ITEM 1.
BUSINESS
This Annual Report on Form 10-K contains, in addition to historical information, certain forward-looking statements that involve significant risks and uncertainties, which are difficult to predict, and are not guarantees of future performance. Such statements can generally be identified by words such as “anticipates,” “expects,” “remains,” “thinks,” “intends,” “may,” “will,” “could,” “believes,” “poised,” “estimates,” “continue,” and similar expressions. Our actual results could differ materially from the information set forth in any such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed under “Item 1A.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
We have no unresolved staff comments.
ITEM 2.
ITEM 2.
PROPERTIES
We maintain our headquarters and manufacturing operations in San Jose, California in a leased facility, totaling approximately 100,000 square feet, which contains general administration and finance, marketing and sales, customer service and support, manufacturing and research, development and engineering. The lease for this facility expires in January 2021. We also rent sales and support offices in the United States and outside the U.S. in Taiwan, the Philippines, Japan, Korea, Thailand, Germany, and China, with varying terms and expiration dates. During the years ended December 31, 2015 and 2014, we either extended our leases in several of these sales facilities or negotiated new terms.
In March 2010, we entered into an operating lease agreement for facilities in preparation for the expansion of our manufacturing operations in Singapore. The initial term of this lease was three years. On August 15, 2012, we renegotiated this lease and entered into a new operating lease that expires in June 2018. The leased facility is approximately 23,000 square feet.
In March 2013, we entered into an operating lease agreement for facilities in Waltham, Massachusetts, totaling approximately 19,000 square feet, for sales, research and development activities. The lease for this facility expires in February 2018.
In July 2015, we entered into a lease amendment for our facilities in San Jose, California. The lease amendment is to extend the building lease for five years which will expire in January 2021.
We believe that our existing facilities will be adequate to meet our currently anticipated requirements and that suitable additional or substitute space will be available as needed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are subject to claims and litigation arising in the ordinary course of business. We do not believe any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our consolidated financial statements.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ Global Market under the symbol UTEK. The following table sets forth, for the periods indicated, the range of high and low reported sale prices of our common stock.
Our fiscal quarters in 2015 ended on April 4, 2015, July 4, 2015, October 3, 2015 and December 31, 2015, respectively. Our fiscal quarters in 2014 ended on March 29, 2014, June 28, 2014, September 27, 2014 and December 31, 2014, respectively.
As of January 29, 2016 we had approximately 186 stockholders of record.
We have not paid cash dividends on our common stock since inception, and our Board of Directors presently plans to reinvest our earnings in our business. Accordingly, it is anticipated that no cash dividends will be paid to holders of common stock in the foreseeable future.
Issuer Purchases of Equity Securities
On October 27, 2014, our Board of Directors authorized the repurchase of up to $100 million of our common stock. The share repurchase plan commenced on October 28, 2014 and will expire on October 28, 2017. Any repurchases may be made through open market purchases, block trades, privately negotiated transactions and/or derivative transactions, subject to market conditions and managements’ ongoing determination that it is the best use of available cash on hand to fund any repurchases. The repurchase authorization does not obligate us to acquire any common stock.
Common stock repurchase activity under our publicly announced stock repurchase plan during the years ended December 31, 2015 and 2014 was as follows:
Stock Performance Graph
The graph depicted below reflects a comparison of the cumulative total return (i.e., change in stock price plus reinvestment of dividends) of our common stock assuming $100 invested as of December 31, 2010 with the cumulative total returns of the NASDAQ Composite Index and the Philadelphia Semiconductor Index.
Comparison of Cumulative Total Returns (1)(2)(3)
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(1)
The graph covers the period from December 31, 2010 to December 31, 2015.
(2)
No cash dividends have been declared on our common stock.
(3)
Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
Notwithstanding anything to the contrary set forth in any of our previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, which might incorporate our future filings under those statutes, the preceding Stock Performance Graph will not be incorporated by reference into any of those prior filings, nor will such report or graph be incorporated by reference into any of our future filings under those statutes.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
__________________
(a)
Operating income in 2011 includes $9.0 million of stock-based compensation expenses.
(b)
Operating income in 2012 includes $12.5 million of stock-based compensation expenses.
(c)
Operating loss in 2013 includes $15.4 million of stock-based compensation expenses.
(d)
Operating loss in 2014 includes $16.9 million of stock-based compensation expenses.
(e)
Operating loss in 2015 includes $15.3 million of stock-based compensation expenses and $0.8 million of restructuring expenses.
Quarterly Data
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain of the statements contained herein, which are not historical facts and which can generally be identified by words such as “anticipates,” “expects,” “thinks,” “remains,” “intends,” “will,” “could,” “believes,” “poised,” “estimates,” “continues,” and similar expressions, are forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, such as risks related to timing, delays, deferrals and cancellations of orders by customers, including as a result of semiconductor manufacturing capacity as well as our customers’ financial condition and demand for semiconductors; demand for consumer devices; industry growth within our served markets; continued delivery of financial performance and value; cyclicality in the semiconductor and nanotechnology industries; our dependence on new product introductions and market acceptance of new products and enhanced versions of our existing products; reliability and technical acceptance of our products; lengthy sales cycles, including the timing of system installations and acceptances; quarterly revenue fluctuations; lengthy and costly development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser processing operation; general economic and financial market conditions including impact on capital spending, as well as difficulty in predicting changes in such conditions; rapid technological change and the importance of timely product introductions; customer concentration; pricing pressures and product discounts; high degree of industry competition including competition from companies that are significantly larger than us; intellectual property matters; changes in pricing by us, our competitors or suppliers; international sales and operations; timing of new product announcements and releases by us or our competitors; improvements, including in cost and technical features, of competitors’ products; ability to volume produce systems and meet customer requirements; sole or limited sources of supply; effect of capital market fluctuations on our investment portfolio; ability and resulting costs to attract or retain key personnel; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon our achieving and maintaining profitability and the market price of our stock; mix of products sold; outcome of litigation; manufacturing variances and production levels; timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; inventory obsolescence; quality of product sourced from suppliers; asset impairment; changes to financial accounting standards; effects of certain anti-takeover provisions; future acquisitions; volatility of stock price; foreign government regulations and restrictions; business interruptions due to natural disasters or utility failures; environmental regulations; and any adverse effects of terrorist attacks in the United States or elsewhere, or government responses thereto, or military actions, on the economy, in general, or on our business in particular. Due to these and additional factors, the statements, historical results and percentage relationships set forth below are not necessarily indicative of the results of operations for any future period. These forward-looking statements are based on management’s current beliefs and expectations, some or all of which may prove to be inaccurate, and which may change. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.
OVERVIEW
Ultratech, Inc. develops, manufactures and markets photolithography, laser thermal processing and inspection equipment for manufacturers of semiconductor devices, including advanced packaging processes and various nanotechnology components such as thin film head magnetic recording devices, laser diodes, high-brightness light emitting diodes (“HBLEDS”) as well as atomic layer deposition systems (“ALD”) for customers located throughout North America, Europe, Singapore, Japan, Taiwan, Korea and the rest of Asia.
We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the semiconductor industry, we target the market for advanced packaging applications. Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, HBLEDs and atomic layer deposition for the nanotechnology portion of our defined served market.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to revenues, inventory valuation, warranty obligations, purchase order commitments, bad debts, deferred income taxes, restructuring liabilities, asset retirement obligations, stock based-compensation and contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies are affected by our more significant judgments and estimates used in the preparation of our consolidated financial statements. We have reviewed these policies with our Audit Committee.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement consideration is fixed or determinable, and collectability is reasonably assured. We derive revenue from four sources: system sales, spare parts sales, service contracts and license fees.
Provided all other criteria are met, we recognize revenues on system sales when system acceptance provisions have been met in accordance with the terms and conditions of the arrangement. In the event that terms of the sale provide for a lapsing system acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or system acceptance, whichever occurs first. In these instances, which are infrequent, revenue is recorded only if the product has met product specifications prior to shipment and management deems that no significant uncertainties as to product performance exist.
Our transactions frequently include the sale of systems and services under multiple element arrangements. In transactions with multiple deliverables, revenue is recognized upon the delivery of the separate elements and when system acceptance has occurred or we are otherwise released from our system acceptance obligations.
For multiple element arrangements, the total consideration for an arrangement is allocated among the separate elements in the arrangement based on a selling price hierarchy. The selling price hierarchy for a deliverable is based on (i) vendor specific objective evidence (“VSOE”); if available; (ii) third party evidence of selling price if VSOE is not available; or (iii) an estimated selling price, if neither VSOE nor third party evidence is available. If we have not established VSOE and cannot obtain third party evidence of selling price, we determine our estimate of the relative selling price by considering our production costs and historical margins of similar products or services. We believe this best represents the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We regularly review the method used to determine our relative selling price and update any estimates accordingly. We limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services or other future performance obligations.
We generally recognize revenue from spare parts sales upon shipment, as our products are generally sold on terms that transfer title and risk of ownership when it leaves our site. We sell service contracts for which revenue is deferred and recognized ratably over the contract period (for time-based service contracts) or as service hours are delivered (for contracts based on a purchased quantity of hours). We recognize license revenue from transactions in which our systems are re-sold by our customers to third parties, as well as from royalty arrangements.
Costs related to deferred product revenues are capitalized (deferred) and recognized at the time of revenue recognition. Deferred product revenue and costs are netted on our balance sheet, under the caption “deferred product and services income.” The gross amount of deferred revenues and deferred costs at December 31, 2015 were $5.3 million and $0.8 million, respectively, as compared to $9.8 million and $1.2 million, respectively, at December 31, 2014.
Costs incurred for shipping and handling are included in cost of sales.
Inventories and Purchase Order Commitments
Inventories are stated at the lower of cost or market using standard costs that generally approximate actual costs on a first-in, first-out basis. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies, and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand.
The semiconductor industry is characterized by rapid technological change, changes in customer requirements and evolving industry standards. We perform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, demand requirements and market conditions. Based on this analysis, we may record adjustments to the value of our inventory. Although we make every effort to ensure the accuracy of our forecasts of product demand, any
significant unanticipated changes in demand, product mix or technological developments would significantly impact the value of our inventory and our reported operating results. In the future, if we find that our estimates are too optimistic and we determine that our inventory needs to be reserved, we will be required to recognize such costs in our cost of sales at the time of such determination.
Warranty Obligations
We recognize the estimated cost of our product warranties at the time revenue is recognized. Our warranty obligation is affected by product failure rates, material usage rates and the efficiency by which the product failure is corrected. Should actual product failure rates, material usage rates and labor efficiencies differ from our estimates, revisions to the estimated warranty liability would be required which could result in future charges or credits to our gross margins. We believe our warranty accrual, as of December 31, 2015, will be sufficient to satisfy outstanding obligations as of that date.
