VEECO INSTRUMENTS INC, 10-K filed on 2/22/2012
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Feb. 21, 2012
Jul. 1, 2011
Document and Entity Information
 
 
 
Entity Registrant Name
VEECO INSTRUMENTS INC 
 
 
Entity Central Index Key
0000103145 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2011 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 2,057,494,571 
Entity Common Stock, Shares Outstanding
 
38,767,203 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 217,922 
$ 245,132 
Short-term investments
273,591 
394,180 
Restricted cash
577 
76,115 
Accounts receivable, net
95,038 
150,528 
Inventories
113,434 
108,487 
Prepaid expenses and other current assets
40,756 
34,328 
Assets held for sale
2,341 
 
Deferred income taxes
10,885 
13,803 
Total current assets
754,544 
1,022,573 
Property, plant and equipment at cost, net
86,067 
42,320 
Goodwill
55,828 
52,003 
Deferred income taxes
 
9,403 
Intangible assets, net
25,882 
16,893 
Other assets
13,742 
4,842 
Total assets
936,063 
1,148,034 
Current liabilities:
 
 
Accounts payable
40,398 
32,220 
Accrued expenses and other current liabilities
107,656 
183,010 
Deferred profit
10,275 
4,109 
Income taxes payable
3,532 
56,369 
Liabilities of discontinued segment held for sale
5,359 
5,359 
Current portion of long-term debt
248 
101,367 
Total current liabilities
167,468 
382,434 
Deferred income taxes
5,029 
 
Long-term debt
2,406 
2,654 
Other liabilities
640 
434 
Equity:
 
 
Preferred stock, 500,000 shares authorized; no shares issued and outstanding
   
   
Common stock; $.01 par value; authorized 120,000,000 shares; 38,768,436 and 40,337,950 shares issued and outstanding in 2011 and 2010, respectively
435 
409 
Additional paid-in-capital
688,353 
656,969 
Retained earnings
265,317 
137,436 
Accumulated other comprehensive income
6,590 
5,796 
Less: treasury stock, at cost; 5,278,828 shares and 1,118,600 shares in 2011 and 2010, respectively
(200,175)
(38,098)
Total equity
760,520 
762,512 
Total liabilities and equity
$ 936,063 
$ 1,148,034 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2011
Dec. 31, 2010
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
38,768,436 
40,337,950 
Common stock, shares outstanding
38,768,436 
40,337,950 
Treasury stock, shares
5,278,828 
1,118,600 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Net sales
$ 979,135 
$ 930,892 
$ 282,262 
Cost of sales
504,801 
481,407 
168,003 
Gross profit
474,334 
449,485 
114,259 
Operating expenses (income):
 
 
 
Selling, general and administrative
95,134 
87,250 
59,419 
Research and development
96,596 
56,948 
37,767 
Amortization
4,734 
3,703 
3,977 
Restructuring
1,288 
(179)
4,479 
Asset impairment
584 
 
304 
Other, net
(261)
(1,490)
682 
Total operating expenses
198,075 
146,232 
106,628 
Operating income
276,259 
303,253 
7,631 
Interest expense
4,600 
8,201 
7,732 
Interest income
(3,776)
(1,629)
(882)
Loss on extinguishment of debt
3,349 
 
 
Income from continuing operations before income taxes
272,086 
296,681 
781 
Income tax provision
81,584 
19,505 
2,558 
Income (loss) from continuing operations
190,502 
277,176 
(1,777)
Discontinued operations:
 
 
 
(Loss) income from discontinued operations, before income taxes (includes gain on disposal of $156,290 in 2010)
(91,885)
129,776 
(15,066)
Income tax (benefit) provision
(29,370)
45,192 
(1,211)
(Loss) income from discontinued operations
(62,515)
84,584 
(13,855)
Net income (loss)
127,987 
361,760 
(15,632)
Net loss attributable to noncontrolling interest
 
 
(65)
Net income (loss) attributable to Veeco
$ 127,987 
$ 361,760 
$ (15,567)
Basic:
 
 
 
Continuing operations (in dollars per share)
$ 4.80 
$ 7.02 
$ (0.05)
Discontinued operations (in dollars per share)
$ (1.57)
$ 2.14 
$ (0.43)
Income (loss) (in dollars per share)
$ 3.23 
$ 9.16 
$ (0.48)
Diluted:
 
 
 
Continuing operations (in dollars per share)
$ 4.63 
$ 6.52 
$ (0.05)
Discontinued operations (in dollars per share)
$ (1.52)
$ 1.99 
$ (0.43)
Income (loss) (in dollars per share)
$ 3.11 
$ 8.51 
$ (0.48)
Weighted average shares outstanding:
 
 
 
Basic (in shares)
39,658 
39,499 
32,628 
Diluted (in shares)
41,155 
42,514 
32,628 
Consolidated Statements of Operations (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2010
Consolidated Statements of Operations
 
(Loss) income from discontinued operations, gain on disposal
$ 156,290 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Net income (loss)
$ 127,987 
$ 361,760 
$ (15,632)
Other comprehensive income (loss), net of tax
 
 
 
Foreign currency translation
794 
(1,322)
(58)
Unrealized gain on available-for-sale securities
43 
97 
 
Defined benefit pension plan
(43)
(120)
32 
Comprehensive income (loss)
128,781 
360,415 
(15,658)
Comprehensive loss attributable to noncontrolling interest
 
 
(65)
Comprehensive income (loss) attributable to Veeco
$ 128,781 
$ 360,415 
$ (15,593)
Consolidated Statements of Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock
Treasury Stock
Additional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive Income
Equity Attributable to Veeco
Equity Attributable to Noncontrolling Interest
Balance at Dec. 31, 2008
$ 225,810 
$ 316 
 
$ 426,300 
$ (208,757)
$ 7,167 
$ 225,026 
$ 784 
Balance (in shares) at Dec. 31, 2008
 
32,187,599 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
Exercise of stock options
12,586 
 
12,578 
 
 
12,586 
 
Exercise of stock options (in shares)
 
755,229 
 
 
 
 
 
 
Equity-based compensation expense-continuing operations
7,113 
 
 
7,113 
 
 
7,113 
 
Equity-based compensation expense-discontinued operations
1,424 
 
 
1,424 
 
 
1,424 
 
Issuance, vesting and cancellation of restricted stock
(607)
 
 
(607)
 
 
(607)
 
Issuance, vesting and cancellation of restricted stock (in shares)
 
310,286 
 
 
 
 
 
 
Issuance of common stock
130,086 
58 
 
130,028 
 
 
130,086 
 
Issuance of common stock (in shares)
 
5,750,000 
 
 
 
 
 
 
Translation adjustments
(58)
 
 
 
 
(58)
(58)
 
Defined benefit pension plan
32 
 
 
 
 
32 
32 
 
Purchase of remaining 80.1% of noncontrolling interest
(1,695)
 
 
(976)
 
 
(976)
(719)
Net income (loss)
(15,632)
 
 
 
(15,567)
 
(15,567)
(65)
Balance at Dec. 31, 2009
359,059 
382 
 
575,860 
(224,324)
7,141 
359,059 
 
Balance (in shares) at Dec. 31, 2009
 
39,003,114 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
Exercise of stock options
45,164 
25 
 
45,139 
 
 
45,164 
 
Exercise of stock options (in shares)
 
2,499,591 
 
 
 
 
 
 
Equity-based compensation expense-continuing operations
8,769 
 
 
8,769 
 
 
8,769 
 
Equity-based compensation expense-discontinued operations
8,551 
 
 
8,551 
 
 
8,551 
 
Issuance, vesting and cancellation of restricted stock
(4,619)
 
(4,621)
 
 
(4,619)
 
Issuance, vesting and cancellation of restricted stock (in shares)
 
(46,155)
 
 
 
 
 
 
Treasury stock
(38,098)
 
