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Business Combinations
 6 Months Ended
Jun. 30, 2017
Business Combinations  
Business Combinations

 

Note 3 — Business Combinations

 

Ultratech

 

On May 26, 2017, the Company completed its acquisition of Ultratech, Inc. (“Ultratech”).  Ultratech designs, manufactures, and markets lithography, laser annealing, and inspection equipment for manufacturers of semiconductor devices, including advanced packaging, MEMS, and atomic layer deposition (“ALD”) applications. Ultratech’s customers are primarily located throughout the United States, EMEA, China, Japan, Taiwan, and Korea. With the addition of Ultratech, the Company establishes itself as a leading equipment supplier in the advanced packaging market, forming a strong technology portfolio to address critical advanced packaging applications. The results of Ultratech’s operations have been included in the consolidated financial statements since the date of acquisition.

 

Ultratech shareholders received (i) $21.75 per share in cash and (ii) 0.2675 of a share of Veeco common stock for each Ultratech common share outstanding on the acquisition date. The Company plans to finalize the purchase accounting within the measurement period, which may include adjustments to the fair values of assets acquired and liabilities assumed. The preliminary acquisition date fair value of the consideration totaled $633.4 million, net of cash acquired, which consisted of the following:

 

 

 

Acquisition Date

 

 

 

(May 26, 2017)

 

 

 

(in thousands)

 

Amount paid, net of cash acquired

 

$
399,478

 

Fair value of equity issuances (7.4 million shares issued)

 
233,655

 

Replacement equity awards attributable to pre-acquisition service

 
228

 

 

 

 

 

Acquisition date fair value

 

$
633,361

 

 

 

 

 

 

 

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

 

 

 

Acquisition Date

 

 

 

(May 26, 2017)

 

 

 

(in thousands)

 

Short-term investments

 

$
47,161

 

Accounts receivable

 
45,465

 

Inventory and deferred cost of sales

 
61,680

 

Prepaid expense and other current assets

 
7,217

 

Property, plant, and equipment

 
19,555

 

Intangible assets

 
346,940

 

Other assets

 
6,442

 

 

 

 

 

Total identifiable assets acquired

 
534,460

 

 

 

 

 

Accounts payable and accrued expenses

 
40,087

 

Customer deposits and deferred revenue

 
4,834

 

Deferred income taxes

 
32,478

 

Other liabilities

 
11,952

 

 

 

 

 

Total liabilities assumed

 
89,351

 

 

 

 

 

Net identifiable assets acquired

 
445,109

 

Goodwill

 
188,252

 

 

 

 

 

Net assets acquired

 

$
633,361

 

 

 

 

 

 

 

The gross contractual value of the acquired accounts receivable was approximately $46.0 million. The fair value of the accounts receivables is the amount expected to be collected by the Company. Goodwill generated from the acquisition is primarily attributable to expected synergies from future growth and strategic advantages provided through the expansion of product offerings as well as assembled workforce and is not expected to be deductible for income tax purposes. The Company has not yet completed its analysis of the allocation of the above acquired goodwill to the reporting units.

 

The preliminary classes of intangible assets acquired and the estimated useful life of each class is presented in the table below:

 

 

 

Acquisition Date

 

 

 

(May 26, 2017)

 

 

 

Amount

 

Useful life

 

 

 

(in thousands)

 

 

 

Technology

 

$
158,390

 

9 years

 

Customer relationships

 
116,710

 

12 years

 

Backlog

 
3,080

 

6 months

 

In-process research and development

 
43,340

 

*

 

Trademark and tradenames

 
25,420

 

7 years

 

 

 

 

 

 

 

Intangible assets acquired

 

$
346,940

 

 

 

 

 

 

 

 

 

 

 

 

*In-process research and development will be amortized (or impaired) upon completion (or abandonment) of the development project

 

The Company 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.

 

In-process research and development (IPR&D) represents the estimated fair values of incomplete Ultratech research and development projects that had not reached the commercialization stage and meet the criteria for recognition as IPR&D as of the date of the acquisition. In the future, the fair value of each project at the acquisition date will be either amortized or impaired depending on whether the projects are completed or abandoned. The fair value of IPR&D was determined using an income approach, and costs to complete the project and expected commercialization timelines are considered key assumptions. This valuation approach reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. The value of the IPR&D was determined to be $43.3 million, approximately half of which is related to the Company’s lithography technologies and one-third of which is related to the Company’s laser annealing technologies.

 

For the three and six months ended June 30, 2017, acquisition related costs were approximately $14.1 million and $15.5 million, respectively, including non-cash charges of $4.2 million for the three months ended June 30, 2017 related to accelerated share-based compensation for employee terminations.

 

The amounts of revenue and income (loss) from continuing operations before income taxes of Ultratech included in the Company’s consolidated statement of operations from the acquisition date to the period ending June 30, 2017 are as follows:

 

 

 

Total

 

 

 

(in thousands)

 

Revenue

 

$
24,050

 

Loss from operations before income taxes

 

$
(21,445

)

 

Loss from operations before income taxes of Ultratech for the period ending June 30, 2017 of $21.4 million includes acquisition costs of $14.1 million, release of inventory fair value step-up related to purchase accounting of $7.4 million, amortization expense on intangible assets of $3.5 million, and restructuring charges of $1.2 million.

 

The following table presents unaudited pro forma financial information as if the acquisition of Ultratech had occurred on January 1, 2016:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(in thousands, except per share amounts)

 

Revenue

 

$
128,399

 

$
124,272

 

$
280,194

 

$
247,493

 

Loss from operations

 
(28,898

)
(54,380

)
(32,852

)
(128,860

)

Diluted earnings per share

 

$
(0.61

)

$
(1.17

)

$
(0.70

)

$
(2.78

)

 

The pro-forma results were calculated by combining the results of the Company with the stand-alone results of Ultratech for the pre-acquisition period, and adjusting for the following:

 

(i)

Additional amortization expense related to identified intangibles valued as part of the purchase price allocation that would have been incurred starting on January 1, 2016.

 

(ii)

Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred starting on January 1, 2016.

 

(iii)

All acquisition related costs incurred by the Company as well as by Ultratech pre-acquisition have been removed from their respective periods and included in the three months ended March 31, 2016, as such expenses would have been incurred in the first quarter following the acquisition.

 

(iv)

All amortization of inventory step-up has been removed from their respective periods and recorded in the first two quarters of 2016, as such costs would have been incurred as the corresponding inventory was sold.

 

(v)

Additional interest expense related to the Convertible Senior Notes (see Note 5, “Liabilities”) as if they had been issued on January 1, 2016.

 

(vi)

Income tax expense (benefit) was adjusted for the impact of the above adjustments for each period.