Allowance for Bad Debts
We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. This reserve is established based upon historical trends, current economic conditions, delinquency status based on contractual terms and an analysis of specific exposures. If the financial conditions of our customers were to deteriorate, or even a single customer was otherwise unable to make payments, additional allowances may be required. The typical selling price of our systems is between $0.2 million and $6.0 million. Accordingly, a single customer default could have a material adverse effect on our results of operations. Our bad debt reserve for accounts receivable was $0.5 million at December 31, 2015 and 2014.
Intangible Assets
Purchased technology, patents and other intangible assets are presented at cost, net of accumulated amortization, and are amortized over their estimated useful lives using the straight-line method. We review for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable and the carrying amount exceeds its fair value.
Stock-Based Compensation
Under the fair value recognition provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors and employee option forfeiture rates. If actual results differ significantly from these estimates, stock-based compensation expense recognized in our results of operations could be materially affected. As stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards that ultimately are expected to vest, the amount of the expense has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If factors change and we employ different assumptions in the application of ASC 718, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period.
Deferred Income Taxes
Deferred income taxes are provided for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. ASC Topic 740, Income Taxes (“ASC 740”), provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur. Realization of our net deferred tax assets is dependent upon the generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain the benefit of the reversal of temporary differences, net operating loss carry-forwards, and tax credit carry-forwards. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of our analysis, we concluded that it is more likely than not that, as of December 31, 2015, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan. We continue to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. However, as of December 31, 2015, we have determined that the following negative evidence outweighs the positive evidence such that it is not more likely than not
we will generate sufficient taxable income in the relevant jurisdictions to utilize our deferred tax assets and release the associated valuation allowance:
•
Movement of certain product manufacturing to Singapore,
•
Cumulative three year U.S. taxable loss,
•
Inherent earnings volatility of our industry resulting in our inability to forecast long term earnings, and
•
Usage limitations resulting in a longer period being required to realize our deferred tax assets.
As of December 31, 2015, we had recorded a valuation allowance of approximately $52.4 million against our net deferred tax assets except for those in Japan and Taiwan. As of December 31, 2015, we had recorded approximately $0.3 million of net foreign deferred tax assets related to our operations in Japan and Taiwan. Based on projected future pre-tax income in Japan and Taiwan, these assets were not subject to a valuation allowance as it is more likely than not that they will be realized in the future.
Impact of Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB agreed to delay the effective date by one year. In accordance with the agreed upon delay, the new standard is effective for us beginning in the first quarter of 2018. Early adoption is permitted, but not before the original effective date of the standard. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method nor have we determined the impact of the new standard on our consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update (ASU) 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. We early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of our net current deferred tax asset to the net non-current deferred tax asset in our Consolidated Balance Sheet as of December 31, 2015. No prior periods were retrospectively adjusted.
RESULTS OF OPERATIONS
We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $0.2 million to $6.0 million. As a result of the larger sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results for any particular period.
Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our sales objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or system acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, our net sales and operating results for a period have been and will continue to be dependent upon our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and system acceptance during that period. Furthermore, a substantial portion of our shipments has historically occurred near the end of each quarter. Delays in installation and system acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customer’s facility, or to the failure of the customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below our expectations, which may materially adversely affect our operating results for that period. This risk is especially applicable in connection with the introduction and initial sales of a new product line or as a result of industry trends impacting our foundry customers, including a shift toward semiconductors utilizing new technology transistor architecture. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing, or performance difficulties, or delays in deliveries by suppliers due to their long production lead times, or quality issues with components sourced from suppliers, have caused and may continue to cause net sales in a particular period to fall significantly below our expectations and for our operating results to
vary from period to period, materially adversely affecting our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers, laser thermal processing and inspection systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial condition and results of operations for a particular quarter.
Additionally, the need for continued expenditures for research and development, capital equipment, ongoing training and worldwide customer service and support, among other factors, will make it difficult for us to reduce our operating expenses in a particular period if we fail to achieve our net sales goals for the period.
Sales Summary
Net Sales
2015 vs. 2014
Net sales consist of revenues from systems sales (systems and system upgrades), spare parts sales, services and licensing of technologies. For the year ended December 31, 2015, systems sales accounted for approximately 79% of total net sales. Sales of spare parts, services and licenses accounted for the remaining 21% of total net sales.
Systems sales increased 2% to $117.2 million primarily attributable to an increase in lithography and inspection system sales, partially offset by a decrease in system upgrades, nanotechnology and laser thermal processing system sales in 2015, as compared to 2014.
On a product market application basis, system sales to the semiconductor industry were $98.9 million for the year ended December 31, 2015, an increase of 6% as compared to $92.9 million in 2014. This increase was primarily due to more system units sold. Semiconductor industry sales consist of sales to the advanced packaging market, semiconductor and semiconductor inspection market. System sales to the semiconductor industry is highly dependent on customer capacity demand.
System sales to the nanotechnology market were $18.2 million for the year ended December 31, 2015, a 16% decrease as compared with $21.7 million in 2014. The decrease in sales to the nanotechnology market was primarily due to a decrease in HBLED systems sales, partially offset by an increase in ALD systems sales. System sales to the nanotechnology market are highly dependent on capacity demand in the industries we serve, including HBLEDs, ALD, thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads. We therefore expect to experience significant variations in sales within this market from period to period.
Sales of spare parts for the year ended December 31, 2015 decreased 14% to $18.5 million, as compared to $21.6 million in 2014. The decrease in sales of spare parts was the result of a decrease in spare parts demand. Services revenue decreased 6% to $13.1 million for the year ended December 31, 2015 as compared to $14.0 million in 2014. The decrease in service revenue was the result of a decrease in the number of service contracts.
Revenues from licensing activities was unchanged for the year ended December 31, 2015, when compared with 2014, Pursuant to our license arrangements, such transactions are subject to a license fee based on units sold. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing arrangements. We may not be successful in generating licensing revenues and do not anticipate the recognition of significant levels of licensing income in the future.
For the year ended December 31, 2015, international net sales were $120.9 million, or 81% of total net sales, as compared with $102.9 million, or 68% of total net sales in 2014. For the year ended December 31, 2015 as compared to the corresponding 2014 period, sales to Taiwan increased by $37.3 million and sales to Japan increased by $8.6 million, partially offset by (i) a decrease in sales to Korea of $21.4 million, (ii) a decrease in sales to the rest of world of $4.6 million, (iii) and a decrease in sales to Europe of $1.9 million. We expect sales to international customers to continue to represent a significant amount of our future revenues as our customer base in Asia continues to expand its capacity.
Our revenue derived from sales in foreign countries is not generally subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. However, we do sell systems and spare parts into Japan and this subjects us to the risk of currency exchange rate fluctuations since the orders are often denominated in Japanese yen. We attempt to mitigate this risk by entering into monthly foreign currency forward exchange contracts, as balance sheet derivatives, which includes a portion of our receivables that are denominated in Japanese yen from parts sales. For system sales, we attempt to mitigate foreign currency risk by entering into foreign currency forward contracts that generally have maturities of nine months or less, as cash flow derivatives. We had approximately $734.1 million of Japanese yen-denominated receivables at December 31, 2015. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customer’s willingness to purchase our product. (See “Risk Factors - A substantial portion of our sales are outside of the United States, which subjects us to risks related to customer service, installation, foreign economic and political stability, uncertain regulatory and tax rules, and foreign exchange rate fluctuations, all of which make it more difficult to operate our business.”).
2014 vs. 2013
Net sales consist of revenues from systems sales (systems and system upgrades), spare parts sales, services and licensing of technologies. For the year ended December 31, 2014, systems sales accounted for approximately 76% of total net sales. Sales of spare parts, services and licenses accounted for the remaining 24% of total net sales.
Systems sales decreased 2% to $114.5 million primarily attributable to a decrease in lithography system sales, partially offset by an increase in system upgrades and nanotechnology sales in 2014, as compared to 2013. Laser thermal processing sales remained flat in 2014, as compared to 2013.
On a product market application basis, system sales to the semiconductor industry were $92.9 million for the year ended December 31, 2014, a decrease of 4% as compared to $96.3 million in 2013. This decrease was primarily due to fewer system units sold. Semiconductor industry sales consist of sales to the advanced packaging market, semiconductor and semiconductor inspection market. System sales to the semiconductor industry is highly dependent on customer capacity demand.
System sales to the nanotechnology market were $21.7 million for the year ended December 31, 2014, a 7% increase as compared with sales of $20.3 million in 2013. The increase in sales to the nanotechnology market was primarily due to an increase in HBLED systems sales, partially offset by a decrease in ALD systems sales. System sales to the nanotechnology market are highly dependent on capacity demand in the industries we serve, including HBLEDs, ALD, thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads, we therefore expect to experience significant variations in sales within this market from period to period.
Sales of spare parts in 2014 decreased 9% to $21.6 million, as compared to $23.8 million in 2013. The decrease in sales of spare parts was the result of a decrease in spare parts demand. Services revenue decreased 15% to $14.0 million for the year ended December 31, 2014 as compared to $16.4 million in 2013. The decrease in service revenue was the result of a decrease in the number of service contracts.
Revenues from licensing activities decreased to $0.4 million in 2014, as compared with $0.5 million in 2013, primarily due to fewer systems being sold under a royalty arrangement. Pursuant to our license arrangements, such transactions are subject to a license fee based on units sold.
For the year ended December 31, 2014, international net sales were $102.9 million, or 68% of total net sales, as compared with $113.9 million, or 72% of total net sales in 2013. For the year ended December 31, 2014 as compared to the corresponding 2013 period, sales to Taiwan decreased by $33.5 million and sales to Japan decreased by $6.5 million, partially offset by (i) an increase in sales to Korea of $18.4 million, (ii) an increase in sales to the rest of world of $6.7 million, (iii) and an increase in sales to Europe of $3.9 million.
Gross Profit
2015 vs. 2014
Gross margins were 44% and 42% for 2015 and 2014, respectively. The 2% increase in gross margin was due to an improvement of 3% resulting from manufacturing efficiencies, partially offset by increases in other manufacturing costs which reduced total gross margin by 1%.
Our gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including: the introduction of new products, which typically have higher manufacturing costs until manufacturing efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the mix of products sold; the rate of capacity utilization; write-down of inventory and open purchase commitments; product discounts, pricing and competition in our targeted markets; and non-linearity of shipments during the period that can result in manufacturing inefficiencies.
2014 vs. 2013
Gross margins were 42% and 43% for 2014 and 2013, respectively. The 1% decrease in gross margin was due to a 4% decrease resulting from costs associated with manufacturing inefficiencies due to lower production volume. This decrease was partially offset by decreases in other manufacturing costs which contributed 3% to total gross margin.
Research, Development and Engineering Expenses
An inherent delay exists between the time product development activities and expenditures occur and when resultant product revenue is ultimately realized. We expect current year research, development and engineering program investments to contribute to revenue in future years.
