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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, 2009

 

 

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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

 

32,544,275 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on July 29, 2009.

 

 

 



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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:

 

·                  Negative worldwide economic conditions could result in a decrease in our net sales and an increase in our operating costs, which could adversely affect our business and operating results;

 

·                  Our sales to data storage and HB-LED manufacturers are highly dependent on these manufacturers’ sales for consumer electronics applications, which can experience significant volatility due to seasonal and other factors, which could materially adversely impact our future results of operations;

 

·                  We are exposed to risks associated with entering the emerging solar industry;

 

·                  We may be required to take additional impairment charges for goodwill and indefinite-lived intangible assets or definite-lived intangible and long-lived assets;

 

·                  Any failure by us to execute our planned cost reductions successfully could result in total costs and expenses that are greater than expected;

 

·                  The cyclicality of the industries we serve directly affects our business;

 

·                  We operate in industries 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 backlog is subject to customer cancellation or modification and such cancellation could result in decreased sales and increased provisions for excess and obsolete inventory;

 

·                  Our sales cycle is long and unpredictable;

 

·                  The failure to successfully implement outsourcing activities and other operational initiatives could adversely affect results of operations;

 

·                  Manufacturing interruptions or delays could affect our ability to meet customer demand, while the failure to estimate customer demand accurately could result in excess or obsolete inventory;

 

·                  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;

 

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·                  We are subject to foreign currency exchange risks;

 

·                  The enforcement and protection of our intellectual property rights may be expensive and could divert our valuable resources;

 

·                  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;

 

·                  We are substantially leveraged, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to finance our future needs;

 

·                  Changes in accounting pronouncements or taxation rules or practices may adversely affect our financial results;

 

·                  The price of our common shares may be volatile and could decline significantly;

 

·                  We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act;

 

·                  We are subject to risks of non-compliance with environmental and safety regulation;

 

·                  We have significant operations in California and other locations which could be materially and adversely impacted, in the event of a natural disaster or other significant disruption;

 

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

 

·                  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, 2008 of Veeco Instruments Inc. (“Veeco,” the “Company,” or “we”).

 

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, 2009 and 2008 (Unaudited)

5

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

37

 

 

 

Item 6.

Exhibits

38

 

 

 

SIGNATURES

39

 

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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,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net sales

 

$

72,020

 

$

114,449

 

$

134,869

 

$

216,756

 

Cost of sales

 

47,636

 

66,719

 

90,103

 

126,400

 

Gross profit

 

24,384

 

47,730

 

44,766

 

90,356

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

19,822

 

24,311

 

38,429

 

46,939

 

Research and development expense

 

13,163

 

15,145

 

26,049

 

29,871

 

Amortization expense

 

1,831

 

2,426

 

3,660

 

4,382

 

Restructuring expense

 

1,944

 

 

6,375

 

2,875

 

Asset impairment charge

 

304

 

 

304

 

285

 

Other (income) expense, net

 

(77

)

(382

)

1,409

 

(378

)

Total operating expenses

 

36,987

 

41,500

 

76,226

 

83,974

 

Operating (loss) income

 

(12,603

)

6,230

 

(31,460

)

6,382

 

Interest expense, net

 

1,698

 

1,700

 

3,407

 

3,305

 

(Loss) income before income taxes

 

(14,301

)

4,530

 

(34,867

)

3,077

 

Income tax provision

 

402

 

1,129

 

780

 

2,048

 

Net (loss) income including noncontrolling interest

 

(14,703

)

3,401

 

(35,647

)

1,029

 

Net loss attributable to the noncontrolling interest

 

(23

)

(70

)

(65

)

(146

)

Net (loss) income attributable to Veeco

 

$

(14,680

)

$

3,471

 

$

(35,582

)

$

1,175

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share:

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to Veeco

 

$

(0.47

)

$

0.11

 

$

(1.13

)

$

0.04

 

Diluted net (loss) income attributable to Veeco

 

$

(0.47

)

$

0.11

 

$

(1.13

)

$

0.04

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

31,497

 

31,255

 

31,506

 

31,197

 

Diluted weighted average shares outstanding

 

31,497

 

31,590

 

31,506

 

31,435

 

 

See accompanying notes.

 

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Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

97,494

 

$

103,799

 

Accounts receivable, net

 

32,187

 

59,659

 

Inventories

 

78,497

 

94,930

 

Prepaid expenses and other current assets

 

6,051

 

6,425

 

Deferred income taxes

 

2,190

 

2,185

 

Total current assets

 

216,419

 

266,998

 

Property, plant, and equipment at cost, net

 

60,513

 

64,372

 

Goodwill

 

59,160

 

59,160

 

Intangible assets, net

 

34,569

 

38,818

 

Other assets

 

197

 

193

 

Total assets

 

$

370,858

 

$

429,541

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

19,054

 

$

29,610

 

Accrued expenses

 

53,431

 

66,964

 

Deferred profit

 

622

 

1,346

 

Income taxes payable

 

153

 

354

 

Current portion of long-term debt

 

204

 

196

 

Total current liabilities

 

73,464

 

98,470

 

Deferred income taxes

 

5,001

 

4,540

 

Long-term debt

 

99,626

 

98,330

 

Other non-current liabilities

 

1,986

 

2,391

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Shareholders’ equity attributable to Veeco

 

190,781

 

225,026

 

Noncontrolling interest

 

 

784

 

Total shareholders’ equity

 

190,781

 

225,810

 

Total liabilities and shareholders’ equity

 

$

370,858

 

$

429,541

 

 

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,

 

 

 

2009

 

2008

 

Operating activities

 

 

 

 

 

Net (loss) income attributable to Veeco

 

$

(35,582

)

$

1,175

 

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

 

 

 

 

 

Depreciation and amortization

 

10,866

 

11,503

 

Deferred income taxes

 

360

 

962

 

Amortization of debt discount

 

1,400

 

1,444

 

Non-cash inventory write-off

 

1,526

 

 

Non-cash share-based compensation

 

3,553

 

3,623

 

Non-cash asset impairment charge

 

304

 

285

 

Other, net

 

5

 

(211

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

26,883

 

3,314

 

Inventories

 

15,063

 

(11,135

)

Accounts payable

 

(10,507

)

(533

)

Accrued expenses, deferred profit, and other current liabilities

 

(6,100

)

(1,069

)

