UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended |
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| 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 |
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(State or Other Jurisdiction of |
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(Address of Principal Executive Offices) |
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Registrant’s telephone number, including area code: (516) 677-0200 | ||
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Website: www.veeco.com |
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
31,739,82331,767,392 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on July 31,October 29, 2007.
SAFE HARBOR STATEMENT
This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing such forward-looking statements may be found in Items 2 and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. These risks and uncertainties include, without limitation, the following:
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| • The cyclicality of the microelectronics industries we serve directly affects our business. • We operate in an industry characterized by rapid technological change. • We face significant competition. • We depend on a limited number of customers that operate in highly concentrated industries. • Our quarterly operating results fluctuate significantly. • Our outsourcing strategy could adversely affect our results of operations. • We rely on a limited number of suppliers. • Any difficulty or inability to attract, retain and motivate key employees could have a material adverse effect on our business. • We are exposed to the risks of operating a global business and the requirement to comply with laws and regulations of various jurisdictions such as import/export controls, which may not apply to our non-U.S. competitors. • We are subject to foreign currency exchange risks. • Our success depends on protection of our intellectual property rights. • We may be subject to claims of intellectual property infringement by others. • Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses. • Changes in accounting standards for stock-based compensation may adversely affect our stock price and our ability to attract, motivate and retain key employees. • The implementation of a new information technology system may disrupt our operations. • We face securities class action and shareholder derivative lawsuits which could result in substantial costs, diversion of management’s attention and resources and negative publicity. • We may not obtain sufficient affordable funds to finance our future needs. • We are subject to risks of non-compliance with environmental and safety regulations. •We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our company by another company more difficult. |
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| •The other matters discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Report and in the Annual Report on Form 10-K for the year ended December 31, 2006 of Veeco Instruments Inc. (“Veeco” or the “Company”). |
Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs. We do not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.
Available Information
We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
Internet Address
We maintain a website where additional information concerning our business and various upcoming events can be found. The address of our website is www.veeco.com. We provide a link on our website, under Investors — Financial Information — SEC Filings, through which investors can access our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. These filings are posted to our Internet site, as soon as reasonably practicable after we electronically file such material with the SEC.
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VEECO INSTRUMENTS INC.
INDEX
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Item 1. Financial Statements (Unaudited)
Veeco Instruments Inc. and Subsidiaries Condensed Consolidated Statements of Operations
See accompanying notes.
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Veeco Instruments Inc. and Subsidiaries Condensed Consolidated Balance Sheets
See accompanying notes.
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Veeco Instruments Inc. and Subsidiaries
See accompanying notes.
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VEECO INSTRUMENTS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1—Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three and
Consistent with prior years, the Company reports 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 2007 interim quarter ends are April 1, July 1, and September 30. The 2006 interim quarter ends were April 2, July 2, and October 1. For ease of reference, the Company reports these interim quarter ends as March 31, June 30, and September 30 in its interim condensed consolidated financial statements.
Net (Loss) Income Per Common Share
The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding:
Net (loss) income and diluted net (loss) income per common share are computed using the weighted average number of common and common equivalent shares outstanding during the period.
During the three and
During the second quarter of 2007, the Company issued a new series of 4.125% convertible subordinated notes due April 15, 2012 (the
The effect of the assumed conversion of the Old Notes is approximately
included in the weighted shares outstanding for the three and
The New Notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, as long as the Company has the ability and the intent to settle the principal amount of the New Notes in cash. Under the terms of the New Notes, the Company may pay the principal amount of converted New Notes in cash or in shares of common stock. The Company has indicated that it intends to pay such amounts in cash. Using the treasury stock method, the impact of the assumed conversion of the New Notes is anti-dilutive for the three and
Income Taxes
In July 2006, the Financial Accounting Standards Board (“FASB”) issued
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,
Note 2—Share-Based Payments Stock Option and Restricted
9 the condensed consolidated statement of operations for the three and
As of
A summary of the Company’s restricted stock awards including restricted stock units as of
A summary of the Company’s stock option plans as of and for the
Note 3—Balance Sheet Information
Inventories
Inventories have been determined by lower of cost (principally first-in, first-out) or market. Inventories consist of:
(1) The prior period has been reclassified to conform to current period presentation.
Accrued Warranty
The Company estimates the costs that may be incurred under the warranty it provides and recognizes a 10 liability in the amount of such costs at the time the related revenue is recognized. Factors that affect the Company’s warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. The Company periodically assesses the adequacy of its recognized warranty liability and adjusts the amount as necessary. Changes in the Company’s warranty liability during the
Note 4—Segment Information
The Company manages the business, reviews operating results, and assesses performance, as well as allocates resources, based upon two separate reporting segments. The Process Equipment segment combines the etch, deposition, dicing and slicing products sold mostly to data storage customers and the molecular beam epitaxy (“MBE”) and metal organic chemical vapor deposition (“MOCVD”) products primarily sold to high-brightness light emitting diode, solar, and wireless telecommunications customers. This segment has production facilities in Plainview, New York, Ft. Collins, Colorado, Camarillo, California, St. Paul, Minnesota and Somerset, New Jersey. The Metrology segment represents products that are used to provide critical surface measurements on
The Company evaluates the performance of its reportable segments based on income (loss) from operations before interest, income taxes, amortization and certain items (“EBITA”)
The following tables present certain data pertaining to the reportable product segments of the Company and a reconciliation of EBITA to income (loss) before income taxes and noncontrolling interest for the three and
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Note 5—Income Taxes The provision for income taxes of $1.0 million for the three months ended September 30, 2007 included $0.6 million relating to Veeco’s foreign operations, which continue to be profitable, and $0.4 million relating to the Company’s domestic operations. The provision for income taxes of $3.5 million for the nine months ended September 30, 2007 included $2.5 million relating to Veeco’s foreign operations and $1.0 million relating to the Company’s domestic operations. Due to significant domestic net operating loss carry forwards, which are fully reserved by a valuation allowance, Veeco’s domestic operations are not expected to incur significant income taxes for the foreseeable future.
The Company adopted FIN 48 on January 1, 2007. As a result of adopting FIN 48, the Company recognized a $0.8 million increase to its reserves for uncertain tax positions during the first quarter of 2007, which was recorded as a reduction to the January 1, 2007 retained earnings balance. At the adoption date of January 1, 2007, the Company had approximately $2.3 million of unrecognized tax benefits, including the cumulative effect increase to its reserve for uncertain tax positions. For the three and The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. All material federal, state, local, and foreign income tax matters have been concluded for years through 2002 subject to subsequent utilization of net operating losses generated in such years. The Company is continuing its practice of recognizing interest and penalties related to income tax matters in income tax expense. The total accrual for interest and penalties related to uncertain tax positions was approximately $1.1 million as of
Note 6—Comprehensive (Loss) Income
Total comprehensive (loss) income
Note 7—Debt Convertible Debt
During the first quarter of 2007, the Company repurchased $56.0 million of its 13 subordinated notes (the “Old Notes”) for $54.8 million, reducing the amount of the Old Notes outstanding from $200.0 million to $144.0 million. As a result of these repurchases, the Company recorded a net gain from the extinguishment of debt of $0.7 million.
On April 20, 2007, the Company issued new convertible subordinated notes (the “New Notes”) pursuant to privately negotiated exchange agreements with certain holders of the Old Notes. Under these agreements, such holders agreed to exchange $106.4 million aggregate principal amount of the Old Notes for approximately $105.5 million aggregate principal amount of New
The New Notes initially will be convertible into 36.7277 shares of common stock per $1,000 principal amount of New Notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for Veeco’s common stock on April 16, 2007). Holders may convert the New Notes at any time during the period beginning on January 15, 2012 through the close of business on the second day prior to April 15, 2012 and earlier upon the occurrence of certain events including the Company’s common stock trading at prices 130% over the conversion price for a specified period.
