VEECO INSTRUMENTS INC, 10-Q filed on 4/29/2011
Quarterly Report
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data
3 Months Ended
Mar. 31,
2011
2010
Net sales
$ 254,676 
$ 134,750 
Cost of sales
125,344 
78,010 
Gross profit
129,332 
56,740 
Operating expenses (income):
 
 
Selling, general and administrative
23,933 
17,726 
Research and development
24,582 
12,956 
Amortization
1,135 
1,237 
Restructuring
 
(179)
Other, net
13 
(175)
Total operating expenses
49,663 
31,565 
Operating income
79,669 
25,175 
Interest expense, net
1,299 
1,783 
Loss on extinguishment of debt
304 
 
Income from continuing operations before income taxes
78,066 
23,392 
Income tax provision
24,983 
567 
Income from continuing operations
53,083 
22,825 
Discontinued operations:
 
 
(Loss) income from discontinued operations
(498)
3,962 
Income tax (benefit) provision
(57)
743 
(Loss) income from discontinued operations
(441)
3,219 
Net income
52,642 
26,044 
Basic:
 
 
Continuing operations (in dollars per share)
1.33 
0.59 
Discontinued operations (in dollars per share)
(0.01)
0.08 
Income (in dollars per share)
1.32 
0.67 
Diluted :
 
 
Continuing operations (in dollars per share)
1.25 
0.54 
Discontinued operations (in dollars per share)
(0.01)
0.08 
Income (in dollars per share)
$ 1.24 
$ 0.62 
Weighted average shares outstanding:
 
 
Basic (in shares)
39,842 
38,784 
Diluted (in shares)
42,531 
42,269 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands
3 Months Ended
Mar. 31,
2011
2010
Net income
$ 52,642 
$ 26,044 
Other comprehensive income (loss), net of tax
 
 
Foreign currency translation
471 
(673)
Unrealized gain on available-for-sale securities
26 
 
Comprehensive income
$ 53,139 
$ 25,371 
Condensed Consolidated Balance Sheets (USD $)
In Thousands
Mar. 31, 2011
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 276,837 
$ 245,132 
Short-term investments
426,025 
394,180 
Restricted cash
76,117 
76,115 
Accounts receivable, net
94,041 
150,528 
Inventories
121,342 
108,487 
Prepaid expenses and other current assets
31,676 
34,328 
Deferred income taxes
5,772 
13,803 
Total current assets
1,031,810 
1,022,573 
Property, plant and equipment at cost, net
48,981 
42,320 
Goodwill
52,003 
52,003 
Deferred income taxes
9,403 
9,403 
Intangible assets, net
15,740 
16,893 
Other assets
5,074 
4,842 
Total assets
1,163,011 
1,148,034 
Current liabilities:
 
 
Accounts payable
38,678 
32,220 
Accrued expenses and other current liabilities
171,275 
183,010 
Deferred profit
4,518 
4,109 
Income taxes payable
21,347 
56,369 
Liabilities of discontinued segment held for sale
5,359 
5,359 
Current portion of long-term debt
94,973 
101,367 
Total current liabilities
336,150 
382,434 
Long-term debt
2,594 
2,654 
Other liabilities
392 
434 
Total equity
823,875 
762,512 
Total liabilities and equity
$ 1,163,011 
$ 1,148,034 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands
3 Months Ended
Mar. 31,
2011
2010
Operating activities
 
 
Net income
$ 52,642 
$ 26,044 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
3,266 
3,274 
Amortization of debt discount
769 
741 
Non-cash equity-based compensation
3,098 
1,866 
Loss on extinguishment of debt
304 
 
Deferred income taxes
7,988 
152 
Excess tax benefits from stock option exercises
(2,188)
 
Other, net
180 
1,869 
Changes in operating assets and liabilities:
 
 
Accounts receivable
55,888 
1,492 
Inventories
(12,843)
(6,350)
Accounts payable
6,478 
4,321 
Accrued expenses, deferred profit and other current liabilities
(11,142)
14,777 
Income taxes payable
(32,743)
514 
Other, net
3,190 
(3,103)
Discontinued operations
 
(3,844)
Net cash provided by operating activities
74,887 
41,753 
Investing activities
 
 
Capital expenditures
(9,402)
(1,010)
Proceeds from the maturity of CDARS
 
40,025 
Proceeds from sales of short-term investments
122,148 
 
Payments for purchases of short-term investments
(154,339)
(60,500)
Other
(99)
Net cash used in investing activities
(41,592)
(21,584)
Financing activities
 
