Table of Contents

 

 

 

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, 2010

 

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 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. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

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

 

40,877,302 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on July 27, 2010.

 

 

 



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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 Part I. 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 reduction or elimination of government subsidies and economic incentives may adversely affect the future order rate for our MOCVD equipment;

 

·                  Our failure to successfully implement outsourcing activities or failure of our outsourcing partners to perform as anticipated could adversely affect our results of operations and our ability to realize the benefits of the recent increase in MOCVD order volume;

 

·                  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 and/or liabilities to our suppliers for products no longer needed;

 

·                  We rely on a limited number of suppliers, some of which are sole-source suppliers;

 

·                  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 and/or liabilities to our suppliers for products no longer needed;

 

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

 

·                  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;

 

·                  We are exposed to the risks of operating a global business, including the need to obtain export licenses for certain of our shipments;

 

·                  We are exposed to risks associated with our entrance into the emerging solar industry;

 

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

 

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

 

·                  Our sales cycle is long and unpredictable;

 

·                  Our inability to attract, retain, and motivate key employees could have a material adverse effect on our business;

 

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

 

·                  We are subject to foreign currency exchange risks;

 

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

 

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

 

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

 

·                  We are subject to risks of non-compliance with environmental, health and safety regulations;

 

·                  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 matters set forth in this Report generally, including the risk factors set forth in “Part 2. Item 1A. Risk Factors.”

 

Consequently, such forward-looking statements should be regarded solely as the Company’s current plans, estimates, and beliefs. The Company does 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 obtain information 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 and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)

5

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (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

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

31

 

 

 

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

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net sales

 

$

253,040

 

$

72,020

 

$

416,271

 

$

134,869

 

Cost of sales

 

139,282

 

47,636

 

232,164

 

90,103

 

Gross profit

 

113,758

 

24,384

 

184,107

 

44,766

 

Operating expenses (income):

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

27,287

 

19,822

 

50,707

 

38,429

 

Research and development

 

20,550

 

13,163

 

36,990

 

26,049

 

Amortization

 

1,634

 

1,831

 

3,319

 

3,660

 

Restructuring

 

 

1,944

 

(179

)

6,375

 

Asset impairment charge

 

 

304

 

 

304

 

Other, net

 

512

 

(77

)

359

 

1,409

 

Total operating expenses

 

49,983

 

36,987

 

91,196

 

76,226

 

Operating income (loss)

 

63,775

 

(12,603

)

92,911

 

(31,460

)

Interest expense, net

 

1,762

 

1,698

 

3,544

 

3,407

 

Income (loss) before income taxes

 

62,013

 

(14,301

)

89,367

 

(34,867

)

Income tax provision

 

9,620

 

402

 

10,930

 

780

 

Net income (loss)

 

52,393

 

(14,703

)

78,437

 

(35,647

)

Net loss attributable to noncontrolling interest

 

 

(23

)

 

(65

)

Net income (loss) attributable to Veeco

 

$

52,393

 

$

(14,680

)

$

78,437

 

$

(35,582

)

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to Veeco:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.32

 

$

(0.47

)

$

2.00

 

$

(1.13

)

Diluted

 

$

1.20

 

$

(0.47

)

$

1.88

 

$

(1.13

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

39,761

 

31,497

 

39,283

 

31,506

 

Diluted

 

43,506

 

31,497

 

41,683

 

31,506

 

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income (loss)

 

$

52,393

 

$

(14,703

)

$

78,437

 

$

(35,647

)

Other comprehensive (loss) income, net of tax Foreign currency translation

 

(152

)

719

 

(825

)

(946

)

Comprehensive income (loss)

 

52,241

 

(13,984

)

77,612

 

(36,593

)

Comprehensive loss attributable to noncontrolling interest

 

 

(23

)

 

(65

)

Comprehensive income (loss) attributable to Veeco

 

$

52,241

 

$

(13,961

)

$

77,612

 

$

(36,528

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

361,382

 

$

148,589

 

Short-term investments

 

53,500

 

135,000

 

Accounts receivable, net

 

140,722

 

84,358

 

Inventories

 

84,210

 

77,564

 

Prepaid expenses and other current assets

 

18,927

 

7,819

 

Deferred income taxes

 

2,963

 

3,105

 

Total current assets

 

661,704

 

456,435

 

Property, plant and equipment at cost, net

 

59,118

 

59,389

 

Goodwill

 

59,422

 

59,422

 

Intangible assets, net

 

25,211

 

29,697

 

Other assets

 

911

 

429

 

Total assets

 

$

806,366

 

$

605,372

 

Liabilities and equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

50,973

 

$

29,112

 

Accrued expenses and other current liabilities

 

158,383

 

106,445

 

Deferred profit

 

7,863

 

2,520

 

Income taxes payable

 

14,149

 

829

 

Current portion of long-term debt

 

220

 

212

 

Total current liabilities

 

231,588

 

139,118

 

Deferred income taxes

 

 

5,039

 

Long-term debt

 

102,352

 

100,964

 

Other liabilities

 

411

 

1,192

 

 

 

 

 

 

 

Equity

 

472,015

 

359,059

 

 

 

 

 

 

 

Total liabilities and equity

 

$

806,366

 

$

605,372

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)
(Unaudited)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

Operating activities

 

 

 

 

 

Net income (loss)

 

$

78,437

 

$

(35,647

)

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

 

 

 

 

 

Depreciation and amortization

 

9,882

 

10,866

 

Amortization of debt discount

 