Credit Agreement During the third quarter of 2007, the Company entered into a Credit Agreement with HSBC Bank USA, National Association, as administrative agent (“HSBC”), and the lenders named therein (the “New Credit Agreement”). The New Credit Agreement amends and restates, and effectively replaces, the prior Credit Agreement, dated as of March 15, 2005, among the Company, HSBC and the lenders named therein (the “Prior Credit Agreement”). The Prior Credit Agreement was set to expire on March 15, 2008. The New Credit Agreement provides for revolving credit borrowings of up to $100.0 million. The annual interest rate under the New Credit Agreement is a floating rate equal to the prime rate of the agent bank. A LIBOR-based interest rate option is also provided. Borrowings may be used for general corporate purposes, including working capital requirements and acquisitions. The New Credit Agreement contains certain restrictive covenants substantially similar to those of the Prior Credit Agreement. These include limitations with respect to the incurrence of indebtedness, the payment of dividends, long-term leases, investments, mergers, acquisitions, consolidations and sales of assets. The Company is required to satisfy certain financial tests under the new Credit Agreement substantially similar to those of the prior Credit Agreement. Substantially all of the assets of the Company and its material domestic subsidiaries, other than real estate, have been pledged to secure the Company’s obligations under the New Credit Agreement. The revolving credit facility under the New Credit Agreement expires on March 31, 2012. In connection with the New Credit Agreement, the Company paid approximately $0.2 million in fees, which will be amortized over the term of the agreement, along with the remaining deferred financing fees of less than $0.1 million associated with the Prior Credit Agreement. As of September 30, 2007 and December 31, 2006, there were no borrowings outstanding. Interest expense associated with the credit agreement recorded during the period was nominal and is included in accrued expenses as of September 30, 2007. Note 8—Commitments, Contingencies and Other Matters
Litigation
As previously reported in Veeco’s Annual Report
14 2007 Restructuring Expenses
In conjunction with a cost reduction plan, the Company recognized a restructuring charge of approximately
The following is a reconciliation of the liability for the restructuring charge (in thousands):
Note 9—Subsequent Events During the fourth quarter of 2007, the Company’s Board of Directors approved a cost reduction plan that included a reduction in staff (employees, consultants and temporary workers), a reduction of discretionary expenses, realignment of the Company’s sales organization to more closely match current market and regional opportunities, and consolidation of certain engineering groups. As a result, during the fourth quarter of 2007, the Company expects to reduce its employment level by approximately 100 employees and will recognize a restructuring charge of $5.0 million, comprised predominantly of severance costs for the related employees. 15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Executive Summary
Veeco designs, manufactures, markets and services a broad line of equipment primarily used by manufacturers in the data storage, scientific and industrial research, semiconductor, high-brightness light emitting diode (“
Veeco’s Process Equipment products precisely deposit or remove (etch) various materials in the manufacturing of thin film magnetic heads (“TFMHs”) for the data storage industry, HB-LED/wireless devices (such as power amplifiers and laser diodes), and semiconductor mask reticles. Veeco’s
Highlights of the
• Revenue was • Orders were • Net loss was • Gross margins were
Highlights of the First
• Revenue was • Orders were • Net loss was • Gross margins were
Current Business |
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Net sales |
| $ | 98,769 |
| 100.0 | % | $ | 111,635 |
| 100.0 | % | $ | (12,866 | ) |
| $ | 97,718 |
| 100.0 | % | $ | 112,369 |
| 100.0 | % | $ | (14,651 | ) |
Cost of sales |
| 56,524 |
| 57.2 |
| 61,923 |
| 55.5 |
| (5,399 | ) |
| 61,824 |
| 63.3 |
| 64,513 |
| 57.4 |
| (2,689 | ) | ||||||
Gross profit |
| 42,245 |
| 42.8 |
| 49,712 |
| 44.5 |
| (7,467 | ) |
| 35,894 |
| 36.7 |
| 47,856 |
| 42.6 |
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Operating expenses: |
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Selling, general and administrative expense |
| 23,818 |
| 24.1 |
| 24,996 |
| 22.4 |
| (1,178 | ) |
| 22,723 |
| 23.3 |
| 22,296 |
| 19.9 |
| 427 |
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Selling, general and administrative expense |
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| 15,903 |
| 16.1 |
| 15,252 |
| 13.7 |
| 651 |
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| 15,049 |
| 15.4 |
| 15,716 |
| 14.0 |
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Amortization expense |
| 2,368 |
| 2.4 |
| 3,989 |
| 3.5 |
| (1,621 | ) |
| 1,959 |
| 2.0 |
| 4,025 |
| 3.6 |
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Write-off of purchased in-process technology |
| — |
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| 1,160 |
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Restructuring expense |
| 1,445 |
| 1.5 |
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| — |
| 1,445 |
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| 529 |
| 0.5 |
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| 529 |
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Other income, net |
| (279 | ) | (0.3 | ) | (132 | ) | (0.1 | ) | (147 | ) |
| (179 | ) | (0.2 | ) | (310 | ) | (0.3 | ) | 131 |
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Total operating expenses |
| 43,255 |
| 43.8 |
| 44,105 |
| 39.5 |
| (850 | ) |
| 40,081 |
| 41.0 |
| 42,887 |
| 38.2 |
| (2,806 | ) | ||||||
Operating (loss) income |
| (1,010 | ) | (1.0 | ) | 5,607 |
| 5.0 |
| (6,617 | ) |
| (4,187 | ) | (4.3 | ) | 4,969 |
| 4.4 |
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Interest expense, net |
| 772 |
| 0.8 |
| 1,149 |
| 1.0 |
| (377 | ) |
| 665 |
| 0.7 |
| 1,056 |
| 0.9 |
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(Loss) income before income taxes and noncontrolling interest |
| (1,782 | ) | (1.8 | ) | 4,458 |
| 4.0 |
| (6,240 | ) |
| (4,852 | ) | (5.0 | ) | 3,913 |
| 3.5 |
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Income tax provision |
| 1,042 |
| 1.0 |
| 1,433 |
| 1.3 |
| (391 | ) |
| 954 |
| 0.9 |
| 612 |
| 0.5 |
| 342 |
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Noncontrolling interest |
| (229 | ) | (0.2 | ) | — |
| — |
| (229 | ) |
| (123 | ) | (0.1 | ) | (1,207 | ) | (1.0 | ) | 1,084 |
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Net (loss) income |
| $ | (2,595 | ) | (2.6 | )% | $ | 3,025 |
| 2.7 | % | $ | (5,620 | ) |
| $ | (5,683 | ) | (5.8 | )% | $ | 4,508 |
| 4.0 | % | $ | (10,191 | ) |
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Segment Analysis |
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Process Equipment |
| $ | 60,016 |
| $ | 67,361 |
| $ | (7,345 | ) | (10.9 | )% | $ | 77,667 |
| $ | 94,309 |
| $ | (16,642 | ) | (17.6 | )% | 1.29 |
| 1.40 |
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Metrology |
| 38,753 |
| 44,274 |
| (5,521 | ) | (12.5 | ) | 34,786 |
| 48,899 |
| (14,113 | ) | (28.9 | ) | 0.90 |
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Total |
| $ | 98,769 |
| $ | 111,635 |
| $ | (12,866 | ) | (11.5 | )% | $ | 112,453 |
| $ | 143,208 |
| $ | (30,755 | ) | (21.5 | )% | 1.14 |
| 1.28 |
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Industry Analysis |
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Data Storage |
| $ | 31,155 |
| $ | 53,105 |
| $ | (21,950 | ) | (41.3 | )% | $ | 41,362 |
| $ | 71,446 |
| $ | (30,084 | ) | (42.1 | )% | 1.33 |
| 1.35 |
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HB-LED/wireless |
| 25,743 |
| 18,424 |
| 7,319 |
| 39.7 |
| 34,515 |
| 27,405 |
| 7,110 |
| 25.9 |
| 1.34 |
| 1.49 |
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Semiconductor |
| 10,782 |
| 12,448 |
| (1,666 | ) | (13.4 | ) | 8,331 |
| 19,997 |
| (11,666 | ) | (58.3 | ) | 0.77 |
| 1.61 |
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Research and Industrial |
| 31,089 |
| 27,658 |
| 3,431 |
| 12.4 |
| 28,245 |
| 24,360 |
| 3,885 |
| 15.9 |
| 0.91 |
| 0.88 |
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Total |
| $ | 98,769 |
| $ | 111,635 |
| $ | (12,866 | ) | (11.5 | )% | $ | 112,453 |
| $ | 143,208 |
| $ | (30,755 | ) | (21.5 | )% | 1.14 |
| 1.28 |
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Regional Analysis (1) |
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North America |
| $ | 31,275 |
| $ | 34,541 |
| $ | (3,266 | ) | (9.5 | )% | $ | 39,428 |
| $ | 52,834 |
| $ | (13,406 | ) | (25.4 | )% | 1.26 |
| 1.53 |
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Europe |
| 20,593 |
| 16,095 |
| 4,498 |
| 27.9 |
| 22,091 |
| 9,648 |
| 12,443 |
| 129.0 |
| 1.07 |
| 0.60 |
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Japan |
| 11,251 |
| 11,297 |
| (46 | ) | (0.4 | ) | 17,057 |
| 19,596 |
