UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

 

 

(Mark One)

 

 

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended June 30, 2007

 

 

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              .

 

Commission file number 0-16244

 


 

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

11-2989601

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

 

 

 

100 Sunnyside Boulevard, Suite B
Woodbury, New York

 

11797-2902

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

 

Registrant’s telephone number, including area code: (516) 677-0200

 

 

 

Website: www.veeco.com

 


 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x   Accelerated filer o   Non-accelerated filer o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

31,739,823 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on July 31, 2007.

 



 

SAFE HARBOR STATEMENT

 

This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing such forward-looking statements may be found in Items 2 and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. These risks and uncertainties include, without limitation, the following:

 

 

The cyclicality of the microelectronics industries we serve directly affects our business.

 

 

 

 

We operate in an industry characterized by rapid technological change.

 

 

 

 

We face significant competition.

 

 

 

 

We depend on a limited number of customers that operate in highly concentrated industries.

 

 

 

 

Our quarterly operating results fluctuate significantly.

 

 

 

 

We face securities class action and shareholder derivative lawsuits which could result in substantial costs, diversion of management’s attention and resources and negative publicity.

 

 

 

 

Our outsourcing strategy could adversely affect our results of operations.

 

 

 

 

We rely on a limited number of suppliers.

 

 

 

 

Any difficulty or inability to attract, retain and motivate key employees could have a material adverse effect on our business.

 

 

 

 

We are exposed to the risks of operating a global business and the requirement to comply with laws and regulations of various jurisdictions such as import/export controls, which may not apply to our non-U.S. competitors.

 

 

 

 

We are subject to foreign currency exchange risks.

 

 

 

 

Our success depends on protection of our intellectual property rights.

 

 

 

 

We may be subject to claims of intellectual property infringement by others.

 

 

 

 

Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.

 

 

 

 

Changes in accounting standards for stock-based compensation may adversely affect our stock price and our ability to attract, motivate and retain key employees.

 

 

 

 

The implementation of a new information technology system may disrupt our operations.

 

 

 

 

We may not obtain sufficient affordable funds to finance our future needs.

 

 

 

 

We are subject to risks of non-compliance with environmental and safety regulations.

 

 

 

 

We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our company by another company more difficult.

 

 

2



 

 

The other matters discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Report and in the Annual Report on Form 10-K for the year ended December 31, 2006 of Veeco Instruments Inc. (“Veeco” or the “Company”).

 

Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs. We do not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.

 

Available Information

 

We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

 

Internet Address

 

We maintain a website where additional information concerning our business and various upcoming events can be found. The address of our website is www.veeco.com. We provide a link on our website, under Investors — Financial Information — SEC Filings, through which investors can access our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. These filings are posted to our Internet site, as soon as reasonably practicable after we electronically file such material with the SEC.

 

3



 

VEECO INSTRUMENTS INC.

 

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited):

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2007 and 2006

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2007 and 2006

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

 

 

 

 

 

 

SIGNATURES

 

 

 

4



 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Net sales

 

$

98,769

 

$

111,635

 

Cost of sales

 

56,524

 

61,923

 

Gross profit

 

42,245

 

49,712

 

Costs and expenses:

 

 

 

 

 

Selling, general and administrative expense

 

23,818

 

24,996

 

Research and development expense

 

15,903

 

15,252

 

Amortization expense

 

2,368

 

3,989

 

Restructuring expense

 

1,445

 

 

Other income, net

 

(279

)

(132

)

Total operating expenses

 

43,255

 

44,105

 

Operating (loss) income

 

(1,010

)

5,607

 

Interest expense, net

 

772

 

1,149

 

(Loss) income before income taxes and noncontrolling interest

 

(1,782

)

4,458

 

Income tax provision

 

1,042

 

1,433

 

Noncontrolling interest

 

(229

)

 

Net (loss) income

 

$

(2,595

)

$

3,025

 

 

 

 

 

 

 

Net (loss) income per common share

 

$

(0.08

)

$

0.10

 

Diluted net (loss) income per common share

 

$

(0.08

)

$

0.10

 

 

 

 

 

 

 

Weighted average shares outstanding

 

30,926

 

30,322

 

Diluted weighted average shares outstanding

 

30,926

 

31,254

 

 

See accompanying notes.

 

5



 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Net sales

 

$

197,935

 

$

205,553

 

Cost of sales

 

111,995

 

114,072

 

Gross profit

 

85,940

 

91,481

 

Costs and expenses:

 

 

 

 

 

Selling, general and administrative expense

 

46,624

 

46,326

 

Research and development expense

 

31,292

 

29,838

 

Amortization expense

 

6,277

 

8,004

 

Restructuring expense

 

1,445

 

 

Other (income) expense, net

 

(426

)

67

 

Total operating expenses

 

85,212

 

84,235

 

Operating income

 

728

 

7,246

 

Interest expense, net

 

1,591

 

2,527

 

Gain on extinguishment of debt

 

(738

)

(330

)

(Loss) income before income taxes and noncontrolling interest

 

(125

)

5,049

 

Income tax provision

 

2,536

 

2,266

 

Noncontrolling interest

 

(359

)

 

Net (loss) income

 

$

(2,302

)

$

2,783

 

 

 

 

 

 

 

Net (loss) income per common share

 

$

(0.07

)

$

0.09

 

Diluted net (loss) income per common share

 

$

(0.07

)

$

0.09

 

 

 

 

 

 

 

Weighted average shares outstanding

 

30,912

 

30,208

 

Diluted weighted average shares outstanding

 

30,912

 

30,946

 

 

See accompanying notes.

