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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, 2008

 

 

 

 

 

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

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

Terminal Drive

Plainview, New York

 


11803

(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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

 

(Do not check if a smaller

 

 

 

 

 

 

reporting company)

 

 

 

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

 

32,165,513 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on July 29, 2008.

 

 

 



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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 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.

 

·                  The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly.

 

·                  Changes in our product mix may cause our quarterly operating results to fluctuate significantly.

 

·                  Our customers may cancel or reschedule their orders with us.

 

·                  Our sales cycle is long and unpredictable.

 

·                  Our outsourcing strategy could adversely affect our results of operations.

 

·                  We rely on a limited number of suppliers.

 

·                  Our 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.

 

·                  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.

 

·                  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.

 

·                  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, 2007 of Veeco Instruments Inc. (“Veeco,” the “Company,” or “we”).

 

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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 such reports. These filings are posted to our Internet site, as soon as reasonably practicable after we electronically file such material with the SEC.

 

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VEECO INSTRUMENTS INC.

 

INDEX

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2008 and 2007 (Unaudited)

5

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (Unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

30

 

 

 

Item 6.

Exhibits

31

 

 

 

SIGNATURES

32

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three months ended

June 30,

 

Six months ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net sales

 

$

114,449

 

$

98,769

 

$

216,756

 

$

197,935

 

Cost of sales

 

66,719

 

56,524

 

126,400

 

111,995

 

Gross profit

 

47,730

 

42,245

 

90,356

 

85,940

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

24,311

 

23,818

 

46,939

 

46,624

 

Research and development expense

 

15,145

 

15,903

 

29,871

 

31,292

 

Amortization expense

 

2,426

 

2,368

 

4,382

 

6,277

 

Restructuring expense

 

 

1,445

 

2,875

 

1,445

 

Asset impairment charge

 

 

 

285

 

 

Other income, net

 

(382

)

(279

)

(378

)

(426

)

Total operating expenses

 

41,500

 

43,255

 

83,974

 

85,212

 

Operating income (loss)

 

6,230

 

(1,010

)

6,382

 

728

 

Interest expense, net

 

969

 

772

 

1,861

 

1,591

 

Gain on extinguishment of debt

 

 

 

 

(738

)

Income (loss) before income taxes and noncontrolling interest

 

5,261

 

(1,782

)

4,521

 

(125

)

Income tax provision

 

1,129

 

1,042

 

2,048

 

2,536

 

Noncontrolling interest

 

(70

)

(229

)

(146

)

(359

)

Net income (loss)

 

$

4,202

 

$

(2,595

)

$

2,619

 

$

(2,302

)

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

$

0.13

 

$

(0.08

)

$

0.08

 

$

(0.07

)

Diluted net income (loss) per common share

 

$

0.13

 

$

(0.08

)

$

0.08

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

31,255

 

30,926

 

31,197

 

30,912

 

Diluted weighted average shares outstanding

 

31,590

 

30,926

 

31,435

 

30,912

 

 

See accompanying notes.

 

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Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

109,644

 

$

117,083

 

Accounts receivable, less allowance for doubtful accounts of $985 in 2008 and $984 in 2007

 

76,413

 

75,207

 

Inventories

 

115,025

 

98,594

 

Prepaid expenses and other current assets

 

6,741

 

8,901

 

Deferred income taxes

 

2,808

 

2,649

 

Total current assets

 

310,631

 

302,434

 

Property, plant, and equipment at cost, net

 

66,458

 

66,142

 

Goodwill

 

101,828

 

100,898

 

Purchased technology, less accumulated amortization of $75,224 in 2008 and $72,481 in 2007

 

35,809

 

36,107

 

Other intangible assets, less accumulated amortization of $32,268 in 2008 and $29,886 in 2007

 

27,812

 

23,540

 

Other assets

 

221

 

213

 

Total assets

 

$

542,759

 

$

529,334

 

Liabilities and shareholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

37,091

 

$

36,639

 

Accrued expenses

 

65,532

 

60,201

 

Deferred profit

 

2,890

 

3,250

 

Income taxes payable

 

1,086

 

2,278

 

Current portion of long-term debt

 

25,422

 

25,550

 

Total current liabilities

 

132,021

 

127,918

 

Deferred income taxes

 

4,673

 

3,712

 

Long-term debt

 

120,939

 

121,035

 

Other non-current liabilities

 

2,514

 

1,978

 

 

 

 

 

 

 

Noncontrolling interest

 

868

 

1,014

 

 

 

 

 

 

 

Total shareholders’ equity

 

281,744

 

273,677

 

Total liabilities and shareholders’ equity

 

$

542,759

 

$

529,334

 

 

See accompanying notes.

 

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Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 (In thousands)

(Unaudited)

 

 

 

Six months ended
June 30,

 

 

 

2008

 

2007

 

Operating activities

 

 

 

 

 

Net income (loss)

 

$

2,619

 

$

(2,302

)

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

 

 

 

 

 

Depreciation and amortization

 

11,503

 

13,459

 

Deferred income taxes

 

962

 

447

 

Net gain on extinguishment of long-term debt

 

 

(738

)

Non-cash compensation expense for stock options and restricted stock

 

3,623

 

2,046

 

Noncontrolling interest

 

(146

)

(359

)

Non-cash asset impairment charge

 

285

 

 

Gain on sale of property, plant, and equipment

 

(62

)

(81

)

Other, net

 

(3

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

3,314

 

21,128

 

Inventories

 

(11,135

)

(4,002

)

Accounts payable

 

(533

)

(2,425

)

Accrued expenses, deferred profit, and other current liabilities

 

(1,069

)

(4,615

)

Other, net

 

1,097

 

(1,919

)

Net cash provided by operating activities

 

10,455

 

20,639

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(7,076

)

(5,876

)

Payments for net assets of business acquired, net of cash acquired

 

(10,855

)

 

Proceeds from sale of property, plant, and equipment

 

99

 

304

 

Net cash used in investing activities

 

(17,832

)

(5,572

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from stock issuances

 

669

 

2,131

 

Repayments of long-term debt

 

(224

)

(54,998

)

Other

 

(607

)

(1,316

)

Net cash used in financing activities

 

(162

)

(54,183

)

Effect of exchange rate changes on cash and cash equivalents

 

100

 

149

 

Net decrease in cash and cash equivalents

 

(7,439

)

(38,967

)

Cash and cash equivalents at beginning of period

 

117,083

 

147,046

 

Cash and cash equivalents at end of period

 

$

109,644

 

$

108,079

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Exchange of convertible subordinated notes

 

$

 

$

118,766

 

Transfers from property, plant, and equipment to inventory

 

$

385

 

$

402

 

 

See accompanying notes.

