UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

		(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              .

 

Commission file number 0-16244

 

 

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

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

 

Website: www.veeco.com

 

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No  o

 

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

 

 

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

 

32,129,344 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on May 6, 2009.

 

 

 

SAFE HARBOR STATEMENT

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  We operate in industries characterized by rapid technological change;

 

·                  We face significant competition;

 

·                  We depend on a limited number of customers that operate in highly concentrated industries;

 

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

 

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

 

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

 

·                  Our sales cycle is long and unpredictable;

 

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

 

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

 

·                  We rely on a limited number of suppliers;

 

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

 

·                  We are exposed to the risks of operating a global business;

 

·                  We are subject to foreign currency exchange risks;

 

2

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  The other matters discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Report and in the Annual Report on Form 10-K for the year ended December 31, 2008 of Veeco Instruments Inc. (“Veeco,” the “Company,” or “we”).

 

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

 

Available Information

 

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

 

Internet Address

 

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

 

3

 

VEECO INSTRUMENTS INC.

 

INDEX

 

			Page
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008 (Unaudited)	5
		Condensed Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and December 31, 2008	6
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008 (Unaudited)	7
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.		Controls and Procedures	29
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings	30
Item 1A.		Risk Factors	30
Item 6.		Exhibits	30
SIGNATURES			31

 

4

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

 

		Three months ended March 31,
		2009			2008
Net sales		$	62,849		$	102,307
Cost of sales		42,467			59,681
Gross profit		20,382			42,626
Operating expenses:
Selling, general, and administrative expense		18,607			22,628
Research and development expense		12,886			14,726
Amortization expense		1,829			1,956
Restructuring expense		4,431			2,875
Asset impairment charge		—			285
Other expense, net		1,486			4
Total operating expenses		39,239			42,474
Operating (loss) income		(18,857		)	152
Interest expense, net		1,709			1,605
Loss before income taxes		(20,566		)	(1,453		)
Income tax provision		378			919
Net loss including noncontrolling interest		(20,944		)	(2,372		)
Net loss attributable to the noncontrolling interest		(42		)	(76		)
Net loss attributable to Veeco		$	(20,902	)	$	(2,296	)
Loss per common share:
Net loss attributable to Veeco		$	(0.66	)	$	(0.07	)
Diluted net loss attributable to Veeco		$	(0.66	)	$	(0.07	)
Weighted average shares outstanding		31,515			31,161
Diluted weighted average shares outstanding		31,515			31,161

 

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

 

5

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Balance Sheets
(In thousands)

 

		March 31,			December 31,
		2009			2008
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	93,048		$	103,799
Accounts receivable, net		37,911			59,659
Inventories		88,729			94,930
Prepaid expenses and other current assets		6,217			6,425
Deferred income taxes		2,077			2,185
Total current assets		227,982			266,998
Property, plant, and equipment at cost, net		63,275			64,372
Goodwill		59,160			59,160
Intangible assets, net		36,671			38,818
Other assets		187			193
Total assets		$	387,275		$	429,541
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable		$	25,050		$	29,610
Accrued expenses		50,307			66,964
Deferred profit		1,425			1,346
Current portion of long-term debt		200			196
Income taxes payable		13			354
Total current liabilities		76,995			98,470
Deferred income taxes		4,771			4,540
Long-term debt		98,971			98,330
Other non-current liabilities		1,941			2,391
Shareholders’ equity:
Shareholders’ equity attributable to Veeco		203,855			225,026
Noncontrolling interest		742			784
Total shareholders’ equity		204,597			225,810
Total liabilities and shareholders’ equity		$	387,275		$	429,541

 

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

 

6

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows
 (In thousands)
(Unaudited)

 

