VEECO INSTRUMENTS INC - Quarter Report: 2010 September (Form 10-Q)

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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 September 30, 2010
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              .

 

Commission file number 0-16244

 

 

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		11-2989601
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
Terminal Drive Plainview, New York		11803
(Address of Principal Executive Offices)		(Zip Code)
Registrant’s telephone number, including area code: (516) 677-0200
Website: www.veeco.com

 

 

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

 

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

 

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

 

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a Smaller reporting company)

 

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

 

39,904,001 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on October 27, 2010.

 

 

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SAFE HARBOR STATEMENT

 

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

 

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

 

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

 

·                  Manufacturing interruptions or delays could affect our ability to meet customer demand, while the failure to estimate customer demand accurately could result in excess or obsolete inventory and/or liabilities to our suppliers for products no longer needed;

 

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

 

·                  Our backlog is subject to customer cancellation or modification and such cancellation could result in decreased sales and increased provisions for excess and obsolete inventory and/or liabilities to our suppliers for products no longer needed;

 

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

 

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

 

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

 

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

 

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

 

·                  We operate in industries characterized by rapid technological change;

 

·                  We face significant competition;

 

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

 

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

 

·                  Our sales cycle is long and unpredictable;

 

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

 

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

 

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·                  We are subject to foreign currency exchange risks;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Available Information

 

We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (the “SEC”). The public may obtain information by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

 

Internet Address

 

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

 

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VEECO INSTRUMENTS INC.

 

INDEX

 

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)	5
	Condensed Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	33
Item 6.	Exhibits	34
SIGNATURES		35

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2010			2009			2010			2009
Net sales		$	277,094		$	74,688		$	633,233		$	163,270
Cost of sales		141,612			44,141			342,210			105,566
Gross profit		135,482			30,547			291,023			57,704
Operating expenses (income):
Selling, general and administrative		24,565			15,631			62,852			41,926
Research and development		18,306			10,662			47,861			29,327
Amortization		1,237			1,270			3,711			3,775
Restructuring		—			781			(179		)	4,770
Asset impairment		—			—			—			304
Other, net		(275		)	(307		)	75			368
Total operating expenses		43,833			28,037			114,320			80,470
Operating income (loss)		91,649			2,510			176,703			(22,766		)
Interest expense, net		1,637			1,656			5,181			5,063
Income (loss) from continuing operations before income taxes		90,012			854			171,522			(27,829		)
Income tax (benefit) provision		(1,092		)	823			7,663			2,379
Income (loss) from continuing operations		91,104			31			163,859			(30,208		)
Discontinued operations:
(Loss) income from discontinued operations		(4,311		)	978			3,546			(5,206		)
Income tax provision (benefit)		630			(261		)	2,805			(1,037		)
(Loss) income from discontinued operations		(4,941		)	1,239			741			(4,169		)
Net income (loss)		86,163			1,270			164,600			(34,377		)
Net loss attributable to noncontrolling interest		—			—			—			(65		)
Net income (loss) attributable to Veeco		$	86,163		$	1,270		$	164,600		$	(34,312	)
Income (loss) per common share attributable to Veeco:
Basic:
Continuing operations		$	2.28		$	—		$	4.15		$	(0.96	)
Discontinued operations		(0.12		)	0.04			0.02			(0.13		)
Income (loss)		$	2.16		$	0.04		$	4.17		$	(1.09	)
Diluted :
Continuing operations		$	2.16		$	—		$	3.89		$	(0.96	)
Discontinued operations		(0.12		)	0.04			0.02			(0.13		)
Income (loss)		$	2.04		$	0.04		$	3.91		$	(1.09	)
Weighted average shares outstanding:
Basic		39,946			31,608			39,508			31,540
Diluted		42,258			32,375			42,175			31,540

 

