VEECO INSTRUMENTS INC, 10-Q filed on 7/27/2012
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2012
Jul. 23, 2012
Document and Entity Information
 
 
Entity Registrant Name
VEECO INSTRUMENTS INC 
 
Entity Central Index Key
0000103145 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2012 
 
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
 
39,156,634 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q2 
 
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Net sales
$ 136,547 
$ 264,815 
$ 276,456 
$ 519,491 
Cost of sales
75,293 
129,466 
149,934 
253,179 
Gross profit
61,254 
135,349 
126,522 
266,312 
Operating expenses (income):
 
 
 
 
Selling, general and administrative
20,893 
27,461 
40,666 
50,397 
Research and development
23,910 
23,652 
47,216 
43,523 
Amortization
1,185 
1,334 
2,400 
2,242 
Restructuring
 
 
63 
 
Other, net
146 
(68)
111 
(28)
Total operating expenses
46,134 
52,379 
90,456 
96,134 
Operating income
15,120 
82,970 
36,066 
170,178 
Interest (income) expense, net
(329)
86 
(532)
1,385 
Loss on extinguishment of debt
 
3,045 
 
3,349 
Income from continuing operations before income taxes
15,449 
79,839 
36,598 
165,444 
Income tax provision
4,438 
23,521 
9,125 
51,147 
Income from continuing operations
11,011 
56,318 
27,473 
114,297 
Discontinued operations:
 
 
 
 
Income (loss) from discontinued operations before income taxes
1,219 
(59,698)
1,138 
(67,735)
Income tax provision (benefit)
412 
(22,586)
381 
(25,286)
Income (loss) from discontinued operations
807 
(37,112)
757 
(42,449)
Net income
$ 11,818 
$ 19,206 
$ 28,230 
$ 71,848 
Basic:
 
 
 
 
Continuing operations (in dollars per share)
$ 0.29 
$ 1.37 
$ 0.72 
$ 2.83 
Discontinued operations (in dollars per share)
$ 0.02 
$ (0.90)
$ 0.02 
$ (1.05)
Income (in dollars per share)
$ 0.31 
$ 0.47 
$ 0.74 
$ 1.78 
Diluted:
 
 
 
 
Continuing operations (in dollars per share)
$ 0.28 
$ 1.31 
$ 0.71 
$ 2.67 
Discontinued operations (in dollars per share)
$ 0.02 
$ (0.86)
$ 0.02 
$ (0.99)
Income (in dollars per share)
$ 0.30 
$ 0.45 
$ 0.73 
$ 1.68 
Weighted average shares outstanding:
 
 
 
 
Basic (in shares)
38,370 
40,998 
38,315 
40,433 
Diluted (in shares)
38,988 
43,002 
38,925 
42,780 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Net income
$ 11,818 
$ 19,206 
$ 28,230 
$ 71,848 
Other comprehensive (loss) income, net of tax
 
 
 
 
Unrealized (loss) gain on available-for-sale securities
(66)
286 
(184)
349 
Less Reclassification adjustments for losses (gains) included in net income
(92)
(9)
(129)
Net unrealized (loss) gain on available-for-sale securities
(65)
194 
(193)
220 
Foreign currency translation
244 
686 
(245)
1,157 
Comprehensive income
$ 11,997 
$ 20,086 
$ 27,792 
$ 73,225 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 317,047 
$ 217,922 
Short-term investments
221,832 
273,591 
Restricted cash
851 
577 
Accounts receivable, net
95,125 
95,038 
Inventories
90,729 
113,434 
Prepaid expenses and other current assets
28,577 
40,756 
Assets of discontinued segment held for sale
 
2,341 
Deferred income taxes
10,298 
10,885 
Total current assets
764,459 
754,544 
Property, plant and equipment at cost, net
97,068 
86,067 
Goodwill
55,828 
55,828 
Intangible assets, net
23,483 
25,882 
Other assets
9,137 
13,742 
Total assets
949,975 
936,063 
Current liabilities:
 