(38,098)
 
 
 
(38,098)
 
Treasury stock (in shares)
(1,118,600)
(1,118,600)
 
 
 
 
 
 
Excess tax benefits from stock option exercises
23,271 
 
 
23,271 
 
 
23,271 
 
Translation adjustments
(1,322)
 
 
 
 
(1,322)
(1,322)
 
Defined benefit pension plan
(120)
 
 
 
 
(120)
(120)
 
Unrealized gain on short-term investments
97 
 
 
 
 
97 
97 
 
Net income (loss)
361,760 
 
 
 
361,760 
 
361,760 
 
Balance at Dec. 31, 2010
762,512 
409 
(38,098)
656,969 
137,436 
5,796 
762,512 
 
Balance (in shares) at Dec. 31, 2010
 
40,337,950 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
Exercise of stock options
10,714 
 
10,707 
 
 
10,714 
 
Exercise of stock options (in shares)
 
688,105 
 
 
 
 
 
 
Equity-based compensation expense-continuing operations
12,807 
 
 
12,807 
 
 
12,807 
 
Equity-based compensation expense-discontinued operations
689 
 
 
689 
 
 
689 
 
Issuance, vesting and cancellation of restricted stock
(3,174)
 
(3,175)
 
 
(3,174)
 
Issuance, vesting and cancellation of restricted stock (in shares)
 
131,196 
 
 
 
 
 
 
Treasury stock
(162,077)
 
(162,077)
 
 
 
(162,077)
 
Treasury stock (in shares)
(4,160,228)
(4,160,228)
 
 
 
 
 
 
Debt Conversion
(32)
18 
 
(50)
 
 
(32)
 
Debt Conversion (in shares)
 
1,771,413 
 
 
 
 
 
 
Excess tax benefits from stock option exercises
10,406 
 
 
10,406 
 
 
10,406 
 
Translation adjustments
688 
 
 
 
(106)
794 
688 
 
Defined benefit pension plan
(43)
 
 
 
 
(43)
(43)
 
Unrealized gain on short-term investments
43 
 
 
 
 
43 
43 
 
Net income (loss)
127,987 
 
 
 
127,987 
 
127,987 
Balance at Dec. 31, 2011
$ 760,520 
$ 435 
$ (200,175)
$ 688,353 
$ 265,317 
$ 6,590 
$ 760,520 
$ 0 
Balance (in shares) at Dec. 31, 2011
 
38,768,436 
 
 
 
 
 
 
Consolidated Statements of Equity (Parenthetical)
12 Months Ended
Dec. 31, 2009
Consolidated Statements of Equity
 
Purchase of remaining noncontrolling interest (as a percent)
80.10% 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Operating activities
 
 
 
Net income (loss)
$ 127,987 
$ 361,760 
$ (15,632)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,892 
10,789 
12,227 
Amortization of debt discount
1,260 
3,058 
2,846 
Non-cash equity-based compensation
12,807 
8,769 
7,113 
Non-cash asset impairment
584 
 
304 
Non-cash inventory write-off
758 
 
1,526 
Non-cash restructuring
 
(179)
 
Loss on extinguishment of debt
3,349 
 
 
Deferred income taxes
11,276 
(25,141)
(414)
Gain on disposal of segment (see Note 3)
 
(156,290)
 
Excess tax benefits from stock option exercises
(10,406)
(23,271)
 
Other, net
(31)
(27)
44 
Non-cash items from discontinued operations
44,381 
14,030 
10,877 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
56,843 
(83,160)
(28,379)
Inventories
(19,385)
(49,535)
10,322 
Prepaid expenses and other current assets
(25,487)
(4,749)
(1,418)
Supplier deposits
12,400 
(23,296)
117 
Accounts payable
8,098 
7,299 
3,067 
Accrued expenses, deferred profit and other current liabilities
(72,723)
85,500 
51,582 
Income taxes payable
(42,204)
78,894 
1,482 
Other, net
(6,957)
(4,742)
(1,486)
Discontinued operations
 
(5,495)
4,860 
Net cash provided by operating activities
115,442 
194,214 
59,038 
Investing activities
 
 
 
Capital expenditures
(60,364)
(10,724)
(7,460)
Payments for net assets of businesses acquired
(28,273)
 
(2,434)
Payments of earn-outs for businesses acquired
 
 
(195)
Transfers from restricted cash, net
75,540 
(76,115)
 
Proceeds from the maturity of CDARS
 
213,641 
 
Proceeds from sales of short-term investments
707,649 
32,971 
 
Payments for purchases of short-term investments
(588,453)
(506,103)
(135,000)
Proceeds from the sale of property, plant and equipment
 
13 
834 
Proceeds from disposal of segment, net of transaction fees (see Note 3)
 
225,188 
 
Other
195 
 
 
Discontinued operations
 
(492)
(10,510)
Net cash provided by (used in) investing activities
106,294 
(121,621)
(154,765)
Financing activities
 
 
 
Proceeds from stock option exercises
10,714 
45,164 
12,586 
Proceeds from issuance of common stock
 
 
130,086 
Restricted stock tax withholdings
(3,173)
(4,619)
(607)
Excess tax benefits from stock option exercises
10,406 
23,271 
 
Purchases of treasury stock
(162,077)
(38,098)
 
Repayments of long-term debt
(105,803)
(213)
(196)
Other
(2)
 
 
Net cash (used in) provided by financing activities
(249,935)
25,505 
141,869 
Effect of exchange rate changes on cash and cash equivalents
989 
(1,466)
(163)
Net (decrease) increase in cash and cash equivalents
(27,210)
96,632 
45,979 
Cash and cash equivalents at beginning of year
245,132 
148,500 
102,521 
Cash and cash equivalents at end of year
217,922 
245,132 
148,500 
Supplemental disclosure of cash flow information
 
 
 
Interest paid
1,393 
4,727 
4,935 
Income taxes paid
89,745 
9,925 
1,808 
Non-cash investing and financing activities
 
 
 
Accrual of payment for net assets of businesses acquired
 
 
1,000 
Transfers from property, plant and equipment to inventory
 
3,913 
1,159 
Transfers from inventory to property, plant and equipment
 
850 
23 
Sale of property, plant and equipment with note receivable
 
$ 140 
 
Description of Business and Significant Accounting Policies
Description of Business and Significant Accounting Policies

1.     Description of Business and Significant Accounting Policies

Business

        Veeco Instruments Inc. (together with its consolidated subsidiaries, "Veeco," the "Company" or "we") creates Process Equipment solutions that enable technologies for a cleaner and more productive world. We design, manufacture and market equipment primarily sold to make light emitting diodes ("LEDs") and hard-disk drives, as well as for emerging applications such as concentrator photovoltaics, power semiconductors, wireless components, microelectromechanical systems (MEMS) and other next-generation devices.

        Veeco's LED & Solar segment designs and manufactures metal organic chemical vapor deposition ("MOCVD") and molecular beam epitaxy ("MBE") systems and components sold to manufacturers of LEDs, wireless devices, power semiconductors, and concentrator photovoltaics, as well as to R&D applications. In 2011 we discontinued the sale of our products related to Copper, Indium, Gallium, Selenide ("CIGS") solar systems technology.

        Veeco's Data Storage segment designs and manufactures the critical technologies used to create thin film magnetic heads ("TFMHs") that read and write data on hard disk drives. These technologies include ion beam etch (IBE), ion beam deposition (IBD), diamond-like carbon (DLC), physical vapor deposition (PVD), chemical vapor deposition (CVD), and slicing, dicing and lapping systems.

        We support our customers through product and process development, training, manufacturing, and sales and service sites in the U.S., Korea, Taiwan, China, Singapore, Japan, Europe and other locations.

Basis of Presentation

        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 were 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.

Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include allowance for doubtful accounts, inventory obsolescence, purchase accounting allocations, recoverability and useful lives of property, plant and equipment and identifiable intangible assets, recoverability of goodwill, recoverability of deferred tax assets, liabilities for product warranty, accruals for contingencies and equity-based payments, including forfeitures and liabilities for tax uncertainties. Actual results could differ from those estimates.

Principles of Consolidation

        The accompanying Consolidated Financial Statements include the accounts of Veeco and its subsidiaries. Intercompany items and transactions have been eliminated in consolidation.

Revenue Recognition

        We recognize revenue based on current accounting guidance provided by the Securities and Exchange Commission ("SEC") and the Financial Accounting Standards Board ("FASB"). Our revenue transactions include sales of products under multiple-element arrangements. Revenue under these arrangements is allocated to each element based upon its estimated selling price.

        We consider a broad array of facts and circumstances when evaluating each of our sales arrangements in determining when to recognize revenue, including specific terms of the purchase order, contractual obligations to the customer, the complexity of the customer's post-delivery acceptance provisions, customer creditworthiness and the installation process. Management also considers the party responsible for installation, whether there are process specification requirements which need to be demonstrated before final sign off and payment, whether Veeco can replicate the field testing conditions and procedures in our factory and our past experience with demonstrating and installing a particular system. Sales arrangements are reviewed on a case-by-case basis; however, the Company's revenue recognition protocol for established systems is as described below.

        System revenue is generally recognized upon shipment or delivery provided title and risk of loss has passed to the customer, evidence of an arrangement exists, prices are contractually fixed or determinable, collectability is reasonably assured and there are no material uncertainties regarding customer acceptance. Revenue from installation services is recognized at the time acceptance is received from the customer. If the arrangement does not meet all the above criteria, the entire amount of the sales arrangement is deferred until the criteria have been met or all elements have been delivered to the customer or been completed.

        For those transactions on which we recognize systems revenue, either at the time of shipment or delivery, our sales and contractual arrangements with customers do not contain provisions for right of return or forfeiture, refund or other purchase price concessions. In the rare instances where such provisions are included, the Company defers all revenue until customer acceptance is achieved. In cases where products are sold with a retention of 10% to 20%, which is typically payable by the customer when installation and field acceptance provisions are completed, the customer has the right to withhold this payment until such provisions have been achieved. We defer the greater of the retention amount or the estimated selling price of the installation on systems that we recognize revenue at the time of shipment or delivery.

        For new products, new applications of existing products or for products with substantive customer acceptance provisions where performance cannot be fully assessed prior to meeting agreed upon specifications at the customer site, revenue is deferred as deferred profit in the accompanying Consolidated Balance Sheets and fully recognized upon completion of installation and receipt of final customer acceptance.

        Our systems are principally sold to manufacturers in the HB-LED, the data storage, solar and other industries. Sales arrangements for these systems generally include customer acceptance criteria based upon Veeco and/or customer specifications. Prior to shipment a customer source inspection of the system is performed in our facility or test data is sent to the customer documenting that the system is functioning within agreed upon specifications. Such source inspection or test data replicates the acceptance testing that will be performed at the customer's site prior to final acceptance of the system. Customer acceptance provisions include reassembly and installation of the system at the customer site, which includes performing functional or mechanical test procedures (i.e. hardware checks, leak testing, gas flow monitoring and quality control checks of the basic features of the product). Additionally, a material demonstration process may be performed to validate the functionality of the product. Upon meeting the agreed upon specifications the customer approves final acceptance of the product.

        Veeco generally is required to install these products and demonstrate compliance with acceptance tests at the customer's facility. Such installations typically are not considered complex and the installation process is not deemed essential to the functionality of the equipment because it does not involve significant changes to the features or capabilities of the equipment or involve building complex interfaces or connections. We have a demonstrated history of completing such installations in a timely, consistent manner and can reliably estimate the costs of such. In such cases, the test environment at our facilities prior to shipment replicates the customer's environment. While there are others in the industry with sufficient knowledge about the installation process for our systems as a practical matter, most customers engage the Company to perform the installation services.

        In Japan, where our contractual terms with customers generally specify risk of loss and title transfers upon customer acceptance, revenue is recognized and the customer is billed upon receipt of written customer acceptance.

        Revenue related to maintenance and service contracts is recognized ratably over the applicable contract term. Component and spare part revenue is recognized at the time of shipment or delivery in accordance with the terms of the applicable sales arrangement.

Cash and Cash Equivalents

        Cash and cash equivalents include cash and highly liquid investments with maturities of three months or less when purchased. Such items may include cash in operating bank accounts, liquid money market accounts, treasury bills, commercial paper, Federal Deposit Insurance Corporation ("FDIC") insured corporate bonds and certificates of deposit placed through an account registry service ("CDARS") with maturities of three months or less when purchased. CDARS, commercial paper and treasury bills classified as cash equivalents are carried at cost, which approximates fair market value.

Short-Term Investments

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

Concentration of Credit Risk

        Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of accounts receivable, short-term investments and cash and cash equivalents. We perform ongoing credit evaluations of our customers and, where appropriate, require that letters of credit be provided on certain foreign sales arrangements. We maintain allowances for potential credit losses and make investments with strong, higher credit quality issuers and continuously monitor the amount of credit exposure to any one issuer.

Inventories

        Inventories are stated at the lower of cost (principally first-in, first-out method) or market. Management evaluates the need to record adjustments for impairment of inventory on a quarterly basis. Our policy is to assess the valuation of all inventories, including raw materials, work in process, finished goods, and spare parts and other service inventory. Obsolete or slow-moving inventory, based upon historical usage, or inventory in excess of management's estimated usage for the next 12 months' requirements is written down to its estimated market value, if less than its cost. Inherent in the estimates of market value are management's estimates related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses and ultimate realization of excess inventory.

Goodwill and Indefinite-Lived Intangibles

        We account for goodwill and intangible assets with indefinite useful lives in accordance with relevant accounting guidance related to goodwill and other intangible assets, which states that goodwill and intangible assets with indefinite useful lives should not be amortized, but instead tested for impairment at least annually at the reporting unit level. Our policy is to perform this annual impairment test in the fourth quarter, using a measurement date of October 1st, of each fiscal year or more frequently if impairment indicators arise. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets.

        Pursuant to the aforementioned guidance we are required to determine if it is appropriate to use the operating segment, as defined under guidance for segment reporting, as the reporting unit, or one level below the operating segment, depending on whether certain criteria are met. We have identified two reporting units that are required to be reviewed for impairment. The reporting units are Data Storage and LED & Solar. In identifying the reporting units management considered the economic characteristics of operating segments including the products and services provided, production processes, types or classes of customer and product distribution.

        We perform this impairment test by first comparing the fair value of our reporting units to their respective carrying amount. When determining the estimated fair value of a reporting unit, we utilize a discounted future cash flow approach since reported quoted market prices are not available for our reporting units. Developing the estimate of the discounted future cash flow requires significant judgment and projections of future financial performance. The key assumptions used in developing the discounted future cash flows are the projection of future revenues and expenses, working capital requirements, residual growth rates and the weighted average cost of capital. In developing our financial projections, we consider historical data, current internal estimates and market growth trends. Changes to any of these assumptions could materially change the fair value of the reporting unit. We reconcile the aggregate fair value of our reporting units to our adjusted market capitalization as a supporting calculation. The adjusted market capitalization is calculated by multiplying the average share price of our common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium.

        If the carrying value of the reporting units exceed the fair value we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any.

Definite-Lived Intangible and Long-Lived Assets

        Intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, software licenses and deferred financing costs. Purchased technology consists of the core proprietary manufacturing technologies associated with the products and offerings obtained through acquisition and are initially recorded at fair value. Customer-related intangible assets, patents, trademarks and covenants not-to-compete are initially recorded at fair value and software licenses and deferred financing costs are initially recorded at cost. Intangible assets with definitive useful lives are amortized using the straight-line method over their estimated useful lives for periods ranging from 2 years to 17 years.

        Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

        Long-lived assets, such as property, plant, and equipment and intangible assets with definite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flow expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Cost Method of Accounting for Investments

        Investee companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, the Company's share of the earnings or losses of such investee companies is not included in the Consolidated Balance Sheet or Statement of Operations. However, impairment charges are recognized in the Consolidated Statement of Operations. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded.

Fair Value of Financial Instruments

        We believe the carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, reflected in the consolidated financial statements approximate fair value due to their short-term maturities. The fair value of our debt, including current maturities, is estimated using a discounted cash flow analysis, based on the estimated current incremental borrowing rates for similar types of securities.

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 consolidated results of operations was approximately $(1.0) million, $1.3 million and $(0.7) million in 2011, 2010 and 2009, respectively. Included in the aggregate foreign currency exchange (loss) gain were gains relating to forward contracts of $0.5 million, $0.1 million and $0.1 million in 2011, 2010 and 2009, respectively. These amounts were recognized and are included in other, net in the accompanying Consolidated Statements of Operations.

        As of 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. 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 $3.6 million, entered into in December 2011 for January 2012, will be settled in January 2012.

        The weighted average notional amount of derivative contracts outstanding during the year ended December 31, 2011 was approximately $10.3 million.

Translation of Foreign Currencies

        Certain of our international subsidiaries operate using local functional currencies. Foreign currency denominated assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and income and expense accounts and cash flow items are translated at average monthly exchange rates during the respective periods. Net exchange gains or losses resulting from the translation of foreign financial statements and the effect of exchange rates on intercompany transactions of a long-term investment nature are recorded as a separate component of equity in accumulated other comprehensive income. Any foreign currency gains or losses related to transactions are included in operating results.

Environmental Compliance and Remediation

        Environmental compliance costs include ongoing maintenance, monitoring and similar costs. Such costs are expensed as incurred. Environmental remediation costs are accrued when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated.

Research and Development Costs

        Research and development costs are charged to expense as incurred and include expenses for the development of new technology and the transition of technology into new products or services.

Warranty Costs

        We estimate the costs that may be incurred under the warranty we provide for our products and record a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Our warranty obligation is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.

Income Taxes

        As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. The carrying value of our deferred tax assets is adjusted by a partial valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net deferred tax assets consist primarily of net operating loss and tax credit carry forwards, and timing differences between the book and tax treatment of inventory, acquired intangible assets and other asset valuations. Realization of these net deferred tax assets is dependent upon our ability to generate future taxable income.

        We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under the relevant accounting guidance, factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.

        Relevant accounting guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under such guidance, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

Advertising Expense

        The cost of advertising is expensed as of the first showing of each advertisement. We incurred $1.4 million, $1.3 million and $0.6 million in advertising expenses during 2011, 2010 and 2009, respectively.

Shipping and Handling Costs

        Shipping and handling costs are costs that are incurred to move, package and prepare our products for shipment and then to move the products to the customer's designated location. These costs are generally comprised of payments to third-party shippers. Shipping and handling costs are included in cost of sales in our Consolidated Statements of Operations.

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 the employee requisite service period. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in the model are assumptions related to risk-free interest rate, dividend yield, expected stock-price volatility and expected option term.

        The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The dividend yield assumption is based on our historical and future expectation of dividend payouts. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and expected option term assumptions require a level of judgment which make them critical accounting estimates.

        We use an expected stock-price volatility assumption that is a combination of both historical volatility, calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option and implied volatility, utilizing market data of actively traded options on our common stock, which are obtained from public data sources. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility and that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock.

        The expected option term, representing the period of time that options granted are expected to be outstanding, is estimated using a lattice-based model incorporating historical post vest exercise and employee termination behavior.

        We estimate forfeitures using historical experience, which is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change.

        With regard to the expected option term assumption, we consider the exercise behavior of past grants and model the pattern of aggregate exercises.

Recent Accounting Pronouncements

        Balance Sheet:    In December 2011, the FASB issued amended guidance related to the Balance Sheet (Disclosures about Offsetting Assets and Liabilities). This amendment requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The amendment should be applied retrospectively. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.

        Comprehensive Income:    In December 2011, the FASB issued amended guidance related to Comprehensive Income. In order to defer only those changes in the June amendment (addressed below) that relate to the presentation of reclassification adjustments, the FASB issued this amendment to supersede certain pending paragraphs in the June amendment. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before the June amendment. All other requirements are not affected, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.

        In June 2011, the FASB issued amended guidance related to Comprehensive Income. This amendment allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendment eliminates the option to present the components of other comprehensive income as part of the statement of equity. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendment should be applied retrospectively. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.

        Business Combinations:    In December 2010, the FASB issued amended guidance related to Business Combinations. The amendments affect any public entity that enters into business combinations that are material on an individual or aggregate basis. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company will assess the impact of these amendments on its consolidated financial statements if and when a material acquisition occurs.

        Intangibles—Goodwill and Other:    In September 2011, the FASB issued amended guidance related to Intangibles—Goodwill and Other: Testing Goodwill for Impairment. The amendment is intended to simplify how entities test goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.

        In December 2010, the FASB issued amended guidance related to Intangibles—Goodwill and Other. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

        Fair Value Measurements:    In January 2010, the FASB issued amended guidance for Fair Value Measurements and Disclosures. This update requires some new disclosures and clarifies existing disclosure requirements about fair value measurement. The FASB's objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, this update requires that a reporting entity disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, this update clarifies the requirements of existing disclosures. For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This update was adopted on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

        In May 2011, the FASB issued amended guidance related to Fair Value Measurements. This amendment represents the converged guidance of the FASB and the International Accounting Standards Board (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in this amendment, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.

        Revenue Recognition:    In October 2009, the FASB issued amended guidance related to multiple-element arrangements which requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This update eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances. All entities must adopt the guidance no later than the beginning of their first fiscal year beginning on or after June 15, 2010. Entities may elect to adopt the guidance through either prospective application for revenue arrangements entered into or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

        In October 2009, the FASB issued amended guidance that is expected to significantly affect how entities account for revenue arrangements that contain both hardware and software elements. As a result, many tangible products that rely on software will be accounted for under the revised multiple-element arrangements revenue recognition guidance, rather than the software revenue recognition guidance. The revised guidance must be adopted by all entities no later than fiscal years beginning on or after June 15, 2010. An entity must select the same transition method and same period for the adoption of both this guidance and the revisions to the multiple-element arrangements guidance noted above. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Income (Loss) Per Common Share Attributable to Veeco
Income (Loss) Per Common Share Attributable to Veeco

2.     Income (Loss) Per Common Share Attributable to Veeco

        The following table sets forth basic and diluted net income (loss) per common share and the weighted average shares outstanding and diluted weighted average shares outstanding (in thousands, except per share data):

 
  Year ended December 31,  
 
  2011   2010   2009  

Net income (loss)

  $ 127,987   $ 361,760   $ (15,632 )

Net loss attributable to noncontrolling interest

            (65 )
               

Net income (loss) from continuing operations attributable to Veeco

  $ 127,987   $ 361,760   $ (15,567 )
               

Income (loss) from continuing operations per common share attributable to Veeco:

                   

Basic

  $ 3.23   $ 9.16   $ (0.48 )
               

Diluted

  $ 3.11   $ 8.51   $ (0.48 )
               

Basic weighted average shares outstanding

    39,658     39,499     32,628  

Dilutive effect of stock options, restricted stock awards and units and convertible debt

    1,497     3,015      
               

Diluted weighted average shares outstanding

    41,155     42,514     32,628  
               

        Basic income (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period. The effect of approximately 0.8 million common equivalent shares for the year ended December 31, 2009 were excluded from the diluted weighted average shares outstanding due to the net losses sustained for these periods. No shares were excluded from the computation of diluted weighted average shares outstanding for the years ended December 31, 2011 and 2010.

