Veeco - 10-Q quarterly report FY

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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 June 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)

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

40,877,302 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on July 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;

·                  We are subject to foreign currency exchange risks;

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·                  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 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 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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events including our common stock trading at prices equal to 130% of the conversion price for a specified period, which is at least 20 trading days during the 30 consecutive trading days of the immediately preceding fiscal quarter and only during such fiscal quarter. At the end of the second quarter of 2010, our common stock was trading at prices equal to or above 130% of the conversion price for the specified period and, as a result, the convertible notes will be convertible during the third 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 6 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 certificates of deposit placed through an account registry service (“CDARS”) with maturities of greater than three months but less than one year when purchased in principal amounts that, when aggregated with interest to accrue over the term, will not exceed Federal Deposit Insurance Corporation limits. These securities are carried at cost, which approximates 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 (loss) gain included in determining the condensed consolidated results of operations was approximately $(0.5) million and $0.1 million during the three months ended June 30, 2010 and 2009, respectively. Included in the aggregate foreign currency exchange (loss) gain were gains related to forward contracts of $0.2 million and $0.1 million during the three months ended June 30, 2010, and 2009, respectively. The aggregate foreign currency exchange loss included in determining the condensed consolidated results of operations was approximately $(0.4) million and $(1.3) million during the six months ended June 30, 2010 and 2009, respectively. Included in the aggregate foreign currency exchange loss were gains related to forward contracts of $0.3 million and $0.2 million during the six months ended June 30, 2010, and 2009, respectively.

These amounts were recognized and are included in other, net in the accompanying condensed consolidated statements of operations. As of June 30, 2010, approximately $0.1 million of losses related to forward contracts were included in accrued expenses and other current liabilities and were subsequently paid in July 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 $9.2 million,  entered into in June 2010 for July 2010, will be settled in July 2010.

The weighted average notional amount of derivative contracts outstanding during the three and six months ended June 30, 2010 were approximately $8.2 and $5.7 million, respectively.

Note 2— 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 six months ended June 30, 2010 and 2009 (in thousands):

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As of June 30, 2010, the total unrecognized compensation costs related to nonvested stock and stock option awards was $11.6 million and $17.7 million, respectively. The related weighted average period over which we expect that such unrecognized compensation costs will be recognized is approximately 2.9 years for nonvested stock awards and 2.4 years for option awards.

Stock Option and Restricted Stock Activity

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

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

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 will replace the 2000 Plan as the 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 market price of the Company’s stock at the prior day close from date of grant; those option awards generally vest over a 3 year period and have 10-year contractual terms. 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.

Note 3—Balance Sheet Information

Accounts Receivable, net

Accounts receivable are shown net of the allowance for doubtful accounts of $0.8 million and $0.9 million as of June 30, 2010 and December 31, 2009, respectively.

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Mortgage Payable

We also have a mortgage payable, with approximately $3.0 million outstanding at June 30, 2010. The mortgage accrues interest at an annual rate of 7.91%, and the final payment is due on January 1, 2020. The fair value of the mortgage at June 30, 2010 was approximately $3.3 million.

Note 7— Fair Value Measurements

We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy. The levels of fair value hierarchy are as follows:

·                  Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

·                  Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

·                  Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset.

Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.

As of June 30, 2010, major categories of assets measured at fair value on a recurring basis under Level 2 consisted of CDARS totaling $159.5 million and treasury bills totaling $147.0 million. As of December 31, 2009, major categories of assets measured at fair value on a recurring basis under Level 2 consisted of CDARS totaling $180.0 million and derivative instruments totaling $0.2 million. As of June 30, 2010, the major category of liabilities measured at fair value on a recurring basis under Level 2 consisted of derivative instruments totaling $0.1 million. The Company had no Level 1 and Level 3 assets and liabilities measured on a recurring basis at June 30, 2010 and December 31, 2009.

CDARS and treasury bills are carried at cost, which approximates market value. Accordingly, no gains or losses (realized/ unrealized) have been incurred.