 
Accounts payable
32,652 
40,398 
Accrued expenses and other current liabilities
95,168 
107,656 
Deferred profit
10,301 
10,275 
Income taxes payable
1,350 
3,532 
Liabilities of discontinued segment held for sale
5,359 
5,359 
Current portion of long-term debt
258 
248 
Total current liabilities
145,088 
167,468 
Deferred income taxes
5,023 
5,029 
Long-term debt
2,275 
2,406 
Other liabilities
324 
640 
Equity:
 
 
Preferred stock, 500,000 shares authorized; no shares issued and outstanding
   
   
Common stock; $.01 par value; authorized 120,000,000 shares; 39,143,126 and 38,768,436 shares issued and outstanding in 2012 and 2011, respectively
385 
435 
Additional paid-in-capital
697,303 
688,353 
Retained earnings
93,425 
265,317 
Accumulated other comprehensive income
6,152 
6,590 
Less: treasury stock, at cost; 5,278,828 shares in 2011
 
(200,175)
Total equity
797,265 
760,520 
Total liabilities and equity
$ 949,975 
$ 936,063 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2012
Dec. 31, 2011
Condensed Consolidated Balance Sheets
 
 
Preferred stock, shares authorized
500,000 
500,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, authorized shares
120,000,000 
120,000,000 
Common stock, shares issued
39,143,126 
38,768,436 
Common stock, shares outstanding
39,143,126 
38,768,436 
Treasury stock, shares
 
5,278,828 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Operating activities
 
 
Net income
$ 28,230 
$ 71,848 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
7,834 
5,801 
Amortization of debt discount
 
1,260 
Non-cash equity-based compensation
7,144 
6,517 
Loss on extinguishment of debt
 
3,349 
Deferred income taxes
587 
6,749 
Excess tax benefits from stock option exercises
(978)
(7,254)
Other, net
 
41 
Non-cash items from discontinued operations
(1,285)
52,792 
Changes in operating assets and liabilities:
 
 
Accounts receivable
23,813 
Inventories
22,888 
(26,150)
Prepaid expenses and other current assets
8,875 
(41,915)
Supplier deposits
3,328 
(516)
Accounts payable
(7,756)
27,748 
Accrued expenses, deferred profit and other current liabilities
(12,476)
(3,326)
Income taxes payable
(1,205)
(44,737)
Other, net
5,358 
(708)
Net cash provided by operating activities
60,551 
75,312 
Investing activities
 
 
Capital expenditures
(16,601)
(31,291)
Payments for net assets of businesses acquired
 
(28,273)
Transfers (to) from restricted cash
(275)
21,633 
Proceeds from sales of short-term investments
99,533 
374,226 
Payments for purchases of short-term investments
(49,014)
(361,051)
Other
 
Proceeds from sale of assets from discontinued segment
3,758 
 
Net cash provided by (used in) investing activities
37,401 
(24,755)
Financing activities
 
 
Proceeds from stock option exercises
2,161 
9,095 
Restricted stock tax withholdings
(1,330)
(2,658)
Excess tax benefits from stock option exercises
978 
7,254 
Purchases of treasury stock
 
(7,753)
Repayments of long-term debt
(121)
(105,686)
Other
 
(2)
Net cash provided by (used in) financing activities
1,688 
(99,750)
Effect of exchange rate changes on cash and cash equivalents
(515)
1,729 
Net increase (decrease) in cash and cash equivalents
99,125 
(47,464)
Cash and cash equivalents at beginning of period
217,922 
245,132 
Cash and cash equivalents at end of period
$ 317,047 
$ 197,668 
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 and six months ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.

 

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 2012 interim quarter ends are April 1, July 1 and September 30. The 2011 interim quarter ends were April 3, July 3 and October 2. 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

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic weighted average shares outstanding

 

38,370

 

40,998

 

38,315

 

40,433

 

Dilutive effect of stock options and restricted stock

 

618

 

1,066

 

610

 

1,108

 

Dilutive effect of convertible notes

 

 

938

 

 

1,239

 

Diluted weighted average shares outstanding

 

38,988

 

43,002

 

38,925

 

42,780

 

 

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.