		Three months ended March 31,
		2009			2008
Operating activities
Net loss attributable to Veeco		$	(20,902	)	$	(2,296	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		5,556			5,594
Amortization of debt discount		693			713
Non-cash share-based compensation expense		1,398			1,609
Non-cash inventory write-off		1,526			—
Deferred income taxes		222			642
Non-cash asset impairment charge		—			285
Other, net		(3		)	(69		)
Changes in operating assets and liabilities:
Accounts receivable		20,709			1,942
Inventories		4,960			(6,264		)
Accounts payable		(4,470		)	1,262
Accrued expenses, deferred profit, and other current liabilities		(7,209		)	(4,639		)
Other, net		(348		)	1,547
Net cash provided by operating activities		2,132			326
Investing activities
Capital expenditures		(2,418		)	(3,053		)
Payment of earn-out for Solar business		(9,644		)	—
Proceeds from sale of property, plant, and equipment		—			2
Net cash used in investing activities		(12,062		)	(3,051		)
Financing activities
Proceeds from stock issuances		—			155
Restricted stock tax withholdings		(2		)	(31		)
Repayments of long-term debt		(48		)	(180		)
Net cash used in financing activities		(50		)	(56		)
Effect of exchange rate changes on cash and cash equivalents		(771		)	127
Net decrease in cash and cash equivalents		(10,751		)	(2,654		)
Cash and cash equivalents at beginning of period		103,799			117,083
Cash and cash equivalents at end of period		$	93,048		$	114,429
Non-cash investing and financing activities
Transfers from property, plant, and equipment to inventory		$	360		$	363
Transfers from inventory to property, plant, and equipment		23			—

 

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

 

7

 

Veeco Instruments Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1—Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company” or “we”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three months ended March 31, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

Consistent with prior years, we report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period.  The interim quarter ends are determined at the beginning of each year based on the 13-week quarters.  The 2009 interim quarter ends are March 29, June 28, and September 27.  The 2008 interim quarter ends were March 30, June 29, and September 28.  For ease of reference, we report these interim quarter ends as March 31, June 30, and September 30 in our interim condensed consolidated financial statements.

 

Net Loss Per Common Share

 

Net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period. The effect of approximately 62,000 common equivalent shares for the three months ended March 31, 2009 and approximately 140,000 common equivalent shares for the three months ended March 31, 2008 were excluded from the diluted weighted average shares outstanding due to a net loss sustained for each period.

 

During the second quarter of 2007, we exchanged $118.8 million of our $144 million in 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 “Notes”) due April 15, 2012, leaving the $25.2 million of the Old Notes that had not been exchanged outstanding.  For the three months ended March 31, 2008, the weighted-average effect of the assumed conversion of the remaining $25.2 million of Old Notes was approximately 0.7 million shares.  The convertible shares were anti-dilutive and, therefore, were not included in the weighted shares outstanding for the three months ended March 31, 2008. During the fourth quarter of 2008, we repaid the remaining $25.2 million of Old Notes outstanding.

 

The Notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, as long as we have the ability and the intent to settle the principal amount of the Notes in cash.  Under the terms of the Notes, we may pay the principal amount of converted Notes in cash or in shares of common stock.  We have indicated that we intend to pay such amounts in cash.  Using the treasury stock method, the impact of the assumed conversion of the Notes was anti-dilutive for the three months ended March 31, 2009 and 2008, as the average stock price for each period was below the conversion price of $27.23.  The effect of the assumed converted shares is dependent on the stock price at the time of the conversion.  The maximum number of common equivalent shares issuable upon conversion at March 31, 2009 was approximately 5.4 million, after giving effect to the $12.2 million of Notes that we repurchased during the fourth quarter of 2008.  See Note 8 for further details on our debt.

 

Derivative Financial Instruments

 

We use derivative financial instruments to minimize the impact of foreign exchange rate changes on earnings and cash flows. In the normal course of business, our operations are exposed to fluctuations in foreign exchange rates. In order to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known foreign currency exposures, we enter into monthly forward contracts.

 

8

 

We do not use derivative financial instruments for trading or speculative purposes. Our forward contracts are intended to offset exchange gains and losses on the underlying assets and liabilities; the forward contracts are marked-to-market through earnings. We conduct our derivative transactions with highly rated financial institutions in an effort to mitigate any material credit risk. The weighted average notional amount of derivative contracts outstanding during the three months ended March 31, 2009 was approximately $4.8 million.

