Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

 

(Mark One)

 

 

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 20072008

OR

o

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              .

 

Commission file number 0-16244


VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

11-2989601

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer
Identification Number)


100 Sunnyside Boulevard, Suite B
Woodbury, New York

 

(I.R.S. Employer

Identification Number)

Terminal Drive
11797-2902Plainview, New York

(Zip Code)

11803

(Address of Principal Executive Offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (516) 677-0200

 

Website: www.veeco.com

 


Indicate by check mark whether the Registrant: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 Registrantregistrant 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 Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filer, and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Large accelerated filer x    Accelerated filer oNon-accelerated filer o

Smaller reporting company o

(Do not check if a smaller

reporting company)

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

31,767,39232,187,122 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on October 29, 2007.27, 2008.

 

 

 



Table of Contents

 

SAFE HARBOR STATEMENT

 

This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Discussions containing such forward-looking statements may be found in Items 2 and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. These risks and uncertainties include, without limitation, the following:

·The recent turmoil in the world’s credit markets may have a protracted adverse impact on capital spending in the markets we serve and, as a result, could have a material adverse effect on our business and our results of operations.

 

·                  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.

 

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

 

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

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

·Our sales cycle is long and unpredictable.

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

 

·                  We rely on a limited number of suppliers.

 

·                  Any difficulty orOur 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.business.

 

·                  We are subject to foreign currency exchange risks.

 

·                  Our success depends on protection of our intellectual property rights.

 

·                  We may be subject to claims of intellectual property infringement by others.

 

·                  Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.

 

·                  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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Table of Contents

 

·                  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, 20062007 of Veeco Instruments Inc. (“Veeco”Veeco,” the “Company,” or the “Company”“we”).

 

Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs. We do not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.

 

Available Information

 

We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

 

Internet Address

 

We maintain a website where additional information concerning our business and various upcoming events can be found. The address of our website is www.veeco.com. We provide a link on our website, under Investors — Financial Information — SEC Filings, through which investors can access our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to thosesuch reports. These filings are posted to our Internet site, as soon as reasonably practicable after we electronically file such material with the SEC.

 

3



Table of Contents

 

VEECO INSTRUMENTS INC.

 

INDEX

Page

PART I. FINANCIAL INFORMATION

Page

 

Item 1.

Financial Statements (Unaudited):Statements:

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 and 2007 and 2006(Unaudited)

5

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 20072008 (Unaudited) and December 31, 20062007

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 and 2006(Unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

Item 2.

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

1617

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2728

 

Item 4.

Controls and Procedures

2829

 

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

2829

 

Item 1A.

Risk Factors

29

 

Item 6.

Exhibits

2930

 

SIGNATURES

3031

 

4



Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements(Unaudited)

 

Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of Operations Operations

(In thousands, except per share data)
(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

97,718

 

$

112,369

 

$

295,653

 

$

317,922

 

Cost of sales

 

61,824

 

64,513

 

173,819

 

178,585

 

Gross profit

 

35,894

 

47,856

 

121,834

 

139,337

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

22,723

 

22,296

 

69,347

 

68,622

 

Research and development expense

 

15,049

 

15,716

 

46,341

 

45,554

 

Amortization expense

 

1,959

 

4,025

 

8,236

 

12,029

 

Restructuring expense

 

529

 

 

1,974

 

 

Write-off of purchased in-process technology

 

 

1,160

 

 

1,160

 

Other income, net

 

(179

)

(310

)

(605

)

(243

)

Total operating expenses

 

40,081

 

42,887

 

125,293

 

127,122

 

Operating (loss) income

 

(4,187

)

4,969

 

(3,459

)

12,215

 

Interest expense, net

 

665

 

1,056

 

2,256

 

3,583

 

Gain on extinguishment of debt

 

 

 

(738

)

(330

)

(Loss) income before income taxes and noncontrolling interest

 

(4,852

)

3,913

 

(4,977

)

8,962

 

Income tax provision

 

954

 

612

 

3,490

 

2,878

 

Noncontrolling interest

 

(123

)

(1,207

)

(482

)

(1,207

)

Net (loss) income

 

$

(5,683

)

$

4,508

 

$

(7,985

)

$

7,291

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share

 

$

(0.18

)

$

0.15

 

$

(0.26

)

$

0.24

 

Diluted net (loss) income per common share

 

$

(0.18

)

$

0.14

 

$

(0.26

)

$

0.23

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

31,100

 

30,693

 

30,975

 

30,369

 

Diluted weighted average shares outstanding

 

31,100

 

31,393

 

30,975

 

31,100

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net sales

 

$

115,709

 

$

97,718

 

$

332,465

 

$

295,653

 

Cost of sales

 

69,626

 

61,824

 

196,026

 

173,819

 

Gross profit

 

46,083

 

35,894

 

136,439

 

121,834

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

23,589

 

22,723

 

70,528

 

69,347

 

Research and development expense

 

15,302

 

15,049

 

45,173

 

46,341

 

Amortization expense

 

3,148

 

1,959

 

7,530

 

8,236

 

Restructuring expense

 

4,120

 

529

 

6,995

 

1,974

 

Asset impairment charge

 

 

 

285

 

 

Other income, net

 

(213

)

(179

)

(591

)

(605

)

Total operating expenses

 

45,946

 

40,081

 

129,920

 

125,293

 

Operating income (loss)

 

137

 

(4,187

)

6,519

 

(3,459

)

Interest expense, net

 

1,052

 

665

 

2,913

 

2,256

 

Gain on extinguishment of debt

 

 

 

 

(738

)

(Loss) income before income taxes and noncontrolling interest

 

(915

)

(4,852

)

3,606

 

(4,977

)

Income tax provision

 

812

 

954

 

2,860

 

3,490

 

Noncontrolling interest

 

(54

)

(123

)

(200

)

(482

)

Net (loss) income

 

$

(1,673

)

$

(5,683

)

$

946

 

$

(7,985

)

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share:

 

 

 

 

 

 

 

 

 

Net (loss) income per common share

 

$

(0.05

)

$

(0.18

)

$

0.03

 

$

(0.26

)

Diluted net (loss) income per common share

 

$

(0.05

)

$

(0.18

)

$

0.03

 

$

(0.26

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

31,458

 

31,100

 

31,293

 

30,975

 

Diluted weighted average shares outstanding

 

31,458

 

31,100

 

31,498

 

30,975

 

 

See accompanying notes.

 

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Table of Contents

 

Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(In thousands)

 

 

September 30, 2007

 

December 31, 2006

 

 

September 30,

 

December 31,

 

 

(Unaudited)

 

 

 

 

2008

 

2007

 

 

 

 

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

108,402

 

$

147,046

 

 

$

117,684

 

$

117,083

 

Accounts receivable, less allowance for doubtful accounts of $2,728 in 2007 and $2,683 in 2006

 

68,603

 

86,589

 

Accounts receivable, less allowance for doubtful accounts of $988 in 2008 and $984 in 2007

 

71,919

 

75,207

 

Inventories

 

105,659

 

100,355

 

 

105,659

 

98,594

 

Prepaid expenses and other current assets

 

10,254

 

9,378

 

 

7,453

 

8,901

 

Deferred income taxes

 

2,605

 

2,565

 

 

2,781

 

2,649

 

Total current assets

 

295,523

 

345,933

 

 

305,496

 

302,434

 

Property, plant and equipment at cost, less accumulated depreciation of $93,559 in 2007 and $88,087 in 2006

 

69,505

 

73,510

 

Property, plant, and equipment at cost, net

 

66,493

 

66,142

 

Goodwill

 

100,898

 

100,898

 

 

105,355

 

100,898

 

Purchased technology, less accumulated amortization of $71,119 in 2007 and $64,736 in 2006

 

37,469

 

43,852

 

Other intangible assets, less accumulated amortization of $28,936 in 2007 and $26,740 in 2006

 

23,754

 

25,053

 

Purchased technology, less accumulated amortization of $76,563 in 2008 and $72,481 in 2007

 

34,470

 

36,107

 

Other intangible assets, less accumulated amortization of $34,447 in 2008 and $29,886 in 2007

 

27,610

 

23,540

 

Other assets

 

215

 

354

 

 

193

 

213

 

Total assets

 

$

527,364

 

$

589,600

 

 

$

539,617

 

$

529,334

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

35,619

 

$

40,588

 

 

$

33,358

 

$

36,639

 

Accrued expenses

 

50,369

 

48,714

 

 

61,820

 

60,201

 

Deferred profit

 

1,342

 

251

 

 

4,814

 

3,250

 

Income taxes payable

 

1,382

 

2,723

 

 

1,084

 

2,278

 

Current portion of long-term debt

 

5,434

 

5,597

 

 

25,426

 

25,550

 

Total current liabilities

 

94,146

 

97,873

 

 

126,502

 

127,918

 

Deferred income taxes

 

3,470

 

2,423

 

 

4,995

 

3,712

 

Long-term debt

 

146,450

 

203,607

 

 

120,889

 

121,035

 

Other non-current liabilities

 

1,716

 

2,304

 

 

2,185

 

1,978

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest

 

1,160

 

1,642

 

 

814

 

1,014

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

280,422

 

281,751

 

Total shareholders’ equity

 

284,232

 

273,677

 

Total liabilities and shareholders’ equity

 

$

527,364

 

$

589,600

 

 

$

539,617

 

$

529,334

 

 

See accompanying notes.

 

6



Table of Contents

 

Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows

(In thousands)
(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

Operating activities

 

 

 

 

 

Net (loss) income

 

$

(7,985

)

$

7,291

 

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

 

 

 

 

 

Depreciation and amortization

 

19,288

 

22,426

 

Deferred income taxes

 

1,111

 

291

 

Gain on extinguishment of debt

 

(738

)

(330

)

Non-cash compensation expense for share-based payments

 

3,490

 

1,443

 

Noncontrolling interest in net loss of subsidiary

 

(482

)

(1,207

)

Gain on sale of property, plant and equipment

 

(79

)

(27

)

Write-off of purchased in-process technology

 

 

1,160

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

19,972

 

3,103

 

Inventories

 

(4,801

)

(14,691

)

Accounts payable

 

(5,042

)

5,025

 

Accrued expenses, deferred profit and other current liabilities

 

524

 

3,159

 

Other, net

 

(2,481

)

(5,119

)

Net cash provided by operating activities

 

22,777

 

22,524

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(6,854

)

(12,473

)

Proceeds from sale of property, plant and equipment

 

311

 

35

 

Payments for net assets of businesses acquired

 

 

(3,068

)

Net maturities of investments

 

 

(128

)

Net cash used in investing activities

 

(6,543

)

(15,634

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from stock issuance

 

2,781

 

15,082

 

Repayments of long-term debt

 

(55,407

)

(19,680

)

Payments for debt issuance costs

 

(1,503

)

 

Other

 

(314

)

 

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

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

Exchange of convertible subordinated notes

 

$

118,766

 

$

 

Transfers from property, plant and equipment to inventory

 

473

 

1,515

 

Transfers from inventory to property, plant and equipment

 

78

 

743

 

Acquisition of assets in connection with the consolidation of a variable interest entity

 

 

3,550

 

Assumption of liabilities in connection with the consolidation of a variable interest entity

 

 

643

 

 

 

Nine months ended
September 30,

 

 

 

2008

 

2007

 

Operating activities

 

 

 

 

 

Net income (loss)

 

$

946

 

$

(7,985

)

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

 

 

 

 

 

Depreciation and amortization

 

18,138

 

19,288

 

Deferred income taxes

 

1,260

 

1,111

 

Non-cash restructuring charge

 

3,018

 

 

Net gain on extinguishment of long-term debt

 

 

(738

)

Non-cash compensation expense for stock options and restricted stock

 

5,671

 

3,490

 

Noncontrolling interest

 

(200

)

(482

)

Non-cash asset impairment charge

 

285

 

 

Gain on sale of property, plant, and equipment

 

(67

)

(79

)

Bad debt expense

 

4

 

40

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

6,663

 

19,932

 

Inventories

 

(1,703

)

(4,801

)

Accounts payable

 

(4,168

)

(5,042

)

Accrued expenses, deferred profit, and other current liabilities

 

(5,449

)

524

 

Other, net

 

(1,978

)

(2,481

)

Net cash provided by operating activities

 

22,420

 

22,777

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(10,430

)

(6,854

)

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

 

(10,970

)

 

Proceeds from sale of property, plant, and equipment

 

104

 

311

 

Net cash used in investing activities

 

(21,296

)

(6,543

)

Financing activities

 

 

 

 

 

Proceeds from stock issuances

 

681

 

2,781

 

Repayments of long-term debt

 

(270

)

(55,407

)

Payments for debt issuance costs

 

 

(1,503

)

Restricted stock tax withholdings

 

(969

)

(314

)

Net cash used in financing activities

 

(558

)

(54,443

)

Effect of exchange rate changes on cash and cash equivalents

 

35

 

(435

)

Net change in cash and cash equivalents

 

601

 

(38,644

)

Cash and cash equivalents at beginning of period

 

117,083

 

147,046

 

Cash and cash equivalents at end of period

 

$

117,684

 

$

108,402

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Accrual of earn-out payments for business acquired

 

$

3,527

 

$

 

Exchange of convertible subordinated notes

 

$

 

$

118,766

 

Transfers from property, plant, and equipment to inventory

 

$

404

 

$

473

 

Transfers from inventory to property, plant, and equipment

 

$

385

 

$

78

 

 

See accompanying notes.

 

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Table of Contents

 

VEECO INSTRUMENTS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1—Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three months and nine months ended September 30, 2007,2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.2008.  For further information, refer to the financial statements and footnotes thereto included in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2006.2007.