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2010			2009			2010			2009
Net income (loss)		$	86,163		$	1,270		$	164,600		$	(34,377	)
Other comprehensive income (loss), net of tax
Foreign currency translation		985			966			160			20
Unrealized gain on available-for-sale securities		252			—			252			—
Comprehensive income (loss)		87,400			2,236			165,012			(34,357		)
Comprehensive loss attributable to noncontrolling interest		—			—			—			(65		)
Comprehensive income (loss) attributable to Veeco		$	87,400		$	2,236		$	165,012		$	(34,292	)

 

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

 

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Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)

 

		September 30,			December 31,
		2010			2009
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	278,144		$	148,500
Short-term investments		157,111			135,000
Restricted cash		31,581			—
Accounts receivable, net		129,574			67,546
Inventories		80,544			55,807
Prepaid expenses and other current assets		31,146			6,419
Assets of discontinued segment held for sale		80,252			40,058
Deferred income taxes		38,892			3,105
Total current assets		827,244			456,435
Property, plant and equipment at cost, net		45,490			44,707
Goodwill		52,003			52,003
Intangible assets, net		18,058			21,770
Other assets		901			429
Assets of discontinued segment held for sale		—			30,028
Total assets		$	943,696		$	605,372
Liabilities and equity
Current liabilities:
Accounts payable		$	44,793		$	24,910
Accrued expenses and other current liabilities		192,122			99,823
Deferred profit		5,853			2,520
Income taxes payable		44,034			829
Liabilities of discontinued segment held for sale		12,000			10,824
Current portion of long-term debt		225			212
Total current liabilities		299,027			139,118
Deferred income taxes		3,019			5,039
Long-term debt		103,063			100,964
Other liabilities		315			1,192
Equity		538,272			359,059
Total liabilities and equity		$	943,696		$	605,372

 

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

 

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Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

		Nine months ended
		September 30,
		2010			2009
Operating activities
Net income (loss)		$	164,600		$	(34,377	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		9,952			10,766
Amortization of debt discount		2,269			2,114
Non-cash equity-based compensation		7,003			5,106
Non-cash asset impairment		—			304
Non-cash inventory write-off		—			1,526
Non-cash restructuring		(179		)	4,770
Deferred income taxes		(37,850		)	683
Non-cash cash flows from discontinued operations		7,050			7,995
Other, net		3			34
Changes in operating assets and liabilities:
Accounts receivable		(61,499		)	(5,324		)
Inventories		(24,579		)	13,406
Accounts payable		19,908			2,378
Accrued expenses, deferred profit and other current liabilities		138,947			12,079
Cash flows from discontinued operations		(11,703		)	6,718
Other, net		(26,051		)	(6,510		)
Net cash provided by operating activities		187,871			21,668
Investing activities
Capital expenditures		(8,023		)	(4,584		)
Payments for net assets of businesses acquired		—			(2,413		)
Payments of earn-outs for businesses acquired		—			(9,839		)
Transfers to restricted cash		(31,581		)	(482		)
Proceeds from the maturity of CDARS		213,641			—
Proceeds from sales of short-term investments		11,013			—
Payments for purchases of short-term investments		(246,514		)	—
Purchases of treasury stock		(31,602		)	—
Proceeds from the sale of property, plant and equipment		13			834
Cash flows from discontinued operations		1,682			(600		)
Net cash used in investing activities		(91,371		)	(17,084		)
Financing activities
Proceeds from stock option exercises		36,060			2,904
Restricted stock tax withholdings		(2,898		)	(495		)
Repayments of long-term debt		(157		)	(146		)
Net cash provided by financing activities		33,005			2,263
Effect of exchange rate changes on cash and cash equivalents		139			(8		)
Net increase in cash and cash equivalents		129,644			6,839
Cash and cash equivalents at beginning of period		148,500			102,521
Cash and cash equivalents at end of period		$	278,144		$	109,360
Non-cash investing and financing activities
Accrual of payment for net assets of businesses acquired		$	—		$	1,000
Transfers from property, plant and equipment to inventory		1,114			1,159
Transfers from inventory to property, plant and equipment		850			23
Sale of property, plant and equipment with note receivable		140			—

 

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

 

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Veeco Instruments Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1—Basis of Presentation

 

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

 

Consistent with prior years, we report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2010 interim quarter ends are March 28, June 27 and September 26. The 2009 interim quarter ends were March 29, June 28 and September 27. For ease of reference, we report these interim quarter ends as March 31, June 30 and September 30 in our interim condensed consolidated financial statements.