 

The condensed consolidated results of operations for the three months ended March 31, 2009 include aggregate foreign currency losses of approximately $1.4 million, which were net of gains of approximately $0.2 million related to forward contracts.  For the three months ended March 31, 2008, the results include aggregate net foreign currency gains of approximately $0.1 million, which included losses of approximately $0.3 million related to forward contracts.  These amounts were recognized and included in other expense, net.

 

As of March 31, 2009, approximately $0.1 million of gains related to forward contracts were included in prepaid and other current assets, and cash in an amount equivalent to such gains was received in April 2009. As of December 31, 2008, approximately $0.9 million of losses related to forward contracts were included in accrued expenses and subsequently paid in January 2009. Monthly forward contracts with a total notional amount of $4.7 million were entered into in March 2009 and will be settled in April 2009.  The fair value of these contracts at inception was zero, which did not significantly change at March 31, 2009.

 

Noncontrolling Interest

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51 (“SFAS 160”).   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.  We implemented SFAS 160 as of January 1, 2009.  The adoption of this statement impacted the manner in which we present noncontrolling interests for all periods included in this report, but did not impact our consolidated financial position or results of operations.

 

Convertible Debt

 

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). We implemented FSP APB 14-1 as of January 1, 2009 and have applied it retrospectively to all periods presented, as required.  See Note 8—Debt for a discussion of the impact of implementing FSP APB 14-1.

 

Note 2—Acquisition of Mill Lane Engineering Co., Inc.

 

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’s 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.

 

As of December 31, 2008, we had accrued $9.6 million for our earn-out obligation due to the former owners of Mill Lane resulting from the achievement of certain operating performance criteria earned through the end of the fourth quarter of 2008. Payment of this earn-out was made in the first quarter of 2009.

 

Note 3—Share-Based Payments

 

Stock Option and Restricted Stock 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)”). 

 

9

 

The following compensation expense was included in the condensed consolidated statements of operations for the three months ended March 31, 2009 and 2008 (in thousands):

 

 

As of March 31, 2009, the total unrecognized compensation cost related to nonvested stock awards is $8.1 million and to stock option awards is $5.9 million.  The related weighted average period over which we expect that such unrecognized compensation costs will be recognized is approximately 2.7 years for the nonvested stock awards and 2.0 years for option awards.

 

A summary of our restricted stock awards including restricted stock units as of and for the three months ended March 31, 2009, is presented below:

 

 

A summary of our stock option plans as of and for the three months ended March 31, 2009, is presented below:

 

 

Note 4—Balance Sheet Information

 

Accounts Receivable, net

 

Accounts receivable are shown net of the allowance for doubtful accounts of $1.0 million and $0.9 million as of March 31, 2009 and December 31, 2008, respectively.

 

Inventories

 

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

 

 

10

 

Accrued Warranty

 

We estimate the costs that may be incurred under the warranty we provide and record a liability in the amount of such costs at the time the related revenue is recognized.  Factors that affect our warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period.  We periodically assess the adequacy of our recognized warranty liability and adjust the amount as necessary.  Changes in our warranty liability during the period are as follows (in thousands):

 

 

Note 5—Segment Information

 

We manage the business, review operating results and assess performance, as well as allocate resources, based upon three separate reporting segments that reflect the market focus of each business.  The Light Emitting Diode (“LED”) & Solar Process Equipment segment consists of metal organic chemical vapor deposition (“MOCVD”) systems, molecular beam epitaxy (“MBE”) systems, thermal deposition sources, and other types of deposition systems used to deposit materials on flexible and glass substrates.  These systems are primarily sold to customers in the high-brightness light emitting diode (“HB-LED”) and solar industries, as well as to scientific research customers. This segment has production facilities in Somerset, New Jersey, St. Paul, Minnesota, and Lowell, Massachusetts. The Data Storage Process Equipment segment consists of the ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, and dicing and slicing products sold primarily to customers in the data storage industry.  This segment has production facilities in Plainview, New York, Ft. Collins, Colorado, and Camarillo, California.  In our Metrology segment, we design and manufacture atomic force microscopes, scanning probe microscopes, stylus profilers, and optical interferometers used to provide critical surface measurements in research and production environments. This broad line of products is used in universities, research facilities and scientific centers worldwide. In production environments such as semiconductor, data storage and other broad industries, our metrology instruments enable customers to monitor their products throughout the manufacturing process to improve yields, reduce costs, and improve product quality.  This segment has production facilities in Camarillo and Santa Barbara, California and Tucson, Arizona.