 

Consistent with prior years, the Company reportswe report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period.  The interim quarter ends are determined at the beginning of each year based on the 13-week quarters.  The 2008 interim quarter ends are March 30, June 29, and September 28.  The 2007 interim quarter ends arewere 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 reportswe report these interim quarter ends as March 31, June 30, and September 30 in itsour interim condensed consolidated financial statements.

 

Net (Loss) Income Per Common Share

 

The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands )

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

31,100

 

30,693

 

30,975

 

30,369

 

Dilutive effect of stock options and restricted stock awards

 

 

700

 

 

731

 

Diluted weighted average shares outstanding

 

31,100

 

31,393

 

30,975

 

31,100

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

31,458

 

31,100

 

31,293

 

30,975

 

Dilutive effect of stock options and restricted stock awards and units

 

 

 

205

 

 

Diluted weighted average shares outstanding

 

31,458

 

31,100

 

31,498

 

30,975

 

 

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

 

During the threethree-month period ended September 30, 2008, options to purchase 5.7 million shares of common stock (at prices ranging from $0.27 to $72.00 per share) were excluded from the computation of diluted earnings per share due to the net loss sustained for the period, which caused their effect to be antidilutive.  During the nine-month period ended September 30, 2008, options to purchase 4.8 million shares of common stock (at prices ranging from $16.56 to $72.00 per share), respectively, were excluded from the computation of diluted earnings per share due to exercise prices that exceeded the average market price of our common stock for the period. During the three-month and nine monthnine-month periods ended September 30, 2007, options to purchase 5.7 million shares of common stock (at prices ranging from $0.27 to $72.00 per share) that were outstandingin both periods were excluded from the computation of diluted earnings per share.  Duringshare due to the comparable 2006 periods, options to purchase 2.9 million shares (at prices ranging from $23.11 to $72.00 per share) and 3.0 million shares (at prices ranging from $22.63 to $72.00 per share) of common stock that were outstanding were excluded fromnet loss sustained for the computation of diluted earnings per share.  In the 2007 periods, the Company recorded net losses, so the effect of all options outstanding was anti-dilutive.  In 2006, the exercise price of these options exceeded the average market price of the Company’s common stock, thereby causingperiod, which caused their effect to be anti-dilutive.antidilutive.

 

During the second quarter of 2007, the Company issuedwe exchanged $118.8 million of our unsecured 4.125% convertible subordinated notes due December 2008 (the “Old Notes”) for $117.8 million of a new series of 4.125% convertible subordinated notes (the “New Notes”) due April 15, 2012 (the "New Notes") pursuant to privately negotiated exchange agreements with certain holders of its outstanding 4.125% convertible subordinated notes due 2008 (the "Old Notes"). In total, the Company exchanged $118.8 million of Old Notes for $117.8 million of New Notes.    

2012.   The effect on diluted shares of the assumed conversion of the Old Notes iswas approximately 0.7 million and 2.2 million common equivalent shares for the three months and nine months ended September 30, 2007, respectively, and 5.2 million and 5.3 million for the comparable periods of 2006, respectively.  The converted shares arewere anti-dilutive and, therefore, arewere not

8



included in the weighted shares outstanding for the three months and nine months ended September 30, 2007 and 2006, respectively.2007.  The second quarter 2007 debt

8



Table of Contents

exchange of the Old Notes for the New Notes, together with the $56 million in debt repurchases of Old Notes during the first quarter of 2007 reduced the effect on earnings per share of the assumed conversion of the Old Notes, which was calculated using the “if converted” method of accounting.  For the three months and nine months ended September 30, 2008, the weighted-average effect on diluted shares of the assumed conversion of the remaining $25.2 million of Old Notes is approximately 0.7 million shares in each period.

 

The New Notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, as long as the Company haswe have the ability and the intent to settle the principal amount of the New Notes in cash.  Under the terms of the New Notes, the Companywe may pay the principal amount of converted New Notes in cash or in shares of common stock.  The Company hasWe have indicated that it intendswe intend to pay such amounts in cash.  Using the treasury stock method, the impact of the assumed conversion of the New Notes is anti-dilutive for the three months and nine months ended September 30, 2008 and 2007, as the average stock price was below the conversion price of $27.23 for both periods.each period.  The effect of the assumed converted shares is dependent on the stock price at the time of the conversion.  The maximum number of common equivalent shares issuable upon conversion inclusive of the maximum make whole provision is approximately 6.0 million.  See Note 8 for further details on our debt.

 

Income TaxesFair Value Measurements

 

In JulySeptember 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation Number 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 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 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. For additional information regarding the adoption of FIN 48, see Note 5, Income Taxes.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“(“SFAS 157”).  SFAS 157 establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.  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.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“(“SFAS 159”). SFAS 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically scoped outexcluded from the scope of the Statement) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as an adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings.

Effective January 1, 2008, we adopted SFAS 159157 and SFAS 159.  Since we do not have any financial assets and liabilities that are required to be recorded at fair value, the only impact of these adoptions will be on the disclosures required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments in our Annual Report on Form 10-K for the year ending December 31, 2008.

Recent Accounting Pronouncements

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

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”) and Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51 (“SFAS 160”).   Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date at fair value with limited exceptions.  SFAS 141(R) also changes the accounting treatment for certain other items that relate to business combinations. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The purpose of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements.  The most significant provisions of this statement result in changes to the presentation of noncontrolling interests in the consolidated financial statements.  SFAS 160 is effective for fiscal years beginning after NovemberDecember 15, 2007.2008.  The adoption of this statement iswill impact the manner in which we present noncontrolling interests, but will not expected to have a material impact on the Company’sour consolidated financial position or results of operations.

 

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Table of Contents

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 and requires comparative disclosures only for periods subsequent to initial adoption. The adoption of the provisions of SFAS 161 will not impact our consolidated financial position or results of operations.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). The guidance is effective for fiscal years beginning after December 15, 2008, and interim periods within those years.  FSP APB 14-1 will require issuers of convertible debt that can be settled in cash to separately account for (i.e. bifurcate) a portion of the debt associated with the conversion feature and reclassify this portion to stockholders’ equity.  The liability portion, which represents the fair value of the debt without the conversion feature, will be accreted to its face value over the life of the debt using the effective interest method, with the accretion expense recorded to interest.  FSP APB 14-1 will be applied retrospectively to all periods presented. The cumulative effect of the change in accounting principle on periods prior to those presented will be recognized as of the beginning of the first period presented. We expect the adoption of FSP APB 14-1 to have a material effect on our consolidated financial position, results of operations, and earnings per share.  Effective as of date of issuance of the New Notes, we will reclassify approximately $16.3 million from long-term debt to additional paid-in capital, and as of the adoption of FSP APB 14-1 in the beginning of 2009, our accumulated deficit will reflect approximately $4.8 million of debt accretion that occurred between the issuance date of the New Notes and the adoption date. Approximately $3.2 to $3.7 million of additional interest expense will be recorded annually from the adoption date through the maturity date of the convertible debt. This additional interest expense will not require the use of cash.

Note 2—Acquisition of Mill Lane Engineering

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

Note 3—Share-Based Payments

Stock Option and Restricted Stock-BasedStock Compensation

 

Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period in accordance with FASB Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”).  The following compensation expense was included in

9



the condensed consolidated statementstatements of operations for the three months and nine months ended September 30, 20072008 and 20062007 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

$

1,505

 

$

722

 

$

3,490

 

$

1,442

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Share-based compensation expense

 

$

2,048

 

$

1,505

 

$

5,671

 

$

3,490

 

 

As of September 30, 2007,2008, the total unrecognized compensation cost related to nonvested stock awards is $10.3 million and to stock option awards is $3.7 million.$10.6 million and $7.8 million, respectively.  The related weighted average period over which it is expectedwe expect that such unrecognized compensation costs will be recognized as expense is approximately 2.42.5 years for both the nonvested stock awards and 2.5 years forthe option awards.

During the third quarter of 2008, we granted to certain key employees 14,500 shares of restricted common

10



Table of Contents

stock, 10,000 restricted stock units, and 61,000 stock options.  The stock options will vest over a three-year period and the restricted stock awards and units will vest over a four-year period.

 

A summary of the Company’sour restricted stock awards including restricted stock units as of and for the nine months ended September 30, 2007,2008, is presented below:

 

 

 

 

Weighted-

 

Shares

 

Average

 

(In

 

Grant-Date

 

thousands)

 

Fair Value

 

Shares
(000s)

 

Weighted
Average
Grant-Date
Fair Value

 

Nonvested at beginning of year

 

244

 

$

22.50

 

680

 

$

19.50

 

Granted

 

505

 

19.25

 

384

 

17.30

 

Vested

 

(93

25.08

 

(361

)

19.67

 

Forfeited

 

(50

18.17

Nonvested as of September 30, 2007

 

606

 

19.75

Forfeited (including cancelled awards)

 

(23

)

18.40

 

Nonvested at September 30, 2008

 

680

 

18.21

 

 

A summary of the Company’sour stock option plans as of and for the nine months ended September 30, 2007,2008, is presented below:

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

Aggregate

 

Average

 

 

 

Weighted-

 

Intrinsic

 

Remaining

 

Shares

 

Average

 

Value

 

Contractual

 

(In

 

Exercise

 

(In

 

Life

 

thousands)

 

Price

 

thousands)

 

(in years)

 

Shares
(000s)

 

Weighted-
Average
Exercise Price

 

Aggregate
Intrinsic
Value (000s)

 

Weighted-
Average
Remaining
Contractual
Life (in years)

 

Outstanding at beginning of year

 

6,363

 

$

25.58

 

 

 

 

 

5,672

 

$

23.04

 

 

 

 

 

Granted

 

603

 

19.58

 

 

 

 

 

1,226

 

17.35

 

 

 

 

 

Exercised

 

(169

)

15.72

 

 

 

 

 

(58

)

11.71

 

 

 

 

 

Forfeited (including cancelled options)

 

(1,079

)

35.46

 

 

 

 

 

(1,117

)

30.78

 

 

 

 

 

Outstanding at September 30, 2007

 

5,718

 

$

23.37

 

$

6,049

 

3.1

Options exercisable at September 30, 2007

 

5,011

 

$

23.86

 

$

5,748

 

2.6

Outstanding at September 30, 2008

 

5,723

 

20.43

 

$

1,229

 

3.6

 

Options exercisable at September 30, 2008

 

4,114

 

21.45

 

$

1,202

 

2.5

 

 

Note 3—4—Balance Sheet Information

 

Inventories

 

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

 

 

 

September 30, 2007

 

December 31, 2006

 

 

(In thousands )

 

 

 

 

 

Parts and components (1)

 

$

60,121

 

$

60,249

Work in process (1)

 

32,192

 

27,961

Finished goods

 

13,346

 

12,145

 

 

$

105,659

 

$

100,355


(1) The prior period has been reclassified to conform to current period presentation.

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

Raw materials

 

$

60,084

 

$

58,157

 

Work in process

 

32,841

 

27,330

 

Finished goods

 

12,734

 

13,107

 

 

 

$

105,659

 

$

98,594

 

 

Accrued Warranty

 

The Company estimatesWe estimate the costs that may be incurred under the warranty it provideswe provide and recognizesrecognize a

10



liability in the amount of such costs at the time the related revenue is recognized.  Factors that affect the Company’sour warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period.  The CompanyWe periodically assessesassess the adequacy of itsour recognized warranty liability and adjustsadjust the amount as necessary.  Changes in the Company’sour warranty liability during the nine months ended September 30, 2007 and 2006period are as follows:follows (in thousands):

 

11

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

Balance as of January 1

 

$

7,118

 

$

6,671

 

Warranties issued during the period

 

4,170

 

5,088

 

Settlements made during the period

 

(4,788

)

(4,602

)

Balance as of September 30

 

$

6,500

 

$

7,157

 



Table of Contents

 

 

 

Nine months ended
September 30,

 

 

 

2008

 

2007

 

Balance at beginning of period

 

$

6,502

 

$

7,118

 

Warranties issued during the period

 

4,962

 

4,170

 

Settlements made during the period

 

(4,096

)

(4,788

)

Balance at end of period

 

$

7,368

 

$

6,500

 

 

Note 4—5—Segment Information

 

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

 

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

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

 

The following tables present certain data pertaining to the reportable productour reporting segments of the Company and a reconciliation of EBITA to income (loss) before income taxes and noncontrolling interest for the three months and nine months ended September 30, 20072008 and 20062007, and goodwill and total assets as of September 30, 20072008 and December 31, 20062007 (in thousands):

 

 

 

Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

Three Months Ended
September 30, 2007

 

 

 

 

 

 

 

 

 

Net sales

 

$

62,923

 

$

34,795

 

$

 

$

 97,718

 

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

 

$

2,249

 

$

(395

)

$

(3,553

)

$

(1,699

)

Interest expense, net

 

 

 

665

 

665

 

Amortization expense

 

1,444

 

399

 

116

 

1,959

 

Restructuring expense

 

159

 

46

 

324

 

529

 

Income (loss) before income taxes and noncontrolling interest

 

$

646

 

$

(840

)

$

(4,658

)

$

(4,852

)

11



 

 

Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

Three Months Ended
September 30, 2006

 

 

 

 

 

 

 

 

Net sales

 

$

71,375

 

$

40,994

 

$

 

$

112,369

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

 

$

7,482

 

$

4,352

 

$

(1,680

)

$

10,154

Interest expense, net

 

 

 

1,056

 

1,056

Amortization expense

 

3,333

 

433

 

259

 

4,025

Write-off of purchased in-process technology

 

1,160

 

 

 