 

Income (Loss) Per Common Share attributable to Veeco

 

The following table sets forth the reconciliation of basic weighted average shares outstanding and diluted weighted average shares outstanding (in thousands):

 

		Three months ended				Nine months ended
		September 30,				September 30,
		2010		2009		2010		2009
Basic weighted average shares outstanding		39,946		31,608		39,508		31,540
Dilutive effect of stock options and restricted stock		1,301		767		1,540		—
Dilutive effect of convertible notes		1,011		—		1,127		—
Diluted weighted average shares outstanding		42,258		32,375		42,175		31,540

 

Basic income (loss) per common share attributable to Veeco is computed using the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share attributable to Veeco is computed using the weighted average number of common shares and common equivalent shares outstanding during the period. For the nine months ended September 30, 2009, the effect of approximately 0.2 million shares were excluded from the computation of diluted weighted average shares outstanding due to the net loss sustained in the period as their inclusion would have been anti-dilutive. For the three and nine months ended September 30, 2010, no shares were excluded from the computation of diluted weighted average shares outstanding.

 

Our convertible notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, as long as we have the ability and the intent to settle the principal amount of the notes in cash. Under the terms of these notes, we may pay the principal amount of converted notes in cash or in shares of common stock. We have indicated that we intend to pay the principal amount in cash. Using the treasury stock method, it was determined that the impact of the assumed conversion for the three and nine months ended September 30, 2010, had a dilutive affect of 1.0 million and 1.1 million common equivalent shares, respectively, for the three months ended September 30, 2009, the impact was anti-dilutive, due to the conversion price being out of the money for the period and for the nine months ended September 30, 2009, the impact was anti-dilutive, due to the net loss sustained in the period. The effect of the assumed converted shares is dependent on the stock price at the time of the conversion. The maximum number of common equivalent shares issuable upon conversion at September 30, 2010 was approximately 5.4 million.

 

On or after April 20, 2011, we may redeem the notes, in whole or in part, for cash at 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but not including, the redemption date. Holders may convert the convertible notes at any time during the period beginning on January 15, 2012 through the

 

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close of business on the second day prior to April 15, 2012 and earlier upon the occurrence of certain events including if the notes have been called for redemption or if, for a given fiscal quarter our common stock trades at prices equal to 130% of the conversion price for at least 20 trading days during the final 30 trading days of the immediately preceding fiscal quarter. At the end of the third quarter of 2010, our common stock was not trading at prices equal to or above 130% of the conversion price for the specified period and, as a result, the convertible notes will not be convertible during the fourth quarter of 2010.  If the convertible notes are converted, we have the ability and intent to pay the principal balance of notes tendered for conversion in cash. We will re-perform this test each quarter up to and including the fourth quarter of 2011. See Note 7 for further details on our debt.

 

Short-term Investments

 

We determine the appropriate balance sheet classification of our investments at the time of purchase and evaluate the classification at each balance sheet date. As part of our cash management program, we maintain a portfolio of marketable securities which are classified as available-for-sale. These securities include Federal Deposit Insurance Corporation (“FDIC”) insured corporate bonds, treasury bills, commercial paper and certificates of deposit placed through an account registry service (“CDARS”) with maturities of greater than three months when purchased in principal amounts that, when aggregated with interest to accrue over the term, will not exceed FDIC limits. Securities classified as available-for-sale are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss) and reported in equity. Net realized gains and losses are included in net income (loss). CDARS, commercial paper and treasury bills classified as cash equivalents are carried at cost, which approximates fair market value.