| (2,539 | ) | (13.0 | ) | 1.52 |
| 1.73 |
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Asia-Pacific |
| 35,650 |
| 49,702 |
| (14,052 | ) | (28.3 | ) | 33,877 |
| 61,130 |
| (27,253 | ) | (44.6 | ) | 0.95 |
| 1.23 |
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Total |
| $ | 98,769 |
| $ | 111,635 |
| $ | (12,866 | ) | (11.5 | )% | $ | 112,453 |
| $ | 143,208 |
| $ | (30,755 | ) | (21.5 | )% | 1.14 |
| 1.28 |
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Segment Analysis |
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Process Equipment |
| $ | 62,923 |
| $ | 71,375 |
| $ | (8,452 | ) | (11.8 | )% | $ | 80,918 |
| $ | 74,806 |
| $ | 6,112 |
| 8.2 | % | 1.29 |
| 1.05 |
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Metrology |
| 34,795 |
| 40,994 |
| (6,199 | ) | (15.1 | ) | 37,399 |
| 40,042 |
| (2,643 | ) | (6.6 | ) | 1.08 |
| 0.98 |
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Total |
| $ | 97,718 |
| $ | 112,369 |
| $ | (14,651 | ) | (13.0 | )% | $ | 118,317 |
| $ | 114,848 |
| $ | 3,469 |
| 3.0 | % | 1.21 |
| 1.02 |
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Industry Analysis |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Data Storage |
| $ | 29,340 |
| $ | 45,410 |
| $ | (16,070 | ) | (35.4 | )% | $ | 35,207 |
| $ | 45,345 |
| $ | (10,138 | ) | (22.4 | )% | 1.20 |
| 1.00 |
|
HB-LED/wireless |
| 31,495 |
| 27,657 |
| 3,838 |
| 13.9 |
| 43,636 |
| 29,207 |
| 14,429 |
| 49.4 |
| 1.39 |
| 1.06 |
| ||||||
Semiconductor |
| 11,804 |
| 15,978 |
| (4,174 | ) | (26.1 | ) | 6,489 |
| 14,193 |
| (7,704 | ) | (54.3 | ) | 0.55 |
| 0.89 |
| ||||||
Research and Industrial |
| 25,079 |
| 23,324 |
| 1,755 |
| 7.5 |
| 32,985 |
| 26,103 |
| 6,882 |
| 26.4 |
| 1.32 |
| 1.12 |
| ||||||
Total |
| $ | 97,718 |
| $ | 112,369 |
| $ | (14,651 | ) | (13.0 | )% | $ | 118,317 |
| $ | 114,848 |
| $ | 3,469 |
| 3.0 | % | 1.21 |
| 1.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Regional Analysis (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
North America |
| $ | 29,014 |
| $ | 41,921 |
| $ | (12,907 | ) | (30.8 | )% | $ | 48,196 |
| $ | 45,349 |
| $ | 2,847 |
| 6.3 | % | 1.66 |
| 1.08 |
|
Europe |
| 18,244 |
| 14,882 |
| 3,362 |
| 22.6 |
| 22,220 |
| 15,558 |
| 6,662 |
| 42.8 |
| 1.22 |
| 1.05 |
| ||||||
Japan |
| 12,585 |
| 7,718 |
| 4,867 |
| 63.1 |
| 12,330 |
| 13,226 |
| (896 | ) | (6.8 | ) | 0.98 |
| 1.71 |
| ||||||
Asia-Pacific |
| 37,875 |
| 47,848 |
| (9,973 | ) | (20.8 | ) | 35,571 |
| 40,715 |
| (5,144 | ) | (12.6 | ) | 0.94 |
| 0.85 |
| ||||||
Total |
| $ | 97,718 |
| $ | 112,369 |
| $ | (14,651 | ) | (13.0 | )% | $ | 118,317 |
| $ | 114,848 |
| $ | 3,469 |
| 3.0 | % | 1.21 |
| 1.02 |
|
(1) The prior period has been reclassified to conform to the current period presentation.
20
18
Net sales of $98.8$97.7 million for the secondthird quarter of 2007 were down $12.9$14.7 million, or 11.5%13.0%, compared to the secondthird quarter of 2006. By segment, Process Equipment sales were down $7.4$8.5 million, or 10.9%11.8%. The decrease in Process Equipment sales is primarily due to a decrease in sales to the data storage market. Partially offsetting this decline was a continued increase in sales to the HB-LED/wireless market. Metrology sales declined $5.5$6.2 million, or 15.1%, primarily due to decreased purchases of optical metrology products in the data storage market and automated AFM products in the semiconductor market. By region, in the third quarter of 2007, net sales increased by 27.9%63.1% and 22.6% in Japan and Europe, respectively, while sales in Asia-Pacific, North America and JapanAsia-Pacific declined 28.3%, 9.5%by 30.8% and 0.4%20.8%, respectively. The Company believes that quarter-to-quarter variations in the geographic distribution of sales will continue.
Orders of $112.5$118.3 million for the secondthird quarter of 2007 decreased by $30.8represented an increase of $3.5 million, or 21.5%3.0%, from the comparable 2006 period. By segment, the 17.6% decrease8.2% increase in Process Equipment orders was primarily due to a $22.0$9.8 million increase in orders for MBE equipment and $9.1 million for MOCVD equipment, driven by the high growth currently being seen in the HB-LED/wireless, solar, and scientific research markets, offset by a decrease in orders for Ion Beamother process equipment as a result of a decrease in customer demand in the data storage industry. The 28.9%6.6% decrease in Metrology orders was due to an $11.9 million decrease in orders for automated AFM products, principally to semiconductor customers, as well asdriven by a $1.6 million22% decrease in orders for optical metrology products, principally to data storage customers.
The Company’s book-to-bill ratio for the secondthird quarter of 2007, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.14. The Company’s backlog as of June 30, 2007 was $161.3 million, compared to $140.8 million as of December 31, 2006. 1.21, an increase from the comparable 2006 period. During the quarter ended JuneSeptember 30, 2007, the Company experienced no significant net backlog adjustments andor order cancellations. However, the Company did experience rescheduling of order delivery dates by customers. Due to changing business conditions and customer requirements, the Company may continue to experience cancellations and/or rescheduling of orders.
Gross profit for the quarter ended JuneSeptember 30, 2007 was 42.8%36.7%, compared to 44.5%42.6% in the secondthird quarter of 2006. Process Equipment sales represented 60.8%64.4% of total sales for the secondthird quarter of 2007, up slightly from 60.3%63.5% in the prior year period. Metrology sales accounted for 39.2%35.6% of total sales for the secondthird quarter of 2007, down from 39.7%36.5% in the prior year period. Process Equipment gross margins decreased to 33.5% from 38.1% in the prior year period, primarily due to a decline in the margin for Ion Beam products resulting from a lower volume of products sold and an unfavorable product mix as compared to the prior year period. This decrease is partially offset by an improvement in MOCVD product gross margins to 33.6% from 26.9% in the prior year period due to favorable pricing of new products sold in the current period. Metrology gross margins decreased to 44.4%42.6% from 51.0%50.3%, principally due to lower sales volume of optical metrology and automated AFM products and a less favorable product mix inpricing of and overhead spending on the AFM products sold to scientific and research customers. This decrease was partially offset by an increase in Process Equipment gross margins to 41.7% from 40.3% in the prior year period, despite a $7.4 million reduction in sales. This increase is primarily due to significant improvement in MOCVD product gross margins to 40.3% up from 22.1% in the prior year period due to a $7.5 million, or 55% increase in sales, as well as a significant improvement in mix and price.
Selling, general and administrative expenses were $23.8increased to $22.7 million, or 24.1%23.3% of net sales, in the secondthird quarter of 2007, compared with $25.0$22.3 million, or 22.4%19.9% of net sales, in the comparable prior year period. The $1.2 million decreaseincrease is primarily attributable to a reduction in managementexecutive stay and sign-on bonuses and long-term incentive expenses associated with reduced earnings in 2007 and a reduction in legal fees partially offset by an increase in non-cash stock-based compensation expense, offset by a decrease in sales commissions related to a reduction in domestic sales.
Research and development expense totaled $15.9$15.0 million in the secondthird quarter of 2007, an increasea decrease of $0.7 million from the secondthird quarter of 2006, primarily due to newprior year product development efforts in automated AFM for the semiconductor market as well as an investment in AFM for life sciences applications.Process Equipment products that were released during 2007. As a percentage of sales, research and development increased to 16.1%15.4% in the secondthird quarter of 2007, compared to 13.7%from 14.0% in the secondthird quarter of 2006.
Amortization expense was $2.4$2.0 million in the secondthird quarter of 2007, compared to $4.0 million in the secondthird quarter of 2006. The decrease was principally due to certain technology-based intangibles becoming fully amortized during the second quarter of 2007.
During the third quarter of 2006, the Company finalized its purchase accounting for its acquisition of 19.9% of the stock of Fluens Corporation (“Fluens”), determining that Fluens is a variable interest entity and the Company is its primary beneficiary as defined by Financial Accounting Standards Board (“FASB”) Financial Interpretation (“FIN”) 46R, Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51. As such, the Company has consolidated the results of Fluens’ operations from the acquisition date, and has attributed
19
the 80.1% portion that is not owned by Veeco to noncontrolling interest in the Company’s consolidated financial statements (see below). As part of this acquisition accounting, the Company recorded $1.2 million of in-process technology, which was written off during the third quarter of 2006. No such costs were recorded during the third quarter of 2007.