 
Proceeds from stock option exercises
2,951 
26,968 
Restricted stock tax withholdings
(13)
(456)
Excess tax benefits from stock option exercises
2,188 
 
Repayments of long-term debt
(7,454)
(52)
Other
(54)
 
Net cash (used in) provided by financing activities
(2,382)
26,460 
Effect of exchange rate changes on cash and cash equivalents
792 
(1,123)
Net increase in cash and cash equivalents
31,705 
45,506 
Cash and cash equivalents at beginning of year
245,132 
148,500 
Cash and cash equivalents at end of year
276,837 
194,006 
Non-cash investing and financing activities
 
 
Transfers from property, plant and equipment to inventory
 
1,102 
Transfers from inventory to property, plant and equipment
 
850 
Sale of property, plant and equipment with note receivable
 
140 
Basis of Presentation
Basis of Presentation

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, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010.

 

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 of each period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2011 interim quarter ends are April 3, July 3 and October 2. The 2010 interim quarter ends were March 28, June 27 and September 26. 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 Per Common Share

 

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

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Basic weighted average shares outstanding

 

39,842

 

38,784

 

Dilutive effect of stock options and restricted stock

 

1,149

 

2,533

 

Dilutive effect of convertible notes

 

1,540

 

952

 

Diluted weighted average shares outstanding

 

42,531

 

42,269

 

 

Basic income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted income per common share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period. For the three months ended March 31, 2011 and 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 months ended March 31, 2011 and 2010, had a dilutive effect of 1.5 million and 1.0 million common equivalent shares, respectively. 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, 2011 was approximately 5.0 million. See Note 6 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. 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 the accompanying Condensed Consolidated Statements of Income was approximately $0.3 million and $(0.1) million during the three months ended March 31, 2011  and 2010, respectively. Included in the aggregate foreign currency exchange loss (gain) were gains related to forward contracts of $0.5 million during the three months ended March 31, 2011.  Minimal gains related to forward contracts were included in the aggregate foreign currency exchange loss (gain) during the three months ended March 31, 2010. These amounts were recognized and are included in Other, net in the accompanying Condensed Consolidated Statements of Income.

 

As of March 31, 2011, approximately $0.2 million of gains related to forward contracts were included in prepaid expenses and other current assets and were subsequently received in April 2011. As of December 31, 2010, approximately $0.3 million of gains related to forward contracts were included in prepaid expenses and other current assets which were subsequently received in January 2011. Monthly forward contracts with a notional amount of $11.7 million, entered into in March 2011 for April 2011, will be settled in April 2011.

 

The weighted average notional amount of derivative contracts outstanding during the three months ended March 31, 2011 were approximately $19.8 million.

Discontinued Operations
Discontinued Operations

Note 2 — Discontinued Operations

 

On August 15, 2010, we signed a definitive agreement to sell our Metrology business to Bruker Corporation (“Bruker”) comprising our entire Metrology reporting segment for $229.4 million. Accordingly, Metrology’s operating results were accounted for as discontinued operations and the related assets and liabilities were classified as held for sale. The sales transaction closed on October 7, 2010, except for assets located in China due to local restrictions. Total proceeds, which included a working capital adjustment of $1 million, totaled $230.4 million of which $7.2 million relates to the assets in China. The Company recorded a liability to defer the gain of $5.4 million on disposal related to the assets in China. As part of our agreement with Bruker, $22.9 million of proceeds is held in escrow and is restricted from use for one year from the closing date of the transaction to secure potential specified losses, if any, arising out of breaches of representations, warranties and covenants we made in the stock purchase agreement and related documents.

 

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

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Net sales

 

$

 

$

28,481

 

Cost of sales

 

 

14,872

 

Gross profit

 

 

13,609

 

Total operating expenses

 

498

 

9,647

 

Operating (loss) income

 

$

(498

)

$

3,962

 

 

 

 

 

 

 

Net (loss) income from discontinued operations, net of tax

 

$

(441

)

$

3,219

 

 

Liabilities of discontinued segment held for sale, totaling $5.4 million, as of March 31, 2011 and December 31, 2010, consist of the deferred gain related to the assets in China.