        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 years ended December 31, 2011 and 2010 had a dilutive effect of 0.6 million shares and 1.2 million shares, respectively. For the year ended December 31, 2009, the assumed conversion was anti-dilutive, as the average stock price was below the conversion price of $27.23 for the period.

Discontinued Operations
Discontinued Operations

3.     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 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 consolidated statements of operations for all periods presented. During the year ended December 31, 2011, total discontinued operations include pre-tax 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.

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 are accounted for as discontinued operations in determining the consolidated results of operations and the related assets and liabilities are classified as held for sale on our consolidated balance sheet for all periods presented. 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. As part of our agreement with Bruker, $22.9 million of proceeds was held in escrow and was restricted from use for one year from the closing date of the transaction to secure certain specified losses arising out of breaches of representations, warranties and covenants we made in the stock purchase agreement and related documents. This restriction lapsed on October 6, 2011. As part of the sale we incurred transaction costs, which consisted of investment bank fees and legal fees, totaling $5.2 million. The Company recognized a pre-tax gain on disposal of $156.3 million and a pre-tax deferred gain of $5.4 million related to the assets in China.

        The following is a summary of the net assets sold as of the closing date on October 7, 2010 (in thousands):

 
  October 7, 2010  

Assets

       

Accounts receivable, net

  $ 21,866  

Inventories

    26,431  

Property, plant and equipment at cost, net

    13,408  

Goodwill

    7,419  

Other assets

    5,485  
       

Assets of discontinued segment held for sale

  $ 74,609  
       

Liabilities

       

Accounts payable

  $ 7,616  

Accrued expenses and other current liabilities

    5,284  
       

Liabilities of discontinued segment held for sale

  $ 12,900  
       

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

 
  Year ended December 31, 2011   Year ended December 31, 2010   Year ended December 31, 2009  
 
  Solar Systems   Metrology   Total   Solar Systems   Metrology   Total   Solar Systems   Metrology   Total  

Net sales

  $   $   $   $ 2,339   $ 92,011   $ 94,350   $ 150   $ 97,737   $ 97,887  

Cost of sales

    30,904         30,904     8,000     47,822     55,822     3,174     57,410     60,584  
                                       

Gross profit

    (30,904 )       (30,904 )   (5,661 )   44,189     38,528     (3,024 )   40,327     37,303  

Total operating expenses

    59,420     1,561     60,981     20,018     45,024     65,042     9,339     43,030     52,369  
                                       

Operating loss

  $ (90,324 ) $ (1,561 ) $ (91,885 ) $ (25,679 ) $ (835 ) $ (26,514 ) $ (12,363 ) $ (2,703 ) $ (15,066 )
                                       

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

  $ (61,453 ) $ (1,062 ) $ (62,515 ) $ (16,645 ) $ 101,229   $ 84,584   $ (12,452 ) $ (1,403 ) $ (13,855 )
                                       

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

Fair Value Measurements
Fair Value Measurements

4.     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 December 31, 2011 and 2010 are as follows (in millions):

 
  December 31, 2011  
 
  Level 1   Level 2   Level 3   Total  

Treasury bills

  $ 70.2   $ 20.0   $   $ 90.2  

FDIC insured corporate bonds

    187.5             187.5  

Commercial paper

    15.9     81.2         97.1  

Money market instruments

        0.2         0.2  
                   

Total

  $ 273.6   $ 101.4   $   $ 375.0  
                   

 

 
  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  
                   

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

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

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

 
  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  
                   

 

 
  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  
                   
Business Combinations
Business Combinations

5.     Business Combinations

        On April 4, 2011, we purchased a privately-held company which supplies certain components to one of our businesses 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 $14.7 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.

Balance Sheet Information
Balance Sheet Information

6.     Balance Sheet Information

Short-term Investments

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

 
  December 31, 2011  
 
  Amortized
Cost
  Gains in Accumulated
Other Comprehensive
Income
  Losses in Accumulated
Other Comprehensive
Income
  Estimated
Fair Value
 

Commercial paper

  $ 15,889   $ 6   $   $ 15,895  

FDIC insured corporate bonds

    187,336     169         187,505  

Treasury bills

    70,147     44         70,191  
                   

Total available-for-sale securities

  $ 273,372   $ 219   $   $ 273,591  
                   

        During the year ended December 31, 2011, available-for-sale securities were sold for total proceeds of $707.6 million. The gross realized gains on these sales were $0.4 million for the year ended December 31, 2011. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification. The net unrealized holding gain on available-for-sale securities amounted to $0.1 million for the year ended December 31, 2011, and has been included in accumulated other comprehensive income. The tax impact on the unrealized gains, which was excluded from the table above, was $0.1 million.

 
  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 year ended December 31, 2010, available-for-sale securities were sold for total proceeds of $246.6 million. The gross realized gains on these sales were minimal for the year ended December 31, 2010. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification. The net unrealized holding gain on available-for-sale securities amounted to $0.1 million for the year ended December 31, 2010, and has been included in accumulated other comprehensive income.

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

 
  Estimated
Fair Value
 

Due in one year or less

  $ 37,088  

Due in 1-2 years

    236,503  
       

Total investments in debt securities

  $ 273,591  
       

        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 December 31, 2011, restricted cash consists of $0.6 million which serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations. This cash is held in custody by the issuing bank, and is restricted as to withdrawal or use while the related bank guarantees are outstanding.

        As of December 31, 2010, restricted cash consists of $22.9 million that relates to the proceeds received from the sale of our Metrology segment. This cash was held in escrow and was restricted from use for one year from the closing date of the transaction (see Note 3). Additionally, restricted cash also consisted of $53.2 million which serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations. This cash is held in custody by the issuing bank, and is restricted as to withdrawal or use while the related bank guarantees are outstanding.

Accounts Receivable, net

        Accounts receivable are shown net of the allowance for doubtful accounts of $0.5 million as of December 31, 2011 and December 31, 2010.

Inventories

 
  December 31,
2011
  December 31,
2010
   

Raw materials

  $ 57,169   $ 49,953    

Work in process

    20,118     33,181    

Finished goods

    36,147     25,353    
             

 

  $ 113,434   $ 108,487    
             

Property, Plant and Equipment

 
  December 31,    
 
  Estimated
Useful Lives
 
  2011   2010

Land

  $ 12,535   $ 7,274    

Buildings and improvements

    34,589     30,731   10-40 years

Machinery and equipment

    102,241     73,173   3-10 years

Leasehold improvements

    6,025     2,276   3-7 years
             

Gross property, plant, and equipment at cost

    155,390     113,454    

Less: accumulated depreciation and amortization

    69,323     71,134    
             

Net property, plant, and equipment at cost

  $ 86,067   $ 42,320    
             

        For the years ended December 31, 2011, 2010 and 2009, depreciation expense was $8.2 million, $7.1 million and $8.3 million, respectively.

Goodwill and Indefinite-Lived Intangible Assets

        In accordance with the relevant accounting guidance related to goodwill and other intangible assets, we conducted our annual impairment test of goodwill and indefinite-lived intangible assets during the fourth quarters of 2011 and 2010, using October 1st as our measurement date, and utilizing a discounted future cash flow approach as described in Note 1. This was consistent with the approach used in previous years. Based upon the results of such assessments, we determined that no goodwill and indefinite-lived intangible asset impairment existed in any of its reporting units, as of October 1, 2011 and 2010, respectively.