Other, net

 

273

 

1,097

 

Net cash provided by operating activities

 

8,044

 

10,455

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(3,645

)

(7,076

)

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

 

(500

)

(10,855

)

Payment of earn-outs for businesses acquired

 

(9,839

)

 

Other, net

 

275

 

99

 

Net cash used in investing activities

 

(13,709

)

(17,832

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from stock issuances

 

 

669

 

Repayments of long-term debt

 

(96

)

(224

)

Restricted stock tax withholdings

 

(295

)

(607

)

Net cash used in financing activities

 

(391

)

(162

)

Effect of exchange rate changes on cash and cash equivalents

 

(249

)

100

 

Net decrease in cash and cash equivalents

 

(6,305

)

(7,439

)

Cash and cash equivalents at beginning of period

 

103,799

 

117,083

 

Cash and cash equivalents at end of period

 

$

97,494

 

$

109,644

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Accrual of payment for net assets acquired

 

$

1,000

 

$

 

Transfers from property, plant, and equipment to inventory

 

$

241

 

$

385

 

Transfers from inventory to property, plant, and equipment

 

$

23

 

$

 

 

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, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  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, 2008.

 

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 2009 interim quarter ends are March 29, June 28, and September 27.  The 2008 interim quarter ends were March 30, June 29, and September 28.  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 (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,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

31,497

 

31,255

 

31,506

 

31,197

 

Dilutive effect of stock options and restricted stock awards and units

 

 

335

 

 

238

 

Diluted weighted average shares outstanding

 

31,497

 

31,590

 

31,506

 

31,435

 

 

Net (loss) income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period.  The effect of approximately 95,000 common equivalent shares for the three months ended June 30, 2009 and approximately 78,000 common equivalent shares for the six months ended June 30, 2009 were excluded from the diluted weighted average shares outstanding due to a net loss sustained in each 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 second quarter of 2007, we exchanged $118.8 million of our 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 due April 15, 2012 (the “Notes”), leaving $25.2 million of Old Notes outstanding.  For the three and six months ended June 30, 2008, the weighted-average effect of the assumed conversion of the remaining $25.2 million of Old Notes was approximately 0.7 million shares.  The convertible shares were anti-dilutive and, therefore, not included in the weighted shares outstanding for the three or six months ended June 30, 2008. During the fourth quarter of 2008, we repaid the remaining $25.2 million of Old Notes outstanding.

 

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The 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 of the Notes in cash.  Under the terms of the Notes, we may pay the principal amount of converted 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 Notes was anti-dilutive for the three and six months ended June 30, 2009 and 2008, as the average stock price for each period was below the conversion price of $27.23.  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 at June 30, 2009 was approximately 5.4 million, after giving effect to the $12.2 million of Notes that we repurchased during the fourth quarter of 2008.  See Note 8 for further details on our debt.

 

Fair Value of Financial Instruments

 

We believe the carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, reflected in the consolidated financial statements approximate fair value due to their short-term maturities. The fair value of our debt, including current maturities, is estimated using a discounted cash flow analysis based on the estimated current incremental borrowing rates for similar types of securities, or based on market value for our publicly-traded debt (see Note 8).

 

Derivative Financial Instruments

 

We use derivative financial instruments to minimize the impact of foreign exchange rate changes on earnings and cash flows. In the normal course of business, our operations are exposed to fluctuations in foreign exchange rates. In order to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known foreign currency exposures, we enter into monthly forward contracts. We do not use derivative financial instruments for trading or speculative purposes. Our forward contracts are intended to offset exchange gains and losses on the underlying assets and liabilities; both the forward contracts and the underlying assets and liabilities are adjusted to current exchange rates through earnings. We conduct our derivative transactions with highly rated financial institutions in an effort to mitigate any material credit risk. The weighted average notional amount of derivative contracts outstanding during the three and six months ended June 30, 2009 was approximately $2.6 million and $3.6 million, respectively.

 

The condensed consolidated results of operations for the three and six months ended June 30, 2009 include an aggregate foreign currency gain of approximately $0.1 million and an aggregate foreign currency loss of approximately $1.3 million, respectively.  The loss of $1.3 million for the six months ended June 30, 2009 was net of gains of approximately $0.2 million related to forward contracts.  The condensed consolidated results of operations for the three and six months ended June 30, 2008 include aggregate foreign currency losses of less than $0.1 million and gains of approximately $0.1 million, respectively, which were net of gains of approximately $0.1 million and losses of $0.2 million, respectively, related to forward contracts.  These amounts were recognized and included in other (income) expense, net in the accompanying Condensed Consolidated Statements of Operations.

 

As of June 30, 2009, gains of less than $0.1 million related to forward contracts were included in prepaid and other current assets, and cash in an amount equivalent to such gains was received in July 2009. As of December 31, 2008, approximately $0.9 million of losses related to forward contracts were included in accrued expenses and subsequently paid in January 2009. Monthly forward contracts with a total notional amount of $2.0 million were entered into in June 2009 and settled in July 2009.  The fair value of these contracts at inception was zero, which did not significantly change at June 30, 2009.

 

Convertible Debt

 

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”). We implemented FSP APB 14-1 as of January 1, 2009 and have applied it retrospectively to all periods presented, as required.  See Note 8—Debt for a discussion of the impact of implementing FSP APB 14-1.

 

Subsequent Events

 

We have evaluated the financial statements for subsequent events through the filing date of this Form 10-Q.

 

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Note 2—Acquisition

 

Fluens Corporation

 

In 2006 we purchased 19.9% of the common stock of Fluens Corporation (“Fluens”).  Veeco and Fluens have jointly developed a next-generation process for high-rate deposition of aluminum oxide for data storage applications.   For accounting purposes we had consolidated Fluens into our financial results and financial position, and recorded the remaining 80.1% portion of its net loss and net assets as a noncontrolling interest.  On May 14, 2009, we acquired the remaining 80.1% of Fluens for $1.5 million plus an earn-out arrangement based on future performance.  Since we already were consolidating Fluens, the purchase of the remaining 80.1% was treated in accordance with the applicable accounting guidance as a transaction among shareholders and not as a new business acquisition.  Thus no gain or loss was recognized upon the purchase of the 80.1% portion, and the difference between the purchase price including the earn-out consideration and the amount by which noncontrolling interest was reduced on the balance sheet was attributed to equity of Veeco.  Such difference amounted to approximately $1.0 million, and was recorded as additional paid-in capital.