The restructuring expense of $1.4$0.5 million for the quarter ended JuneSeptember 30, 2007, was related toconsisted of personnel severance costs principally associated withincurred throughout the Company’s Metrology operations in Santa Barbara, California and Tucson, Arizona.Company.
Net interest expense in the secondthird quarter of 2007 was $0.8$0.7 million, compared to $1.1 million in the secondthird quarter of 2006. This reduction in net interest expense is primarily related tothe result of less interest expense associated with the extinguishment ofnet debt and higher cash balances investedoutstanding during the second quarter of 2007 compared to the second quarter of 2006.period.
21
The income tax provision for the quarter ended JuneSeptember 30, 2007 was $1.0 million compared to $1.4$0.6 million in the secondthird quarter of 2006. The 2007 provision for income taxes included $0.7$0.6 million relating to Veeco’s foreign operations, which continue to be profitable, and $0.3$0.4 million relating to the Company’s domestic operations. Due to significant domestic net operating loss carry forwards, which are fully reserved by a valuation allowance, Veeco’s domestic operations are not expected to incur significant income taxes for the foreseeable future. The 2006 provision for income taxes included $1.1$0.2 million relating to Veeco’s foreign operations and $0.3$0.4 million relating to the Company’s domestic operations. The reduction inincrease to the income tax provision is due to a decreasean increase in taxable income inrelating to the Company’s foreign operations.
Noncontrolling interest was a credit to income of $0.2$0.1 million for the three months ended JuneSeptember 30, 2007.2007, and a credit of $1.2 million for the comparable period in the prior year. As the Company is the primary beneficiary of Fluens, Corporation (“Fluens”), a variable interest entity, as defined by Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51, it is required to consolidate Fluens and eliminate the portion of its results attributable to noncontrolling interests. As a result, the Company eliminatedeliminates from its net income 80.1% of Fluens’ operating losses forlosses. The credit in the three months ended June 30, 2007.prior comparable period includes the elimination of 80.1% of the write-off of in-process technology recorded in the 2006 third quarter.
The following tables show selected itemsthe details of Veeco’s Consolidated Statementscondensed consolidated statements of Operations,operations, percentages of sales and comparisons between the sixnine months ended JuneSeptember 30, 2007 and 2006 and the analysis of sales and orders for the same periods by segment, industry and region (in thousands):
|
| Six Months ended |
| Dollar |
|
| Nine Months Ended |
| Dollar |
| |||||||||||||||||||
|
| 2007 |
| 2006 |
| Change |
|
| 2007 |
| 2006 |
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net sales |
| $ | 197,935 |
| 100.0 | % | $ | 205,553 |
| 100.0 | % | $ | (7,618 | ) |
| $ | 295,653 |
| 100.0 | % | $ | 317,922 |
| 100.0 | % | $ | (22,269 | ) | |
Cost of sales |
| 111,995 |
| 56.6 |
| 114,072 |
| 55.5 |
| (2,077 | ) |
| 173,819 |
| 58.8 |
| 178,585 |
| 56.2 |
| (4,766 | ) | |||||||
Gross profit |
| 85,940 |
| 43.4 |
| 91,481 |
| 44.5 |
| (5,541 | ) |
| 121,834 |
| 41.2 |
| 139,337 |
| 43.8 |
| (17,503 | ) | |||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Selling, general and administrative expense |
| 46,624 |
| 23.6 |
| 46,326 |
| 22.6 |
| 298 |
|
| 69,347 |
| 23.4 |
| 68,622 |
| 21.5 |
| 725 |
| |||||||
Research and development expense |
| 31,292 |
| 15.8 |
| 29,838 |
| 14.5 |
| 1,454 |
|
| 46,341 |
| 15.7 |
| 45,554 |
| 14.3 |
| 787 |
| |||||||
Amortization expense |
| 6,277 |
| 3.2 |
| 8,004 |
| 3.9 |
| (1,727 | ) |
| 8,236 |
| 2.8 |
| 12,029 |
| 3.8 |
| (3,793 | ) | |||||||
Restructuring expense |
| 1,445 |
| 0.7 |
| — |
| — |
| 1,445 |
|
| 1,974 |
| 0.7 |
| — |
| — |
| 1,974 |
| |||||||
Other (income) expense, net |
| (426 | ) | (0.2 | ) | 67 |
| — |
| (493 | ) | ||||||||||||||||||
Write-off of purchased in-process technology |
| — |
| — |
| 1,160 |
| 0.4 |
| (1,160 | ) | ||||||||||||||||||
Other income, net |
| (605 | ) | (0.2 | ) | (243 | ) | (0.0 | ) | (362 | ) | ||||||||||||||||||
Total operating expenses |
| 85,212 |
| 43.1 |
| 84,235 |
| 41.0 |
| 977 |
|
| 125,293 |
| 42.4 |
| 127,122 |
| 40.0 |
| (1,829 | ) | |||||||
Operating income |
| 728 |
| 0.3 |
| 7,246 |
| 3.5 |
| (6,518 | ) |
| (3,459 | ) | (1.2 | ) | 12,215 |
| 3.8 |
| (15,674 | ) | |||||||
Interest expense, net |
| 1,591 |
| 0.8 |
| 2,527 |
| 1.2 |
| (936 | ) |
| 2,256 |
| 0.7 |
| 3,583 |
| 1.1 |
| (1,327 | ) | |||||||
Gain on extinguishment of debt |
| (738 | ) | (0.4 | ) | (330 | ) | (0.2 | ) | (408 | ) |
| (738 | ) | (0.2 | ) | (330 | ) | (0.1 | ) | (408 | ) | |||||||
(Loss) income before income taxes and noncontrolling interest |
| (125 | ) | (0.1 | ) | 5,049 |
| 2.5 |
| (5,174 | ) |
| (4,977 | ) | (1.7 | ) | 8,962 |
| 2.8 |
| (13,939 |
| |||||||
(Loss) income before income taxes and noncontrolling interest | ) | ||||||||||||||||||||||||||||
| 2,536 |
| 1.3 |
| 2,266 |
| 1.1 |
| 270 |
|
| 3,490 |
| 1.2 |
| 2,878 |
| 0.9 |
| 612 |
| ||||||||
Noncontrolling interest |
| (359 | ) | (0.2 | ) | — |
| — |
| (359 | ) |
| (482 | ) | (0.2 | ) | (1,207 | ) | (0.4 | ) | 725 |
| |||||||
Net (loss) income |
| $ | (2,302 | ) | (1.2 | )% | $ | 2,783 |
| 1.4 | % | $ | (5,085 | ) |
| $ | (7,985 | ) | (2.7 | )% | $ | 7,291 |
| 2.3 | % | $ |
(15,276 | ) |
22
20
|
| Sales |
| Orders |
|
|
| ||||||||||||||||||||
|
| Six Months ended |
| Dollar and |
| Six Months ended |
| Dollar and |
| Book to Bill |
| ||||||||||||||||
|
| 2007 |
| 2006 |
| Year to Year |
| 2007 |
| 2006 |
| Year to Year |
| 2007 |
| 2006 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Segment Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Process Equipment |
| $ | 118,105 |
| $ | 120,552 |
| $ | (2,447 | ) | (2.0 | )% | $ | 146,367 |
| $ | 177,802 |
| $ | (31,435 | ) | (17.7 | )% | 1.24 |
| 1.47 |
|
Metrology |
| 79,830 |
| 85,001 |
| (5,171 | ) | (6.1 | ) | 71,993 |
| 92,100 |
| (20,107 | ) | (21.8 | ) | 0.90 |
| 1.08 |
| ||||||
Total |
| $ | 197,935 |
| $ | 205,553 |
| $ | (7,618 | ) | (3.7 | )% | $ | 218,360 |
| $ | 269,902 |
| $ | (51,542 | ) | (19.1 | )% | 1.10 |
| 1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Industry Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Data Storage |
| $ | 66,666 |
| $ | 93,188 |
| $ | (26,522 | ) | (28.5 | )% | $ | 70,737 |
| $ | 141,832 |
| $ | (71,095 | ) | (50.1 | )% | 1.06 |
| 1.52 |
|
HB-LED/wireless |
| 46,745 |
| 33,520 |
| 13,225 |
| 39.5 |
| 73,372 |
| 51,732 |
| 21,640 |
| 41.8 |
| 1.57 |
| 1.54 |
| ||||||
Semiconductor |
| 20,951 |
| 23,757 |
| (2,806 | ) | (11.8 | ) | 20,073 |
| 30,095 |
| (10,022 | ) | (33.3 | ) | 0.96 |
| 1.27 |
| ||||||
Research and Industrial |
| 63,573 |
| 55,088 |
| 8,485 |
| 15.4 |
| 54,178 |
| 46,243 |
| 7,935 |
| 17.2 |
| 0.85 |
| 0.84 |
| ||||||
Total |
| $ | 197,935 |
| $ | 205,553 |
| $ | (7,618 | ) | (3.7 | )% | $ | 218,360 |
| $ | 269,902 |
| $ | (51,542 | ) | (19.1 | )% | 1.10 |
| 1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Regional Analysis (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
North America |
| $ | 66,502 |
| $ | 67,259 |
| $ | (757 | ) | (1.1 | )% | $ | 73,500 |
| $ | 92,902 |
| $ | (19,402 | ) | (20.9 | )% | 1.11 |
| 1.38 |
|
Europe |
| 34,955 |
| 34,450 |
| 505 |
| 1.5 |
| 41,176 |
| 26,816 |