 

We evaluate the performance of our reportable segments based on income (loss) from operations before interest, income taxes, amortization and certain items (“segment (loss) profit”), which is the primary indicator used to plan and forecast future periods. The presentation of this financial measure facilitates meaningful comparison with prior periods, as management believes segment (loss) profit reports baseline performance and thus provides useful information. Certain items include restructuring expenses, asset impairment charges, inventory write-offs, and equity-based compensation expense. The accounting policies of the reportable segments are the same as those described in the summary of critical accounting policies.

 

The following tables present certain data pertaining to our reporting segments and a reconciliation of segment (loss) profit to income (loss) before income taxes for the three months ended March 31, 2009 and 2008, respectively, and goodwill and total assets as of March 31, 2009 and December 31, 2008, respectively (in thousands):

 

		LED & Solar Process Equipment			Data Storage Process Equipment			Metrology			Unallocated Corporate Amount			Total
Three months ended March 31, 2009
Net sales		$	22,202		$	16,905		$	23,742		$	—		$	62,849
Segment loss		$	(3,712	)	$	(1,632	)	$	(2,705	)	$	(1,624	)	$	(9,673	)
Interest expense, net		—			—			—			1,709			1,709
Amortization expense		775			405			577			72			1,829
Equity-based compensation expense		156			252			236			754			1,398
Restructuring expense		734			1,386			2,124			187			4,431
Inventory write-off		—			1,526			—			—			1,526
Loss before income taxes		$	(5,377	)	$	(5,201	)	$	(5,642	)	$	(4,346	)	$	(20,566	)

 

11

 

Three months ended March 31, 2008
Net sales		$	42,132		$	24,078		$	36,097		$	—		$	102,307
Segment profit (loss)		$	8,667		$	(1,321	)	$	1,948		$	(2,417	)	$	6,877
Interest expense, net		—			—			—			1,605			1,605
Amortization expense		487			952			406			111			1,956
Equity-based compensation expense		75			151			126			1,257			1,609
Restructuring expense		—			124			190			2,561			2,875
Asset impairment charges		—			—			—			285			285
Income (loss) before income taxes		$	8,105		$	(2,548	)	$	1,226		$	(8,236	)	$	(1,453	)

 

		LED & Solar Process Equipment			Data Storage Process Equipment			Metrology			Unallocated Corporate Amount			Total
As of March 31, 2009
Goodwill		$	51,727		$	—		$	7,433		$	—		$	59,160
Total assets		$	141,398		$	63,733		$	77,294		$	104,850		$	387,275
As of December 31, 2008
Goodwill		$	51,727		$	—		$	7,433		$	—		$	59,160
Total assets		$	137,037		$	84,335		$	85,390		$	122,779		$	429,541

 

Corporate total assets are comprised principally of cash and cash equivalents and property and equipment at March 31, 2009 and December 31, 2008.

 

Note 6—Income Taxes

 

We had approximately $1.0 million of unrecognized tax benefits at March 31, 2009 and December 31, 2008, respectively, which predominantly relate to positions taken on our foreign tax returns and all of which represent the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in future periods.

 

We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions.  All material federal, state, local, and foreign income tax matters have been concluded for years through 2002 subject to subsequent utilization of net operating losses generated in such years. During the third quarter of 2008, the Internal Revenue Service initiated an examination of our Federal income tax return for the calendar year 2006. The majority of our foreign jurisdictions have been reviewed through 2007 with only a few jurisdictions having open tax years between 2004 and 2007. None of our tax returns are currently under examination in foreign jurisdictions.

 

We recognize interest and penalties related to income tax matters in income tax expense. The total accrual for interest and penalties related to uncertain tax positions was approximately $0.3 million as of March 31, 2009 and December 31, 2008.