 

We paid $0.5 million of the $1.5 million purchase price of the 80.1% remaining portion of Fluens upon closing, as well as $0.2 million in respect of the earn-out arrangement.  We will pay the remaining $1.0 million of the $1.5 million in equal quarterly installments of $0.5 million in each of the third and fourth quarters of 2009.  Prior to our purchase of the remaining 80.1%, approximately 31% of Fluens was owned by a Senior Vice President of Veeco.

 

Note 3—Share-Based 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, 2009 and 2008 (in thousands):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Share-based compensation expense

 

$

2,155

 

$

2,014

 

$

3,553

 

$

3,623

 

 

As of June 30, 2009, the total unrecognized compensation cost related to nonvested restricted stock awards and stock option awards is $10.6 million and $7.9 million, respectively.  The related weighted average period over which we expect that such unrecognized compensation costs will be recognized as expense is approximately 2.8 years for the nonvested restricted stock awards and 2.2 years for option awards.

 

A summary of our restricted stock awards including restricted stock units as of and for the six months ended June 30, 2009, is presented below:

 

 

 

Shares
(000s)

 

Weighted
Average
Grant-Date
Fair Value

 

Nonvested at beginning of year

 

679

 

$

17.76

 

Granted

 

469

 

8.97

 

Vested

 

(110

)

18.92

 

Forfeited (including cancelled awards)

 

(71

)

18.40

 

Nonvested at June 30, 2009

 

967

 

13.31

 

 

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Table of Contents

 

A summary of our stock option plans as of and for the six months ended June 30, 2009, 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

 

5,572

 

$

20.29

 

 

 

 

 

Granted

 

748

 

8.95

 

 

 

 

 

Exercised

 

(1

)

0.27

 

 

 

 

 

Forfeited (including cancelled options)

 

(1,658

)

23.64

 

 

 

 

 

Outstanding at June 30, 2009

 

4,661

 

17.28

 

$

3,448

 

4.2

 

Options exercisable at June 30, 2009

 

2,886

 

19.40

 

$

685

 

2.9

 

 

Note 4—Balance Sheet Information

 

Accounts Receivable, net

 

Accounts receivable are shown net of the allowance for doubtful accounts of $0.9 million as of both June 30, 2009 and December 31, 2008.

 

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,

 

 

 

2009

 

2008

 

Raw materials

 

$

51,611

 

$

57,815

 

Work in process

 

19,403

 

28,733

 

Finished goods

 

7,483

 

8,382

 

 

 

$

78,497

 

$

94,930

 

 

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 six months ended June 30, 2009 and 2008 are as follows (in thousands):

 

 

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

Balance at beginning of period

 

$

6,892

 

$

6,502

 

Warranties issued during the period

 

1,304

 

3,003

 

Settlements made during the period

 

(1,922

)

(2,329

)

Balance at end of period

 

$

6,274

 

$

7,176

 

 

Note 5—Segment Information

 

We manage the business, review operating results and assess performance, as well as allocate resources, based upon three separate reporting segments that reflect the market focus of each business.  The Light Emitting Diode (“LED”) & Solar Process Equipment segment consists of metal organic chemical vapor deposition (“MOCVD”) systems, molecular beam epitaxy (“MBE”) systems, thermal deposition sources, and other types of deposition systems used to deposit materials on flexible and glass substrates.  These systems are primarily sold to customers in the high-brightness light emitting diode (“HB-LED”) and solar industries, as well as to scientific research customers. 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 sold primarily to customers in the data storage industry.  This segment has production facilities in Plainview, New York, and Ft. Collins, Colorado.  In our Metrology segment, we design and manufacture atomic force microscopes, scanning probe microscopes, stylus

 

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Table of Contents

 

profilers, and optical interferometers used to provide critical surface measurements in research and production environments. This broad line of products is used in universities, research facilities and scientific centers worldwide. In production environments such as semiconductor, data storage and other broad industries, our metrology instruments enable customers to monitor their products throughout the manufacturing process to improve yields, reduce costs, and improve product quality.  This segment has production facilities in Camarillo and Santa Barbara, California and Tucson, Arizona.

 

We evaluate the performance of our reportable segments based on income (loss) from operations before interest, income taxes, amortization and certain items (“segment (loss) profit”), 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 segment (loss) profit reports baseline performance and thus provides useful information. Certain items include restructuring expenses, asset impairment charges, inventory write-offs, and equity-based compensation expense. 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 segment (loss) profit to (loss) income before income taxes for the three months and six months ended June 30, 2009 and 2008, respectively, and goodwill and total assets as of June 30, 2009 and December 31, 2008, respectively (in thousands):

 

 

 

LED & Solar
Process
Equipment

 

Data Storage Process Equipment

 

Metrology

 

Unallocated Corporate Amount

 

Total

 

Three months ended June 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

31,882

 

$

17,593

 

$

22,545

 

$

 

$

72,020

 

Segment loss

 

$

(472

)

$

(1,009

)

$

(3,012

)

$

(1,876

)

$

(6,369

)

Interest expense, net

 

 

 

 

1,698

 

1,698

 

Amortization expense

 

774

 

403

 

578

 

76

 

1,831

 

Equity-based compensation expense

 

218

 

337

 

321

 

1,279

 

2,155

 

Restructuring expense

 

195

 

1,444

 

262

 

43

 

1,944

 

Asset impairment charge

 

 

304

 

 

 

304

 

Loss before income taxes

 

$

(1,659

)

$

(3,497

)

$

(4,173

)

$

(4,972

)

$

(14,301

)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

45,090

 

$

36,762

 

$

32,597

 

$

 

$

114,449

 

Segment profit (loss)

 

$

8,834

 

$

5,416

 

$

(1,030

)

$

(2,550

)

$

10,670

 

Interest expense, net

 

 

 

 

1,700

 

1,700

 

Amortization expense

 

967

 

952

 

394

 

113

 

2,426

 

Equity-based compensation expense

 

102

 

238

 

220

 

1,454

 

2,014

 

Income (loss) before income taxes

 

$

7,765

 

$

4,226

 

$

(1,644

)

$

(5,817

)

$

4,530

 

 

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Table of Contents

 

 

 

LED & Solar
Process
Equipment

 