2015 vs. 2014
Research, development and engineering expenses in 2015 decreased to $32.9 million, as compared to $33.6 million in 2014. The $0.7 million decrease was primarily due to (i) a $1.0 million decrease in research and development expense primarily due to reduction in headcount and related expenses as well as the timing of certain research and development projects and (ii) a $0.1 million decrease in other research and development expenses, partially offset by (a) a $0.3 million increase in stock-based compensation expense. As a percentage of net sales, research, development and engineering expenses for the year ended December 31, 2015 remained flat at 22% compared to 2014.
2014 vs. 2013
Research, development and engineering expenses in 2014 remained flat at $33.6 million when compared to 2013. Although the total remained unchanged, there was (i) a $0.8 million decrease in employee benefit costs, (ii) a $0.2 million decrease in bonus plan expense, and (iii) a $0.1 million decrease in 401(k) match expense, partially offset by (a) a $0.6 million increase in manufacturing support costs, (b) a $0.4 million increase in stock-based compensation expense, and (c) $0.1 million increase in expenses related to the ALD product group. As a percentage of net sales, research, development and engineering
expenses for the year ended December 31, 2014 were 22% compared to 21% for 2013. The percentage increase was due to the decrease in net sales as compared to 2013.
Selling, General and Administrative Expenses
2015 vs. 2014
Selling, general and administrative expenses decreased to $46.8 million in 2015, as compared to $48.7 million in 2014. The $1.9 million decrease was primarily due to (i) a $1.8 million decrease in stock-based compensation expense, (ii) a $1.5 million decrease in travel expenses as a result of cost reduction measures, and (iii) a $0.9 million decrease associated with reduction in headcount, partially offset by (a) a $1.0 million increase in legal expenses, (b) a $0.7 million increase in bonus plan expenses, (c) a $0.3 increase in employee benefit costs and (d) a $0.3 million increase in certain marketing activities. As a percentage of net sales, selling, general and administrative expenses for the year ended December 31, 2015 were 31% compared to 32% for 2014. The decrease was due primarily to the decrease in selling, general and administrative expenses as compared to 2014.
2014 vs. 2013
Selling, general and administrative expenses decreased to $48.7 million in 2014, as compared to $48.9 million in 2013. The $0.2 million decrease was primarily due to (i) a $0.6 million decrease in employee benefit costs, (ii) a $0.4 million decrease in bonus plan expense, (iii) a $0.2 million decrease in executive deferred compensation, and (iv) a $0.1 million decrease in 401(k) match expense, partially offset by a $1.0 million increase in stock-based compensation expense and a $0.1 million increase in expenses related to the ALD product group. As a percentage of net sales, selling, general and administrative expenses for the year ended December 31, 2014 were 32% compared to31% for 2013. This increase was due primarily to the decrease in net sales as compared to 2013.
Restructuring Expenses
During the year ended December 31, 2015, we made reductions in our workforce as part of our efforts to remain competitive in the current environment. The restructuring costs totaled $0.8 million and were related to severance and benefits for headcount reductions in certain functions in the U.S. and certain foreign countries. The severance and benefits expenses of $0.8 million associated with the restructuring plan is included in Restructuring in the Consolidated Statements of Operations as of December 31, 2015.
Interest and Other Income, Net
Interest and other income, net, was $0.4 million for the year ended December 31, 2015, as compared with $0.2 million and $0.2 million for 2014 and 2013, respectively. We recorded $0.5 million of interest income during the year ended December 31, 2015. The $0.4 million increase was primarily due to higher returns on short-term investments balance during
the year ended December 31, 2015, as compared to 2014. For the year ended December 31, 2014 interest and other income, net was $0.2 million, as compared with $0.2 million for 2013. We recorded $0.1 million of interest income during the year end December 31, 2014. The $0.5 million decrease was primarily due to the lower average short-term investments balance during the year ended December 31, 2014, as compared to 2013. We presently maintain an investment portfolio with a weighted-average maturity of less than one year. Consequently, changes in short-term interest rates have a significant impact on our interest income. Future changes in short-term interest rates are expected to continue to have a significant impact on our interest income.
Other expense net of $0.1 million for the year ended December 31, 2015 was primarily the result of $0.2 million of losses from foreign currency movements, partially offset by $0.1 million in miscellaneous other income. In 2014, other income, net of $0.1 million, was the result of $0.5 million in miscellaneous other income, partially offset by $0.4 million of losses from foreign currency movements. In 2013, other expense, net of $0.4 million was the result of losses from foreign currency exchange.
Provision for Income Taxes
For the year ended December 31, 2015, we recorded income tax expense of $0.5 million, as compared to income tax expense of $0.2 million in 2014, and income tax benefit of $1.1 million in 2013. The income tax expense recorded in 2015 and 2014 resulted primarily from foreign taxes. The income tax benefit recorded in 2013 resulted primarily from tax benefits due to return to provision adjustments associated with the filing of our 2012 tax return and the extension of the federal research and development tax credits under the American Taxpayer Relief Act of 2012, partially offset by state taxes and foreign taxes of $0.5 million. The actual expense or benefit recorded for the years ended 2015, 2014, and 2013 differs from the federal tax expense or benefit at 35% primarily due to current tax expense in foreign jurisdictions and the fact that in 2015, 2014 and 2013 the U.S. taxable loss was not realized due to the valuation allowance.
We are eligible for tax incentives that provide that certain income earned in Singapore would be subject to a tax holiday and/or reduced tax rates for a limited period of time under the laws of Singapore. To realize these benefits, we must meet certain requirements relating to employment and investment activities. This exemption is expected to expire within five years. In 2015 the tax benefit attributable to the tax holiday was approximately $3.1 million with a $0.11 impact on diluted earnings per share. In 2014, the tax benefit attributable to the tax holiday was approximately $1.0 million with a $0.04 impact on diluted earnings per share. In 2013, the tax benefit attributable to the tax holiday was approximately $0.5 million with a $0.02 impact on diluted earnings per share. Our ability to realize benefits from these initiatives could be materially adversely affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction.
Income taxes can be affected by estimates of whether, and within which jurisdictions, future earnings will occur and how, when and if cash is repatriated to the United States, combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters and we do not anticipate any material earnings impact from their ultimate resolutions.
In accordance with ASC 740, we had unrecognized benefits of $17.4 million as of December 31, 2015 due to uncertain tax positions. We continue to recognize interest and penalties as a component of income tax provision and accrued an insignificant amount for these items for the year. During the year ended December 31, 2015, the balance related to uncertain tax positions increased by $9.3 million, net. If we are able to eventually recognize these uncertain tax positions, $8.1 million of the unrecognized benefit on January 1, 2015 and $17.4 million of the unrecognized benefit on December 31, 2015, would reduce our effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future.
Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of our analysis, and as further described in the Critical Accounting Policies and Estimates section, deferred income taxes, we concluded that it is more likely than not that, as of December 31, 2015, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan.
We are subject to federal and state tax examination for years 2000 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2003 and forward. There are no material income tax examinations currently in progress.
Outlook
The anticipated timing of orders, shipments and system acceptances usually requires that we fill a number of production slots in any given period in order to meet our sales targets. If we are unsuccessful in our efforts to secure those production orders, or if existing production orders are delayed or cancelled, our results of operations will be materially adversely impacted. Additionally, we may not exceed or even maintain our current or prior levels of net sales for any period in the future for the reasons enumerated in this report. We believe that the market acceptance and volume production of our advanced packaging systems, laser processing systems and inspection systems are of critical importance to our future financial results. At December 31, 2015, these systems represented approximately 83% of our backlog.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $8.4 million for the year ended December 31, 2015, as compared with $6.7 million for the comparable period in 2014. Net cash used in operating activities during the year ended December 31, 2015 was attributable to $0.9 million of working capital cash used by changes in operating assets and liabilities as described below, partially offset by $9.3 million of cash generated from operations after adjustments for non-cash charges such as stock-based compensation, depreciation and amortization of intangibles and others.
Working capital uses of cash of $18.9 million were due to (i) a $13.1 million increase in inventory, (ii) a $4.1 million decrease in deferred product and service income, and (iii) a $1.7 million decrease in other liabilities. Working capital sources of cash of $18.0 million were due to (a) a $16.1 million decrease in accounts receivable, (b) a $1.3 million decrease in prepaid expenses and other assets, and (c) a $0.6 million increase in accrued expenses
We believe that because of the relatively long manufacturing cycle of certain systems, particularly newer products, our inventories will continue to represent a significant portion of working capital. Currently, we are devoting significant resources to the development, introduction and commercialization of our laser thermal processing systems and inspection systems and to the development of our next generation 1X lithography technologies. We intend to continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing, and selling, general and administrative costs in order to further develop, produce and support these new products. There can be no assurance that any expenditures to develop these products will result in improved sales or that markets for these products will become viable. Additionally, gross profit margins, inventory and capital equipment levels may be adversely impacted in the future by costs associated with the initial production of the laser thermal processing systems, inspection systems and by future generations of our 1X wafer steppers. These costs include, but are not limited to, additional manufacturing overhead, costs of demonstration systems and facilities and the establishment of additional after-sales support organizations. Additionally, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding technical, marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our cash flow and operating results will be materially adversely affected until, among other factors, costs and expenses can be reduced. Our failure to achieve our sales targets for these new products could result in additional inventory write-offs and asset impairment charges, either of which could materially adversely impact our results of operations.
During the year ended December 31, 2015, net cash provided by investing activities was $10.0 million, as compared with net cash used in investing activities of $1.0 million for the comparable period in 2014. Net cash provided by investing activities during the year ended December 31, 2015 was attributable to maturities of available-for-sale investment securities of $12.6 million, net of purchases, partially offset by capital expenditures of $2.6 million.
Net cash used in financing activities was $23.4 million during the year ended December 31, 2015, as compared with net cash provided by financing activities of $17.9 million for the comparable period in 2014. Net cash used in financing activities during the year ended December 31, 2015 was primarily attributable to repurchases of the Company’s common stock of $21.4 million and tax payments for release of restricted stock units of $2.3 million, partially offset by proceeds received from the issuance of common stock under our employee stock-based compensation plans of $0.3 million, net.
Historically, our principal source of liquidity has been cash provided by our operations. At December 31, 2015, we had working capital of $315.4 million. At December 31, 2015, our cash, cash equivalents and short-term investments, net of related borrowings under our line of credit, was $246.8 million.
At December 31, 2015, $36.0 million of our cash, cash equivalents, and investments were held by foreign subsidiaries. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the United States. We currently have no plans to repatriate any foreign earnings back to the United States as we believe our cash flows provided by our U.S. operations will meet our future U.S. liquidity needs.