Equity-based Compensation Plans
Equity-based Compensation Plans

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 Income for the three months ended March 31, 2011 and 2010 (in thousands):

 

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Equity-based compensation expense

 

$

3,098

 

$

1,866

 

 

As a result of the sale of our Metrology segment to Bruker, equity-based compensation expense related to Metrology employees totaling $0.3 million has been classified as discontinued operations in determining the Condensed Consolidated Statements of Income for the three months ended March 31, 2010.

 

As of March 31, 2011, the total unrecognized compensation costs related to nonvested stock and stock option awards was $7.8 million and $12.8 million, respectively. The related weighted average period over which we expect that such unrecognized compensation costs will be recognized is approximately 2.5 years for nonvested stock awards and 1.9 years for option awards.

 

Stock Option and Restricted Stock Activity

 

A summary of our restricted stock awards including restricted stock units for the three months ended March 31, 2011, is presented below:

 

 

 

Shares (000’s)

 

Weighted-
Average
Grant-Date
Fair Value

 

Nonvested at December 31, 2010

 

616

 

$

19.06

 

Granted

 

6

 

44.82

 

Vested

 

(1

)

4.20

 

Forfeited (including cancelled awards)

 

(2

)

26.20

 

Nonvested at March 31, 2011

 

619

 

$

19.28

 

 

A summary of our stock option awards for the three months ended March 31, 2011, is presented below:

 

 

 

Shares (000s)

 

Weighted-
Average
Exercise
Price

 

Aggregate
Intrinsic
Value (000s)

 

Weighted-
Average
Remaining
Contractual Life
(in years)

 

Outstanding at December 31, 2010

 

2,569

 

$

19.71

 

 

 

 

 

Granted

 

16

 

44.02

 

 

 

 

 

Exercised

 

(211

)

13.85

 

 

 

 

 

Forfeited (including cancelled options)

 

(24

)

32.61

 

 

 

 

 

Outstanding at March 31, 2011

 

2,350

 

$

20.28

 

$

70,815

 

5.7

 

Options exercisable at March 31, 2011

 

573

 

$

17.40

 

$

18,920

 

3.6

 

 

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. The Company had no share repurchase activity for the three months ended March 31, 2011 and 2010. At March 31, 2011, there remained $161.9 million of authorization for future repurchases.

Balance Sheet Information
Balance Sheet Information

Note 4—Balance Sheet Information

 

Short-term Investments

 

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

 

 

 

March 31, 2011

 

 

 

Amortized
Cost

 

Gains in Accumulated
Other Comprehensive
Income

 

Losses in Accumulated
Other Comprehensive
Income

 

Estimated
Fair Value

 

Commercial paper

 

$

95,584

 

$

61

 

$

 

$

95,645

 

 

 

 

 

 

 

 

 

 

 

FDIC insured corporate bonds

 

105,348

 

21

 

 

105,369

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

224,970

 

41

 

 

225,011

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

425,902

 

$

123

 

$

 

$

426,025

 

 

 

 

December 31, 2010

 

 

 

Amortized
Cost

 

Gains in Accumulated
Other Comprehensive
Income

 

Losses in Accumulated
Other Comprehensive
Income

 

Estimated
Fair Value

 

Commercial paper

 

$

128,527

 

$

61

 

$

 

$

128,588

 

 

 

 

 

 

 

 

 

 

 

FDIC insured corporate bonds

 

129,353

 

24

 

 

129,377

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

136,203

 

12

 

 

136,215

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

394,083

 

$

97

 

$

 

$

394,180

 

 

During the three months ended March 31, 2011, available-for-sale securities were sold for total proceeds of $122.1 million. The gross realized gains on these sales were minimal for the three months ended March 31, 2011. 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 of less than $0.1 million for the three months ended March 31, 2011, have been included in accumulated other comprehensive income. During the three months ended March 31, 2010, available-for-sale securities matured for total proceeds of $40.0 million. The gross realized gains on these sales were minimal for the three months ended March 31, 2010. There were no unrealized holding gains on available-for-sale securities for the three months ended March 31, 2010.

 

Contractual maturities of available-for-sale debt securities at March 31, 2011, are as follows (in thousands):

 

 

 

Estimated Fair Value

 

Due in one year or less

 

$

276,642

 

 

 

 

 

Due in 1–2 years

 

149,383

 

 

 

 

 

Total investments in debt securities

 

$

426,025

 

 

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

 

As of March 31, 2011, we had $76.1 million of restricted cash consisting of $22.9 million that relates to the proceeds received from the sale of our Metrology segment. This cash is held in escrow and is restricted from use for one year from the closing date of the transaction to secure potential losses, if any, arising out of breaches of representations, warranties and covenants we made in the stock purchase agreement and related documents. Additionally, we had restricted cash consisting of $53.2 million which serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations. This 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 $0.5 million as of March 31, 2011 and December 31, 2010.