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

 
  Year ended
December 31,
 
 
  2011   2010  

Beginning Balance

  $ 52,003   $ 52,003  

Write-off (see Note 3)

    (10,836 )    

Acquisition (see Note 5)

    14,661      
           

Ending Balance

  $ 55,828   $ 52,003  
           

        As of December 31, 2011 and 2010, we had $2.9 million of indefinite-lived intangible assets consisting of trademarks and tradenames, which are included in the accompanying Consolidated Balance Sheets in the caption intangible assets, net.

Intangible Assets

 
  December 31, 2011   December 31, 2010  
 
  Purchased
technology
  Other
intangible
assets
  Total
intangible
assets
  Purchased
technology
  Other
intangible
assets
  Total
intangible
assets
 

Gross intangible assets

  $ 109,248   $ 19,635   $ 128,883   $ 98,473   $ 22,734   $ 121,207  

Less accumulated amortization

    (89,620 )   (13,381 )   (103,001 )   (86,376 )   (17,938 )   (104,314 )
                           

Intangible assets, net

  $ 19,628   $ 6,254   $ 25,882   $ 12,097   $ 4,796   $ 16,893  
                           

        The estimated aggregate amortization expense for intangible assets with definite useful lives for each of the next five fiscal years is as follows (in thousands):

2012

  $ 4,538  

2013

    3,286  

2014

    2,961  

2015

    2,859  

2016

    2,671  

        In accordance with the relevant accounting guidance related to the impairment or disposal of long-lived assets, we performed an analysis as of December 31, 2011 and 2010 of our definite-lived intangible and long-lived assets. No impairment existed in any of our reporting units.

Accrued Expenses

 
  December 31,  
 
  2011   2010  

Payroll and related benefits

  $ 19,017   $ 27,374  

Sales, use, income and other taxes

    6,315     4,914  

Customer deposits and advanced billings

    57,075     129,225  

Warranty

    9,778     9,238  

Restructuring liability

    956     714  

Other

    14,515     11,545  
           

 

  $ 107,656   $ 183,010  
           

Accrued Warranty

        We estimate the costs that may be incurred under the warranty we provide for our products and recognize 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. Changes in our warranty liability during the year are as follows:

 
  Year ended
December 31,
 
 
  2011   2010  

Balance as of the beginning of year

  $ 9,238   $ 6,675  

Warranties issued during the year

    12,465     9,695  

Settlements made during the year

    (11,925 )   (7,132 )
           

Balance as of the end of year

  $ 9,778   $ 9,238  
           
Debt
Debt

7.     Debt

Long-term Debt

        Long-term debt as of December 31, 2011, consists of a mortgage note payable, which is secured by certain land and buildings with carrying amounts aggregating approximately $5.0 million and $5.1 million as of December 31, 2011 and December 31, 2010, respectively. The mortgage note payable ($2.7 million as of December 31, 2011 and $2.9 million as of December 31, 2010) bears interest at an annual rate of 7.91%, with the final payment due on January 1, 2020. The fair market value of this note as of December 31, 2011 and 2010 was approximately $2.9 million and $3.1 million, respectively.

Maturity of Long-term Debt

        Long-term debt matures as follows (in thousands):

2012

  $ 248  

2013

    268  

2014

    290  

2015

    314  

2016

    340  

Thereafter

    1,194  
       

 

    2,654  

Less current portion

    248  
       

 

  $ 2,406  
       

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 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.

        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):

 
  Year ended December 31,  
 
  2011   2010   2009  

Contractual interest

  $ 2,025   $ 4,355   $ 4,356  

Accretion of the discount on the notes

    1,260     3,058     2,846  
               

Total interest expense on the notes

  $ 3,285   $ 7,413   $ 7,202  
               

Effective interest rate

    6.7 %   7.0 %   6.8 %
               

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

 
  December 31,
2011
  December 31,
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  
           
Equity Compensation Plans and Equity
Equity Compensation Plans and Equity

8.     Equity Compensation Plans and Equity

Stock Option and Restricted Stock Plans

        We have several stock option and restricted stock plans. On April 1, 2010, the Board of Directors of the Company, and on May 14, 2010, our shareholders, approved the 2010 Stock Incentive Plan (the "2010 Plan"). The 2010 Plan replaced the 2000 Stock Incentive Plan, as amended (the "2000 Plan"), as the Company's active stock plan. The Company's employees, directors and consultants are eligible to receive awards under the 2010 Plan. The 2010 Plan permits the granting of a variety of awards, including both non-qualified and incentive stock options, share appreciation rights, restricted shares, restricted share units and dividend equivalent rights. The Company is authorized to issue up to 3,500,000 shares under the 2010 Plan. Option awards are generally granted with an exercise price equal to the closing price of the Company's stock on the trading day prior to the date of grant; those option awards generally vest over a 3 year period and have a 7 or 10-year term. Restricted share awards generally vest over 1-5 years. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 2010 Plan. As of December 31, 2011, there are 900,034 options outstanding under this plan.

        The 2000 Plan was approved by the Board of Directors and shareholders in May 2000. The 2000 Plan provides for the grant to officers and key employees of stock awards, either in the form of options to purchase shares of our common stock or restricted stock awards. Stock awards granted pursuant to the 2000 Plan expire after seven years and generally vest over a two-year to five-year period following the grant date. In addition, the 2000 Plan provides for automatic annual grants of restricted stock to each member of our Board of Directors who is not an employee. As of December 31, 2011, there are 1,205,743 options outstanding under this plan.

Equity-Based Compensation Expense, Stock Option and Restricted Stock Activity

        Equity-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period. The following compensation expense was included as part of continuing operations in the Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 (in thousands):

 
  Years ended December 31,  
 
  2011   2010   2009  

Equity-based compensation expense

  $ 12,807   $ 8,769   $ 7,113  

        During the year ended December 31, 2011, we discontinued our CIGS solar systems business and as a result the equity-based compensation expense related to each CIGS solar systems business employee has been classified as discontinued operations in determining the consolidated results of operations for the years ended December 31, 2011, 2010 and 2009. For the years ended December 31, 2011, 2010 and 2009 discontinued operations included compensation expense of $0.7 million, $0.9 million and $0.4 million, respectively.

        As a result of the sale of our Metrology segment to Bruker, equity-based compensation expense related to Metrology employees has been classified as discontinued operations in determining the consolidated results of operations for the years ended December 31, 2010 and 2009. For the year ended December 31, 2010, discontinued operations included compensation expense of $7.7 million that related to the acceleration of equity awards from employees that were terminated as a result of the sale of our Metrology segment to Bruker. For the year ended December 31, 2009, discontinued operations included compensation expense of $1.0 million.

        For the year ended December 31, 2009, total equity-based compensation expense included a charge of $0.7 million for the acceleration of equity awards associated with the retirement of our former CFO.

        As of December 31, 2011, the total unrecognized compensation cost related to nonvested stock awards and option awards expected to vest is $15.7 million and $12.8 million, respectively, and the related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 3.0 years and 1.9 years for the nonvested stock awards and for option awards, respectively.

        The fair value of each option granted during the years ended December 31, 2011, 2010 and 2009, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 
  Year ended December 31,  
 
  2011   2010   2009  

Weighted-average expected stock-price volatility

    55%     62%     65%  

Weighted-average expected option life

    4 years     5 years     4 years  

Average risk-free interest rate

    1.40%     1.92%     1.79%  

Average dividend yield

    0%     0%     0%  

        A summary of our restricted stock awards including restricted stock units as of December 31, 2011, is presented below:

 
  Shares (000's)   Weighted-
Average
Grant-Date
Fair Value
 

Nonvested at December 31, 2010

    616   $ 19.06  

Granted

    304     48.91  

Vested

    (199 )   14.50  

Forfeited (including cancelled awards)

    (103 )   28.72  
             

Nonvested at December 31, 2011

    618   $ 33.61  
             

        During the year ended December 31, 2011, we granted 304,356 shares of restricted common stock and restricted stock units to key employees, which vest over three or four year periods. Included in this grant were 9,826 shares of restricted common stock granted to the non-employee members of the Board of Directors in May, which vest over the lesser of one year or at the time of the next annual meeting. The vested shares include the impact of 67,256 shares of restricted stock which were cancelled in 2011 due to employees electing to receive fewer shares in lieu of paying withholding taxes. The total grant date fair value of shares that vested during 2011 was $9.7 million.