In December 2004, we entered into a line of credit agreement with a brokerage firm replacing a similar arrangement that we had with a different firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds rate plus 125 basis points (i.e. 1.45% as of December 31, 2015). Certain of our cash, cash equivalents and short-term investments secure outstanding borrowings under this facility. We may borrow up to 75% of our total cash, cash equivalents and investments balance in this brokerage account. Funds are advanced to us under this facility based on pre-determined advance rates on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants. As of December 31, 2015 and 2014, balances of $5.1 million were outstanding under this facility with a related collateral requirement of approximately $6.8 million of our cash, cash equivalents and investments.
The following summarizes our contractual obligations at December 31, 2015, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:
The amounts shown in the table above for open purchase order commitments are primarily related to the purchase of inventories, equipment and leasehold improvements. We record charges to operations for purchase order commitments we deem in excess of normal operating requirements (see “Critical Accounting Policies and Estimates”).
The development and manufacture of new systems and enhancements are highly capital-intensive. In order to be competitive, we believe we must continue to make significant expenditures for capital equipment; sales, service, training and support capabilities; systems, procedures and controls; and expansion of operations and research and development, among many other items. We expect that cash generated from operations and our cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements for at least the next twelve months. However, in the near-term, we may continue to utilize existing and future lines of credit, and other sources of financing, in order to maintain our present levels of cash, cash equivalents and short-term investments. Beyond the next twelve months, we may require additional equity or debt financing to address our working capital or capital equipment needs. In addition, we may seek to raise equity or debt capital at any time that we deem market conditions to be favorable. Additional financing, if needed, may not be available on reasonable terms, or at all.
We have in the past, and may in the future, pursue acquisitions of complementary product lines, technologies or businesses. Future acquisitions may require the use of substantial amounts of our cash, cash equivalents and short-term investments, the issuance of potentially dilutive equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other intangible assets, which could materially adversely affect our financial condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, personnel and products of the acquired companies; the diversion of management’s attention from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees of the acquired company. In the event we acquire product lines, technologies or businesses which do not complement our business, or which otherwise do not enhance our sales or operating results, we may incur substantial write-offs and higher recurring operating costs, which could have a material adverse effect on our business, financial condition and results of operations. In the event that any such acquisition does occur, there can be no assurance as to the effect thereof on our business or operating results.
Off-Balance Sheet Transactions
Our off-balance sheet transactions consist of certain financial guarantees, both expressed and implied, related to indemnification for product liability, patent infringement and latent product defects. Other than liabilities recorded pursuant to known product defects, at December 31, 2015, we did not record a liability associated with these guarantees, as we have little or no history of costs associated with such indemnification requirements. See Note 17 to our Consolidated Financial Statements for additional information.
Foreign Currency
As part of our overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, we attempt to hedge most of our Japanese yen-denominated foreign currency exposures. We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen-denominated receipts from customers, for actual or forecasted sales of equipment after receipt of customer orders, may be adversely affected by changes in foreign currency exchange rates. We use foreign currency forward exchange contracts and natural hedges to offset substantial portions of the potential gains or losses associated with our Japanese yen-denominated assets and liabilities due to exchange rate fluctuations. We enter into foreign currency forward contracts that generally have maturities of nine months or less.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk due to potential changes in interest rates, relates primarily to our investment portfolio, which consisted primarily of fixed interest rate instruments as of December 31, 2015 and 2014. We maintain an investment policy designed to ensure the safety and preservation of our invested funds by limiting market risk and the risk of default.
Certain of our cash, cash equivalents and investments serve as collateral for a line of credit we maintain with a brokerage firm. The line of credit is used for liquidity purposes, mitigating the need to liquidate investments in order to meet our current operating cash requirements.
The following table presents the hypothetical changes in fair values in the financial instruments held by us at December 31, 2015 that are sensitive to changes in interest rates. These instruments are comprised of cash equivalents and investments. These instruments are held for purposes other than trading. The modeling techniques used to measure the change in fair values arising from selected hypothetical changes in interest rates. Assumed market value changes to our portfolio reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS, and 150 BPS:
During the year ended December 31, 2015, we did not materially alter our investment objectives or criteria and believe that, although the composition of our portfolio has changed from the preceding year, the portfolio’s sensitivity to changes in interest rates is materially the same.
Credit Risk
We mitigate credit default risk by attempting to invest in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. Our portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and is diversified in accordance with our investment policy. To date, we have not experienced significant liquidity problems with our portfolio. Our single largest holding at December 31, 2015, excluding the U.S. government and its agencies, was a $5.2 million money market fund.
As of December 31, 2015, we did not have any investments in mortgage backed or auction rate securities. However, we intend to closely monitor developments in the credit markets and make appropriate changes to our investment policy as deemed necessary or advisable. Based on our ability to liquidate our investment portfolio and our expected operating cash flows, we do not anticipate any liquidity constraints as a result of the current credit environment.
Foreign Exchange Risk
The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do enter into these transactions in other currencies, primarily Japanese yen. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, we have established cash flow and balance sheet hedging programs.
We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen-denominated receipts from customers for actual or forecasted sales of equipment may be adversely affected by changes in foreign currency exchange rates. Our hedging programs reduce, but do not always entirely eliminate, the impact of currency movements. See “Derivative instruments and hedging” in Note 4 of Notes to Consolidated Financial Statements for additional disclosures.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Selected Financial Data information contained in Item 6 of Part II hereof is hereby incorporated by reference into this Item 8 of Part II of this Form 10-K.
ULTRATECH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements included in Item 8:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Ultratech, Inc.
We have audited the accompanying consolidated balance sheets of Ultratech, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ultratech, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Ultratech, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 26, 2016 expressed an unqualified opinion thereon.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Ultratech, Inc.
We have audited Ultratech, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Ultratech, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Ultratech, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ultratech, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015 of Ultratech, Inc. and our report dated February 26, 2016 expressed an unqualified opinion thereon.
ULTRATECH, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
ULTRATECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
ULTRATECH, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
See accompanying notes to consolidated financial statements.
ULTRATECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
ULTRATECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
ULTRATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY AND INDUSTRY INFORMATION
Nature of Operations
Ultratech, Inc. develops, manufactures and markets photolithography, laser thermal processing and inspection equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Singapore, Japan, Taiwan, Korea and the rest of Asia.
We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuit industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, laser diodes, high-brightness light emitting diodes (“HBLEDs”) and atomic layer deposition (“ALD”). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.
Major Customers
In 2015, Siliconware Precision Industries Co. Ltd. (“SPIL”), Taiwan Semiconductor Manufacturing Co. Ltd. (“TSMC”) and Intel Corporation (“Intel”) accounted for 21%, 13%, and 10% of our total systems sales, respectively. In 2014, Intel, Samsung and Global Foundries Incorporated (“GFI”) accounted for 18%, 14% and 13% of our total system sales, respectively. In 2013, SPIL accounted for 16% of our total system sales.
At December 31, 2015, TSMC and Flash Forward, Ltd. accounted for 36% and 19% of our accounts receivable, respectively. At December 31, 2014, GFI, Samsung, SMIC, and Intel accounted for 16%, 14%, 14% and 11% of our accounts receivable, respectively.
Business Segments
In evaluating our business, we give consideration to the Chief Executive Officer’s review of financial information and the organizational structure of our management. Based on this review, we concluded that, at the present time, resources are allocated and other financial decisions are made based on consolidated financial information. Accordingly, we have determined that we operate in one business segment, which is the manufacture and distribution of capital equipment to manufacturers of integrated circuits and nanotechnology components.
Enterprise-Wide Disclosures
Our products are manufactured in the United States and Singapore, and are sold worldwide. We market our products internationally through domestic and foreign-based sales and service offices. The following table presents enterprise-wide sales to external customers and long-lived assets by geographic region:
The rest of the world is comprised of sales to customers and long-lived assets in countries that are individually insignificant.
With the exception of Japan, our operations in foreign countries are not currently subject to significant currency exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, we sell our products in both U.S. dollars and Japanese yen. However, we attempt to mitigate our currency exchange rate exposure through the use of currency forward contracts. (See “Derivative Instruments and Hedging” in Note 4.)
2. CONCENTRATIONS OF RISKS
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, short-term investments and trade receivables. These credit risks include the potential inability of an issuer or customer to honor their obligations under the terms of the instrument or the sales agreement. We place our cash equivalents and investments with high credit-quality financial institutions. We invest our excess cash in commercial paper, readily marketable debt instruments and collateralized funds of United States and state government entities. We have established guidelines relative to credit ratings, diversification and maturities that seek to maintain principal balance and liquidity.
A majority of our trade receivables are derived from sales in various geographic areas, principally the United States, Europe, Korea, Japan, Taiwan and the rest of Asia, to large companies within the integrated circuit and nanotechnology industries. We perform ongoing credit evaluations of our customers’ financial condition and require collateral, whenever deemed necessary. As of December 31, 2015 and 2014, the recorded value of our accounts receivable approximated fair value due to the short-term nature of our accounts receivable.
Sole-source and single-source suppliers provide critical components and services for the manufacture of our products. The reliance on sole or limited groups of suppliers may subject us from time to time to quality, allocation and pricing constraints.
3. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Ultratech and our subsidiaries, all of which are wholly owned. Intercompany balances and transactions have been eliminated.
The U.S. dollar is the functional currency for all foreign operations. Foreign exchange gains and losses which result from the process of remeasuring foreign currency financial statements into U.S. dollars or from foreign currency exchange transactions during the period, are included in interest and other income, net. Net foreign exchange losses during the years ended December 31, 2015, 2014 and 2013 were $0.2 million, $0.4 million, and $0.3 million, respectively.
Our fiscal quarters in 2015 ended on April 4, 2015, July 4, 2014, October 3, 2015 and December 31, 2015. Our fiscal quarters in 2014 ended on March 29, 2014, June 28, 2014, September 27, 2014 and December 31, 2014.
We have evaluated subsequent events, as defined by Accounting Standard Codification (“ASC”) Topic 855, through February 26, 2016, which is the issuance date of our financial statements.
Use of Estimates
The preparation of the financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, management evaluates its estimates, including those related to inventory valuation and purchase order commitments, warranty obligations, asset retirement obligations, bad debts, estimated useful lives of fixed assets, intangible assets, asset impairment, income taxes, deferred income tax valuation allowance, stock-based compensation, and contingencies and litigation. Management bases its estimates on historical experience and on various other analyses and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid investments with an original maturity date at acquisition of three months or less. The carrying value of cash equivalents approximates fair value.
Investments
Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the classification at each balance sheet date. At December 31, 2015 and 2014, all investments and cash equivalents in our portfolio were classified as “available-for-sale” and are stated at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss), as a separate component of stockholders’ equity. The fair value of short-term investments are estimated based on quoted prices in active markets or significant other observable inputs as of December 31, 2015 and 2014.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as interest, dividends, realized gains and losses and declines in value judged to be other than temporary are included in interest and other income, net. The cost of securities sold is based on the specific identification method.