1,501

 

1,400

 

Non-cash equity-based compensation

 

5,128

 

3,553

 

Non-cash asset impairment charge

 

 

304

 

Non-cash inventory write-off

 

 

1,526

 

Non-cash restructuring

 

(179

)

6,375

 

Deferred income taxes

 

(4,756

)

360

 

Other, net

 

(2

)

70

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(54,631

)

26,883

 

Inventories

 

(6,383

)

15,063

 

Accounts payable

 

21,810

 

(10,507

)

Accrued expenses, deferred profit and other current liabilities

 

70,050

 

(12,475

)

Other, net

 

(11,857

)

273

 

Net cash provided by operating activities

 

109,000

 

8,044

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(6,168

)

(3,645

)

Payments for net assets of businesses acquired

 

 

(500

)

Payments of earn-outs for businesses acquired

 

 

(9,839

)

Proceeds from the redemption of short-term investments

 

160,141

 

 

Payments for purchases of short-term investments

 

(78,500

)

 

Proceeds from the sale of property, plant and equipment

 

13

 

275

 

Net cash provided by (used in) investing activities

 

75,486

 

(13,709

)

Financing activities

 

 

 

 

 

Proceeds from stock option exercises

 

33,113

 

 

Restricted stock tax withholdings

 

(2,898

)

(295

)

Repayments of long-term debt

 

(105

)

(96

)

Net cash provided by (used in) financing activities

 

30,110

 

(391

)

Effect of exchange rate changes on cash and cash equivalents

 

(1,803

)

(249

)

Net increase (decrease) in cash and cash equivalents

 

212,793

 

(6,305

)

Cash and cash equivalents at beginning of period

 

148,589

 

103,799

 

Cash and cash equivalents at end of period

 

$

361,382

 

$

97,494

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Accrual of payment for net assets of businesses acquired

 

$

 

$

1,000

 

Transfers from property, plant and equipment to inventory

 

1,123

 

241

 

Transfers from inventory to property, plant and equipment

 

850

 

23

 

Sale of property, plant and equipment with note receivable

 

140

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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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 of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company” or “we”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three and six months ended June 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

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 2010 interim quarter ends are March 28, June 27 and September 26. The 2009 interim quarter ends were March 29, June 28 and September 27. 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 basic weighted average shares outstanding and diluted weighted average shares outstanding (in thousands):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

39,761

 

31,497

 

39,283

 

31,506

 

Dilutive effect of stock options and restricted stock

 

2,327

 

 

1,215

 

 

Dilutive effect of convertible notes

 

1,418

 

 

1,185

 

 

Diluted weighted average shares outstanding

 

43,506

 

31,497

 

41,683

 

31,506

 

 

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. For the three months ended June 30, 2009, the effect of approximately 0.8 million stock options and 0.4 million restricted shares were excluded from the computation of diluted weighted average shares outstanding due to the net loss sustained in the period as their inclusion would have been anti-dilutive. For the six months ended June 30, 2009, the effect of approximately 0.1 million stock options were excluded from the computation of diluted weighted average shares outstanding due to the net loss sustained in the period as their inclusion would have been anti-dilutive.  For the three and six months ended June 30, 2010, no shares were excluded from the computation of diluted weighted average shares outstanding.

 

Our convertible 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 these 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 the principal amount in cash. Using the treasury stock method, it was determined that the impact of the assumed conversion for the three and six months ended June 30, 2010, had a dilutive affect of 1,418,000 and 1,185,000 common equivalent shares, respectively and for the three and six months ended June 30, 2009, the impact was anti-dilutive, due to the net loss sustained in the 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 at June 30, 2010 was approximately 5.4 million.

 

Holders may convert the convertible 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

 

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events including our common stock trading at prices equal to 130% of the conversion price for a specified period, which is at least 20 trading days during the 30 consecutive trading days of the immediately preceding fiscal quarter and only during such fiscal quarter. At the end of the second quarter of 2010, our common stock was trading at prices equal to or above 130% of the conversion price for the specified period and, as a result, the convertible notes will be convertible during the third quarter of 2010.  If the convertible notes are converted, we have the ability and intent to pay the principal balance of notes tendered for conversion in cash. We will re-perform this test each quarter up to and including the fourth quarter of 2011. See Note 6 for further details on our debt.

 

Short-Term Investments

 

We determine the appropriate balance sheet classification of our investments at the time of purchase and evaluate the classification at each balance sheet date. As part of our cash management program, we maintain a portfolio of marketable securities which are classified as available-for-sale. These securities include certificates of deposit placed through an account registry service (“CDARS”) with maturities of greater than three months but less than one year when purchased in principal amounts that, when aggregated with interest to accrue over the term, will not exceed Federal Deposit Insurance Corporation limits. These securities are carried at cost, which approximates market value.

 

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 not expected to subject us to material risks due to exchange rate movements because gains and losses on these contracts are intended to offset exchange gains and losses on the underlying assets and liabilities. The forward contracts are marked-to-market through earnings. We conduct our derivative transactions with highly rated financial institutions in an effort to mitigate any material credit risk.

 

The aggregate foreign currency exchange (loss) gain included in determining the condensed consolidated results of operations was approximately $(0.5) million and $0.1 million during the three months ended June 30, 2010 and 2009, respectively. Included in the aggregate foreign currency exchange (loss) gain were gains related to forward contracts of $0.2 million and $0.1 million during the three months ended June 30, 2010, and 2009, respectively. The aggregate foreign currency exchange loss included in determining the condensed consolidated results of operations was approximately $(0.4) million and $(1.3) million during the six months ended June 30, 2010 and 2009, respectively. Included in the aggregate foreign currency exchange loss were gains related to forward contracts of $0.3 million and $0.2 million during the six months ended June 30, 2010, and 2009, respectively.

 

These amounts were recognized and are included in other, net in the accompanying condensed consolidated statements of operations. As of June 30, 2010, approximately $0.1 million of losses related to forward contracts were included in accrued expenses and other current liabilities and were subsequently paid in July 2010. As of December 31, 2009, approximately $0.2 million of gains related to forward contracts were included in prepaid expenses and other current assets and were subsequently received in January 2010. Monthly forward contracts with a notional amount of $9.2 million,  entered into in June 2010 for July 2010, will be settled in July 2010.

 

The weighted average notional amount of derivative contracts outstanding during the three and six months ended June 30, 2010 were approximately $8.2 and $5.7 million, respectively.

 

Note 2— Equity-Based Compensation Plans

 

Equity-Based Compensation

 

Equity-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over each employee’s requisite service period. The following compensation expense was included in the condensed consolidated statements of operations for the three and six months ended June 30, 2010 and 2009 (in thousands):

 

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Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Equity-based compensation expense

 

$

2,958

 

$

2,155

 

$

5,128

 

$

3,553

 

 

As of June 30, 2010, the total unrecognized compensation costs related to nonvested stock and stock option awards was $11.6 million and $17.7 million, respectively. The related weighted average period over which we expect that such unrecognized compensation costs will be recognized is approximately 2.9 years for nonvested stock awards and 2.4 years for option awards.

 

Stock Option and Restricted Stock Activity

 

A summary of our restricted stock awards including restricted stock units for the six months ended June 30, 2010, is presented below:

 

 

 

Shares
(000s)

 

Weighted
Average Grant-
Date Fair Value

 

Nonvested at January 1, 2010

 

892

 

$

12.97

 

Granted

 

169

 

34.42

 

Vested

 

(253

)

11.28

 

Forfeited (including cancelled awards)

 

(13

)

14.38

 

Nonvested at June 30, 2010

 

795

 

18.04

 

 

A summary of our stock option awards for the six months ended June 30, 2010, is presented below:

 

 

 

Shares
(000s)

 

Weighted-
Average
Exercise Price

 

Aggregate
Intrinsic
Value (000s)

 

Weighted-
Average
Remaining
Contractual
Life (in years)

 

Outstanding at January 1, 2010

 

4,506

 

$

16.35

 

 

 

 

 

Granted

 

610

 

33.98

 

 

 

 

 

Exercised

 

(1,709

)

19.37

 

 

 

 

 

Forfeited (including cancelled options)

 

(37

)

14.22

 

 

 

 

 

Expirations of vested options

 

(9

)

34.13

 

 

 

 

 

Outstanding at June 30, 2010

 

3,361

 

17.99

 

$

70,354

 

5.8

 

Options exercisable at June 30, 2010

 

1,032

 

16.91

 

$

22,960

 

3.7

 

 

2010 Stock Incentive Plan

 

On April 1, 2010, the Board of Directors of the Company and on May 14, 2010, our shareholders approved the 2010 Stock Incentive Plan (the “2010 Plan”). The 2010 Plan will replace the 2000 Plan as the active stock plan. The Company’s employees, directors and consultants are eligible to receive awards under the 2010 Plan. The 2010 Plan permits the granting of a variety of awards, including both non-qualified and incentive stock options, share appreciation rights, restricted shares, restricted share units and dividend equivalent rights. The Company is authorized to issue up to 3,500,000 shares under the 2010 Plan. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the prior day close from date of grant; those option awards generally vest over a 3 year period and have 10-year contractual terms. Share awards generally vest over 4-5 years. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 2010 Plan.

 

Note 3—Balance Sheet Information

 

Accounts Receivable, net

 

Accounts receivable are shown net of the allowance for doubtful accounts of $0.8 million and $0.9 million as of June 30, 2010 and December 31, 2009, respectively.

 

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Table of Contents

 

Inventories

 

Inventories are stated at the lower of cost (principally first-in, first-out) or market. Inventories consist of (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Raw materials

 

$

51,480

 

$

49,013

 

Work in process

 

26,147

 

21,560

 

Finished goods

 

6,583

 

6,991

 

 

 

$

84,210

 

$

77,564

 

 

Accrued Warranty

 

We estimate the costs that may be incurred under the warranty we provide and record 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,

 

 

 

2010

 

2009

 

Balance as of beginning of period

 

$

7,556

 

$

6,892

 

Warranties issued during the period

 

5,390

 

1,304

 

Settlements made during the period

 

(3,577

)

(1,923

)

Balance at end of period

 

$

9,369

 

$

6,273

 

 

Note 4—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. These systems are primarily sold to customers in the high-brightness LED (“HB LED”) and solar industries, as well as to scientific research customers. This segment has product development and marketing sites in Somerset, New Jersey, St. Paul, Minnesota, Clifton Park, New York 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 product development and marketing sites in Plainview, New York and Ft. Collins, Colorado. In our Metrology segment, we design and manufacture atomic force microscopes, scanning probe microscopes, 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 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 product development and marketing sites 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 profit (loss)”), 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 profit (loss) reports baseline performance and thus provides useful information. The other excluded items include restructuring (credits) 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.

 

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The following tables present certain data pertaining to our reportable product segments and a reconciliation of Segment profit (loss) to income (loss) before income taxes for the three and six months ended June 30, 2010 and 2009, respectively, and goodwill and total assets as of June 30, 2010 and December 31, 2009 (in thousands):

 

 

 

LED & Solar
Process
Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

 

Three months ended June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

185,646

 

$

35,742

 

$

31,652

 

$

 

$

253,040

 

Segment profit (loss)

 

$

58,856

 

$

9,925

 

$

3,354

 

$

(3,768

)

$

68,367

 

Interest, net

 

 

 

 

1,762

 

1,762

 

Amortization

 

796

 

383

 

397

 

58

 

1,634

 

Equity-based compensation

 

671

 

308

 

435

 

1,544

 

2,958

 

Income (loss) before income taxes

 

$

57,389

 

$

9,234

 

$

2,522

 

$

(7,132

)

$

62,013

 

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, net

 

 

 

 

1,698

 

1,698

 

Amortization

 

774

 

403

 

578

 

76

 

1,831

 

Equity-based compensation

 

218

 

337

 

321

 

1,279

 

2,155

 

Restructuring

 

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

)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

297,150

 

$

58,987

 

$

60,134

 

$

 

$

416,271

 

Segment profit (loss)

 

$

88,673

 

$

13,122

 

$

6,286

 

$

(6,902

)

$

101,179

 

Interest, net

 

 

 

 

3,544

 

3,544

 

Amortization

 

1,592

 

766

 

844

 

117

 

3,319

 

Equity-based compensation

 

1,138

 

523

 

739

 

2,728

 

5,128

 

Restructuring

 

 

(179

)

 

 

(179

)

Income (loss) before income taxes

 

$

85,943

 

$

12,012

 

$

4,703

 

$

(13,291

)

$

89,367

 

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, net

 

 

 

 

3,407

 

3,407

 

Amortization

 

1,549

 

808

 

1,155

 

148

 

3,660

 

Equity-based compensation

 

374

 

589

 

557

 

2,033

 

3,553

 

Restructuring

 

929

 

2,830

 

2,386

 

230

 

6,375

 

Inventory write-offs

 

 

1,526

 

 

 

1,526

 

Asset impairment charge

 

 

304

 

 

 

304

 

Loss before income taxes

 

$

(7,036

)

$

(8,698

)

$

(9,815

)

$

(9,318

)

$

(34,867

)

 

 

 

LED & Solar
Process
Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

 

As of June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

51,989

 

$

 

$

7,433

 

$

 

$

59,422

 

Total assets

 

$

239,266

 

$

58,669

 

$

81,047

 

$

427,384

 

$

806,366

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

51,989

 

$

 

$

7,433

 

$

 

$

59,422

 

Total assets

 

$

178,406

 

$

54,106

 

$

72,912

 

$

299,948

 

$

605,372

 

 

Corporate total assets are comprised principally of cash and cash equivalents and short-term investments at June 30, 2010 and December 31, 2009, respectively.

 

Note 5—Income Taxes

 

In assessing the realizability of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. Significant judgment is required in making this assessment. The ultimate realization of the net deferred tax assets, consisting of net operating losses, tax credit carryforwards and temporary differences is dependent upon the generation of future taxable income prior to the expiration of any net operating loss carryforwards.

 

The Company evaluates the need for a valuation allowance against its deferred tax assets each quarter. For the year ending December 31, 2010, the Company has determined that a significant portion of its deferred tax assets

 

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Table of Contents

 

are realizable on a more-likely-than-not basis based on the forecasted results of operations.  This tax benefit has been included in calculating the estimated effective tax rate for the year ending December 31, 2010.

 

Note 6—Debt

 

Convertible Notes

 

The convertible 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 convertible 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% of the conversion price for a specified period, which is at least 20 trading days during the 30 consecutive trading days of the immediately preceding fiscal quarter and only during such fiscal quarter. At the end of the second quarter of 2010, our common stock was trading at prices equal to or above 130% of the conversion price for the specified period and, as a result, the convertible notes will be convertible during the third quarter of 2010.  If the convertible notes are converted, we have the ability and intent to pay the principal balance of notes tendered for conversion in cash. We will re-perform this test each quarter up to and including the fourth quarter of 2011. 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.

 

In May 2008, accounting guidance was issued that requires a portion of convertible debt to be allocated to equity. We implemented this guidance as of January 1, 2009. This guidance 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 equity. The liability portion, which represents the fair value of the debt without the conversion feature, is accreted to its face value over the life of the debt using the effective interest method by amortizing the discount between the face amount and the fair value. The amortization is recorded as interest expense. The convertible notes are subject to such accounting guidance since they may be settled in cash upon conversion. Thus, as a result of the adoption of this accounting guidance, 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 is amortized over the remaining life of the notes, which will be through April 15, 2012. This additional interest expense does not require the use of cash.

 

The components of interest expense recorded on the notes were as follows (in thousands):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Contractual interest

 

$

1,089

 

$

1,089

 

$

2,178

 

$

2,178

 

Amortization of the discount on the Notes

 

760

 

707

 

1,501

 

1,400

 

Total interest expense on the Notes

 

$

1,849

 

$

1,796

 

$

3,679

 

$

3,578

 

Effective interest rate

 

7.0

%

6.8

%

7.0

%

6.8

%

 

The carrying amounts of the liability and equity components of the notes were as follows (in thousands):

 

 

 

June 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Carrying amount of the equity component

 

$

16,318

 

$

16,318

 

 

 

 

 

 

 

Principal balance of the liability component

 

$

105,574

 

$

105,574

 

Less: unamortized discount

 

5,993

 

7,493

 

Net carrying value of the liability component

 

$

99,581

 

$

98,081

 

 

At June 30, 2010, $105.6 million of the notes outstanding had a fair value of approximately $156.7 million.

 

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Table of Contents

 

Mortgage Payable

 

We also have a mortgage payable, with approximately $3.0 million outstanding at June 30, 2010. The mortgage accrues interest at an annual rate of 7.91%, and the final payment is due on January 1, 2020. The fair value of the mortgage at June 30, 2010 was approximately $3.3 million.

 

Note 7— Fair Value Measurements

 

We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy. The levels of fair value hierarchy are as follows:

 

·                  Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

·                  Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

·                  Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset.

 

Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.

 

As of June 30, 2010, major categories of assets measured at fair value on a recurring basis under Level 2 consisted of CDARS totaling $159.5 million and treasury bills totaling $147.0 million. As of December 31, 2009, major categories of assets measured at fair value on a recurring basis under Level 2 consisted of CDARS totaling $180.0 million and derivative instruments totaling $0.2 million. As of June 30, 2010, the major category of liabilities measured at fair value on a recurring basis under Level 2 consisted of derivative instruments totaling $0.1 million. The Company had no Level 1 and Level 3 assets and liabilities measured on a recurring basis at June 30, 2010 and December 31, 2009.

 

CDARS and treasury bills are carried at cost, which approximates market value. Accordingly, no gains or losses (realized/ unrealized) have been incurred.

 

Derivative instruments include foreign currency forward contracts to hedge certain foreign currency transactions. Derivative instruments are valued using standard calculations/models that are primarily based on observable inputs, including foreign currency exchange rates, volatilities and interest rates.

 

As of June 30, 2010, major categories of assets and liabilities measured at fair value under Level 3 on a nonrecurring basis consisted of property, plant and equipment totaling $59.1 million, goodwill totaling $59.4 million, intangible assets totaling $25.2 million, an asset retirement obligation totaling ($0.2) million and a restructuring liability totaling ($1.3) million. As of December 31, 2009, major categories of assets and liabilities measured at fair value under Level 3 on a nonrecurring basis consisted of property, plant and equipment totaling $59.4 million, goodwill totaling $59.4 million, intangible assets totaling $29.7 million, an asset retirement obligation totaling ($0.2) million and a restructuring liability totaling ($2.5) million. The Company had no Level 1 or Level 2 assets and liabilities measured on a nonrecurring basis at June 30, 2010 and December 31, 2009.

 

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Table of Contents

 

Note 8— Commitments, Contingencies and Other Matters

 

Restructuring and Other Charges (Credits)

 

During 2009, we continued our multi-quarter plan to improve profitability and reduce and contain spending, which began in 2007. We made progress against the initiatives that management set in 2007, continued our restructuring plan and executed activities with a focus on creating a more cost effective organization, with a greater percentage of variable costs. These activities included downsizing and consolidating some locations, reducing our workforce, consultants and discretionary expenses and realigning our sales organization and engineering groups.

 

In conjunction with these activities, we recorded a restructuring credit of approximately $0.2 million during six months ended June 30, 2010. We recorded restructuring charges of approximately $1.9 million and $6.4 million during the three and six months ended June 30, 2009, respectively, and inventory write-offs of $1.5 million, included in cost of sales in the accompanying Condensed Consolidated Statement of Operations, associated with the discontinuance of certain products in connection with the transitioning to outsourced manufacturing during the three and six months ended June 30, 2009. Restructuring for the three and six months ended June 30, 2010 and 2009 is as follows (in thousands):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Personnel severance and related costs

 

$

 

$

767

 

$

 

$

5,153

 

Lease-related costs (credits)

 

 

893

 

(179

)

893

 

Moving costs and consolidation activities

 

 

284

 

 

329

 

 

 

$

 

$

1,944

 

$

(179

)

$

6,375

 

 

Personnel severance and related costs

 

During the three and six months ended June 30, 2009, we recorded $0.8 million and $5.2 million, respectively, in personnel severance and related costs resulting from a headcount reduction of approximately 53 employees during the three month period and 193 employees during the six month period. This reduction in workforce included executives, management, administration, sales and service personnel and manufacturing employees’ companywide.

 

Lease-related costs (credits)

 

During the first quarter of 2010, we had a change in estimate relating to one of our leased facilities. As a result, we incurred a restructuring credit of $0.2 million, consisting primarily of the remaining lease payment obligations and estimated property taxes for a portion of the facility we will occupy, offset by a reduction in expected sublease income. We made certain assumptions in determining the credit, which included a reduction in 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 remaining 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 new information is obtained.

 

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.

 

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Table of Contents

 

Restructuring liability

 

The following is a reconciliation of the liability for the 2009 and 2008 restructuring charge from inception through June 30, 2010 (in thousands):

 

 

 

LED & Solar
Process
Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate

 

Total

 

Short-term liability

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2010

 

$

353

 

$

486

 

$

15

 

$

1,597

 

$

2,451

 

Reversal of lease-related costs

 

 

(108

)

 

 

(108

)

Short-term/long-term reclassification

 

 

70

 

 

536

 

606

 

Cash payments

 

(353

)

(253

)

(15

)

(1,030

)

(1,651

)

Balance as of June 30, 2010

 

$

 

$

195

 

$

 

$

1,103

 

$

1,298

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term liability

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2010

 

$

 

$

229

 

$

 

$

536

 

$

765

 

Reversal of lease-related costs

 

 

(71

)

 

 

(71

)

Short-term/long-term reclassification

 

 

(70

)

 

(536

)

(606

)

Balance as of June 30, 2010

 

$

 

$

88

 

$

 

$

 

$

88

 

 

The balance of the short-term restructuring liability relating to personnel severance charges is expected to be paid over the next three months. The long-term liability will be paid over the remaining life of the leases for the former corporate headquarters and a former Data Storage Process Equipment facility, which expire in June 2011 and May 2012, respectively. We have not incurred and currently do not anticipate or expect to incur additional restructuring charges during 2010.

 

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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 high brightness (“HB”) light emitting diode (“LED”) (“HB LED”), solar, data storage, scientific research, semiconductor, and industrial markets. We have leading technology positions in our three segments: 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 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, chemical vapor deposition, and dicing and slicing systems 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 Minnesota, Pennsylvania, France, England, Germany, Netherlands, Japan, Singapore, China, Taiwan, Korea, Malaysia, Philippines and Thailand.

 

Highlights of the Second Quarter of 2010

 

·                  Revenue was $253.0 million, a 251.3% increase from the second quarter of 2009.

·                  Orders were $346.9 million, a 251.6% increase from the second quarter of 2009.

·                  Net income was $52.4 million, or $1.20 per share, compared to a net loss of $(14.7) million, or $(0.47) per share, in the second quarter of 2009.

·                  Gross margins were 45.0%, compared to 33.9% in the second quarter of 2009.

 

Outlook

 

With backlog of $597 million at the end of June 2010, Veeco continues to have very strong business momentum. We continue to experience high levels of activity in our LED business, similar to the last three quarters, with multi-tool MOCVD system orders being quoted across a large number of customers. Our K465i™ is performing well in the market and we are increasing manufacturing capacity to satisfy customer demand.  In the second quarter of 2010, we shipped 81 systems. We currently plan to ship approximately 100 MOCVD tools in the third quarter 2010 and plan to reach a production capacity of 120 tools or more by the fourth quarter.  As a result of our variable-cost, outsourced manufacturing strategy, we have dramatically increased our production capacity with the ability to flex our actual MOCVD shipments up or down each quarter depending upon specific customer demand and delivery requirements.

 

We currently believe that the third quarter will be another strong order quarter for our MOCVD business. In particular, China’s initiative to subsidize the HB LED industry via seven national ‘industrial parks’ is spurring strong order quoting patterns for Veeco, both from Chinese entities as well as from Korean and Taiwanese customers that are partnering with Chinese entities.  We believe the HB LED industry is at the beginning of a multi-year MOCVD investment cycle as HB LEDs increase their penetration in laptop and TV backlighting and gain momentum for general illumination.

 

We are continuing to invest in our copper, indium, gallium, selenide (“CIGS”) Solar business, with a goal to build a “best of breed” deposition product line and ultimately help to drive CIGS technology as a low-cost, high

 

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efficiency solar technology. We shipped our first tool from our FastFlex family of deposition systems to an Asia customer during the second quarter of 2010.

 

Business conditions in our other segments, Data Storage and Metrology, also remain positive. In 2010, our Data Storage business is currently anticipated to perform well as customers invest in capacity additions and next-generation recording head technology.  Order rates have improved significantly from the low levels of business experienced in late 2008 and early 2009, with customers again investing in technology and capacity purchases. In Metrology we are winning in the market due to our new AFM and Optical products and have higher demand in the semiconductor, research and industrial markets as the global economy improved from 2009

 

Based upon Veeco’s strong backlog, the Company is currently forecasting that 2010 revenues will be over $1 billion, with strong year-over year growth from 2009 in revenue and profitability in all three business segments.

 

Our outlook discussion above constitutes “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. Our expectations regarding future results are subject to risks and uncertainties. Our actual results may differ materially from those anticipated. Risks associated with our ability to achieve these results are set forth in Items 1, 1A, 3, 7 and 7A in our annual report on Form 10-K for the year ended December 31, 2009, as well as any modifications or revisions to risk factors contained in our subsequent filings with the SEC

 

You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made.

 

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Table of Contents

 

Results of Operations:

 

Three Months Ended June 30, 2010 and 2009

 

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 2010 interim quarter ends are March 28, June 27 and September 26. The 2009 interim quarter ends were March 29, June 28 and September 27. 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 Condensed Consolidated Statements of Operations, percentages of sales, and comparisons between the three months ended June 30, 2010 and 2009 (dollars in thousands):

 

 

 

 

 

Dollar and

 

 

 

Three months ended

 

Percentage

 

 

 

June 30,

 

Change

 

 

 

2010

 

2009

 

Period to Period

 

Net sales

 

$

253,040

 

100.0

%

$

72,020

 

100.0

%

$

181,020

 

251.3

%

Cost of sales

 

139,282

 

55.0

 

47,636

 

66.1

 

91,646

 

192.4

 

Gross profit

 

113,758

 

45.0

 

24,384

 

33.9

 

89,374

 

366.5

 

Operating expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

27,287

 

10.8

 

19,822

 

27.5

 

7,465

 

37.7

 

Research and development

 

20,550

 

8.1

 

13,163

 

18.3

 

7,387

 

56.1

 

Amortization

 

1,634

 

0.6

 

1,831

 

2.5

 

(197

)

(10.8

)

Restructuring

 

 

 

1,944

 

2.7

 

(1,944

)

(100.0

)

Asset impairment charge

 

 

 

304

 

0.4

 

(304

)

(100.0

)

Other, net

 

512

 

0.2

 

(77

)

(0.1

)

589

 

*

 

Total operating expenses

 

49,983

 

19.8

 

36,987

 

51.4

 

12,996

 

35.1

 

Operating income (loss)

 

63,775

 

25.2

 

(12,603

)

(17.5

)

76,378

 

*

 

Interest expense, net

 

1,762

 

0.7

 

1,698

 

2.4

 

64

 

3.8

 

Income (loss) before income taxes

 

62,013

 

24.5

 

(14,301

)

(19.9

)

76,314

 

*

 

Income tax provision

 

9,620

 

3.8

 

402

 

0.6

 

9,218

 

2,293.0

 

Net income (loss)

 

52,393

 

20.7

 

(14,703

)

(20.4

)

67,096

 

*

 

Net loss attributable to noncontrolling interest

 

 

 

(23

)

0.1

 

23

 

(100.0

)

Net income (loss) attributable to Veeco

 

$

52,393

 

20.7

%

$

(14,680

)

(20.4

)%

$

67,073

 

*

 

 


* Not Meaningful

 

Net Sales and Orders

 

Net sales of $253.0 million for the three months ended June 30, 2010 were up 251.3% compared to the comparable 2009 quarter. The following is an analysis of net 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

 

 

 

2010

 

2009

 

Period to Period

 

2010

 

2009

 

Period to Period

 

2010

 

2009

 

Segment Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LED & Solar Process Equipment

 

$

185,646

 

$

31,882

 

$

153,764

 

482.3

%

$

260,439

 

$

56,342

 

$

204,097

 

362.2

%

1.40

 

1.77

 

Data Storage Process Equipment

 

35,742

 

17,593

 

18,149

 

103.2

 

50,025

 

19,318

 

30,707

 

159.0

 

1.40

 

1.10

 

Metrology

 

31,652

 

22,545

 

9,107

 

40.4

 

36,499

 

23,010

 

13,489

 

58.6

 

1.15

 

1.02

 

Total

 

$

253,040

 

$

72,020

 

$

181,020

 

251.3

%

$

346,963

 

$

98,670

 

$

248,293

 

251.6

%

1.37

 

1.37

 

Regional Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

30,200

 

$

23,864

 

$

6,336

 

26.6

%

$

33,101

 

$

20,660

 

$

12,441

 

60.2

%

1.10

 

0.87

 

Europe, Middle East and Africa (“EMEA”)

 

26,637

 

14,889

 

11,748

 

78.9

 

26,830

 

16,193

 

10,637

 

65.7

 

1.01

 

1.09

 

Japan

 

12,414

 

4,511

 

7,903

 

175.2

 

10,151

 

7,434

 

2,717

 

36.5

 

0.82

 

1.65

 

Asia Pacific

 

183,789

 

28,756

 

155,033

 

539.1

 

276,881

 

54,383

 

222,498

 

409.1

 

1.51

 

1.89

 

Total

 

$

253,040

 

$

72,020

 

$

181,020

 

251.3

%

$

346,963

 

$

98,670

 

$

248,293

 

251.6

%

1.37

 

1.37

 

 

Sales and orders increased in each segment in the second quarter of 2010 compared with the comparable 2009 quarter due to our customers’ requirements in response to increasingly favorable economic conditions compared to 2009. LED & Solar Process Equipment sales were up 482.3% from the comparable 2009 quarter primarily due to an increase in end user demand for HB LED backlighting applications and continued strong customer acceptance of Veeco’s newest generation systems. Data Storage Process Equipment segment sales were up 103.2% from the

 

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comparable 2009 quarter due to an increase in demand by our data storage customers as the global economy improved from 2009. Additionally, Metrology sales were up 40.4% from the comparable 2009 quarter, due to higher demand in the semiconductor, research and industrial markets as the global economy improved from 2009. By region, net sales increased by 539.1% in the Asia Pacific region, primarily due to MOCVD sales to HB LED customers, while sales in the Americas, EMEA and Japan also increased 26.6%, 78.9% and 175.2%, respectively. We believe that there will continue to be period-to-period variations in the geographic distribution of sales.

 

Orders for the second quarter of 2010 increased 251.6% from the comparable 2009 quarter. By segment, the 362.2% increase in orders for LED & Solar Process Equipment was principally driven by HB LED based manufacturers increasing production for television and laptop backlighting applications. The 159.0% increase in Data Storage Process Equipment orders resulted from an increase in demand by our data storage customers due to both capacity expansion and technology buys. The 58.6% increase in Metrology orders is due to higher demand in the semiconductor, research and industrial markets.

 

Our book-to-bill ratio for the second quarter of 2010, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.37 to 1, reflecting the increasingly favorable economic conditions experienced in the last four quarters, specifically related to our LED & Solar Process Equipment segment. Our backlog as of June 30, 2010 was $597.5 million, compared to $402.0 million as of December 31, 2009. During the three months ended June 30, 2010, we experienced backlog adjustments of approximately $1.4 million, principally due to adjustments related to foreign currency translation. For certain sales arrangements we require a deposit for a portion of the sales price before shipment. As of June 30, 2010 we had customer deposits and advanced billings of $113.6 million.

 

Gross Profit

 

Gross profit, as a percentage of net sales, for the second quarter of 2010, was 45.0%, compared to 33.9% in the comparable 2009 quarter. LED & Solar Process Equipment gross margins increased to 44.0% from 32.7%, Data Storage Process Equipment gross margins increased to 48.6% from 34.3% and Metrology gross margins increased to 46.6% from 35.2%. The increases in gross margin were driven primarily by increased sales volume in each of our segments.

 

Operating Expenses

 

Selling, general and administrative expenses increased by $7.5 million, or 37.7%, from the comparable 2009 quarter, however, decreased from 27.5% of net sales to 10.8% of sales.  The dollar increase was primarily due to an increase in bonus and profit sharing expense, equity-based compensation, travel and entertainment expenses, salary and related expenses and professional fees associated primarily with the significant increase in business activity in our LED & Solar Process Equipment segment.

 

Research and development expenses increased $7.4 million from the comparable 2009 quarter, however, decreased from 18.3% of net sales to 8.1%. The dollar increase was primarily due to increased spending in our LED & Solar Process Equipment segment to support future growth.

 

Restructuring expense of $1.9 million for the second quarter of 2009 consisted 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 $0.2 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.

 

Other, net for the second quarter of 2010 includes a foreign currency exchange loss of $0.5 million compared to a foreign currency exchange gain of $0.1 million in the comparable 2009 quarter.

 

Income Taxes

 

Our provision for income taxes consists of U.S. federal, state and local and foreign taxes in amounts necessary to align our quarter-to-date tax provision with the effective tax rate we expect to achieve for the full year.

 

For the three months ended June 30, 2010, the Company had an effective tax rate of 15.5% and recorded a provision for income taxes of $9.6 million which includes $2.0 million relating to our foreign operations and $7.6 million relating to U.S. federal, state and local taxes. The effective tax rate is lower than the statutory rate primarily

 

20



Table of Contents

 

due to the Company’s ability to realize a significant portion of its deferred tax assets, primarily related to net operating loss carryforwards and federal tax credits, on a more-likely-than-not basis based on the forecasted results of operations for the year ending December 31, 2010.

 

For the three months ended June 30, 2009, the Company had an effective tax rate of (2.8)% and recorded a provision for income taxes of $0.4 million which included $0.2 million relating to our foreign operations and $0.2 million relating to state and local taxes.

 

Results of Operations:

 

Six Months Ended June 30, 2010 and 2009

 

The following table shows our Condensed Consolidated Statements of Operations, percentages of sales, and comparisons between the six months ended June 30, 2010 and 2009 (dollars in thousands):

 

 

 

 

 

Dollar and

 

 

 

Six months ended

 

Percentage

 

 

 

June 30,

 

Change

 

 

 

2010

 

2009

 

Period to Period

 

Net sales

 

$

416,271

 

100.0

%

$

134,869

 

100.0

%

$

281,402

 

208.6

%

Cost of sales

 

232,164

 

55.8

 

90,103

 

66.8

 

142,061

 

157.7

 

Gross profit

 

184,107

 

44.2

 

44,766

 

33.2

 

139,341

 

311.3

 

Operating expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

50,707

 

12.2

 

38,429

 

28.5

 

12,278

 

31.9

 

Research and development

 

36,990

 

8.9

 

26,049

 

19.3

 

10,941

 

42.0

 

Amortization

 

3,319

 

0.8

 

3,660

 

2.7

 

(341

)

(9.3

)

Restructuring

 

(179

)

(0.0

)

6,375

 

4.7

 

(6,554

)

*

 

Asset impairment charge

 

 

 

304

 

0.2

 

(304

)

(100.0

)

Other, net

 

359

 

0.1

 

1,409

 

1.0

 

(1,050

)

(74.5

)

Total operating expenses

 

91,196

 

21.9

 

76,226

 

56.5

 

14,970

 

19.6

 

Operating income (loss)

 

92,911

 

22.3

 

(31,460

)

(23.3

)

124,371

 

*

 

Interest expense, net

 

3,544

 

0.9

 

3,407

 

2.5

 

137

 

4.0

 

Income (loss) before income taxes

 

89,367

 

21.5

 

(34,867

)

(25.9

)

124,234

 

*

 

Income tax provision

 

10,930

 

2.6

 

780

 

0.6

 

10,150

 

1,301.3

 

Net income (loss)

 

78,437

 

18.8

 

(35,647

)

(26.4

)

114,084

 

*

 

Net loss attributable to noncontrolling interest

 

 

 

(65

)

0.1

 

65

 

(100.0

)

Net income (loss) attributable to Veeco

 

$

78,437

 

18.8

%

$

(35,582

)

(26.4

)%

$

114,019

 

*

 

 


* Not Meaningful

 

Net Sales and Orders

 

Net sales of $416.3 million for the six months ended June 30, 2010 were up 208.6% compared to the comparable 2009 period. The following is an analysis of net 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

 

 

 

2010

 

2009

 

Period to Period

 

2010

 

2009

 

Period to Period

 

2010

 

2009

 

Segment Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LED & Solar Process Equipment

 

$

297,150

 

$

54,084

 

$

243,066

 

449.4

%

$

472,102

 

$

84,863

 

$

387,239

 

456.3

%

1.59

 

1.57

 

Data Storage Process Equipment

 

58,987

 

34,498

 

24,489

 

71.0

 

76,398

 

27,136

 

49,262

 

181.5

 

1.30

 

0.79

 

Metrology

 

60,134

 

46,287

 

13,847

 

29.9

 

66,307

 

39,721

 

26,586

 

66.9

 

1.10

 

0.86

 

Total

 

$