 

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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 months and six months ended June 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.  For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.

 

Consistent with prior years, we report interim quarters, other than fourth quarters which always 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 2008 interim quarter ends are March 30, June 29, and September 28.  The 2007 interim quarter ends were April 1, July 1, and September 30.  For ease of reference, we report these interim quarter ends as March 31, June 30, and September 30 in our interim condensed consolidated financial statements.

 

Net Income (Loss) 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,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

31,255

 

30,926

 

31,197

 

30,912

 

Dilutive effect of stock options and restricted stock awards and units

 

335

 

 

238

 

 

Diluted weighted average shares outstanding

 

31,590

 

30,926

 

31,435

 

30,912

 

 

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

 

During the three-month and six-month periods ended June 30, 2008, options to purchase 3.8 million shares of common stock (at prices ranging from $18.26 to $72.00 per share) and options to purchase 5.0 million shares of common stock (at prices ranging from $16.93 to $72.00 per share), respectively, were excluded from the computation of diluted earnings per share due to exercise prices that exceeded the average market price of our common stock for the period. During the three-month 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) in both periods were excluded from the computation of diluted earnings per share due to the net loss sustained for the period, which caused their effect to be antidilutive.

 

During the second quarter of 2007, we exchanged $118.8 million of our unsecured 4.125% convertible subordinated notes due December 2008 (the “Old Notes”) for $117.8 million of a new series of 4.125% convertible subordinated notes (the “New Notes”) due April 15, 2012.   The effect on diluted shares of the assumed conversion of the Old Notes was approximately 1.5 million and 3.0 million common equivalent shares for the three and six months ended June 30, 2007, respectively.  The converted shares were anti-dilutive and, therefore, were not included in the weighted shares outstanding for the three months and six months ended June 30, 2007.  The exchange of the Old Notes for the New Notes, together with $56 million in repurchases of Old Notes during the first quarter of 2007

 

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reduced the effect of the assumed conversion of the Old Notes, which was calculated using the “if converted” method of accounting.  For the three months and six months ended June 30, 2008, the weighted-average effect on diluted shares of the assumed conversion of the remaining $25.2 million of Old Notes is approximately 0.7 million shares in each period.

 

The New Notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, as long as we have the ability and the intent to settle the principal amount in cash.  Under the terms of the New Notes, we may pay the principal amount of converted New Notes in cash or in shares of common stock.  We have indicated that we intend 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 months and six months ended June 30, 2008 and 2007, as the average stock price was below the conversion price of $27.23 for each period.  The effect of the assumed converted shares is dependent on the stock price at the time of the conversion.  The maximum number of common equivalent shares issuable upon conversion is approximately 6.0 million.  See Note 8 for further details on our debt.

 

Fair Value Measurements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”).  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.  In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically excluded from the scope 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.

 

Effective January 1, 2008, we adopted SFAS 157 and SFAS 159.  Since we do not have any financial assets and liabilities that are required to be recorded at fair value, the only impact of these adoptions will be on the disclosures required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments in our Annual Report on Form 10-K for the year ending December 31, 2008.

 

Recent Accounting Pronouncements

 

On February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”).  FSP 157-2 amends SFAS 157 to delay the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually).  For items within its scope, FSP 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.  We are currently evaluating the impact of adopting the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed on a non-recurring basis.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”) and Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51 (“SFAS 160”).   Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date at fair value with limited exceptions.  SFAS 141(R) also changes the accounting treatment for certain other items that relate to business combinations. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The purpose of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements.  The most significant provisions of this statement result in changes to the presentation of noncontrolling interests in the consolidated financial statements.  SFAS 160 is effective for fiscal years beginning after December 15, 2008.  The adoption of this statement will impact the manner in which we present noncontrolling interests, but will not impact our consolidated financial position or results of operations.

 

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”).

 

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The guidance is effective for fiscal years beginning after December 15, 2008, and interim periods within those years.  FSP APB 14-1 will require issuers of convertible debt that can be settled in cash to separately account for (i.e. bifurcate) a portion of the debt associated with the conversion feature and reclassify this portion to stockholders’ equity.  The liability portion, which represents the fair value of the debt without the conversion feature, will be accreted to its face value over the life of the debt using the effective interest method, with the accretion expense recorded to interest.  FSP APB 14-1 will be applied retrospectively to all periods presented. The cumulative effect of the change in accounting principle on periods prior to those presented will be recognized as of the beginning of the first period presented. We expect the adoption of FSP APB 14-1 to have a material effect on our consolidated financial position, results of operations, and earnings per share.  Effective on the date of issuance of the New Notes, we will reclassify approximately $16.3 million from long-term debt to additional paid-in capital, and as of the adoption of FSP APB 14-1 in the beginning of 2009, our accumulated deficit will reflect approximately $4.3 million of debt accretion that occurred between the issuance date of the New Notes and the adoption date. Approximately $3.1 to $3.6 million of additional interest expense will be recorded annually from the adoption date through the maturity date of the convertible debt. This interest expense will not require the use of cash.