 

6



 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

June 30, 2007

 

December 31, 2006

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

108,079

 

$

147,046

 

Accounts receivable, less allowance for doubtful accounts of $2,716 in 2007 and $2,683 in 2006

 

65,215

 

86,589

 

Inventories

 

104,658

 

100,355

 

Prepaid expenses and other current assets

 

10,323

 

9,378

 

Deferred income taxes

 

2,650

 

2,565

 

Total current assets

 

290,925

 

345,933

 

Property, plant and equipment at cost, less accumulated depreciation of $92,436 in 2007 and $88,087 in 2006

 

72,105

 

73,510

 

Goodwill

 

100,898

 

100,898

 

Purchased technology, less accumulated amortization of $69,757 in 2007 and $64,736 in 2006

 

38,831

 

43,852

 

Other intangible assets, less accumulated amortization of $28,281 in 2007 and $26,740 in 2006

 

24,301

 

25,053

 

Other assets

 

214

 

354

 

Total assets

 

$

527,274

 

$

589,600

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

38,153

 

$

40,588

 

Accrued expenses

 

44,653

 

48,714

 

Deferred profit

 

1,244

 

251

 

Income taxes payable

 

1,924

 

2,723

 

Current portion of long-term debt

 

5,489

 

5,597

 

Total current liabilities

 

91,463

 

97,873

 

Deferred income taxes

 

2,987

 

2,423

 

Long-term debt

 

146,496

 

203,607

 

Other non-current liabilities

 

2,120

 

2,304

 

 

 

 

 

 

 

Noncontrolling interest

 

1,802

 

1,642

 

 

 

 

 

 

 

Shareholders’ equity

 

282,406

 

281,751

 

Total liabilities and shareholders’ equity

 

$

527,274

 

$

589,600

 

 

See accompanying notes.

 

7



 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 (In thousands)

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

Operating activities

 

 

 

 

 

Net (loss) income

 

$

(2,302

)

$

2,783

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

13,459

 

14,594

 

Deferred income taxes

 

447

 

303

 

Gain on extinguishment of debt

 

(738

)

(330

)

Non-cash compensation expense for share-based payments

 

2,046

 

721

 

Noncontrolling interest in net loss of subsidiary

 

(359

)

 

Gain on sale of property, plant and equipment

 

(81

)

(16

)

Other

 

 

21

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

21,128

 

2,659

 

Inventories

 

(4,002

)

(6,354

)

Accounts payable

 

(2,425

)

6,765

 

Accrued expenses, deferred profit and other current liabilities

 

(4,615

)

(1,576

)

Other, net

 

(1,919

)

(2,827

)

Net cash provided by operating activities

 

20,639

 

16,743

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(5,876

)

(9,570

)

Proceeds from sale of property, plant and equipment

 

304

 

35

 

Payments for net assets of businesses acquired

 

 

(3,161

)

Other

 

 

(580

)

Net cash used in investing activities

 

(5,572

)

(13,276

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from stock issuance

 

2,131

 

7,983

 

Repayments of long-term debt

 

(54,998

)

(19,585

)

Other

 

(1,316

)

 

Net cash used in financing activities

 

(54,183

)

(11,602

)

Effect of exchange rates on cash and cash equivalents

 

149

 

(335

)

Net change in cash and cash equivalents

 

(38,967

)

(8,470

)

Cash and cash equivalents at beginning of period

 

147,046

 

124,499

 

Cash and cash equivalents at end of period

 

$

108,079

 

$

116,029

 

 

Non-Cash Items

 

During the six months ended June 30, 2007, the Company had non-cash items, which were excluded from the Condensed Consolidated Statements of Cash Flows of approximately $118.8 million related to a debt exchange and transfers between fixed assets and inventory totaling $0.5 million. During the six months ended June 30, 2006, the Company had transfers between fixed assets and inventory totaling $0.6 million.

 

See accompanying notes.

 

8



 

VEECO INSTRUMENTS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1—Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three and six months ended June 30, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

 

Consistent with prior years, the Company reports interim quarters, other than fourth quarters which end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2007 interim quarter ends are April 1, July 1 and September 30. The 2006 interim quarter ends were April 2, July 2 and October 1. For ease of reference, the Company reports these interim quarter ends as March 31, June 30, and September 30 in its interim condensed consolidated financial statements.

 

Net (Loss) Income Per Common Share

 

The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding:

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

30,926

 

30,322

 

30,912

 

30,208

 

Dilutive effect of stock options and restricted stock awards

 

 

932

 

 

738

 

Diluted weighted average shares outstanding

 

30,926

 

31,254

 

30,912

 

30,946

 

 

Net (loss) income and diluted net (loss) income per common share are computed using the weighted average number of common and common equivalent shares outstanding during the period.

 

During the three and six month periods ended June 30, 2007, options to purchase 5.9 million shares of common stock (at prices ranging from $0.27 to $72.00 per share) that were outstanding were excluded from the computation of diluted earnings per share. During the comparable 2006 periods, options to purchase 2.9 million and 3.2 million shares of common stock (at prices ranging from $23.98 to $72.00 and $22.63 to $72.00 per share, respectively) that were outstanding, were excluded from the computation of diluted earnings per share. In the 2007 periods, the Company recorded net losses, so the effect of all options outstanding was anti-dilutive. In 2006, the exercise price of these options exceeded the average market price of our common stock, thereby causing their effect to be anti-dilutive.

 

During the second quarter of 2007, the Company issued a new series of 4.125% convertible subordinated notes due April 15, 2012 (the “New Notes”) pursuant to privately negotiated exchange agreements with certain holders of its outstanding 4.125% convertible subordinated notes due 2008 (the “Old Notes”). In total, the Company exchanged $118.8 million of Old Notes for $117.8 million of New Notes.

 

The effect of the assumed conversion of the Old Notes is approximately 1.5 million and 3.0 million common equivalent shares for the three and six months ended June 30, 2007, respectively, and 5.2 million and 5.3 million for the comparable periods of 2006, respectively. The converted shares are anti-dilutive, and therefore, are not included

 

 

9



 

in the weighted shares outstanding for the three and six months ended June 30, 2007 and 2006, respectively. The second quarter 2007 debt exchange, together with $56 million in debt repurchases of Old Notes during the first quarter of 2007 reduced the effect of the assumed conversion of the Old Notes, which was calculated using the “if converted” method of accounting.

 

The New Notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, as long as the Company has the ability and the intent to settle the principal amount of the New Notes in cash. Under the terms of the New Notes, the Company may pay the principal amount of converted New Notes in cash or in shares of common stock. The Company has indicated that it intends to pay such amounts in cash. Using the treasury stock method, the impact of the assumed conversion of the New Notes is anti-dilutive for the three and six months ended June 30, 2007, as the average stock price was below the conversion price of $27.23 for both the three and six month periods. The effect of the assumed converted shares is dependent on the stock price at the time of the conversion. The maximum common equivalent shares issuable upon conversion is approximately 4.3 million.

 

Taxes

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”), which became effective for Veeco on January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. The Company is required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time and changes in assumptions and judgments can materially affect the amounts recognized in the Company’s condensed consolidated financial statements. The impact of the Company’s reassessment during the first quarter of 2007 of its tax positions in accordance with FIN 48 resulted in a $0.8 million reduction to the January 1, 2007 retained earnings balance. For additional information regarding the adoption of FIN 48, see Note 5, Income Taxes.

