all of which become due within one year.
Bank Guarantees
Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At June 30, 2020, outstanding bank guarantees and letters of credit totaled $ i 5.9 million, and unused bank guarantees and letters of credit of $ i 25.9 million were available to be drawn upon.
Legal Proceedings
On June 8, 2018, an Ultratech shareholder who received Veeco stock as part of the consideration for the Ultratech acquisition filed a purported class action complaint in the Superior Court of the State of California, County of Santa Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, i two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the Securities Act of 1933 for, among other things, alleged false/misleading statements in the registration statement and prospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. Veeco is defending this matter vigorously.
On December 21, 2018, a purported Veeco stockholder filed a derivative action in the Superior Court of the State of California, County of Santa Clara, captioned Vladimir Gusinsky Revocable Trust v. Peeler, et al., Case No. 18CV339925, on behalf of nominal defendant Veeco. The complaint seeks to assert claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against current and former Veeco directors premised on purported misstatements and omissions in the registration statement relating to the Ultratech acquisition. Veeco is defending this matter vigorously.
The Company is involved in various other legal proceedings arising in the normal course of business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
iNote 6 — Derivative Financial Instruments
The Company is exposed to financial market risks arising from changes in currency exchange rates. Changes in currency exchange rates could affect the Company’s foreign currency denominated monetary assets and liabilities and forecasted cash flows. The Company enters into monthly forward derivative contracts from time to time with the intent of mitigating a portion of this risk. The Company only uses derivative financial instruments in the context of hedging and not for speculative purposes and had not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other operating expense (income), net” in the Company’s Consolidated
21
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
Statements of Operations. The Company executes derivative transactions with highly rated financial institutions to mitigate counterparty risk.
The Company did not have any outstanding derivative contracts at June 30, 2020 or December 31, 2019. Additionally, the Company did not have any gains or losses from currency exchange derivatives during the six months ended June 30, 2020 and 2019.
i
Note 7 — Equity
Statement of Stockholders’ Equity
The following tables present the changes in Stockholders’ Equity:
i
| | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| | |
| Accumulated |
| | | |
| | | | | | | Additional | | | | | Other | | | | ||
| | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | | | ||||||
| | Shares | | Amount | | Capital | | Deficit | | Income | | Total | |||||
| | (in thousands) | |||||||||||||||
Balance at December 31, 2019 |
| i 48,994 | | $ | i 490 | | $ | i 1,071,058 | | $ | ( i 698,930) | | $ | i 1,894 | | $ | i 374,512 |
Net loss |
| — | |
| — | |
| — | |
| ( i 567) | |
| — | |
| ( i 567) |
Other comprehensive income (loss), net of tax |
| — | |
| — | |
| — | |
| — | |
| i 153 | |
| i 153 |
Share-based compensation expense |
| — | |
| — | |
| i 3,646 | |
| — | |
| — | |
| i 3,646 |
Net issuance under employee stock plans |
| i 434 | | | i 4 | | | ( i 684) | | | — | | | — | | | ( i 680) |
Balance at March 31, 2020 |
| i 49,428 | | $ | i 494 | | $ | i 1,074,020 | | $ | ( i 699,497) | | $ | i 2,047 | | $ | i 377,064 |
Net loss |
| — | |
| — | |
| — | |
| ( i 8,302) | |
| — | |
| ( i 8,302) |
Other comprehensive income (loss), net of tax |
| — | |
| — | |
| — | |
| — | |
| ( i 130) | |
| ( i 130) |
Share-based compensation expense |
| — | |
| — | |
| i 2,974 | |
| — | |
| — | |
| i 2,974 |
Net issuance under employee stock plans |
| i 191 | | | i 3 | | | i 752 | | | — | | | — | | | i 755 |
Extinguishment of equity component of repurchased 2023 Notes | | — | | | — | | | ( i 80) | | | — | | | — | | | ( i 80) |
Equity component of 2027 Notes | | — | | | — | | | i 33,363 | | | — | | | — | | | i 33,363 |
Purchase of capped calls | | — | | | — | | | ( i 10,313) | | | — | | | — | | | ( i 10,313) |
Balance at June 30, 2020 |
| i 49,619 | | $ | i 497 | | $ | i 1,100,716 | | $ | ( i 707,799) | | $ | i 1,917 | | $ | i 395,331 |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| |
| | |
| | | | | |
| | |
| | |
| Accumulated |
| | | |
| | | | | | | | | | | | | Additional | | | | | Other | | | | ||
| | Common Stock | | Treasury Stock | | Paid-in | | Accumulated | | Comprehensive | | | | ||||||||||
| | Shares | | Amount | | Shares |
| Amount | | Capital | | Deficit | | Income | | Total | |||||||
| | (in thousands) | |||||||||||||||||||||
Balance at December 31, 2018 |
| i 48,547 | | $ | i 485 | | | i 523 | | $ | ( i 5,872) | | $ | i 1,061,325 | | $ | ( i 619,983) | | $ | i 1,820 | | $ | i 437,775 |
Net loss |
| — | |
| — | |
| — | |
| — | |
| — | |
| ( i 18,530) | |
| — | |
| ( i 18,530) |
Other comprehensive income (loss), net of tax |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| i 38 | |
| i 38 |
Share-based compensation expense |
| — | |
| — | |
| — | |
| — | |
| i 3,157 | |
| — | |
| — | |
| i 3,157 |
Net issuance under employee stock plans | | i 128 | | | i 2 | | | ( i 523) | | | i 5,872 | | | ( i 6,303) | | | ( i 213) | | | — | | | ( i 642) |
Balance at March 31, 2019 |
| i 48,675 | | $ | i 487 | | | — | | $ | — | | $ | i 1,058,179 | | $ | ( i 638,726) | | $ | i 1,858 | | $ | i 421,798 |
Net loss |
| — | |
| — | |
| — | |
| — | |
| — | |
| ( i 15,565) | |
| — | |
| ( i 15,565) |
Other comprehensive income (loss), net of tax |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| i 20 | |
| i 20 |
Share-based compensation expense |
| — | |
| — | |
| — | |
| — | |
| i 4,588 | |
| — | |
| — | |
| i 4,588 |
Net issuance under employee stock plans | | i 296 | | | i 3 | | | — | | | — | | | i 182 | | | — | | | — | | | i 185 |
Balance at June 30, 2019 |
| i 48,971 | | $ | i 490 | | | — | | $ | — | | $ | i 1,062,949 | | $ | ( i 654,291) | | $ | i 1,878 | | $ | i 411,026 |
/22
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
Accumulated Other Comprehensive Income (“AOCI”)
The following table presents the changes in the balances of each component of AOCI, net of tax:
i
| | | | | | | | | |
| | | | Unrealized | | | | ||
| | | | Gains (Losses) | | | | ||
| | Foreign | | on Available | | | | ||
| | Currency | | for Sale | | | | ||
|
| Translation |
| Securities |
| Total | |||
| | (in thousands) | |||||||
Balance - December 31, 2019 | | $ | i 1,861 | | $ | i 33 | | $ | i 1,894 |
Other comprehensive income (loss) | |
| ( i 30) | |
| i 53 | |
| i 23 |
Balance - June 30, 2020 | | $ | i 1,831 | | $ | i 86 | | $ | i 1,917 |
There were minimal reclassifications from AOCI into net income for the three and six months ended June 30, 2020 and 2019.
iNote 8 — Share-based Compensation
Restricted share awards are issued to employees that are subject to specified restrictions and a risk of forfeiture. The restrictions typically lapse over one to i five years and may entitle holders to dividends and voting rights. Other types of share-based compensation include performance share awards, performance share units, and restricted share units (collectively with restricted share awards, “restricted shares”), as well as options to purchase common stock.
Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019:
i
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in thousands) | | ||||||||||
Cost of sales |
| $ | i 474 |
| $ | i 595 |
| $ | i 995 |
| $ | i 1,065 |
|
Research and development | | | i 613 | | | i 982 | | | i 1,486 | | | i 1,775 | |
Selling, general, and administrative | | | i 1,887 | | | i 3,011 | | | i 4,139 | | | i 4,905 | |
Total | | $ | i 2,974 | | $ | i 4,588 | | $ | i 6,620 | | $ | i 7,745 | |
For the six months ended June 30, 2020, equity activity related to stock options was as follows:
i
| | | | | |
| | | | Weighted | |
| | Number of | | Average | |
|
| Shares |
| Exercise Price | |
| | (in thousands) | | | |
Balance - December 31, 2019 | | i 1,119 | | | i 34.88 |
Expired or forfeited | | ( i 324) | | | i 33.96 |
Balance - June 30, 2020 | | i 795 | | | i 35.25 |
/23
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
For the six months ended June 30, 2020, equity activity related to non-vested restricted shares and performance shares was as follows:
i
| | | | | |
|
| |
| Weighted | |
| | | | Average | |
| | Number of | | Grant Date | |
| | Shares | | Fair Value | |
| | (in thousands) | | | |
Balance - December 31, 2019 | | i 2,257 | | | i 16.20 |
Granted | | i 983 | | | i 9.32 |
Performance award adjustments | | ( i 45) | | | i 31.34 |
Vested | | ( i 572) | | | i 15.95 |
Forfeited | | ( i 348) | | | i 15.47 |
Balance - June 30, 2020 | | i 2,275 | | | i 13.10 |
iNote 9 — Income Taxes
Income taxes are estimated for each of the jurisdictions in which the Company operates. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Realization of net deferred tax assets is dependent on future taxable income. At June 30, 2020, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized.
At the end of each interim reporting period, the effective tax rate is aligned with expectations for the full year. This estimate is used to determine the income tax provision on a year-to-date basis and may change in subsequent interim periods.
Loss before income taxes and income tax expense (benefit) for the three and six months ended June 30, 2020 and 2019 were as follows:
i
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in thousands) |
| ||||||||||
Loss before income taxes | | $ | ( i 8,251) | | $ | ( i 15,420) | | $ | ( i 8,550) | | $ | ( i 33,759) | |
Income tax expense (benefit) |
| $ | i 51 |
| $ | i 145 | | $ | i 319 |
| $ | i 336 | |
The Company’s tax expense for both the three months ended June 30, 2020 and 2019 was $ i i 0.1 / million. The 2020 tax expense included a $ i 0.1 million expense related to the Company’s domestic operations offset by a minimal benefit related to the Company’s non-U.S. operations, compared to 2019 when the expense included a $ i 0.1 million expense related to the Company’s domestic operations and minimal expense related to the Company’s non-U.S. operations. Although there was a domestic pre-tax loss for the three months ended June 30, 2020 and 2019, the Company did not provide a current tax benefit on domestic pre-tax losses, as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for both periods is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.
/24
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
The Company’s tax expense for both the six months ended June 30, 2020 and 2019 was $ i i 0.3 / million. The 2020 tax expense included a $ i 0.2 million expense related to the Company’s domestic operations and a $ i 0.1 million expense related to the Company’s non-U.S. operations, compared to 2019 when the expense included a $ i 0.1 million expense related to domestic operations and a $ i 0.2 million expense related to non-U.S. operations. Although there was a domestic pre-tax loss for the six months ended June 30, 2020 and 2019, Veeco did not provide a current tax benefit on domestic pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The current period domestic tax expense is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.
iNote 10 — Segment Reporting and Geographic Information
Veeco operates and measures its results in i one operating segment and therefore has i one reportable segment: the design, development, manufacture, and support of thin film process equipment primarily sold to make electronic devices.
Veeco categorizes its sales into the following i four end-markets:
Front-End Semiconductor
Front-End Semiconductor refers to the early steps in the process of integrated circuit fabrication where the microchips are created but still remain on the silicon wafer. This category includes Laser Spike Anneal, Ion Beam etch for front-end semiconductor applications, and Ion Beam deposition for EUV mask blanks.
Advanced Packaging, MEMS & RF Filters
Advanced Packaging includes a portfolio of wafer-level assembly technologies that enable improved performance of electronic products, such as smartphones, high-end servers, and graphical processors. Micro-Electro Mechanical Systems (“MEMS”) includes tiny mechanical devices such as sensors, switches, mirrors, and actuators embedded in semiconductor chips used in vehicles, smartphones, tablets, and games. RF Filters refers to RF filters used in smartphones, tablets, and mobile devices.
LED Lighting, Display & Compound Semiconductor
LED Lighting refers to Light Emitting Diode and semiconductor illumination sources used in various applications including, but not limited to, displays such as backlights, general lighting, automotive running lights, and headlamps. Display refers to LEDs used for displays and Organic Light Emitting Diode displays found in outdoor display/signage applications, TVs, smartphones, wearable devices, and tablets. Compound Semiconductor includes Photonics, Power Electronics, and Radio Frequency (“RF”) Devices. Photonics refers to laser diodes, Vertical Cavity Surface Emitting Lasers in 3D sensing and communications, and various other optical devices. Power Electronics refers to semiconductor devices such as rectifiers, inverters, and converters for the control and conversion of electric power. RF devices refers to radio frequency emitting and receiving devices that enable wireless communications. Such devices include power amplifiers, switches, and transceivers for applications such as mobile (including handsets and base stations), defense, automobile, and the Internet of Things.
Scientific & Industrial
Scientific refers to advanced materials research at university research institutions, industry research institutions, industry consortiums, and government research agencies. Industrial refers to large-scale product manufacturing applications including data storage and optical coatings: thin layers of material deposited on a lens or mirror that alters how light reflects and transmits.
/25
Veeco Instruments Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - continued
(unaudited)
Sales by end-market and geographic region for the three and six months ended June 30, 2020 and 2019 were as follows:
i i
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2020 | | 2019 |
| 2020 | | 2019 |
| ||||
| | (in thousands) | | ||||||||||
Sales by end-market | | | | | | | | | | | | | |
Front-End Semiconductor | | $ | i 17,759 | | $ | i 24,509 | | $ | i 49,125 | | $ | i 47,126 | |
Advanced Packaging, MEMS & RF Filters | |
| i 21,454 | |
| i 16,443 | |
| i 30,042 | |
| i 39,570 | |
LED Lighting, Display & Compound Semiconductor | | | i 16,017 | | | i 9,692 | | | i 31,419 | | | i 23,242 | |
Scientific & Industrial | |
| i 43,407 | |
| i 47,178 | |
| i 92,553 | |
| i 87,255 | |
Total | | $ | i 98,637 | | $ | i 97,822 | | $ | i 203,139 | | $ | i 197,193 | |
Sales by geographic region | | | | | | | | | | | | | |
United States | | $ | i 29,632 | | $ | i 39,784 | | $ | i 69,268 | | $ | i 72,099 | |
China | | | i 17,393 | | | i 19,654 | | | i 27,865 | | | i 29,813 | |
EMEA(1) | | | i 26,130 | | | i 12,324 | | | i 42,280 | | | i 30,151 | |
Rest of World | |
| i 25,482 | |
| i 26,060 | |
| i 63,726 | |
| i 65,130 | |
Total | | $ | i 98,637 | | $ | i 97,822 | | $ | i 203,139 | | $ | i 197,193 | |
| (1) | EMEA consists of Europe, the Middle East, and Africa |
For geographic reporting, sales are attributed to the location in which the customer facility is located.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
Our discussion below constitutes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made.