 

Note 2—Acquisition of Mill Lane Engineering

 

On May 22, 2008, we acquired Mill Lane Engineering Co., Inc. (“Mill Lane”), a privately held manufacturer of web coating systems for flexible solar panels, for a purchase price of $11.0 million plus $0.7 million in acquisition-related fees, and plus potential future earn-out payments of up to $19.0 million (representing additional purchase price) contingent upon the future achievement of certain operating performance criteria.  Mill Lane is based in Lowell, Massachusetts and has approximately 20 employees.  Mill Lane has been renamed Veeco Solar Equipment Inc. (“Veeco Solar”), and its financial results are included in our LED & Solar Process Equipment segment (see Note 5) as of the acquisition date.  We have determined that this acquisition does not constitute a material business combination, and therefore, we are not including pro forma financial statements in this report.

 

Note 3—Share-Based Payments

 

Stock Option and Restricted Stock Compensation

 

Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period in accordance with FASB Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”).  The following compensation expense was included in the condensed consolidated statements of operations for the three months and six months ended June 30, 2008 and 2007 (in thousands):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Share-based compensation expense

 

$

2,014

 

$

1,257

 

$

3,623

 

$

2,046

 

 

As of June 30, 2008, the total unrecognized compensation cost related to nonvested stock awards and stock option awards is $13.7 million and $9.2 million, respectively.  The related weighted average period over which we expect that such unrecognized compensation costs will be recognized as expense is approximately 2.5 years for the nonvested stock awards and 2.6 years for option awards.

 

During the second quarter of 2008, we granted to certain key employees 259,670 shares of restricted common stock, 20,150 restricted stock units, and 1,115,032 stock options.  The stock options will vest over a three-year period.  The majority of the restricted stock awards and units will vest at the end of the fifth year after issuance, with early vesting possible based on the Company’s attainment of certain performance measures.  Additionally, we granted 35,000 shares of restricted common stock, which vest over a one-year period, to the non-employee members of the Board of Directors in May 2008.

 

A summary of our restricted stock awards including restricted stock units as of and for the six months ended June 30, 2008, is presented below:

 

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Shares
(000s)

 

Weighted
Average
Grant-Date
Fair Value

 

Nonvested at beginning of year

 

680

 

$

19.50

 

Granted

 

360

 

17.34

 

Vested

 

(182

)

19.60

 

Forfeited (including cancelled awards)

 

(11

)

18.92

 

Nonvested at June 30, 2008

 

847

 

18.57

 

 

A summary of our stock option plans as of and for the six months ended June 30, 2008, is presented below:

 

 

 

Shares
(000s)

 

Weighted-
Average
Exercise Price

 

Aggregate
Intrinsic
Value (000s)

 

Weighted-
Average
Remaining
Contractual
Life (in years)

 

Outstanding at beginning of year

 

5,672

 

$

23.04

 

 

 

 

 

Granted

 

1,165

 

17.39

 

 

 

 

 

Exercised

 

(57

)

11.71

 

 

 

 

 

Forfeited (including cancelled options)

 

(457

)

28.01

 

 

 

 

 

Outstanding at June 30, 2008

 

6,323

 

21.73

 

$

2,314

 

3.5

 

Options exercisable at June 30, 2008

 

4,486

 

23.20

 

$

2,172

 

2.2

 

 

Note 4—Balance Sheet Information

 

Inventories

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

Raw materials

 

$

61,089

 

$

58,157

 

Work in process

 

37,032

 

27,330

 

Finished goods

 

16,904

 

13,107

 

 

 

$

115,025

 

$

98,594

 

 

Accrued Warranty

 

We estimate the costs that may be incurred under the warranty we provide and recognize a liability in the amount of such costs at the time the related revenue is recognized.  Factors that affect our warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period.  We periodically assess the adequacy of our recognized warranty liability and adjust the amount as necessary.  Changes in our warranty liability during the period are as follows (in thousands):

 

 

 

Six months ended
June 30,

 

 

 

2008

 

2007

 

Balance at beginning of period

 

$

6,502

 

$

7,118

 

Warranties issued during the period

 

3,003

 

2,628

 

Settlements made during the period

 

(2,329

)

(3,141

)

Balance at end of period

 

$

7,176

 

$

6,605

 

 

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Note 5—Segment Information

 

In 2008, we began to manage the business, review operating results and assess performance, as well as allocate resources, based upon three separate reporting segments to more accurately reflect the market focus of each business.  The Light Emitting Diode (“LED”) & Solar Process Equipment segment consists of the metal organic chemical vapor deposition (“MOCVD”) and molecular beam epitaxy (“MBE”) products primarily sold to customers in the high-brightness light emitting diode (“HB-LED”), solar, and wireless industries, as well as web coaters for flexible photovoltaic applications. This segment has production facilities in Somerset, New Jersey, St. Paul, Minnesota, and Lowell, Massachusetts. The Data Storage Process Equipment segment consists of the ion beam etch, ion beam deposition, diamond like carbon, physical vapor deposition, and dicing and slicing products (collectively Ion Beam and Slider products) sold primarily to customers in the data storage industry.  This segment has production facilities in Plainview, New York, Ft. Collins, Colorado, and Camarillo, California.  The Metrology segment consists of products that are used to provide critical surface measurements on items such as semiconductor devices and thin film magnetic heads (“TFMHs”), as well as biological, nanoscience, and material science samples, and includes our broad line of atomic force microscopes, optical interferometers and stylus profilers sold to customers in the semiconductor and data storage industries and thousands of research facilities and scientific centers. This segment has production facilities in Camarillo and Santa Barbara, California and Tucson, Arizona.

 

Prior to 2008, we managed the business based on two segments, Process Equipment and Metrology.  The Process Equipment segment combined the ion beam etch, ion beam deposition, diamond like carbon, physical vapor deposition, and dicing and slicing products with the MOCVD and MBE technologies. This change in segment composition was based upon management’s view that the business segments should coincide more precisely with the markets in which each segment sells its products.  The Metrology segment has remained unchanged.  The prior year segment financial information presented below has been conformed to the current period presentation.