 

During the second quarter of 2011, the entire outstanding principal balance of our convertible debt was converted, with the principal amount paid in cash and the conversion premium paid in shares. The convertible notes met the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, since we had settled the principal amount of the notes in cash. Using the treasury stock method, it was determined that the impact of the assumed conversion for the three and six months ended June 30, 2011, had a dilutive effect of 0.9 million and 1.2 million common equivalent shares, respectively.

 

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 included in determining the condensed consolidated results of operations was approximately $0.3 million during the three and six months ended June 30, 2012 and $0.1 million and $0.4 million during the three and six months ended June 30, 2011, respectively. Included in the aggregate foreign currency exchange losses were losses (gains) related to forward contracts of $0.2 million and $0.1 million during the three and six months ended June 30, 2012, respectively and ($0.3) million and ($0.8) million during the three and six months ended June 30, 2011. These amounts were recognized and are included in Other, net in the accompanying Condensed Consolidated Statements of Income.

 

As of June 30, 2012 and December 31, 2011, there were no gains or losses related to forward contracts included in prepaid expenses and other current assets or accrued expenses and other current liabilities. Monthly forward contracts with a notional amount of $0.6 million, entered into in June 2012 for October 2012, will be settled in October 2012.

 

The weighted average notional amount of derivative contracts outstanding during the three and six months ended June 30, 2012 was approximately $1.3 million and $2.5 million, respectively.

Discontinued Operations
Discontinued Operations

Note 2 — Discontinued Operations

 

CIGS Solar Systems Business

 

On July 28, 2011, we announced a plan to discontinue our CIGS solar systems business. The action, which was completed on September 27, 2011, was in response to the dramatically reduced cost of mainstream solar technologies driven by significant reductions in prices, large industry investment, a lower than expected end market acceptance for CIGS technology and technical barriers in scaling CIGS. This business was previously included as part of our LED & Solar segment.

 

Accordingly, the results of operations for the CIGS solar systems business have been recorded as discontinued operations in the accompanying condensed consolidated statements of income for all periods presented. During the three and six months ended June 30, 2011, total discontinued operations include charges totaling $59.3 million and $66.8 million, respectively. These charges include an inventory write-off totaling $33.4 million, charges to settle contracts totaling $11.1 million and an asset impairment charge totaling $6.2 million.

 

Metrology

 

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 sale 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 net assets in China. The Company recorded a liability to defer the gain of $5.4 million on disposal related to the assets in China. During the three months ended June 30, 2012, the Company recorded a $1.4 million gain on the sale of assets of this discontinued segment that were held for sale.

 

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

 

 

 

Three months ended June 30, 2012

 

Three months ended June 30, 2011

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

 

$

 

$

 

$

 

Cost of sales

 

 

 

 

35,281

 

 

35,281

 

Gross profit

 

 

 

 

(35,281

)

 

(35,281

)

Total operating expenses (income)

 

80

 

(1,299

)

(1,219

)

24,020

 

397

 

24,417

 

Operating (loss) income

 

$

(80

)

$

1,299

 

$

1,219

 

$

(59,301

)

$

(397

)

$

(59,698

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(53

)

$

860

 

$

807

 

$

(37,106

)

$

(6

)

$

(37,112

)

 

 

 

Six months ended June 30, 2012

 

Six months ended June 30, 2011

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

 

$

 

$

 

$

 

Cost of sales

 

 

 

 

36,912

 

 

36,912

 

Gross profit

 

 

 

 

(36,912

)

 

(36,912

)

Total operating expenses (income)

 

74

 

(1,212

)

(1,138

)

29,928

 

895

 

30,823

 

Operating (loss) income

 

$

(74

)

$

1,212

 

$

1,138

 

$

(66,840

)

$

(895

)

$

(67,735

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(49

)

$

806

 

$

757

 

$

(42,002

)

$

(447

)

$

(42,449

)

 

Liabilities of discontinued segment held for sale, totaling $5.4 million, as of June 30, 2012 and December 31, 2011, consist of the deferred gain related to the net assets of the former Metrology business in China.