        A summary of our stock option plans as of and for the year ended December 31, 2011, is presented below:

 
  Shares (000s)   Weighted-
Average
Exercise
Price
  Aggregate
Intrinsic
Value (000s)
  Weighted-
Average
Remaining
Contractual
Life
(in years)
 

Outstanding at December 31, 2010

    2,569   $ 19.71              

Granted

    404     48.11              

Exercised

    (688 )   15.57              

Forfeited (including cancelled options)

    (179 )   30.72              
                         

Outstanding at December 31, 2011

    2,106   $ 25.58   $ 8,274     6.0  
                         

Options exercisable at December 31, 2011

    983   $ 17.92   $ 4,963     4.4  
                         

        The weighted-average grant date fair value of stock options granted for the years ended December 31, 2011, 2010 and 2009 was $21.90, $18.41, and $5.35 per option, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2011, 2010 and 2009 was $22.8 million, $53.1 million and $7.3 million, respectively.

        The following table summarizes information about stock options outstanding at December 31, 2011:

 
  Options Outstanding   Options Exercisable  
Range of Exercise Prices
  Number
Outstanding at
December 31, 2011
(000s)
  Weighted-
Average
Remaining
Contractual Life
(in years)
  Weighted-
Average
Exercise Price
  Number
Exercisable at
December 31, 2011
(000s)
  Weighted-
Average
Exercise Price
 

$8.82-15.08

    737     4.4   $ 10.98     412   $ 11.27  

15.29-23.55

    425     3.1     18.49     417     18.39  

24.40-39.79

    545     8.3     33.39     150     34.11  

42.19-51.70

    399     8.9     49.45     4     47.37  
                       

 

    2,106     6.0   $ 25.58     983   $ 17.92  
                       

Shares Reserved for Future Issuance

        As of December 31, 2011, we have 3,961,178 shares reserved for future issuance upon exercise of stock options and grants of restricted stock.

Issuance of Common Stock

        On October 28, 2009 the Company entered into an Underwriting Agreement (the "Underwriting Agreement") with Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. (the "Underwriters"), for the sale of 5,000,000 shares of our common stock. In addition, the Underwriters had an option, which they exercised in full, to purchase up to an additional 750,000 shares of our common stock on the same terms for 30 days from the date of the Underwriting Agreement, solely to cover over-allotments. On November 3, 2009, we completed this offering selling 5,750,000 shares for net proceeds totaling $130.1 million, net of transaction costs totaling $0.3 million.

Preferred Stock

        Our Board of Directors has authority under our Certificate of Incorporation to issue shares of preferred stock with voting and economic rights to be determined by the Board of Directors.

Treasury Stock

        On August 24, 2010, our Board of Directors authorized the repurchase of up to $200 million of our common stock. 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 2011, we purchased 4,160,228 shares for $162 million (including transaction costs) under the program at an average cost of $38.96 per share. During 2010, we purchased 1,118,600 shares for $38 million (including transaction costs) under the program at an average cost of $34.06 per share. This stock repurchase is included as treasury stock in the Consolidated Balance Sheet.

Income Taxes
Income Taxes

9.     Income Taxes

        Our income (loss) from continuing operations before income taxes in the accompanying Consolidated Statements of Operations consists of (in thousands):

 
  Year ended December 31,  
 
  2011   2010   2009  

Domestic

  $ 230,204   $ 260,268   $ (3,425 )

Foreign

    41,882     36,413     4,206  
               

 

  $ 272,086   $ 296,681   $ 781  
               

        Significant components of the provision for income taxes from continuing operations are presented below (in thousands):

 
  Year ended December 31,  
 
  2011   2010   2009  

Current:

                   

Federal

  $ 59,921   $ 42,324   $ (344 )

Foreign

    10,714     7,720     1,879  

State and local

    805     5,215     799  
               

Total current provision for income taxes

    71,440     55,259     2,334  

Deferred:

                   

Federal

    10,454     (32,033 )   940  

Foreign

    (1,073 )   239     (273 )

State and local

    763     (3,960 )   (443 )
               

Total deferred (benefit) provision for income taxes

    10,144     (35,754 )   224  
               

Total provision for income taxes

  $ 81,584   $ 19,505   $ 2,558  
               

        The following is a reconciliation of the income tax provision (benefit) computed using the Federal statutory rate to our actual income tax provision (in thousands):

 
  Year ended December 31,  
 
  2011   2010   2009  

Income tax provision (benefit) at U.S. statutory rates

  $ 95,231   $ 103,838   $ (4,053 )

State income tax expense (benefit) (net of federal impact)

    1,616     6,379     188  

Nondeductible expenses

    (749 )   333     145  

Noncontrolling interest

            28  

Equity compensation

            1,678  

Domestic production activities deduction

    (4,581 )   (6,365 )    

Nondeductible compensation

    841     2,840     826  

Research and development tax credit

    (4,675 )   (1,823 )   (1,855 )

Net change in valuation allowance

    121     (83,079 )   5,110  

Change in accrual for unrecognized tax benefits

    824     (1,076 )   (4,114 )

Foreign tax rate differential

    (5,225 )   (5,280 )   5,450  

Other

    (1,819 )   3,738     (845 )
               

 

  $ 81,584   $ 19,505   $ 2,558  
               

        During 2011, the Company recorded an income tax benefit of $29.4 million relating to discontinued operations compared to the $45.2 million income tax expense from discontinued operations in the prior which was reported in accordance with the intraperiod tax allocation provisions. In addition, the Company recorded a current tax benefit of $10.4 million related to equity-based compensation which was credit to additional paid-in capital compared to $23.3 million tax benefit recorded in the prior year.

        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

        Significant components of our deferred tax assets and liabilities are as follows (in thousands):

 
  December 31,  
 
  2011   2010  

Deferred tax assets:

             

Inventory valuation

  $ 5,468   $ 8,999  

Domestic net operating loss carry forwards

    1,082     1,219  

Tax credit carry forwards

    3,015     9,961  

Foreign net operating loss carry forwards

    89     147  

Warranty and installation accruals

    3,044     2,742  

Equity compensation

    5,821     3,655  

Other accruals

    2,373     2,063  

Depreciation

        1,325  

Other

    1,636     1,890  
           

Total deferred tax assets

    22,528     32,001  

Valuation allowance

    (1,765 )   (1,644 )
           

Net deferred tax assets

    20,763     30,357  
           

Deferred tax liabilities:

             

Purchased intangible assets

    9,818     4,854  

Convertible debt discount

        1,663  

Undistributed earnings

    974     370  

Depreciation

    4,115      

Other

        264  
           

Total deferred tax liabilities

    14,907     7,151  
           

Net deferred taxes

  $ 5,856   $ 23,206  
           

        A provision has not been made at December 31, 2011 for U.S. or additional foreign withholding taxes on approximately $72.5 million of undistributed earnings of our foreign subsidiaries because it is the present intention of management to permanently reinvest the undistributed earnings of our foreign subsidiaries in China, Korea, Japan, Malaysia, Singapore and Taiwan. As it is our intention to reinvest those earnings permanently, it is not practicable to estimate the amount of tax that might be payable if they were remitted. We have provided deferred income taxes and future withholding taxes on the earnings that we anticipate will be remitted.

        Our valuation allowance of approximately $1.8 million at December 31, 2011 increased by approximately $0.1 million during the year then ended and relates primarily to state and local tax attributes for which we could not conclude were realizable on a more-likely-than-not basis.