 

Note 7—Comprehensive (Loss) Income

 

Total comprehensive (loss) income for the three months ended March 31, 2009 and 2008 was as follows (in thousands):

 

 

12

 

Note 8—Debt

 

Convertible Debt

 

During the second quarter of 2007, we exchanged $118.8 million of our $144 million in 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 “Notes”) due April 15, 2012 pursuant to privately negotiated exchange agreements with certain holders of the Old Notes.  During the fourth quarter of 2008 we repaid in full the $25.2 million of the Old Notes that remained outstanding after the exchange transactions.

 

The Notes are initially convertible into 36.7277 shares of common stock per $1,000 principal amount of Notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for Veeco’s common stock on April 16, 2007). Holders may convert the Notes at any time during the period beginning on January 15, 2012 through the close of business on the second day prior to April 15, 2012 and earlier upon the occurrence of certain events including our common stock trading at prices equal to 130% over the conversion price for a specified period.  We pay interest on these Notes on April 15 and October 15 of each year.  The Notes are unsecured and are effectively subordinated to all of our senior and secured indebtedness, and to all indebtedness and other liabilities of our subsidiaries.

 

We implemented FSP APB 14-1 as of January 1, 2009 and have applied it retrospectively to all periods presented, as required.  FSP APB 14-1 requires issuers of convertible debt that can be settled in cash to separately account for (i.e., bifurcate) a portion of the debt associated with the conversion feature and reclassify this portion to stockholders’ equity.  The liability portion, which represents the fair value of the debt without the conversion feature, is accreted to its face value using the effective interest method by amortizing the discount between the face amount and the fair value.  The amortization is recorded as non-cash interest expense.  The Notes are subject to FSP APB 14-1 since they may be settled in cash upon conversion.  Thus, as a result of the adoption of FSP APB 14-1, we reclassified approximately $16.3 million from long-term debt to additional paid-in capital effective as of the date of issuance of the Notes.  This reclassification created a $16.3 million discount on the debt that will be amortized over the remaining life of the Notes, which will be through April 15, 2012.  The reclassification generated a $6.7 million deferred tax liability, which we offset with a corresponding decrease of the valuation allowance by the same amount.  FSP APB 14-1 requires that we present prior periods as if the guidance was in effect as of the date of issuance.  Thus, we have presented all financial data for prior periods as if we had reclassified this $16.3 million discount and began amortizing it in April 2007.

 

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

 

For the three months ended March 31, 2009 and 2008, respectively, we recorded approximately $0.7 million of additional interest expense in each period resulting from the amortization of the debt discount.  This additional interest expense did not require the use of cash.  The retrospective application of FSP APB 14-1 to the results for the three months ended March 31, 2008 increased the net loss attributable to Veeco in that period from ($1,583) to ($2,296) and increased the net loss per share attributable to Veeco from ($0.05) to ($0.07).

 

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The components of interest expense recorded on the Notes for the three months ended March 31, 2009 and 2008 were as follows (in thousands):

 

 

The total interest expense recorded on the Notes amounted to an effective interest rate of 6.8% and 6.5% for the three months ended March 31, 2009 and 2008, respectively.

 

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

 

 

The total effect on shareholders’ equity as of the date of adoption on January 1, 2009 was a net increase of $10.3 million, comprised of an increase in additional paid-in capital of $16.3 million and an increase in the accumulated deficit of $6.0 million.  The $6.0 million is comprised of $2.9 million and $1.9 million in amortization of the debt discount for 2008 and 2007, respectively, as well as the $1.2 million reduction in the gain that was recorded on the November 2008 repurchases.  A rollforward of the components of debt and shareholders’ equity from issuance through the date of adoption of FSP APB 14-1 is as follows:

 

		Debt			Debt  Discount			Additional Paid-In Capital			Accum. Deficit			Total Shareholders’ Equity
Principal amount of debt at issuance in April 2007		$	117,744		$	—		$	—		$	—		$	—
Bifurcation of conversion feature at issuance		—			(16,318		)	16,318			—			16,318
Amortization of debt discount in 2007		—			1,851			—			(1,851		)	(1,851		)
Amortization of debt discount in 2008		—			2,918			—			(2,918		)	(2,918		)
Repurchase of debt in November 2008		(12,170		)	1,210			—			(1,210		)	(1,210		)
Balance at adoption date of January 1, 2009		$	105,574		$	(10,339	)	$	16,318		$	(5,979	)	$	10,339

