VEECO INSTRUMENTS INC, 10-Q filed on 10/31/2011
Quarterly Report
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
Net sales
$ 267,959 
$ 277,094 
$ 787,450 
$ 631,130 
Cost of sales
143,025 
139,711 
396,204 
336,828 
Gross profit
124,934 
137,383 
391,246 
294,302 
Operating expenses (income):
 
 
 
 
Selling, general and administrative
23,569 
23,303 
73,966 
59,326 
Research and development
26,404 
15,250 
69,927 
39,121 
Amortization
1,277 
928 
3,519 
2,785 
Restructuring
 
 
 
(179)
Other, net
(199)
(267)
(227)
184 
Total operating expenses
51,051 
39,214 
147,185 
101,237 
Operating income
73,883 
98,169 
244,061 
193,065 
Interest (income) expense, net
(244)
1,637 
1,141 
5,182 
Loss on extinguishment of debt
 
 
3,349 
 
Income from continuing operations before income taxes
74,127 
96,532 
239,571 
187,883 
Income tax provision
21,510 
2,845 
72,657 
14,130 
Income from continuing operations
52,617 
93,687 
166,914 
173,753 
Discontinued operations:
 
 
 
 
Loss from discontinued operations before income taxes
(23,839)
(10,831)
(91,574)
(12,815)
Income tax benefit
(7,085)
(3,307)
(32,371)
(3,662)
Loss from discontinued operations
(16,754)
(7,524)
(59,203)
(9,153)
Net income
35,863 
86,163 
107,711 
164,600 
Net loss attributable to noncontrolling interest
 
 
 
Net income
$ 35,863 
$ 86,163 
$ 107,711 
$ 164,600 
Basic:
 
 
 
 
Continuing operations (in dollars per share)
$ 1.34 
$ 2.35 
$ 4.16 
$ 4.40 
Discontinued operations (in dollars per share)
$ (0.43)
$ (0.19)
$ (1.48)
$ (0.23)
Income (in dollars per share)
$ 0.91 
$ 2.16 
$ 2.68 
$ 4.17 
Diluted:
 
 
 
 
Continuing operations (in dollars per share)
$ 1.31 
$ 2.22 
$ 3.98 
$ 4.12 
Discontinued operations (in dollars per share)
$ (0.41)
$ (0.18)
$ (1.41)
$ (0.21)
Income (in dollars per share)
$ 0.90 
$ 2.04 
$ 2.57 
$ 3.91 
Weighted average shares outstanding:
 
 
 
 
Basic (in shares)
39,335 
39,946 
40,132 
39,508 
Diluted (in shares)
40,069 
42,258 
41,941 
42,175 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
Net income
$ 35,863 
$ 86,163 
$ 107,711 
$ 164,600 
Other comprehensive income (loss), net of tax
 
 
 
 
Foreign currency translation
70 
985 
1,227 
160 
Unrealized (loss) gain on available-for-sale securities
(127)
252 
93 
252 
Comprehensive income
$ 35,806 
$ 87,400 
$ 109,031 
$ 165,012 
Condensed Consolidated Balance Sheets (USD $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 213,236 
$ 245,132 
Short-term investments
212,727 
394,180 
Restricted cash
22,901 
76,115 
Accounts receivable, net
115,168 
150,528 
Inventories
127,518 
108,487 
Prepaid expenses and other current assets
60,107 
34,328 
Assets held for sale
2,341 
 
Deferred income taxes
6,975 
13,803 
Total current assets
760,973 
1,022,573 
Property, plant and equipment at cost, net
76,232 
42,320 
Goodwill
56,271 
52,003 
Deferred income taxes
2,998 
9,403 
Intangible assets, net
27,097 
16,893 
Other assets
10,652 
4,842 
Total assets
934,223 
1,148,034 
Current liabilities:
 
 
Accounts payable
44,784 
32,220 
Accrued expenses and other current liabilities
135,003 
183,010 
Deferred profit
5,911 
4,109 
Income taxes payable
4,446 
56,369 
Liabilities of discontinued segment held for sale
5,359 
5,359 
Current portion of long-term debt
243 
101,367 
Total current liabilities
195,746 
382,434 
Long-term debt
2,470 
2,654 
Other liabilities
755 
434 
Total equity
735,252 
762,512 
Total liabilities and equity
$ 934,223 
$ 1,148,034 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands
9 Months Ended
Sep. 30,
2011
2010
Operating activities
 
 
Net income
$ 107,711 
$ 164,600 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
9,291 
8,339 
Amortization of debt discount
1,260 
2,269 
Non-cash equity-based compensation
9,472 
6,222 
Non-cash restructuring
 
(179)
Loss on extinguishment of debt
3,349 
 
Deferred income taxes
6,800 
(37,850)
Excess tax benefits from stock option exercises
(8,601)
 
Discontinued operations
44,381 
9,444 
Changes in operating assets and liabilities:
 
 
Accounts receivable
36,222 
(61,499)
Inventories
(32,639)
(24,579)
Prepaid expenses and other current assets
(32,645)
(2,159)
Accounts payable
12,494 
19,908 
Accrued expenses, deferred profit and other current liabilities
(49,685)
95,742 
Income taxes payable
(43,023)
43,205 
Other, net
(4,292)
(23,889)
Discontinued operations
 
(11,703)
Net cash provided by operating activities
60,095 
187,871 
Investing activities
 
 
Capital expenditures
(47,516)
(8,023)
Payments for net assets of businesses acquired
(28,273)
 
Transfers from (to) restricted cash
53,216 
(31,581)
Proceeds from the maturity of CDARS
 
213,641 
Proceeds from sales of short-term investments
667,216 
11,013 
Payments for purchases of short-term investments
(486,639)
(246,514)
Other
110 
1,695 
Net cash provided by (used in) investing activities
158,114 
(59,769)
Financing activities
 
 
Proceeds from stock option exercises
9,975 
36,060 
Restricted stock tax withholdings
(2,919)
(2,898)
Excess tax benefits from stock option exercises
8,601 
 
Purchases of treasury stock
(162,077)
(31,602)
Repayments of long-term debt
(105,745)
(157)
Net cash (used in) provided by financing activities
(252,165)
1,403 
Effect of exchange rate changes on cash and cash equivalents
2,060 
139 
Net (decrease) increase in cash and cash equivalents
(31,896)
129,644 
Cash and cash equivalents at beginning of year
245,132 
148,500 
Cash and cash equivalents at end of year
213,236 
278,144 
Non-cash investing and financing activities
 
 
Transfers from property, plant and equipment to inventory
 
1,114 
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 and nine months ended September 30, 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 within such 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

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Basic weighted average shares outstanding

 

39,335

 

39,946

 

40,132

 

39,508

 

Dilutive effect of stock options and restricted stock

 

734

 

1,301

 

983

 

1,540

 

Dilutive effect of convertible notes

 

 

1,011

 

826

 

1,127

 

Diluted weighted average shares outstanding

 

40,069

 

42,258

 

41,941

 

42,175

 

 

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 and nine months ended September 30, 2011 and 2010, no shares were excluded from the computation of diluted weighted average shares outstanding.

 

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 the ability and the intent to settle 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 nine months ended September 30, 2011, had a dilutive effect of 0.8 million common equivalent shares and for the three and nine months ended September 30, 2010, had a diluted effect of 1.0 million and 1.1 million common equivalent shares, respectively. The effect of the assumed converted shares is dependent on the stock price at the time of the conversion. See Note 7 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 determining the condensed consolidated results of operations was approximately $(0.2) million and $(0.7) million during the three and nine months ended September 30, 2011, respectively and approximately $0.1 million and $(0.3) million during the three and nine months ended September 30, 2010, respectively. Included in the aggregate foreign currency exchange (loss) gain were (losses) gains related to forward contracts of $(0.3) million and $0.5 million during the three and nine months ended September 30, 2011, respectively and $(0.1) million and less than $(0.1) million during the three and nine months ended September 30, 2010, respectively. These amounts were recognized and are included in Other, net in the accompanying Condensed Consolidated Statements of Income.

 

As of September 30, 2011, $0.1 million of losses related to forward contracts were included in accrued expenses and other current liabilities and were subsequently paid in October 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 and were subsequently received in January 2011. Monthly forward contracts with a notional amount of $1.4 million, entered into in September 2011 for October 2011, will be settled in October 2011.

 

The weighted average notional amount of derivative contracts outstanding during the three and nine months ended September 30, 2011 were approximately $4.6 million and $13.2 million, respectively.

Business Combination
Business Combination

Note 2 — 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. We have determined that this acquisition does not constitute a material business combination and therefore are not including pro forma financial statements in this report.

Discontinued Operations
Discontinued Operations

Note 3 — Discontinued Operations

 

Copper, Indium, Gallium, Selenide (“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 and impacted approximately 80 employees, 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 nine months ended September 30, 2011, total discontinued operations include charges totaling $69.8 million. These charges include an asset impairment charge totaling $6.2 million, a goodwill write-off of $10.8 million, an inventory write-off totaling $27.0 million, charges to settle contracts totaling $22.1 million, lease related charges totaling $1.4 million and personnel severance charges totaling $2.3 million. During the three months ended September 30, 2011, total discontinued operations include charges totaling $19.0 million. These charges include a goodwill write-off totaling $10.8 million, a charge to settle contracts totaling $11.0 million, lease related charges totaling $1.4 million and personnel severance charges totaling $2.3 million, partially offset by a $6.5 million recovery of cost relating to inventory written-off during the second quarter.

 

Metrology Divestiture

 

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. As of October 6, 2011 the restriction relating to the escrowed proceeds of $22.9 million was released.

 

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

 

 

 

Three months ended

 

 

 

September 30, 2011

 

September 30, 2010

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

 

$

 

$

31,880

 

$

31,880

 

Cost of sales

 

(6,449

)

 

(6,449

)

1,901

 

16,257

 

18,158

 

Gross profit

 

6,449

 

 

6,449

 

(1,901

)

15,623

 

13,722

 

Total operating expenses

 

29,736

 

552

 

30,288

 

4,619

 

19,934

 

24,553

 

Operating loss

 

$

(23,287

)

$

(552

)

$

(23,839

)

$

(6,520

)

$

(4,311

)

$

(10,831

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from discontinued operations, net of tax

 

$

(16,366

)

$

(388

)

$

(16,754

)

$

(2,583

)

$

(4,941

)

$

(7,524

)

 

 

 

Nine months ended

 

 

 

September 30, 2011

 

September 30, 2010

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

 

$

2,103

 

$

92,011

 

$

94,114

 

Cost of sales

 

30,904

 

 

30,904

 

5,383

 

47,822

 

53,205

 

Gross profit

 

(30,904

)

 

(30,904

)

(3,280

)

44,189

 

40,909

 

Total operating expenses

 

59,224

 

1,446

 

60,670

 

13,081

 

40,643

 

53,724

 

Operating (loss) income

 

$

(90,128

)

$

(1,446

)

$

(91,574

)

$

(16,361

)

$

3,546

 

$

(12,815

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(58,268

)

$

(935

)

$

(59,203

)

$

(9,894

)

$

741

 

$

(9,153

)

 

Liabilities of discontinued segment held for sale, totaling $5.4 million, as of September 30, 2011 and December 31, 2010, consist of the deferred gain related to the assets in China.

Equity
Equity

Note 4— 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 nine months ended September 30, 2011 and 2010 (in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Equity-based compensation expense

 

$

2,951

 

$

2,356

 

$

9,472

 

$

6,222

 

 

As a result of the discontinuance of our CIGS solar systems business, equity-based compensation expense related to Solar employees totaling $0.1 million and $0.7 million, and $0.3 million and $0.8 million has been classified as discontinued operations in determining the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010, respectively.

 

As a result of the sale of our Metrology segment to Bruker, equity-based compensation expense related to Metrology employees totaling $4.9 million and $5.6 million has been classified as discontinued operations in determining the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2010, respectively.

 

As of September 30, 2011, the total unrecognized compensation costs related to nonvested stock and stock option awards was $17.0 million and $14.8 million, respectively. The related weighted average period over which we expect that such unrecognized compensation costs will be recognized is approximately 3.2 years for nonvested stock awards and 2.0 years for option awards.

 

Stock Option and Restricted Stock Activity

 

A summary of our restricted stock awards including restricted stock units for the nine months ended September 30, 2011, is presented below:

 

 

 

Shares
(000’s)

 

Weighted-
Average
Grant-Date
Fair Value

 

Nonvested at December 31, 2010

 

616

 

$

19.06

 

Granted

 

279

 

51.11

 

Vested

 

(173

)

14.33

 

Forfeited (including cancelled awards)

 

(87

)

26.83

 

Nonvested at September 30, 2011

 

635

 

$

33.36

 

 

A summary of our stock option awards for the nine months ended September 30, 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

 

368

 

50.65

 

 

 

 

 

Exercised

 

(638

)

15.63

 

 

 

 

 

Forfeited (including cancelled options)

 

(141

)

29.17

 

 

 

 

 

Outstanding at September 30, 2011

 

2,158

 

$

25.56

 

$

19,273

 

6.1

 

Options exercisable at September 30, 2011

 

1,006

 

$

17.92

 

$

12,482

 

4.6

 

 

Treasury Stock

 

On August 24, 2010, our Board of Directors authorized the repurchase of up to $200 million of our common stock. This repurchase program was completed by 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 September 30, 2011, we purchased 3,994,940 shares for $154.3 million (including transaction costs) under the program at an average cost of $38.63 per share. During the nine months ended September 30, 2011, we purchased 4,160,228 shares for $162.1 million (including transaction costs) under the program at an average cost of $38.96 per share. These stock repurchases are included as a reduction to Equity in the Condensed Consolidated Balance Sheet.

Balance Sheet Information
Balance Sheet Information

Note 5—Balance Sheet Information

 

Short-term Investments

 

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

 

 

 

September 30, 2011

 

 

 

Amortized
Cost

 

Gains in Accumulated
Other Comprehensive
Income

 

Losses in Accumulated
Other Comprehensive
Income

 

Estimated
Fair Value

 

Commercial paper

 

$

24,284

 

$

6

 

$

 

$

24,290

 

 

 

 

 

 

 

 

 

 

 

FDIC insured corporate bonds

 

137,138

 

153

 

 

137,291

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

51,116

 

30

 

 

51,146

 

Total available-for-sale securities

 

$

212,538

 

$

189

 

$

 

$

212,727

 

 

 

 

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 and nine months ended September 30, 2011, available-for-sale securities were sold for total proceeds of $292.9 million and $667.2 million, respectively. The gross realized gains on these sales were $0.2 million and $0.4 million for the three and nine months ended September 30, 2011, respectively. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification. Net unrealized holding (losses) gains on available-for-sale securities amounting to $(0.1) million and $0.1 million for the three and nine months ended September 30, 2011, respectively, have been included in accumulated other comprehensive income. During the three and nine months ended September 30, 2010, available-for-sale securities were sold for total proceeds of $11.0 million. The gross realized gains on these sales were minimal for the three and nine months ended September 30, 2010. Net unrealized holding gains on available-for-sale securities amounting to $0.2 million for the three and nine months ended September 30, 2010 have been included in accumulated other comprehensive income.

 

Contractual maturities of available-for-sale debt securities at September 30, 2011, are as follows (in thousands):

 

 

 

Estimated Fair Value

 

Due in one year or less

 

$

31,503

 

 

 

 

 

Due in 1–2 years

 

181,224

 

Total investments in debt securities

 

$

212,727

 

 

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 September 30, 2011, we had $22.9 million of restricted cash relating 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. The restriction relating to the escrowed proceeds totaling $22.9 million from the sale of our Metrology segment was released on October 6, 2011.

 

Accounts Receivable, net

 

Accounts receivable are shown net of the allowance for doubtful accounts of $0.5 million as of September 30, 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):

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Raw materials

 

$

62,678

 

$

49,953

 

Work in process

 

28,026

 

33,181

 

Finished goods

 

36,814

 

25,353

 

 

 

$

127,518

 

$

108,487

 

 

Goodwill

 

Changes in our goodwill are as follows (in thousands):

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2011

 

Beginning Balance

 

$

52,003

 

Write-off (see Note 3)

 

(10,836

)

Acquisition (see Note 2)

 

15,104

 

Ending Balance

 

$

56,271

 

 

Accrued Warranty

 

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

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Balance as of the beginning of period

 

$

9,238

 

$

6,675

 

Warranties issued during the period

 

7,935

 

7,242

 

Settlements made during the period

 

(6,870

)

(4,906

)

Balance as of the end of period

 

$

10,303

 

$

9,011

 

Segment Information
Segment Information

Note 6—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”) and solar industries, as well as to scientific research customers. This segment has manufacturing, product development and marketing sites in Somerset, New Jersey and St. Paul, Minnesota. By the end of the third quarter, we discontinued our CIGS solar systems business located in Tewksbury, Massachusetts and Clifton Park, New York (see Note 3). 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 and nine months ended September 30, 2011 and 2010, respectively, and goodwill and total assets as of September 30, 2011 and December 31, 2010 (in thousands):

 

 

 

LED & Solar

 

Data Storage

 

Unallocated
Corporate

 

Total

 

Three months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

233,865

 

$

34,094

 

$

 

$

267,959

 

Segment profit (loss)

 

$

72,815

 

$

7,877

 

$

(2,581

)

$

78,111

 

Interest, net

 

 

 

(244

)

(244

)

Amortization

 

924

 

353

 

 

1,277

 

Equity-based compensation

 

992

 

339

 

1,620

 

2,951

 

Income (loss) from continuing operations before income taxes

 

$

70,899

 

$

7,185

 

$

(3,957

)

$

74,127

 

Three months ended September 30, 2010

 

 

 

 

 

 

 

 

 

Net sales

 

$

242,613

 

$

34,481

 

$

 

$

277,094

 

Segment profit (loss)

 

$

97,904

 

$

9,211

 

$

(5,662

)

$

101,453

 

Interest, net

 

 

 

1,637

 

1,637

 

Amortization

 

487

 

383

 

58

 

928

 

Equity-based compensation

 

324

 

258

 

1,774

 

2,356

 

Income (loss) from continuing operations before income taxes

 

$

97,093

 

$

8,570

 

$

(9,131

)

$

96,532

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

667,697

 

$

119,753

 

$

 

$

787,450

 

Segment profit (loss)

 

$

232,848

 

$

33,158

 

$

(8,954

)

$

257,052

 

Interest, net

 

 

 

1,141

 

1,141

 

Amortization

 

2,364

 

1,072

 

83

 

3,519

 

Equity-based compensation

 

2,567

 

999

 

5,906

 

9,472

 

Loss on extinguishment of debt

 

 

 

3,349

 

3,349

 

Income (loss) from continuing operations before income taxes

 

$

227,917

 

$

31,087

 

$

(19,433

)

$

239,571

 

Nine months ended September 30, 2010

 

 

 

 

 

 

 

 

 

Net sales

 

$

537,662

 

$

93,468

 

$

 

$

631,130

 

Segment profit (loss)

 

$

192,670

 

$

21,382

 

$

(12,159

)

$

201,893

 

Interest, net

 

 

 

5,182

 

5,182

 

Amortization

 

1,461

 

1,149

 

175

 

2,785

 

Equity-based compensation

 

939

 

781

 

4,502

 

6,222

 

Restructuring

 

 

(179

)

 

(179

)

Income (loss) from continuing operations before income taxes

 

$

190,270

 

$

19,631

 

$

(22,018

)

$

187,883

 

 

 

 

LED & Solar

 

Data Storage

 

Unallocated
Corporate

 

Total

 

As of September 30, 2011

 

 

 

 

 

 

 

 

 

Goodwill

 

$

56,271

 

$

 

$

 

$

56,271

 

Total assets

 

$

349,498

 

$

58,089

 

$

526,636

 

$

934,223

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2010

 

 

 

 

 

 

 

 

 

Goodwill

 

$

52,003

 

$

 

$

 

$

52,003

 

Total assets

 

$

323,096

 

$

61,691

 

$

763,247

 

$

1,148,034

 

 

As of September 30, 2011 and December 31, 2010 unallocated corporate total assets were comprised principally of cash and cash equivalents, short-term investments and restricted cash.

Debt
Debt

Note 7—Debt

 

Mortgage Payable

 

Long-term debt consists of a mortgage payable, with approximately $2.7 million outstanding at September 30, 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 at September 30, 2011 was approximately $2.9 million.

 

Convertible Notes

 

Our convertible notes were 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). We paid interest on these notes on April 15 and October 15 of each year. The notes were unsecured and were effectively subordinated to all of our senior and secured indebtedness and to all indebtedness and other liabilities of our subsidiaries.

 

During the first quarter of 2011, at the option of the holders, $7.5 million of 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 notes outstanding. In lieu of redemption, 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. Accordingly, 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.

 

Certain 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 were subject to this accounting guidance. This additional interest expense did not require the use of cash.

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Contractual interest

 

$

 

$

1,089

 

$

2,025

 

$

3,268

 

Accretion of the discount on the Notes

 

 

769

 

1,260

 

2,269

 

Total interest expense on the Notes

 

$

 

$

1,858

 

$

3,285

 

$

5,537

 

Effective interest rate

 

0.0

%

7.0

%

6.7

%

7.0

%

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Carrying amount of the equity component

 

$

 

$

16,318

 

 

 

 

 

 

 

Principal balance of the liability component

 

$

 

$

105,574

 

Less: unamortized discount

 

 

4,436

 

Net carrying value of the liability component

 

$

 

$

101,138

 

Fair Value Measurements
Fair Value Measurements

Note 8— 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 September 30, 2011 and December 31, 2010, are as follows (in millions):

 

 

 

September 30, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Treasury bills

 

$

51.1

 

$

24.5

 

$

 

$

75.6

 

FDIC insured corporate bonds

 

137.3

 

8.9

 

 

146.2

 

Commercial paper

 

24.3

 

70.4

 

 

94.7

 

Derivative instrument

 

 

0.1

 

 

0.1

 

Total

 

$

212.7

 

$

103.9

 

$

 

$

316.6

 

 

 

 

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 and included in Level 2. 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 September 30, 2011 and December 31, 2010, are as follows (in millions):

 

 

 

September 30, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Property,plant and equipment, net

 

$

 

$

 

$

76.2

 

$

76.2

 

Goodwill

 

 

 

56.3

 

56.3

 

Intangible assets, net

 

 

 

27.1

 

27.1

 

Total

 

$

 

$

 

$

159.6

 

$

159.6

 

 

 

 

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

 

Total

 

$

 

$

 

$

111.2

 

$

111.2

 

Basis of Presentation (Policies)

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 and nine months ended September 30, 2011 and 2010, no shares were excluded from the computation of diluted weighted average shares outstanding.

 

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 the ability and the intent to settle 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 nine months ended September 30, 2011, had a dilutive effect of 0.8 million common equivalent shares and for the three and nine months ended September 30, 2010, had a diluted effect of 1.0 million and 1.1 million common equivalent shares, respectively. The effect of the assumed converted shares is dependent on the stock price at the time of the conversion. See Note 7 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.

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Basic weighted average shares outstanding

 

39,335

 

39,946

 

40,132

 

39,508

 

Dilutive effect of stock options and restricted stock

 

734

 

1,301

 

983

 

1,540

 

Dilutive effect of convertible notes

 

 

1,011

 

826

 

1,127

 

Diluted weighted average shares outstanding

 

40,069

 

42,258

 

41,941

 

42,175

 

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

 

 

 

Three months ended

 

 

 

September 30, 2011

 

September 30, 2010

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

 

$

 

$

31,880

 

$

31,880

 

Cost of sales

 

(6,449

)

 

(6,449

)

1,901

 

16,257

 

18,158

 

Gross profit

 

6,449

 

 

6,449

 

(1,901

)

15,623

 

13,722

 

Total operating expenses

 

29,736

 

552

 

30,288

 

4,619

 

19,934

 

24,553

 

Operating loss

 

$

(23,287

)

$

(552

)

$

(23,839

)

$

(6,520

)

$

(4,311

)

$

(10,831

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from discontinued operations, net of tax

 

$

(16,366

)

$

(388

)

$

(16,754

)

$

(2,583

)

$

(4,941

)

$

(7,524

)

 

 

 

Nine months ended

 

 

 

September 30, 2011

 

September 30, 2010

 

 

 

Solar Systems

 

Metrology

 

Total

 

Solar Systems

 

Metrology

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

 

$

2,103

 

$

92,011

 

$

94,114

 

Cost of sales

 

30,904

 

 

30,904

 

5,383

 

47,822

 

53,205

 

Gross profit

 

(30,904

)

 

(30,904

)

(3,280

)

44,189

 

40,909

 

Total operating expenses

 

59,224

 

1,446

 

60,670

 

13,081

 

40,643

 

53,724

 

Operating (loss) income

 

$

(90,128

)

$

(1,446

)

$

(91,574

)

$

(16,361

)

$

3,546

 

$

(12,815

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(58,268

)

$

(935

)

$

(59,203

)

$

(9,894

)

$

741

 

$

(9,153

)

Equity (Tables)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Equity-based compensation expense

 

$

2,951

 

$

2,356

 

$

9,472

 

$

6,222

 

 

 

 

Shares
(000’s)

 

Weighted-
Average
Grant-Date
Fair Value

 

Nonvested at December 31, 2010

 

616

 

$

19.06

 

Granted

 

279

 

51.11

 

Vested

 

(173

)

14.33

 

Forfeited (including cancelled awards)

 

(87

)

26.83

 

Nonvested at September 30, 2011

 

635

 

$

33.36

 

 

 

 

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

 

368

 

50.65

 

 

 

 

 

Exercised

 

(638

)

15.63

 

 

 

 

 

Forfeited (including cancelled options)

 

(141

)

29.17

 

 

 

 

 

Outstanding at September 30, 2011

 

2,158

 

$

25.56

 

$

19,273

 

6.1

 

Options exercisable at September 30, 2011

 

1,006

 

$

17.92

 

$

12,482

 

4.6

 

Balance Sheet Information (Tables)

 

 

 

September 30, 2011

 

 

 

Amortized
Cost

 

Gains in Accumulated
Other Comprehensive
Income

 

Losses in Accumulated
Other Comprehensive
Income

 

Estimated
Fair Value

 

Commercial paper

 

$

24,284

 

$

6

 

$

 

$

24,290

 

 

 

 

 

 

 

 

 

 

 

FDIC insured corporate bonds

 

137,138

 

153

 

 

137,291

 

 

 

 

 

 

 

 

 

 

 

Treasury bills

 

51,116

 

30

 

 

51,146

 

Total available-for-sale securities

 

$

212,538

 

$

189

 

$

 

$

212,727

 

 

 

 

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

 

 

 

 

Estimated Fair Value

 

Due in one year or less

 

$

31,503

 

 

 

 

 

Due in 1–2 years

 

181,224

 

Total investments in debt securities

 

$

212,727

 

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Raw materials

 

$

62,678

 

$

49,953

 

Work in process

 

28,026

 

33,181

 

Finished goods

 

36,814

 

25,353

 

 

 

$

127,518

 

$

108,487

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2011

 

Beginning Balance

 

$

52,003

 

Write-off (see Note 3)

 

(10,836

)

Acquisition (see Note 2)

 

15,104

 

Ending Balance

 

$

56,271

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Balance as of the beginning of period

 

$

9,238

 

$

6,675

 

Warranties issued during the period

 

7,935

 

7,242