Allowance for Bad Debts
We maintain an allowance for uncollectible accounts receivable based upon expected collectability. This reserve is established based upon historical trends, current economic conditions, delinquency status based on contractual terms and an analysis of specific exposures.
Inventories
Inventories are stated at the lower of cost or market using standard costs that generally approximate actual costs on a first-in, first-out basis. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies, and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. The semiconductor industry is characterized by rapid technological change, changes in customer requirements and evolving industry standards. We perform a detailed
assessment of inventory at each balance sheet date, which includes a review of, among other factors, demand requirements and market conditions. Based on this analysis, we may record adjustments to the value of our inventory. During the years ended December 31, 2015 and 2014 we have recorded zero and $0.3 million, respectively, in reserves for excess and obsolete inventories and open purchase order commitments.
Long-lived Assets
Equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Equipment is depreciated on a straight-line basis over the estimated useful lives (i.e. three to nine years). Leasehold improvements are amortized on a straight-line basis over the life of the related assets or the lease term, whichever is shorter. Depreciation and amortization expense for the years ended December 31, 2015, 2014 and 2013 was $6.5 million, $6.4 million and $5.6 million, respectively.
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess these assets for impairment based on estimated future cash flows from these assets. No asset impairment charges have been recorded during the three years ended December 31, 2015.
Intangible Assets
Purchased technology, patents and other intangible assets are presented at cost, net of accumulated amortization, and are amortized over their estimated useful lives using the straight-line method. Amortization expense for the years ended December 31, 2015, 2014 and 2013 was $1.7 million, $1.7 million and $1.5 million, respectively.
We review for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable and the carrying amount exceeds its fair value. No intangible assets impairment charges have been recorded during the three years ended December 31, 2015.
Related-Party Transactions
From time to time, we make loans to our employees. All currently outstanding employee notes accrue interest and have remaining terms ranging from two to five years.
During the year ended December 31, 2015, no new loans were made to an employee. At each of the years ended December 31, 2015 and 2014, the aggregate outstanding principal balance of all loans were $0.1 million.
Derivative Instruments and Hedging
The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we also enter into these transactions in other currencies, primarily Japanese yen. Our policy is to minimize foreign currency denominated transaction and remeasurement exposures with derivative instruments, mainly forward contracts. The gains and losses on these derivatives are intended to at least partially offset the transaction and remeasurement gains and losses recognized in earnings. We do not enter into foreign exchange forward contracts for speculative purposes. Under ASC Topic 815, Derivatives and Hedging (“ASC 815”) all derivatives are recorded on the balance sheet at fair value. The gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.
The fair value of derivative instruments recorded in our Consolidated Balance Sheets is as follows:
Our derivative financial instruments are subject to both credit and market risk. Credit risk is the risk of loss due to failure of a counter-party to perform its obligations in accordance with contractual terms. Market risk is the potential change in an investment’s value caused by fluctuations in interest and currency exchange rates, credit spreads or other variables. We monitor the credit-worthiness of the financial institutions that are counter-parties to our derivative financial instruments and do not consider the risks of counter-party nonperformance to be material. Credit and market risks, as a result of an offset by the underlying cash flow being hedged, related to derivative instruments were not considered material at December 31, 2015 and 2014.
Cash Flow Hedging
We designate and document as cash flow hedges foreign exchange forward contracts that are used by us to hedge the risk that forecasted revenue may be adversely affected by changes in foreign currency exchange rates. The effective portion of the contracts’ gains or losses is included in accumulated other comprehensive income (loss) (“OCI”) until the period in which the forecasted sale being hedged is recognized, at which time the amount in OCI is reclassified to earnings as a component of revenue. To the extent that any of these contracts are not considered to be effective in offsetting the change in the value of the forecasted sales being hedged, the ineffective portion of these contracts is immediately recognized in income as a component of interest and other income, net. We calculate hedge effectiveness at a minimum each fiscal quarter. We measure hedge effectiveness by comparing the cumulative change in the spot rate of the derivative with the cumulative change in the spot rate of the anticipated sales transactions. The maturity of these instruments is generally nine months or less. We record any excluded components of the hedge in interest and other income, net.
In the event the underlying forecasted transaction does not occur within the designated hedge period or it becomes probable that the forecasted transaction will not occur, the related gains and losses on the cash flow hedge are reclassified from OCI to interest and other income, net on the consolidated statement of operations.
At December 31, 2015, we had one currency forward contract for the sale of Japanese yen of 661.0 million. At December 31, 2014, there were no outstanding cash flow hedges. During the year ended December 31, 2015, and 2014, we reclassified into earnings an accumulated loss of $0.1 million and an insignificant amount that was recorded as a component of other comprehensive income (loss).
Balance Sheet Derivatives
We manage the foreign currency risk associated with yen-denominated assets and liabilities using foreign exchange forward contracts with maturities of less than nine months. The change in fair value of these derivatives is recognized as a component of interest and other income, net and is intended to offset the remeasurement gains and losses associated with the non-functional currency denominated assets and liabilities.
At December 31, 2015 and 2014, we had currency sell-forward contracts classified as fair value hedges for the sale of Japanese yen of $3.2 million and $1.9 million, respectively. At December 31, 2015 and 2014, we had buy-forward contracts for the purchase of Japanese yen of $0.3 million and $0.1 million, respectively. The fair value of derivatives at December 31, 2015 and 2014 was insignificant.
The following sets forth the effect of the derivative instruments on our Consolidated Statements of Operations for the years ended:
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement consideration is fixed or determinable, and collectability is reasonably assured. We derive revenue from four sources: system sales, spare parts sales, service contracts and license fees.
Provided all other criteria are met, we recognize revenues on system sales when system acceptance provisions have been met in accordance with the terms and conditions of the arrangement. In the event that terms of the sale provide for a lapsing system acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or system
acceptance, whichever occurs first. In these instances, which are infrequent, revenue is recorded only if the product has met product specifications prior to shipment and management deems that no significant uncertainties as to product performance exist.
Our transactions frequently include the sale of systems and services under multiple element arrangements. In transactions with multiple deliverables, revenue is recognized upon the delivery of the separate elements and when system acceptance has occurred or we are otherwise released from our system acceptance obligations.
For multiple element arrangements, the total consideration for an arrangement is allocated among the separate elements in the arrangement based on a selling price hierarchy. The selling price hierarchy for a deliverable is based on (i) vendor specific objective evidence (“VSOE”); if available; (ii) third party evidence of selling price if VSOE is not available; or (iii) an estimated selling price, if neither VSOE nor third party evidence is available. If we have not established VSOE and cannot obtain third party evidence of selling price, we determine our estimate of the relative selling price by considering our production costs and historical margins of similar products or services. We believe this best represents the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We regularly review the method used to determine our relative selling price and update any estimates accordingly. We limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services or other future performance obligations.
We generally recognize revenue from spare parts sales upon shipment, as our products are generally sold on terms that transfer title and risk of ownership when it leaves our site. We sell service contracts for which revenue is deferred and recognized ratably over the contract period (for time-based service contracts) or as service hours are delivered (for contracts based on a purchased quantity of hours). We recognize license revenue from transactions in which our systems are re-sold by our customers to third parties, as well as from royalty arrangements.
Costs related to deferred product revenues are capitalized (deferred) and recognized at the time of revenue recognition. Deferred product revenue and costs are netted on our balance sheet, under the caption “deferred product and services income.” The gross amount of deferred revenues and deferred costs at December 31, 2015 were $5.3 million and $0.8 million, respectively. The gross amount of deferred revenues and deferred costs at December 31, 2014 were $9.8 million and $1.2 million, respectively.
Costs incurred for shipping and handling are included in cost of sales.
Warranty Accrual
We generally warrant our products for material and labor to repair the product for a period of 12 months for new products, or three months for refurbished products, from the date of system acceptance. Accordingly, an accrual for the estimated cost of the warranty is recorded at the time the product is shipped and the related charge is recorded in the statement of operations at the time revenue is recognized.
Research, Development and Engineering Expenses
We are actively engaged in basic technology and applied research programs designed to develop new products and product applications. In addition, substantial ongoing product and process improvement engineering and support programs relating to existing products are conducted within engineering departments and elsewhere. Research, development and engineering costs are charged to operations as incurred.
Stock-Based Compensation
Under the fair value recognition provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors and employee option forfeiture rates. As stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards that ultimately are expected to vest, the amount of the expense has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.
Deferred Income Taxes
Deferred income taxes are provided for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. ASC Topic 740, Income Taxes (“ASC 740”) provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur. Realization of our net deferred tax assets is dependent upon our generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain the benefit of the reversal of temporary differences, net operating loss carry-forwards, and tax credit carry-forwards. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. With the exception of certain international jurisdictions (i.e. Japan and Taiwan), we have determined that at this time it is more likely than not that deferred tax assets attributable to the remaining jurisdictions will not be realized, primarily due to uncertainties related to our ability to utilize the net operating loss and tax credit carry-forwards before they expire based on the fact that it is more likely than not we will not generate sufficient taxable income in the relevant jurisdictions. Accordingly, we have established a valuation allowance for such deferred tax assets. Management continues to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. See Note 14 Income Taxes for further details.
Taxes Collected from Customers
We collect taxes from our customers for sales transactions as assessed by respective governmental authorities. On our consolidated statements of operations these taxes are presented on a net basis and are excluded from revenues and expenses.
Impact of Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB agreed to delay the effective date by one year. In accordance with the agreed upon delay, the new standard is effective for us beginning in the first quarter of 2018. Early adoption is permitted, but not before the original effective date of the standard. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method nor have we determined the impact of the new standard on our consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update (ASU) 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. We early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of our net current deferred tax asset to the net non-current deferred tax asset in our Consolidated Balance Sheet as of December 31, 2015. No prior periods were retrospectively adjusted.
5. STOCK-BASED COMPENSATION
The following table shows total stock-based compensation expense recognized under ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), for employees and directors and the effect on the accompanying Consolidated Statement of Operations for the years ended December 31:
Compensation cost capitalized as part of inventory was insignificant, $0.8 million and $0.5 million during the years ended December 31, 2015, 2014 and 2013, respectively.
The estimated fair value of our stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period using a single grant approach on a ratable basis for awards granted after the adoption of ASC 718 and using a multiple grant approach on an accelerated basis for awards granted prior to the adoption of ASC 718.
The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The expected life of options is based on observed historical exercise patterns. Groups of employees that have similar historical exercise patterns have been considered separately for valuation purposes. The Black-Scholes valuation input for expected volatility used for our stock options for all years presented was based on the historical volatility of our common stock. The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield reflects that we have not paid any cash dividends since inception and do not intend to pay any cash dividends in the foreseeable future.
We used the following weighted-average assumptions to estimate the fair value of stock options at the date of grant using the Black-Scholes option-pricing model for the years ended December 31:
The weighted-average fair value per share of stock options granted during the years ended December 31, 2015, 2014 and 2013 was $7.19, $10.40, and $14.09 respectively.