 

Inventories

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Raw materials

 

$

55,584

 

$

49,953

 

Work in process

 

50,268

 

33,181

 

Finished goods

 

15,490

 

25,353

 

 

 

$

121,342

 

$

108,487

 

 

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):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Balance as of the beginning of period

 

$

9,238

 

$

6,675

 

Warranties issued during the period

 

3,014

 

1,446

 

Settlements made during the period

 

(2,121

)

(1,382

)

Balance as of the end of period

 

$

10,131

 

$

6,739

Segment Information
Segment Information

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. Certain items include restructuring credits, equity-based compensation expense and loss on extinguishment of debt. 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 reportable product segments and a reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes for the three months ended March 31, 2011 and 2010, respectively, and goodwill and total assets as of March 31, 2011 and December 31, 2010 (in thousands):

 

 

 

LED & Solar

 

Data Storage

 

Unallocated
Corporate
Amount

 

Total

 

Three months ended March 31, 2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

214,698

 

$

39,978

 

$

 

$

254,676

 

Segment profit (loss)

 

$

73,963

 

$

12,231

 

$

(2,292

)

$

83,902

 

Interest, net

 

 

 

1,299

 

1,299

 

Amortization

 

714

 

363

 

58

 

1,135

 

Equity-based compensation

 

977

 

308

 

1,813

 

3,098

 

Loss on extinguishment of debt

 

 

 

304

 

304

 

Income (loss) from continuing operations before income taxes

 

$

72,272

 

$

11,560

 

$

(5,766

)

$

78,066

 

Three months ended March 31, 2010

 

 

 

 

 

 

 

 

 

Net sales

 

$

111,505

 

$

23,245

 

$

 

$

134,750

 

Segment profit (loss)

 

$

28,358

 

$

2,877

 

$

(3,136

)

$

28,099

 

Interest, net

 

 

 

1,783

 

1,783

 

Amortization

 

796

 

383

 

58

 

1,237

 

Equity-based compensation

 

467

 

215

 

1,184

 

1,866

 

Restructuring

 

 

(179

)

 

(179

)

Income (loss) from continuing operations before income taxes

 

$

27,095

 

$

2,458

 

$

(6,161

)

$

23,392

 

 

 

 

LED & Solar

 

Data Storage

 

Unallocated
Corporate
Amount

 

Total

 

As of March 31, 2011

 

 

 

 

 

 

 

 

 

Goodwill

 

$

52,003

 

$

 

$

 

$

52,003

 

Total assets

 

$

274,678

 

$

65,350

 

$

822,983

 

$

1,163,011

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2010

 

 

 

 

 

 

 

 

 

Goodwill

 

$

52,003

 

$

 

$

 

$

52,003

 

Total assets

 

$

323,096

 

$

61,691

 

$

763,247

 

$

1,148,034

 

 

As of March 31, 2011 and December 31, 2010 corporate total assets were comprised principally of cash and cash equivalents, short-term investments and restricted cash.

Debt
Debt

Note 6—Debt

 

Convertible Notes

 

Our convertible 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). 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 close of business on the second day prior to April 15, 2012 and earlier upon the occurrence of certain events, including if the notes are called for redemption or if, for a given fiscal quarter, our common stock trades at prices equal to or above 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 first quarter of 2011, 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 notes are convertible during the second quarter of 2011. If the notes are converted, we have the ability and intent to pay the principal balance of notes tendered for conversion in cash. Accordingly, the balance of the convertible notes at March 31, 2011 has been classified as current in our Condensed Consolidated Balance Sheet. 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.

 

Current accounting guidance requires a portion of convertible debt to be allocated to equity. This guidance 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 equity. The liability portion, which represents the fair value of the debt without the conversion feature, is accreted to its face value over the life of the debt using the effective interest method by amortizing the discount between the face amount and the fair value. The amortization is recorded as interest expense. Our convertible notes are subject to this accounting guidance since they may be settled in cash upon conversion. This created a $16.3 million discount on the debt that is amortized over the remaining life of the notes, which will be through April 15, 2012. This additional interest expense does not require the use of cash.