1,160

Income (loss) before income taxes and noncontrolling interest

 

$

2,989

 

$

3,919

 

$

(2,995

)

$

3,913

 

 

Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

Nine Months Ended
September 30, 2007

 

 

 

 

 

 

 

 

Net sales

 

$

181,028

 

$

114,625

 

$

 

$

295,653

 

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

 

$

11,842

 

$

4,015

 

$

(9,106

)

$

6,751

 

Interest expense, net

 

 

 

2,256

 

2,256

 

Amortization expense

 

6,628

 

1,135

 

473

 

8,236

 

Restructuring expense

 

159

 

1,398

 

417

 

1,974

 

Gain on extinguishment of debt

 

 

 

(738

)

(738

)

Income (loss) before income taxes and noncontrolling interest

 

$

5,055

 

$

1,482

 

$

(11,514

)

$

(4,977

)

 

 

Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

Nine Months Ended
September 30, 2006

 

 

 

 

 

 

 

 

Net sales

 

$

191,927

 

$

125,995

 

$

 

$

317,922

 

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

 

$

17,159

 

$

16,280

 

$

(8,035

)

$

25,404

 

Interest expense, net

 

 

 

3,583

 

3,583

 

Amortization expense

 

9,909

 

1,328

 

792

 

12,029

 

Write-off of purchased in-process technology

 

1,160

 

 

 

1,160

 

Gain on extinguishment of debt

 

 

 

(330

)

(330

)

Income (loss) before income taxes and noncontrolling interest

 

$

6,090

 

$

14,952

 

$

(12,080

)

$

8,962

 

 

 

LED & Solar
Process
Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

 

Three months ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

40,983

 

$

43,256

 

$

31,470

 

$

 

$

115,709

 

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

 

$

5,477

 

$

6,739

 

$

45

 

$

(3,929

)

$

8,332

 

Interest expense, net

 

 

 

 

1,052

 

1,052

 

Amortization expense

 

1,587

 

952

 

495

 

114

 

3,148

 

Restructuring expense

 

 

 

437

 

3,683

 

4,120

 

Purchase accounting adjustment (1)

 

927

 

 

 

 

927

 

Income (loss) before income taxes and noncontrolling interest

 

$

2,963

 

$

5,787

 

$

(887

)

$

(8,778

)

$

(915

)

 

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Three months ended September 30, 2007

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

31,824

 

$

31,099

 

$

34,795

 

$

 

$

97,718

 

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

 

$

3,196

 

$

(947

)

$

(395

)

$

(3,553

)

$

(1,699

)

Interest expense, net

 

 

 

 

665

 

665

 

Amortization expense

 

492

 

952

 

399

 

116

 

1,959

 

Restructuring expense

 

 

159

 

46

 

324

 

529

 

Income (loss) before income taxes and noncontrolling interest

 

$

2,704

 

$

(2,058

)

$

(840

)

$

(4,658

)

$

(4,852

)

Nine months ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

128,204

 

$

104,097

 

$

100,164

 

$

 

$

332,465

 

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

 

$

22,807

 

$

10,446

 

$

618

 

$

(11,615

)

$

22,256

 

Interest expense, net

 

 

 

 

2,913

 

2,913

 

Amortization expense

 

3,040

 

2,856

 

1,295

 

339

 

7,530

 

Restructuring expense

 

7

 

124

 

627

 

6,237

 

6,995

 

Asset impairment charge

 

 

 

 

285

 

285

 

Purchase accounting adjustment (1)

 

927

 

 

 

 

927

 

Income (loss) before income taxes and noncontrolling interest

 

$

18,833

 

$

7,466

 

$

(1,304

)

$

(21,389

)

$

3,606

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2007

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

82,188

 

$

98,840

 

$

114,625

 

$

 

$

295,653

 

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

 

$

8,787

 

$

3,055

 

$

4,015

 

$

(9,106

)

$

6,751

 

Interest expense, net

 

 

 

 

2,256

 

2,256

 

Amortization expense

 

3,774

 

2,854

 

1,135

 

473

 

8,236

 

Restructuring expense

 

 

159

 

1,398

 

417

 

1,974

 

Gain on extinguishment of debt

 

 

 

 

(738

)

(738

)

Income (loss) before income taxes and noncontrolling interest

 

$

5,013

 

$

42

 

$

1,482

 

$

(11,514

)

$

(4,977

)

 

 

LED & Solar
Process
Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

45,610

 

$

30,377

 

$

29,368

 

$

 

$

105,355

 

Total assets

 

132,342

 

148,531

 

116,866

 

141,878

 

539,617

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

41,153

 

$

30,377

 

$

29,368

 

$

 

$

100,898

 

Total assets

 

121,326

 

144,944

 

121,060

 

142,004

 

529,334

 

 

 

Process
Equipment

 

Metrology

 

Unallocated
Corporate
Amount

 

Total

As of September 30, 2007

 

 

 

 

 

 

 

 

Goodwill

 

$

71,530

 

$

29,368

 

$

 

$

100,898

Total assets

 

272,842

 

127,069

 

127,453

 

527,364

 

 

 

 

 

 

 

 

 

As of December 31, 2006

 

 

 

 

 

 

 

 

Goodwill

 

$

71,530

 

$

29,368

 

$

 

$

100,898

Total assets

 

285,661

 

138,140

 

165,799

 

589,600

 

 

 

 

 

 

 

 

 


(1) This adjustment relates to the required capitalization of profit in inventory associated with the acquisition of Mill Lane which is included in cost of sales.

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

 

Note 5—6—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 forFor the nine months ended September 30, 2007 included $2.52008, our reserve for unrecognized tax benefits decreased by approximately $0.3 million primarily due to the expiration of the statute of limitations relating to Veeco’scertain 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.tax positions.  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 Companywe 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 nine months ended September 30, 2007, the Company recorded $0.1 million and $0.6 million, respectively, related to unrecognized tax benefits.  As a result, the Company had $3.0$1.6 million of unrecognized tax benefits at September 30, 2007,2008, all of which relate to

13



Table of Contents

positions taken on itsour foreign tax returns and represent the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in future periods.

The Company

We or one of itsour subsidiaries filesfile income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions.  All material federal, state, local, and foreign income tax matters have been concluded for years through 2002 subject to subsequent utilization of net operating losses generated in such years. During the third quarter of 2008, the Internal Revenue Service initiated an examination of our Federal income tax return for the calendar year 2006.  In addition, our tax returns are under examination in certain foreign jurisdictions.

The Company is

We are continuing itsour 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$0.4 million as of September 30, 2007, which included $0.2 million accrued during the nine months ended September 30, 2007, the impact of which was to reduce net income by $0.2 million and earnings per diluted share by less than $0.01 for the nine months ended September 30, 2007.

2008.

 

Note 6—7—Comprehensive (Loss) Income

 

Total comprehensive (loss) income for the three months and nine months ended September 30, 20072008 and 20062007 was as follows (in thousands):

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

2007

 

2006

 

2007

 

2006

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(5,683

)

$

4,508

 

$

(7,985

)

$

7,291

 

 

$

(1,673

)

$

(5,683

)

$

946

 

$

(7,985

)

Foreign currency translation

 

1,481

 

(1,065

)

1,387

 

672

 

Foreign currency translation (loss) gain

 

(555

)

1,481

 

1,208

 

1,387

 

Total comprehensive (loss) income

 

$

(4,202

)

$

3,443

 

$

(6,598

)

$

7,963

 

 

$

(2,228

)

$

(4,202

)

$

2,154

 

$

(6,598

)

 

Note 7—8—Debt

 

Convertible Debt

 

During the first quarter of 2007, the Companywe repurchased $56.0 million of itsour 4.125% convertibleOld Notes

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 Companywe recorded a net gain from the extinguishment of debt of $0.7 million.

 

On April 20,During the second quarter of 2007, the Companywe issued new convertible subordinated notes (the “New Notes”)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 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.  Following the exchange transactions, approximately $25.2 million of the Old Notes, with a conversion price of $38.51 per common share, remained outstanding.  The Old Notes are due in December 2008, and we expect to pay off these notes through the use of our available cash balances.

 

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’sour 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’sour common stock trading at prices equal to 130% over the conversion price for a specified period.

 

Credit Agreement

During the third quarter of 2007, the Companywe entered into a Credit Agreement with HSBC Bank USA, National Association, as administrative agent (“HSBC”), and the lenders named therein (the “New Credit“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, 20072008 and December 31, 2006,2007, there were no borrowings outstanding.  Interest expense associated with the credit agreement recorded during the periodnine months ended September 30, 2008 was nominal and$0.2 million, of which $0.1 million 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 on Form 10-K for the year ended 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.

2008.

 

14



Table of Contents

Note 9 — Commitments, Contingencies and Other Matters

 

2007 Legal Proceedings

On August 11, 2008, we announced that we had settled the patent litigation which we had brought in 2003 in the United States District Court for the Central District of California against Asylum Research Corporation, a privately-held company founded by former Veeco employees (“Asylum”).  In the lawsuit, we had alleged that the manufacture, use, and sale of Asylum’s MFP-3D AFM constituted willful infringement of five patents owned by us, as well as other claims.  In the settlement, Veeco and Asylum agreed to drop all pending claims against each other and agreed to a five year, worldwide cross license of each company’s patents and a mutual covenant not to sue on patents either party has a right to assert.  Asylum made a net payment to Veeco and will pay an ongoing royalty to Veeco for the five-year term of the cross license.  As part of the settlement, Asylum acknowledged the validity of the Veeco patents asserted in the case.  During the case, we capitalized legal costs incurred to defend our patents and are now amortizing these capitalized costs over the remaining lives of these patents.  Payments received from Asylum have been and will continue to be netted against the capitalized legal costs upon receipt.

Restructuring Expenses

 

In conjunction withDuring 2007, management initiated a cost reductionprofit improvement plan, the Company recognized a restructuring charge of approximately $0.5 million and $2.0 million during the three months and nine months ended September 30, 2007, respectively, which was recorded as restructuring expenseresulting in the condensed consolidated statements of operations. The charge consisted of personnel severance costs for approximately 4090 employees, or approximately 3%7.5% of totalour employees, which included management, administration, and manufacturing employees companywide.  As of September 30, 2007, approximately $0.9 million has been paid and approximately $1.1 million remains accrued. The remainder is expectedFurthermore, we took additional measures to be paid over the next twelve to eighteen months.

The following is a reconciliation of the liability for the restructuring charge (in thousands):

 

 

Process
Equipment

 

Metrology

 

Corporate

 

Total

Charged to accrual

 

$

159

 

$

1,398

 

$

417

 

$

1,974

 

Cash payments during 2007

 

(93

)

(692

)

(70

)

(855

)

Balance as of September 30, 2007

 

$

66

 

$

706

 

$

347

 

$

1,119

 

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),improve profitability, including a reduction of discretionary expenses, realignment of the Company’sour sales organization to more closely match current market and regional opportunities, and consolidation of certain engineering groups.  As a result, duringgroups within our data storage business, which included the fourth quarterdiscontinuation of 2007, the Company expects to reduce its employment level by approximately 100 employees and will recognizetwo products. In conjunction with these activities, we recognized a restructuring charge of $5.0approximately $6.7 million during 2007.

During the first quarter of 2008, we consolidated our Corporate headquarters into our Plainview, New York location.  As a result, we incurred an additional restructuring charge of $2.6 million, representing the remaining lease rentals and estimated property taxes for the facility we vacated, offset by the estimated expected sublease income to be received.  We made certain assumptions in determining the charge, which included estimated sublease income and terms of the sublease as well as the estimated discount rate to be used in determining the fair value of the liability.  We developed these assumptions based on our understanding of the current real estate market as well as current market interest rates.  The assumptions were based on management’s best estimates, and will be adjusted periodically if better information is obtained.

During the second quarter of 2008, we did not incur any additional restructuring charges.  During the third quarter of 2008, we recorded a charge of $4.1 million, comprised predominantly of the following: $3.7 million related to a mutually agreed-upon termination of the employment agreement with Veeco’s former CEO following the successful completion of the CEO transition, which included a charge of $3.0 million for the acceleration of stock-based compensation expense; personnel severance costs of $0.1 million for Metrology employees; and $0.3 million in lease-related expenses associated with the termination of the lease for a Metrology facility in Santa Barbara, California.  Restructuring expenses for the related employees.three months and nine months ended September 30, 2008 and 2007 are as follows (in thousands):

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Lease-related costs

 

$

282

 

$

 

$

2,836

 

$

 

Personnel severance costs

 

820

 

529

 

1,141

 

1,974

 

Modification of equity awards

 

3,018

 

 

3,018

 

 

Total restructuring expense

 

$

4,120

 

$

529

 

$

6,995

 

$

1,974

 

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

 

15



Table of Contents

 

 

 

LED & Solar
Process
Equipment

 

Data Storage
Process
Equipment

 

Metrology

 

Unallocated
Corporate

 

Total

 

Short-Term Liability

 

 

 

 

 

 

 

 

 

 

 

2007 Activity

 

 

 

 

 

 

 

 

 

 

 

Personnel severance charges

 

$

34

 

$

658

 

$

1,153

 

$

2,469

 

$

4,314

 

Purchase order commitments

 

 

1,840

 

 

 

1,840

 

Total charged to accrual (1)

 

34

 

2,498

 

1,153

 

2,469

 

6,154

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash payments

 

(17

)

(435

)

(751

)

(633

)

(1,836

)

Balance as of December 31, 2007

 

17

 

2,063

 

402

 

1,836

 

4,318

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 Activity

 

 

 

 

 

 

 

 

 

 

 

Lease-related costs

 

 

 

282

 

971

 

1,253

 

Personnel severance charges

 

7

 

124

 

344

 

666

 

1,141

 

Total charged to accrual (2)

 

7

 

124

 

626

 

1,637

 

2,394

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term/long-term reclassification

 

 

 

 

25

 

25

 

Cash payments

 

(15

)

(2,069

)

(780

)

(2,369

)

(5,233

)

Balance as of September 30, 2008

 

$

9

 

$

118

 

$

249

 

$

1,128

 

$

1,504

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liability

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

Lease-related costs

 

$

 

$

 

$

 

$

1,583

 

$

1,583

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term/long-term reclassification

 

 

 

 

(25

)

(25

)

Other adjustments

 

 

 

 

(172

)

(172

)

Balance as of September 30, 2008

 

$

 

$

 

$

 

$

1,386

 

$

1,386

 


(1)          In 2007, a charge of $0.6 million for the modification of stock options was recorded as part of a termination agreement with each of five key employees as an increase to additional paid-in capital.