 

Credit Agreement

 

In February 2009, we entered into an amendment to our existing credit agreement with HSBC Bank USA, National Association (“HSBC”), as administrative agent, and the lenders named therein (as amended, the “Credit Agreement”).  As part of the amendment, we reduced the amount of the revolving credit facility, modified certain existing covenants and added certain new covenants.  As amended, the Credit Agreement provides for revolving credit borrowings of up to $30.0 million. The Credit Agreement was amended effective March 27, 2009 to modify certain financial covenants, to provide for the cash collateralization of borrowings under the Credit Agreement, and to permit the acquisition of the 80.1% noncontrolling interest in Fluens Corporation (“Fluens”).  The annual interest rate under the Credit Agreement is a floating rate equal to the prime rate of the agent bank plus 2.0%.  A LIBOR-based interest rate option is also provided.  Borrowings may be used for general corporate purposes, including working capital requirements, as well as permitted acquisitions. 

 

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The Credit Agreement contains certain restrictive covenants which include the maintenance of minimum cash balances and limitations with respect to incurrence of indebtedness, the payment of dividends, long-term leases, investments, mergers, acquisitions, consolidations and sales of assets.  In addition, under the Credit Agreement, we are required to satisfy certain financial tests, including minimum profitability levels.  As of the effective date of the amendment, we were in compliance with all covenants of the Credit Agreement.  Substantially all of our assets and those of our material domestic subsidiaries, other than real estate, have been pledged to secure our obligations under the Credit Agreement.  The revolving credit facility under the Credit Agreement expires on March 31, 2012.  In the first quarter of 2009, we recognized an expense of $0.2 million representing the amount of deferred financing fees equal to the portion of the revolving credit facility which was terminated in connection with the amendment, which is included in other expense, net. We capitalized $0.1 million in deferred financing fees that we incurred in connection with the February 2009 amendment.  As of March 31, 2009 and December 31, 2008, there were no borrowings outstanding under the Credit Agreement and letters of credit outstanding were approximately $0.5 million and $0.4 million, respectively.  Interest expense associated with the Credit Agreement recorded during the three months ended March 31, 2009 and 2008, respectively, was approximately $0.1 million for each period.

 

Note 9— Fair Value Measurements

 

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

 

SFAS 157 requires that we disclose the type of inputs we use to value such assets, based on three categories of inputs as defined in SFAS 157.  Level 1 inputs are quoted, unadjusted prices in active markets for identical assets or liabilities that the company has the ability to access at the measurement date.  Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities.  Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.  We use Level 3 inputs to value all of our property, plant and equipment, goodwill, and intangible assets balances.  We value such assets on a non-recurring basis and did not perform a valuation during the first quarter of 2009, though the methodology we would use to value such assets has not changed since December 31, 2008.  We did not record any gain or loss in adjusting the carrying amounts to fair value in the three months ended March 31, 2009, since we made no such adjustment during that period.  The carrying amounts of property, plant and equipment, goodwill, and intangible assets as of March 31, 2009 were $63,275, $59,160, and $36,671, respectively.

 

Note 10— Commitments, Contingencies and Other Matters

 

Restructuring and Other Charges

 

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

 

Restructuring expense for the quarters ended March 31, 2009 and 2008 is as follows (in thousands):

 

 

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2009 Restructuring and Other Charges

 

In conjunction with these activities, during the three months ended March 31, 2009, we recognized restructuring charges of approximately $4.4 million, principally consisting of personnel severance costs resulting from a headcount reduction of approximately 140 employees and the notification of other employees that will be transitioned out of the Company during 2009.  This reduction in workforce included executives, management, administration, sales and service personnel and manufacturing employees companywide.  We also incurred charges associated with moving and consolidation activities which are scheduled to occur throughout 2009.  In addition, we recorded an inventory write-off of $1.5 million in our Data Storage Process Equipment segment associated with the discontinuance of certain products in connection with transitioning to outsourced manufacturing during the three months ended March 31, 2009, which is included in cost of sales.