Executive Summary
We are an innovative manufacturer of semiconductor process equipment. Our proven ion beam, laser annealing, lithography, MOCVD and single wafer etch & clean technologies play an integral role in the fabrication and packaging of advanced semiconductor devices. With equipment designed to optimize performance, yield and cost of ownership, Veeco holds leading technology positions in the markets we serve. To learn more about Veeco’s systems and service offerings, visit www.veeco.com.
COVID-19 Update
As a result of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to contain the virus, such as travel bans and restrictions, limits on gatherings, quarantines, shelter-in-place orders, and business shutdowns. We have important manufacturing operations in the U.S. and sales and support operations in China, Germany, Japan, Malaysia, Philippines, Singapore, South Korea, Thailand, Taiwan and the United Kingdom, all of which have been affected by the COVID-19 pandemic.
Measures providing for business shutdowns generally exclude certain essential services, and those essential services include critical infrastructure and the businesses that support that critical infrastructure. Our operations are considered part of the critical and essential infrastructure defined by applicable government authorities, and, although governmental measures to contain the pandemic may be modified or extended, our manufacturing facilities remain open. We believe our diverse product offerings and the critical nature of certain of our products for infrastructure insulate us, to some extent, from the adverse effects of the pandemic; however, a prolonged economic downturn will adversely affect our customers, which could have a material adverse effect on our revenues, particularly if customers from whom we derive a significant amount of revenue reduce or delay purchases to mitigate the impacts of the pandemic or fail to make payments to us on time or at all.
We serve a global and highly interconnected customer base across the Asia-Pacific region, Europe, and North America. Our net sales to customers located outside of the United States represented approximately 70%, 77%, and 80% of our total net sales in 2019, 2018, and 2017, respectively, and we expect that net sales to customers outside the United States will continue to represent a significant percentage of our total net sales. As a result, our business will be adversely impacted by further deterioration in global economic conditions, particularly in markets in Asia and Europe.
To date, we have not yet experienced any significant interruptions to our supply chain as a result of the COVID-19 pandemic. We continue to monitor our global supply chain and may experience disruptions in future periods, primarily as a result of financial challenges confronting companies in our supply chain and restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, any of which could cause a disruption in our ability to obtain raw materials or components required to manufacture our products.
Like many in our industry, we are managing through the effects of the COVID-19 pandemic. Although the full extent of the COVID-19 pandemic’s impact on our business, results of operations, supply chains and growth can not be predicted or quantified, we proactively identified potential challenges to our business and have been executing business continuity activities to manage disruptions in our business and continue to provide critical infrastructure to our customers. In
27
response to the pandemic, we have taken, or intend to take, the following steps, among others, to keep our employees safe and minimize the spread of the virus, while continuing to serve our customers:
| ● | implemented rigorous health and safety protocols at our manufacturing facilities, including extensively and frequently disinfecting our facilities, limiting access to our facilities, checking temperatures of individuals entering our facilities, staggering shifts to minimize employee overlap in gowning areas, and providing protective equipment; |
| ● | mandated remote working arrangements for employees that do not need to be physically present on the manufacturing floor or at customer facilities, which has impacted approximately 52% of our global workforce; |
| ● | implemented virtual meetings, customer demos, and factory acceptances to enable customers to review data and performance of their system in our factory remotely via live video; |
| ● | performing service and support activities remotely to resolve customer issues and enable our customers to maintain their operations; |
| ● | proactively identified gaps in our supply chain and re-sourced a number of components in order to maintain our customer shipment commitments and mitigate single points of failure; |
| ● | monitoring our IT systems and implementing contingency and disaster recovery plans to support our IT infrastructure to ensure that our systems remain continuously operative; and |
| ● | continuing to monitor and, if necessary, reduce our operating expenses and capital expenditures to maintain financial flexibility and profit margins. |
While these steps have been effective so far, there could be additional challenges ahead that may impact either our operations or those of our customers, which could have a negative effect on our financial performance, including productivity and capacity impacts as a result of the ongoing pandemic. We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers and suppliers. As a result, we may incur additional expenses in future periods in response to the pandemic, which could adversely affect our financial position, results of operations, or cash flows. In addition, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees and customers, and mitigate the impact of the pandemic on our business.
Business Update
We categorize our revenue by the key market segments into which we sell. Our four key markets are: Front-End Semiconductor; Advanced Packaging, MEMS & RF Filters; LED Lighting, Display & Compound Semiconductor; and Scientific & Industrial.
Sales in the Front-End Semiconductor market were driven by shipments of our laser annealing systems and upgrades. Customers appear to be ramping production at their current nodes, such as 7nm and 5nm. Looking ahead, we continue to work with our customers with our laser annealing technology, as they develop their “next nodes”. In the EUV market, customers appear to be moving ahead with their leading node EUV lithography plans, continuing to drive requirements for our mask blank systems. We believe demand for these two product lines, driven by the development and release of advanced node semiconductors, will continue to provide future growth opportunities for us.
Sales in the Advanced Packaging, MEMS and RF Filter market were strong in the second quarter as customers added capacity and upgraded their existing install base to further enable their advanced packaging processes. We believe our advanced packaging lithography systems and our wet etch and clean systems are an ideal fit for our advanced packaging and RF customers’ current and future requirements.
28
Sales in the LED Lighting, Display & Compound Semiconductor market remained soft in the second quarter. Our broad portfolio of MOCVD and PSP technologies have been developed to support emerging applications such as 5G driven RF device manufacturing, photonics devices including 3D sensing laser diodes and mini/microLEDs, and GaN-based power electronics. We continue to work with customers to penetrate these markets.
Sales in the Scientific & Industrial market were primarily driven by shipments of Ion Beam systems for data storage applications. Demand for our Ion Beam products for Data Storage is being driven by big data and cloud-based storage growth. In order to be successful, hard disk drive manufacturers are required to improve areal density of magnetic heads for hard disk drives and are manufacturing drives with an increasing number of thin film magnetic heads. These two factors taken together along, with new innovations by HDD manufacturers such as heat assisted magnetic recording and microwave assisted magnetic recording, are driving additional capacity and equipment upgrades. Given recent trends, the importance of cloud computing and work from home environment are also providing tailwinds to this market.