(2)          In 2008, a charge of $3.0 million for the acceleration of equity awards was recorded as part of a mutually agreed upon termination with our former CEO (who currently remains as Chairman of the Board of Directors) as an increase to additional paid-in capital.

The balance of the restructuring accrual is expected to be paid over the next thirty-three months, or the remaining life of the lease for the former Corporate headquarters.  Given the recent change in business climate, management is currently evaluating various cost cutting actions, and it is likely that we will incur restructuring charges in the fourth quarter, depending upon the timing and extent of actions under consideration.  We are not able to estimate the extent of these charges at this time.

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

16



Table of Contents

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

 

Executive Summary

 

                Veeco designs, manufactures, marketsWe design, manufacture, market, and services a broad line of equipment primarily used by manufacturersservice enabling solutions for customers in the HB-LED, solar, data storage, semiconductor, scientific research and industrial research, semiconductor, high-brightness light emitting diode (“HB-LED”)markets.  We have leading technology positions in our three businesses:  LED & Solar Process Equipment, Data Storage Process Equipment, and wireless industries. These industries help create a wide range of information age products such as computer integrated circuits, personal computers, LEDs for backlighting and automotive applications, hard disk drives, network servers, digital cameras, wireless phones, TV set-top boxes, personal music/video players, and personal digital assistants. Veeco’s broad line of products features leading edge technology and allows customers to improve time-to-market of their next generation products. Veeco’s products are also enabling advancements in the growing fields of nanoscience, nanobiology, and other areas of scientific and industrial research.Metrology.

 

                Veeco’sOur LED & Solar Process Equipment products, precisely deposit or remove (etch) various materialswhich include MOCVD and MBE technologies, and web coaters for flexible photovoltaic applications, are used in the manufacturing of thin film magnetic heads (“TFMHs”) for the data storage industry, HB-LED/HB-LEDs and wireless devices (such as power amplifiersamplifiers) and laser diodes),solar panels.  Our Data Storage Process Equipment products, which include ion beam etch and semiconductor mask reticles.  Veeco’sdeposition, physical vapor deposition and other technologies, are used primarily in the manufacturing of TFMHs for the data storage industry.  Our Metrology equipment includes atomic force microscopes (“AFMs”), scanning probe microscopes (“SPMs”), optical interferometers, and stylus profilers, and is used to provide critical surface measurements on semiconductor devicesin research and TFMHs. Thisproduction environments. In production, our equipment allows customers, such as those in semiconductor and data storage, to monitor their products throughout the manufacturing process in order to improve yields, reduce costs, and improve product quality. Veeco’s Metrology solutionsOur instruments are also used by many universities, scientific laboratories, and industrial applications. Veeco sells its broad line of atomic force microscopes (“AFMs”), optical interferometers, and stylus profilerssold to thousands of universities, research facilities and scientific centers worldwide.worldwide to enable a variety of nanotechnology related research.

 

                VeecoWe currently maintains manufacturingmaintain facilities in Arizona, California, Colorado, Minnesota, New Jersey, and New York, and Massachusetts, with sales and service locations aroundin North America, Europe, Japan, and the world.Asia Pacific region.

During 2007, management established a profit improvement plan, resulting in a 7.5% reduction in our employment levels, a reduction of discretionary expenses, the realignment of our sales organization to match more closely market and regional opportunities, consolidation of our Corporate headquarters, and the consolidation of certain engineering groups within our Data Storage Process Equipment business, which included the discontinuation of two products.  In conjunction with these activities, we recognized a restructuring charge of approximately $6.7 million during the year ended December 31, 2007, as well as an inventory write-off of $4.8 million and an asset impairment charge of $1.1 million.  During the nine months ended September 30, 2008, we incurred additional restructuring charges of $7.0 million and asset impairment charges of $0.3 million, discussed further in Results of Operations below.  Through the first nine months of 2008, we have seen the positive impact of these restructuring activities on the Company’s operating expenses.

 

Highlights of the Third Quarter of 20072008

 

·                  Revenue was $97.7$115.7 million, a 13% decreasean 18% increase over the third quarter of 2007.

·                  Orders were $90.2 million, down 24% from the third quarter of 2006.2007.

·                  Orders were $118.3 million, an increase of 3% from the third quarter of 2006.

Net loss was $(5.7)($1.7) million, or $(0.18)($0.05) per share, compared to net incomeloss of $4.5($5.7) million, or $0.14($0.18) per share, in the third quarter of 2006.2007.

·                  Gross margins were 36.7%39.8%, compared to 42.6%36.7% in the third quarter of 2006.2007.

 

Highlights of the First Nine Months of 20072008

 

·                  Revenue was $295.7$332.5 million, a 7% decrease from12% increase over the comparable 2007 period.

·                  Orders were $335.9 million, consistent with the comparable 2007 period.

·                  Net income was $0.9 million, or $0.03 per share, compared to a net loss of ($8.0) million, or ($0.26) per share, in the comparable 2007 period.

·                  Gross margins were 41.0%, compared to 41.2% in 2007.

Outlook

For the first nine months of 2006.

Orders were $336.7 million,2008, the Company has reported a decrease of 13% from the first nine months of 2006.

Net loss was $(8.0) million, or $(0.26) per share, compared to net income of $7.3 million, or $0.23 per share,meaningful recovery year in both revenue growth and profitability.  While Veeco has delivered strong revenue growth and profit improvement in 2008, in the first nine monthsthird quarter we experienced a deterioration in business conditions with a sharp decline in orders of 2006.

Gross margins were 41.2%, compared to 43.8% inMOCVD systems as the first nine months of 2006.

Current Business Conditions

                Veeco reported revenue of $97.7 million forHB-LED industry digests the three months ended September 30, 2007, a 13% decrease from the prior year. Veeco expects continued fluctuations in data storage and semiconductor capital expenditure purchases as customers reassess their production ramps and timingsignificant number of new tools purchased this past year, and the global credit crisis caused customers to delay or forego capacity and technology transition plans. Veeco’s revenues were in line with guidance of $92 million to $97 million; however, the Company continued to experience field acceptance delays of new data storage systems. In addition to the challenges in data storage, weakness in Veeco’s semiconductor business also negatively impacted revenue and profitability.

                Veeco’s orders for the three months ended September 30, 2007 were $118.3 million, an increase of 3% from the $114.8 million reported in the same three-month period of 2006.purchases. Third quarter orders inof $90.2 million were significantly below our prior expectations, and the HB-LED/wireless segment remain strong at $43.6 million, up 26% sequentiallyCompany also experienced some push-outs and 49% from last year’s third quarter. This increased order rate compared to the prior year reflects positive customer interest in Veeco’s next generation “K-Series” metal organic chemical vapor deposition (“MOCVD”) tools, which were introduced in December 2006 and provide significantcancellations of equipment purchases.

 

1617



advantages in uniformity and throughput to Veeco’s older tools and thoseTable of its competitors.  End market demand for this product line remains strong due to emerging LED applications such as PC backlighting and automotive applications.  Veeco’s data storage orders decreased 15% sequentially and 22% from last year’s third quarter.  While Veeco’s data storage customers are undergoing a period of consolidation and Veeco often has limited visibility to their spending patterns, the Company believes that longer-term industry requirements for increased areal density and consumer electronic expansion will drive future investment in perpendicular head technology and conversion to larger wafer size. The weakest order segment for Veeco during the third quarter was semiconductor, down 22% sequentially and 54% from last year’s third quarter. Veeco is in the process of beta testing its next generation automated AFM product, and currently expects the introduction of this product to help improve Veeco’s semiconductor order and revenue stream in 2008.Contents

 

                Technology changes are continuing in all of Veeco’s markets:While the continued increase of 80 GB hard drives, the investment in 120 GB hard drives, and the transition to perpendicular recording in data storage; the increased usage of “mini” drives in consumer electronic applications; the reduction of feature sizesCompany has a healthy prospect list for new orders in the semiconductor industryfourth quarter, it appears that the global economic climate and constrained financing environment may cause a broad slowdown in capital equipment purchases by our customers, with uncertainty as to 45 nanometerthe depth and below;duration of the growing applications in HB-LED such as automotive, architectural lighting,downturn. Due to this limited visibility, we are unable to give an accurate assessment of fourth quarter orders, and backlightingwe currently anticipate order rates to come under pressure for laptops; and emerging opportunities in the solar industry, which utilize Veeco’s existing deposition and metrology technologies.foreseeable future. Veeco believesestimates that these trends, together with the continued funding of nanoscience research, will prompt customers to seek its next-generation solutions to address their manufacturing and technology challenges. In addition, consumer spending on many types of electronics has increased, and various worldwide economies, such as those in the Asia-Pacific region, are experiencing growth.

Outlook

The Company reviews a number of indicators to evaluate the strength of its markets going forward, such as plant utilization trends, capacity requirements and capital spending trends.  Veeco is currently forecasting an increase in revenues on a sequential basis for the fourth quarter of 2007, with expectations for revenues to2008 will be in the range of approximately $104 million to $112 million, with bookings of $105 million to $115$110-$118 million. Fourth quarter 2007 profitability is forecasted to improve from the weak third quarter levels on improved volume and pricing in both Process Equipment and Metrology. Additionally, management has initiated the first phase of a multi-quarter turn-around plan to improve Veeco’s profitability through a combination of increased focus on its best growth opportunities, gross margin improvement and expense reduction and containment. While Veeco has a strong pipeline of new products for the data storage, HB-LED, semiconductor and scientific research markets, many of these are in the early stages of shipments and there is uncertainty associated with customer acceptance and the Company’s ability to recognize revenue upon shipment of the products. The Company’s current expectations for the fourth quarter, which are subject to uncertainties such as the timing of customer acceptance of shipped products, would bring revenue for the full year to approximately $400 million to $408 million, down approximately 10% from 2006.

 

The Company anticipates endingis taking corrective actions to lower our cost structure in preparation for what is likely to be a reduced revenue year in 2009.  Our goal is to lower our spending while maintaining strategic investments in research and development, particularly in our LED & Solar business.   It is our intent to emerge from the year with significant backlog, which will set the stage for an improved 2008.  This forecast is supported by favorable growth trends specificallypresent economic environment in the HB-LED/wireless market driven by the Company’s unique MOCVDa strong position to enable future revenue and MBE technologies and LED applications, as well as early penetration in specific solar applications.  The Company also anticipates the positive trend in scientific research to continue due to strong customer acceptance of several new instrumentation products.

During the fourth quarter of 2007,profit growth.  Since the Company engaged in ais currently evaluating various cost reduction plancutting actions, it is likely that included a reduction in staff (employees, consultants and temporary workers), a reduction of discretionary expenses, the 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 andVeeco will recognize a restructuring charge of $5.0 million, comprised predominantly of severance costs for the related employees.  Additionalincur restructuring charges in the range of $8.0 million to 13.0 million could potentially impact fourth quarter, 2007 and first quarter 2008 earnings, depending upon the timing and extent of additional actions under consideration.  Management expects thatWe are not able to estimate the extent of these potential additional charges will not result in a significant outlay of cashat this time.

Despite the recent deteriorating business conditions, Veeco has forecasted revenues in the near term.range of $440 to $450 million in 2008, up approximately 10% from the $402.5 million reported in 2007, as well as a meaningful profit improvement as compared to 2007. The Company believes that it is well-positioned to capitalize on exciting multi-year technology trends across our LED & Solar, Data Storage and Metrology businesses, and we have made significant progress this year in refocusing our businesses and improving our performance.  We have a strong balance sheet and positive cash flow, and we expect at this time that we can manage Veeco through the global economic crisis while maintaining our commitment to R&D to ensure our long-term growth and success.

 

Veeco will remain focused on executing our core strategies to improve the Company’s performance:

17

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

·Strengthening the global sales and services organization;

·Maximizing profitability through a continued focus on gross margin improvement and cost containment activities;

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

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

18



Table of Contents

 

Results of Operations:

 

Three Months Ended September 30, 20072008 and 20062007

 

Consistent with prior years, the Company reportswe report interim quarters, other than fourth quarters, which always end on December 31, on a 13-week basis ending on the last Sunday within such period.  The interim quarter ends are determined at the beginning of each year based on the 13-week quarters.  The 2008 interim quarter ends are March 30, June 29 and September 28.  The 2007 interim quarter ends arewere 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 reportswe report these interim quarter ends as March 31, June 30, and September 30 in itsour interim condensed consolidated financial statements.