| 14,360 |
| 53.6 |
| 1.18 |
| 0.78 |
| ||||||
Japan |
| 31,147 |
| 26,298 |
| 4,849 |
| 18.4 |
| 29,795 |
| 31,174 |
| (1,379 | ) | (4.4 | ) | 0.96 |
| 1.19 |
| ||||||
Asia-Pacific |
| 65,331 |
| 77,546 |
| (12,215 | ) | (15.8 | ) | 73,889 |
| 119,010 |
| (45,121 | ) | (37.9 | ) | 1.13 |
| 1.53 |
| ||||||
Total |
| $ | 197,935 |
| $ | 205,553 |
| $ | (7,618 | ) | (3.7 | )% | $ | 218,360 |
| $ | 269,902 |
| $ | (51,542 | ) | (19.1 | )% | 1.10 |
| 1.31 |
|
|
| Sales |
| Orders |
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Nine Months Ended |
| Dollar and |
| Nine Months Ended |
| Dollar and |
| Book to Bill |
| ||||||||||||||||
|
| September 30, |
| Percentage |
| September 30, |
| Percentage |
| Ratio |
| ||||||||||||||||
|
|
|
|
|
| Change |
|
|
|
|
| Change |
|
|
|
|
| ||||||||||
|
| 2007 |
| 2006 |
| Year to Year |
| 2007 |
| 2006 |
| Year to Year |
| 2007 |
| 2006 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Segment Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Process Equipment |
| $ | 181,028 |
| $ | 191,927 |
| $ | (10,899 | ) | (5.7 | )% | $ | 227,285 |
| $ | 252,608 |
| $ | (25,323 | ) | (10.0 | )% | 1.26 |
| 1.32 |
|
Metrology |
| 114,625 |
| 125,995 |
| (11,370 | ) | (9.0 | ) | 109,392 |
| 132,142 |
| (22,750 | ) | (17.2 | ) | 0.95 |
| 1.05 |
| ||||||
Total |
| $ | 295,653 |
| $ | 317,922 |
| $ | (22,269 | ) | (7.0 | )% | $ | 336,677 |
| $ | 384,750 |
| $ | (48,073 | ) | (12.5 | )% | 1.14 |
| 1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Industry Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Data Storage |
| $ | 96,006 |
| $ | 138,598 |
| $ | (42,592 | ) | (30.7 | )% | $ | 105,944 |
| $ | 187,177 |
| $ | (81,233 | ) | (43.4 | )% | 1.10 |
| 1.35 |
|
HB-LED/wireless |
| 78,240 |
| 61,177 |
| 17,063 |
| 27.9 |
| 117,008 |
| 80,939 |
| 36,069 |
| 44.6 |
| 1.50 |
| 1.32 |
| ||||||
Semiconductor |
| 32,755 |
| 39,735 |
| (6,980 | ) | (17.6 | ) | 26,562 |
| 44,288 |
| (17,726 | ) | (40.0 | ) | 0.81 |
| 1.11 |
| ||||||
Research and Industrial |
| 88,652 |
| 78,412 |
| 10,240 |
| 13.1 |
| 87,163 |
| 72,346 |
| 14,817 |
| 20.5 |
| 0.98 |
| 0.92 |
| ||||||
Total |
| $ | 295,653 |
| $ | 317,922 |
| $ | (22,269 | ) | (7.0 | )% | $ | 336,677 |
| $ | 384,750 |
| $ | (48,073 | ) | (12.5 | )% | 1.14 |
| 1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Regional Analysis (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
North America |
| $ | 95,516 |
| $ | 109,180 |
| $ | (13,664 | ) | (12.5 | )% | $ | 121,696 |
| $ | 138,251 |
| $ | (16,555 | ) | (12.0 | )% | 1.27 |
| 1.27 |
|
Europe |
| 53,199 |
| 49,332 |
| 3,867 |
| 7.8 |
| 63,396 |
| 42,374 |
| 21,022 |
| 49.6 |
| 1.19 |
| 0.86 |
| ||||||
Japan |
| 43,732 |
| 34,016 |
| 9,716 |
| 28.6 |
| 42,125 |
| 44,400 |
| (2,275 | ) | (5.1 | ) | 0.96 |
| 1.31 |
| ||||||
Asia-Pacific |
| 103,206 |
| 125,394 |
| (22,188 | ) | (17.7 | ) | 109,460 |
| 159,725 |
| (50,265 | ) | (31.5 | ) | 1.06 |
| 1.27 |
| ||||||
Total |
| $ | 295,653 |
| $ | 317,922 |
| $ | (22,269 | ) | (7.0 | )% | $ | 336,677 |
| $ | 384,750 |
| $ | (48,073 | ) | (12.5 | )% | 1.14 |
| 1.21 |
|
(1) The prior period has been reclassified to conform to the current period presentation.
Net sales of $197.9$295.7 million for the sixnine months ended JuneSeptember 30, 2007 were down $7.6$22.3 million, or 3.7%7.0%, compared to the sixnine months ended JuneSeptember 30, 2006. By segment, Process Equipment sales were down $2.4$10.9 million, or 2.0%5.7%. The decrease in Process Equipment sales is primarily due to a decrease in customer demandsales to customers in the data storage industry. Partially offsetting this decline was an increase in sales to the HB-LED/wireless market. Metrology sales decreased $5.2$11.4 million, or 6.1%9.0%, primarily due to decreased purchases of optical metrology products in the data storage market and automated AFM products in the semiconductor market. By region, in the nine months ended September 30, 2007, net sales increased by 18.4%28.6% in Japan and 1.5%7.8% in Europe, while sales in Asia-Pacific and North America declined 15.8%17.7% and 1.1%12.5%, respectively. The Company believes that there will continue to be period-to-period variations in the geographic distribution of sales.
Orders of $218.4$336.7 million for the sixnine months ended JuneSeptember 30, 2007 decreased by $51.5represented a decrease of $48.1 million, or 19.1%12.5%, from the comparable 2006 period. By segment, the 17.7%10.0% decrease in Process Equipment orders was primarily due to a $40.6$49.5 million decrease in orders for Ion Beam equipment as a result of a decrease in customer demand in the data storage industry, partially offset by a $21.7$30.8 million increase in MOCVD orders resulting from an increase in purchases in the HB-LED/wireless market. The 21.8%17.2% decrease in Metrology orders was primarily due to a $10.1$13.5 million decrease in orders for optical metrology products, principally to data storage customers, and a $10.2$10.8 million decrease in orders for automated AFM products, principally to semiconductor customers.
The Company’s book-to-bill ratio for the sixnine months ended JuneSeptember 30, 2007, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.10.1.14, a decrease from the comparable 2006 period. The Company’s backlog as of JuneSeptember 30, 2007 was $161.3$181.6 million, compared to $140.8 million as of December 31, 2006. During the sixnine months ended JuneSeptember 30, 2007, the Company experienceddid not experience significant net backlog adjustments andor order cancellations of less than $0.1 million. Thecancellations. However, the Company also experienceddid experience rescheduling of order delivery dates by customers. Due to changing business conditions and customer requirements, the Company may continue to experience cancellations and/or rescheduling of orders.
Gross profit for the sixnine months ended JuneSeptember 30, 2007 was 43.4%41.2%, compared to 44.5%43.8% in the comparable prior year period. Process Equipment sales represented 59.7%61.2% of total sales for the sixnine months ended JuneSeptember 30, 2007, up from 58.6%60.4% in the prior year period. Metrology sales accounted for 40.3%38.8% of total sales for the sixnine months ended JuneSeptember 30, 2007, down from 41.4%39.6% in the comparable prior year period. Process Equipment gross margin was consistent with the prior year period. However, included in the margin was a significant improvement in MOCVD product gross margins from 23.0% in the prior year to 37.2% in the current year due to an increase in sales volume, as well as a significant improvement in mix and price. This was offset by a decrease in the margin for Ion Beam products from 46.9% in the 2006 period to 41.2% in the current comparable period due to an unfavorable product mix, as well as the decrease in sales to customers in the data storage market. Metrology gross margins decreased to 46.9%45.6% from 51.9%
21
51.4%, principally due to less favorable product mix in AFM products sold to scientific and research customers and lower sales volume of automated AFM and optical metrology products. This decrease was partially offset by an increase in Process Equipment gross margins to 41.0% from 39.3% in the prior year period. This increase is primarily due to significant improvement in MOCVD product gross margins when compared to the prior year period due to a $12.3 million, or 55.1% increase in sales, as well as a significant improvement in mix and price.