 

Recent Accounting Pronouncements

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), Fair Value Measurements. SFAS 157 establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically scoped out of the Statement) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as an adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

10



 

Note 2—Share-Based Payments

 

Stock Option and Restricted Stock Plans

 

During the three and six months ended June 30, 2007 and 2006, the Company made equity compensation awards under the Veeco Instruments Inc. 2000 Stock Incentive Plan, as amended, (the “2000 Plan”). In 2007, the Company granted to certain key employees: 442,750 shares of restricted common stock, 15,800 restricted stock units and 599,000 stock options during the three month period ended June 30, 2007 and an additional 3,000 shares of restricted common stock in the first quarter of 2007. In the three and six months ended June 30, 2007, 89,720 shares of restricted stock vested, of which the Company cancelled 16,343 shares due to executives electing to receive fewer shares in lieu of paying withholding taxes. Also during the three and six month periods ended June 30, 2007, the Company cancelled 18,384 and 19,584 shares of restricted stock related to employee terminations, respectively. In the comparable 2006 periods, the Company granted to certain key employees: 198,250 shares of restricted common stock and 146,200 stock options. There were no cancellations of restricted common stock during those prior year periods. All awards to employees vest over three years. The Company also granted 40,000 shares of restricted common stock, which vest over a one-year period, to the non-employee members of the Board of Directors in May of 2007 and 2006. The 2000 Plan provides for the grant to officers and key employees of up to 8,530,000 share-based awards (of which, 1,857,335 are available for future option grants as of June 30, 2007) in common stock of the Company. Of those, up to 1,700,000 of the awards may be issued in the form of restricted stock (974,083 shares of the total available for future grants as of June 30, 2007, are available in the form of restricted stock).

 

Total compensation expense related to restricted stock awards and stock options recognized in operating results under Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”), was $1.2 million and $2.0 million for the three and six months ended June 30, 2007, respectively and $0.5 million and $0.7 million for the comparable prior year periods. As of June 30, 2007, the total unrecognized compensation cost related to nonvested stock awards is $11.4 million and stock option awards is $4.2 million. The related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 2.6 years for the nonvested stock awards and 2.7 years for option awards.

 

A summary of the Company’s restricted stock awards including restricted stock units as of June 30, 2007, is presented below:

 

 

 

Shares
(000’s)

 

Weighted-
Average Grant -Date
Fair Value

 

Nonvested at beginning of year

 

244

 

$

22.50

 

Granted

 

502

 

19.23

 

Vested

 

(90

)

25.17

 

Forfeited

 

(20

)

16.79

 

Nonvested as of June 30, 2007

 

636

 

$

19.72

 

 

The Company applies the Black-Scholes option-pricing model to determine the fair value of options on the grant date. Inherent in that model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which make them critical accounting estimates. Since the fourth quarter of 2005, the Company has used an expected stock-price volatility assumption that is a combination of both historical and implied volatilities of the underlying stock, which are obtained from public data sources. Prior to that time, the Company based this assumption solely on historical volatility. The Company considers the exercise behavior of past grants and models the pattern of aggregate exercises in determining the expected weighted-average option life.

 

11



 

The following assumptions were used to estimate the fair value of stock options granted using the Black-Scholes option-pricing model for the following periods:

 

 

 

Granted in
2007

 

Granted in
2006

 

Unvested at
January 1,
2006

 

Weighted-average expected stock-price volatility

 

35

%

40

%

60

%

Weighted-average expected option life

 

3 years

 

3 years

 

4 years

 

Average risk-free interest rate

 

5.0

%

5.0

%

3.6

%

Average dividend yield

 

0

%

0

%

0

%

 

A summary of the Company’s stock option plans as of and for the six months ended June 30, 2007, is presented below:

 

 

 

Shares
(000’s)

 

Weighted-
Average
Exercise
Price

 

Aggregate
Intrinsic
Value (000’s)

 

Weighted-
Average
Remaining
Contractual Life
(in years)

 

Outstanding at beginning of year

 

6,363

 

$

25.58

 

 

 

 

 

Granted

 

599

 

19.57

 

 

 

 

 

Exercised

 

(124

)

16.17

 

 

 

 

 

Forfeited (including cancelled options)

 

(915

)

37.58

 

 

 

 

 

Outstanding at June 30, 2007

 

5,923

 

$

23.31

 

$

8,719

 

3.3

 

Options exercisable at June 30, 2007

 

5,199

 

$

23.79

 

$

7,887

 

2.9

 

 

The weighted average grant date fair value of the stock options granted for the three and six months ended June 30, 2007 and 2006 was $5.74 and $7.61 per option, respectively. The total intrinsic value of stock options exercised during the three and six months ended June 30, 2007 was $0.2 million and $0.5 million, respectively. The total intrinsic value of stock options exercised during the comparable 2006 periods was $2.8 million and $3.2 million, respectively.

 

The following table summarizes information about stock options outstanding at June 30, 2007:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Prices

 

Number
Outstanding at
June
30, 2007
(000’s)

 

Weighted-
Average
Remaining
Contractual
Life
(in years)

 

Weighted-
Average
Exercise Price

 

Number
Outstanding at
June 30, 2007
(000’s)

 

Weighted-
Average
Exercise Price

 

$0.27

 

91

 

3.5

 

$

0.27

 

91

 

$

0.27

 

10.26-15.35

 

141

 

4.1

 

14.50

 

132

 

14.52

 

15.45-22.80

 

3,648

 

4.0

 

19.50

 

3,011

 

19.49

 

23.61-35.00

 

1,825

 

1.9

 

29.67

 

1,747

 

29.94

 

35.75-50.60

 

163

 

1.9

 

46.94

 

163

 

46.94

 

54.35-72.00

 

55

 

1.8

 

56.05

 

55

 

56.05

 

 

 

5,923

 

3.3

 

$

23.31

 

5,199

 

$

23.79

 

 

Shares Reserved for Future Issuance

 

As of June 30, 2007, the Company has reserved the following shares for future issuance related to:

 

Issuance upon exercise of stock options and issuance of restricted stock

 

7,799,868

 

Issuance upon conversion of subordinated debt (see Note 1)

 

6,623,018

 

Issuance of shares pursuant to the ESP Plan

 

1,440,024

 

Total shares reserved

 

15,862,910

 

 

12



 

Note 3—Balance Sheet Information

 

Inventories

 

Inventories have been determined by lower of cost (principally first-in, first-out) or market. Inventories consist of:

 

 

 

June 30, 2007

 

December 31, 2006

 

 

 

(In thousands)

 

 

 

 

 

 

 

Parts and components (1)

 

$

60,821

 

$

60,249

 

Work in process (1)

 

30,789

 

27,961

 

Finished goods

 

13,048

 

12,145

 

 

 

$

104,658

 

$

100,355

 


(1) The prior period has been reclassified to conform to current period presentation.