1993 Stock Option Plan/Stock Issuance Plan
On July 19, 2011, our stockholders approved amendments to our 1993 Stock Option/Stock Issuance Plan which increased the number of shares available for issuance pursuant to the 1993 Plan by 3.3 million shares. The amendments, which were adopted by our Board of Directors on May 31, 2011, effective as of their approval by our stockholders, increased the share reserve, altered share-counting procedures, made changes to the non-employee director automatic grant program and enabled the granting of performance-based awards under the plan. These plans provide for the grant of stock-based awards to our eligible employees, consultants and advisers and non-employee directors.
Under our 1993 Stock Option Plan/Stock Issuance Plan, as amended and restated as of May 31, 2011, officers and other key employees, non-employee Board members and consultants may receive equity incentive awards in the form of stock options to purchase shares of common stock at no less than 100% of fair value at the grant date or restricted stock or restricted stock units. Options historically have vested in equal monthly installments over a fifty-month period or one hundred-month period, with a minimum vesting period of twelve months from the grant date, and generally expire ten years from the date of grant or upon the expiration of a limited period following any earlier termination of employment. The plan was amended in January 2006 to allow the issuance of shares pursuant to restricted stock unit awards. These awards when granted generally vest in equal monthly installments over the vesting period but which defer the issuance of the vested shares until the end of the issuance period measured from the award date, subject to earlier issuance upon termination of employment under certain circumstances or a change in control. Awards under the plan may be subject to accelerated vesting under certain circumstances should a change in control occur. The plan terminates on the earlier of June 6, 2020 or the date on which all shares available for issuance under the plan have been issued. Under the plan, approximately 0.4 million, 0.2 million and 1.2 million shares were available for issuance at December 31, 2015, 2014 and 2013, respectively.
1998 Supplemental Stock Option/Stock Issuance Plan
Under our 1998 Supplemental Stock Option/Stock Issuance Plan, as amended, eligible employees (i.e. other than executive officers and employees holding the title of Vice President or General Manager) were able to receive options to purchase shares of common stock at not less than 100% of fair value on the grant date. These options generally vest in equal monthly installments over a fifty-month period, with a minimum vesting period of twelve months from grant date, and generally expire ten years from date of grant, subject to earlier termination following the optionee’s cessation of employee status. Direct stock issuances may also be made under the plan, subject to similar vesting provisions. The plan was amended in January 2008 to allow the issuance of shares pursuant to restricted stock unit awards. Since the plan terminated on October 19, 2008, there were no options available for issuance under the plan at December 31, 2015, 2014 and 2013.
Stock Option Activity
The following table is a summary of our stock option activity and related information for the year ended December 31, 2015:
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the year ended December 31, 2015 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2015. Total intrinsic value of options exercised (selling price of the exercised stock less the option strike price multiplied by the share amount) in the year ended December 31, 2015 was $0.1 million as compared to $1.8 million and $9.6 million in 2014 and 2013, respectively. Cash received from option exercises in the years ended December 31, 2015 and 2014 was $0.3 million and $4.3 million, respectively.
The following table is a summary of our option activity for the years ended December 31:
The following table shows the related information for options outstanding and options exercisable as of December 31, 2015:
As of December 31, 2015, $13.6 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 3.01 years.
Restricted Stock Unit Activity
The following table is a summary of our restricted stock unit activity and related information as of December 31:
A total of 327,455 shares of our common stock subject to restricted stock units was vested but not yet distributed as of December 31, 2015. Stock-based compensation expense related to our restricted stock units for the year ended December 31, 2015 was $10.0 million. As of December 31, 2015, $19.6 million of total unrecognized compensation cost related to unvested restricted stock units is expected to be recognized over a weighted-average period of 3.11 years. Total fair value of vested shares in the year ended December 31, 2015 was $10.2 million compared to $11.1 million and $9.9 million in 2014 and 2013, respectively.
6. Common Stock Repurchase Program
On October 27, 2014, our Board of Directors authorized the repurchase of up to $100 million of the Company’s common stock. Any repurchases may be made through open market purchases, block trades, privately negotiated transactions and/or derivative transactions, subject to market conditions and managements’ ongoing determination that it is the best use of available cash on hand to fund any repurchases. The repurchase authorization does not obligate us to acquire any common stock.
During the year ended December 31, 2015, we repurchased 1.3 million shares of common stock at an average cost per share of $17.15. The total purchase price of $21.4 million was reflected as an increase to treasury stock resulting in a reduction in stockholder’s equity.
7. BASIC AND DILUTED NET LOSS PER SHARE
The following sets forth the computation of basic and diluted net income (loss) per share:
The dilutive effect of outstanding options and restricted stock units is reflected in diluted net income per share, but not diluted net loss per share, by application of the treasury stock method, which includes consideration of stock-based compensation required by U.S. GAAP. As the Company reported net losses for each of the years ended December 31, 2015 and 2014, both basic and diluted net loss per share are the same.
For the year ended December 31, 2015, a total of 3.0 million shares of common stock subject to options and restricted stock units was excluded from the computation of diluted net loss per share as the resulting effect would have been anti-dilutive, compared to 2.7 million shares and 2.3 million shares for the years ended December 31, 2014 and 2013, respectively. Options and restricted stock units are anti-dilutive when we have a net loss or when the exercise price of the stock option and the average unrecognized compensation cost of the stock option or restricted stock unit are greater than the average market price of our common stock.
8. FAIR VALUE MEASUREMENTS
On January 1, 2008, we adopted ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) for financial assets and liabilities recognized at fair value on a recurring basis. On January 1, 2009, we adopted ASC 820 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The adoption of this deferred portion of ASC 820 did not have any impact on our results of operations or financial position.
Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
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Level 1-Quoted prices for identical assets or liabilities in active markets.
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Level 2-Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
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Level 3-Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.
We measure certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale securities and foreign currency derivatives. There were no movements between levels one and two for any years presented.
The fair value of these certain financial assets and liabilities was determined at December 31, 2015 and 2014:
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(1)
Included in cash and cash equivalents and short-term investments on our consolidated balance sheet. Cash equivalents at December 31, 2015 and 2014 were $15.1 million and $26.5 million, respectively.
(2)
Included in current assets on our consolidated balance sheet. Consisted of forward foreign exchange contracts for the Japanese yen. See Note 4 - Derivative Instruments and Hedging.
(3)
Included in current liabilities on our consolidated balance sheet. Consisted of forward foreign exchange contracts for the Japanese yen. See Note 4 - Derivative Instruments and Hedging.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss is comprised of the following items, net of tax:
The amount of gain on foreign exchange contracts reclassified to earnings was $0.1 million and insignificant and for the years ended December 31, 2015, and 2014, respectively. Unrealized gains and losses on investments affect the short-term investment line on our consolidated balance sheet. Amounts in other comprehensive income for changes in the minimum post-retirement obligation are recorded on our consolidated balance sheets in other liabilities or expensed to our consolidated statement of operations in selling, general, and administrative expenses.
10. INVESTMENTS
We classified all of our investments as “available-for-sale” as of December 31, 2015 and 2014. Accordingly, we state our investments at estimated fair value. Fair values are determined based on quoted market prices or pricing models using current market rates. We deem all investments to be available to meet current working capital requirements.
The following is a summary of our investments:
The following is a reconciliation of our investments to the balance sheet classifications at December 31, 2015 and 2014:
Gross realized gains and losses on sales of investments were insignificant in each of the years ended December 31, 2015, 2014 and 2013.
The gross amortized cost and estimated fair value of our investments at December 31, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
The following table provides the breakdown of the cash equivalents and investments with unrealized losses at December 31, 2015:
The following table provides the breakdown of the cash equivalents and investments with unrealized losses at December 31, 2014:
We review our investment portfolio regularly for impairment. A security is considered impaired when its fair value is less than its cost basis. If we intend to sell an impaired debt security or it is more likely than not that we will be required to sell it prior to recovery of its amortized cost basis, and other-than-temporary-impairment (“OTTI”) is deemed to have occurred. In these instances, the OTTI loss is recognized in earnings equal to the entire difference between the debt security’s amortized cost basis and its fair value at the balance sheet date.
If we do not intend to sell an impaired debt security and it is not more likely than not that we will be required to sell it prior to recovery of its amortized cost basis, we must determine whether it will recover its amortized cost basis. If we conclude it will not, a credit loss exists and the resulting OTTI is separated into:
•
The amount representing the credit loss, which is recognized in earnings, and
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The amount related to all other factors, which is recognized in other comprehensive income.
As part of this assessment we will consider the various characteristics of each security, including, but not limited to the following: the length of time and the extent to which the fair value has been less than the amortized cost basis; adverse conditions specifically related to the security, an industry, or a geographic area; the payment structure of the debt security; failure of the issuer of the security to make scheduled interest or principal payments; any changes to the rating of the security by a rating agency and related outlook or status; recoveries or additional declines in fair value subsequent to the balance sheet date. The relative importance of this information varies based on the facts and circumstances surrounding each security, as well as the economic environment at the time of assessment.
We have not recorded any OTTI on our investments for the years ended December 31, 2015, 2014 and 2013.
11. BALANCE SHEET DETAIL
Warranty Accrual
We generally warrant our products for a period of 12 months for new products, or three months for refurbished products, from the date of system acceptance for material and labor to repair the product; accordingly, an accrual for the estimated cost of the warranty is recorded at the time the product is shipped. Extended warranty terms, if granted, result in deferral of revenue equating to our standard pricing for similar service contracts. Recognition of the related warranty cost is deferred until product revenue is recognized. Factors that affect our warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
Changes in our product liability are as follows:
Deferred Service Income
We sell service contracts for which revenue is deferred and recognized ratably over the contract period (for time based service contracts) or as service hours are delivered (for contracts based on a purchased quantity of hours). Changes in our deferred service revenue are as follows:
Asset Retirement Obligations
In accordance with ASC 410, Asset Retirement and Environmental Obligations, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation (“ARO”) if the fair value of the liability can be reasonably estimated, even if conditional on a future event. The ARO liability is principally for estimable retirement obligations related to remediation costs, which we estimate will be incurred upon the expiration of certain operating leases.
The following table sets forth an analysis of the ARO activity for the years ended December 31, 2015 and 2014:
Advanced Billings
On occasion, we require, or our customers pay, a deposit in advance of order shipment. These amounts are classified as advanced billings until the related order ships. At December 31, 2015, we have received $0.5 million in advanced billings from our customers and $0.2 million at December 31, 2014.
12. NOTES PAYABLE
In December 2004, we entered into a line of credit agreement with a brokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current federal funds rate plus 1.25 basis points (1.45% as of December 31, 2015). Certain of our cash, cash equivalents and short-term investments secure borrowings outstanding under
this facility, but we are not restricted in the use of those assets. Funds are advanced to us under this facility based on pre-determined advance rates on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants, other than the aforementioned collateral requirement which does not legally restrict the cash and securities. At each of the years ended December 31, 2015 and 2014, $5.1 million was outstanding under this facility, with a related collateral requirement of approximately of $6.8 million of our cash, cash equivalents and short-term investments.