Global trade policies have recently become more restrictive, resulting in increased tensions, which have impacted and are expected to continue to impact our business. The U.S. government has implemented controls over transactions involving Chinese entities, and possibly others, that potentially pose a threat to U.S. national security. Foreign customers affected by these U.S. government sanctions or threats of sanctions may respond by developing their own solutions to replace our products or by utilizing our foreign competitors’ products. We have seen evidence of this behavior during the second quarter of 2020 in transactions across our product lines, including our MOCVD and Wet Etch & Clean products. We are experiencing challenges closing new orders in China due to the current trade-restriction environment and have lost several orders that we were anticipating. This has impacted our second quarter results and in the near term we expect revenue from customers in China to decrease as a percentage of our overall revenue. The degree to which this environment will impact us is unclear.
Results of Operations
For the three months ended June 30, 2020 and 2019
The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2020 and 2019 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Change | | |||||||||||||
| | 2020 | | | 2019 | | | Period to Period | | ||||||||||
| | (dollars in thousands) | | ||||||||||||||||
Net sales |
| $ | 98,637 |
| 100% | | | $ | 97,822 |
| 100% | | | $ | 815 |
| 1% | |
|
Cost of sales | |
| 56,743 |
| 58% | | |
| 61,537 |
| 63% | | |
| (4,794) |
| (8)% | | |
Gross profit | |
| 41,894 |
| 42% | | |
| 36,285 |
| 37% | | |
| 5,609 |
| 15% | | |
Operating expenses, net: | |
|
|
|
| | |
|
|
| | | |
|
|
| | | |
Research and development | |
| 19,254 |
| 20% | | |
| 22,922 |
| 23% | | |
| (3,668) |
| (16)% | | |
Selling, general, and administrative | |
| 17,818 |
| 18% | | |
| 19,757 |
| 20% | | |
| (1,939) |
| (10)% | | |
Amortization of intangible assets | |
| 3,834 |
| 4% | | |
| 4,243 |
| 4% | | |
| (409) |
| (10)% | | |
Restructuring | |
| 472 |
| - | | |
| 616 |
| 1% | | |
| (144) |
| (23)% | | |
Asset impairment | |
| 281 |
| - | | |
| — |
| - | | |
| 281 |
| * | | |
Other operating expense (income), net | |
| (174) |
| - | | |
| (44) |
| - | | |
| (130) |
| * | | |
Total operating expenses, net | |
| 41,485 |
| 42% | | |
| 47,494 |
| 49% | | |
| (6,009) |
| (13)% | | |
Operating income (loss) | |
| 409 |
| - | | |
| (11,209) |
| (11)% | | |
| 11,618 |
| * | | |
Interest income (expense), net | |
| (5,614) |
| (6)% | | |
| (4,211) |
| (4)% | | |
| (1,403) |
| 33% | | |
Loss on extinguishment of debt | | | (3,046) | | (3)% | | | | — | | - | | |
| (3,046) |
| * | | |
Income (loss) before income taxes | |
| (8,251) |
| (8)% | | |
| (15,420) |
| (16)% | | |
| 7,169 |
| (46)% | | |
Income tax expense (benefit) | |
| 51 |
| - | | |
| 145 |
| - | | |
| (94) |
| (65)% | | |
Net income (loss) | | $ | (8,302) |
| (8)% | | | $ | (15,565) |
| (16)% | | | $ | 7,263 |
| (47)% | | |
* | Not meaningful |
29
Net Sales
The following is an analysis of sales by market and by region:
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Change |
| | ||||||||||||
| | 2020 | | | 2019 | | | Period to Period |
| | |||||||||
| | (dollars in thousands) |
| | |||||||||||||||
Sales by market |
| |
|
|
| | | |
|
|
| | | |
|
|
| |
|
Front-End Semiconductor | | $ | 17,759 |
| 18% | | | $ | 24,509 |
| 25% | | | $ | (6,750) |
| (28)% | | |
Advanced Packaging, MEMS & RF Filters | |
| 21,454 |
| 22% | | |
| 16,443 |
| 17% | | |
| 5,011 |
| 30% | | |
LED Lighting, Display & Compound Semiconductor | |
| 16,017 |
| 16% | | |
| 9,692 |
| 10% | | |
| 6,325 |
| 65% | | |
Scientific & Industrial | |
| 43,407 |
| 44% | | |
| 47,178 |
| 48% | | |
| (3,771) |
| (8)% | | |
Total | | $ | 98,637 |
| 100% | | | $ | 97,822 |
| 100% | | | $ | 815 |
| 1% | | |
Sales by geographic region | |
|
|
|
| | |
|
|
|
| | |
|
|
| | | |
United States | | $ | 29,632 |
| 30% | | | $ | 39,784 |
| 40% | | | $ | (10,152) |
| (26)% | | |
China | |
| 17,393 |
| 18% | | |
| 19,654 |
| 20% | | |
| (2,261) |
| (12)% | | |
EMEA | |
| 26,130 |
| 26% | | |
| 12,324 |
| 13% | | |
| 13,806 |
| 112% | | |
Rest of World | |
| 25,482 |
| 26% | | |
| 26,060 |
| 27% | | |
| (578) |
| (2)% | | |
Total | | $ | 98,637 |
| 100% | | | $ | 97,822 |
| 100% | | | $ | 815 |
| 1% | | |
Sales remained consistent for the three months ended June 30, 2020 against the comparable prior year period, as increases in the Advanced Packaging, MEMS & RF Filters and LED Lighting, Display & Compound Semiconductor markets were partially offset by decreases in the Front-End Semiconductor and Scientific & Industrial markets. Pricing was not a significant driver of the change in total sales. By geography, sales increased in the EMEA region, partially offset by decreases in the United States and China regions. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies. In light of the global nature of our business, we are impacted by conditions in the various countries in which we and our customers operate. Several markets continue to remain challenged in light of ongoing restrictions on business and travel, and decreased business and consumer spending generally, resulting from the COVID-19 pandemic.
Gross Profit
In the second quarter of 2020, gross profit increased compared to the second quarter of 2019 primarily due to increased gross margins. Gross margins increased principally due to reductions in inventory reserves and manufacturing expenses. We expect our gross margins to fluctuate each period due to product mix and other factors.
Research and Development
The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses decreased for the three months ended June 30, 2020 against the comparable prior period primarily related to personnel-related expenses and professional fees as a result of our continued initiative to streamline operations, enhance efficiency, and reduce costs. In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions.
Selling, General, and Administrative
Selling, general, and administrative expenses decreased for the three months ended June 30, 2020 against the comparable prior period primarily related to personnel-related expenses as a result of our continued initiative to streamline operations, enhance efficiency, and reduce costs. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions. Given the the uncertainty regarding the impacts on our business resulting from the
30
COVID-19 pandemic, we are focused on the proactive management of expenses. In future periods, we may incur additional selling, general and administrative expenses to support our responses to the COVID-19 pandemic.
Amortization Expense
Amortization expense decreased compared to prior period primarily due to the sale of a non-core product line, including related intangible assets, as well as changes in amortization expense to reflect expected cash flows of certain intangible assets.
Restructuring Expense
We continued to record restructuring charges during the year ended December 31, 2019 as a result of our efforts to further streamline operations, enhance efficiencies, and reduce costs. In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. In addition, we delayered the organization. Collectively, these actions impacted approximately 60 employees. During the three months ended June 30, 2020, additional accruals were recognized and payments were made related to these restructuring initiatives.