 

Accrued Warranty

 

The Company estimates the costs that may be incurred under the warranty it provides and recognizes a liability in the amount of such costs at the time the related revenue is recognized. Factors that affect the Company’s warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. The Company periodically assesses the adequacy of its recognized warranty liability and adjusts the amount as necessary. Changes in the Company’s warranty liability during the period are as follows:

 

 

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

 

 

 

 

 

 

Balance as of January 1

 

$

7,118

 

$

6,671

 

Warranties issued during the period

 

2,628

 

3,353

 

Settlements made during the period

 

(3,141

)

(3,264

)

Balance as of June 30

 

$

6,605

 

$

6,760

 

 

Note 4—Segment Information

 

The Company manages the business, reviews operating results and assesses performance, as well as allocates resources, based upon two separate reporting segments. The Process Equipment segment combines the etch, deposition, dicing and slicing products sold mostly to data storage customers and the molecular beam epitaxy and metal organic chemical vapor deposition products primarily sold to high-brightness light emitting diode and wireless telecommunications customers. This segment has production facilities in Plainview, New York, Ft. Collins, Colorado, Camarillo, California, St. Paul, Minnesota and Somerset, New Jersey. The Metrology segment represents products that are used to provide critical surface measurements on products such as semiconductor devices and thin film magnetic heads and includes the Company’s broad line of atomic force microscopes, optical interferometers and stylus profilers sold to semiconductor customers, data storage customers and thousands of research facilities and scientific centers. This segment has production facilities in Camarillo and Santa Barbara, California and Tucson, Arizona.

 

The Company evaluates the performance of its reportable segments based on income (loss) from operations before interest, income taxes, amortization and certain items (“EBITA”). Certain items include charges for purchased in-process technology, restructuring and asset impairment charges and merger-related costs. The accounting policies of the reportable segments are the same as those described in the summary of critical accounting policies.

 

13



 

The following tables present certain data pertaining to the reportable product segments of the Company and a reconciliation of EBITA to income (loss) before income taxes and noncontrolling interest for the three and six months ended June 30, 2007 and 2006 and goodwill and total assets as of June 30, 2007 and December 31, 2006 (in thousands):

 

 

 

 

 

 

 

Unallocated

 

 

 

 

 

Process

 

 

 

Corporate

 

 

 

 

 

Equipment

 

Metrology

 

Amount

 

Total

 

Three Months Ended June 30, 2007

 

 

 

 

 

 

 

 

 

Net sales

 

$

60,016

 

$

38,753

 

$

 

$

98,769

 

Income (loss) before interest, taxes, amortization and certain items (EBITA)

 

$

5,382

 

$

388

 

$

(2,967

)

$

2,803

 

Interest expense, net

 

 

 

772

 

772

 

Amortization expense

 

1,910

 

325

 

133

 

2,368

 

Other items (1)

 

 

1,352

 

93

 

1,445

 

Income (loss) before income taxes and noncontrolling interest

 

$

3,472

 

$

(1,289

)

$

(3,965

)

$

(1,782

)

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2006

 

 

 

 

 

 

 

 

 

Net sales

 

$

67,361

 

$

44,274

 

$

 

$

111,635

 

Income (loss) before interest, taxes, amortization and certain items (EBITA)

 

$

7,801

 

$

6,316

 

$

(4,521

)

$

9,596

 

Interest expense, net

 

 

 

1,149

 

1,149

 

Amortization expense

 

3,288

 

441

 

260

 

3,989

 

Income (loss) before income taxes and noncontrolling interest

 

$

4,513

 

$

5,875

 

$

(5,930

)

$

4,458

 

 

 

 

 

 

 

 

 

Unallocated

 

 

 

 

 

Process

 

 

 

Corporate

 

 

 

 

 

Equipment

 

Metrology

 

Amount

 

Total

 

Six Months Ended June 30, 2007

 

 

 

 

 

 

 

 

 

Net sales

 

$

118,105

 

$

79,830

 

$

 

$

197,935

 

Income (loss) before interest, taxes, amortization and certain items (EBITA)

 

$

9,593

 

$

4,410

 

$

(5,553

)

$

8,450

 

Interest expense, net

 

 

 

1,591

 

1,591

 

Amortization expense

 

5,184

 

736

 

357

 

6,277

 

Other items (2)

 

 

1,352

 

(645

)

707

 

Income (loss) before income taxes and noncontrolling interest

 

$

4,409

 

$

2,322

 

$

(6,856

)

$

(125

)

 

 

14



 

Six Months Ended June 30, 2006

 

 

 

 

 

 

 

 

 

Net sales

 

$

120,552

 

$

85,001

 

$

 

$

205,553

 

Income (loss) before interest, taxes, amortization and certain items (EBITA)

 

$

9,677

 

$

11,928

 

$

(6,355

)

$

15,250

 

Interest expense, net

 

 

 

2,527

 

2,527

 

Amortization expense

 

6,576

 

895

 

533

 

8,004

 

Other items (3)

 

 

 

(330

)

(330

)

Income (loss) before income taxes and noncontrolling interest

 

$

3,101

 

$

11,033

 

$

(9,085

)

$

5,049

 

 


(1)

 

Restructuring expense.

 

 

 

(2)

 

Restructuring expense, net of gain on extinguishment of debt.

 

 

 

(3)

 

Gain on extinguishment of debt.

 

 

 

 

 

 

 

Unallocated

 

 

 

 

 

Process

 

 

 

Corporate

 

 

 

 

 

Equipment

 

Metrology

 

Amount

 

Total

 

As of June 30, 2007

 

 

 

 

 

 

 

 

 

Goodwill

 

$

71,530

 

$

29,368

 

$

 

$

100,898

 

Total assets

 

270,780

 

130,154

 

126,340

 

527,274

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2006

 

 

 

 

 

 

 

 

 

Goodwill

 

$

71,530

 

$

29,368

 

$

 

$

100,898

 

Total assets

 

285,661

 

138,140

 

165,799

 

589,600

 

 

Corporate total assets are comprised principally of cash and cash equivalents at June 30, 2007 and December 31, 2006.