 

The following tables show the detailstable shows our Consolidated Statements of Veeco’s condensed consolidated statements of operations,Operations, percentages of sales, and comparisons between the three months ended September 30, 2008 and 2007 (dollars in thousands):

 

 

Three Months Ended
September 30,

 

Dollar and
Percentage

 

 

 

2008

 

2007

 

Change

 

Net sales

 

$

115,709

 

100.0

%

$

97,718

 

100.0

%

$

17,991

 

18.4

%

Cost of sales

 

69,626

 

60.2

 

61,824

 

63.3

 

7,802

 

12.6

 

Gross profit

 

46,083

 

39.8

 

35,894

 

36.7

 

10,189

 

28.4

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

23,589

 

20.4

 

22,723

 

23.3

 

866

 

3.8

 

Research and development expense

 

15,302

 

13.2

 

15,049

 

15.4

 

253

 

1.7

 

Amortization expense

 

3,148

 

2.7

 

1,959

 

2.0

 

1,189

 

60.7

 

Restructuring expense

 

4,120

 

3.6

 

529

 

0.5

 

3,591

 

678.8

 

Other income, net

 

(213

)

(0.2

)

(179

)

(0.2

)

34

 

19.0

 

Total operating expenses

 

45,946

 

39.7

 

40,081

 

41.0

 

5,865

 

14.6

 

Operating income (loss)

 

137

 

0.1

 

(4,187

)

(4.3

)

4,324

 

103.3

 

Interest expense, net

 

1,052

 

0.9

 

665

 

0.7

 

387

 

58.2

 

Loss before income taxes and noncontrolling interest

 

(915

)

(0.8

)

(4,852

)

(5.0

)

(3,937

)

(81.1

)

Income tax provision

 

812

 

0.6

 

954

 

0.9

 

(142

)

(14.9

)

Noncontrolling interest

 

(54

)

(0.0

)

(123

)

(0.1

)

(69

)

(56.1

)

Net loss

 

$

(1,673

)

(1.4

)%

$

(5,683

)

(5.8

)%

$

4,010

 

(70.6

)%

Net Sales and 2006 andOrders

Net sales of $115.7 million for the three months ended September 30, 2008 were up 18.4% compared to the comparable 2007 quarter.  The following is an analysis of sales and orders for the same periods by segment industry, and by region (in(dollars in thousands):

 

 

 

Three Months Ended
September 30,

 

Dollar
Change

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

97,718

 

100.0

%

$

112,369

 

100.0

%

$

(14,651

)

Cost of sales

 

61,824

 

63.3

 

64,513

 

57.4

 

(2,689

)

Gross profit

 

35,894

 

36.7

 

47,856

 

42.6

 

(11,962

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

22,723

 

23.3

 

22,296

 

19.9

 

427

 

 

Research and development expense

 

15,049

 

15.4

 

15,716

 

14.0

 

(667

)

Amortization expense

 

1,959

 

2.0

 

4,025

 

3.6

 

(2,066

)

Write-off of purchased in-process technology

 

 

 

1,160

 

1.0

 

(1,160

)

 

Restructuring expense

 

529

 

0.5

 

 

 

529

 

Other income, net

 

(179

)

(0.2

)

(310

)

(0.3

)

131

 

Total operating expenses

 

40,081

 

41.0

 

42,887

 

38.2

 

(2,806

)

Operating (loss) income

 

(4,187

)

(4.3

)

4,969

 

4.4

 

(9,156

)

Interest expense, net

 

665

 

0.7

 

1,056

 

0.9

 

(391

)

(Loss) income before income taxes and  noncontrolling interest

 

(4,852

)

(5.0

)

3,913

 

3.5

 

(8,765

)

Income tax provision

 

954

 

0.9

 

612

 

0.5

 

342

 

Noncontrolling interest

 

(123

)

(0.1

)

(1,207

)

(1.0

)

1,084

 

Net (loss) income

 

$

(5,683

)

(5.8

)%

$

4,508

 

4.0

%

$

(10,191

)

 

 

Sales

 

Orders

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Dollar and Percentage
Change

 

Three Months Ended
September 30,

 

Dollar and Percentage
Change

 

Book-to-Bill
Ratio

 

 

 

2008

 

2007

 

Year to Year

 

2008

 

2007

 

Year to Year

 

2008

 

2007

 

Segment Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LED & Solar Process Equipment

 

$

40,983

 

$

31,824

 

$

9,159

 

28.8

%

$

25,775

 

$

48,679

 

$

(22,904

)

(47.1

)%

0.63

 

1.53

 

Data Storage Process Equipment

 

43,256

 

31,099

 

12,157

 

39.1

 

32,359

 

32,239

 

120

 

0.4

 

0.75

 

1.04

 

Metrology

 

31,470

 

34,795

 

(3,325

)

(9.6

)

32,031

 

37,399

 

(5,368

)

(14.4

)

1.02

 

1.07

 

Total

 

$

115,709

 

$

97,718

 

$

17,991

 

18.4

%

$

90,165

 

$

118,317

 

$

(28,152

)

(23.8

)%

0.78

 

1.21

 

Regional Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

38,865

 

$

29,014

 

$

9,851

 

34.0

%

$

31,256

 

$

48,196

 

$

(16,940

)

(35.1

)%

0.80

 

1.66

 

Europe

 

28,578

 

18,244

 

10,334

 

56.6

 

22,650

 

22,220

 

430

 

1.9

 

0.79

 

1.22

 

Japan

 

6,604

 

12,585

 

(5,981

)

(47.5

)

7,769

 

12,330

 

(4,561

)

(37.0

)

1.18

 

0.98

 

Asia Pacific

 

41,662

 

37,875

 

3,787

 

10.0

 

28,490

 

35,571

 

(7,081

)

(19.9

)

0.68

 

0.94

 

Total

 

$

115,709

 

$

97,718

 

$

17,991

 

18.4

%

$

90,165

 

$

118,317

 

$

(28,152

)

(23.8

)%

0.78

 

1.21

 

 

 

 

Sales

 

Orders

 

 

 

 

 

Three Months Ended

 

Dollar and

 

Three 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

 

$

62,923

 

$

71,375

 

$

(8,452

)

(11.8

)%

$

80,918

 

$

74,806

 

$

6,112

 

8.2

%

1.29

 

1.05

 

Metrology

 

34,795

 

40,994

 

(6,199

)

(15.1

)

37,399

 

40,042

 

(2,643

)

(6.6

)

1.08

 

0.98

 

Total

 

$

97,718

 

$

112,369

 

$

(14,651

)

(13.0

)%

$

118,317

 

$

114,848

 

$

3,469

 

3.0

%

1.21

 

1.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industry Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 reclassifiedBy segment, LED & Solar Process Equipment sales were up 28.8% due to conform toan increase in end user demand from expanding applications for HB-LEDs, strong customer acceptance of Veeco’s newest generation systems, and $5.0 million in sales from the current period presentation.solar equipment product line, which was acquired in the second quarter of 2008 as a result of the Mill Lane

 

1819



Table of Contents

 

Net sales of $97.7 million for the third quarter of 2007 were down $14.7 million, or 13.0%, compared to the third quarter of 2006. By segment,acquisition.  Additionally, Data Storage Process Equipment sales were down $8.5 million, or 11.8%. Theup 39.1%, primarily as a result of customers’ technology and capacity requirements.  These increases were partially offset by a decrease in Process EquipmentMetrology sales isof 9.6%, 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 $6.2 million, or 15.1%, primarily due to decreased purchases of optical metrology products in the data storage market and automated AFM productsslowdown in the semiconductor market.and research and industrial markets.  By region, in the third quarter of 2007, net sales increased by 63.1%34.0%, 56.6% and 22.6% in Japan and Europe, respectively, while sales10.0% in North America, Europe, and Asia-Pacific declinedAsia Pacific, respectively, and decreased by 30.8% and 20.8%, respectively. The Company believes47.5% in Japan. We believe that there will continue to be quarter-to-quarter variations in the geographic distribution of sales will continue.sales.

 

Orders of $118.3 million for the third quarter of 2007 represented an increase of $3.5 million, or 3.0%,2008 decreased by 23.8% from the comparable 20062007 period. By segment, the 8.2% increase in Process Equipment orders was primarily due to a $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 a47.1% decrease in orders for other process equipment asLED & Solar Process Equipment was a result of a decrease in customer demand in the data storage industry.HB-LED industry’s slower absorption of the significant number of new MOCVD tools purchased during the past two years. Additionally, the global credit crisis has caused customers to delay or forego capacity and technology purchases.  The 6.6%14.4% decrease in Metrology orders was driven by a 22% decrease indue to decreased orders for optical metrologyAFM products principallydue to data storage customers.lower demand in the semiconductor and research and industrial markets.  Data Storage Process Equipment orders remained flat when compared to the 2007 period.

 

The Company’sOur book-to-bill ratio for the third quarter of 2007,2008, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.21, an increase from the comparable 2006 period.0.78 to 1.  Our backlog as of September 30, 2008 was $176.0 million, compared to $173.5 million as of December 31, 2007.  During the quarter ended September 30, 2007, the Company2008, we experienced no significant neta decrease in backlog adjustments orof $9.7 million primarily from order cancellations.  However,The outlook for orders in the Company did experience rescheduling of order delivery datesfourth quarter is uncertain, and it appears that the global economic climate and constrained financing environment may cause a broad slowdown in capital equipment purchases by our customers.  Due to these changing business conditions and customer requirements,weak capital equipment spending by customers in our business, as well as the Company may continueglobal credit crisis, we expect to experience continued volatility in the form of cancellations and/or rescheduling ofrescheduled orders.

Gross Profit

 

Gross profit for the quarter ended September 30, 20072008, was 36.7%39.8%, compared to 42.6%36.7% in the third quarter of 2006.2007 primarily due to strong performance in Process Equipment sales represented 64.4% of total sales for the third quarter of 2007, up slightly from 63.5% in the prior year period. Metrology sales accounted for 35.6% of total sales for the third quarter of 2007, down from 36.5% in the prior year period.Equipment.  Data Storage Process Equipment gross margins decreased toincreased from 33.5% from 38.1% in the prior-year period to 39.8%, primarily from an increase in sales volume due to increased capacity spending, a favorable product mix and favorable pricing when compared to the prior yearcomparable period, and cost reductions resulting from management’s profit improvement plan, introduced in the fourth quarter of 2007.  LED & Solar Process Equipment gross margins increased from 33.4% in the prior-year period to 36.0%, primarily due to an increase in sales volume, as well as a decline in the margin for Ion Beam products resulting from a lower volume of products sold and an unfavorablefavorable product mix, as compared to the prior yearprior-year period.   The current-year period includes a reduction in gross profit of $0.9 million related to the acquisition of Mill Lane.  This decreasereduction was the result of purchase accounting, which requires adjustments to capitalize inventory at fair value.  This impact is partially offset by an improvementreflected in MOCVD productcost of sales.  Metrology gross margins to 33.6%increased from 26.9%42.6% in the prior year period due to favorable pricing of new products sold44.9%, despite a reduction in the current period.  Metrology gross margins decreased to 42.6% from 50.3%,sales volume, principally due to lower sales volume of optical metrology and automated AFM products and less favorable pricing of and overhead spending on the AFM products sold to scientific and research customers.a richer product mix, as well as a reduction in costs.

Operating Expenses

 

Selling, general and administrative expenses increased to $22.7by $0.9 million, or 23.3%3.8%, from the prior-year period primarily due to increased bonus incentives as a result of netimproved profitability, and an increase in non-cash compensation expense related to stock options and shares of restricted stock. These increases were partially offset by reductions in consulting services and travel and entertainment expense resulting from our cost reduction efforts.  As a percentage of sales, selling, general and administrative expenses decreased from 23.3% in the third quarter of 2007 compared with $22.3 million, or 19.9% of net sales,to 20.4% in the comparable prior year period. The increase is attributable to executive stay and sign-on bonuses and an increase in non-cash stock-based compensation expense, offset by a decrease in sales commissions related to a reduction in domestic sales.third quarter of 2008.

 

Research and development expense totaled $15.0 million in the third quarter of 2007, a decrease of $0.7increased $0.3 million from the third quarter of 2006,2007, primarily due to prior year product developmentresearch efforts forin LED & Solar Process Equipment products that were released during 2007.Equipment.  As a percentage of sales, research and development increased todecreased from 15.4% in the third quarter of 2007 from 14.0%to 13.2% in the third quarter of 2006.2008.

 

Amortization expense was $2.0increased by $1.2 million, or 60.7% from the third quarter of 2007, due primarily to amortization of intangible assets acquired as part of the acquisition of Mill Lane in the second quarter of 2008.

Restructuring expense of $4.1 million in the third quarter of 2008 consisted of $3.7 million associated with the acceleration of equity awards and other severance costs resulting from the mutually agreed upon termination of the employment agreement of our former CEO, as well as $0.4 million for severance and lease-related charges in Metrology.  Restructuring expense of $0.5 million in the third quarter of 2007 compared to $4.0 million in the third 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 $0.5 million for the quarter ended September 30, 2007, consisted of personnel severance costs incurred throughout the Company.across all divisions.

 

20



Table of Contents

Interest Expense, Net

Net interest expense in the third quarter of 20072008 was $0.7$1.1 million, compared to $1.1$0.7 million in the third quarter of 2006. This reduction2007.  The increase in net interest expense is the result of less net debt outstandingdue to a reduction in interest income resulting primarily from lower interest rates during the current period.

 

The incomeIncome Taxes

Income tax provision for the quarter ended September 30, 20072008 was $1.0$0.8 million, compared to $0.6$1.0 million in the third quarter of 2006.2007. The 2008 provision for income taxes included $0.5 million relating to our foreign operations which continue to be profitable, and $0.3 million relating to our domestic operations.  The 2007 provision for income taxes 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.  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 $0.2 million relating to Veeco’sour foreign operations and $0.4 million relating to the Company’sour domestic operations.  The increase to the income tax provision is due to an increase in taxable income relating to the Company’s foreign operations.