Data Storage Process Equipment

 

Metrology

 

Unallocated Corporate Amount

 

Total

 

Six months ended June 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

54,084

 

$

34,498

 

$

46,287

 

$

 

$

134,869

 

Segment loss

 

$

(4,184

)

$

(2,641

)

$

(5,717

)

$

(3,500

)

$

(16,042

)

Interest expense, net

 

 

 

 

3,407

 

3,407

 

Amortization expense

 

1,549

 

808

 

1,155

 

148

 

3,660

 

Equity-based compensation expense

 

374

 

589

 

557

 

2,033

 

3,553

 

Restructuring expense

 

929

 

2,830

 

2,386

 

230

 

6,375

 

Inventory write-off

 

 

1,526

 

 

 

1,526

 

Asset impairment charge

 

 

304

 

 

 

304

 

Loss before income taxes

 

$

(7,036

)

$

(8,698

)

$

(9,815

)

$

(9,318

)

$

(34,867

)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

87,221

 

$

60,841

 

$

68,694

 

$

 

$

216,756

 

Segment profit (loss)

 

$

17,501

 

$

4,096

 

$

918

 

$

(4,968

)

$

17,547

 

Interest expense, net

 

 

 

 

3,305

 

3,305

 

Amortization expense

 

1,453

 

1,904

 

800

 

225

 

4,382

 

Equity-based compensation expense

 

177

 

389

 

346

 

2,711

 

3,623

 

Restructuring expense

 

 

124

 

190

 

2,561

 

2,875

 

Asset impairment charge

 

 

 

 

285

 

285

 

Income (loss) before income taxes

 

$

15,871

 

$

1,679

 

$

(418

)

$

(14,055

)

$

3,077

 

 

 

 

LED & Solar
Process
Equipment

 

Data Storage Process Equipment

 

Metrology

 

Unallocated Corporate Amount

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

51,727

 

$

 

$

7,433

 

$

 

$

59,160

 

Total assets

 

$

128,769

 

$

57,102

 

$

73,797

 

$

111,190

 

$

370,858

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

51,727

 

$

 

$

7,433

 

$

 

$

59,160

 

Total assets

 

$

137,037

 

$

84,335

 

$

85,390

 

$

122,779

 

$

429,541

 

 

Corporate total assets are comprised principally of cash and cash equivalents at June 30, 2009 and December 31, 2008.

 

Note 6—Income Taxes

 

We had approximately $1.0 million of unrecognized tax benefits at June 30, 2009 and December 31, 2008, respectively, which predominantly relate to positions taken on our foreign tax returns and all of which 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. During the third quarter of 2008, the Internal Revenue Service initiated an examination of our Federal income tax return for the calendar year 2006. The majority of our foreign jurisdictions have been reviewed through 2007 with only a few jurisdictions having open tax years between 2004 and 2007. None of our tax returns are currently under examination in foreign jurisdictions.

 

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Table of Contents

 

We recognize 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 $0.3 million as of June 30, 2009 and December 31, 2008.

 

Note 7—Comprehensive Income

 

Total comprehensive income for the three months and six months ended June 30, 2009 and 2008 was as follows (in thousands):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income including noncontrolling interest

 

$

(14,703

)

$

3,401

 

$

(35,647

)

$

1,029

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

719

 

(1,270

)

(946

)

1,763

 

Comprehensive (loss) income:

 

(13,984

)

2,131

 

(36,593

)

2,792

 

Comprehensive loss attributable to the noncontrolling interest

 

(23

)

(70

)

(65

)

(146

)

Comprehensive (loss) income attributable to Veeco

 

$

(13,961

)

$

2,201

 

$

(36,528

)

$

2,938

 

 

Note 8—Debt

 

Convertible Debt

 

During the second quarter of 2007, we exchanged $118.8 million of Old Notes for $117.8 million of Notes pursuant to privately negotiated exchange agreements with certain holders of the Old Notes.  During the fourth quarter of 2008 we repaid in full the $25.2 million of the Old Notes that remained outstanding after the exchange transactions.

 

The Notes are initially convertible into 36.7277 shares of common stock per $1,000 principal amount of 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 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.  We pay interest on these Notes on April 15 and October 15 of each year.  The Notes are unsecured and are effectively subordinated to all of our senior and secured indebtedness, and to all indebtedness and other liabilities of our subsidiaries.

 

We implemented FSP APB 14-1 as of January 1, 2009 and have applied it retrospectively to all periods presented, as required.  FSP APB 14-1 requires 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, is accreted to its face value using the effective interest method by amortizing the discount between the face amount and the fair value.  The amortization is recorded as non-cash interest expense.  The Notes are subject to FSP APB 14-1 since they may be settled in cash upon conversion.  Thus, as a result of the adoption of FSP APB 14-1, we reclassified approximately $16.3 million from long-term debt to additional paid-in capital effective as of the date of issuance of the Notes.  This reclassification created a $16.3 million discount on the debt that will be amortized over the remaining life of the Notes, which will be through April 15, 2012.  The reclassification generated a $6.7 million deferred tax liability, which we offset with a corresponding decrease of the valuation allowance by the same amount.  FSP APB 14-1 requires that we present prior periods as if the guidance was in effect as of the date of issuance.  Thus, we have presented all financial data for prior periods as if we had reclassified this $16.3 million discount and began amortizing it in April 2007.

 

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Table of Contents

 

During the fourth quarter of 2008, we repurchased an aggregate principal amount of $12.2 million of the Notes for $7.2 million in cash, of which $7.1 million related to principal and $0.1 million related to accrued interest, reducing the amount outstanding from $117.8 million to $105.6 million.  A gross gain of approximately $5.1 million was recorded on these repurchases offset by the write-off of approximately $0.1 million of unamortized deferred financing costs associated with the Notes, for a net gain of approximately $5.0 million.  Such net gain was reduced to $3.8 million upon the adoption of FSP APB 14-1, which required that the gain be calculated based on the fair value of the portion repurchased as of the repurchase date.  The fair value approximated the carrying value net of the unamortized discount on the portion repurchased.  The difference of approximately $1.2 million was recorded as a reduction in the gain originally reported, and thus increased the accumulated deficit as of December 31, 2008 by such amount.