 

We evaluate the performance of our reportable segments based on income (loss) from operations before interest, income taxes, amortization and certain items (“EBITA”), which is the primary indicator used to plan and forecast future periods. The presentation of this financial measure facilitates meaningful comparison with prior periods, as management believes EBITA reports baseline performance and thus provides useful information. Certain items include restructuring expenses, asset impairment charges, and debt-related gains. The accounting policies of the reportable segments are the same as those described in the summary of critical accounting policies.

 

The following tables present certain data pertaining to our reporting segments and a reconciliation of EBITA to income (loss) before income taxes and noncontrolling interest for the three months and six months ended June 30, 2008 and 2007, and goodwill and total assets as of June 30, 2008 and December 31, 2007 (in thousands):

 

 

 

LED & Solar
Process
Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

 

Three months ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

45,090

 

$

36,762

 

$

32,597

 

$

 

$

114,449

 

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

 

$

8,732

 

$

5,178

 

$

(1,250

)

$

(4,004

)

$

8,656

 

Interest expense, net

 

 

 

 

969

 

969

 

Amortization expense

 

967

 

952

 

394

 

113

 

2,426

 

Income (loss) before income taxes and noncontrolling interest

 

$

7,765

 

$

4,226

 

$

(1,644

)

$

(5,086

)

$

5,261

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

27,957

 

$

32,059

 

$

38,753

 

$

 

$

98,769

 

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

 

$

3,812

 

$

1,570

 

$

388

 

$

(2,967

)

$

2,803

 

Interest expense, net

 

 

 

 

772

 

772

 

Amortization expense

 

959

 

951

 

325

 

133

 

2,368

 

Restructuring expense

 

 

 

1,352

 

93

 

1,445

 

Income (loss) before income taxes and noncontrolling interest

 

$

2,853

 

$

619

 

$

(1,289

)

$

(3,965

)

$

(1,782

)

 

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Six months ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

87,221

 

$

60,841

 

$

68,694

 

$

 

$

216,756

 

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

 

$

17,330

 

$

3,707

 

$

573

 

$

(7,686

)

$

13,924

 

Interest expense, net

 

 

 

 

1,861

 

1,861

 

Amortization expense

 

1,453

 

1,904

 

800

 

225

 

4,382

 

Restructuring expense

 

7

 

124

 

190

 

2,554

 

2,875

 

Asset impairment charge

 

 

 

 

285

 

285

 

Income (loss) before income taxes and noncontrolling interest

 

$

15,870

 

$

1,679

 

$

(417

)

$

(12,611

)

$

4,521

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

50,364

 

$

67,741

 

$

79,830

 

$

 

$

197,935

 

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

 

$

5,591

 

$

4,002

 

$

4,410

 

$

(5,553

)

$

8,450

 

Interest expense, net

 

 

 

 

1,591

 

1,591

 

Amortization expense

 

3,282

 

1,902

 

736

 

357

 

6,277

 

Restructuring expense

 

 

 

1,352

 

93

 

1,445

 

Gain on extinguishment of debt

 

 

 

 

(738

)

(738

)

Income (loss) before income taxes and noncontrolling interest

 

$

2,309

 

$

2,100

 

$

2,322

 

$

(6,856

)

$

(125

)

 

 

 

LED & Solar
Process
Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

42,083

 

$

30,377

 

$

29,368

 

$

 

$

101,828

 

Total assets

 

146,821

 

149,670

 

119,017

 

127,251

 

542,759

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

41,153

 

$

30,377

 

$

29,368

 

$

 

$

100,898

 

Total assets

 

121,326

 

144,944

 

121,060

 

142,004

 

529,334

 

 

Corporate total assets are comprised principally of cash and cash equivalents and property and equipment at June 30, 2008 and December 31, 2007.

 

Note 6—Income Taxes

 

We adopted FASB Interpretation Number 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. As a result of adopting FIN 48, we recognized a $0.8 million increase to our reserves for uncertain tax positions during the first quarter of 2007, which was recorded as an increase to the January 1, 2007 accumulated deficit balance.  At the adoption date of January 1, 2007, we had approximately $2.3 million of unrecognized tax benefits, including the cumulative effect increase to our reserve for uncertain tax positions.  For the year ended December 31, 2007, we released approximately $0.4 million of the reserve relating to foreign unrecognized tax benefits.  As a result, we had $1.9 million of unrecognized tax benefits at December 31, 2007.  For the six months ended June 30, 2008, our reserve for unrecognized tax benefits decreased by approximately $0.4 million primarily due to the expiration of the statute of limitations relating to certain foreign tax positions.  As a result, we had $1.5 million of unrecognized tax benefits at June 30, 2008, all of which relate to positions taken on our foreign tax returns and represent the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in future periods.

 

We or one of our subsidiaries file 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 subject to subsequent utilization of net operating losses generated in such years.

 

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We are continuing our 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 $0.4 million as of June 30, 2008.

 

Note 7—Comprehensive Income

 

Total comprehensive income for the three months and six months ended June 30, 2008 and 2007 was as follows (in thousands):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,202

 

$

(2,595

)

$

2,619

 

$

(2,302

)

Foreign currency translation

 

(1,270

)

(419

)

1,763

 

(94

)

Total comprehensive income

 

$

2,932

 

$

(3,014

)

$

4,382

 

$

(2,396

)

 

Note 8—Debt

 

Convertible Debt

 

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

 

During the second quarter of 2007, we issued New Notes pursuant to privately negotiated exchange agreements with certain holders of the Old Notes.  Under these agreements, such holders agreed to exchange $118.8 million aggregate principal amount of the Old Notes for approximately $117.8 million aggregate principal amount of New 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 our 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 our common stock trading at prices equal to 130% over the conversion price for a specified period.