 

Noncontrolling interest was a credit to income of $0.1 million for the three months ended September 30, 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, a variable interest entity, it is required to consolidate Fluens and eliminate the portion of its results attributable to noncontrolling interests.  As a result, the Company eliminates from its net income 80.1% of Fluens’ operating losses.  The credit in the prior comparable period includes the elimination of 80.1% of the write-off of in-process technology recorded in the 2006 third quarter.

Nine Months Ended September 30, 20072008 and 20062007

 

The following tables show the detailstable shows our Consolidated Statements of Veeco’s condensed consolidated statements of operations,Operations, percentages of sales, and comparisons between the nine months ended September 30, 2008 and 2007 and 2006 and the analysis of sales and orders for the same periods by segment, industry and region (in(dollars in thousands):

 

 

Nine Months Ended
September 30,

 

Dollar
Change

 

 

2007

 

2006

 

 

 

 

Nine Months Ended
September 30,

 

Dollar and
Percentage

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

Change

 

Net sales

 

$

295,653

 

100.0

%

$

317,922

 

100.0

%

$

(22,269

)

 

$

332,465

 

100.0

%

$

295,653

 

100.0

%

$

36,812

 

12.5

%

Cost of sales

 

173,819

 

58.8

 

178,585

 

56.2

 

(4,766

)

 

196,026

 

59.0

 

173,819

 

58.8

 

22,207

 

12.8

 

Gross profit

 

121,834

 

41.2

 

139,337

 

43.8

 

(17,503

)

 

136,439

 

41.0

 

121,834

 

41.2

 

14,605

 

12.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

69,347

 

23.4

 

68,622

 

21.5

 

725

 

Selling, general, and administrative expense

 

70,528

 

21.2

 

69,347

 

23.4

 

1,181

 

1.7

 

Research and development expense

 

46,341

 

15.7

 

45,554

 

14.3

 

787

 

 

45,173

 

13.6

 

46,341

 

15.7

 

(1,168

)

(2.5

)

Amortization expense

 

8,236

 

2.8

 

12,029

 

3.8

 

(3,793

)

 

7,530

 

2.3

 

8,236

 

2.8

 

(706

)

(8.6

)

Restructuring expense

 

1,974

 

0.7

 

 

 

1,974

 

 

6,995

 

2.1

 

1,974

 

0.7

 

5,021

 

254.4

 

Write-off of purchased in-process technology

 

 

 

1,160

 

0.4

 

(1,160

)

Asset impairment charge

 

285

 

0.1

 

 

0.0

 

285

 

100.0

 

Other income, net

 

(605

)

(0.2

)

(243

)

(0.0

)

(362

)

 

(591

)

(0.2

)

(605

)

(0.2

)

(14

)

(2.3

)

Total operating expenses

 

125,293

 

42.4

 

127,122

 

40.0

 

(1,829

)

 

129,920

 

39.1

 

125,293

 

42.4

 

4,627

 

3.7

 

Operating income

 

(3,459

)

(1.2

)

12,215

 

3.8

 

(15,674

)

Operating income (loss)

 

6,519

 

1.9

 

(3,459

)

(1.2

)

9,978

 

288.5

 

Interest expense, net

 

2,256

 

0.7

 

3,583

 

1.1

 

(1,327

)

 

2,913

 

0.8

 

2,256

 

0.7

 

657

 

29.1

 

Gain on extinguishment of debt

 

(738

)

(0.2

)

(330

)

(0.1

)

(408

)

 

 

0.0

 

(738

)

(0.2

)

(738

)

(100.0

)

(Loss) income before income taxes and noncontrolling interest

 

(4,977

)

(1.7

)

8,962

 

2.8

 

(13,939

 

)

Income (loss) before income taxes and noncontrolling interest

 

3,606

 

1.1

 

(4,977

)

(1.7

)

8,583

 

172.5

 

Income tax provision

 

3,490

 

1.2

 

2,878

 

0.9

 

612

 

 

2,860

 

0.9

 

3,490

 

1.2

 

(630

)

(18.1

)

Noncontrolling interest

 

(482

)

(0.2

)

(1,207

)

(0.4

)

725

 

 

(200

)

(0.1

)

(482

)

(0.2

)

(282

)

(58.5

)

Net (loss) income

 

$

(7,985

)

(2.7

)%

$

7,291

 

2.3

%

$

 

(15,276

)

Net income (loss)

 

$

946

 

0.3

%

$

(7,985

)

(2.7

)%

$

8,931

 

111.8

%

 

20



 

 

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 and Orders

 

Net sales of $295.7$332.5 million for the nine months ended September 30, 20072008 were down $22.3 million, or 7.0%,up 12.5% compared to the nine months ended September 30, 2006. comparable 2007 period.  The following is an analysis of sales and orders by segment and by region (dollars in thousands):

 

 

Sales

 

Orders

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

Dollar and Percentage
Change

 

Nine Months Ended
September 30,

 

Dollar and Percentage
Change

 

Book-to-Bill
Ratio

 

 

 

2008

 

2007

 

Year to Year

 

2008

 

2007

 

Year to Year

 

2008

 

2007

 

Segment Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LED & Solar Process Equipment

 

$

128,205

 

$

82,188

 

$

46,017

 

56.0

%

$

116,513

 

$

121,448

 

$

(4,935

)

(4.1

)%

0.91

 

1.48

 

Data Storage Process Equipment

 

104,096

 

98,840

 

5,256

 

5.3

 

124,685

 

105,837

 

18,848

 

17.8

 

1.20

 

1.07

 

Metrology

 

100,164

 

114,625

 

(14,461

)

(12.6

)

94,738

 

109,392

 

(14,654

)

(13.4

)

0.95

 

0.95

 

Total

 

$

332,465

 

$

295,653

 

$

36,812

 

12.5

%

$

335,936

 

$

336,677

 

$

(741

)

(0.2

)%

1.01

 

1.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regional Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

116,631

 

$

95,516

 

$

21,115

 

22.1

%

$

124,666

 

$

121,696

 

$

2,970

 

2.4

%

1.07

 

1.27

 

Europe

 

69,607

 

53,199

 

16,408

 

30.8

 

57,664

 

63,396

 

(5,732

)

(9.0

)

0.83

 

1.19

 

Japan

 

29,347

 

43,732

 

(14,385

)

(32.9

)

24,548

 

42,125

 

(17,577

)

(41.7

)

0.84

 

0.96

 

Asia Pacific

 

116,880

 

103,206

 

13,674

 

13.2

 

129,058

 

109,460

 

19,598

 

17.9

 

1.10

 

1.06

 

Total

 

$

332,465

 

$

295,653

 

$

36,812

 

12.5

%

$

335,936

 

$

336,677

 

$

(741

)

(0.2

)%

1.01

 

1.14

 

21



Table of Contents

By segment, LED & Solar Process Equipment sales were down $10.9 million, or 5.7%. The decreaseup 56.0% due to an increase in end user demand from expanding applications for HB-LEDs, as well as strong customer acceptance of Veeco’s newest generation systems.  Additionally, Data Storage Process Equipment sales isincreased by 5.3% due to customers’ technology and capacity requirements.  This was partially offset by a decrease in Metrology sales of 12.6%, primarily due to a decrease in sales 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 $11.4 million, or 9.0%, primarily due to decreased purchases of optical metrology products in the data storage market and automated AFM productsslowdown in the semiconductor market.and research and industrial markets.  By region, in the nine months ended September 30, 2007, net sales increased by 28.6%22.1%, 30.8% and 13.2% in Japan and 7.8% in Europe, while sales in Asia-Pacific and North America, declined 17.7%Europe, and 12.5%, respectively. The Company believesAsia Pacific, respectively, and decreased by 32.9% in Japan. We believe that there will continue to be period-to-periodquarter-to-quarter variations in the geographic distribution of sales.

 

Orders of $336.7 million for the nine monthsnine-month period ended September 30, 2007 represented a decrease of $48.1 million, or 12.5%, from2008 were essentially flat with the comparable 20062007 period. By segment, the 10.0% decrease in Process Equipment orders was primarily due to a $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 $30.8 million increase in MOCVD orders resulting from an increase in purchases in the HB-LED/wireless market.  The 17.2%13.4% decrease in Metrology orders was primarily due to a $13.5 milliondecreased orders for AFM products resulting from lower demand in the semiconductor, research, and industrial markets. The 4.1% decrease in orders for optical metrologyLED & Solar Process Equipment was due primarily to the third quarter 2008 decline in MOCVD orders as the HB-LED industry absorbs the significant number of new MOCVD tools purchased in the past two years. These decreases are principally offset by a 17.8% increase in Data Storage Process Equipment orders, primarily for slicing and dicing products principallyused to data storage customers, and a $10.8 million decrease in orders for automated AFM products, principally to semiconductor customers.create TFMHs.

 

The Company’sOur book-to-bill ratio for the nine months ended September 30, 2007, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period,2008 was 1.14, a decrease from the comparable 2006 period.  The Company’s 1.01 to 1.  Our backlog as of September 30, 20072008 was $181.6$176.0 million, compared to $140.8$173.5 million as of December 31, 2006.  2007.  During the nine months ended September 30, 2007,2008, we experienced an increase in backlog of $12.7 million due to the Company did not experience significant net backlog adjustments oracquisition of Mill Lane, offset by order cancellations.  However,cancellations of $13.7 million.  The outlook for orders in the Company did experience rescheduling of order delivery datesfourth quarter is uncertain, and it appears that the global economic climate and constrained financing environment may cause a broad slowdown in capital equipment purchases by our customers. Due to these changing business conditions and customer requirements,weak capital equipment spending by customers in our businesses, as well as the Company may continueglobal credit crisis, we expect to experience continued volatility in the form of cancellations and/or rescheduling ofrescheduled orders.

Gross Profit

 

Gross profit for the nine months ended September 30, 20072008, was 41.2%41.0%, compared to 43.8%41.2% in the comparable prior year2007 period. Strong performance in Process Equipment sales represented 61.2% of total sales for the nine months ended September 30, 2007, up from 60.4% in the prior year period.  Metrology sales accounted for 38.8% of total sales for the nine months ended September 30, 2007, down from 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 primarily to an increase in sales volume was offset primarily by unfavorable sales volume in Metrology.  LED & Solar Process Equipment gross margins increased from 37.0% in the prior-year period to 39.6%, primarily due to a significant overall increase in sales volume as compared to the prior-year period as well as favorable pricing on new MOCVD products and a significant improvementfavorable product mix in mix and price.MBE products.  The current-year period includes a reduction in gross profit of $0.9 million related to the acquisition of Mill Lane.  The reduction was the result of purchase accounting, which requires adjustments to capitalize inventory at fair value.  This was offset by a decreaseimpact is reflected in cost of sales.  Data Storage Process Equipment gross margins decreased from 39.5% in the margin for Ion Beam products from 46.9%prior-year period to 38.9%, due to favorable warranty and pricing 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.prior-year period.  Metrology gross margins decreased from 45.6% in the prior-year period to 45.6% from

21



51.4%45.2%, principally due to less favorable product mix in AFM products sold to scientific and research customers and lower sales volume of automated AFMoffset by a reduction in spending and optical metrology products.favorable product mix.

Operating Expenses

 

Selling, general and administrative expenses were $69.3increased by $1.2 million, or 23.4%1.7%, from the prior-year period primarily due to increased bonus incentives and profit sharing as a result of sales, in the nine months ended September 30, 2007, compared with $68.6 million, or 21.5% of sales, in the comparable prior year period.  The $0.7 million increase is primarily attributable to better profitability performance, as well as an increase in non-cash compensation expense related to stock options and shares of restricted shares and an increase in selling expense due primarily to an investment in the AFM product line for life sciences applications.stock.  This iswas partially offset by a reductionreductions in management incentive bonustravel and entertainment expense and legal fees, as well as reduced consulting services associated with our cost reduction initiatives.  As a percentage of sales, commissions relatedselling, general and administrative expenses decreased from 23.4% in 2007 to the reduction21.2% in domestic sales.2008.

 

Research and development expense totaled $46.3 million in the nine months ended September 30, 2007, an increase of $0.8decreased $1.2 million from the comparable prior year2007 period, driven by an investment in life sciences applications in AFM as well as newprimarily due to a more focused approach to data storage product development effortsas a result of the decision made in the Company’s MOCVDfourth quarter of 2007 by management to discontinue two product platform for HB-LED/wireless applicationslines and automated AFM products forconsolidate facilities to better reflect the semiconductor industry.  This is partially offset by a decrease in research volume of business

22



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and development expense in Ion Beam products from the prior comparable period, due to the release of these products during 2007.industry growth rates.   As a percentage of sales, research and development expense increased todecreased from 15.7% in 2007 to 13.6% in 2008.

Amortization expense was $7.5 million in the 2008 period, compared to $8.2 million in 2007. The decrease was the result of certain technology-based intangible assets becoming fully amortized, offset by the amortization in the current period of intangibles acquired as part of the acquisition of Mill Lane.

During the nine months ended September 30, 2007, from 14.3% in the comparable prior year period.

Amortization expense was $8.2 million in the nine months ended September 30, 2007, compared to $12.0 million in the comparable prior year period.  The decrease was due to certain technology-based intangibles becoming fully amortized during the second quarter2008, we recorded restructuring charges of 2007.