 

For the six months ended June 30, 2009 and 2008, respectively, we recorded approximately $1.4 million of additional interest expense in each period resulting from the amortization of the debt discount.  This additional interest expense did not require the use of cash.  The retrospective application of FSP APB 14-1 to the results for the three and six months ended June 30, 2008 decreased the net income attributable to Veeco in those periods from $4,202 to $3,471 and from $2,619 to $1,175, respectively, and decreased the basic earnings per share attributable to Veeco for those periods from $0.13 to $0.11 and from $0.08 to $0.04, respectively.

 

The components of interest expense recorded on the Notes for the three and six months ended June 30, 2009 and 2008 were as follows (in thousands):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Contractual interest

 

$

1,089

 

$

1,214

 

$

2,177

 

$

2,428

 

Amortization of the discount on the Notes

 

707

 

731

 

1,400

 

1,444

 

Total interest expense on the Notes

 

$

1,796

 

$

1,945

 

$

3,577

 

$

3,872

 

Effective interest rate

 

6.8

%

6.6

%

6.8

%

6.6

%

 

The carrying amounts of the liability and equity components of the Notes as of June 30, 2009 and December 31, 2008, respectively, were as follows (in thousands):

 

 

 

June 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

Carrying amount of the equity component

 

$

16,318

 

$

16,318

 

 

 

 

 

 

 

Principal balance of the liability component

 

$

105,574

 

$

105,574

 

Less: unamortized discount

 

8,939

 

10,339

 

Net carrying value of the liability component

 

$

96,635

 

$

95,235

 

 

At June 30, 2009, $105.6 million of the New Notes were outstanding with a fair value of approximately $97.7 million.

 

Mortgage Payable

 

We also have a mortgage note payable, with approximately $3.2 million outstanding at June 30, 2009.  The note accrues interest at an annual rate of 7.91%, and the final payment is due on January 1, 2020.  The fair value of this note at June 30, 2009 was approximately $3.5 million.

 

Credit Agreement

 

In February 2009, we entered into an amendment to our existing credit agreement with HSBC Bank USA, National Association (“HSBC”), as administrative agent, and the lenders named therein (as amended, the “Credit Agreement”).  As part of the amendment, we reduced the amount of the revolving credit facility, modified certain

 

15



Table of Contents

 

existing covenants and added certain new covenants.  As amended, the Credit Agreement provides for revolving credit borrowings of up to $30.0 million. The Credit Agreement was amended effective March 27, 2009 to modify certain financial covenants, to provide for the cash collateralization of borrowings under the Credit Agreement, and to permit the acquisition of the 80.1% of Fluens’ outstanding stock which we did not yet own.  The annual interest rate under the Credit Agreement is a floating rate equal to the prime rate of the agent bank plus 2.0%.  A LIBOR-based interest rate option is also provided.  Borrowings may be used for general corporate purposes, including working capital requirements, as well as permitted acquisitions.  The Credit Agreement contains certain restrictive covenants which include the maintenance of minimum cash balances and limitations with respect to incurrence of indebtedness, the payment of dividends, long-term leases, investments, mergers, acquisitions, consolidations and sales of assets.  In addition, under the Credit Agreement, we are required to satisfy certain financial tests, including minimum profitability levels.  As of June 30, 2009, we were in compliance with all covenants of the Credit Agreement as amended.  Substantially all of our assets and those of our material domestic subsidiaries, other than real estate, have been pledged to secure our obligations under the Credit Agreement.  The revolving credit facility under the Credit Agreement expires on March 31, 2012.  In the first quarter of 2009, we recognized an expense of $0.2 million representing the amount of deferred financing fees equal to the portion of the revolving credit facility which was terminated in connection with the amendment, which is included in other expense, net. We capitalized $0.1 million in deferred financing fees that we incurred in connection with the amendment that was effective February 2009.  As of June 30, 2009 and December 31, 2008, there were no borrowings outstanding under the Credit Agreement and letters of credit outstanding were approximately $0.5 million and $0.4 million, respectively.  Interest expense associated with the Credit Agreement recorded during the six months ended June 30, 2009 and 2008, respectively, was approximately $0.1 million for each period.

 

Note 9— Fair Value Measurements

 

We implemented the guidance in Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), for our non-financial assets and non-financial liabilities as of January 1, 2009.  SFAS 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. The accounts subject to the guidance are our long-lived assets, goodwill, and intangible assets.  The implementation expanded our fair value disclosures but did not impact our consolidated financial position or results of operations.  However, applying the provisions of SFAS 157 may impact our periodic fair value measurements for long-lived assets, goodwill and intangible assets in the future, as fair values calculated under SFAS 157 may be different from the fair values that would have been calculated under previous guidance.

 

SFAS 157 requires that we disclose the type of inputs we use to value such assets, based on three categories of inputs as defined in SFAS 157.  Level 1 inputs are quoted, unadjusted prices in active markets for identical assets or liabilities that the company has the ability to access at the measurement date.  Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities.  Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.  We use Level 3 inputs to value all of our property, plant and equipment, goodwill, and intangible assets balances.  We value such assets on a non-recurring basis and did not perform a valuation during the first or second quarter of 2009, though the methodology we would use to value such assets has not changed since December 31, 2008.  We did not record any gain or loss in adjusting the carrying amounts to fair value in the three months or six months ended June 30, 2009, since we made no such adjustment during that period.  The carrying amounts of property, plant and equipment, goodwill, and intangible assets as of June 30, 2009 were $60,513, $59,160, and $34,569, respectively.

 

Note 10 — Commitments, Contingencies and Other Matters

 

Restructuring Expenses

 

During 2008 and through the six months ended June 30, 2009, we have continued our multi-quarter plan to improve profitability and reduce and contain spending.  We have continued to make progress against the initiatives that management has set, continued our restructuring plan and executed activities with a focus on creating a more variable cost effective organization. These activities included downsizing and consolidating some locations, reducing our workforce, consultants and discretionary expenses and realigning our sales organization and engineering groups.  In addition, due to a weakened and deteriorated business environment we intensified and accelerated our restructuring activities.