Interest Income (Expense)
We recorded net interest expense of $5.6 million for the three months ended June 30, 2020, compared to $4.2 million for the comparable prior year period. The increase in interest expense was primarily related to the issuance of the 2027 Notes in May 2020, partially offset by the partial repurchase of the 2023 Notes. Included in interest expense for the three months ended June 30, 2020 were non-cash charges of $3.5 million related to the amortization of debt discount and transaction costs of the 2023 and 2027 Notes, while the three months ended June 30, 2019 included non-cash charges of $3.1 million related to the amortization of debt discount and transaction costs of the 2023 Notes. Additionally, interest income decreased approximately $0.8 million for the three months ended June 30, 2020 compared to the prior period, primarily as a result of lower interest rates, and we expect interest income to remain depressed as a result.
Loss on Extinguishment of Debt
On May 18, 2020, in connection with the completion of a private offering of $125 million aggregate principal amount of 3.75% convertible senior notes described below, we repurchased and retired approximately $88.3 million in aggregate principal amount of our outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash. We accounted for the repurchase of the $88.3 million of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $3.0 million for the three months ended June 30, 2020.
Income Taxes
At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods.
We incurred a tax expense of $0.1 million for the three months ended June 30, 2020 and 2019. The 2020 tax expense included an expense of $0.1 million related to our domestic operations offset by a minimal benefit related to our non-U.S. operations, compared to 2019 when the expense included a $0.1 million expense related to the Company’s domestic operations and minimal expense related to the Company’s non-U.S. operations. Although there was a domestic pre-tax loss for the three months ended June 30, 2020 and 2019, we did not provide a current tax benefit on domestic pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for both periods is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.
31
For the six months ended June 30, 2020 and 2019
The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2020 and 2019 and the period-over-period dollar and percentage changes for those line items.
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | Change | |||||||||||||
| | 2020 | | | 2019 | | | Period to Period | ||||||||||
| | (dollars in thousands) | ||||||||||||||||
Net sales |
| $ | 203,139 |
| 100% | | | $ | 197,193 |
| 100% | | | $ | 5,946 |
| 3% | |
Cost of sales | |
| 114,826 |
| 57% | | |
| 126,192 |
| 64% | | |
| (11,366) |
| (9)% | |
Gross profit | |
| 88,313 |
| 43% | | |
| 71,001 |
| 36% | | |
| 17,312 |
| 24% | |
Operating expenses, net: | |
|
|
|
| | |
|
|
| | | |
|
|
| | |
Research and development | |
| 38,449 |
| 19% | | |
| 46,262 |
| 23% | | |
| (7,813) |
| (17)% | |
Selling, general, and administrative | |
| 36,123 |
| 18% | | |
| 39,660 |
| 20% | | |
| (3,537) |
| (9)% | |
Amortization of intangible assets | |
| 7,671 |
| 4% | | |
| 8,460 |
| 4% | | |
| (789) |
| (9)% | |
Restructuring | |
| 1,097 |
| 1% | | |
| 2,046 |
| 1% | | |
| (949) |
| (46)% | |
Asset Impairment | |
| 281 |
| - | | |
| — |
| - | | |
| 281 |
| * | |
Other operating expense (income), net | |
| (283) |
| - | | |
| (80) |
| - | | |
| (203) |
| * | |
Total operating expenses, net | |
| 83,338 |
| 41% | | |
| 96,348 |
| 49% | | |
| (13,010) |
| (14)% | |
Operating income (loss) | |
| 4,975 |
| 2% | | |
| (25,347) |
| (13)% | | |
| 30,322 |
| (120)% | |
Interest income (expense), net | |
| (10,479) |
| (5)% | | |
| (8,412) |
| (4)% | | |
| (2,067) |
| 25% | |
Loss on extinguishment of debt | | | (3,046) | | (1)% | | | | — | | - | | | | (3,046) | | * | |
Income (loss) before income taxes | |
| (8,550) |
| (4)% | | |
| (33,759) |
| (17)% | | |
| 25,209 |
| (75)% | |
Income tax expense (benefit) | |
| 319 |
| - | | |
| 336 |
| - | | |
| (17) |
| * | |
Net income (loss) | | $ | (8,869) |
| (4)% | | | $ | (34,095) |
| (17)% | | | $ | 25,226 |
| (74)% | |
Net Sales
The following is an analysis of sales by market and by region:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | Change | ||||||||||||
| | 2020 | | | 2019 | | | Period to Period | |||||||||
| | (dollars in thousands) | |||||||||||||||
Sales by market |
| |
|
|
| | | |
|
|
| | | |
|
|
|
Front-End Semiconductor | | $ | 49,125 |
| 24% | | | $ | 47,126 |
| 24% | | | $ | 1,999 |
| 4% |
Advanced Packaging, MEMS & RF Filters | | | 30,042 |
| 15% | | | | 39,570 |
| 20% | | | | (9,528) |
| (24)% |
LED Lighting, Display & Compound Semiconductor | |
| 31,419 |
| 15% | | |
| 23,242 |
| 12% | | |
| 8,177 |
| 35% |
Scientific & Industrial | |
| 92,553 |
| 46% | | |
| 87,255 |
| 44% | | |
| 5,298 |
| 6% |
Total | | $ | 203,139 |
| 100% | | | $ | 197,193 |
| 100% | | | $ | 5,946 |
| 3% |
Sales by geographic region | |
|
|
|
| | |
|
|
|
| | |
|
|
| |
United States | | $ | 69,268 |
| 34% | | | $ | 72,099 |
| 37% | | | $ | (2,831) |
| (4)% |
China | |
| 27,865 |
| 14% | | |
| 29,813 |
| 15% | | |
| (1,948) |
| (7)% |
EMEA | |
| 42,280 |
| 21% | | |
| 30,151 |
| 15% | | |
| 12,129 |
| 40% |
Rest of World | |
| 63,726 |
| 31% | | |
| 65,130 |
| 33% | | |
| (1,404) |
| (2)% |
Total | | $ | 203,139 |
| 100% | | | $ | 197,193 |
| 100% | | | $ | 5,946 |
| 3% |
Sales increased for the six months ended June 30, 2020 against the comparable prior year period principally in the LED Lighting, Display & Compound Semiconductor, Scientific & Industrial, and Front-End Semiconductor markets, partially offset by a decrease in the Advanced Packaging, MEMS & RF Filters market. Sales in the Scientific & Industrial market were primarily driven by shipments of Ion Beam systems for data storage applications, while sales in the Front-End Semiconductor market were driven by shipments of our laser annealing systems, as well as our LDD-IBD system for EUV Mask Blank production. Pricing was not a significant driver of the change in total sales. By geography, sales increased in the EMEA region, partially offset by decreases in China and the other remaining regions. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies. In light of the
32
global nature of our business, we are impacted by conditions in the various countries in which we and our customers operate. Several markets continue to remain challenged in light of ongoing restrictions on business and travel, and decreased business and consumer spending generally, resulting from the COVID-19 pandemic.
Gross Profit
For the six months ended June 30, 2020, gross profit increased against the comparable prior period due to an increase in sales volume and increased gross margins. Gross margins increased principally due to product and region mix of sales in the periods, as well as reductions in inventory reserves and manufacturing expenses. We expect our gross margins to fluctuate each period due to product mix and other factors.