 

The following is a reconciliation of the liability for the 2009 restructuring charge from inception through March 31, 2009 (in thousands):

 

 

The balance of the 2009 restructuring accrual is expected to be paid over the next twelve to fifteen months.  We expect to continue our restructuring program in light of the overall business decline, and expect to incur restructuring charges throughout the remainder of 2009 associated with consolidating business units, decreasing the number of manufacturing sites, implementing specific manufacturing initiatives, and centralizing certain functions.  We currently expect to incur additional restructuring charges of $3.6 to $4.1 million during the remainder of 2009.

 

2008 Restructuring and Other Charges

 

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

 

An asset impairment charge of $0.3 million was taken during the first quarter of 2008 primarily for leasehold improvements and furniture and fixtures abandoned in connection with the consolidation and relocation of our former corporate headquarters into our Plainview, New York facility.

 

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

 

 

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

 

2007 Restructuring and Other Charges

 

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

 

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

 

Executive Summary

 

We design, manufacture, market, and service enabling solutions for customers in the HB-LED, solar, data storage, scientific research, semiconductor, and industrial markets.  We have leading technology positions in our three businesses:  LED & Solar Process Equipment, Data Storage Process Equipment, and Metrology Instruments.

 

In our LED & Solar segment, we design and manufacture MOCVD systems, MBE systems and sources, and other types of deposition systems such as web and glass coaters, which we sell primarily to manufacturers of HB-LEDs and solar panels, as well as to scientific research customers.

 

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

 

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

 

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

 

Highlights of the First Quarter of 2009

 

·                  Revenue was $62.8 million, a 38.6% decrease from the first quarter of 2008.

·                  Orders were $53.1 million, down 51.4% from the first quarter of 2008.

·                  Net loss was $20.9 million, or ($0.66) per share, compared to a net loss of $2.3 million, or ($0.07) per share, in the first quarter of 2008.

·                  Gross margins were 32.4%, compared to 41.7% in the first quarter of 2008.

·                  Restructuring charges totaled $4.4 million, principally consisting of personnel severance costs resulting from a companywide reduction in workforce of approximately 140 employees.

·                  We recognized an inventory write-off of $1.5 million in our Data Storage Process Equipment segment in the first quarter of 2009.

 

Outlook

 

The global economic slowdown has had a significant negative impact on our business as we start 2009, affecting our customers’ ability and willingness to invest in capital projects in the short term.

 

Key areas of focus for Veeco in 2009 include:

 

·                  Increased variable cost percentage for better performance through the cycles;

·                  Simplified organizational structure and lower company breakeven point;

·                  An improved balance sheet;

·                  Excellent connectivity and relationships with customers; and

·                  Alignment to customers’ technology roadmaps by driving R&D spending toward high growth markets and leveraging Veeco’s market positions in core technologies.

 

In light of the weak business environment, our restructuring program includes:

 

·                  Approximately 25% reduction in force from the third quarter of 2008 to be completed by the end of 2009;

·                  Centralizing supply chain and operational organizations;

·                  Decreasing the number of manufacturing sites through increased outsourcing for many of our product lines;

·                  Changing compensation structure for our senior management and Board of Directors; and

 

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·                  Decreasing discretionary spending in all categories

 

Given the low first quarter order rate, beginning in the second quarter of 2009 we will be implementing additional cost cutting actions, primarily consisting of plant shut-downs and temporary salary reductions.  These actions, when combined with those already underway, will have the impact of reducing manufacturing overhead, service and operating expenses by approximately $40 million in 2009 compared to last year.

 

We remain cautious about the economic climate, and do not know how long the current downturn will last. We are, however, encouraged to see early signs of improvement in business conditions.  These signals include improved equipment utilization rates, better quoting activity across our three businesses and no significant additional push-outs.  We currently believe that second quarter orders will improve from the trough levels we experienced in the first quarter.

 

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Results of Operations:

 

Three Months Ended March 31, 2009 and 2008

 

Consistent with prior years, we report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period.  The interim quarter ends are determined at the beginning of each year based on the 13-week quarters.  The 2009 interim quarter ends are March 29, June 28 and September 27.  The 2008 interim quarter ends were March 30, June 29 and September 28.  For ease of reference, we report these interim quarter ends as March 31, June 30, and September 30 in our interim condensed consolidated financial statements.