 

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Table of Contents

 

Restructuring expenses for the three months and six months ended June 30, 2009 and 2008 are as follows (in thousands):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Personnel severance costs

 

$

767

 

$

 

$

5,153

 

$

321

 

Lease-related costs

 

893

 

 

893

 

2,554

 

Moving costs and consolidation activities

 

284

 

 

329

 

 

Total restructuring expense

 

$

1,944

 

$

 

$

6,375

 

$

2,875

 

 

2009 Restructuring and Other Charges

 

In conjunction with these activities, during the six months ended June 30, 2009, we recognized restructuring charges of approximately $6.4 million, principally consisting of personnel severance costs resulting from a headcount reduction of 193 employees and the notification of other employees that will be transitioned out of the Company during 2009.  This reduction in workforce included executives, management, administration, sales and service personnel and manufacturing employees companywide.

 

During the second quarter of 2009, we vacated our Data Storage Process Equipment facilities in Camarillo, CA.  As a result, we incurred an additional restructuring charge, representing the remaining lease payment obligations 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.  We also incurred charges associated with moving and consolidation activities for both of these locations.  We relocated 27 employees from the Data Storage Process Equipment segment to Metrology’s Santa Barbara, CA facility.

 

We also recorded an inventory write-off of $1.5 million in our Data Storage Process Equipment segment associated with the discontinuance of certain products in connection with transitioning to outsourced manufacturing during the first quarter of 2009, which is included in cost of sales.

 

The following is a reconciliation of the liability for the 2009 restructuring charge from inception through June 30, 2009 (in thousands):

 

 

 

LED & Solar
Process

Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate

 

Total

 

Short-Term Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel severance charges

 

$

850

 

$

1,706

 

$

2,378

 

$

219

 

$

5,153

 

Moving costs and consolidation activities

 

83

 

233

 

13

 

 

329

 

Total charged to accrual

 

933

 

1,939

 

2,391

 

219

 

5,482

 

Lease-related and other costs

 

 

516

 

 

 

516

 

Cash payments

 

(607

)

(1,382

)

(1,824

)

(174

)

(3,987

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2009

 

$

326

 

$

1,073

 

$

567

 

$

45

 

$

2,011

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease-related and other costs

 

$

 

$

377

 

$

 

$

 

$

377

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2009

 

$

 

$

377

 

$

 

$

 

$

377

 

 

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The balance of the short-term 2009 restructuring accrual is expected to be paid over the next nine to twelve months, and the long-term portion will continue over the remaining life of the lease until May 1, 2012.  We expect to continue our restructuring program in light of the overall business decline, and expect to incur restructuring charges of $0.5 million to $1.0 million throughout the remainder of 2009 associated with consolidating business units, decreasing the number of manufacturing sites, implementing specific manufacturing initiatives, and centralizing certain functions.

 

2008 Restructuring and Other Charges

 

During the three months ended March 31, 2008, we recorded a $2.6 million restructuring charge for lease-related costs as part of the consolidation of our Corporate headquarters into our Plainview, New York manufacturing facility. This charge primarily consisted of the liability for the remaining lease payments and property taxes relating to the facility we vacated, offset by expected sublease income.  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 net cash flows.  We developed these assumptions, based on our understanding of the current real estate market as well as current market interest rates, which are adjusted periodically based upon new information, events and changes in the real estate market.   During the fourth quarter of 2008, we adjusted these assumptions which resulted in an additional restructuring charge of $1.1 million.

 

The following is a reconciliation of the liability for the 2008 restructuring charge from December 31, 2008 through June 30, 2009 (in thousands):

 

 

 

LED & Solar
Process

Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate

 

Total

 

Short-Term Liability

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2008

 

$

660

 

$

270

 

$

534

 

$

1,859

 

$

3,323

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term/long-term Reclassification

 

 

 

 

540

 

540

 

Cash payments

 

(253

)

(268

)

(384

)

(878

)

(1,783

)

Reversal of accrual

 

(4

)

(2

)

(5

)

 

(11

)

Balance as of June 30, 2009

 

$

403

 

$

 

$

145

 

$

1,521

 

$

2,069

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liability

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2008

 

$

 

$

 

$

 

$

1,620

 

$

1,620

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term/long-term Reclassification

 

 

 

 

(540

)

(540

)

Balance as of June 30, 2009

 

$

 

$

 

$

 

$

1,080

 

$

1,080

 

 

The balance of the 2008 restructuring accrual related to the lease for the former Corporate headquarters is expected to be paid over the remaining life of that lease through June 2011, and the remaining balance of the 2008 restructuring accrual is expected to be paid over the next twelve months.

 

2007 Restructuring and Other Charges

 

As of December 31, 2008, we had a balance of $0.2 million in the liability related to restructuring charges incurred in 2007.  We made cash payments of $0.1 million against this liability in the first quarter of 2009, and paid the remaining balance of $0.1 million during the second quarter of 2009.

 

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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 high-brightness light emitting diode (“HB-LED”), solar, data storage, scientific research, semiconductor, and industrial markets.  We have leading technology positions in our three segments:  Light Emitting Diode (“LED”) & Solar Process Equipment, Data Storage Process Equipment, and Metrology.

 

In our LED & Solar segment, we design and manufacture metal organic chemical vapor deposition (“MOCVD”) systems, molecular beam epitaxy (“MBE”) systems and sources, and other types of deposition systems such as web and glass coaters, which we sell primarily to manufacturers of HB-LEDs and solar panels, as well as to scientific research customers.

 

In our Data Storage segment, we design and manufacture ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, and dicing and slicing products primarily used to create thin film magnetic heads (“TFMHs”) that read and write data on hard disk drives.

 

In our Metrology segment, we design and manufacture atomic force microscopes (“AFMs”), scanning probe microscopes (“SPMs”), stylus profilers, and optical interferometers used to provide critical surface measurements in research and production environments. This broad line of products is used in universities, research facilities and scientific centers worldwide. In production environments such as semiconductor, data storage and other industries, our metrology instruments enable customers to monitor their products throughout the manufacturing process to improve yields, reduce costs, and improve product quality.

 

We currently maintain facilities in Arizona, California, Colorado, Massachusetts, Minnesota, New Jersey and New York, with sales and service locations in North America, Europe, Japan, and the Asia Pacific region.

 

Highlights of the Second Quarter of 2009

 

·                  Revenue was $72.0 million, a 37% decrease from the second quarter of 2008, but up 15% from the first quarter of 2009.

 

·                  Orders were $98.7 million, down 28% from the second quarter of 2008, but up 86% from the first quarter of 2009.

 

·                  Net loss was $14.7 million, or ($0.47) per share, compared to net income of $3.5 million, or $0.11 per share, in the second quarter of 2008.