 

On February 14, 2011, at the option of the holder, $7.5 million of notes were tendered for conversion at a price of $45.95 per share, calculated as defined in the indenture relating to the notes, in a net share settlement. We paid the principal amount of $7.5 million in cash and issued 111,318 shares of our common stock. As a result, we recorded a loss on extinguishment of $0.3 million during the three months ended March 31, 2011.

 

The components of interest expense recorded on the notes were as follows (in thousands):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Contractual interest

 

$

1,012

 

$

1,089

 

Accretion of the discount on the Notes

 

769

 

741

 

Total interest expense on the Notes

 

$

1,781

 

$

1,830

 

Effective interest rate

 

7.1

%

6.9

%

 

The carrying amounts of the liability and equity components of the notes were as follows (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Carrying amount of the equity component

 

$

15,166

 

$

16,318

 

 

 

 

 

 

 

Principal balance of the liability component

 

$

98,120

 

$

105,574

 

Less: unamortized discount

 

3,381

 

4,436

 

Net carrying value of the liability component

 

$

94,739

 

$

101,138

 

 

As of March 31, 2011, the $98.1 million of the convertible notes outstanding had a fair value of approximately $177.2 million.

 

Mortgage Payable

 

We also have a mortgage payable, with approximately $2.8 million outstanding as of March 31, 2011. 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 as of March 31, 2011 was approximately $3.1 million.

Fair Value Measurements
Fair Value Measurements

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.

 

The major categories of assets and liabilities measured on a recurring basis, at fair value, as of March 31, 2011 and December 31, 2010, are as follows (in millions):

 

 

 

March 31, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Treasury bills

 

$

225.0

 

$

25.3

 

$

 

$

250.3

 

FDIC insured corporate bonds

 

105.4

 

 

 

105.4

 

Commercial paper

 

95.6

 

69.2

 

 

164.8

 

Money market instruments

 

 

0.9

 

 

0.9

 

Derivative instrument

 

 

0.2

 

 

0.2

 

Total

 

$

426.0

 

$

95.6

 

$

 

$

521.6

 

 

 

 

December 31, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Treasury bills

 

$

136.2

 

$

79.5

 

$

 

$

215.7

 

FDIC insured corporate bonds

 

129.4

 

 

 

129.4

 

Commercial paper

 

128.6

 

62.8

 

 

191.4

 

Money market instruments

 

 

0.6

 

 

0.6

 

Derivative instrument

 

 

0.3

 

 

0.3

 

Total

 

$

394.2

 

$

143.2

 

$

 

$

537.4

 

 

Commercial paper and treasury bills that are classified as cash equivalents are carried at cost, which approximates market value. Accordingly, no gains or losses (realized/unrealized) have been incurred for cash equivalents. All investments classified as available-for-sale contain quoted prices in active markets.

 

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.

 

The major categories of assets and liabilities measured on a nonrecurring basis, at fair value, as of March 31, 2011 and December 31, 2010, are as follows (in millions):

 

 

 

March 31, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Property, plant and equipment, net

 

$

 

$

 

$

49.0

 

$

49.0

 

Goodwill

 

 

 

52.0

 

52.0

 

Intangible assets, net

 

 

 

15.7

 

15.7

 

Restructuring liability

 

 

 

0.5

 

0.5

 

Total

 

$

 

$

 

$

117.2

 

$

117.2

 

 

 

 

December 31, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Property, plant and equipment, net

 

$

 

$

 

$

42.3

 

$

42.3

 

Goodwill

 

 

 

52.0

 

52.0

 

Intangible assets, net

 

 

 

16.9

 

16.9

 

Restructuring liability

 

 

 

(1.0

)

(1.0

)

Total

 

$

 

$

 

$

110.2

 

$

110.2

Subsequent Events
Subsequent Events

Note 8— Subsequent Events

 

On April 5, 2011, we purchased a privately-held company which supplies certain components to our business for $28.0 million in cash.

Document and Entity Information
3 Months Ended
Mar. 31, 2011
Apr. 28, 2011
Document and Entity Information
 
 
Entity Registrant Name
VEECO INSTRUMENTS INC 
 
Entity Central Index Key
0000103145 
 
Document Type
10-Q 
 
Document Period End Date
2011-03-31 
 
Amendment Flag
FALSE 
 
Current Fiscal Year End Date
12/31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
40,739,182 
Document Fiscal Year Focus
2011 
 
Document Fiscal Period Focus
Q1