Equity
Equity

Note 3— Equity

 

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 and six months ended June 30, 2012 and 2011 (in thousands):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Equity-based compensation expense

 

$

4,014

 

$

3,717

 

$

7,144

 

$

6,517

 

 

As a result of the discontinuance of our CIGS solar systems business, equity-based compensation expense related to the business totaling $0.3 million and $0.6 million has been classified as discontinued operations in determining the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011, respectively.

 

As of June 30, 2012, the total unrecognized compensation costs related to nonvested stock and stock option awards was $21.8 million and $18.5 million, respectively. The related weighted average period over which we expect that such unrecognized compensation costs will be recognized is approximately 3.1 years for nonvested stock awards and 2.3 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, 2012, is presented below:

 

 

 

Shares 
(000’s)

 

Weighted-
Average 
Grant-Date 
Fair Value

 

Nonvested as of December 31, 2011

 

618

 

$

33.61

 

Granted

 

307

 

32.64

 

Vested

 

(133

)

19.42

 

Forfeited (including cancelled awards)

 

(31

)

32.79

 

Nonvested as of June 30, 2012

 

761

 

$

35.73

 

 

A summary of our stock option awards for the six months ended June 30, 2012, is presented below:

 

 

 

Shares 
(000s)

 

Weighted-
Average 
Exercise 
Price

 

Aggregate 
Intrinsic 
Value 
(000s)

 

Weighted- 
Average 
Remaining 
Contractual 
Life 
(in years)

 

Outstanding as of December 31, 2011

 

2,106

 

$

25.58

 

 

 

 

 

Granted

 

687

 

32.56

 

 

 

 

 

Exercised

 

(143

)

15.05

 

 

 

 

 

Forfeited (including cancelled options)

 

(52

)

31.06

 

 

 

 

 

Outstanding as of June 30, 2012

 

2,598

 

$

27.90

 

$

22,593

 

6.7

 

Options exercisable as of June 30, 2012

 

1,414

 

$

20.89

 

$

20,823

 

4.8

 

 

Treasury Stock

 

On August 24, 2010, our Board of Directors authorized the repurchase of up to $200 million of our common stock. During the three months ended June 30, 2011, we purchased 165,288 shares for $7.8 million (including transaction costs) under the program at an average cost of $46.91 per share. This stock repurchase is included as a reduction to Equity in the Condensed Consolidated Balance Sheet. All funds for this repurchase program were exhausted as of August 19, 2011. Repurchases were made from time to time on the open market in accordance with applicable federal securities laws. During the three months ended June 30, 2012, we cancelled and retired the 5,278,828 shares of treasury stock we purchased under the repurchase program. As a result of this transaction, we recorded a reduction in treasury stock of $200.2 million and a corresponding reduction of $200.1 million and $0.1 million in retained earnings and common stock, respectively.

Balance Sheet Information
Balance Sheet Information

Note 4—Balance Sheet Information

 

Short-term Investments

 

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

 

 

 

June 30, 2012

 

 

 

Amortized 
Cost

 

Gains in 
Accumulated 
Other 
Comprehensive 
Income

 

Losses in 
Accumulated 
Other 
Comprehensive 
Income

 

Estimated 
Fair Value

 

Government Agency Securities

 

$

43,742

 

$

23

 

$

 

$

43,765

 

 

 

 

 

 

 

 

 

 

 

FDIC insured corporate bonds

 

60,958

 

4

 

 

60,962

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

117,106

 

 

(1

)

117,105

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

221,806

 

$

27

 

$

(1

)

$

221,832

 

 

 

 

December 31, 2011

 

 

 

Amortized 
Cost

 

Gains in 
Accumulated 
Other 
Comprehensive 
Income

 

Losses in 
Accumulated 
Other 
Comprehensive 
Income

 

Estimated 
Fair Value

 

Government Agency Securities

 

$

88,585

 

$

119

 

$

 

$

88,704

 

 

 

 

 

 

 

 

 

 

 

FDIC insured corporate bonds

 

114,640

 

56

 

 

114,696

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

70,147

 

44

 

 

70,191

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

273,372

 

$

219

 

$

 

$

273,591

 

 