Research and Development
The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses decreased for the six months ended June 30, 2020 against the comparable prior period primarily related to personnel-related expenses and professional fees as a result of our continued initiative to streamline operations, enhance efficiency, and reduce costs. In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions.
Selling, General, and Administrative
Selling, general, and administrative expenses decreased for the six months ended June 30, 2020 against the comparable prior period primarily related to personnel-related expenses as a result of our continued initiative to streamline operations, enhance efficiency, and reduce costs. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions. Given the the uncertainty regarding the impacts on our business resulting from the COVID-19 pandemic, we are focused on the proactive management of expenses. In future periods, we may incur additional selling, general and administrative expenses to support our responses to the COVID-19 pandemic.
Amortization Expense
Amortization expense decreased compared to prior period primarily due to the sale of a non-core product line, including related intangible assets, as well as changes in amortization expense to reflect expected cash flows of certain intangible assets.
Restructuring Expense
We continued to record restructuring charges during the year ended December 31, 2019 as a result of our efforts to further streamline operations, enhance efficiencies, and reduce costs. In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. In addition, we delayered the organization. Collectively, these actions impacted approximately 60 employees. During the six months ended June 30, 2020, additional accruals were recognized and payments were made related to these restructuring initiatives.
Interest Income (Expense)
We recorded net interest expense of $10.5 million for the six months ended June 30, 2020, compared to $8.4 million for the comparable prior year period. The increase in interest expense was primarily related to the issuance of the 2027 Notes in May 2020, partially offset by the partial repurchase of the 2023 Notes. Included in interest expense for the six months ended June 30, 2020 were non-cash charges of $6.8 million related to the amortization of debt discount and transaction costs of the 2023 and 2027 Notes, while the six months ended June 30, 2019 included non-cash charges of $6.2 million related to the amortization of debt discount and transaction costs of the 2023 Notes. Additionally, interest
33
income decreased approximately $1.3 million for the six months ended June 30, 2020 compared to the prior period, primarily as a result of lower interest rates, and we expect interest income to remain depressed as a result.
Loss on Extinguishment of Debt
On May 18, 2020, in connection with the completion of a private offering of $125 million aggregate principal amount of 3.75% convertible senior notes described below, we repurchased and retired approximately $88.3 million in aggregate principal amount of our outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash. We accounted for the repurchase of the $88.3 million of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $3.0 million for the six months ended June 30, 2020.
Income Taxes
At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods.
Our tax expense for the six months ended June 30, 2020 and 2019 was $0.3 million. The 2020 tax expense included an expense of $0.2 million related to our domestic operations and $0.1 million related to our non-U.S. operations, compared to 2019 when the expense included a $0.1 million expense related to our domestic operations and $0.2 million related to our non-U.S. operations. Although there was a domestic pre-tax loss for the six months ended June 30, 2020 and 2019, we did not provide a current tax benefit on domestic pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for both periods is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.
Liquidity and Capital Resources
Our cash and cash equivalents, restricted cash, and short-term investments are as follows:
| | | | | | |
| | June 30, | | |||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Cash and cash equivalents | | $ | 188,203 | | $ | 129,294 |
Restricted cash | |
| 647 | |
| 657 |
Short-term investments | |
| 112,279 | |
| 115,252 |
Total | | $ | 301,129 | | $ | 245,203 |
At June 30, 2020 and December 31, 2019, cash and cash equivalents of $68.5 million and $73.0 million, respectively, were held outside the United States. As of June 30, 2020, we had $11.3 million of accumulated undistributed earnings generated by our non-U.S. subsidiaries for which the U.S. repatriation tax has been provided and did not require the use of cash due to the use of net operating loss carryforwards. Approximately $5.6 million of undistributed earnings will be subject to foreign withholding taxes if distributed back to the United States.
We believe that our projected cash flow from operations, combined with our cash and short-term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months, including scheduled interest payments on our convertible senior notes, purchase commitments and payments in respect of operating leases. However, the COVID-19 pandemic, together with other dynamics in the marketplace, has resulted in wider credit spreads and significantly increased borrowing costs and, in certain cases, limited the ability of companies to access the capital markets and other sources of financing on attractive terms or at all.
Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our business model, our current cash and short-term investments and the recent steps we have taken to rationalize expenses, leave us well-positioned to manage our business through this crisis as it continues to unfold.
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A summary of the cash flow activity for the six months ended June 30, 2020 and 2019 is as follows:
| | | | | | | |
| | Six Months Ended June 30, |
| ||||
|
| 2020 |
| 2019 |
| ||
| | (in thousands) | | ||||
Net income (loss) | | $ | (8,869) | | $ | (34,095) | |
Non-cash items: | | | | | | | |
Depreciation and amortization | |
| 15,372 | |
| 17,315 | |
Non-cash interest expense | |
| 6,778 | |
| 6,219 | |
Deferred income taxes | |
| 191 | |
| 10 | |
Share-based compensation expense | |
| 6,620 | |
| 7,745 | |
Loss on extinguishment of debt | | | 3,046 | | | — | |
Asset impairment | |
| 281 | |
| — | |
Changes in operating assets and liabilities | |
| (5,869) | |
| (5,335) | |
Net cash provided by (used in) operating activities | | $ | 17,550 | | $ | (8,141) | |
Net cash provided by operating activities was $17.6 million for the six months ended June 30, 2020 and was due to the net loss of $8.9 million and a decrease in cash flow from changes in operating assets and liabilities of $5.9 million, offset by adjustments for non-cash items of $32.3 million. The changes in operating assets and liabilities were largely attributable to 1) increases in accounts receivable, inventories, and prepaid expenses and other current assets, and 2) a decrease in deferred revenue, partially offset by 3) increases in accounts payable and customer deposits, and 4) a decrease in contract assets.
Cash Flows from Investing Activities
| | | | | | | |
| | Six Months Ended June 30, | | ||||
|
| 2020 |
| 2019 |
| ||
| | (in thousands) | | ||||
Capital expenditures | | $ | (1,957) | | $ | (6,441) | |
Changes in investments, net | |
| 3,365 | |
| (35,608) | |
Proceeds from held for sale assets, net of costs to sell | | | 9,503 | | | — | |
Net cash provided by (used in) investing activities | | $ | 10,911 | | $ | (42,049) | |
The cash provided by investing activities during the six months ended June 30, 2020 was primarily attributable to the net proceeds from sale of a non-core product line, partially offset by capital expenditures.
Cash Flows from Financing Activities
| | | | | | | |
| | Six Months Ended June 30, | | ||||
|
| 2020 |
| 2019 |
| ||
| | (in thousands) | | ||||
Proceeds from issuance of 2027 Notes, net of issuance costs | | $ | 121,946 | | $ | — | |
Purchase of capped calls | | | (10,313) | | | — | |
Repurchase of 2023 Notes | | | (81,240) | | | — | |
Settlement of equity awards, net of withholding taxes | | | 74 | | | (457) | |
Net cash provided by (used in) financing activities | | $ | 30,467 | | $ | (457) | |
The cash provided by financing activities for the six months ended June 30, 2020 was primarily related to the net cash proceeds received from the issuance of the 2027 Notes, partially offset by the cash used to repurchase the 2023 Notes as well as the purchase of the capped call transactions.