 

The following table shows our Consolidated Statements of Operations, percentages of sales, and comparisons between the three months ended March 31, 2009 and 2008 (dollars in thousands):

 

		Three months ended  March 31,										Dollar and Percentage
		2009					2008					Change
Net sales		$	62,849		100.0	%	$	102,307		100.0	%	$	(39,458	)	(38.6	)%
Cost of sales		42,467			67.6		59,681			58.3		(17,214		)	(28.8	)
Gross profit		20,382			32.4		42,626			41.7		(22,244		)	(52.2	)
Operating expenses:
Selling, general, and administrative expense		18,607			29.6		22,628			22.2		(4,021		)	(17.8	)
Research and development expense		12,886			20.5		14,726			14.4		(1,840		)	(12.5	)
Amortization expense		1,829			2.9		1,956			1.9		(127		)	(6.5	)
Restructuring expense		4,431			7.1		2,875			2.8		1,556			54.1
Asset impairment charge		—			0.0		285			0.2		(285		)	(100.0	)
Other expense, net		1,486			2.3		4			0.0		1,482			*
Total operating expenses		39,239			62.4		42,474			41.5		(3,235		)	(7.6	)
Operating (loss) income		(18,857		)	(30.0	)	152			0.1		(19,009		)	*
Interest expense, net		1,709			2.7		1,605			1.6		104			6.5
Loss before income taxes		(20,566		)	(32.7	)	(1,453		)	(1.4	)	(19,113		)	*
Income tax provision		378			0.6		919			0.9		(541		)	(58.9	)
Net loss including noncontrolling interest		(20,944		)	(33.3	)	(2,372		)	(2.3	)	(18,572		)	(783.0	)
Net loss attributable to noncontrolling interest		(42		)	(0.1	)	(76		)	(0.1	)	34			(44.7	)
Net loss attributable to Veeco		$	(20,902	)	(33.3	)%	$	(2,296	)	(2.2	)%	$	(18,606	)	(810.4	)%

 

* The percentage change in this item was over 1,000%.

 

Net Sales and Orders

 

Net sales of $62.8 million for the three months ended March 31, 2009 were down 38.6% compared to the comparable 2008 quarter.  The following is an analysis of sales and orders by segment and by region (dollars in thousands):

 

		Sales											Orders
		Three months ended March 31,						Dollar and Percentage Change					Three months ended March 31,						Dollar and Percentage Change					Book-to-Bill Ratio
		2009			2008			Year to Year					2009			2008			Year to Year					2009		2008
Segment Analysis
LED & Solar Process Equipment		$	22,202		$	42,132		$	(19,930	)	(47.3	)%	$	28,521		$	38,677		$	(10,156	)	(26.3	)%	1.28		0.92
Data Storage Process Equipment		16,905			24,078			(7,173		)	(29.8	)	7,818			40,610			(32,792		)	(80.7	)	0.46		1.69
Metrology		23,742			36,097			(12,355		)	(34.2	)	16,711			29,972			(13,261		)	(44.2	)	0.70		0.83
Total		$	62,849		$	102,307		$	(39,458	)	(38.6	)%	$	53,050		$	109,259		$	(56,209	)	(51.4	)%	0.84		1.07
Regional Analysis
Americas		$	19,969		$	33,078		$	(13,109	)	(39.6	)%	$	11,572		$	40,641		$	(29,069	)	(71.5	)%	0.58		1.23
Europe, Middle East and Africa (“EMEA”)		18,261			17,887			374			2.1		11,304			15,883			(4,579		)	(28.8	)	0.62		0.89
Japan		5,476			16,754			(11,278		)	(67.3	)	6,926			8,970			(2,044		)	(22.8	)	1.26		0.54
Asia Pacific		19,143			34,588			(15,445		)	(44.7	)	23,248			43,765			(20,517		)	(46.9	)	1.21		1.27
Total		$	62,849		$	102,307		$	(39,458	)	(38.6	)%	$	53,050		$	109,259		$	(56,209	)	(51.4	)%	0.84		1.07

 

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