 

·                  Gross margins were 33.9%, compared to 41.7% in the second quarter of 2008.

 

·                  Restructuring charges totaled $1.9 million, principally consisting of personnel severance costs as well as lease-related and moving and consolidation costs associated with our Camarillo, CA facilities, which we vacated during the quarter.

 

The second quarter remained challenging for Veeco from a revenue and loss perspective due to the global economic slowdown that began in the fall of 2008.  We have made significant progress on our cost and workforce reduction plans, various outsourcing initiatives and materials cost management.

 

Veeco’s second quarter order improvement compared to the first quarter was primarily driven by significant sequential growth in LED & Solar bookings to $57 million, as LED manufacturers ramp production for TV and laptop backlighting applications.  Data storage orders also improved 147% from the first quarter of 2009 to $19 million, with hard disk drive customers resuming both technology and capacity purchases.  Metrology orders were $23 million, up 38% from the first quarter of 2009, due to new product traction and some improvement in scientific research spending.

 

Outlook

 

While Veeco remains cautious about overall economic conditions, we are encouraged by the improvement in bookings over the first quarter of 2009 for all three businesses.  Veeco’s backlog at June 30, 2009 was $160 million.  The positive trends we experienced in the second quarter in our MOCVD business have accelerated into the beginning of this quarter driven by key customers’ investments in LED capacity for backlighting applications.  We have already received orders for a total of over $110 million in MOCVD systems during the month of July from

 

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multiple customers in APAC.  As a result of this pace of orders, we currently believe that third quarter LED & Solar bookings will be between $125 to 175 million. While we remain cautious to the possibility of cancellations and/or rescheduling of orders, based on these order trends it is our current expectation that Veeco’s overall third quarter orders will be significantly higher than the second quarter.

 

Veeco’s outlook for the remainder of the year looks significantly different than it did just one quarter ago, primarily due to the strong LED industry demand.  We are currently expecting that Veeco will return to EBITA profitability in the third quarter.  Since the global economic situation remains uncertain, it is our intention to continue to carefully manage our expenses, while at the same time making selected investments that are required to support the MOCVD production ramp as well as our new CIGS solar equipment business.  Veeco currently anticipates that its 2009 revenues will be in the range of $310 to $325 million.

 

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Table of Contents

 

Results of Operations:

 

Three Months Ended June 30, 2009 and 2008

 

The following table shows our Condensed Consolidated Statements of Operations, percentages of sales, and comparisons between the three months ended June 30, 2009 and 2008 (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

Dollar and
Percentage

 

 

 

2009

 

2008

 

Change

 

Net sales

 

$

72,020

 

100.0

%

$

114,449

 

100.0

%

$

(42,429

)

(37.1

)%

Cost of sales

 

47,636

 

66.1

 

66,719

 

58.3

 

(19,083

)

(28.6

)

Gross profit

 

24,384

 

33.9

 

47,730

 

41.7

 

(23,346

)

(48.9

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

19,822

 

27.5

 

24,311

 

21.3

 

(4,489

)

(18.5

)

Research and development expense

 

13,163

 

18.3

 

15,145

 

13.2

 

(1,982

)

(13.1

)

Amortization expense

 

1,831

 

2.5

 

2,426

 

2.1

 

(595

)

(24.5

)

Restructuring expense

 

1,944

 

2.8

 

 

 

1,944

 

(100.0

)

Asset impairment charge

 

304

 

0.4

 

 

 

304

 

(100.0

)

Other income, net

 

(77

)

(0.1

)

(382

)

(0.3

)

305

 

(79.8

)

Total operating expenses

 

36,987

 

51.4

 

41,500

 

36.3

 

(4,513

)

(10.9

)

Operating (loss) income

 

(12,603

)

(17.5

)

6,230

 

5.4

 

(18,833

)

(302.3

)

Interest expense, net

 

1,698

 

2.4

 

1,700

 

1.4

 

(2

)

(0.1

)

(Loss) income before income

 

(14,301

)

(19.9

)

4,530

 

4.0

 

(18,831

)

(415.7

)

Income tax provision

 

402

 

0.6

 

1,129

 

1.0

 

(727

)

(64.4

)

(Loss) income including noncontrolling interest

 

(14,703

)

(20.4

)

3,401

 

3.0

 

(18,104

)

(532.3

)

Noncontrolling interest

 

(23

)

(0.0

)

(70

)

 

47

 

(67.1

)

Net (loss) income

 

$

(14,680

)

(20.4

)%

$

3,471

 

3.0

%

$

(18,151

)

(522.9

)%

 

Net Sales and Orders

 

Net sales of $72.0 million for the three months ended June 30, 2009 were down 37.1% compared to the comparable 2008 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

 

 

 

2009

 

2008

 

Year to Year

 

2009

 

2008

 

Year to Year

 

2009

 

2008

 

Segment Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LED & Solar Process Equipment

 

$

31,882

 

$

45,090

 

$

(13,208

)

(29.3

)%

$

56,342

 

$

52,061

 

$

4,281

 

8.2

%

1.77

 

1.15

 

Data Storage Process Equipment

 

17,593

 

36,762

 

(19,169

)

(52.1

)

19,318

 

51,716

 

(32,398

)

(62.6

)

1.10

 

1.41

 

Metrology

 

22,545

 

32,597

 

(10,052

)

(30.8

)

23,010

 

32,735

 

(9,725

)

(29.7

)

1.02

 

1.00

 

Total

 

$

72,020

 

$

114,449

 

$

(42,429

)

(37.1

)%

$

98,670

 

$

136,512

 

$

(37,842

)

(27.7

)%

1.37

 

1.19

 

Regional Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

23,864

 

$

44,688

 

$

(20,824

)

(46.6

)%

$

20,660

 

$

52,769

 

$

(32,109

)

(60.8

)%

0.87

 

1.18

 

Europe, Middle East and Africa (“EMEA”)

 

14,889

 

23,142

 

(8,253

)

(35.7

)

16,193

 

19,131

 

(2,938

)

(15.4

)

1.09

 

0.83

 

Japan

 

4,511

 

5,989

 

(1,478

)

(24.7

)

7,434

 

7,809

 

(375

)

(4.8

)

1.65

 

1.30

 

Asia Pacific

 

28,756

 

40,630

 