 

Credit Agreement

 

During the third quarter of 2007, we entered into a Credit Agreement with HSBC Bank USA, National Association, as administrative agent (“HSBC”), and the lenders named therein (the “New Credit Agreement”).  The New Credit Agreement amended and restated, and effectively replaced, the prior Credit Agreement, dated as of March 15, 2005, among Veeco, HSBC and the lenders named therein (the “Prior Credit Agreement”).  The Prior Credit Agreement was set to expire on March 15, 2008.  The New Credit Agreement provides for revolving credit borrowings of up to $100.0 million. As of June 30, 2008 and December 31, 2007, there were no borrowings outstanding.  Interest expense associated with the credit agreement recorded during the six months ended June 30, 2008 was $0.1 million, of which the majority is included in accrued expenses as of June 30, 2008.

 

Note 9 — Commitments, Contingencies and Other Matters

 

Restructuring Expenses

 

During 2007, management initiated a profit improvement plan, resulting in severance costs for approximately 90 employees, or approximately 7.5% of our employees, which included management, administration, and manufacturing employees companywide.  Furthermore, we took additional measures to improve profitability, including

 

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Table of Contents

 

a reduction of discretionary expenses, realignment of our sales organization to more closely match current market and regional opportunities, and consolidation of certain engineering groups within our data storage business, which included the discontinuation of two products. In conjunction with these activities, we recognized a restructuring charge of approximately $6.7 million during 2007.

 

During the first quarter of 2008, we consolidated our Corporate headquarters into our Plainview, New York location.  As a result, we incurred an additional restructuring charge, representing the remaining lease rentals and estimated property taxes for the facility we vacated, offset by the estimated expected sublease income to be received.  We made certain assumptions in determining the charge, which included estimated sublease income and terms of the sublease as well as the estimated discount rate to be used in determining the fair value of the liability.  We developed these assumptions based on our understanding of the current real estate market as well as current market interest rates.  The assumptions are based on management’s best estimates, and will be adjusted periodically if better information is obtained.  During the second quarter of 2008, we did not incur any additional restructuring charges.  Restructuring expenses for the three months and six months ended June 30, 2008 and 2007 are as follows (in thousands):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Lease-related costs

 

$

 

$

 

$

2,554

 

$

 

Personnel severance costs

 

 

1,445

 

321

 

1,445

 

Total restructuring expense

 

$

 

$

1,445

 

$

2,875

 

$

1,445

 

 

The following is a reconciliation of the liability for the restructuring charge from inception through June 30, 2008 (in thousands):

 

 

 

LED & Solar
Process
Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate

 

Total

 

Short-Term Liability

 

 

 

 

 

 

 

 

 

 

 

2007 Activity

 

 

 

 

 

 

 

 

 

 

 

Personnel severance charges

 

$

34

 

$

658

 

$

1,153

 

$

2,469

 

$

4,314

 

Purchase order commitments

 

 

1,840

 

 

 

1,840

 

Total charged to accrual (1)

 

34

 

2,498

 

1,153

 

2,469

 

6,154

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash payments

 

(17

)

(435

)

(751

)

(633

)

(1,836

)

Balance as of December 31, 2007

 

17

 

2,063

 

402

 

1,836

 

4,318

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 Activity

 

 

 

 

 

 

 

 

 

 

 

Lease-related costs

 

 

 

 

971

 

971

 

Personnel severance charges

 

7

 

124

 

190

 

 

321

 

Total charged to accrual

 

7

 

124

 

190

 

971

 

1,292

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification from long-term liability

 

 

 

 

236

 

236

 

Cash payments

 

(12

)

(1,262

)

(396

)

(1,134

)

(2,804

)

Balance as of June 30, 2008

 

$

12

 

$

925

 

$

196

 

$

1,909

 

$

3,042

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liability

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

Lease-related costs

 

$

 

$

 

$

 

$

1,583

 

$

1,583

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification to short-term liability

 

 

 

 

(236

)

(236

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2008

 

$

 

$

 

$

 

$

1,347

 

$

1,347

 

 


(1)   In 2007, a charge of $0.6 million for the modification of stock options was recorded as part of a termination agreement with each of five key employees as an increase to additional paid-in capital.  No such charge was recorded in 2008.

 

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Table of Contents

 

The balance of the restructuring accrual is expected to be paid over the next thirty-six months, or the remaining life of the lease for the former Corporate headquarters.  During the third quarter of 2008, we expect to incur an additional $3.7 million charge related to the expense associated with the mutually agreed-upon termination of the employment agreement with Veeco’s former CEO following the successful completion of the CEO transition, as well as a $0.7 million charge for the remaining lease payments on one of our Metrology facilities and additional severance costs for employees in our Metrology business.

 

In addition to restructuring expenses, during the first quarter of 2008, we recorded a $0.3 million asset impairment charge associated with property and equipment abandoned as part of the consolidation of our Corporate headquarters into our Plainview facility.

 

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Table of Contents

 

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

 

Executive Summary

 

We design, manufacture, market, and service enabling solutions for customers in the HB-LED, solar, data storage, semiconductor, scientific research and industrial markets.  We have leading technology positions in our three businesses:  LED & Solar Process Equipment, Data Storage Process Equipment, and Metrology.

 

Our LED & Solar Process Equipment products, which include MOCVD and MBE technologies, and web coaters for flexible photovoltaic applications, are used in the manufacturing of HB-LEDs and wireless devices (such as power amplifiers) and solar panels.  Our Data Storage Process Equipment products, which include ion beam etch and deposition, physical vapor deposition and other technologies, are used primarily in the manufacturing of TFMHs for the data storage industry.  Our Metrology equipment is used to provide critical surface measurements in research and production environments. In production, our equipment allows customers, such as those in semiconductor and data storage, to monitor their products throughout the manufacturing process in order to improve yields, reduce costs, and improve product quality. We also sell our broad line of atomic force microscopes (“AFMs”), scanning probe microscopes (“SPMs”), optical interferometers, and stylus profilers to thousands of universities, research facilities and scientific centers worldwide to enable a variety of nanotechnology related research.