During the three and six months ended June 30, 2012, available-for-sale securities were sold for total proceeds of $55.9 million and $99.5 million, respectively. The gross realized gains and losses on these sales were minimal for the three and six months ended June 30, 2012. For purpose of determining gross realized gains and losses, the cost of securities sold is based on specific identification. Net unrealized holding losses on available-for-sale securities of $0.1 million and $0.2 million for the three and six months ended June 30, 2012, respectively, have been included in accumulated other comprehensive income. During the three and six months ended June 30, 2011, available-for-sale securities were sold for total proceeds of $252.0 million and $374.2 million, respectively. The gross realized gains on these sales were $0.2 million for the three and six months ended June 30, 2011. Net unrealized holding gains on available-for-sale securities amounting to $0.2 million for the three and six months ended June 30, 2011, have been included in accumulated other comprehensive income.

 

Contractual maturities of available-for-sale debt securities at June 30, 2012, are as follows (in thousands):

 

 

 

Estimated Fair Value

 

Due in one year or less

 

$

30,751

 

 

 

 

 

Due in 1—2 years

 

191,081

 

 

 

 

 

Total investments in debt securities

 

$

221,832

 

 

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 June 30, 2012 and December 31, 2011, restricted cash consisted of $0.9 million and $0.6 million, respectively, 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 June 30, 2012 and December 31, 2011.

 

Inventories

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Raw materials

 

$

54,992

 

$

57,169

 

Work in process

 

22,049

 

20,118

 

Finished goods

 

13,688

 

36,147

 

 

 

$

90,729

 

$

113,434

 

 

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):

 

 

 

June 30,

 

 

 

2012

 

2011

 

Balance as of the beginning of period

 

$

9,778

 

$

9,238

 

Warranties issued during the period

 

1,502

 

5,843

 

Settlements made during the period

 

(3,821

)

(4,489

)

Balance as of the end of period

 

$

7,459

 

$

10,592

 

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 and thermal deposition sources. These systems are primarily sold to customers in the high-brightness LED (“HB LED”), wireless devices and solar industries, as well as to scientific research customers. This segment has manufacturing, product development and marketing sites in Somerset, New Jersey, Poughkeepsie, New York and St. Paul, Minnesota. 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 charges, 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 and six months ended June 30, 2012 and 2011, respectively, and goodwill and total assets as of June 30, 2012 and December 31, 2011 (in thousands):

 

 

 

LED & Solar

 

Data Storage

 

Unallocated 
Corporate 
Amount

 

Total

 

Three months ended June 30, 2012

 

 

 

 

 

 

 

 

 

Net sales

 

$

86,778

 

$

49,769

 

$

 

$

136,547

 

Segment profit (loss)

 

$

9,587

 

$

12,136

 

$

(1,404

)

$

20,319

 

Interest, net

 

 

 

(329

)

(329

)

Amortization

 

861

 

324

 

 

1,185

 

Equity-based compensation

 

1,096

 

440

 

2,478

 

4,014

 

Income (loss) from continuing operations before income taxes

 

$

7,630

 

$

11,372

 

$

(3,553

)

$

15,449

 

Three months ended June 30, 2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

219,135

 

$

45,680

 

$

 

$

264,815

 

Segment profit (loss)

 

$

79,052

 

$

13,050

 

$

(4,081

)

$

88,021

 

Interest, net

 

 

 

86

 

86

 

Amortization

 

953

 

356

 

25

 

1,334

 

Equity-based compensation

 

892

 

352

 

2,473

 

3,717

 

Loss on extinguishment of debt

 

 

 

3,045

 

3,045

 

Income (loss) from continuing operations before income taxes

 

$

77,207

 

$

12,342

 

$

(9,710

)

$

79,839

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2012

 

 

 

 

 

 

 

 

 

Net sales

 

$

182,352

 

$

94,104

 

$

 

$

276,456

 

Segment profit (loss)

 

$

27,073

 

$

21,089

 

$

(2,489

)

$

45,673

 

Interest, net

 

 

 

(532

)

(532

)

Amortization

 

1,724

 

676

 

 

2,400

 