The restructuring expense of $2.0 million for the nine months ended September 30, 2007, consisted of personnel severance costs incurred throughout the Company during the second and third quarters 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 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$7.0 million, of in-process technology, which $4.1 million was written offincurred during the third quarter of 2006.2008 and $2.9 million was incurred during the first quarter of 2008.  The third quarter restructuring charge consists of $3.7 million associated with the acceleration of equity awards and other severance costs resulting from the mutually agreed upon termination of the employment agreement of our former CEO, as well as $0.4 million for severance and lease-related charges in Metrology.  The first quarter restructuring charge consisted of $2.6 million of costs associated with the consolidation and relocation of our Corporate headquarters and $0.3 million of personnel severance costs.  Restructuring expense in 2007 of $2.0 million consisted of personnel severance costs.

An asset impairment charge of $0.3 million was taken during 2008 primarily for leasehold improvements and furniture and fixtures abandoned in connection with the consolidation and relocation of our Corporate headquarters into our Plainview, New York facility during the first quarter.  No such costs were recorded during 2007.similar expense was incurred in the prior-year period.

Interest Expense, Net

 

Net interest expense in the nine monthsnine-month period ended September 30, 20072008 was $2.3$2.9 million, compared to $3.6$2.3 million in the comparable prior year2007 period.  This reductionincrease in net interest expense is the resultwas due to a reduction in interest income resulting from lower interest rates.

Gain on Extinguishment of less net debt outstanding during the period.Debt

 

During the nine months ended September 30,first quarter of 2007, the Companywe repurchased $56.0 million of itsour 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,these repurchases, the Companywe recorded a net gain from the extinguishment of debt in the amount of $0.7 million. In the 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.2007.

 

The incomeIncome Taxes

Income tax provision for the nine months ended September 30, 20072008 was $3.5$2.9 million compared to $2.9$3.5 million in the comparable prior year period.prior-year period, primarily as a result of a $0.4 million decrease in the reserve relating to foreign unrecognized tax benefits as required by FASB Interpretation Number 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). The 20072008 provision for income taxes included $2.5$1.9 million relating to Veeco’sour foreign operations which continue to be profitable, and $1.0 million relating to the Company’sour 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 20062007 provision for income taxes included $1.9$2.5 million relating to Veeco’sour foreign operations and $1.0 million relating to the Company’sour domestic operations.

Noncontrolling interest was a credit to income of $0.5 million for the nine months ended September 30, 2007 and a credit of $1.2 million in the comparable prior year period.  As the Company is the primary beneficiary of Fluens, a variable interest entity, it is required to consolidate Fluens and eliminate the portion of its results attributable to noncontrolling interests.  As a result, the Company eliminates from its net income 80.1% of Fluens’ operating losses. The credit in the prior comparable period includes the elimination of 80.1% of the write-off of in-process technology recorded in the 2006 third quarter.

 

22



Liquidity and Capital Resources

 

 Historically, Veeco’sour principal capital requirements have included the funding of acquisitions and capital expenditures. The CompanyWe traditionally hashave generated cash from operations and debt and stock issuances. Veeco’sOur ability to generate sufficient cash flows from operations is dependent on the continued demand for the Company’sour products and services. A summary of the current period cash flow activity for the nine months ended September 30, 2008 and 2007 is as follows (in thousands):

 

 

Nine Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2007

 

2006

 

 

2008

 

2007

 

Net (loss) income

 

$

(7,985

)

$

7,291

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

22,777

 

$

22,524

 

 

$

22,420

 

$

22,777

 

Net cash used in investing activities

 

(6,543

)

(15,634

)

 

(21,296

)

(6,543

)

Net cash used in financing activities

 

(54,443

)

(4,598

)

 

(558

)

(54,443

)

Effect of exchange rates on cash and cash equivalents

 

(435

)

(226

)

 

35

 

(435

)

Net change in cash and cash equivalents

 

(38,644

)

2,066

 

 

601

 

(38,644

)

Cash and cash equivalents at beginning of period

 

147,046

 

124,499

 

 

117,083

 

147,046

 

Cash and cash equivalents at end of period

 

$

108,402

 

$

126,565

 

 

$

117,684

 

$

108,402

 

 

The Company23



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We had a net decreaseincrease in cash of $38.6$0.6 million forduring the nine months ended September 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”).2008. Cash provided by operations was $22.8$22.4 million for this period, as compared to cash provided by operations of $22.5$22.8 million for the comparable 20062007 period. Net (loss) income adjusted for non-cash items provided operating cash flows of $14.6$29.0 million for the nine months ended September 30, 2007, compared to $31.0 million for the comparable 2006 period.2008. Net cash provided by operations for the nine months ended September 30, 20072008 was favorablynegatively impacted by a decreasenet change in net operating assets and liabilities of $8.2$6.6 million. AccountsThis was driven by a decrease in accounts payable and accrued expenses of approximately $9.6 million and an increase of $2.0 million in capitalized patent costs, partially offset by a decrease in accounts receivable decreased $20.0of $6.6 million.  Due to the current global economic crisis, we cannot assure timely receipts of accounts receivable, due to cash constraints on our customers.  As of September 30, 2008, we are not aware of any specific uncollectible accounts resulting from the current economic uncertainties and believe that related reserves are adequate to cover the uncertainties that exist.

Cash used in investing activities of $21.3 million duringfor the nine months ended September 30, 2007, due to a $25.42008 resulted from the acquisition of Mill Lane, net of cash acquired, for $11.0 million, reduction in sales when comparingas well as capital expenditures of $10.4 million. During the fourth quarter of 20062008, we expect to the third quarterinvest an estimated additional $4.2 million in capital projects primarily related to engineering equipment and lab tools used in producing, testing and process development of 2007,our products and favorable cash collections during 2007.  Inventories increased by approximately $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 fourth quarter of 2007 and the first quarter of 2008 in the Process Equipment segment.  Accounts payable decreased $5.0 million during the nine months ended September 30, 2007, due to the timing of payments.

enhanced manufacturing facilities. Cash used in investing activities of $6.5 million for the nine months ended September 30, 2007 was driven byresulted primarily from capital expenditures of $6.8 million, partially offset by $0.3 million in proceeds from the sale of property, plant, and equipment. During

Cash used in financing activities for the fourth quarter of 2007, the Company expects to invest an additional $5.3nine months ended September 30, 2008 totaled $0.6 million, resulting from $1.0 million in capital equipment primarily related to engineering equipmentrestricted stock tax withholdings and lab tools used$0.3 million in enhancing, testing and process developmentmortgage payments, offset by proceeds of Veeco’s products.

$0.7 million from common stock issuances resulting from stock option exercises. Cash used in financing activities for the nine months ended September 30, 2007 totaled $54.4 million, primarily consisting of $55.4 million used to repurchase a portion of the Company’s Old Notes and pay down other existing long-term debtour outstanding convertible subordinated notes (discussed below) and $1.5 million in payments for debt issuance costs, partially offset by $2.8 million from the issuance of common stock resulting from the exercise of employee stock options.  The debt

During the first quarter of 2007, we repurchased $56.0 million of our 4.125% convertible subordinated notes repurchasedue 2008 (the “Old Notes”), for $55.1 million (including accrued interest) in cash which reduced the amount of Old Notes outstanding from $200.0 million to $144.0 million and the Companymillion.  As a result of these repurchases, we recorded a net gain of $0.7 million.  We may engage in similar transactions in the future depending on market conditions, our cash position and other factors.

 

In April and MayDuring the second quarter of 2007, the Companywe issued new convertible subordinated notes due 2012 (the “New Notes”) pursuant to privately negotiated exchange agreements with certain holders of the Old Notes.  Under these agreements, such holders agreed to exchange $118.8 million aggregate principal amount of the Old Notes for approximately $117.8 million aggregate principal amount of a new series of 4.125% convertible subordinated notesNew Notes due April 15, 2012 (the "New Notes"). Following the exchange transactions, approximately $25.2 million of the Old Notes, with a conversion price of $38.51 per common share, remained outstanding.2012. 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. Following the exchange transactions, approximately $25.2 million of the Old Notes remained outstanding and are due in December 2008.  We expect to pay off these Old Notes through the use of our available cash balances.

 

The New Notes initially will be are convertible into 36.7277 shares of common stock per $1,000 principal amount of New Notes (equivalent toat 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

23



earlier upon the occurrence of certain events including Veeco's common stock trading at prices 130% overevents.  We pay interest on the conversion price for a specified period.New Notes on April 20 and October 15 of each year.

 

During the third quarter of 2007, the Companywe entered into athe Credit Agreement with HSBC.HSBC Bank, as administrative agent.  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.  Themillion with an annual interest rate under the New Credit Agreementthat 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 iswe are required to satisfy certain financial tests under the new Credit Agreement substantially similar to those of the prior Credit Agreement.  As of September 30, 2008, we are in compliance with all covenants.  Substantially all of theour domestic assets, of the Company and its material domestic subsidiaries, other than real estate, have been pledged to secure the Company’sour obligations under the New Credit Agreement.  The revolving credit facility

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under the New Credit Agreement expires on March 31, 2012.  As of September 30, 2008 and December 31, 2007, there were no borrowings outstandingor unsecured letters of credit outstanding.  Since borrowing availability under the NewCredit Agreement is based upon earnings, the anticipated business downturn may have an impact on our borrowing availability and could potentially result in noncompliance with the restrictive covenants required by the Credit Agreement.

The Company believesWe believe that existing cash balances together with cash generated from operations and amounts available under the Credit Agreement Company’s new revolving credit facility will be sufficient to meet the Company’sour projected working capital and other cash flow requirements for the next twelve months, as well as the Company’sour contractual obligations, over the next two years. The Company believes itobligations. We believe we will be able to meet itsour obligation to repay the outstanding $25.2 million of theoutstanding Old Notes that mature on December 21, 2008 through the use of available cash, and to repay the $117.8 million outstanding New Notes that mature on hand andApril 15, 2012 through a combination of conversion of the notes outstanding, refinancing, cash generated from operations. The Company believes itoperations, and other means.

During the second quarter of 2008, we acquired Mill Lane for $11.0 million, net of cash acquired, plus potential future earn-out payments of up to $19.0 million, contingent upon the future achievement of certain operating performance criteria.  As of September 30, 2008, we have accrued $3.5 million in earn-out payments due to revenues earned through the end of the third quarter of 2008, and we anticipate accruing approximately $6.1 million during the fourth quarter of 2008.  Payment for these earn-outs will be made in the first quarter of 2009.  We believe we will be able to meet itsour obligation to repaypay these earn-out amounts to Mill Lane from 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.sources referred to above.

 

In 2006, Veeco purchasedwe invested $0.5 million to purchase 19.9% of the common stock of Fluens.Fluens Corporation (“Fluens”), of which 31% is owned by one of our Senior Vice Presidents.  Veeco and Fluens arehave jointly developingdeveloped a next-generation process for high-rate deposition of aluminum oxide for data storage applications.  If this development is successful and upon the satisfaction of certain additional conditions by May 2009, Veecowe will be obligated to purchase the balance of the outstanding stock of Fluens for $3.5 million and payplus 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 expectsearn-out payment 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.Fluens’ stockholders based on future performance.

 

Application of Critical Accounting Policies

 

General:  Veeco’s  Our discussion and analysis of itsour financial condition and results of operations are based upon the Company’s condensed consolidated financial statements,our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principlesU.S. generally accepted in the United States.accounting principles. The preparation of these financial statements requires Veecous 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 considersWe consider 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 income taxes, and share-based compensation to be critical policies due to the estimation processes involved in each.

 

Revenue Recognition:  The Company recognizes  We recognize revenue in accordance with the Securities and Exchange Commission (“SEC”)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 recognizesWe recognize revenue when persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collectibilitycollectability is reasonably assured.

   For products manufacturedproduced according to the Company'sour 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

25



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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. At September 30, 2007 and December 31, 2006, $1.3 million and $0.3 million, respectively, are recorded in deferred profit.

sheets. 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'sOur 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 down to its estimated market value, if less than its cost. Inherent in the estimates of market value are management'smanagement’s estimates related to Veeco'sour 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  We have significant intangible assets related to goodwill and other acquired intangibles. In assessing the recoverability of the Company'sour goodwill and other indefinite-lived intangible assets, the Companywe 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. During the fourth quarter of 2007, as required, we performed an annual impairment test, and based upon the judgment of management, it was determined that no impairment exists.  Management continues to believe that there are no impairment indicators at the current time.

 

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 amortization or depreciation period, theirthe carrying values of such assets 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 Veecous 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  We estimate the costs that may be incurred under the warranty it provideswe provide and recordsrecord 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’sOur 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'sour 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’sour estimates, revisions to the estimated warranty liability would be required.

 

Income Taxes:  As part of the process of preparing Veeco’s condensed consolidated financial statements, the Company isour Consolidated Financial Statements, we are required to estimate itsour income taxes in each of the jurisdictions in which it operates.we operate. 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.our Condensed Consolidated Balance Sheets. The carrying value of our 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’sOur net deferred tax assets consist primarily of net operating loss and tax credit carryforwards, and timing differences between the book and

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tax treatment of inventory and other asset valuations. Realization of these net deferred tax assets is dependent upon the Company’sour ability to generate future taxable income.

 

                The CompanyWe records record valuation allowances in order to reduce itsour deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, it considerswe consider 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, 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.