Derivative instruments include foreign currency forward contracts to hedge certain foreign currency transactions. Derivative instruments are valued using standard calculations/models that are primarily based on observable inputs, including foreign currency exchange rates, volatilities and interest rates.

As of June 30, 2010, major categories of assets and liabilities measured at fair value under Level 3 on a nonrecurring basis consisted of property, plant and equipment totaling $59.1 million, goodwill totaling $59.4 million, intangible assets totaling $25.2 million, an asset retirement obligation totaling ($0.2) million and a restructuring liability totaling ($1.3) million. As of December 31, 2009, major categories of assets and liabilities measured at fair value under Level 3 on a nonrecurring basis consisted of property, plant and equipment totaling $59.4 million, goodwill totaling $59.4 million, intangible assets totaling $29.7 million, an asset retirement obligation totaling ($0.2) million and a restructuring liability totaling ($2.5) million. The Company had no Level 1 or Level 2 assets and liabilities measured on a nonrecurring basis at June 30, 2010 and December 31, 2009.

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Note 8—Commitments, Contingencies and Other Matters

Restructuring and Other Charges (Credits)

During 2009, we continued our multi-quarter plan to improve profitability and reduce and contain spending, which began in 2007. We made progress against the initiatives that management set in 2007, continued our restructuring plan and executed activities with a focus on creating a more cost effective organization, with a greater percentage of variable costs. These activities included downsizing and consolidating some locations, reducing our workforce, consultants and discretionary expenses and realigning our sales organization and engineering groups.

In conjunction with these activities, we recorded a restructuring credit of approximately $0.2 million during six months ended June 30, 2010. We recorded restructuring charges of approximately $1.9 million and $6.4 million during the three and six months ended June 30, 2009, respectively, and inventory write-offs of $1.5 million, included in cost of sales in the accompanying Condensed Consolidated Statement of Operations, associated with the discontinuance of certain products in connection with the transitioning to outsourced manufacturing during the three and six months ended June 30, 2009. Restructuring for the three and six months ended June 30, 2010 and 2009 is as follows (in thousands):

Personnel severance and related costs

During the three and six months ended June 30, 2009, we recorded $0.8 million and $5.2 million, respectively, in personnel severance and related costs resulting from a headcount reduction of approximately 53 employees during the three month period and 193 employees during the six month period. This reduction in workforce included executives, management, administration, sales and service personnel and manufacturing employees’ companywide.

Lease-related costs (credits)

During the first quarter of 2010, we had a change in estimate relating to one of our leased facilities. As a result, we incurred a restructuring credit of $0.2 million, consisting primarily of the remaining lease payment obligations and estimated property taxes for a portion of the facility we will occupy, offset by a reduction in expected sublease income. We made certain assumptions in determining the credit, which included a reduction in 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 remaining liability. We developed these assumptions based on our understanding of the current real estate market as well as current market interest rates. The assumptions are based on management’s best estimates, and will be adjusted periodically if new information is obtained.

During the second quarter of 2009, we vacated our Data Storage Process Equipment facilities in Camarillo, CA.  As a result, we incurred an additional restructuring charge, representing the remaining lease payment obligations and estimated property taxes for the facility we vacated, offset by the estimated expected sublease income to be received.  We made certain assumptions in determining the charge, which included estimated sublease income and terms of the sublease as well as the estimated discount rate to be used in determining the fair value of the liability.  We developed these assumptions based on our understanding of the current real estate market as well as current market interest rates.  The assumptions are based on management’s best estimates, and will be adjusted periodically if better information is obtained.  We also incurred charges associated with moving and consolidation activities for both of these locations.

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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 high brightness (“HB”) light emitting diode (“LED”) (“HB LED”), solar, data storage, scientific research, semiconductor, and industrial markets. We have leading technology positions in our three segments: LED & Solar Process Equipment, Data Storage Process Equipment and Metrology.