 

Note 5—Income Taxes

 

The Company adopted FIN 48 on January 1, 2007. As a result of adopting FIN 48, the Company recognized a $0.8 million increase to its reserves for uncertain tax positions during the first quarter of 2007, which was recorded as a reduction to the January 1, 2007 retained earnings balance. At the adoption date of January 1, 2007, the Company had approximately $2.3 million of unrecognized tax benefits, including the cumulative effect increase to its reserve for uncertain tax positions. For the three and six months ended June 30, 2007, the Company recorded $0.2 million and $0.5 million related to unrecognized tax benefits. As a result, the Company had $2.8 million of unrecognized tax benefits at June 30, 2007, all of which relate to positions taken on its foreign tax returns and representing the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in future periods.

 

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. All material federal, state, local, and foreign income tax matters have been concluded for years through 2002.

 

The Company is continuing its practice of recognizing interest and penalties related to income tax matters in income tax expense. The total accrual for interest and penalties related to uncertain tax positions was approximately $1.1 million as of June 30, 2007, which included $0.1 million accrued during the first quarter and the second quarter of 2007, the impact of which was to reduce net income by $0.1 million and earnings per diluted share by less than $0.01 in the three and six months ended June 30, 2007.

 

15



 

Note 6—Comprehensive (Loss) Income

 

Total comprehensive (loss) income was $(3.0) million and $(2.4) million for the three and six months ended June 30, 2007, and $4.0 million and $4.5 million for the three and six months ended June 30, 2006. The Company’s comprehensive (loss) income is comprised of net (loss) income and foreign currency translation adjustments.

 

Note 7—Debt

 

During the first quarter of 2007, the Company repurchased $56.0 million of its Old Notes for $54.8 million, reducing the amount of Old Notes outstanding from $200.0 million to $144.0 million. As a result of these repurchases, the Company recorded a net gain from the extinguishment of debt of $0.7 million.

 

On April 20, 2007, the Company issued new notes pursuant to privately negotiated exchange agreements with certain holders of Old Notes. Under these agreements, such holders agreed to exchange $106.4 million aggregate principal amount of the Old Notes for approximately $105.5 million aggregate principal amount of New Notes . On May 1, 2007, the Company issued an additional $12.3 million aggregate principal amount of New Notes in a second round of exchange transactions with the holders of $12.4 million of Old Notes. Following the exchange transactions, approximately $25.2 million of the Old Notes, with a conversion price of $38.51 per common share, remained outstanding. No net gain or loss was recorded on the exchange transactions since the carrying value of the Old Notes including unamortized deferred financing costs approximated the exchange value of the New Notes.

 

The New Notes initially will be convertible into 36.7277 shares of common stock per $1,000 principal amount of New Notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for Veeco’s common stock on April 16, 2007). Holders may convert the New Notes at any time during the period beginning on January 15, 2012 through the close of business on the second day prior to April 15, 2012 and earlier upon the occurrence of certain events including the Company’s common stock trading at prices 130% over the conversion price for a specified period.

 

Note 8— Commitments, Contingencies and Other Matters

 

Litigation

 

As previously reported in Veeco’s Annual Report of Form 10-K for the year ending December 31, 2006, Veeco and certain of its officers have been named as defendants in a securities class action lawsuit consolidated in August 2005 that is pending in federal court in the Southern District of New York (“the Court”). The lawsuit arises out of the restatement in March 2005 of Veeco’s financial statements for the quarterly periods and nine months ended September 30, 2004 as a result of the Company’s discovery of certain improper accounting transactions at its TurboDisc business unit. On July 5, 2007, Veeco entered into a Memorandum of Understanding to settle and fully resolve this lawsuit for a payment of $5.5 million.  Veeco expects that insurance proceeds will cover the settlement amount and any significant legal expenses related to the settlement.  The settlement agreement is subject to court approval and would dismiss all pending claims against Veeco and the other defendants with no admission or finding of wrongdoing by Veeco or any of the other defendants, and Veeco and the other defendants would receive a full release of all claims pending in the litigation.

 

2007 Restructuring Expenses

 

In conjunction with a cost reduction plan, the Company recognized a restructuring charge of approximately $1.4 million during the second quarter of 2007, which was recorded as restructuring expense in the condensed consolidated statements of operations. The charge consisted of personnel severance costs for approximately 25 employees, or approximately 2% of total employees, which included management, administration and manufacturing employees primarily located at the Company’s Metrology operations in Santa Barbara, California and Tucson, Arizona. As of June 30, 2007, approximately $0.2 million has been paid and approximately $1.2 million remains accrued. The remainder is expected to be paid by the fourth quarter of 2008.

 

16



 

The following is a reconciliation of the liability for the restructuring charge (in thousands):

 

 

 

Process
Equipment

 

Metrology

 


Corporate

 

Total

 

Charged to accrual

 

$

 

$

1,352

 

$

93

 

$

1,445

 

Cash payments during 2007

 

 

(226

)

(27

)

(253

)

Balance as of June 30, 2007

 

$

 

$

1,126

 

$

66

 

$

1,192

 

 

17



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Executive Summary

 

                Veeco designs, manufactures, markets and services a broad line of equipment primarily used by manufacturers in the data storage, scientific and industrial research, semiconductor, high-brightness light emitting diode (“HB-LED) and wireless industries. These industries help create a wide range of information age products such as computer integrated circuits, personal computers, hard disk drives, network servers, digital cameras, wireless phones, TV set-top boxes, personal music/video players and personal digital assistants. Our broad line of products features leading edge technology and allows customers to improve time-to-market of their next generation products. Veeco’s products are also enabling advancements in the growing fields of nanoscience, nanobiology and other areas of scientific and industrial research.

 

                Veeco’s Process Equipment products precisely deposit or remove (etch) various materials in the manufacturing of thin film magnetic heads (“TFMHs”) for the data storage industry, HB-LED/wireless devices (such as power amplifiers and laser diodes) and semiconductor mask reticles. Veeco’s metrology equipment is used to provide critical surface measurements on semiconductor devices and TFMHs. This equipment allows customers to monitor their products throughout the manufacturing process in order to improve yields, reduce costs and improve product quality. Veeco’s metrology solutions are also used by many universities, scientific laboratories and industrial applications. We sell our broad line of atomic force microscopes (“AFMs”), optical interferometers and stylus profilers to thousands of universities, research facilities and scientific centers worldwide.