 

At September 30, 2007, the Company2008, we had a valuation allowance of approximately $68.5$68.0 million against substantially all of itsour 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 placeplaces primary importance on the Company’sour historical results of operations. Although the Company’sour operating results in prior years were significantly affected by restructuring and other charges, the Company’sour historical losses and the lossesloss incurred in 2005 and 20042007 represent negative evidence sufficient to require a full valuation allowance under the provisions of SFAS 109. If the Company iswe are able to realize part or all of the deferred tax assets in future periods, itwe will reduce itsour 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.FIN 48,Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109, which became effective for Veecous 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 Companywe 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 onunder 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 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), Share-Based Payment (“  We account for our share-based compensation in accordance with 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.Additionally, SFAS No. 123(R) was adopted using the modified prospective method of application, which requires the recognitionbenefits of tax deductions in excess of recognized compensation expense oncost to be reported as a prospective basis. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflectfinancing cash flow, rather than as an operating cash flow as required under previous accounting literature, which has the remaining service periodeffect of awards that had been included in the pro forma disclosuresreducing consolidated net operating cash flows and increasing consolidated net financing cash flows in periods reported prior toafter adoption. For the adoption of SFAS 123(R).nine months ended September 30, 2008, we did not recognize any consolidated financing cash flows for such excess tax deductions.

 

26



Under SFAS 123(R), the Company iswe are 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 applieswe apply 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 usedWe use 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 considersWe consider the exercise behavior of past grants and modelsmodel the pattern of aggregate exercises in determining the expected weighted-average option life.

 

Recent Accounting Pronouncements

On February 12, 2008, the FASB issued FSP 157-2.  FSP 157-2 amends SFAS 157 to delay the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually).  For items within its scope, FSP 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.  Currently we believe the impact of the adoption of FSP 157-2 in 2009 will be on our disclosures only.

In December 2007, the FASB issued SFAS 141(R) and SFAS 160.   Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date at fair value with limited exceptions.  SFAS 141(R) also changes the accounting treatment for certain other items that relate to business combinations. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The purpose of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements.  The most significant

27



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provisions of this statement result in changes to the presentation of noncontrolling interests in the consolidated financial statements.  SFAS 160 is effective for fiscal years beginning after December 15, 2008.  The adoption of this statement will impact the manner in which we present noncontrolling interests, but will not impact our consolidated financial position or results of operations.

In September 2006,March 2008, the FASB issued Statement of Financial Accounting Standards No. 157,161, Fair Value MeasurementsDisclosures about Derivative Instruments and Hedging Activities (“SFAS 157”161”). SFAS 157 establishes a common definition161 changes the disclosure requirements for fair valuederivative instruments and hedging activities. Entities are required to be applied to U.S. generally accepted accounting principles requiring use of fair value, establishes a frameworkprovide disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for measuring fair value,under FASB Statement No. 133, Accounting for Derivative Instruments and expands disclosure about such fair value measurements.Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 157161 is effective for fiscal years and interim periods beginning after November 15, 2007.2008 and requires comparative disclosures only for periods subsequent to initial adoption. The adoption of this statement isthe provisions of SFAS 161 will not expected to have a material impact on the Company’sour consolidated financial position or results of operations.

 

In February 2007,May 2008, the FASB issued Statement of Financial Accounting Standards No. 159, FSP APB 14-1. 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 159guidance is effective for fiscal years beginning after NovemberDecember 15, 2007. The adoption2008 and interim periods within those years.  FSP APB 14-1 will require issuers of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In 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 settlementcan be settled in any combination of cash and shares at the issuer’s option.  The FSP would require bifurcation ofto separately account for (i.e. bifurcate) a componentportion of the debt associated with the conversion feature reclassification of that componentand reclassify this portion to stockholders’ equity, and then accretionequity.  The liability portion, which represents the fair value of the resulting discount ondebt without the debtconversion feature, will be accreted to its face value over the remaining life of the obligation resulting indebt using the effective interest method, with the accretion expense equalrecorded 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 proposedinterest.  FSP would make any final guidance effective for fiscal years beginning after December 15, 2007, would not permit early application, and wouldAPB 14-1 will be applied retrospectively to all periods presented. The Company has reviewed the impactcumulative effect of the proposedchange in accounting principle on periods prior to those presented will be recognized as of the beginning of the first period presented. We expect the adoption of FSP and has determined that if the guidance is issued as currently proposed, it would result in a non-cash increase in interest expense, which couldAPB 14-1 to have a material impacteffect on net income.   our consolidated financial position, results of operations, and earnings per share.  Effective as of the date of issuance of the New Notes, we will reclassify approximately $16.3 million from long-term debt to additional paid-in capital, and as of the adoption of FSP APB 14-1 in the beginning of 2009, our accumulated deficit will reflect approximately $4.8 million of debt accretion that occurred between the issuance date of the New Notes and the adoption date. Approximately $3.2 to $3.7 million of additional interest expense will be recorded annually from the adoption date through the maturity date of the convertible debt.  This additional interest expense will not require the use of cash.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Veeco’sOur net sales to foreign customers represented approximately 71.1%66.4% and 68.4%64.9%, respectively, of Veeco’sour total net sales for the three months and nine months ended September 30, 2007,2008, and 70.3% and 67.7%, respectively, and 63.9% and 67.0% for the comparable 2006 periods, respectively. The Company expects2007 periods. We expect that net sales to foreign customers will continue to represent a large percentage of Veeco’sour total net sales. Veeco’sOur net sales denominated in foreign currencies represented approximately 21.1%13.2% and 20.7%13.9% of Veeco’sour total net sales for the three months and nine months ended September 30, 2007,2008, respectively, and 12.5%21.1% and 15.1%20.7%, respectively, for the comparable 2006 periods, respectively.2007 periods.

 

The condensed consolidated results of operations for the three months and nine months ended September 30, 2008 include aggregate foreign currency gains of less than $0.1 million and $0.1 million, respectively, which were net of losses of approximately $0.1 million and $0.3 million, respectively, related to forward contracts.  For the three months and nine months ended September 30, 2007, includethe results included aggregate foreign currency losses of less than $0.1 million and approximately $0.3 million, respectively.  Included in those losses were lossesrespectively, which included gains 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 impact of a gain of approximately $0.1 million and a loss of approximately $0.3 million for the three and nine months ended September 30, 2006, respectively.  Included in this impact were losses of approximately $0.3 million and $0.2 million,

 

27



respectively, related to forward hedge contracts.

Veeco isWe are 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’sour international operating profit are the Japanese Yen and the Euro. Veeco usesWe use derivative financial instruments to mitigate these risks. Veeco doesWe do not use derivative financial instruments for speculative or trading purposes. The CompanyWe generally entersenter 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 $3.0$0.6 million and $1.8 million, respectively, for both the three months and nine months ended September 30, 2007. As of2008. On September 30, 2007, the Company had25, 2008 we entered into onetwo forward contractcontracts for the month of October. October with a total notional amount of approximately $3.5 million.  The fair values of these contracts at inception were zero, which did not significantly change at September 30, 2008.  We do not anticipate any significant future loss from fluctuations in currency exchange rates, as our hedging strategy is designed to minimize the risk of such fluctuations.

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Assuming third quarter 20072008 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’sOur 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 Companyus 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’sSEC’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 hasWe have evaluated the effectiveness of the design and operation of itsour disclosure controls and procedures under the supervision of and with the participation of management, including the Chief Executive OfficerCEO and Chief Financial Officer (“CFO”), as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive OfficerCEO and Chief Financial OfficerCFO 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 CommissionSEC filings.

 

The Company is presently in the process of implementingWe have implemented new company-wide integrated applications software and, assoftware.  As of September 30, 2007, hasApril 1, 2008, we have completed the conversion to this new platform in tenall of Veeco’s business locations withother than at the remainder expected to be completedMill Lane location, which was recently acquired by the first half of 2008.Veeco. As a result, certain changes have been made to the Company’sour internal controls, which management believes will strengthen the Company’sour internal control structure.  There have been no other significant changes in our internal controls or other factors during the fiscal quarter ended September 30, 20072008 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.

 

Part II. OTHER INFORMATION

Item 1.  Legal Proceedings.Proceedings

 

As previously reported,On August 11, 2008, we announced that we had settled the patent litigation which we had brought in 2003 in the United States District Court for the Central District of California against Asylum Research Corporation, a privately-held company founded by former Veeco employees.  In the lawsuit, we had alleged that the manufacture, use, and sale of Asylum’s MFP-3D AFM constituted willful infringement of five patents owned by us, as well as other claims.  In the settlement, 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 UnderstandingAsylum agreed 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 dismissdrop all pending claims against each other and agreed to a five year, worldwide cross license of each company’s patents and a mutual covenant not to sue on patents either party has a right to assert.  Asylum made a net payment to Veeco and will pay an ongoing royalty to Veeco for the other defendants with no admission or finding of wrongdoing by Veeco or anyfive-year term of the other defendants, andcross license.  As part of the settlement, Asylum acknowledged the validity of the Veeco and the other defendants would receive a full release of all claims pendingpatents asserted in the litigation.case.  During the case, we capitalized legal costs incurred to defend our patents and are now amortizing these capitalized costs over the remaining lives of these patents.  Payments received from Asylum have been and will continue to be netted against the capitalized legal costs upon receipt.

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Item 1A.  Risk Factors.

 

InformationIn addition to the information regarding risk factors that 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.  There2007, we have been nonoted the following significant risk factor as of September 30, 2008:

The recent turmoil in the world’s credit markets may have a protracted adverse impact on capital spending in the markets we serve and, as a result, could have a material changes fromadverse effect on our business and our results of operations.

We are exposed to the risk factors previously disclosedrisks associated with the volatility of the U.S. and global economies. In October 2008, the global financial markets experienced significant losses due to failures of many dominant financial institutions.  The governments of the United States and several foreign countries instituted a bailout plan to assist many banks and lenders through the economic crisis.  This crisis results in a lack of visibility regarding whether or when there will be sustained

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growth periods for sales of our Annual Reportproducts and uncertainty regarding the amount of sales, since many of our customers rely on Form 10-K.lending arrangements and/or have limited resources to finance capital technology expenditures.  In addition, it is expected that this crisis and economic uncertainty will result in decreased consumer business and government spending, which will likely reduce the need our customers have for our products.  Slow or negative growth in the global economy may continue to materially and adversely affect our business, financial condition and results of operations for the foreseeable future. Our results of operations would be further adversely affected if we were to experience lower than anticipated order levels, cancellations of orders in backlog, extended customer delivery requirements, or pricing pressure as a result of a slowdown.  Any negative effect on our earnings may affect our borrowing availability and potentially result in noncompliance with the restrictive covenants of our existing credit agreement.

 

Item 6. Exhibits.

 

Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange CommissionSEC by the Company under File No. 0-16244.

 

Number

 

Description

 

Incorporated by Reference to the
Following Document:

 

 

 

 

 

3.1

Fourth Amended and Restated Bylaws of the Company, effective October 23, 2008

Current Report on Form 8-K filed October 27, 2008, Exhibit 3.1

10.1

 

CreditAmendment to Employment Agreement dated as of August 20, 2007, bySeptember 12, 2008 between John F. Rein, Jr. and among Veeco Instruments Inc., HSBC Bank USA, National Association, as administrative agent, and the lenders named therein.

 

*

 

 

 

 

 

10.2

 

Amendment and Reaffirmation dated August 20, 2007 of Securityto Employment Agreement dated as of March 15, 2005 amongSeptember 12, 2008 between Robert P. Oates and Veeco Instruments Inc., the subsidiaries of Veeco named therein and HSBC Bank USA, National Association, as administrative agent.

 

*

10.3

Senior Executive Change in Control Policy effective as of September 12, 2008

*

10.4

Service Agreement effective July 24, 2008 between Edward H. Braun and Veeco Instruments Inc.

Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, Exhibit 10.1

 

 

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)13a—14(a) or Rule 15d-14(a)15d—14(a) of the Securities and Exchange Act of 1934.

 

*

 

 

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)13a—14(a) or Rule 15d-14(a)15d—14(a) of the Securities and Exchange Act of 1934.

 

*

 

 

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleySarbanes- Oxley Act of 2002.

 

*

 

 

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleySarbanes- Oxley Act of 2002.

 

*

 


*      Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date:  October 30, 200729, 2008

 

 

Veeco Instruments Inc.

 

 

 

 

By:

/s/ JOHN R. PEELER

 

 

John R. Peeler
Chief Executive Officer

 

 

 

 

By:

/s/ JOHN F. REIN, JR.

 

 

John F. Rein, Jr.
Executive Vice President and Chief Financial Officer

and Secretary

 

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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
Following Document:

3.1

Fourth Amended and Restated Bylaws of the Company, effective October 23, 2008

Current Report on Form 8-K filed October 27, 2008, Exhibit 3.1

 

 

 

 

 

10.1

 

CreditAmendment to Employment Agreement dated as of August 20, 2007, bySeptember 12, 2008 between John F. Rein, Jr. and among Veeco Instruments Inc., HSBC Bank USA, National Association, as administrative agent, and the lenders named therein.

 

*

 

 

 

 

 

10.2

 

Amendment and Reaffirmation dated August 20, 2007 of Securityto Employment Agreement dated as of March 15, 2005 amongSeptember 12, 2008 between Robert P. Oates and Veeco Instruments Inc., the subsidiaries of Veeco named therein and HSBC Bank USA, National Association, as administrative agent.

 

*

10.3

Senior Executive Change in Control Policy effective as of September 12, 2008

*

10.4

Service Agreement effective July 24, 2008 between Edward H. Braun and Veeco Instruments Inc.

Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, Exhibit 10.1

 

 

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)13a—14(a) or Rule 15d-14(a)15d—14(a) of the Securities and Exchange Act of 1934.

 

*

 

 

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)13a—14(a) or Rule 15d-14(a)15d—14(a) of the Securities and Exchange Act of 1934.

 

*

 

 

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleySarbanes- Oxley Act of 2002.

 

*

 

 

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleySarbanes- Oxley Act of 2002.

 

*

 


*Filed herewith