 

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

 

During 2007, management established a profit improvement plan, resulting in a 7.5% reduction in our employment levels, a reduction of discretionary expenses, the realignment of our sales organization to match more closely current market and regional opportunities, and the consolidation of certain engineering groups within our data storage business, which included the discontinuation of two products.  In conjunction with these activities, we recognized a restructuring charge of approximately $6.7 million during the year ended December 31, 2007, as well as an inventory write-off of $4.8 million and an asset impairment charge of $1.1 million.  During the first quarter of 2008, we incurred additional restructuring and asset impairment charges of $3.2 million, primarily due to the consolidation and relocation of our Corporate headquarters into our Plainview, New York location. In 2008, we have begun to see the positive impact of these restructuring activities on our profitability.

 

Highlights of the Second Quarter of 2008

 

·                  Revenue was $114.4 million, a 16% increase over the second quarter of 2007.

 

·                  Orders were $136.5 million, up 21% from the second quarter of 2007.

 

·                  Net income was $4.2 million, or $0.13 per share, compared to net loss of $(2.6) million, or $(0.08) per share, in the second quarter of 2007.

 

·                  Gross margins were 41.7%, compared to 42.8% in the second quarter of 2007.

 

·                  We completed the purchase of Mill Lane, renamed Veeco Solar Equipment Inc., expanding our solar product offerings to include web coaters for flexible photovoltaic applications. As anticipated, this acquisition did not affect our second quarter revenue or order performance.

 

Outlook

 

We expect 2008 to be a recovery year for Veeco in both revenue growth and profitability.  In mid 2007, John Peeler joined Veeco as its new Chief Executive Officer (“CEO”) and initiated a turnaround-plan focused on the following key initiatives:

 

·                  Directing Veeco’s resources to the best growth opportunities;

 

·                  Strengthening the global sales and services organization;

 

·                  Improving profitability in the short term through revenue growth, gross margin improvement and cost containment activities;

 

·                  Ensuring that each of Veeco’s product businesses, LED & Solar Process Equipment, Data Storage Process Equipment, and Metrology, are executing well; and

 

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·                  Improving Veeco’s business processes to increase effectiveness, predictability and profitability.

 

As we navigate 2008, we are seeing growth opportunities in several of our core markets, particularly in our LED & Solar Process Equipment business.  It is our intention to significantly increase the research and development spending in this business segment to drive new product introductions. Veeco’s purchase of Mill Lane will further enable us to exploit the technology growth opportunity for Veeco in 2009 and beyond represented by the solar industry, due to our thin film process knowledge and technology capabilities. During the fourth quarter of 2007, as part of management’s profit improvement plan, we discontinued two product lines, consolidated facilities, and made other changes to our Data Storage Process Equipment business to better reflect the volume of business and growth rates in that industry.  As a result of these actions, we believe that Veeco is positioned for improved profitability while staying well-aligned to our customers’ technology requirements.  The performance of Veeco’s Data Storage business has been positively impacted by our cost cutting activities as well as some demand pull from key data storage customers who are utilizing Veeco’s products for capacity purchases and to enable their move to larger wafer sizes.

 

In February 2008, we provided annual guidance that revenues will grow a minimum of 10% this year to approximately $440 million based upon significant new product introductions and continued investments in technology by our customers across our various end markets.  During the second quarter of 2008, this guidance was revised to $450-$455 million in revenues to reflect the additional revenues expected from the operations of Mill Lane.  We are currently seeing strength in our LED & Solar Process Equipment and Data Storage Process Equipment businesses resulting from customer technology and capacity spending; but declines in our Metrology business due to weak semiconductor and research end market conditions.

 

While we currently expect our 2008 operating spending to increase due to necessary raises, incentive compensation and other variable costs, we believe that our significant cost-cutting actions in 2007 and continued cost containment focus will allow us to decrease our operating spending as a percentage of sales in 2008. In 2008, we are undergoing a significant period of transition to improve our financial performance after a disappointing 2007.  Our goal is to increase gross margins in 2008, with improvements in each of our businesses, specifically in the latter half of 2008 as revenues are forecasted to increase. We anticipate that progress in this area will continue to come from activities such as better supply chain management, including outsourcing of new products, differentiated, value-added new product introductions, and development of common hardware and software platforms.

 

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Table of Contents

 

Results of Operations:

 

Three Months Ended June 30, 2008 and 2007

 

Consistent with prior years, we report interim quarters, other than fourth quarters which always 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 2008 interim quarter ends are March 30, June 29 and September 28.  The 2007 interim quarter ends were April 1, July 1 and September 30.  For ease of reference, we report these interim quarter ends as March 31, June 30, and September 30 in our interim condensed consolidated financial statements.

 

The following table shows our Consolidated Statements of Operations, percentages of sales, and comparisons between the three months ended June 30, 2008 and 2007 (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

Dollar and
Percentage

 

 

 

2008

 

2007

 

Change

 

Net sales

 

$

114,449

 

100.0

%

$

98,769

 

100.0

%

$

15,680

 

15.9

%

Cost of sales

 

66,719

 

58.3

 

56,524

 

57.2

 

10,195

 

18.0

 

Gross profit

 

47,730

 

41.7

 

42,245

 

42.8

 

5,485

 

13.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

24,311

 

21.3

 

23,818

 

24.1

 

493

 

2.1

 

Research and development expense

 

15,145

 

13.2

 

15,903

 

16.1

 

(758

)

(4.8

)

Amortization expense

 

2,426

 

2.1

 

2,368

 

2.4

 

58

 

2.4

 

Restructuring expense

 

 

0.0

 

1,445

 

1.5

 

(1,445

)

(100.0

)

Other income, net

 

(382

)

(0.3

)

(279

)

(0.3

)

103

 

36.9

 

Total operating expenses

 

41,500

 

36.3

 

43,255

 

43.8

 

(1,755

)

(4.1

)

Operating income (loss)

 

6,230

 

5.4

 

(1,010

)

(1.0

)