 

                We currently maintain manufacturing facilities in Arizona, California, Colorado, Minnesota, New Jersey and New York, with sales and service locations around the world.

 

Highlights of the Second Quarter of 2007

 

                  Revenue was $98.8 million, a 12% decrease from the second quarter of 2006.

                  Orders were $112.5 million, down 21% from the second quarter of 2006.

                  Net loss was $2.6 million, or ($0.08) per share, compared to net income of $3.0 million, or $0.10 per share, in the second quarter of 2006.

                  Gross margins were 42.8%, compared to 44.5% in the second quarter of 2006.

 

Highlights of the First Half of 2007

 

                  Revenue was $197.9 million, a 4% decrease from the first half of 2006.

                  Orders were $218.4 million, down 19% from the first half of 2006.

                  Net loss was $2.3 million, or ($0.07) per share, compared to net income of $2.8 million, or $0.09 per share, in the first half of 2006.

                  Gross margins were 43.4%, compared to 44.5% in the first half of 2006.

 

Current Business Conditions/Outlook

 

            Veeco reported revenue of $98.8 million in the second quarter of 2007, a 12% decrease from the prior year. Veeco expects continued fluctuations in data storage and semiconductor capital expenditure purchases as customers reassess their production ramps and timing of new technology transition plans. Veeco’s revenues fell below guidance of $100 million to $105 million due primarily to the field acceptance delay of a new data storage PVD system and end of quarter data storage customer factory shut-downs. In addition to the challenges in data storage, weakness in Veeco’s semiconductor business also negatively impacted revenue and profitability.

 

                Veeco’s orders for the three months ended June 30, 2007 were $112.5 million, a decrease of 21% from the $143.2 million reported in the same three month period of 2006. While still below last year’s peak rates, Veeco’s data storage orders increased 41% sequentially to $41.4 million (a decrease of 42% from last year’s second quarter) and the Company currently believes that the data storage environment has improved from an order perspective. While Veeco’s data storage customers are undergoing a period of consolidation and Veeco often has limited visibility to their spending

 

18



 

patterns, we believe that longer term industry requirements for increased areal density and consumer electronic expansion will drive future investment in perpendicular head technology and conversion to larger wafer size. Second quarter orders in the HB-LED/Wireless segment remain strong at $34.5 million, down 11% sequentially but up 26% from last year’s second quarter. This increased order rate compared to the prior year reflects the introduction of new consumer HB-LED backlighting for emerging applications such as personal computers and flat panel televisions as well as positive customer interest in Veeco’s next generation “K-Series” metal organic chemical vapor deposition (“MOCVD”) tools, which were introduced in December 2006 and provide significant advantages in uniformity and throughput. The most unfavorable order segment for Veeco during the second quarter was semiconductor, down 29% sequentially. Veeco will be launching its next generation automated AFM product in the fall of 2007 (currently taking evaluation orders from key customers), and currently expects this product to help improve Veeco’s semiconductor order and revenue stream in 2008.

 

                Technology changes are continuing in all of Veeco’s markets: the continued increase of 80 GB hard drives and investment in 120 GB hard drives and the transition to perpendicular recording in data storage; the increased usage of “mini” drives in consumer electronic applications; the reduction of feature sizes in the semiconductor industry to 45 nanometer and below; the growing applications in HB-LED such as automotive, architectural lighting and backlighting for laptops; and opportunities in the solar industry. Veeco believes that these trends, together with the continued funding of nanoscience research, will prompt customers to seek our next-generation solutions to address their manufacturing and technology challenges. In addition, consumer spending on many types of electronics has increased and various worldwide economies, such as those in the Asia Pacific region, are experiencing growth.

 

Outlook

 

                The Company reviews a number of indicators to evaluate the strength of its markets going forward, such as plant utilization trends, capacity requirements and capital spending trends. Veeco is currently forecasting a decline in revenues on a sequential basis for the third quarter of 2007 with revenues improving in the fourth quarter. Veeco currently expects its revenues to be in the range of approximately $92 million to $97 million for the third quarter of 2007. While Veeco has a strong pipeline of new products for the data storage, HB-LED, semiconductor and scientific research markets, many of these are in the early stages of shipments and there is uncertainty associated with customer acceptance and the Company’s ability to recognize revenue upon shipment of the products. The Company is also forecasting a decline in profitability in the third quarter of 2007 compared to the second quarter due to several key factors including: introductory pricing for several new data storage products and low revenue in Veeco’s Metrology business. Fourth quarter 2007 revenues and profitability are forecasted to improve from the weak third quarter levels on improved volume and pricing in both Process Equipment and Metrology. Compared with first half 2007 revenue of $197.9 million, Veeco currently forecasts that second half 2007 revenue will improve to $200-$220 million, subject to customer acceptance timing. This would bring revenue for the full year to approximately $400-$420 million, down 5-10% from 2006.

 

19



 

Results of Operations:

 

Three Months Ended June 30, 2007 and 2006

 

Consistent with prior years, the Company reports interim quarters, other than fourth quarters which end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2007 interim quarter ends are April 1, July 1 and September 30. The 2006 interim quarter ends were April 2, July 2 and October 1. For ease of reference, the Company reports these interim quarter ends as March 31, June 30, and September 30 in its interim condensed consolidated financial statements.