 

Derivative Financial Instruments

 

We use derivative financial instruments to minimize the impact of foreign exchange rate changes on earnings and cash flows. In the normal course of business, our operations are exposed to fluctuations in foreign exchange rates. In order to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known foreign currency exposures, we enter into monthly forward contracts. We do not use derivative financial instruments for trading or speculative purposes. Our forward contracts are not expected to subject us to material risks due to exchange rate movements because gains and losses on these contracts are intended to offset exchange gains and losses on the underlying assets and liabilities. The forward contracts are marked-to-market through earnings. We conduct our derivative transactions with highly rated financial institutions in an effort to mitigate any material credit risk.

 

The aggregate foreign currency exchange gain (loss) included in determining the condensed consolidated results of operations was approximately $0.1 million and $(0.1) million during the three months ended September 30, 2010 and 2009, respectively. Included in the aggregate foreign currency exchange gain were losses related to forward contracts of $(0.1) million during the three months ended September 30, 2010. The aggregate foreign currency exchange loss included in determining the condensed consolidated results of operations was approximately $(0.3) million and $(0.6) million during the nine months ended September 30, 2010 and 2009, respectively. Included in the aggregate foreign currency exchange loss were gains related to forward contracts of $0.1 million during the nine months ended September 30, 2009.

 

These amounts were recognized and are included in Other, net in the accompanying condensed consolidated statements of operations. As of September 30, 2010, approximately $0.2 million of losses related to forward contracts were included in accrued expenses and other current liabilities and were subsequently paid in October 2010. As of December 31, 2009, approximately $0.2 million of gains related to forward contracts were included in prepaid expenses and other current assets and were subsequently received in January 2010. Monthly forward contracts with a notional amount of $1.7 million, entered into in September 2010 for October 2010, will be settled in October 2010.

 

The weighted average notional amount of derivative contracts outstanding during the three and nine months ended September 30, 2010 were approximately $6.8 and $5.9 million, respectively.

 

Note 2 — Discontinued Operations

 

On August 15, 2010, we signed a definitive agreement to sell our metrology business to Bruker Corporation for approximately $229 million, comprising our entire Metrology reporting segment. Accordingly, Metrology’s operating results are accounted for as discontinued operations in determining the condensed consolidated results of operations for all periods presented. Additionally, Metrology’s assets and liabilities are classified as held for sale on our condensed consolidated balance sheet for all periods presented. The sales transaction closed on October 7, 2010.

 

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Summary information related to discontinued operations is as follows (in thousands):

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2010			2009			2010			2009
Net sales		$	31,880		$	24,225		$	92,011		$	70,512
Gross profit		15,623			10,361			44,189			27,970
Total operating expenses		19,934			9,383			40,643			33,176
Operating (loss) income		(4,311		)	978			3,546			(5,206		)
Net (loss) income from discontinued operations, net of tax		(4,941		)	1,239			741			(4,169		)

 

		September 30,			December 31,
		2010			2009
Assets
Cash		$	48		$	89
Accounts receivable, net		27,669			16,812
Inventories		26,047			21,757
Property, plant and equipment at cost, net		13,412			14,682
Goodwill		7,419			7,419
Other assets		5,657			9,327
Assets of discontinued segment held for sale		$	80,252		$	70,086
Liabilities
Accounts payable		$	7,287		$	4,202
Accrued expenses and other current liabilities		4,713			6,622
Liabilities of discontinued segment held for sale		$	12,000		$	10,824

 

Note 3— Equity-based Compensation Plans

 

Equity-based Compensation

 

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

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2010			2009			2010			2009
Equity-based compensation expense		$	7,514		$	2,400		$	12,642		$	5,953

 

As a result of the sale of our Metrology segment to Bruker Corporation, equity-based compensation expense related to Metrology employees has been classified as discontinued operations in determining the condensed consolidated results of operations for the three and nine months ended September 30, 2010 and 2009. For the three and nine months ended September 30, 2010, $4.9 million and $5.6 million of equity-based compensation expense has been classified as discontinued operations. For the three and nine months ended September 30, 2009, $0.3 million and $0.9 million of equity-based compensation expense has been classified as discontinued operations. For the three and nine months ended September 30, 2010, total equity-based compensation expense included a charge of $4.5 million related to the acceleration of equity awards associated with the sale of our Metrology business. We expect to recognize approximately $2.0 million of additional equity-based compensation expense in the fourth quarter related to the acceleration of these awards.