23
Selling, general and administrative expenses were $46.6$69.3 million, or 23.6%23.4% of sales, in the sixnine months ended JuneSeptember 30, 2007, compared with $46.3$68.6 million, or 22.6%21.5% of sales, in the comparable prior year period. The $0.3$0.7 million increase is primarily attributable to an increase in non-cash compensation expense related to stock options and restricted shares and an increase in selling expense due primarily to an investment in the AFM product line for life sciences applicationsapplications. This is partially offset by a reduction in management incentive bonus expense and legal fees.fees, as well as reduced sales commissions related to the reduction in domestic sales.
Research and development expense totaled $31.3$46.3 million in the sixnine months ended JuneSeptember 30, 2007, an increase of $1.5$0.8 million from the comparable prior year period, primarily due todriven by an investment in life sciences applications in AFM as well as new product development efforts in the Company’s MOCVD product platform for HB-LED/wireless applications and automated AFM products for the semiconductor industry. This is partially offset by a decrease in research and development expense in Ion Beam products from the prior comparable period, due to the release of these products during 2007. As a percentage of sales, research and development expense increased to 15.8%15.7% in the sixnine months ended JuneSeptember 30, 2007, compared to 14.5%from 14.3% in the comparable prior year period.
Amortization expense was $6.3$8.2 million in the sixnine months ended JuneSeptember 30, 2007, compared to $8.0$12.0 million in the comparable prior year period. The decrease was due to certain technology-based intangibles becoming fully amortized during the second quarter of 2007.
The restructuring expense of $1.4$2.0 million for the sixnine months ended JuneSeptember 30, 2007, was related toconsisted of personnel severance costs principally associated withincurred throughout the Company’s Metrology operations in Santa Barbara, CaliforniaCompany during the second and Tucson, Arizona.third quarters of 2007.
During the sixthird quarter of 2006, the Company finalized its purchase accounting for its acquisition of 19.9% of the stock of Fluens determining that Fluens is a variable interest entity and the Company is its primary beneficiary. As such, the Company has consolidated the results of Fluens’ operations from the acquisition date, and has attributed the 80.1% portion that is not owned by Veeco to noncontrolling interest in the Company’s consolidated financial statements. As part of this acquisition accounting, the Company recorded $1.2 million of in-process technology, which was written off during the third quarter of 2006. No such costs were recorded during 2007.
Net interest expense in the nine months ended JuneSeptember 30, 2007 was $2.3 million compared to $3.6 million in the comparable prior year period. This reduction in net interest expense is the result of less net debt outstanding during the period.
During the nine months ended September 30, 2007, the Company repurchased $56.0 million of its convertible subordinated notes, reducing the amount outstanding from $200.0 million to $144.0 million. The repurchase amount was $55.1 million in cash, of which $54.8 million related to principal and $0.3 million related to accrued interest. As a result of the repurchase, the Company recorded a net gain from the extinguishment of debt in the amount of $0.7 million. DuringIn the six months ended June 30,comparable 2006 period, the Company repurchased $20.0 million of its convertible subordinated notes reducing the amount outstanding from $220.0 million to $200.0 million. As a result of these repurchases, the Company recorded a net gain from the extinguishment of debt in the amount of $0.3 million.
Net interest expense in six months ended June 30, 2007 was $1.6 million compared to $2.5 million in the comparable prior year period. This reduction in net interest expense is primarily related to less interest expense associated with the extinguishment of debt and higher cash balances invested during the six months ended June 30, 2007 compared to the prior year period.
The income tax provision for the sixnine months ended JuneSeptember 30, 2007 was $2.5$3.5 million compared to $2.3$2.9 million in the comparable prior year period. The 2007 provision for income taxes included $1.9$2.5 million relating to Veeco’s foreign operations, which continue to be profitable, and $0.6$1.0 million relating to the Company’s domestic operations. Due to significant domestic net operating loss carry forwards, which are fully reserved by a valuation allowance, Veeco’s domestic operations are not expected to incur significant income taxes for the foreseeable future. The 2006 provision for income taxes included $1.7$1.9 million relating to Veeco’s foreign operations and $0.6$1.0 million relating to the Company’s domestic operations.
Noncontrolling interest was a credit to income of $0.4$0.5 million for the sixnine months ended JuneSeptember 30, 2007.2007 and a credit of $1.2 million in the comparable prior year period. As the Company is the primary beneficiary of Fluens, Corporation, a variable interest entity as defined by FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51,, it is required to consolidate Fluens and eliminate the portion of its results attributable to noncontrolling interests. As a result, the Company eliminatedeliminates from its net income 80.1% of Fluens’ operating losses forlosses. The credit in the six months ended June 30, 2007.prior comparable period includes the elimination of 80.1% of the write-off of in-process technology recorded in the 2006 third quarter.
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Liquidity and Capital Resources
Historically, Veeco’s principal capital requirements have included the funding of acquisitions and capital expenditures. The Company traditionally has generated cash from operations and debt and stock issuances. Veeco’s ability to generate sufficient cash flows from operations is dependent on the continued demand for the Company’s products and services. A summary of the current period cash flow activity is as follows (in thousands):
24
|
| Nine Months Ended |
| ||||
|
| 2007 |
| 2006 |
| ||
Net (loss) income |
| $ | (7,985 | ) | $ | 7,291 |
|
|
|
|
|
|
| ||
Net cash provided by operating activities |
| $ | 22,777 |
| $ | 22,524 |
|
Net cash used in investing activities |
| (6,543 | ) | (15,634 | ) | ||
Net cash used in financing activities |
| (54,443 | ) | (4,598 | ) | ||
Effect of exchange rates on cash and cash equivalents |
| (435 | ) | (226 | ) | ||
Net change in cash and cash equivalents |
| (38,644 | ) | 2,066 |
| ||
Cash and cash equivalents at beginning of period |
| 147,046 |
| 124,499 |
| ||
Cash and cash equivalents at end of period |
| $ | 108,402 |
| $ | 126,565 |
|
The Company had a net decrease in cash of $39.0$38.6 million for the sixnine months ended JuneSeptember 30, 2007 from December 31, 2006, primarily due to the repurchase of $56.0 million of its 4.125% convertible subordinated notes due 2008 (the “Old Notes”). Cash provided by operations was $20.6$22.8 million for this period, as compared to cash provided by operations of $16.7$22.5 million for the comparable 2006 period. Net (loss) income adjusted for non-cash items provided operating cash flows of $12.5$14.6 million for the sixnine months ended JuneSeptember 30, 2007, compared to $18.1$31.0 million for the comparable 2006 period. Net cash provided by operations for the sixnine months ended JuneSeptember 30, 2007 was favorably impacted by an increasea decrease in net operating assets and liabilities of $8.2 million. Accounts receivable decreased $21.1$20.0 million during the sixnine months ended JuneSeptember 30, 2007, due to a $24.3$25.4 million reduction in sales when comparing the fourth quarter of 2006 to the secondthird quarter of 2007, and favorable cash collections during 2007. Inventories increased by approximately $4.0$4.8 million during the same period, principally due to an increase in work in process and finished goods inventories for systems to be shipped during the second halffourth quarter of 2007 and the first quarter of 2008 in the Process Equipment segment. Accrued expenses and other current liabilitiesAccounts payable decreased $4.1$5.0 million during the sixnine months ended JuneSeptember 30, 2007, due primarily to the first quarter payouttiming of management incentive compensation and sales commissions.payments.
Cash used in investing activities of $5.6$6.5 million for the sixnine months ended JuneSeptember 30, 2007, resulted primarily fromwas driven by capital expenditures of $5.9$6.8 million, partially offset by $0.3 million in proceeds from the sale of property, plant and equipment. During the fourth quarter of 2007, the Company expects to invest a total of approximately $16.4an additional $5.3 million in capital projectsequipment primarily related to engineering equipment and lab tools used in producing,enhancing, testing and process development forof Veeco’s products, enhanced manufacturing facilities and the continuing implementation of SAP and related computer systems.products.
Cash used in financing activities for the sixnine months ended JuneSeptember 30, 2007, totaled $54.2$54.4 million, primarily consisting of $55.1$55.4 million primarily used to repurchase a portion of the Company’s Old Notes $1.0and pay down other existing long-term debt and $1.5 million in payments for debt issuance costs, partially offset by $2.1$2.8 million from the issuance of common stock resulting from the exercise of employee stock options.
During the first quarter of 2007, the Company repurchased $56.0 million of its Old Notes, for $54.8 million. As a result of these repurchases, The debt repurchase reduced the amount of Old Notes outstanding was reduced to $144.0 million and the Company recorded a net gain of $0.7 million.