 

The following tables show selected items of Veeco’s Consolidated Statements of Operations, percentages of sales and comparisons between the three months ended June 30, 2007 and 2006 and the analysis of sales and orders for the same periods by segment, industry and region (in thousands):

 

 

 

Three Months ended
June 30,

 

Dollar

 

 

 

2007

 

2006

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

98,769

 

100.0

%

$

111,635

 

100.0

%

$

(12,866

)

Cost of sales

 

56,524

 

57.2

 

61,923

 

55.5

 

(5,399

)

Gross profit

 

42,245

 

42.8

 

49,712

 

44.5

 

(7,467

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

23,818

 

24.1

 

24,996

 

22.4

 

(1,178

)

Research and development expense

 

15,903

 

16.1

 

15,252

 

13.7

 

651

 

Amortization expense

 

2,368

 

2.4

 

3,989

 

3.5

 

(1,621

)

Restructuring expense

 

1,445

 

1.5

 

 

 

1,445

 

Other income, net

 

(279

)

(0.3

)

(132

)

(0.1

)

(147

)

Total operating expenses

 

43,255

 

43.8

 

44,105

 

39.5

 

(850

)

Operating (loss) income

 

(1,010

)

(1.0

)

5,607

 

5.0

 

(6,617

)

Interest expense, net

 

772

 

0.8

 

1,149

 

1.0

 

(377

)

(Loss) income before income taxes and noncontrolling interest

 

(1,782

)

(1.8

)

4,458

 

4.0

 

(6,240

)

Income tax provision

 

1,042

 

1.0

 

1,433

 

1.3

 

(391

)

Noncontrolling interest

 

(229

)

(0.2

)

 

 

(229

)

Net (loss) income

 

$

(2,595

)

(2.6

)%

$

3,025

 

2.7

%

$

(5,620

)

 

 

 

Sales

 

Orders

 

 

 

 

 

 

 

Three Months ended
June 30,

 

Dollar and
Percentage
Change

 

Three Months ended
June 30,

 

Dollar and
Percentage
Change

 

Book to Bill
Ratio

 

 

 

2007

 

2006

 

Year to Year

 

2007

 

2006

 

Year to Year

 

2007

 

2006

 

Segment Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Process Equipment

 

$

60,016

 

$

67,361

 

$

(7,345

)

(10.9

)%

$

77,667

 

$

94,309

 

$

(16,642

)

(17.6

)%

1.29

 

1.40

 

Metrology

 

38,753

 

44,274

 

(5,521

)

(12.5

)

34,786

 

48,899

 

(14,113

)

(28.9

)

0.90

 

1.10

 

Total

 

$

98,769

 

$

111,635

 

$

(12,866

)

(11.5

)%

$

112,453

 

$

143,208

 

$

(30,755

)

(21.5

)%

1.14

 

1.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industry Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Data Storage

 

$

31,155

 

$

53,105

 

$

(21,950

)

(41.3

)%

$

41,362

 

$

71,446

 

$

(30,084

)

(42.1

)%

1.33

 

1.35

 

HB-LED/wireless

 

25,743

 

18,424

 

7,319

 

39.7

 

34,515

 

27,405

 

7,110

 

25.9

 

1.34

 

1.49

 

Semiconductor

 

10,782

 

12,448

 

(1,666

)

(13.4

)

8,331

 

19,997

 

(11,666

)

(58.3

)

0.77

 

1.61

 

Research and Industrial

 

31,089

 

27,658

 

3,431

 

12.4

 

28,245

 

24,360

 

3,885

 

15.9

 

0.91

 

0.88

 

Total

 

$

98,769

 

$

111,635

 

$

(12,866

)

(11.5

)%

$

112,453

 

$

143,208

 

$

(30,755

)

(21.5

)%

1.14

 

1.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regional Analysis (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

31,275

 

$

34,541

 

$

(3,266

)

(9.5

)%

$

39,428

 

$

52,834

 

$

(13,406

)

(25.4

)%

1.26

 

1.53

 

Europe

 

20,593

 

16,095

 

4,498

 

27.9

 

22,091

 

9,648

 

12,443

 

129.0

 

1.07

 

0.60

 

Japan

 

11,251

 

11,297

 

(46

)

(0.4

)

17,057

 

19,596

 

(2,539

)

(13.0

)

1.52

 

1.73

 

Asia-Pacific

 

35,650

 

49,702

 

(14,052

)

(28.3

)

33,877

 

61,130

 

(27,253

)

(44.6

)

0.95

 

1.23

 

Total

 

$

98,769

 

$

111,635

 

$

(12,866

)

(11.5

)%

$

112,453

 

$

143,208

 

$

(30,755

)

(21.5

)%

1.14

 

1.28

 

 


(1) The prior period has been reclassified to conform to the current period presentation.

 

20



 

Net sales of $98.8 million for the second quarter of 2007 were down $12.9 million, or 11.5%, compared to the second quarter of 2006. By segment, Process Equipment sales were down $7.4 million, or 10.9%. The decrease in Process Equipment sales is primarily due to a decrease in sales to the data storage market. Partially offsetting this decline was a continued increase in sales to the HB-LED/wireless market. Metrology sales declined $5.5 million, primarily due to decreased purchases of optical metrology products in the data storage market and automated AFM products in the semiconductor market. By region, net sales increased by 27.9% in Europe, while sales in Asia-Pacific, North America and Japan declined 28.3%, 9.5% and 0.4%, respectively. The Company believes that quarter-to-quarter variations in the geographic distribution of sales will continue.

 

Orders of $112.5 million for the second quarter of 2007 decreased by $30.8 million, or 21.5%, from the comparable 2006 period. By segment, the 17.6% decrease in Process Equipment orders was primarily due to a $22.0 million decrease in orders for Ion Beam equipment as a result of a decrease in customer demand in the data storage industry. The 28.9% decrease in Metrology orders was due to an $11.9 million decrease in orders for automated AFM products, principally to semiconductor customers, as well as a $1.6 million decrease in orders for optical metrology products, principally to data storage customers.

 

The Company’s book-to-bill ratio for the second quarter of 2007, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.14. The Company’s backlog as of June 30, 2007 was $161.3 million, compared to $140.8 million as of December 31, 2006. During the quarter ended June 30, 2007, the Company experienced no significant net backlog adjustments and order cancellations. However the Company did experience rescheduling of order delivery dates by customers. Due to changing business conditions and customer requirements, the Company may continue to experience cancellations and/or rescheduling of orders.

 

Gross profit for the quarter ended June 30, 2007 was 42.8%, compared to 44.5% in the second quarter of 2006. Process Equipment sales represented 60.8% of total sales for the second quarter of 2007, up from 60.3% in the prior year period. Metrology sales accounted for 39.2% of total sales for the second quarter of 2007, down from 39.7% in the prior year period. Metrology gross margins decreased to 44.4% from 51.0%, principally due to lower sales volume of optical metrology and automated AFM products and a less favorable product mix in the AFM products sold to scientific and research customers. This decrease was partially offset by an increase in Process Equipment gross margins to 41.7% from 40.3% in the prior year period, despite a $7.4 million reduction in sales. This increase is primarily due to significant improvement in MOCVD product gross margins to 40.3% up from 22.1% in the prior year period due to a $7.5 million, or 55% increase in sales, as well as a significant improvement in mix and price.