 

As of September 30, 2010, the total unrecognized compensation costs related to nonvested stock and stock option awards was $9.4 million and $15.7 million, respectively. The related weighted average period over which we

 

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expect that such unrecognized compensation costs will be recognized is approximately 2.8 years for nonvested stock awards and 2.2 years for option awards.

 

Stock Option and Restricted Stock Activity

 

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

 

 

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

 

		Shares (000s)		Weighted- Average Exercise Price			Aggregate Intrinsic Value (000s)			Weighted- Average Remaining Contractual Life (in years)
Outstanding at January 1, 2010		4,506		$	16.35
Granted		631		34.21
Exercised		(1,951	)	18.95
Forfeited (including cancelled options)		(42	)	13.63
Expirations of vested options		(22	)	47.20
Outstanding at September 30, 2010		3,122		18.15			$	57,068		5.7
Options exercisable at September 30, 2010		1,107		15.98			$	22,676		3.9

 

Treasury Stock

 

On August 24, 2010, our Board of Directors authorized the repurchase of up to $200 million of our common stock until August 26, 2011. Repurchases are expected to be made from time to time on the open market in accordance with applicable federal securities laws. The timing of repurchases and the exact number of shares of common stock to be purchased will depend upon market conditions, SEC regulations, and other factors. The repurchases will be funded using the Company’s available cash balances and cash generated from operations. The program does not obligate the Company to acquire any particular amount of common stock and may be modified or suspended at any time at the Company’s discretion. During the three months ended September 30, 2010, we purchased 929,382 shares for $31.6 million (including transaction costs) under the program at an average cost of $34.00 per share. This stock repurchase is included as a reduction to Equity in the Condensed Consolidated Balance Sheet.

 

2010 Stock Incentive Plan

 

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

 

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Note 4—Balance Sheet Information

 

Short-term Investments

 

Available-for-sale securities consist of the following (in thousands):

 

		September 30, 2010
		Amortized Cost			Gains in Accumulated Other Comprehensive Income			Losses in Accumulated Other Comprehensive Income			Estimated Fair Value
Commercial paper		$	35,915		$	32		$	—		$	35,947
FDIC insured corporate bonds		85,802			160			—			85,962
Treasury bills		35,142			60			—			35,202
Total available-for-sale securities		$	156,859		$	252		$	—		$	157,111

 

During the three and nine months ended September 30, 2010, available-for-sale securities were sold for total proceeds of $11.0 million. The gross realized gains on these sales were minimal for the three and nine months ended September 30, 2010. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification. Net unrealized holding gains on available-for-sale securities amounting to $0.2 million for the three and nine months ended September 30, 2010, respectively, have been included in accumulated other comprehensive income. We held no available-for-sale securities during the nine months ended September 30, 2009.

 

Contractual maturities of available-for-sale debt securities at September 30, 2010, are as follows (in thousands):

 

 

Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

Restricted Cash

 

At September 30, 2010, the Company has $31.6 million of restricted cash which serves as collateral for bank guarantees which provide financial assurance that the Company will fulfill certain customer obligations. The cash is held in custody by the issuing bank, and is restricted as to withdrawal or use while the related bank guarantees are outstanding.

 

Accounts Receivable, net

 

Accounts receivable are shown net of the allowance for doubtful accounts of $0.4 million as of September 30, 2010 and December 31, 2009.