Equity-based compensation

 

2,102

 

851

 

4,191

 

7,144

 

Restructuring

 

58

 

5

 

 

63

 

Income (loss) from continuing operations before income taxes

 

$

23,189

 

$

19,557

 

$

(6,148

)

$

36,598

 

Six months ended June 30, 2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

433,833

 

$

85,658

 

$

 

$

519,491

 

Segment profit (loss)

 

$

160,029

 

$

25,281

 

$

(6,373

)

$

178,937

 

Interest, net

 

 

 

1,385

 

1,385

 

Amortization

 

1,440

 

719

 

83

 

2,242

 

Equity-based compensation

 

1,571

 

660

 

4,286

 

6,517

 

Loss on extinguishment of debt

 

 

 

3,349

 

3,349

 

Income (loss) from continuing operations before income taxes

 

$

157,018

 

$

23,902

 

$

(15,476

)

$

165,444

 

 

 

 

LED & Solar

 

Data Storage

 

Unallocated 
Corporate 
Amount

 

Total

 

As of June 30, 2012

 

 

 

 

 

 

 

 

 

Goodwill

 

$

55,828

 

$

 

$

 

$

55,828

 

Total assets

 

$

285,219

 

$

68,660

 

$

596,096

 

$

949,975

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

 

 

 

 

Goodwill

 

$

55,828

 

$

 

$

 

$

55,828

 

Total assets

 

$

319,457

 

$

57,203

 

$

559,403

 

$

936,063

 

 

As of June 30, 2012 and December 31, 2011 corporate total assets were comprised principally of cash and cash equivalents and short-term investments.

Debt
Debt

Note 6—Debt

 

Mortgage Payable

 

We have a mortgage payable, with approximately $2.5 million outstanding as of June 30, 2012. 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 June 30, 2012 was approximately $2.7 million.

 

Convertible Notes

 

During the first quarter of 2011, at the option of the holders, $7.5 million of our convertible notes were tendered for conversion at a price of $45.95 per share 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. We recorded a loss on extinguishment totaling $0.3 million related to these transactions.

 

During the second quarter of 2011, we issued a notice of redemption on the remaining outstanding principal balance of notes outstanding. As a result, at the option of the holders, the notes were tendered for conversion at a price of $50.59 per share, calculated as defined in the indenture relating to the notes, in a net share settlement. As a result, we paid the principal amount of $98.1 million in cash and issued 1,660,095 shares of our common stock. We recorded a loss on extinguishment totaling $3.0 million related to these transactions.

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 June 30, 2012 and December 31, 2011, are as follows (in millions):

 

 

 

June 30, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Treasury bills

 

$

117.1

 

$

83.8

 

$

 

$

200.9

 

FDIC insured corporate bonds

 

61.0

 

 

 

61.0

 

Government Agency Securities

 

43.7

 

106.3

 

 

150.0

 

Total

 

$

221.8

 

$

190.1

 

$

 

$

411.9

 

 

 

 

December 31, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Treasury bills

 

$

70.2

 

$

20.0

 

$

 

$

90.2

 

FDIC insured corporate bonds

 

114.8

 

 

 

114.8

 

Government Agency Securities

 

88.6

 

81.2

 

 

169.8

 

Money market instruments

 

 

0.2

 

 

0.2

 

Total

 

$

273.6

 

$

101.4

 

$

 

$

375.0

 

 

Government agency securities 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.

 

The major categories of assets and liabilities measured on a nonrecurring basis, at fair value, as of June 30, 2012 and December 31, 2011, are as follows (in millions):

 

 

 

June 30, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Property,plant and equipment, net

 

$

 

$

 

$

97.1

 

$

97.1

 

Goodwill

 

 

 

55.8

 

55.8

 

Intangible assets, net

 

 

 

23.5

 

23.5

 

Total

 

$

 

$

 

$

176.4

 

$

176.4

 

 

 

 

December 31, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Property,plant and equipment, net

 

$

 

$

 

$

86.1

 

$

86.1

 

Goodwill

 

 

 

55.8

 

55.8

 

Intangible assets, net

 

 

 

25.9

 

25.9

 

Total

 

$

 

$

 

$

167.8

 

$

167.8

 

Business Combination
Business Combination

Note 8 — Business Combination

 

On April 4, 2011, we purchased a privately-held company which supplies certain components to our business for $28.3 million in cash. As a result of this purchase, we acquired $16.4 million of definite-lived intangibles, of which $13.6 million related to core technology, and $15.1 million of goodwill. The financial results of this acquisition are included in our LED & Solar segment as of the acquisition date.

Basis of Presentation (Policies)

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

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic weighted average shares outstanding

 

38,370

 

40,998

 

38,315

 

40,433

 

Dilutive effect of stock options and restricted stock

 

618

 

1,066

 

610

 

1,108

 

Dilutive effect of convertible notes

 

 

938

 

 

1,239

 

Diluted weighted average shares outstanding

 

38,988

 

43,002

 

38,925

 

42,780

 

 

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.

 

During the second quarter of 2011, the entire outstanding principal balance of our convertible debt was converted, with the principal amount paid in cash and the conversion premium paid in shares. The convertible notes met the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, since we had settled the principal amount of the notes in cash. Using the treasury stock method, it was determined that the impact of the assumed conversion for the three and six months ended June 30, 2011, had a dilutive effect of 0.9 million and 1.2 million common equivalent shares, respectively.

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.

Basis of Presentation (Tables)
Reconciliation of basic weighted average shares outstanding and diluted weighted average shares outstanding

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic weighted average shares outstanding

 

38,370

 

40,998

 

38,315

 

40,433

 

Dilutive effect of stock options and restricted stock

 

618

 

1,066

 

610

 

1,108

 

Dilutive effect of convertible notes

 

 

938

 

 

1,239

 

Diluted weighted average shares outstanding

 

38,988

 

43,002

 

38,925

 

42,780

 

Discontinued Operations (Tables)
Summary of information related to discontinued operations

Three months ended June 30, 2012

 

Three months ended June 30, 2011

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

 

$

 

$

 

$

 

Cost of sales

 

 

 

 

35,281

 

 

35,281

 

Gross profit

 

 

 

 

(35,281

)

 

(35,281

)

Total operating expenses (income)

 

80

 

(1,299

)

(1,219

)

24,020

 

397

 

24,417

 

Operating (loss) income

 

$

(80

)

$

1,299

 

$

1,219

 

$

(59,301

)

$

(397

)

$

(59,698

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(53

)

$

860

 

$

807

 

$

(37,106

)

$

(6

)

$

(37,112

)

 

 

 

Six months ended June 30, 2012

 

Six months ended June 30, 2011

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

 

$

 

$

 

$

 

Cost of sales

 

 

 

 

36,912

 

 

36,912

 

Gross profit

 

 

 

 

(36,912

)

 

(36,912

)

Total operating expenses (income)

 

74

 

(1,212

)

(1,138

)

29,928

 

895

 

30,823

 

Operating (loss) income

 

$

(74

)

$

1,212

 

$

1,138

 

$

(66,840

)

$

(895

)

$

(67,735

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(49

)

$

806

 

$

757

 

$

(42,002

)

$

(447

)

$

(42,449

)

 

Equity (Tables)

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Equity-based compensation expense

 

$

4,014

 

$

3,717

 

$

7,144

 

$

6,517

 

 

 

 

Shares 
(000’s)

 

Weighted-
Average 
Grant-Date 
Fair Value

 

Nonvested as of December 31, 2011

 

618

 

$

33.61

 

Granted

 

307

 

32.64

 

Vested

 

(133

)

19.42

 

Forfeited (including cancelled awards)

 

(31

)

32.79

 

Nonvested as of June 30, 2012

 

761

 

$

35.73

 

 

 

 

Shares 
(000s)

 

Weighted-
Average 
Exercise 
Price

 

Aggregate 
Intrinsic 
Value 
(000s)

 

Weighted- 
Average 
Remaining 
Contractual 
Life 
(in years)

 

Outstanding as of December 31, 2011

 

2,106

 

$

25.58

 