13. EMPLOYEE BENEFIT PLANS
Employee bonus plans
We currently sponsor an executive incentive bonus plan that distributes employee awards based on the achievement of predetermined targets. We recorded charges of $2.1 million, $1.5 million, and $2.0 million under this bonus plan for the years ended December 31, 2015, 2014, and 2013, respectively.
Employee Savings and Retirement Plans
We sponsor a 401(k) employee salary deferral plan that allows voluntary contributions by all full-time employees up to the Internal Revenue Service limits of their pretax earnings. We may also make matching contributions to this plan at our discretion. Employees are eligible for the matching plan if they contribute at least 2% of their compensation. Our contributions, when made, are limited to a maximum of 3% of the employee’s compensation if the company exceeds certain income levels. During the year ended December 31, 2015 and 2014, we made zero contributions to the plan and in 2013, we made $0.2 million in contributions to the plan.
We also sponsor an executive non-qualified deferred compensation plan (the “Plan”) that allows qualifying executives to defer current cash compensation. At December 31, 2015 Plan assets of $4.3 million, representing the cash surrender value of life insurance policies held by us, and liabilities of $5.2 million are included in our consolidated balance sheets under the captions “other assets” and “other liabilities,” respectively.
Postretirement Benefits
We have committed to providing lifetime postretirement medical and dental benefits to our Chief Executive Officer and Chief Financial Officer and their spouses, commencing after retirement. These medical and dental benefits are similar to the benefits provided to all full-time employees while employed by us, except that we are paying the entire cost of these benefits.
The following table sets forth the amounts of unrecognized prior service cost and unrecognized actuarial loss included in accumulated other comprehensive loss:
The reconciliation of the beginning and ending balance of the accumulated postretirement benefit obligation and the fair value of plan assets is as follows:
Amounts recognized in the statement of financial position are included in noncurrent liabilities.
Weighted-average discount rates as of December 31, 2015 were 4.0% and 4.2% for each of the Chief Executive Officer’s plan and the Chief Financial Officer’s plan, respectively, as compared to 3.8% and 3.9%, as of December 31, 2014.
For measurement purposes, a 5% annual rate of increase in the per capita cost of covered health care benefits was assumed for the year ended December 31, 2015 and the rate was assumed to remain at 5% thereafter.
Components of net periodic benefit cost and other amounts are recognized in selling, general, and administrative expense on our Consolidated Statements of Operations are as follows:
Other changes in plan benefit obligations from other comprehensive loss recognized in selling, general, and administrative expense on our Consolidated Statements of Operations are as follows:
The expected benefit payments are as follows:
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
14. INCOME TAXES
The domestic and foreign components of loss before income taxes is as follows:
The components of the provision (benefit) for income taxes were as follows:
The difference between the provision (benefit) for income taxes and the amount computed by applying the U.S. federal statutory rate of 35 percent to income (loss) before income taxes is explained below:
To better align with the international nature of our business, we transitioned certain manufacturing processes to Singapore, thereby bringing these activities closer to our Asia-based customers. We have qualified for tax incentives that provide that certain income earned in Singapore would be subject to a tax holiday and/or reduced tax rates for a limited period of time under the laws of Singapore. To realize these benefits, we must meet certain requirements relating to employment and investment activities. This exemption is expected to expire within five years. In 2015, the tax benefit attributable to tax holidays was approximately $3.0 million with a $0.11 impact on diluted earnings per share. In 2014, the tax benefit attributable to tax holidays was approximately $1.0 million with a $0.04 impact on diluted earnings per share. In 2013, the tax benefit attributable to tax holidays was approximately $0.5 million with a $0.02 impact on diluted earnings per share. Our ability to realize benefits from these initiatives could be materially adversely affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction.
Significant components of deferred income tax assets and liabilities are as follows:
We have not provided for U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2015 because we intend to permanently reinvest such earnings outside the United States given that we have moved certain manufacturing processes to Singapore and that our future U.S. cash flows are expected to meet our future U.S. cash needs. As of December 31, 2015, the cumulative amount of earnings for which U.S. income taxes have not been provided is approximately $53.7 million. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.
We currently have a full valuation allowance against our U.S. net deferred tax asset. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. As a result of our analysis, we concluded that it is more likely than not that, as of December 31, 2015, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan. Management continues to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. However, as of December 31, 2015, we have determined that the following negative evidence outweighs the positive evidence such that it is not more likely than not we will generate sufficient taxable income in the relevant jurisdictions to utilize our deferred tax assets and release the associated valuation allowance:
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Movement of certain product manufacturing to Singapore,
•
Cumulative three year U.S. taxable loss,
•
Inherent earnings volatility of our industry resulting in our inability to forecast long term earnings, and
•
Usage limitations resulting in a longer period being required to realize our deferred tax assets.
The net valuation allowance increased by $0.8 million during the year ended December 31, 2015, and increased by $3.7 million and $10.9 million during the years ended December 31, 2014 and 2013, respectively. The increase in valuation allowance in 2015 was primarily due to an increase in net operating loss carry-forwards and tax credit carryforwards.
Approximately $4.7 million of the valuation allowance as of December 31, 2015 is attributable to pre-2006 windfall stock option deductions, the benefit of which will be credited to paid-in capital if and when realized through a reduction in income taxes payable. Beginning in 2006, we are tracking the windfall stock option deductions off balance sheet, as required by ASC 718. As of December 31, 2015, we have a previously recorded balance of $40.7 million of windfall stock option deductions that are being tracked off balance sheet. If and when realized, a tax benefit of $15.0 million associated with those deductions will be credited to additional paid-in capital. In 2015, no entry was made to paid-in capital to reflect the benefit from windfall stock option deductions, which is the excess of federal income tax liabilities expected on the tax return without windfall stock option deductions over federal income tax liabilities expected on the tax return with windfall stock option
deductions, because we are in a loss position. Prior to 2015, a tax benefit of $9.9 million associated with those deductions had been credited to additional paid-in capital.
As of December 31, 2015, we had net operating loss carry-forwards for federal and state tax purposes of $54.9 million and $24.5 million, respectively. We also had federal and California research and development tax credit carry-forwards of approximately $5.5 million and $13.6 million, respectively. The federal and state net operating loss carry-forwards will expire at various dates beginning in 2020 through 2035, if not utilized. The federal tax credit carry-forwards will expire at various dates beginning in 2021 through 2035, if not utilized. The California tax credit carry-forwards have no expiration date.
Utilization of our net operating loss and tax credit carry-forwards is subject to an annual limitation due to an ownership change, as defined by the IRS code section 382 that occurred in 2007. None of the net operating loss or tax credit carry-forwards is anticipated to expire as a result of the ownership change. Any future changes of ownership could result in the expiration of net operating losses or credits before utilization.
During the year ended December 31, 2015, our reserve for uncertain tax positions increased by $9.3 million, net due to additional royalty reserves. Interest and penalties related to the reserve for uncertain tax positions were insignificant in 2015 and 2014. Over the next twelve months, we expect an approximately $2.4 million reduction in the estimated amount of liabilities associated with our uncertain tax positions which arose prior to December 31, 2015 as a result of expiring statutes of limitations.
If we are able to eventually recognize these uncertain tax positions, $8.1 million of the unrecognized benefit on January 1, 2015 and $17.4 million of the unrecognized benefit on December 31, 2015, would reduce our effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future.
We are subject to federal and state tax examination for years 2000 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2003 and forward. There are no income tax examinations currently in progress.
A reconciliation of the change in the uncertain income tax benefits from January 1, 2014 to December 31, 2015 is as follows:
15. COMMITMENTS AND CONTINGENCIES
Commitments
We lease our facilities and certain equipment under operating leases. During 2011, we renewed our leases for our sales offices in China, Taiwan and the Philippines. None of these renewed leases were significant commitments for us. During 2012, we extended our lease in Germany. During 2015, we extended our lease in San Jose, California. Certain of our leasing arrangements subject us to letter of credit requirements to provide a $2.4 million bank letter of credit as security to the landlord. In addition, certain of our leases require us to restore the facilities back to the original condition at the end of lease terms. As such, we recorded asset retirement obligations related to remediation costs as disclosed in Note 11 herein.
In March 2010, we entered into an operating lease agreement for facilities in preparation for the expansion of our manufacturing operations in Singapore. The initial term of this lease was three years. On August 15, 2012, we renegotiated this lease and entered into a new lease that will expire in June 2018.
In March 2013, we entered into an operating lease agreement for facilities in Waltham, Massachusetts, for sales, research and development activities. The lease for this facility expires in February 2018.
In October 2013, we entered into a twenty-four month operating lease agreement for equipment that have expired on December 14, 2015.
In August 2014, we entered into a thirty-six month capital lease agreement for equipment valued at $2.5 million. At the end of the lease term, we have an option to purchase the leased equipment for a bargain purchase price. Accordingly, this lease is classified as a capital lease. The amortization of these leased assets is included with depreciation expense. As of December 31, 2015, the total amortization of the leased equipment is $0.6 million.
In July 2015, we entered into a lease amendment for our facilities in San Jose, California. The lease amendment is to extend the building lease for five years and will expire in January 2021. We account for this lease as an operating lease; any improvements to the leased property are capitalized and classified as leasehold improvements.
The table below summarizes our capital and operating lease commitments as of December 31, 2015:
Rent expense was approximately $2.7 million, $2.7 million and $2.8 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Our open purchase order commitments, which primarily relate to purchases of inventories and equipment, were approximately $13.9 million as of December 31, 2015.
Legal Proceedings
We are subject to claims and litigation arising in the ordinary course of business. We do not believe any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our consolidated financial statements. At December 31, 2015, there were no significant outstanding legal matters.
16. INTANGIBLE ASSETS, NET
During the year ended December 31, 2013, we entered into one patent assignment agreement and acquired the rights to collections of patents and patent applications.
On December 14, 2012, we acquired from Cambridge NanoTech, intangible assets of $4.3 million and other tangible assets of an insignificant amount in a cash transaction. We accounted for this transaction using the acquisition method.
As of December 31, 2015, the gross carrying amount of all our intangible assets was $18.1 million and accumulated amortization was $5.8 million. The weighted average remaining life of all our intangible assets was 9.6 years as of December 31, 2015. During the years ended December 31, 2015, 2014 and 2013, our amortization expense for our intangibles was $1.7 million, $1.7 million and $1.5 million, respectively.
The following table summarizes the balances and activity of our intangibles:
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Based on the intangible assets recorded as of December 31, 2015, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:
17. FINANCIAL GUARANTEES
Our off-balance sheet transactions consist of certain financial guarantees, both express and implied, related to indemnification for product liability, patent infringement and latent product defects. Other than liabilities recorded pursuant to known product defects, at December 31, 2015, we did not record a liability associated with these guarantees, as we have little or no history of costs associated with such indemnification requirements. Contingent liabilities associated with product liability may be mitigated by insurance coverage we maintain.