 

Inventories

 

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

 

 

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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):

 

		Nine months ended
		September 30,
		2010			2009
Balance as of beginning of period		$	6,675		$	5,533
Warranties issued during the period		7,242			2,414
Settlements made during the period		(4,906		)	(2,394		)
Balance at end of period		$	9,011		$	5,553

 

Note 5—Segment Information

 

We manage the business, review operating results and assess performance, as well as allocate resources, based upon two separate reporting segments that reflect the market focus of each business. The Light Emitting Diode (“LED”) & Solar segment consists of metal organic chemical vapor deposition (“MOCVD”) systems, molecular beam epitaxy (“MBE”) systems, Copper, Indium, Gallium, Selenide (“CIGS”) deposition systems and thermal deposition sources. These systems are primarily sold to customers in the high-brightness LED (“HB LED”) and solar industries, as well as to scientific research customers. This segment has manufacturing, product development and marketing sites in Somerset, New Jersey, St. Paul, Minnesota and Lowell, Massachusetts and has a product development site in Clifton Park, New York. The Data Storage 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 manufacturing, product development and marketing sites in Plainview, New York, Camarillo, California and Ft. Collins, Colorado.

 

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

 

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

 

		LED & Solar			Data Storage			Unallocated Corporate Amount			Total
Three months ended September 30, 2010
Net sales		$	242,613		$	34,481		$	—		$	277,094
Segment profit (loss)		$	91,785		$	9,377		$	(5,662	)	$	95,500
Interest, net		—			—			1,637			1,637
Amortization		796			383			58			1,237
Equity-based compensation		582			258			1,774			2,614
Income (loss) from continuing operations before income taxes		$	90,407		$	8,736		$	(9,131	)	$	90,012
Three months ended September 30, 2009
Net sales		$	52,965		$	21,723		$	—		$	74,688
Segment profit (loss)		$	8,456		$	857		$	(2,642	)	$	6,671
Interest, net		—			—			1,656			1,656
Amortization		792			405			73			1,270
Equity-based compensation		245			303			1,562			2,110
Restructuring		200			224			357			781
Income (loss) from continuing operations before income taxes		$	7,219		$	(75	)	$	(6,290	)	$	854
Nine months ended September 30, 2010
Net sales		$	539,765		$	93,468		$	—		$	633,233
Segment profit (loss)		$	177,538		$	21,859		$	(12,159	)	$	187,238
Interest, net		—			—			5,181			5,181
Amortization		2,388			1,149			174			3,711
Equity-based compensation		1,720			781			4,502			7,003
Restructuring		—			(179		)	—			(179		)
Income (loss) from continuing operations before income taxes		$	173,430		$	20,108		$	(22,016	)	$	171,522
Nine months ended September 30, 2009
Net sales		$	107,050		$	56,220		$	—		$	163,270
Segment loss		$	1,948		$	(3,092	)	$	(6,141	)	$	(7,285	)
Interest, net		—			—			5,063			5,063
Amortization		2,341			1,213			221			3,775
Equity-based compensation		619			892			3,595			5,106
Restructuring		1,129			3,054			587			4,770
Inventory write-offs		—			1,526			—			1,526
Asset impairment charge		—			304			—			304
Loss from continuing operations before income taxes		$	(2,141	)	$	(10,081	)	$	(15,607	)	$	(27,829	)

 

		LED & Solar			Data Storage			Unallocated Corporate Amount			Total
As of September 30, 2010
Goodwill		$	52,003		$	—		$	—		$	52,003
Total assets		$	291,902		$	50,217		$	601,577		$	943,696
As of December 31, 2009
Goodwill		$	52,003		$	—		$	—		$	52,003
Total assets		$	178,406		$	54,106		$	372,860		$	605,372

 

Corporate total assets are comprised principally of cash and cash equivalents, short-term investments and assets of discontinued segment held for sale at September 30, 2010 and December 31, 2009, respectively.

 

Note 6—Income Taxes

 

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

 

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