7,240

 

716.8

 

Interest expense, net

 

969

 

0.8

 

772

 

0.8

 

197

 

25.5

 

Income (loss) before income taxes and noncontrolling interest

 

5,261

 

4.6

 

(1,782

)

(1.8

)

7,043

 

395.2

 

Income tax provision

 

1,129

 

1.0

 

1,042

 

1.0

 

87

 

8.3

 

Noncontrolling interest

 

(70

)

(0.1

)

(229

)

(0.2

)

(159

)

(69.4

)

Net income (loss)

 

$

4,202

 

3.7

%

$

(2,595

)

(2.6

)%

$

6,797

 

261.9

%

 

Net Sales and Orders

 

Net sales of $114.4 million for the three months ended June 30, 2008 were up 15.9% compared to the comparable 2007 quarter.  The following is an analysis of sales and orders by segment and by region (dollars in thousands):

 

 

 

Sales

 

Orders

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Dollar and Percentage
Change

 

Three Months Ended
June 30,

 

Dollar and
Percentage Change

 

Book-to-Bill
Ratio

 

 

 

2008

 

2007

 

Year to Year

 

2008

 

2007

 

Year to Year

 

2008

 

2007

 

Segment Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LED & Solar Process Equipment

 

$

45,090

 

$

27,957

 

$

17,133

 

61.3

%

$

52,061

 

$

36,385

 

$

15,676

 

43.1

%

1.15

 

1.30

 

Data Storage Process Equipment

 

36,762

 

32,059

 

4,703

 

14.7

 

51,716

 

41,282

 

10,434

 

25.3

 

1.41

 

1.29

 

Metrology

 

32,597

 

38,753

 

(6,156

)

(15.9

)

32,735

 

34,786

 

(2,051

)

(5.9

)

1.00

 

0.90

 

Total

 

$

114,449

 

$

98,769

 

$

15,680

 

15.9

%

$

136,512

 

$

112,453

 

$

24,059

 

21.4

%

1.19

 

1.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regional Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

44,688

 

$

31,275

 

$

13,413

 

42.9

%

$

52,769

 

$

39,428

 

$

13,341

 

33.8

%

1.18

 

1.26

 

Europe

 

23,142

 

20,593

 

2,549

 

12.4

 

19,131

 

22,091

 

(2,960

)

(13.4

)

0.83

 

1.07

 

Japan

 

5,989

 

11,251

 

(5,262

)

(46.8

)

7,809

 

17,057

 

(9,248

)

(54.2

)

1.30

 

1.52

 

Asia Pacific

 

40,630

 

35,650

 

4,980

 

14.0

 

56,803

 

33,877

 

22,926

 

67.7

 

1.40

 

0.95

 

Total

 

$

114,449

 

$

98,769

 

$

15,680

 

15.9

%

$

136,512

 

$

112,453

 

$

24,059

 

21.4

%

1.19

 

1.14

 

 

By segment, LED & Solar Process Equipment sales were up 61.3% due to an increase in end user demand

 

19



Table of Contents

 

and expanding applications for HB-LEDs, as well as strong customer acceptance of Veeco’s newest generation systems.  Additionally, Data Storage Process Equipment sales were up 14.7%, primarily as a result of increased volume due to the timing of customers’ requirements in the data storage industry, as well as a favorable product mix and increased capacity spending.  These increases were partially offset by a decrease in Metrology sales of 15.9%, primarily due to a slowdown in the semiconductor and research and industrial markets.  By region, net sales increased by 42.9%, 12.4% and 14.0% in North America, Europe, and Asia Pacific, respectively, and decreased by 46.8% in Japan. We believe that there will continue to be quarter-to-quarter variations in the geographic distribution of sales.

 

Orders for the second quarter of 2008 increased by 21.4% from the comparable 2007 period. By segment, the 43.1% increase in orders for LED & Solar Process Equipment was driven by an increase in end user demand and expanding applications for HB-LEDs, as well as strong customer acceptance of Veeco’s newest generation systems.  The 25.3% increase in Data Storage Process Equipment orders was primarily due to an increase in demand from key data storage customers who are utilizing Veeco’s products to enable their move to larger wafer sizes, as well as increased capacity spending.  The 5.9% decrease in Metrology orders was due to decreased orders for AFM products due to lower demand in the semiconductor and research and industrial markets.

 

Our book-to-bill ratio for the second quarter of 2008, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.19.  Our backlog as of June 30, 2008 was $211.3 million, compared to $173.5 million as of December 31, 2007.  During the quarter ended June 30, 2008, we experienced an increase in backlog of $12.7 million due to the acquisition of Mill Lane, offset by order cancellations of $2.8 million.  Due to changing business conditions and customer requirements, we may continue to experience cancellations and/or rescheduling of orders.

 

Gross Profit

 

Gross profit for the quarter ended June 30, 2008, was 41.7%, compared to 42.8% in the second quarter of 2007.  Metrology gross margins decreased from 44.4% in the prior year period to 43.8%, principally due to lower sales volume and less favorable pricing for automated AFM products associated with a slowdown in the semiconductor market. Additionally, Data Storage Process Equipment gross margins decreased from 43.0% in the prior-year period to 40.2%, due to favorable warranty experience in the prior year period, as well as higher manufacturing utilization in the 2007 period compared to 2008, resulting in better absorption of fixed costs.  LED & Solar Process Equipment gross margins increased from 40.3% in the prior-year period to 41.4%, primarily due to product mix, as well as a significant increase in sales volume as compared to the prior-year period.  The aggregate decrease in gross profit resulted principally from a lower proportion of Metrology sales as well as a lower concentration of non-system sales, which both have higher average gross margins than our other products.

 

Operating Expenses

 

Selling, general and administrative expenses increased by $0.5 million, or 2.1%, from the prior-year period primarily due to increased bonus incentives and profit sharing as a result of better than budgeted performance as compared to the second quarter of 2007, and an increase in non-cash compensation expense related to stock options and shares of restricted stock.  This was partially offset by a decrease in selling expense due to decreased AFM spending. As a percentage of sales, selling, general and administrative expenses decreased from 24.1% in the second quarter of 2007 to 21.3% in the second quarter of 2008.