Convertible Senior Notes
On January 10, 2017, we issued $345.0 million of 2.70% convertible senior unsecured notes (the “2023 Notes”). We received net proceeds, after deducting underwriting discounts and fees and expenses payable by us, of approximately
35
$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 us, redeemed, or converted. On May 18, 2020, in connection with the completion of a private offering of $125 million aggregate principal amount of 3.75% convertible senior notes described below, we repurchased and retired approximately $88.3 million in aggregate principal amount of our outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash.
On May 18, 2020, we issued $125.0 million of 3.75% convertible senior notes (the “2027 Notes”). We received net proceeds of approximately $121.9 million, after deducting underwriting discounts and fees and expenses payable by us. Additionally, we used approximately $10.3 million of cash to purchase the capped calls. 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 us, redeemed, or converted.
We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on the 2023 and 2027 Notes.
Contractual Obligations and Commitments
We have commitments under certain contractual arrangements to make future payments for goods and services. These contractual arrangements secure the rights to various assets and services to be used in the future in the normal course of business. We expect to fund these contractual arrangements with cash generated from operations in the normal course of business.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, expenses, and results of operations, liquidity, capital expenditures or capital resources other than bank guarantees and purchase commitments disclosed in the preceding footnotes.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates primarily relates to our investment portfolio. We centrally manage our investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately $112.3 million at June 30, 2020. These securities are subject to interest rate risk and, based on our investment portfolio at June 30, 2020, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of $0.6 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.
Currency Exchange Risk
We conduct business on a worldwide basis and, as such, a portion of our revenues, earnings, and net investments in foreign affiliates is exposed to changes in currency exchange rates. The economic impact of currency exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions, and other factors. These changes, if material, could cause us to adjust our financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.
Changes in currency exchange rates could affect our foreign currency denominated monetary assets and liabilities and forecasted cash flows. We enter into monthly forward derivative contracts from time to time with the intent of mitigating a portion of this risk. We only use derivative financial instruments in the context of hedging and not for speculative purposes and had not designated our foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other, net” in our Consolidated Statements of Operations. We execute derivative transactions with highly rated financial institutions to mitigate counterparty risk.
Our net sales to customers located outside of the United States represented approximately 70% and 66% of our total net sales for the three and six months ended June 30, 2020, respectively, and 60% and 63% for the comparable 2019 period. We expect that net sales to customers outside the United States will continue to represent a large percentage of our total net sales. Our sales denominated in currencies other than the U.S. dollar represented 5% and 4% of total net sales in the three and six months ended June 30, 2020, respectively, and 4% and 5% for the comparable 2019 period.
A 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of operations since most of our sales outside the United States are denominated in U.S. dollars.
Item 4. Controls and Procedures
Management’s Report on Internal Control Over Financial Reporting
Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective as of June 30, 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.
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Changes in Internal Control Over Financial Reporting
As a result of the COVID-19 pandemic, certain of our employees began working remotely in March 2020 but these remote working arrangements did not have a material effect on our internal control over financial reporting. During the quarter ended June 30, 2020, there were no changes in internal control that have materially affected or are reasonably likely to materially affect internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
On June 8, 2018, an Ultratech shareholder who received Veeco stock as part of the consideration for the Ultratech acquisition filed a purported class action complaint in the Superior Court of the State of California, County of Santa Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the Securities Act of 1933 for, among other things, alleged false/misleading statements in the registration statement and prospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. Veeco is defending this matter vigorously.
On December 21, 2018, a purported Veeco stockholder filed a derivative action in the Superior Court of the State of California, County of Santa Clara, captioned Vladimir Gusinsky Revocable Trust v. Peeler, et al., Case No. 18CV339925, on behalf of nominal defendant Veeco. The complaint seeks to assert claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against current and former Veeco directors premised on purported misstatements and omissions in the registration statement relating to the Ultratech acquisition. Veeco is defending this matter vigorously.
The Company is involved in various other legal proceedings arising in the normal course of business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
Item 1A. Risk Factors
Information regarding risk factors appears in the Safe Harbor Statement at the beginning of this quarterly report on Form 10-Q and in Part I — Item 1A of our 2019 Form 10-K. There have been no material changes from the risk factors previously disclosed in our 2019 Form 10-K, except for as disclosed in our quarterly report on Form 10-Q for the quarter ended March 31, 2020 and the following.
The following risk factors are added:
We may not have the ability to raise the funds necessary to settle for cash conversions of our 3.75% Convertible Senior Notes due 2027 (the “2027 Notes”) or our 2.70% Convertible Senior Notes due 2023 (the “2023 Notes”) (the 2027 Notes and 2023 Notes, together, the “Notes”) or to repurchase the Notes for cash upon a fundamental change, and any future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.
As of June 30, 2020, we had $256.7 million in principal amounts outstanding in 2023 Notes and $125.0 million in principal amounts outstanding in 2027 Notes.
Holders of the 2027 Notes will have the right to require us to repurchase all or any portion of their 2027 Notes upon the occurrence of a fundamental change before the maturity date at a fundamental change repurchase price equal to 100% of the principal amount of the 2027 Notes to be repurchased, plus accrued and unpaid interest, if
38
any, to, but excluding, the fundamental change repurchase date, as described in the 2027 Notes and the related indenture. In addition, upon conversion of the 2027 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2027 Notes being converted. Our 2023 Notes contain similar provisions concerning the holders’ rights to require us to repurchase their 2023 Notes and to pay cash to settle conversions of their 2023 Notes. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Notes surrendered therefor or pay cash with respect to the Notes being converted.
In addition, our ability to repurchase or to pay cash upon conversion of the Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness that exist at the time of repurchase. Our failure to repurchase the Notes at a time when the repurchase is required by the respective indenture or to pay any cash upon conversion of the Notes as required by the respective indenture would constitute a default under the indenture for that series of convertible notes and could also lead to a default under the indenture for the other series of convertible notes. A default under either indenture or the fundamental change itself could lead to a default under any of our future indebtedness. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or to pay cash upon conversion of the Notes.
The conditional conversion feature of the 2027 Notes, if triggered, may materially and adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the 2027 Notes is triggered, holders of 2027 Notes will be entitled to convert the 2027 Notes at any time during specified periods at their option. If one or more holders elect to convert the 2027 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert the 2027 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2027 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an entity must separately account for the liability and equity components of certain convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date, and the value of the equity component is treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we are required to record a greater amount of non-cash interest expense as a result of the amortization of the discounted carrying value of the Notes to their face amount over the respective terms of the Notes. We report lower net income (or higher net loss) in our financial results because ASC 470-20 requires interest to include both the amortization of the debt discount and the instrument’s coupon interest rate, which could adversely affect our financial results, the trading price of our common stock and the trading price of the Notes.
In addition, under certain circumstances, including our ability and intent to settle the convertible debt instruments in cash, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted income per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted income per share purposes, the transaction is accounted for as if the number of shares of
39
common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that we will meet the criteria to utilize the treasury stock method in the future. If we are unable to utilize the treasury stock method, we would be required to apply the if-converted method. Under that method, diluted income per share would generally be calculated assuming that all the notes were converted solely into shares of our common stock at the beginning of the reporting period, unless the result would be anti-dilutive. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted income per share would be adversely affected.
