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Business Combinations
 12 Months Ended
Dec. 31, 2013
Business Combinations  
Business Combinations

5.  Business Combinations

 

On April 4, 2011, we purchased a privately-held company which supplies certain components to one of our businesses for $28.3 million in cash. As a result of this purchase, we acquired $16.4 million of definite-lived intangibles, of which $13.6 million related to core technology, and $14.7 million of goodwill. The financial results of this acquisition are included in our LED & Solar segment as of the acquisition date. We determined that this acquisition does not constitute a material business combination and therefore we have not included pro forma financial information in this report.

 

On October 1, 2013 (“the Acquisition Date”), Veeco acquired 100% of the outstanding common shares and voting interest of Synos Technology, Inc. (“Synos”). The results of Synos’ operations have been included in the consolidated financial statements since that date. Synos is an early stage manufacturer of fast array scanning atomic layer deposition (“FAST-ALD”) tools for OLED and other applications. As a result of the acquisition, the Company has entered the FAST-ALD market which is complimentary to the Company’s MOCVD LED offerings.

 

The Acquisition Date fair value of the consideration totaled $102.3 million, net of cash acquired, which consisted of the following (in thousands):

 

 

Acquisition Date

 

 

 

(October 1, 2013)

 

Cash (net of cash acquired)

 

$

71,488

 

Working capital adjustment

 

(2,695

)

Contingent consideration

 

33,539

 

Total

 

$

102,332

 

 

As part of Veeco’s acquisition of Synos, we may be obligated to pay to the selling shareholders of Synos certain contingent consideration. The aggregate fair value of the contingent consideration arrangement at the acquisition date was $33.5 million. The contingency arrangements are generally as follows:

·                  Up to $40.0 million based on defined milestones tied to the receipt of certain purchase orders from customers by certain dates through the first quarter of 2014. The Company determined the fair value of these contingent payments to be $24.3 million.  Of this amount, $5.0 million was earned and paid in the fourth quarter of 2013.  The second milestone pertaining to this contingency is to be measured by March 31, 2014 and could result in either no payment, a payment of $17.5 million or a payment of $35 million.  The difference between the amount earned and the fair value recorded will be recorded in the statement of operations for the period ended March 31, 2014.  The outcome is currently unknown.

·                  Up to $75.0 million based on defined milestones tied to meeting certain revenue and gross margin thresholds based on full year 2014 results. The Company has determined the fair value of these contingent payments to be $9.2 million. The fair value of this contingency will continued to be measured at each reporting period and changes in fair value will be recorded in the statement of operations.

 

We estimated the fair value of the contingent consideration by applying various probabilities and discount factors to each of the various performance milestones. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The discount rates used ranged from 3.6% to 13.0% for the purchase order related contingent payments and from 15.5% to 30.5% for the revenue and gross margin related contingent payments. These rates were determined based on the nature of the milestone, the risks and uncertainties involved and the time period until the milestone was measured. The determination of the various probabilities and discount factors are highly subjective and require significant judgment and are influenced by a number of factors, including the adoption of OLED technology and limited history.  While the use of OLED is expected to grow in the near future, it is difficult to predict the rate at which OLED will be adopted by the market and thus would impact the sales of our equipment.

 

As of December 31, 2013, the first milestone was achieved and we paid the former shareholders of Synos $5.0 million.  In addition, the recognized amount for the contingencies increased by $0.8 million as of December 31, 2013 as a result of changes in the fair value of contingent consideration.

 

The following table summarizes the estimated fair values of the assets acquired, net of the cash acquired, and liabilities assumed at the Acquisition Date. Veeco utilized third-party valuations of the tangible and intangible assets acquired as well as the contingent consideration. The amounts below are preliminary and are subject to change (in thousands):

 

 

 

Acquisition Date

 

 

 

(October 1, 2013)

 

Accounts receivable

 

$

1,523

 

Inventory

 

386

 

Other current assets

 

512

 

Property, plant, and equipment

 

1,917

 

Intangible assets

 

99,270

 

Total identifiable assets acquired

 

103,608

 

 

 

 

 

Current liabilities

 

4,370

 

Estimated deferred tax liability, net

 

32,426

 

Total liabilities assumed

 

36,796

 

Net identifiable assets acquired

 

66,812

 

Goodwill

 

35,520

 

Net assets acquired

 

$

102,332

 

 

The $35.5 million of goodwill was assigned to the LED & Solar segment. None of the goodwill is expected to be deductible for income tax purposes. As of December 31, 2013, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Synos.

 

The classes of intangible assets acquired and the estimated weighted-average useful life of each class is presented in the table below (in thousands):

 

 

 

Acquisition Date

 

 

 

(October 1, 2013)

 

 

 

Amount

 

Average useful life

 

Technology

 

$

73,160

 

14 years

 

In-process research and development

 

5,070

 

To be determined

 

Customer relationship

 

20,630

 

8 years

 

Trademark and trade name

 

140

 

1 year

 

Non-compete agreement

 

270

 

3 years

 

Intangible assets acquired

 

$

99,270

 

 

 

 

We determined the estimated fair value of the identifiable intangible assets based on various factors including: cost, discounted cash flow, income method, loss-of-revenue/income method and relief-from-royalty method in determining the purchase price allocation.

 

Technology is being amortized on an accelerated basis consistent with the timing of the cash flows it is expected to generate. Pursuant to the accounting guidance, acquired in-process research and development is not amortized until such time as it is completed or abandoned. Upon completion, we will amortize the acquired amount over its useful life. As noted earlier, the fair value of the acquired assets is provisional pending the final valuations for these assets.

 

We recognized $1.0 million of acquisition related costs that were expensed in 2013. These costs are included in the Consolidated Statements of Operations in the line item entitled “Selling, general and administrative.”

 

The amounts of revenue and income (loss) from continuing operations before income taxes of Synos included in the Company’s consolidated statement of operations from the acquisition date (October 1, 2013) to the period ending December 31, 2013 are as follows (in thousands):

 

Revenue

 

$

409

 

Income (loss) from continuing operations before income taxes

 

$

(6,480

)

 

The following represents the pro forma Consolidated Statements of Operations as if Synos had been included in our consolidated results (in thousands):

 

 

 

For the year ended December 31,

 

 

 

(unaudited)

 

 

 

2013

 

2012

 

Revenue

 

$

346,319

 

$

522,029

 

Income (loss) from continuing operations before income taxes

 

$

(60,983

)

$

16,840

 

 

These amounts have been calculated after applying our accounting policies to material amounts and also adjusting the results of Synos to reflect the additional amortization that would have been expensed assuming the fair value adjustments to intangible assets had been applied on January 1, 2012.