OnIn April 20,and May of 2007, the Company issued new notes pursuant to privately negotiated exchange agreements with certain holders of the Old Notes. Under these agreements, such holders agreed to exchange $106.4$118.8 million aggregate principal amount of the Old Notes for approximately $105.5$117.8 million aggregate principal amount of a new series of 4.125% convertible subordinated notes due April 15, 2012 (the “New Notes”"New Notes"). On May 1, 2007, the Company issued an additional $12.3 million aggregate principal amount of New Notes in a second round of exchange transactions with the holders of $12.4 million of Old Notes. Following the exchange transactions, approximately $25.2 million of the Old Notes, with a conversion price of $38.51 per common share, remained outstanding. No net gain or loss was recorded on the exchange transactions since the carrying value of the Old Notes, including unamortized deferred financing costs, approximated the exchange value of the New Notes.
The New Notes initially will be convertible into 36.7277 shares of common stock per $1,000 principal amount of New Notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for Veeco’sVeeco's common stock on April 16, 2007). Holders may convert the New Notes at any time during the period beginning on January 15, 2012 through the close of business on the second day prior to April 15, 2012 and
23
earlier upon the occurrence of certain events including Veeco’sVeeco's common stock trading at prices 130% over the conversion price for a specified period.
During the third quarter of 2007, the Company entered into a Credit Agreement with HSBC. The New Credit Agreement amends and restates, and effectively replaces, the Prior Credit Agreement, dated as of March 15, 2005, with HSBC, which was set to expire on March 15, 2008. The New Credit Agreement provides for revolving credit borrowings of up to $100.0 million. The annual interest rate under the New Credit Agreement is a floating rate equal to the prime rate of the agent bank. A LIBOR-based interest rate option is also provided. Borrowings may be used for general corporate purposes, including working capital requirements and acquisitions. The New Credit Agreement contains certain restrictive covenants substantially similar to those of the Prior Credit Agreement. These include limitations with respect to the incurrence of indebtedness, the payment of dividends, long-term leases, investments, mergers, acquisitions, consolidations and sales of assets. The Company is required to satisfy certain financial tests under the new Credit Agreement substantially similar to those of the prior Credit Agreement. Substantially all of the assets of the Company and its material domestic subsidiaries, other than real estate, have been pledged to secure the Company’s obligations under the New Credit Agreement. The revolving credit facility under the New Credit Agreement expires on March 31, 2012. As of September 30, 2007, there were no borrowings outstanding under the New Credit Agreement.
The Company believes that existing cash balances together with cash generated from operations and amounts available under the Company’s new revolving credit facility will be sufficient to meet the Company’s projected working capital and other cash flow requirements for the next twelve months, as well as the Company’s contractual obligations, over the next two years. The Company believes it will be able to meet its obligation to repay the outstanding $25.2 million of the Old Notes that mature on December 21, 2008 through cash on hand and cash generated from operations. The Company believes it will be able to meet its obligation to repay the outstanding $117.8 million of the New Notes due in April 2012 through a combination of refinancing, cash generated from operations and/or other means.
In 2006, Veeco purchased 19.9% of the common stock of Fluens Corporation.Fluens. Veeco and Fluens are jointly developing a next-generation process for high-rate deposition of aluminum oxide for data storage applications. If this
25
development is successful and upon the satisfaction of certain additional conditions by May 2009, Veeco will be obligated to purchase the balance of the outstanding stock of Fluens for $3.5 million and pay an earn-out. Approximately 31% of Fluens is owned by a Vice President of one of Veeco’s business units.
During the fourth quarter of 2007, the Company expects to recognize $5.0 million of severance charges related to a cost reduction plan. Of this total amount, approximately $1.4 million will be paid out during the fourth quarter of 2007, with the remainder paid out over the next twelve months.
Application of Critical Accounting Policies
General: Veeco’s discussion and analysis of its financial condition and results of operations are based upon the Company’s Condensed Consolidated Financial Statements,condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Veeco to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, intangible assets and other long-lived assets, income taxes, warranty obligations, restructuring costs and contingent liabilities, including potential litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company considers certain accounting policies related to revenue recognition, the valuation of inventories, the impairment of goodwill and indefinite-lived intangible assets, the impairment of long-lived assets, warranty costs, the accounting for taxes and share-based compensation to be critical policies due to the estimation processes involved in each.
Revenue Recognition: The Company recognizes revenue in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. Certain of our product sales are accounted for as multiple-element arrangements in accordance with Emerging Issues Task Force (“EITF”) 00-21, Revenue Arrangements with Multiple Deliverables. A multiple-element arrangement is a transaction which may involve the delivery or performance of multiple products, services, or rights to use assets, and performance may occur at different points in time or over different periods of time. The Company recognizes revenue when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectibility is reasonably assured.
For products manufactured according to the Company’sCompany's published specifications, where no installation is required or installation is deemed perfunctory and no substantive customer acceptance provisions exist, revenue is recognized when title passes to the customer, generally upon shipment. For products produced according to a particular customer’scustomer's specifications, revenue is recognized when the product has been tested, it has been demonstrated that it meets the customer’scustomer's specifications and title passes to the customer. The amount of revenue recorded is reduced by the amount of any customer retention (generally 10% to 20%), which is not payable by the customer until installation is completed and final customer acceptance is achieved. Installation is not deemed to be essential to the functionality of the equipment
24
since installation does not involve significant changes to the features or capabilities of the equipment or building complex interfaces and connections. In addition, the equipment could be installed by the customer or other vendors and generally the cost of installation approximates only 1% to 2% of the sales value of the related equipment.
For new products, new applications of existing products, or for products with substantive customer acceptance provisions where performance cannot be fully assessed prior to meeting customer specifications at the customer site, revenue is recognized upon completion of installation and receipt of final customer acceptance. Since title to goods generally passes to the customer upon shipment and 80% to 90% of the contract amount becomes payable at that time, inventory is relieved and accounts receivable is recorded for the amount billed at the time of shipment. The profit on the amount billed for these transactions is deferred and recorded as deferred profit in the accompanying condensed consolidated balance sheets.sheets. At JuneSeptember 30, 2007 and December 31, 2006 $1.2, $1.3 million and $0.3 million, respectively, are recorded in deferred profit.
Service and maintenance contract revenues are recorded as deferred revenue, which is included in other accrued expenses, and recognized as revenue on a straight-line basis over the service period of the related contract.
Inventory Valuation: Inventories are stated at the lower of cost (principally first-in, first-out method) or market. Management evaluates the need to record adjustments for impairment of inventory on a quarterly basis. The Company’sCompany's policy is to assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts. Obsolete inventory or inventory in excess of management’smanagement's estimated usage for the next 12 month’smonth's requirements is written-downwritten down to its estimated market value, if less than its cost. Inherent in the estimates of market value
26
are management’smanagement's estimates related to Veeco’sVeeco's future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses, and ultimate realization of excess inventory.
Goodwill and Indefinite-Lived Intangible Asset Impairment: The Company has significant intangible assets related to goodwill and other acquired intangibles. In assessing the recoverability of the Company’sCompany's goodwill and other indefinite-lived intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If it is determined that impairment indicators are present and that the assets will not be fully recoverable, their carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Changes in strategy and/or market conditions could significantly impact these assumptions, and thus Veeco may be required to record impairment charges for those assets not previously recorded.recorded.
Long-Lived Asset Impairment: The carrying values of long-lived assets are periodically reviewed to determine if any impairment indicators are present. If it is determined that such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining depreciation period, their carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Assumptions utilized by management in reviewing for impairment of long-lived assets could be effected by changes in strategy and/or market conditions which may require Veeco to record additional impairment charges for these assets, as well as impairment charges on other long-lived assets not previously recorded.
Warranty Costs: The Company estimates the costs that may be incurred under the warranty it provides and records a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. The Company’s warranty obligation is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. As the Company’sCompany's customer engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from the Company’s estimates, revisions to the estimated warranty liability would be required.
Income Taxes: As part of the process of preparing Veeco’s Consolidated Financial Statements,condensed consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves
25
estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s Condensed Consolidated Balance Sheets.condensed consolidated balance sheets. The carrying value of deferred tax assets is adjusted by a valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Veeco’s net deferred tax assets consist primarily of net operating loss and tax credit carryforwards, and timing differences between the book and tax treatment of inventory and other asset valuations. Realization of these net deferred tax assets is dependent upon the Company’s ability to generate future taxable income.
The Company records valuation allowances in order to reduce its deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, it considers a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under Statement of Financial Accounting Standards No. 109, (“SFAS 109”), Accounting for Income Taxes (“SFAS 109”), factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.