 

 

 

 

Granted

 

687

 

32.56

 

 

 

 

 

Exercised

 

(143

)

15.05

 

 

 

 

 

Forfeited (including cancelled options)

 

(52

)

31.06

 

 

 

 

 

Outstanding as of June 30, 2012

 

2,598

 

$

27.90

 

$

22,593

 

6.7

 

Options exercisable as of June 30, 2012

 

1,414

 

$

20.89

 

$

20,823

 

4.8

 

Balance Sheet Information (Tables)

 

 

 

June 30, 2012

 

 

 

Amortized 
Cost

 

Gains in 
Accumulated 
Other 
Comprehensive 
Income

 

Losses in 
Accumulated 
Other 
Comprehensive 
Income

 

Estimated 
Fair Value

 

Government Agency Securities

 

$

43,742

 

$

23

 

$

 

$

43,765

 

 

 

 

 

 

 

 

 

 

 

FDIC insured corporate bonds

 

60,958

 

4

 

 

60,962

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

117,106

 

 

(1

)

117,105

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

221,806

 

$

27

 

$

(1

)

$

221,832

 

 

 

 

December 31, 2011

 

 

 

Amortized 
Cost

 

Gains in 
Accumulated 
Other 
Comprehensive 
Income

 

Losses in 
Accumulated 
Other 
Comprehensive 
Income

 

Estimated 
Fair Value

 

Government Agency Securities

 

$

88,585

 

$

119

 

$

 

$

88,704

 

 

 

 

 

 

 

 

 

 

 

FDIC insured corporate bonds

 

114,640

 

56

 

 

114,696

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

70,147

 

44

 

 

70,191

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

273,372

 

$

219

 

$

 

$

273,591

 

 

 

 

Estimated Fair Value

 

Due in one year or less

 

$

30,751

 

 

 

 

 

Due in 1—2 years

 

191,081

 

 

 

 

 

Total investments in debt securities

 

$

221,832

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Raw materials

 

$

54,992

 

$

57,169

 

Work in process

 

22,049

 

20,118

 

Finished goods

 

13,688

 

36,147

 

 

 

$

90,729

 

$

113,434

 

 

 

 

June 30,

 

 

 

2012

 

2011

 

Balance as of the beginning of period

 

$

9,778

 

$

9,238

 

Warranties issued during the period

 

1,502

 

5,843

 

Settlements made during the period

 

(3,821

)

(4,489

)

Balance as of the end of period

 

$

7,459

 

$

10,592

 

Segment Information (Tables)

 

 

 

LED & Solar

 

Data Storage

 

Unallocated 
Corporate 
Amount

 

Total

 

Three months ended June 30, 2012

 

 

 

 

 

 

 

 

 

Net sales

 

$

86,778

 

$

49,769

 

$

 

$

136,547

 

Segment profit (loss)

 

$

9,587

 

$

12,136

 

$

(1,404

)

$

20,319

 

Interest, net

 

 

 

(329

)

(329

)

Amortization

 

861

 

324

 

 

1,185

 

Equity-based compensation

 

1,096

 

440

 

2,478

 

4,014

 

Income (loss) from continuing operations before income taxes

 

$

7,630

 

$

11,372

 

$

(3,553

)

$

15,449

 

Three months ended June 30, 2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

219,135

 

$

45,680

 

$

 

$

264,815

 

Segment profit (loss)

 

$

79,052

 

$

13,050

 

$

(4,081

)

$

88,021

 

Interest, net

 

 

 

86

 

86

 

Amortization

 

953

 

356

 

25

 

1,334

 

Equity-based compensation

 

892

 

352

 

2,473

 

3,717

 

Loss on extinguishment of debt

 

 

 

3,045

 

3,045

 

Income (loss) from continuing operations before income taxes

 

$

77,207

 

$

12,342

 

$

(9,710

)

$

79,839

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2012

 

 

 

 

 

 

 

 

 

Net sales

 

$

182,352

 

$

94,104

 

$

 

$

276,456

 

Segment profit (loss)

 

$

27,073

 

$

21,089

 

$

(2,489

)