In our LED & Solar segment, we design and manufacture metal organic chemical vapor deposition (“MOCVD”) systems, molecular beam epitaxy (“MBE”) systems and sources, and other types of deposition systems such as web and glass coaters, which we sell 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, chemical vapor deposition, and dicing and slicing systems primarily used to create thin film magnetic heads (“TFMHs”) that read and write data on hard disk drives.

In our Metrology segment, we design and manufacture atomic force microscopes (“AFMs”), scanning probe microscopes (“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 Minnesota, Pennsylvania, France, England, Germany, Netherlands, Japan, Singapore, China, Taiwan, Korea, Malaysia, Philippines and Thailand.

Highlights of the Second Quarter of 2010

·                  Revenue was $253.0 million, a 251.3% increase from the second quarter of 2009.

·                  Orders were $346.9 million, a 251.6% increase from the second quarter of 2009.

·                  Net income was $52.4 million, or $1.20 per share, compared to a net loss of $(14.7) million, or $(0.47) per share, in the second quarter of 2009.

·                  Gross margins were 45.0%, compared to 33.9% in the second quarter of 2009.

Outlook

With backlog of $597 million at the end of June 2010, Veeco continues to have very strong business momentum. We continue to experience high levels of activity in our LED business, similar to the last three quarters, with multi-tool MOCVD system orders being quoted across a large number of customers. Our K465i™ is performing well in the market and we are increasing manufacturing capacity to satisfy customer demand.  In the second quarter of 2010, we shipped 81 systems. We currently plan to ship approximately 100 MOCVD tools in the third quarter 2010 and plan to reach a production capacity of 120 tools or more by the fourth quarter.  As a result of our variable-cost, outsourced manufacturing strategy, we have dramatically increased our production capacity with the ability to flex our actual MOCVD shipments up or down each quarter depending upon specific customer demand and delivery requirements.

We currently believe that the third quarter will be another strong order quarter for our MOCVD business. In particular, China’s initiative to subsidize the HB LED industry via seven national ‘industrial parks’ is spurring strong order quoting patterns for Veeco, both from Chinese entities as well as from Korean and Taiwanese customers that are partnering with Chinese entities.  We believe the HB LED industry is at the beginning of a multi-year MOCVD investment cycle as HB LEDs increase their penetration in laptop and TV backlighting and gain momentum for general illumination.

We are continuing to invest in our copper, indium, gallium, selenide (“CIGS”) Solar business, with a goal to build a “best of breed” deposition product line and ultimately help to drive CIGS technology as a low-cost, high

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Results of Operations:

Three Months Ended June 30, 2010 and 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.

The following table shows our Condensed Consolidated Statements of Operations, percentages of sales, and comparisons between the three months ended June 30, 2010 and 2009 (dollars in thousands):

* Not Meaningful

Net Sales and Orders

Net sales of $253.0 million for the three months ended June 30, 2010 were up 251.3% compared to the comparable 2009 quarter. The following is an analysis of net sales and orders by segment and by region (dollars in thousands):

Sales and orders increased in each segment in the second quarter of 2010 compared with the comparable 2009 quarter due to our customers’ requirements in response to increasingly favorable economic conditions compared to 2009. LED & Solar Process Equipment sales were up 482.3% from the comparable 2009 quarter primarily due to an increase in end user demand for HB LED backlighting applications and continued strong customer acceptance of Veeco’s newest generation systems. Data Storage Process Equipment segment sales were up 103.2% from the

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due to the Company’s ability to realize a significant portion of its deferred tax assets, primarily related to net operating loss carryforwards and federal tax credits, on a more-likely-than-not basis based on the forecasted results of operations for the year ending December 31, 2010.

For the three months ended June 30, 2009, the Company had an effective tax rate of (2.8)% and recorded a provision for income taxes of $0.4 million which included $0.2 million relating to our foreign operations and $0.2 million relating to state and local taxes.

Results of Operations:

Six Months Ended June 30, 2010 and 2009

The following table shows our Condensed Consolidated Statements of Operations, percentages of sales, and comparisons between the six months ended June 30, 2010 and 2009 (dollars in thousands):