 

Research and development expense decreased $0.8 million from the second quarter of 2007, primarily due to a more focused approach to data storage product development as well as the shutdown of our research and development facility in Fremont, California, which was announced in the fourth quarter of 2007.  As a percentage of sales, research and development decreased from 16.1% in the second quarter of 2007 to 13.2% in the second quarter of 2008.

 

Amortization expense was $2.4 million in the second quarter of both 2008 and 2007.  Amortization decreased due to certain technology-based intangible assets becoming fully amortized; however, this was offset by amortization in the current period for intangible assets acquired as part of the acquisition of Mill Lane in the second quarter of 2008.

 

Restructuring expense of $1.4 million for the second quarter of 2007 consisted of personnel severance costs principally associated with our Metrology operations.  No such costs were incurred in the second quarter of 2008.

 

20



Table of Contents

 

Interest Expense, Net

 

Net interest expense in the second quarter of 2008 was $1.0 million, compared to $0.8 million in the second quarter of 2007.  The increase in net interest expense is due to lower interest income resulting primarily from lower interest rates during the current period, compounded by lower cash balances invested.

 

Income Taxes

 

Income tax provision for the quarter ended June 30, 2008 was $1.1 million compared to $1.0 million in the second quarter of 2007. The 2008 provision for income taxes included $0.8 million relating to our foreign operations which continue to be profitable, and $0.3 million relating to our domestic operations.  Due to significant domestic net operating loss carryforwards, which are fully reserved by a valuation allowance, our domestic operations are not expected to incur significant income taxes for the foreseeable future.  The 2007 provision for income taxes included $0.7 million relating to our foreign operations and $0.3 million relating to our domestic operations.

 

Six Months Ended June 30, 2008 and 2007

 

The following table shows our Consolidated Statements of Operations, percentages of sales, and comparisons between the six months ended June 30, 2008 and 2007 (dollars in thousands):

 

 

 

Six Months Ended
June 30,

 

Dollar and
Percentage

 

 

 

2008

 

2007

 

Change

 

Net sales

 

$

216,756

 

100.0

%

$

197,935

 

100.0

%

$

18,821

 

9.5

%

Cost of sales

 

126,400

 

58.3

 

111,995

 

56.6

 

14,405

 

12.9

 

Gross profit

 

90,356

 

41.7

 

85,940

 

43.4

 

4,416

 

5.1

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

46,939

 

21.7

 

46,624

 

23.6

 

315

 

0.7

 

Research and development expense

 

29,871

 

13.8

 

31,292

 

15.8

 

(1,421

)

(4.5

)

Amortization expense

 

4,382

 

2.0

 

6,277

 

3.2

 

(1,895

)

(30.2

)

Restructuring expense

 

2,875

 

1.3

 

1,445

 

0.7

 

1,430

 

99.0

 

Asset impairment charge

 

285

 

0.1

 

 

0.0

 

285

 

100.0

 

Other income, net

 

(378

)

(0.2

)

(426

)

(0.2

)

(48

)

(11.3

)

Total operating expenses

 

83,974

 

38.7

 

85,212

 

43.1

 

(1,238

)

(1.5

)

Operating income

 

6,382

 

3.0

 

728

 

0.3

 

5,654

 

776.6

 

Interest expense, net

 

1,861

 

0.9

 

1,591

 

0.8

 

270

 

17.0

 

Gain on extinguishment of debt

 

 

0.0

 

(738

)

(0.4

)

(738

)

(100.0

)

Income (loss) before income taxes and noncontrolling interest

 

4,521

 

2.1

 

(125

)

(0.1

)

4,646

 

3,716.8

 

Income tax provision

 

2,048

 

1.0

 

2,536

 

1.3

 

(488

)

(19.2

)

Noncontrolling interest

 

(146

)

(0.1

)

(359

)

(0.2

)

(213

)

(59.3

)

Net income (loss)

 

$

2,619

 

1.2

%

$

(2,302

)

(1.2

)%

$

4,921

 

213.8

%

 

Net Sales and Orders

 

Net sales of $216.8 million for the six months ended June 30, 2008 were up 9.5% compared to the comparable 2007 period.  The following is an analysis of sales and orders by segment and by region (dollars in thousands):

 

 

 

Sales

 

Orders

 

 

 

 

 

Six Months Ended
June 30,

 

Dollar and Percentage
Change

 

Six Months Ended
June 30,

 

Dollar and
Percentage Change

 

Book-to-Bill
Ratio

 

 

 

2008

 

2007

 

Year to Year

 

2008

 

2007

 

Year to Year

 

2008

 

2007

 

Segment Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LED & Solar Process Equipment

 

$

87,222

 

$

50,364

 

$

36,858

 

73.2

%

$

90,738

 

$

72,769

 

$

17,969

 

24.7

%

1.04

 

1.44

 

Data Storage Process Equipment

 

60,840

 

67,741

 

(6,901

)

(10.2

)

92,326

 

73,598

 

18,728

 

25.4

 

1.52

 

1.09

 

Metrology

 

68,694

 

79,830

 

(11,136

)

(13.9

)

62,707

 

71,993

 

(9,286

)

(12.9

)

0.91

 

0.90

 

Total

 

$

216,756

 

$

197,935

 

$

18,821

 

9.5

%

$

245,771

 

$

218,360

 

$

27,411

 

12.6

%

1.13

 

1.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regional Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

77,766

 

$

66,502

 

$

11,264

 

16.9

%

$

93,410

 

$

73,500

 

$

19,910

 

27.1

%

1.20

 

1.11

 

Europe

 

41,029

 

34,955

 

6,074

 

17.4

 

35,014

 

41,176

 

(6,162

)

(15.0

)

0.85