27
At JuneSeptember 30, 2007, the Company had a valuation allowance of approximately $67.8$68.5 million against substantially all of its domestic net deferred tax assets, which consist of net operating loss and tax credit carryforwards, as well as temporary deductible differences. The valuation allowance was calculated in accordance with the provisions of SFAS 109, which place primary importance on the Company’s historical results of operations. Although the Company’s results in prior years were significantly affected by restructuring and other charges, the Company’s historical losses and the losses incurred in 2005 and 2004 represent negative evidence sufficient to require a full valuation allowance under the provisions of SFAS 109. If the Company is able to realize part or all of the deferred tax assets in future periods, it will reduce its provision for income taxes with a release of the valuation allowance in an amount that corresponds with the income tax liability generated.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109, which became effective for Veeco on January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. The Company is required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time and changes in assumptions and judgments can materially affect the amounts recognized in the Company’s condensed consolidated financial statements. The impact of the Company’s reassessment during the first quarter of 2007 of its tax positions in accordance with FIN 48 during the first quarter of 2007 resulted in a $0.8 million reduction to the January 1, 2007 retained earnings balance.
Share-Based Compensation: In 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R)123(R), Share-Based Payment (“SFAS 123(R)”), which is a revision of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, supersedes Accounting Principles Board No. 25, Accounting for Stock Issued to Employees(“APB 25”) and amends Statement of Financial Accounting Standards No. 95, Statement of Cash Flows (“SFAS 95”). Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123(R) was adopted using the modified prospective method of application, which requires the recognition of compensation expense on a prospective basis. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in the pro forma disclosures in periods reported prior to the adoption of SFAS 123(R).
26
Under SFAS 123(R), the Company is required to record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the grant date, the Company applies the Black-Scholes option-pricing model. Inherent in the model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which make them critical accounting estimates. Since the fourth quarter of 2005, the Company has used an expected stock-price volatility assumption that is a combination of both historical and implied volatilities of the underlying stock, which is obtained from public data sources. Prior to that time, the Company based this assumption solely on historical volatility. The Company considers the exercise behavior of past grants and models the pattern of aggregate exercises in determining the expected weighted-average option life.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, (“SFAS 157”), Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
28
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically scoped out of the Statement) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as an adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
29In July 2007, the FASB issued an Exposure Draft on Proposed FASB Staff Position (FSP) No. APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (including partial cash settlement). The FSP will impact the accounting for certain structured convertible debt instruments that allow settlement in any combination of cash and shares at the issuer’s option. The FSP would require bifurcation of a component of the debt associated with the conversion feature, reclassification of that component to stockholders’ equity, and then accretion of the resulting discount on the debt over the remaining life of the obligation resulting in interest expense equal to the issuer’s nonconvertible debt borrowing rate. The intent is that the amount allocated to equity represents the interest cost that was “paid” for the conversion option. The proposed FSP would make any final guidance effective for fiscal years beginning after December 15, 2007, would not permit early application, and would be applied retrospectively to all periods presented. The Company has reviewed the impact of the proposed FSP and has determined that if the guidance is issued as currently proposed, it would result in a non-cash increase in interest expense, which could have a material impact on net income.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Veeco’s net sales to foreign customers represented approximately 68.7%71.1% and 67.1%68.4% of Veeco’s total net sales for the three and sixnine months ended JuneSeptember 30, 2007, respectively, and 71.1%63.9% and 68.6%67.0% for the comparable 2006 periods, respectively. The Company expects that 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 20.6%21.1% and 20.5%20.7% of Veeco’s total net sales for the three and sixnine months ended JuneSeptember 30, 2007, respectively, and 16.4%12.5% and 16.5%15.1% for the comparable 2006 periods, respectively.
The condensed consolidated results of operations for the three and sixnine months ended JuneSeptember 30, 2007 include aggregate foreign currency losses of approximately $0.2less than $0.1 million and approximately $0.3 million, respectively. Included in those losses were gainslosses of less than $0.1 million and losses of approximately $0.1 million, respectively, related to forward contracts. The 2006 condensed consolidated results of operations include aggregate foreign currency lossesimpact of a gain of approximately $0.1 million and $0.4a loss of approximately $0.3 million for the three and sixnine months ended JuneSeptember 30, 2006, respectively. Included in those lossesthis impact were losses of approximately $0.1$0.3 million and gains of approximately $0.1$0.2 million,
27
respectively, related to forward hedge contracts.
Veeco is exposed to financial market risks, including changes in foreign currency exchange rates. The changes in currency exchange rates that have the largest impact on translating Veeco’s international operating profit are the Japanese Yen and the Euro. Veeco uses derivative financial instruments to mitigate these risks. Veeco does not use derivative financial instruments for speculative or trading purposes. The Company generally enters into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known currency exposures. The average notional amount of such contracts was approximately $2.4$3.0 million and $2.9 million for both the three and sixnine months ended JuneSeptember 30, 2007, respectively.2007. As of JuneSeptember 30, 2007, the Company had not entered into anyone forward contractscontract for the month of July.October.
Assuming secondthird quarter 2007 variable debt and investment levels, the effect of a one-point change in interest rates would not have a material effect on net interest expense.
Item 4. Controls and Procedures.
The Company’s senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures under the supervision of and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings.
The Company is presently in the process of implementing new company-wide integrated applications software and, as of JuneSeptember 30, 2007, has completed the conversion to this new platform in ten of Veeco’s business locations with the remainder expected to be completed by the first half of 2008. As a result, certain changes have been made to the Company’s internal controls, which management believes will strengthen the Company’s internal control structure. There have been no other significant changes in our internal controls or other factors during the fiscal quarter ended JuneSeptember 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
30
As previously reported, in Veeco’s Annual Report of Form 10-K for the year ending December 31, 2006, Veeco and certain of its officers have been named as defendants in a securities class action lawsuit consolidated in August 2005 that is pending in federal court in the Southern District of New York (“the Court”). The lawsuit arises out of the restatement in March 2005 of Veeco’s financial statements for the quarterly periods and nine months ended September 30, 2004 as a result of the Company’s discovery of certain improper accounting transactions at its TurboDisc business unit. On July 5, 2007, Veeco entered into a Memorandum of Understanding to settle and fully resolve this lawsuit for a payment of $5.5 million. Veeco expects that insurance proceeds will cover the settlement amount and any significant legal expenses related to the settlement. The settlement agreement is subject to court approval and would dismiss all pending claims against Veeco and the other defendants with no admission or finding of wrongdoing by Veeco or any of the other defendants, and Veeco and the other defendants would receive a full release of all claims pending in the litigation.
28
Information regarding risk factors appears in the “Safe Harbor Statement” at the beginning of this Quarterly Report on Form 10-Q and in Part I — I—Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders of the Company was held on May 4, 2007. The matters voted on at the meeting were: (a) the election of three directors: (i) Heinz K. Fridrich, (ii) Roger D. McDaniel and (iii) Irwin H. Pfister; and (b) ratification of the Board’s appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2007. The terms of each of the following directors continued after the meeting: Joel A. Elftmann, Paul R. Low, Peter J. Simone, Edward H. Braun, Richard A. D’Amore and Douglas A. Kingsley. As of the record date for the meeting, there were 31,149,232 shares of common stock outstanding, each of which was entitled to one vote with respect to each of the matters voted on at the meeting. Each of the directors up for reelection was reelected and the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm was ratified by the required number of votes on each such matter. The results of the voting were as follows:
Matter |
| For |
| Withheld |
|
|
|
|
|
|
|
(a)(i) |
| 28,423,918 |
| 173,347 |
|
(a)(ii) |
| 28,423,086 |
| 174,179 |
|
(a)(iii) |
| 28,430,528 |
| 166,737 |
|
Matter |
| For |
| Against |
| Abstained |
| Broker |
|
|
|
|
|
|
|
|
|
|
|
(b) |
| 27,389,356 |
| 1,193,132 |
| 14,779 |
| — |
|
31
Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.
Number |
| Description |
| Incorporated by Reference to the |
|
|
|
|
|
10.1 |
|
|
| * |
10.2 |
|
|
| * |
|
|
|
|
|
|
|
| ||
31.1 |
| Certification of Chief Executive Officer pursuant to Rule |
| * |
31.2 |
| Certification of Chief Financial Officer pursuant to Rule |
| * |
32.1 |
| Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the |
| * |
32.2 |
| Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the |
| * |
* Filed herewith
3229
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: August 7,October 30, 2007
| Veeco Instruments Inc. | |
|
|
|
| By: | /s/ JOHN R. PEELER |
|
| John R. Peeler |
| ||
|
|
|
| By: | /s/ JOHN F. REIN, JR. |
|
| John F. Rein, Jr. |
|
33
30
INDEX TO EXHIBITS
Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.
Number |
| Description |
| Incorporated by Reference to the |
|
|
|
|
|
10.1 |
|
|
| * |
10.2 |
|
|
| * |
|
|
|
|
|
|
|
| ||
31.1 |
| Certification of Chief Executive Officer pursuant to Rule |
| * |
31.2 |
| Certification of Chief Financial Officer pursuant to Rule |
| * |
32.1 |
| Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the |
| * |
32.2 |
| Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the |
| * |
*Filed herewith