In July 2019, the FASB issued an exposure draft that proposes to change the accounting for the convertible debt instruments described above. Under the exposure draft, an entity may no longer be required to separately account for the liability and equity components of convertible debt instruments. This could have the impact of reducing non-cash interest expense, and thereby increasing net income (or reducing net loss). Additionally, as currently proposed, the treasury stock method for calculating earnings per share will no longer be allowed for convertible debt instruments whose principal amount may be settled using shares. Rather, the if-converted method may be required, which could adversely affect our diluted net income (loss) per share. We cannot be sure that the proposed changes in this exposure draft will be adopted, or will be adopted in their current format. We also cannot be sure whether other changes may be made to the current accounting standards related to the Notes, or otherwise, that could have an adverse impact on our financial statements. Furthermore, the accounting treatment described above is preliminary based on the exposure draft and has not been subject to review or audit by our independent registered public accounting firm as these proposed rules have not been finalized.
Issuance of our common stock, if any, upon conversion of the Notes, as well as the capped call transactions and the hedging activities of the option counterparties, may impair or reduce our ability to utilize our net operating loss carryforwards in the future.
Pursuant to U.S. federal and state tax rules, a corporation is generally permitted to deduct from taxable income in any year net operating losses (“NOLs”) carried forward from prior years.
As of June 30, 2020, we had U.S. federal NOL carryforwards of approximately $270.4 million, of which $6.4 million has an indefinite carryforward period, with the remaining expiring in varying amounts between 2033 and 2037, if not utilized. If we were to experience a “change in ownership” under Section 382 of the Internal Revenue Code (“Section 382”), the NOL carry forward limitations under Section 382 would impose an annual limit on the amount of the future taxable income that may be offset by our NOL generated prior to the change in ownership. If an ownership change were to occur, we may be unable to use a significant portion of our NOL to offset future taxable income. In connection with a prior acquisition, we have $120.8 million of historical U.S. federal NOLs that are subject to an existing annual limitation under Section 382.
We did not initially experience an ownership change as a result of the issuance of the 2027 Notes. Nonetheless, the shares of common stock, if any, issued upon conversion of the 2027 Notes will, upon such issuance, be taken into account determining the cumulative change in our ownership for Section 382 purposes. As a result, any conversion of the 2027 Notes that we elect to settle in shares may materially increase the risk that we could experience an ownership change in the future.
In connection with the pricing of the 2027 Notes, we entered into capped call transactions with one of the initial purchasers and other financial institutions (the “option counterparties”). Veeco was advised that the option counterparties were expected to establish hedge positions with respect to the capped call transactions and thereafter to modify their hedge positions from time to time by, among other things, purchasing, selling or otherwise effecting transactions with respect to our common stock or other securities of ours as described under “Risk factors—The capped call transactions may affect the value of the Notes and our common stock.”
40
The capped call transactions may affect the value of the Notes and our common stock.
We have entered into capped call transactions with the option counterparties. The capped call transactions were expected generally to reduce the potential dilution upon conversion of the notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap.
In connection with establishing its initial hedge of the capped call transactions, the option counterparties or their affiliates expect to enter into various derivative transactions with respect to our common stock and/or purchase our common stock concurrently with or shortly after the pricing of the notes. This activity could increase (or reduce the size of any decrease in) the market price of our common stock or the notes at that time.
In addition, the option counterparties or their affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2027 Notes (and are likely to do so during any observation period related to a conversion of the 2027 Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock, the Notes, which could affect the ability of the noteholders to convert the Notes, and, to the extent the activity occurs during any observation period related to a conversion of the 2027 Notes, it could affect the number of shares and value of the consideration that noteholders will receive upon conversion of the 2027 Notes.
Our issuance of preferred stock could adversely affect holders of our common stock.
Our board of directors is authorized to issue series of preferred stock without any action on the part of our holders of common stock. Our board of directors also has the power, without stockholder approval, to set the terms of any such series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or if we liquidate, dissolve or wind up our business and other terms. Therefore, if noteholders receive common stock upon conversion of the Notes and we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of a holder of our common stock or the price of our common stock could be adversely affected.
We do not currently intend to pay dividends on our common stock, and, consequently, our
stockholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.
We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Since we do not intend to pay dividends, our stockholders’ ability to receive a return on their investment will depend on any future appreciation in the market value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which our stockholders initially purchased shares.
If securities or industry analysts issue an adverse or misleading opinion regarding our stock, our stock price and trading volume and the value of the Notes could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issues an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our operating results fail to meet the expectations of analysts, our stock price and the value of the Notes would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume and the value of the Notes to decline.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Unless otherwise indicated, each of the following exhibits has been filed with the Securities and Exchange Commission by Veeco under File No. 0-16244.
Exhibit | | | | | Filed or | |||||
Number |
| Exhibit Description |
| Form |
| Exhibit |
| Filing Date |
| Herewith |
| | | | | | | | |||
4.1 | | | 8-K | | 4.1 | | 5/18/2020 | | | |
4.2 | | Form of 3.75% Convertible Senior Notes due 2027 (included in Exhibit 4.1). | | 8-K | | 4.2 | | 5/18/2020 | | |
10.1 | | | 8-K | | 10.1 | | 5/18/2020 | | | |
10.2 | | Agreement and General Release dated May 7, 2020 between Veeco and John R. Peeler. | | | | | | | | * |
31.1 | | | | | | | | | * | |
31.2 | | | | | | | | | * | |
32.1 | | | | | | | | | * | |
32.2 | | | | | | | | | * | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | ** |
101.XSD | | XBRL Schema. | | | | | | | | ** |
101.PRE | | XBRL Presentation. | | | | | | | | ** |
101.CAL | | XBRL Calculation. | | | | | | | | ** |
101.DEF | | XBRL Definition. | | | | | | | | ** |
101.LAB | | XBRL Label. | | | | | | | | ** |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | | | | | | | |
** Filed herewith electronically
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 3, 2020.
| |||
| Veeco Instruments Inc. | ||
| | ||
| By: | ||
| | ||
| | Chief Executive Officer | |
| | | |
| By: | /s/ JOHN P. KIERNAN | |
| | ||
| | Senior Vice President and Chief Financial Officer | |
44
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 6/1/27 | ||||
| 10/1/26 | ||||
| 1/15/23 | ||||
| 12/31/20 | 10-K, SD | |||
| 12/1/20 | ||||
| 9/30/20 | 10-Q | |||
| Filed on: | 8/3/20 | 4, 8-K | ||
| 7/29/20 | ||||
| For Period end: | 6/30/20 | 4 | ||
| 5/18/20 | 8-K | |||
| 5/13/20 | 8-K | |||
| 3/31/20 | 10-Q, 8-K | |||
| 12/31/19 | 10-K, SD | |||
| 6/30/19 | 10-Q | |||
| 3/31/19 | 10-Q | |||
| 12/31/18 | 10-K, 10-K/A, SD | |||
| 12/21/18 | ||||
| 12/11/18 | ||||
| 8/8/18 | 4 | |||
| 6/8/18 | ||||
| 7/15/17 | ||||
| 1/10/17 | 424B5, 8-K, S-3ASR | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/07/20 Veeco Instruments Inc. S-3ASR 8/10/20 4:486K Toppan Merrill/FA |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 5/18/20 Veeco Instruments Inc. 8-K:1,2,3,9 5/13/20 12:1.3M Toppan Merrill/FA |