(11,874

)

(29.2

)

54,383

 

56,803

 

(2,420

)

(4.3

)

1.89

 

1.40

 

Total

 

$

72,020

 

$

114,449

 

$

(42,429

)

(37.1

)%

$

98,670

 

$

136,512

 

$

(37,842

)

(27.7

)%

1.37

 

1.19

 

 

Sales declined in each segment in the second quarter of 2009 compared with the second quarter in 2008 due to our customers’ reluctance to invest in capital equipment during the current difficult economic conditions. LED & Solar Process Equipment sales were down 29.3% from the second quarter of 2008 primarily due to a pause in capacity spending as LED customers absorb the equipment purchased from Veeco during the last two years. However, the book-to-bill ratio in that segment increased to 1.77 from 1.15 in the comparable quarter of 2008, indicating an improvement in business outlook for the LED business.  Data Storage Process Equipment segment sales

 

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declined by 52.1% from the second quarter of 2008 due to the slowdown in capital spending by our data storage customers.  Additionally, Metrology sales decreased by 30.8% from the second quarter of 2008, primarily due to a slowdown in the research, industrial and data storage markets.  By region, net sales decreased by 46.6%, 35.7%, 24.7%, and 29.2% in the Americas, EMEA, Japan, and Asia Pacific, respectively. We believe that there will continue to be quarter-to-quarter variations in the geographic distribution of sales.

 

Orders for the second quarter of 2009 decreased by 27.7% from the comparable 2008 period.  However, orders for LED & Solar Process Equipment increased by 8.2% over the second quarter 2008.  This increase was principally driven by LED manufacturers ramping up production for television and laptop backlighting applications.  The 62.6% decrease in Data Storage Process Equipment orders resulted from customers continuing to be cautious about their capital spending.  The 29.7% decrease in Metrology orders is due to low demand from customers in the semiconductor, research and industrial markets.

 

Our overall book-to-bill ratio for the second quarter of 2009, which is calculated by dividing orders received in a given period by revenue recognized in the same time period, was 1.37 to 1, an improvement over the ratio of 1.19 to 1 in the comparable quarter of 2008.  Our backlog as of June 30, 2009 was $160 million, compared to $147.2 million as of December 31, 2008.  During the quarter ended June 30, 2009, we experienced backlog adjustments of approximately $1.8 million, consisting of $1.1 million for order cancellations and $0.7 million of adjustments related to foreign currency translation.  Due to changing business conditions and weak capital equipment spending by certain customers in our businesses, we may continue to experience cancellations and/or rescheduling of orders.  Despite some indications of improvement over the first quarter of 2009, particularly in our LED & Solar Process Equipment segment, we still expect 2009 to be a challenging year for the Company overall.

 

Gross Profit

 

Gross profit for the quarter ended June 30, 2009, was 33.9%, compared to 41.7% in the second quarter of 2008, primarily due to the significant decline in sales.  LED & Solar Process Equipment gross margins decreased to 32.7% from 41.4% in the prior-year period, primarily due to the significant decrease in sales volume and unfavorable product mix as compared to the prior-year period.  Data Storage Process Equipment gross margins decreased to 34.3% from 40.2% in the prior-year period, due to reduced sales volume.  Metrology gross margins decreased to 35.2% from 43.8%, principally due to lower sales volume and a less favorable product mix and pricing in Metrology instruments.

 

Operating Expenses

 

Selling, general and administrative expenses decreased by $4.5 million, or 18.5%, from the prior-year period, primarily due to lower salary and related expenses resulting from the personnel reductions taken as part of management’s restructuring plan, a reduction in incentive bonus and profit-sharing expense, and lower commissions as well as cost savings initiatives resulting in less travel and entertainment, marketing, and other operating and occupancy expenses.

 

Research and development expense decreased $2.0 million from the second quarter of 2008, primarily due to a more focused approach to Metrology and Data Storage product development that resulted from our restructuring activities.  As a percentage of sales, research and development increased to 18.3% in the second quarter of 2009 from 13.2% in the second quarter of 2008, as a result of lower sales volume.   The Company continues to invest in higher-growth end market opportunities, particularly in its LED & Solar segment.

 

Amortization expense was $1.8 million in the second quarter of 2009, compared to $2.4 million in the second quarter of 2008, due to reduced intangible assets resulting from asset impairment charges taken during the fourth quarter of 2008.

 

Restructuring expense of $1.9 million for the second quarter of 2009 consists of $0.8 million of personnel severance costs resulting from a reduction in workforce.  In addition, there were $0.9 million of lease-related costs and $0.3 million of moving and consolidation costs incurred in our Data Storage Process Equipment segment associated with vacating our Camarillo, CA facilities.  In addition to the $1.9 million in restructuring expense, we incurred $0.3 million of asset impairment costs.  No such costs were incurred in the second quarter of 2008.

 

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Table of Contents

 

Interest Expense, Net

 

Net interest expense was $1.7 million in the second quarter in each of 2009 and 2008, comprised in both years of $1.0 million in cash net interest expense and $0.7 million in non-cash interest expense related to the implementation of FASB Staff Position No. APB 14-1 (“FSP APB 14-1”), Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). See “Recent Accounting Pronouncements” for a further discussion of the implementation of FSP APB 14-1.

 

Income Taxes

 

The income tax provision for the quarter ended June 30, 2009 was $0.4 million compared to $1.1 million in the second quarter of 2008. The 2009 provision for income taxes included $0.3 million relating to our foreign operations, which continue to be profitable, and $0.1 million relating to our domestic operations. The 2008 provision for income taxes included $0.8 million relating to our foreign operations, 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.

 

Six Months Ended June 30, 2009 and 2008

 

The following table shows our Condensed Consolidated Statements of Operations, percentages of sales, and comparisons between the six months ended June 30, 2009 and 2008 (dollars in thousands):

 

 

 

Six Months Ended
June 30,

 

Dollar and
Percentage

 

 

 

2009

 

2008

 

Change

 

Net sales

 

$

134,869

 

100.0

%

$

216,756

 

100.0

%

$

(81,887

)

(37.8

)%

Cost of sales

 

90,103

 

66.8

 

126,400

 

58.3

 

(36,297

)

(28.7

)

Gross profit

 

44,766

 

33.2

 

90,356

 

41.7

 

(45,590

)

(50.5

)

Operating expenses: