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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998MARCH 31, 1999
Commission file number 0-16244
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VEECO INSTRUMENTS INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2989601
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Terminal Drive
Plainview, New York 11803
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 349-8300
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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|/X/ No |_|
14,739,783/ /
15,921,767 shares of common stock, $.01 par value per share, were outstanding
as of November 5, 1998.
================================================================================May 4, 1999.
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VEECO INSTRUMENTS INC.
INDEX
Page
----PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Income -
Three Months Ended September 30,March 31, 1999 and 1998 and 1997 3
Condensed Consolidated Statements of Income -
Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Balance Sheets -
September 30, 1998March 31, 1999 and December 31, 1997 51998 4
Condensed Consolidated Statements of Cash Flows -
NineThree Months Ended September 30,March 31, 1999 and 1998 and 1997 65
Notes to Condensed Consolidated Financial Statements 76
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 1514
SIGNATURES 1615
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended
September 30,
----------------------March 31,
-----------------------
1999 1998 1997
-------- --------
Net sales $ 50,53955,979 $ 55,19553,659
Cost of sales 27,317 28,23429,462 29,518
-------- --------
Gross profit 23,222 26,96126,517 24,141
Costs and expenses:
Research and development expense 7,052 6,1547,131 6,490
Selling, general and administrative expense 10,172 9,825
Amortization expense 97 6911,474 10,047
Other, net (439) (20)
Merger and reorganization expenses -- 2,250(71) (35)
-------- --------
Operating income 6,340 8,6837,983 7,639
Interest expense, (income), net 283 (209)(141) 198
-------- --------
Income before income taxes 6,057 8,8928,124 7,441
Income tax provision 1,817 2,0073,006 1,733
-------- --------
Net income $ 4,2405,118 $ 6,8855,708
======== ========
Net income per common share $ 0.290.33 $ 0.480.39
Diluted net income per common share $ 0.290.32 $ 0.46
======== ========
Weighted average shares outstanding 14,654 14,432
Diluted weighted average shares outstanding 14,860 15,049
======== ========0.39
Pro forma presentation (See Note 1):income tax presentation:
Income before income taxes $ 6,057 $ 8,8927,441
Pro forma income tax provision 2,241 3,350
--------2,836
--------
Pro forma net income $ 3,816 $ 5,542
========4,605
========
Pro forma net income per common share $ 0.26 $ 0.380.32
Pro forma diluted income per common share $ 0.26 $ 0.37
======== ========
See accompanying notes. -3-
Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Nine Months Ended
September 30,
-------------------------
1998 1997
--------- ---------
Net sales $ 155,345 $ 158,952
Cost of sales 83,883 80,829
--------- ---------
Gross profit 71,462 78,123
Costs and expenses:
Research and development expense 20,549 17,261
Selling, general and administrative expense 31,403 28,842
Amortization expense 292 206
Other, net (695) (335)
Merger and reorganization expenses 7,500 2,250
Purchased in process technology -- 4,200
--------- ---------
Operating income 12,413 25,699
Interest expense, (income) net 748 (79)
--------- ---------
Income before income taxes 11,665 25,778
Income tax provision 3,499 5,927
--------- ---------
Net income $ 8,166 $ 19,851
========= =========
Net income per common share $ 0.56 $ 1.38
Diluted net income per common share $ 0.55 $ 1.33
========= =========0.31
Weighted average shares outstanding 14,577 14,36515,531 14,510
Diluted weighted average shares outstanding 14,813 14,879
========= =========
Pro forma presentation (See Note 1):
Income before income taxes $ 11,665 $ 25,778
Pro forma income tax provision 4,316 9,850
--------- ---------
Pro forma net income $ 7,349 $ 15,928
========= =========
Pro forma net income per common share $ 0.50 $ 1.11
Pro forma diluted net income per common share $ 0.50 $ 1.07
========= =========
See accompanying notes. -4-16,012 14,733
SEE ACCOMPANYING NOTES.
-3-
Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
September 30,March 31, December 31,
1999 1998
1997
------------ -------------------- --------
(Unaudited)
AssetsASSETS
Current assets:
Cash and cash equivalents $ 14,25170,017 $ 20,44423,492
Accounts and trade notes receivable, net 46,795 44,92754,008 43,018
Inventories 51,621 44,82553,622 53,324
Prepaid expenses and other current assets 1,403 1,6952,616 1,388
Deferred income taxes 6,001 4,6025,849 5,910
-------- --------
Total current assets 120,071 116,493186,112 127,132
Property, plant and equipment at cost, net 36,262 33,34436,889 37,204
Excess of cost over net assets acquired 4,220 4,3184,155 4,187
Other assets, net 5,338 5,4764,294 4,314
-------- --------
Total assets $165,891 $159,631$231,450 $172,837
======== ========
Liabilities and shareholders' equityLIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 15,413 15,624
Accrued expenses 26,037 24,549
Notes payable to former Digital shareholders 8,000 --
Other current liabilities $ 42,227 $ 47,715
Other non-current3,283 1,433
-------- --------
Total current liabilities 995 1,01252,733 41,606
Long term debt, net of current portion 16,995 17,1468,883 8,940
Notes payable to former Digital shareholders -- 8,000
Other non-current liabilities 1,128 1,067
Shareholders' equity 105,674 93,758168,706 113,224
-------- --------
Total liabilities and shareholders' equity $165,891 $159,631$231,450 $172,837
======== ========
See accompanying notes -5-SEE ACCOMPANYING NOTES.
-4-
Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30,
--------------------
1998 1997
-------- --------
Operating activities
Net income $ 8,166 $ 19,851
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,570 1,319
Deferred income taxes (1,399) (1,919)
Non-cash compensation charge 1,585 --
Purchased in process technology -- 4,200
Changes in operating assets and liabilities:
Accounts receivable (1,546) (11,344)
Inventories (6,614) (8,107)
Accounts payable (5,756) 7,571
Accrued expenses and other current liabilities 233 4,214
Other, net 2,418 620
-------- --------
Net cash provided by operating activities 657 16,405
Investing activities
Capital expenditures (6,194) (5,774)
Net assets of business acquired -- (4,375)
-------- --------
Net cash used in investing activities (6,194) (10,149)
Financing activities
Proceeds from stock issuance 1,952 1,751
Distribution to Digital shareholders (2,000) (8,000)
Other (156) (83)
-------- --------
Net cash used in financing activities (204) (6,332)
Effect of exchange rates on cash (452) (179)
-------- --------
Net change in cash and cash equivalents (6,193) (255)
Cash and cash equivalents at beginning of period 20,444 26,322
-------- --------
Cash and cash equivalents at end of period $ 14,251 $ 26,067
Three Months Ended
March 31,
-----------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Net income $ 5,118 $ 5,708
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,333 889
Deferred income taxes 132 (55)
Other, net (222) --
Changes in operating assets and liabilities:
Accounts receivable (12,414) (4,412)
Inventories (829) (1,731)
Accounts payable (95) (648)
Accrued expenses and other current liabilities 4,242 (3,453)
Other, net (1,352) 701
-------- --------
Net cash used in operating activities (4,087) (3,001)
INVESTING ACTIVITIES
Capital expenditures (3,382) (1,208)
Proceeds from sale of property, plant and equipment 2,679 --
-------- --------
Net cash used in investing activities (703) (1,208)
FINANCING ACTIVITIES
Proceeds from stock issuance 50,607 195
Distribution to Digital shareholders -- (1,000)
Other (55) (61)
-------- --------
Net cash provided by (used in) financing activities 50,552 (866)
Effect of exchange rates on cash 763 (203)
-------- --------
Net change in cash and cash equivalents 46,525 (5,278)
Cash and cash equivalents at beginning of period 23,492 20,444
-------- --------
Cash and cash equivalents at end of period $ 70,017 $ 15,166
======== ========
See accompanying notes. -6-
SEE ACCOMPANYING NOTES.
-5-
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NoteNOTE 1 - Basis of PresentationBASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 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 ninethree months ended September 30, 1998March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.1999. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.1998.
Earnings per share isare computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share isare computed
using the weighted average number of common and common equivalent shares
outstanding during the period.
The following table sets forth the reconciliation of diluted weighted-average
shares outstanding:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(In Thousands) (In Thousands)
1998 1997 1998 1997
---- ----- ---- ----
Weighted - average shares outstanding 14,654 14,432 14,577 14,365
Dilutive effect of stock options 206 617 236 514
------ ------ ------ ------
Diluted weighted - average shares outstanding 14,860 15,049 14,813 14,879Three Months Ended
March 31,
------------------
(In thousands)
1999 1998
------ ------
Weighted-average shares outstanding 15,531 14,510
Dilutive effect of stock options 481 223
------ ------
Diluted weighted-average shares outstanding 16,012 14,733
====== ====== ====== ======
Pro forma net income and pro forma earnings per share as shown on the Condensed
Consolidated Statements of Income presents income taxes for Digital Instruments,
Inc. as if Digital
Instruments, Inc. ("Digital"), which was merged in a pooling of interest with the Company in May 1998 in
a transaction accounted for as a pooling of interests, had been a "C"
Corporation for all periods presented and therefore, subject to federal income
taxes at the corporation level (See Note 2).
Note 2 - Merger
On May 29, 1998, the Company merged with Digital Instruments, Inc. of Santa
Barbara, CA ("Digital") a world leader in scanning probe/atomic force microscopy
(SPM/AFM). Under the merger, Digital shareholders received 5,583,725 shares of
Veeco common stock. The merger is accounted for as a pooling of interests
transaction and, accordingly, historical financial data has been restated to
include Digital data. Merger and reorganization expenses principally related to
this transaction amounted to $7.5 million . They were comprised of transaction
fees and expenses of $3.3 million, a $1.6 million non-cash compensation charge
related to stock issued in accordance with a pre-existing agreement with a key
Digital Instruments employee, $1.4 million of duplicate facility costs and $1.2
million of reorganization costs all of which were charged to operating expenses
during the nine month period ended September 30, 1998.level. Prior to the merger, Digital had elected "S"
Corporation status for income tax purposes and, therefore, was not subject to
federal income taxes at the corporation level.taxes. As a result of the merger, financial data for the three
months ended March 31, 1998 has been restated to include Digital terminated
-7-data.
-6-
its "S" Corporation election. Pro forma net income presents income taxesNOTE 2 - PUBLIC OFFERING
On February 2, 1999, the Company completed a public offering pursuant to which
1,000,000 shares of Common Stock, par value $.01 per share were issued and sold
for Digital$52.00 per share, less underwriting discounts and commissions of $2.34 per
share. In addition, as if it had been a "C" Corporation for all periods presented. The
following unaudited pro forma data summarizespart of the combined results of operationspublic offering, certain stockholders of the
Company and Digital as thoughsold 2,575,000 shares of Common Stock. The Company did not receive any
of the merger occurred atproceeds from the beginningsale of fiscal year 1995 and as if Digital had been a "C" Corporation.
Unaudited pro forma data
(In thousands)
Years Ended
December 31,
1997 1996 1995
--------------------------------------
Revenues:
Veeco $165,408 $115,042 $ 85,825
Digital 51,320 50,017 38,151
-------- -------- --------
Combined $216,728 $165,059 $123,976
======== ======== ========
Pro forma net income:
Veeco $ 12,283 $ 10,835 $ 9,237
Digital 8,537 10,040 7,039
-------- -------- --------
Combined $ 20,820 $ 20,875 $ 16,276
======== ======== ========
Noteshares by the selling stockholders.
NOTE 3 - InventoriesINVENTORIES
Interim inventories have been determined by lower of cost (principally first-in,
first-out) or market. Inventories consist of:
September 30,March 31, December 31,
1999 1998 1997
------- -------
(In thousands)
Raw materials $29,430 $25,016
Work-in process 11,225 8,101$28,773 $28,202
Work-in-process 13,040 12,652
Finished goods 10,966 11,70811,809 12,470
------- -------
$51,621 $44,825$53,622 $53,324
======= =======
NoteNOTE 4- Balance Sheet InformationBALANCE SHEET INFORMATION
Selected balance sheet account disclosures follow:
September 30,March 31, December 31,
1999 1998 1997
------- -------
(In thousands)
Allowance for doubtful accounts $ 1,0881,726 $ 1,0051,725
Accumulated depreciation and amortization
of property, plant and equipment 14,895 11,58916,464 15,861
Accumulated amortization of excess of cost
over net assets acquired 1,138 1,040
-8-1,203 1,171
-7-
NoteNOTE 5 - Other Information
Interest paid duringSEGMENT INFORMATION
The following represents the ninereportable product segments of the Company as of
and for the three months ended September 30,March 31, 1999 and 1998, in thousands:
Net Sales Operating Income (Loss) Total Assets
------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
------------------------------------------------------------------------------------------
Metrology $30,973 $32,919 $6,714 $7,198 $73,045 $73,053
Process equipment 19,488 15,160 2,681 780 64,036 50,403
Industrial measurement 5,518 5,580 (6) 457 16,334 15,185
Unallocated corporate amount (1,406) (796) 78,035 22,273
------------------------------------------------------------------------------------------
Total $55,979 $53,659 $7,983 $7,639 $231,450 $160,914
==========================================================================================
NOTE 6 - COMPREHENSIVE INCOME
Total comprehensive income was $4.6 million and 1997 was $.9$5.5 million for each period. The Company made income tax payments of $4.3 million
during each of the nine month periodsthree
months ended September 30,March 31, 1999 and 1998, and 1997.
Note 6 - New Accounting Pronouncement
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income". SFAS No. 130 establishes new rules for the reporting and display ofrespectively. Other comprehensive income
and its components; however, the adoptionis comprised of this statement
had no impact on the Company's reported net income or shareholders' equity. SFAS
No. 130 requires foreign currency translation adjustments which prior to its
adoption were reported separately as part of stockholders' equity to be included
in other comprehensive income.
For the nine months ended September 30, 1998 and 1997, total comprehensive
income amounted to $8.2 million and $19.2 million, respectively.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which is
effective for both interim and annual financial statements for periods ending
after December 15, 1997. Segment information is not required to be reported in
interim financial statements in the first year of application. The Company
intends to adopt SFAS No. 131 for the fiscal year ending December 31, 1998.adjustments.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Three Months Ended September 30,RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 and 1997
Net sales of $50.5$56.0 million for the three months ended September 30, 1998
declined 8%March 31, 1999 represents
an increase of 4% from the 19971998 comparable period sales of $55.2$53.7 million,
reflecting a
declinean increase in process equipment sales partially offset by an increasea decline
in metrology sales. Sales in the US, Europe, Japan and Asia Pacific,
respectively, accounted for 56%32%, 14%18%, 15%24% and 10%25%, respectively, of the
Company's net sales for the three months ended September 30, 1998.March 31, 1999. Sales in the USU.S.
decreased 25% from the comparable 1998 period due to a 15% decline in U.S.
process equipment sales and a 40% decline in U.S. metrology sales. The decrease
in U.S. metrology sales reflects a shift in the sales of in-line inspection
tools from U.S. to foreign locations of U.S. based leading data storage
customers. Sales in Europe and Japan remained flatincreased 5% and 8%, respectively, while sales in Europe increased 11% and
sales in Asia Pacific decreased 58% from
the comparable 1997 period. Metrology salesincreased 187% principally as a result of an increase in
the U.S. increased 22% while
process equipment sales declined 14%.metrology sales. The increase in Europeanmetrology sales resulted
from increased metrology and industrial measurement sales partially offset by a
decline in process equipment sales. The decrease in Asia Pacific sales reflected
the continued economic downturn in that region, particularlyis primarily
related to an increase in the sale of in-line inspection tools to a leading data
storage industry.customer. The Company believes that there will continue to be quarter to
quarter variations in the geographic concentration of sales.
Metrology sales of $30.2$31.0 million for the three months ended September 30, 1998
increased by $3.6March 31, 1999
represents a decrease of $1.9 million or 13% over6% from the comparable 19971998 period,
reflecting increasedsoftness in the semiconductor market for use of metrology products for in-line inspection of critical stepstools in
data storage.production applications. Process equipment sales of $15.6$19.5 million for the three
months ended September 30, 1998 decreased by $8.4March 31, 1999 represents an increase of $4.3 million or 35%29% from
the comparable 19971998 period, as sales of ion beam etch products declined, partially offset by an
increase in sales of ion beam deposition equipment. Sales of ion beam etch
products continuereflecting the data storage industry's accelerated
transition to be negatively affected by industry over capacity in data
storage.giant magnetoresistive ("GMR") thin film magnetic head
development. Industrial measurement sales of $4.7$5.5 million for the three months
ended September 30, 1998 increased 3%March 31, 1999 remained relatively flat from the comparable 19971998 period.
-9-
Veeco received $43.5$65.0 million of orders for the three months ended September 30,
1998,March 31,
1999, a 27%1% decrease compared to $59.5$65.9 million of orders for the comparable 19971998
period. Metrology orders decreased by 24%37% to $25.3$25.0 million while process
equipment orders decreased 33%increased 65% to $14.0$36.2 million, whichreflecting continued acceptance
of Veeco's ion beam deposition, ion beam etch, and physical vapor deposition
equipment for next generation GMR thin film head manufacturing by the leading
data storage companies. The reduction in metrology orders reflects the continued
weaknessreduction
in orders for in-line inspection equipment and the softness in the
semiconductor and data storage industries.market for use of metrology tools in production applications.
The book/bill ratio for the thirdfirst quarter of 19981999 was .86. Based upon the continued weakness in the
semiconductor and data storage industries, the Company expects revenues and
operating income to remain relatively flat for each of the next several
quarters.1.16.
Gross profit for the three months ended September 30, 1998March 31, 1999 of $23.2$26.5 million
represents a declinean increase of $3.7$2.4 million from the comparable 19971998 period. Gross
profit as a percentage of net sales decreasedincreased to 45.9%47.4% for 19981999 from 48.8%45.0% for
the comparable 19971998 period, principally due to a decreaseas gross margin improvements were experienced in
each of the three product segments. The increase in gross margin for process
equipment. This declineequipment is principally due to the increased sales volume of this product. The
increase in process equipment gross margin resulted from
lower sales volume, increased field service, warranty, facility and information
system costs and the increasefor metrology is related to a mix shift in sales of new deposition products with lower
initial gross margins than established ion beam etch products. The metrology
product experiencedto
higher field servicemargin atomic force microscopes and warranty costs as it expanded sales
of production relatedoptical in-line inspection tools to data storage customers at a variety of
international locations.tools.
Research and development expenses of $7.1 million for the three months ended
September 30, 1998March 31, 1999 increased by $.9$.6 million or 15%10% over the comparable period of
19971998 as the Company continues to increase spending for new product development
in each of its product lines, particularly in its process equipment and metrology product linebusiness for in-line inspection toolsproducts for
semiconductor andnext generation products for advanced GMR applications for the data storage
industries.industry.
-9-
Selling, general and administrative expenses of $10.2$11.5 million for the three
months ended September 30,March 31, 1999 increased by approximately $1.4 million to 20.5% of
net sales in 1999 from 18.7% in 1998, were relatively flat as comparedprincipally due to higher sales
commissions resulting from higher sales volume and from the same
periodincrease in
international sales particularly in Japan and Asia Pacific.
The Company recorded reorganization expenses of 1997.
In connection withapproximately $1.7 million in
1998 principally related to the merger with Wyko Corporation,Digital representing severance and
other costs and an estimated loss on a future sublease of an abandoned office
and manufacturing facility. At December 31, 1998 approximately $.8 million
remained accrued for these expenses. During the three months ended March 31,
1999 the Company incurred approximately $2.3$.2 million of merger related fees incosts that were charged
against the three months ended
September 30, 1997 consisting of investment banking, legal and other transaction
costs.accrual.
Income taxes for the three months ended September 30, 1998March 31, 1999 amounted to $1.8$3.0 million
or 30%37% of income before income taxes as compared to $2.0$1.7 million or 23% of
income before income taxes for the same period of 1997. This increase in the1998. The lower effective tax
rate in 1998 reflects Digital's "S" Corporation tax status for five months in
1998 (through the merger date) compared to a full year in 1997.. As an "S" Corporation, Digital was not subject
to federal income tax at the corporation level.
Nine Months Ended September 30, 1998 and 1997LIQUIDITY AND CAPITAL RESOURCES
Net sales were $155.3cash used in operations totaled $4.1 million for the ninethree months ended
September 30, 1998
representing a decrease of $3.6 million or 2% from the comparable 1997 period.
The decrease in sales reflects a 34% decrease in process equipment sales offset
by a 23% increase in metrology sales. Sales in the US, Europe, Japan and Asia
Pacific, respectively, accounted for 50%, 18%, 17% and 10%, respectively, of the
Company's net sales for the nine months ended September 30, 1998. Sales in the
US decreased approximately 14%, while international sales included a 92%
increase in Europe, a 21% increase in Japan and a 28% decrease in Asia Pacific
from the comparable 1997 period. The decrease in US sales principally reflects
reduced process equipment sales to data storage customers. The increase in
European sales principally reflects increased process equipment sales to data
storage customers along with increased metrology sales for data storage and
semiconductor applications. The increase in sales in Japan principally reflects
an increase in process metrology sales. The decrease in sales in Asia Pacific
principally reflects a decrease in sales of all product lines resulting from the
economic downturn in that region. The Company believes that there will continue
to be quarter to quarter variations in the geographic concentration of sales.
Metrology sales of $97.6 million for the nine months ended September 30, 1998
increased by $18.1 million or 23% over the comparable 1997 period principally
reflecting increased use of metrology products for in-line inspection of
-10-
critical steps in data storage applications. Process equipment sales of $42.6
million for the nine months ended September 30, 1998 decreased by $22.0 million
or 34% from the comparable 1997 period, as sales of ion beam etch products
declined, partially offset by sales of new deposition equipment. Ion beam etch
sales continue to be negatively affected by excess capacity in data storage.
Industrial measurement sales for the nine months ended September 30, 1998 of
$15.1 million increased 3% over the comparable 1997 period.
Veeco received $159.4 million of orders for the nine months ended September 30,
1998 representing a 5% decrease from $167.6 million of orders in the comparable
1997 period. Metrology orders increased 16% to $97.2 million reflecting the
increased use of in line metrology for production applications such as PTR (pole
tip recession) measurements for new MR/GMR thin film magnetic heads. Process
equipment orders decreased 27% to $48.9 million as a result of a reduction in
orders of ion beam etch products reflecting weak data storage market conditions
accompanied by industry wide over capacity. The book/bill ratio for the nine
months ended September 30, 1998 was 1.03.
Gross profit for the nine months ended September 30, 1998 of $71.5 million
represents a decrease of $6.6 million from the comparable 1997 period. Gross
profit as a percentage of net sales decreased to 46.0% for 1998 from 49.1% for
1997, principally due to a decrease in gross margin for the process equipment
product line. This decline resulted from lower sales volume, increased field
support, warranty, facility and information system costs and the increase in
sales of new deposition products with lower initial gross margins than
established ion beam etch products. The metrology product experienced higher
field service and warranty costs as it expanded sales of production related
inspection tools to data storage customers at a variety of international
locations.
Research and development expense for the nine months ended September 30, 1998 of
$20.5 million increased by $3.3 million or 19% over the comparable period of
1997, as the Company continues to invest in new product development in each of
its product lines with particular emphasis on in-line inspection tools in the
metrology product line and deposition tools for its process equipment line.
Selling, general and administrative expenses of $31.4 million for the nine
months ended September 30, 1998 increased by $2.6 millionMarch 31, 1999 compared to the
comparable 1997 period as a result of increased costs to support the growth in
the metrology product line along with investments made in customer sales and
field support including the transition to more direct sales and support coverage
in Japan, Europe and Asia Pacific.
As described in Note 2, the Company recorded a $7.5 million non-recurring
pre-tax charge for merger and reorganization expenses during the nine months
ended September 30, 1998. During the nine months ended September 30, 1997, the
Company recorded a $4.2 million expense for the fair value of acquired
in-process engineering and development projects and a non-recurring $2.3 million
charge for merger related fees consisting of investment banking, legal and other
transaction costs in connection with the merger with Wyko Corporation.
Income taxes for the nine months ended September 30, 1998 amounted to $3.5
million or 30% of income before income taxes as compared to $5.9 million or 23%
of income before income taxes for the same period of 1997. This increase in the
effective tax rate reflects Digital's "S" Corporation status for five months in
1998 (through the merger date) compared to a full year in 1997. As an "S"
Corporation, Digital was not subject to federal income taxes at the corporation
level.
Liquidity and Capital Resources
Net cash provided by operations totaled $.7 million for the nine months ended
September 30, 1998 compared to $16.4$3.0 million for the comparable 19971998 period. This
change in cash provided fromused in operations reflects a decrease in net income for the 19981999
period of $11.7$.6 million from the comparable 19971998 period, along with the use of
cash for changes in operating assets and liabilities. Accounts payable and
accrued expenses and other current liabilities decreasedincreased by $5.5$4.1 million during
the ninethree months ended September 30,March 31, 1999 while decreasing $4.1 million during the
comparable 1998 period. Accounts receivable increased by $12.4 million during
the three months ended March 31, 1999 while increasing $11.8$4.4 million during -11-
the
comparable period of 1997. The decrease in accounts payable and accrued
expenses and other current liabilities in 1998 reflects the payment of certain
liabilities including a portion of the non recurring merger related expenses and
the reduction in customer deposits.period. The increase in accounts payable and accrued
expenses and other current liabilitiesreceivable is due to the timing
of sales which were skewed towards the end of the quarter as well as increased
sales volume.
Net cash used in 1997 reflectinvesting activities for the growth in business in
1997 over 1996. Accounts receivable increased $1.5 million during the ninethree months ended September 30, 1998 while increasing $11.3March 31, 1999
totaled $.7 million during the
comparable 1997 period.
Veeco made capital expenditures of $6.2compared to $1.2 million for the nine month period ended
September 30,comparable 1998 comparedperiod.
Cash used in 1999 consisted of $3.4 million of capital expenditures partially
offset by $2.7 million of proceeds from sale of property, plant and equipment
versus $1.2 million of cash used for capital expenditures for the comparable
1998 period.
On February 2, 1999, the Company completed a public offering, pursuant to $5.8which
1,000,000 shares of Common Stock, par value $.01 per share, were issued and sold
for $52.00 per share, less underwriting discounts and commissions of $2.34 per
share. The Company expects to use the net proceeds of the offering
(approximately $49.0 million) for capital expenditures including clean
manufacturing areas and expanded customer application laboratories and for
working capital and general corporate purposes, including potential
acquisitions.
The Company has an unsecured $40.0 million Credit Facility (the "Credit
Facility") which may be used for working capital, acquisitions and general
corporate purposes. The Credit Facility bears interest at the prime rate of the
lending banks, but is adjustable to a maximum rate of 1/4% above the prime rate
in the comparable 1997 period.
Capital expensesevent the Company's ratio of debt to cash flow exceeds a defined ratio. A
LIBOR-based interest rate option is also provided. As of March 31, 1999 there
were no amounts outstanding under the Credit Facility.
The Company will be required to repay promissory notes owed to former
stockholders of Digital in 1998 were principally for engineering and application lab
equipment.the aggregate principal amount of $8.0 million when
they become due in March 2000. The notes bear interest at an annual rate of
7.21%.
-10-
The Company believes that existing cash balances together with cash generated
from operations and amounts available under the Company's credit facility will
be sufficient to meet the Company's projected working capital and other cash
flow requirements for the next twelve months.
YearYEAR 2000
The Year 2000 Issue is the result of computer programs using two digits rather
than four to define the applicable year. Any of the Company's computer programsprogram or hardware or
other equipment that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on recent assessments, theThe Company has determined that it will be requiredneeds to modify or replace portions of its
business systemssystems' software and certain hardware so that those systems will
properly utilize dates beyond December 31, 1999. The Company presently believes
that with modifications or replacements of itits business systemssystems' existing
software and certain hardware, the Company's computer programs should be able to
continue to operate effectively after December 31, 1999. However, if such
modifications and replacements are not made,
or are not completed in a timely manner, the Year
2000 Issue could have a material impact on the operations of the Company.
Furthermore, in addition to its own systems, the Company relies directly and
indirectly on external systems of its customers, suppliers, creditors, financial
organizations, utilities providers and governmental agencies (collectively,
"Third Parties").
The Company is utilizing both internal and external resources to resolve the
Year 2000 Issue following a phased approach which is comprised of inventory and
assessment, planning and renovation, testing and implementation. The following
describes the Company's efforts to identify and address its and applicable Third
Party Year 2000 Issues with respect to a) the Company's information technology
(IT) and non-IT systems, including facilities and infrastructure, b) the
Company's products and c) the Company's suppliers:
a) The Company's information technologyIT and non-IT systems including facilities and
infrastructure:
In 1997, the Company completed itsthe installation of a new business system
for its process equipment and industrial product lines which has been
certified by the vendor as Year 2000 compliant. The Company is in the processhas completed
its assessment and testing of either testing
or assessing the extent of upgrades or modification required for its business systems for its metrology
productbusiness lines. Based upon such assessment and testing, along with
installing vendor upgrades and relying upon compliance statements received
from its software and hardware vendors, the Company believes its metrology
business systems will properly utilize dates beyond December 31, 1999.
Furthermore, the Company is in the process of installing a new business
system for its sales and service offices in Europe that the vendor has
certified is Year 2000 compliant.
The Company is also in the process of completingcompleted its inventory and assessment of its desktop systems
-12-
and laptops. The Company currently uses standard "off the shelf"
vendor suppliedvendor-supplied software on its desktop systems and laptops. Many of these vendors are still
implementing their Year 2000 compliance programs andBased upon
this assessment, the Company is not aware of any business critical
remediation that is required and believes that its business critical
desktop systems and laptops will implement
the Year 2000 compliant versions as required when those solutions are available.properly utilize dates beyond December 31,
1999.
The Company is in the process of assessing its Year 2000 risk with respect
to telephone and communications systems, utility systems and building
security systems. Formal inquires are expected to beinquiries were sent to third parties beforeThird Parties in December 31,
1998 inquiring as to such Third PartiesParties' Year 2000 readiness. The Company
anticipates completing its assessment before June 30, 1999.
-11-
b) The Company's products:
The Company is in the process of completinghas completed its inventory and assessment of its productsproducts'
Year 2000 readiness utilizing testing guidelines prepared by Sematech, a
consortium of suppliers to worldwide semiconductor manufacturers. The
Company plans to comply with Sematech's guidelines for Year 2000 compliance
for its metrology and process equipment lines. The Company believes itsCompany's new products
are designed to be Year 2000 capable,ready; however, some of the Company's older
products will require upgrades for Year 2000 capability.readiness. The Company intends
to provide upgrades for certain of such products, some of which will be
provided to customers without charge. Major customers have been notified of
the Company's upgrade program. Notwithstanding such efforts, any failure of
the Company's products to perform, including system malfunctions due to the
onset of Year 2000, could result in claims against the Company which could
have a material adverse effect on the Company's business, results of
operations or financial condition. Moreover,In such event, the Company's customers
could choose to convert to other Year 2000 capableready products in order to avoid
such malfunctions, which could have a material adverse effect on the
Company's business, financial condition or results of operations.
c) The Company's suppliers:
The Company is in the process of inquiring ofassessing its significant suppliers and
subcontractors regarding the status of their Year 2000 readiness. To date,
the Company is not aware of any Year 2000 issue that would materially
impact the Company's business, financial condition or results of
operations, liquidity or capital resources.operations. However, the Company has no means of ensuring that suppliers or
subcontractors will be Year 2000 ready. The inability of suppliers or
subcontractors to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The Company is unable to
determine the effect of non-compliance by suppliers or subcontractors.
The Company will utilize both internal and external resources to reprogram or
replace, test, and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $400,000
to $750,000$500,000
and is being funded through operating cash flows. To date, the Company has
incurred approximately $340,000, of which $100,000 (which has been expensed),expensed and
$240,000 has been capitalized, related to all phases of the Year 2000 project.
Of the total remaining project costs, approximately $250,000 to $400,000$80,000 is attributable to
the purchase of new software and operating equipment, which will be capitalized.
The remaining $50,000 to $250,000$80,000 relates to repair of hardware and software and external
consultant costs and will be expensed as incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
the Company does not successfully complete any additional phases, it may disrupt
the Company's
ability to do business with its suppliers and customers.customers may be disrupted. In
addition, there can be no assurance that the systems of Third Parties with which
the Company interacts will not suffer from Year 2000 problems, or that such
problems would not have a material adverse effect on the Company's business,
financial condition or results of operations. In particular, Year 2000 problems
that have been or may in the future be identified with respect to the IT and
Non-IT systems of Third Parties having widespread national and international
interactions with persons and entities generally (for example, certain IT and
Non-IT systems of governmental agencies, utilities and information and financial
networks) could have a material adverse impact on the Company's financial
condition or results of operations.
-13-
The Company does not currently have any contingency plans and has not yet
determined its most reasonably likely worst case scenario with respect to the
Year 2000 Issue. The Company currently is in the process of reviewing its Year
2000 compliance plans to determine what contingency plans, if any, are
appropriate. There can be no assurance that such measures will prevent the
occuranceoccurrence of Year 2000 problems, which could have a material adverse effect
upon the Company's business, results of operations or financial condition.
Forward-Looking Statements-12-
FORWARD-LOOKING STATEMENTS
To the extent that this Report on Form 10-Q discusses expectations about market
conditions including the continued weakness experienced by the data storage and
semiconductor industries, or about market acceptance and future sales of the Company's products
or the Company's profitability, or otherwise makes statements about the future,
including statements of the Company's Year 2000 readiness, such statements are
forward looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. These
factors include the cyclical nature of the data storage and semiconductor
industries, risks associated with the acceptance of new products by individual
customers and by the marketplace, and other factors discussed in the Business
Description on Form 10-K and Annual Report to Shareholders.
-14-ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Veeco's investment portfolio consists of cash equivalents; accordingly, the
carrying amounts approximate market value. It is the Company's practice to hold
these investments to maturity. Assuming March 31, 1999 variable debt and
investment levels, a one-point change in interest rates would not have a
material impact on net interest expense. Veeco's net sales to foreign customers
represented approximately 68% of Veeco's total net sales for the three months
ended March 31, 1999 and 56% for the comparable 1998 period. The Company expects
net sales to foreign customers will continue to represent a large percentage of
Veeco's total net sales. Veeco's net sales denominated in foreign currencies
represented approximately 12% of Veeco's total net sales for the three months
ended March 31, 1999 and 15% for the comparable 1998 period. The Company
generally has not engaged in foreign currency hedging transactions. The
aggregate foreign exchange losses included in determining consolidated
results of operations was $691,000 for the three months ended March 31, 1999
and were not material during the three months ended March 31, 1998. Changes
in currency exchange rates that have the largest impact on translating
Veeco's international operating profit include the German mark and Japanese
yen. The Company estimates that a 10% change in foreign exchange rates would
impact reported operating profit for the three months ended March 31, 1999 by
less than $1.5 million. The Company believes that this quantitative measure
has inherent limitations because it does not take into account any
governmental actions or changes in either customer purchasing patterns or our
financing and operating strategies.
-13-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's quarterly report on Form 10-Q for the quarter
ended June 30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial data schedule of Veeco Instruments Inc. for the quarterly period
ended September 30, 1998,March 31, 1999, filed herein.
27.2 Financial data schedule of Veeco Instruments Inc. for the quarterly period
ended September 30, 1997,March 31, 1998, (restated) filed herein.
b) Reports on Form 8-K.
None.
-15-The Registrant filed a Form 8-K on January 11, 1999 which included the
Registrant's consolidated financial statements and related financial data,
retroactively restated to reflect the Registrant's mergers with Wyko
Corporation in July 1997 and Digital Instruments, Inc. in May 1998, which
were accounted for as pooling of interests transactions.
The Registrant filed a Form 8-K on January 22, 1999 reporting the
Registrant's unaudited sales and orders for the quarter and year ended
December 31, 1998, and reference was made to the press release dated
January 21, 1999, announcing such information.
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: NovemberMay 12, 19981999
Veeco Instruments Inc.
By: /s/ Edward H. Braun
---------------------------------------------------------
Edward H. Braun
Chairman, CEO and President
By: /s/ John F. Rein, Jr.
---------------------------------------------------------
John F. Rein, Jr.
Vice President, Finance
and Chief Financial Officer
-16--15-
EXHIBIT INDEX
Exhibits:
27.1 Financial data schedule of Veeco Instruments, Inc. for the quarterly
period ended September 30, 1998,March 31, 1999, filed herein.
27.2 Financial data schedule of Veeco Instruments, Inc. for the quarterly
period ended September 30, 1997March 31, 1998 (restated), filed herein.