 

Selling, general and administrative expenses were $23.8 million, or 24.1% of sales, in the second quarter of 2007, compared with $25.0 million, or 22.4% of sales, in the comparable prior year period. The $1.2 million decrease is primarily attributable to a reduction in management bonuses and long-term incentive expenses associated with reduced earnings in 2007 and a reduction in legal fees partially offset by an increase in non-cash stock-based compensation expense.

 

Research and development expense totaled $15.9 million in the second quarter of 2007, an increase of $0.7 million from the second quarter of 2006, primarily due to new product development efforts in automated AFM for the semiconductor market as well as an investment in AFM for life sciences applications. As a percentage of sales, research and development increased to 16.1% in the second quarter of 2007, compared to 13.7% in the second quarter of 2006.

 

Amortization expense was $2.4 million in the second quarter of 2007, compared to $4.0 million in the second quarter of 2006. The decrease was principally due to certain technology-based intangibles becoming fully amortized during the second quarter of 2007.

 

                The restructuring expense of $1.4 million for the quarter ended June 30, 2007, was related to personnel severance costs principally associated with the Company’s Metrology operations in Santa Barbara, California and Tucson, Arizona.

 

                Net interest expense in the second quarter of 2007 was $0.8 million compared to $1.1 million in the second quarter of 2006. This reduction in net interest expense is primarily related to less interest expense associated with the extinguishment of debt and higher cash balances invested during the second quarter of 2007 compared to the second quarter of 2006.

 

21



 

The income tax provision for the quarter ended June 30, 2007 was $1.0 million compared to $1.4 million in the second quarter of 2006. The 2007 provision for income taxes included $0.7 million relating to Veeco’s foreign operations which continue to be profitable and $0.3 million relating to the Company’s domestic operations. Due to significant domestic net operating loss carry forwards, which are fully reserved by a valuation allowance, Veeco’s domestic operations are not expected to incur significant income taxes for the foreseeable future. The 2006 provision for income taxes included $1.1 million relating to Veeco’s foreign operations and $0.3 million relating to the Company’s domestic operations. The reduction in income tax provision is due to a decrease in taxable income in the Company’s foreign operations.

 

Noncontrolling interest was a credit to income of $0.2 million for the three months ended June 30, 2007. As the Company is the primary beneficiary of Fluens Corporation (“Fluens”), a variable interest entity as defined by Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51, it is required to consolidate Fluens and eliminate the portion of its results attributable to noncontrolling interests. As a result, the Company eliminated from its net income 80.1% of Fluens’ operating losses for the three months ended June 30, 2007.

 

Six Months Ended June 30, 2007 and 2006

 

The following tables show selected items of Veeco’s Consolidated Statements of Operations, percentages of sales and comparisons between the six months ended June 30, 2007 and 2006 and the analysis of sales and orders for the same periods by segment, industry and region (in thousands):

 

 

 

Six Months ended
June 30,

 

Dollar

 

 

 

2007

 

2006

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

197,935

 

100.0

%

$

205,553

 

100.0

%

$

(7,618

)

Cost of sales

 

111,995

 

56.6

 

114,072

 

55.5

 

(2,077

)

Gross profit

 

85,940

 

43.4

 

91,481

 

44.5

 

(5,541

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

46,624

 

23.6

 

46,326

 

22.6

 

298

 

Research and development expense

 

31,292

 

15.8

 

29,838

 

14.5

 

1,454

 

Amortization expense

 

6,277

 

3.2

 

8,004

 

3.9

 

(1,727

)

Restructuring expense

 

1,445

 

0.7

 

 

 

1,445

 

Other (income) expense, net

 

(426

)

(0.2

)

67

 

 

(493

)

Total operating expenses

 

85,212

 

43.1

 

84,235

 

41.0

 

977

 

Operating income

 

728

 

0.3

 

7,246

 

3.5

 

(6,518

)

Interest expense, net

 

1,591

 

0.8

 

2,527

 

1.2

 

(936

)

Gain on extinguishment of debt

 

(738

)

(0.4

)

(330

)

(0.2

)

(408

)

(Loss) income before income taxes and noncontrolling interest

 

(125

)

(0.1

)

5,049

 

2.5

 

(5,174

)

Income tax provision

 

2,536

 

1.3

 

2,266

 

1.1

 

270

 

Noncontrolling interest

 

(359

)

(0.2

)

 

 

(359

)

Net (loss) income

 

$

(2,302

)

(1.2

)%

$

2,783

 

1.4

%

$

(5,085

)

 

22



 

 

 

Sales

 

Orders

 

 

 

 

 

Six Months ended
June 30,

 

Dollar and
Percentage
Change

 

Six Months ended
June 30,

 

Dollar and
Percentage
Change

 

Book to Bill
Ratio

 

 

 

2007

 

2006

 

Year to Year

 

2007

 

2006

 

Year to Year

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Process Equipment

 

$

118,105

 

$

120,552

 

$

(2,447

)

(2.0

)%

$

146,367

 

$

177,802

 

$

(31,435

)

(17.7

)%

1.24

 

1.47

 

Metrology

 

79,830

 

85,001

 

(5,171

)

(6.1

)

71,993

 

92,100

 

(20,107

)

(21.8

)

0.90

 

1.08

 

Total

 

$

197,935

 

$

205,553

 

$

(7,618

)

(3.7

)%

$

218,360

 

$

269,902

 

$

(51,542

)

(19.1

)%

1.10

 

1.31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industry Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Data Storage

 

$

66,666

 

$

93,188

 

$

(26,522

)

(28.5

)%

$

70,737

 

$

141,832

 

$

(71,095

)

(50.1

)%

1.06

 

1.52

 

HB-LED/wireless

 

46,745

 

33,520

 

13,225

 

39.5

 

73,372

 

51,732

 

21,640

 

41.8

 

1.57

 

1.54

 

Semiconductor

 

20,951

 

23,757

 

(2,806

)

(11.8

)

20,073

 

30,095

 

(10,022

)

(33.3

)

0.96

 

1.27

 

Research and Industrial

 

63,573

 

55,088

 

8,485

 

15.4

 

54,178

 

46,243

 

7,935

 

17.2

 

0.85

 

0.84

 

Total

 

$

197,935

 

$

205,553

 

$

(7,618

)

(3.7

)%

$

218,360

 

$

269,902

 

$

(51,542

)

(19.1

)%

1.10

 

1.31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regional Analysis (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

66,502

 

$

67,259

 

$

(757

)