18. RESTRUCTURING
During the year ended December 31, 2015, we made reductions in our workforce as part of our efforts to remain competitive in the current environment. The restructuring costs for the year ended December 31, 2015 totaled $0.8 million and were related to severance and benefits for headcount reductions in certain functions in the U.S. and certain foreign countries. The severance and benefits expense of $0.8 million associated with the restructuring plan is included in Restructuring in the Consolidated Statements of Operations. These payments were made in cash as of December 31, 2015.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is further required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013 framework). Based on this assessment, our management has concluded that, as of December 31, 2015, our internal control over financial reporting is effective based on those criteria. Our management has also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Ernst & Young, LLP, the independent registered public accounting firm who also audited our consolidated financial statements, has issued an attestation report on our internal control over financial reporting. This attestation report appears elsewhere herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
The information required by Part III is omitted from this Report and is incorporated herein by reference from our definitive proxy statement to be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A for our 2016 Annual Meeting of Stockholders currently scheduled to be held on July 19, 2016.
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
All of our directors, officers and employees must act in accordance with the Code of Business Conduct and Ethics, which has been adopted by our Board of Directors. In addition, our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions must act in accordance with the Code of Ethics for Corporate Officers and Director-level Employees, which has been adopted by our Board of Directors. Copies of these Codes are available in the Corporate Governance sub-section of the Investors section of our website at http://www.ultratech.com. To the extent required by applicable rules of the NASDAQ Stock Market LLC and the SEC, any future amendments or waivers to these Codes will be posted on our website at the location specified above.
The information concerning our directors required by this Item is incorporated by reference from the Item captioned “Election of Directors” in our Proxy Statement for the 2016 Annual Meeting of Stockholders (the “Proxy Statement”). Other information required by this Item is incorporated herein by reference from the Item captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Executive Officers of the Registrant
As of December 31, 2015, the executive officers of Ultratech, who are appointed by and serve at the discretion of the Board of Directors, were as follows:
Name
Age
Position with the Company
Arthur W. Zafiropoulo
Chairman of the Board of Directors, Chief Executive Officer and President
Bruce R. Wright
Senior Vice President, Finance, Chief Financial Officer and Secretary
Mr. Zafiropoulo founded Ultratech in September 1992 to acquire certain assets and liabilities of the Ultratech Stepper Division (the “Predecessor”) of General Signal Technology Corporation (“General Signal”) and, since March 1993, has served as Chief Executive Officer and Chairman of the Board. Additionally, Mr. Zafiropoulo served as President of Ultratech from March 1993 to March 1996, from May 1997 until April 1999 and from April 2001 to January 2004. In October 2006, he resumed the responsibilities of President and Chief Operating Officer. Between September 1990 and March 1993, he was President of the Predecessor. From February 1989 to September 1990, Mr. Zafiropoulo was President of General Signal’s Semiconductor Equipment Group International, a semiconductor equipment company. From August 1980 to February 1989, Mr. Zafiropoulo was President and Chief Executive Officer of Drytek, Inc., a plasma dry-etch company that he founded in August 1980, and which was later sold to General Signal in 1986. From July 1987 to September 1989, Mr. Zafiropoulo was also President of Kayex, a semiconductor equipment manufacturer, which was a unit of General Signal. From July 2001 to July 2002, Mr. Zafiropoulo served as Vice Chairman of Semiconductor Equipment and Materials International (“SEMI”), an international trade association representing the semiconductor, flat panel display equipment and materials industry. From July 2002 to June 2003, Mr. Zafiropoulo served as Chairman of SEMI, and Mr. Zafiropoulo has been on the Board of Directors of SEMI since July 1995. In December 2007, Mr. Zafiropoulo was elected as Director Emeritus of SEMI. Beginning January 1, 2013, Mr. Zafiropoulo is a member of the Board of Trustees at Northeastern University.
Mr. Wright has served as Senior Vice President, Finance, Chief Financial Officer and Secretary since joining Ultratech in June 1999. From May 1997 to May 1999, Mr. Wright served as Executive Vice President, Finance and Chief Financial Officer of Spectrian Corporation, a radio frequency amplifier company. From November 1994 through May 1997, Mr. Wright was Senior Vice President of Finance and Administration, and Chief Financial Officer of Tencor Instruments until its acquisition by KLA Instruments Corporation in 1997, which formed KLA-Tencor Corporation, and from December 1991 through October 1994, Mr. Wright was Vice President and Chief Financial Officer of Tencor Instruments. Mr. Wright serves on the Board of Directors of Xcerra Corporation, a global provider of automated test equipment solutions for the testing of semiconductor integrated circuits.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the Item captioned “Executive Compensation” in the Proxy Statement.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from the Items captioned “Election of Directors,” “Ownership of Securities” and “Equity Compensation Information for Plans or Individual Arrangements with Employees and Non-Employees” in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference from the items captioned “Election of Directors” and “Certain Relationships and Related Transactions” in the Proxy Statement.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference from the item captioned “Fees billed to Ultratech by Ernst & Young LLP during fiscal year 2015” in the Proxy Statement.
PART IV
ITEM 15.
ITEM 15.
FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND EXHIBITS
(a)
The following documents are filed as part of this Report on Form 10-K
(1)
Financial Statements
The financial statements (including the notes thereto) listed in the Index to Consolidated Financial Statement Schedule (set forth in Item 8 of Part II of this Form 10-K) are filed within this Annual Report on Form 10-K.
(2)
Financial Statement Schedules
The following consolidated financial statement schedule is included herein:
Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes.
(3)
Exhibits
Except as indicated in Exhibit 32.1, the following exhibits are filed as part of, or incorporated in reference into this Annual Report on Form 10-K:
___________________
(1)
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 (Commission File No. 0-22248).
(2)
Incorporated by reference to our Current Report on Form 8-K filed on April 17, 2012 (Commission File No. 0-22248).
(3)
Incorporated by reference to our Registration Statement on Form S-1 declared effective with the Securities and Exchange Commission on September 28, 1993. (Commission File No. 33-66522).
(4)
Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 0-22248).
(5)
Incorporated by reference to our 1993 Annual Report on Form 10-K (Commission File No. 0-22248).
(6)
Incorporated by reference to our Current Report on Form 8-K filed on February 1, 2008 (Commission File No. 0-22248).
(7)
Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2004 (Commission File No. 0-22248).
(8)
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended October 3, 2009 (Commission File No. 0-22248).
(9)
Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2008 (Commission File No. 0-22248).
(10)
Incorporated herein by reference to our Current Report on Form 8-K filed on January 27, 2012 (Commission File No. 0-22248).
(11)
Incorporated by reference to our Current Report on Form 8-K filed on January 30, 2009 (Commission File No. 0-22248).
(12)
Incorporated by reference to our Current Report on Form 8-K filed on November 5, 2009 (Commission File No. 0-22248).
(13)
Incorporated by reference to our Current Report on Form 8-K filed on April 23, 2010 (Commission File No. 0-22248).
(14)
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended July 3, 2010 (Commission File No. 0-22248).
(15)
Incorporated herein by reference to our Current Report on Form 8-K filed on January 28, 2011 (Commission File No. 0-22248).
(16)
Incorporated herein by reference to our Annual Report on Form 10-K for the year ended December 31, 2010 (Commission File No. 0-22248).
(17)
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012
(Commission File No. 0-22248).
(18) Incorporated by reference to our Current Report on Form 8-K filed on June 28, 2012 (Commission File No. 0-22248).
(19) Incorporated by reference to our Current Report on Form 8-K filed on August 21, 2012 (Commission File No. 0-22248).
(20)
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended July 4, 20(Commission File No. 0-22248).
(b) Exhibits. See list of exhibits under (a)(3) above.
(c) Financial Statement Schedules. See list of schedules under (a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunder duly authorized.
ULTRATECH, INC.
Date:
February 26, 2016
By:
/s/ ARTHUR ZAFIROPOULO
Arthur Zafiropoulo
Chairman of the Board of Directors and Chief Executive Officer
The undersigned directors and officers of Ultratech, Inc. (the “Company”), a Delaware corporation, hereby constitute and appoint Arthur W. Zafiropoulo and Bruce R. Wright, and each of them with full power to act without the other, the undersigned’s true and lawful attorney-in-fact, with full power of substitution and re-substitution, for the undersigned and in the undersigned’s name, place and stead in the undersigned’s capacity as an officer and/or director of the Company, to execute in the name and on behalf of the undersigned this Report and to file such Report, with exhibits thereto and other documents in connection therewith and any and all amendments thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done and to take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required of, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact’s discretion.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below (and the above Powers of Attorney granted) by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SCHEDULE II
ULTRATECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
EXHIBIT INDEX
___________________
(1)
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 (Commission File No. 0-22248).
(2)
Incorporated by reference to our Current Report on Form 8-K filed on April 17, 2012 (Commission File No. 0-22248).
(3)
Incorporated by reference to our Registration Statement on Form S-1 declared effective with the Securities and Exchange Commission on September 28, 1993. (Commission File No. 33-66522).
(4)
Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 0-22248).
(5)
Incorporated by reference to our 1993 Annual Report on Form 10-K (Commission File No. 0-22248).
(6)
Incorporated by reference to our Current Report on Form 8-K filed on February 1, 2008 (Commission File No. 0-22248).
(7)
Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2004 (Commission File No. 0-22248).
(8)
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended October 3, 2009 (Commission File No. 0-22248).
(9)
Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2008 (Commission File No. 0-22248).
(10)
Incorporated herein by reference to our Current Report on Form 8-K filed on January 27, 2012 (Commission File No. 0-22248).
(11)
Incorporated by reference to our Current Report on Form 8-K filed on January 30, 2009 (Commission File No. 0-22248).
(12)
Incorporated by reference to our Current Report on Form 8-K filed on November 5, 2009 (Commission File No. 0-22248).
(13)
Incorporated by reference to our Current Report on Form 8-K filed on April 23, 2010 (Commission File No. 0-22248).
(14)
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended July 3, 2010 (Commission File No. 0-22248).
(15)
Incorporated herein by reference to our Current Report on Form 8-K filed on January 28, 2011 (Commission File No. 0-22248).
(16)
Incorporated herein by reference to our Annual Report on Form 10-K for the year ended December 31, 2010 (Commission File No. 0-22248).
(17)
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012
(Commission File No. 0-22248)
(18) Incorporated by reference to our Current Report on Form 8-K filed on June 28, 2012 (Commission File No. 0-22248).
(19) Incorporated by reference to our Current Report on Form 8-K filed on August 21, 2012 (Commission File No. 0-22248).
(20) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended July 4, 2015 (Commission File No. 0-22248).