        A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 
  December 31,  
 
  2011   2010  

Beginning balance as of December 31

  $ 3,660   $ 1,357  

Additions for tax positions related to current year

    1,069     1,227  

Reductions for tax positions relating to current year

         

Additions for tax positions relating to prior years

    1,209     1,736  

Reductions for tax positions relating to prior years

    (422 )   (478 )

Reductions due to the lapse of the applicable statute of limitations

    (586 )   (17 )

Settlements

    (182 )   (165 )
           

Ending balance as of December 31

  $ 4,748   $ 3,660  
           

        The Company does not anticipate that its uncertain tax position will change significantly within the next twelve months.

        Of the amounts reflected in the table above at December 31, 2011, the entire amount if recognized would reduce our effective tax rate. It is our policy to recognize interest and penalties related to income tax matters in income tax expense. The total accrual for interest and penalties related to unrecognized tax benefits was approximately $0.2 million and $0.3 million as of December 31, 2011 and 2010, respectively.

        We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. All material federal income tax matters have been concluded for years through 2006 subject to subsequent utilization of net operating losses generated in such years. None of our federal tax returns are currently under examination. All material state and local income tax matters have been reviewed through 2008 with two states currently under examination for open tax years between 2007 and 2010. The majority of our foreign jurisdictions have been reviewed through 2009 with only a few jurisdictions having open tax years between 2006 and 2009. Principally all our foreign jurisdictions remain open with respect to the 2010 tax year.

Commitments and Contingencies and Other Matters
Commitments and Contingencies and Other Matters

10.   Commitments and Contingencies and Other Matters

Restructuring and Other Charges

        During 2011, in response to challenging business conditions, we initiated activities to reduce and contain spending, including reducing our workforce, consultants and discretionary expenses.

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

        In conjunction with these activities, we recognized restructuring charges (credits) of approximately $1.3 million, $(0.2) million and $4.5 million during the years ended December 31, 2011, 2010 and 2009, respectively. We also recognized inventory write-offs of $0.8 million and $1.5 million, included in cost of sales in the accompanying Consolidated Statement of Operations, related to a discontinued product line in our LED & Solar segment during the year ended December 31, 2011 and discontinued data storage products during the year ended December 31, 2009. Restructuring expense for the years ended December 31, 2011, 2010 and 2009 are as follows (in thousands):

 
  Year ended December 31,  
 
  2011   2010   2009  

Personnel severance and related costs

  $ 1,288   $   $ 3,109  

Lease-related and other (credits) costs

        (179 )   1,370  
               

 

  $ 1,288   $ (179 ) $ 4,479  
               

Personnel Severance Costs

        During 2011, we recorded $1.3 million in personnel severance and related costs related to a companywide reorganization resulting in a headcount reduction of 65 employees. During 2009, we recorded $3.1 million in personnel severance and related costs resulting from a headcount reduction of 161 employees. These reductions in workforce included executives, management, administration, sales and service personnel and manufacturing employees' companywide.

Lease-related and Other Costs

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

        During 2009, we vacated our Data Storage facilities in Camarillo, CA. As a result, we incurred a $1.4 million restructuring charge, consisting primarily of the remaining lease payment obligations and estimated property taxes for the facility we vacated, offset by the estimated expected sublease income to be received. We made certain assumptions in determining the charge, which included estimated sublease income and terms of the sublease as well as the estimated discount rate to be used in determining the fair value of the liability. We developed these assumptions based on our understanding of the current real estate market as well as current market interest rates. The assumptions are based on management's best estimates, and will be adjusted periodically if new information is obtained.

        The following is a reconciliation of the liability for the 2011, 2010 and 2009 restructuring charge from inception through December 31, 2011 (in thousands):

 
  LED & Solar   Data Storage   Unallocated Corporate   Total  

Short-term liability

                         

Beginning Balance January 1, 2009

  $ 36   $ 270   $ 1,859   $ 2,165  

Lease-related and other costs 2009

    190     803         993  

Personnel severance and related costs 2009

    647     1,826     636     3,109  
                   

Total charged to accrual 2009

    837     2,629     636     4,102  
                   

Lease-related and other credits 2010

        (87 )       (87 )
                   

Total credited to accrual 2010

        (87 )       (87 )
                   

Personnel severance and related costs 2011

    672     51     311     1,034  
                   

Total charged to accrual 2011

    672     51     311     1,034  
                   

Short-term/long-term reclassification 2009

        148     1,084     1,232  

Short-term/long-term reclassification 2010

        123     536     659  

Short-term/long-term reclassification 2011

        58         58  

Cash payments 2009

    (677 )   (2,561 )   (1,982 )   (5,220 )

Cash payments 2010

    (196 )   (344 )   (1,597 )   (2,137 )

Cash payments 2011

    (138 )   (159 )   (553 )   (850 )
                   

Balance as of December 31, 2011

  $ 534   $ 128   $ 294   $ 956  
                   

Long-term liability

                         

Beginning Balance January 1, 2009

  $   $   $ 1,620   $ 1,620  

Lease-related and other costs 2009

        377         377  

Lease-related and other credits 2010

        (48 )       (48 )

Short-term/long-term reclassification 2009

        (148 )   (1,084 )   (1,232 )

Short-term/long-term reclassification 2010

        (123 )   (536 )   (659 )

Short-term/long-term reclassification 2011

        (58 )       (58 )
                   

Balance as of December 31, 2011

  $   $   $   $  
                   

Asset Impairment Charges

        During 2011, we recorded a $0.6 million asset impairment charge in the fourth quarter for property, plant and equipment related to the discontinuance of a certain product line in our LED & Solar reporting unit.

        During 2009, we recorded a $0.3 million asset impairment charge in the second quarter for property, plant and equipment no longer being utilized in our Data Storage reporting unit.

Minimum Lease Commitments

        Minimum lease commitments as of December 31, 2011 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows (in thousands):

2012

  $ 3,936  

2013

    2,659  

2014

    1,689  

2015

    1,150  

2016

    654  

Thereafter

    716  
       

 

  $ 10,804  
       

        Rent charged to operations amounted to $2.7 million, $1.7 million and $1.6 million in 2011, 2010 and 2009, respectively. In addition, we are obligated under such leases for certain other expenses, including real estate taxes and insurance.

Environmental Remediation

        We may, under certain circumstances, be obligated to pay up to $250,000 in connection with the implementation of a comprehensive plan of environmental remediation at our Plainview, New York facility. We have been indemnified by the former owner for any liabilities we may incur in excess of $250,000 with respect to any such remediation and have a liability recorded for this amount as of December 31, 2011. No comprehensive plan has been required to date. Even without consideration of such indemnification, we do not believe that any material loss or expense is probable in connection with any remediation plan that may be proposed.

        We are aware that petroleum hydrocarbon contamination has been detected in the soil at the site of a facility formerly leased by us in Santa Barbara, California. We have been indemnified for any liabilities we may incur which arise from environmental contamination at the site. Even without consideration of such indemnification, we do not believe that any material loss or expense is probable in connection with any such liabilities.

        The former owner of the land and building in Santa Barbara, California in which our former Metrology operations were located, which business (sold to Bruker on October 7, 2010), has disclosed that there are hazardous substances present in the ground under the building. Management believes that the comprehensive indemnification clause that was part of the purchase contract relating to the purchase of such land provides adequate protection against any environmental issues that may arise. We have provided Bruker indemnification as part of the sale.

Litigation

        We are involved in various legal proceedings arising in the normal course of our business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Concentrations of Credit Risk

        Our business depends in large part upon the capital expenditures of our top ten customers, which accounted for 79% and 80% of total accounts receivable at December 31, 2011 and 2010, respectively. Of such, HB LED and data storage customers accounted for approximately 58% and 19%, and 62% and 18%, respectively, of total accounts receivable at December 31, 2011 and 2010.

        Customers who accounted for more than 10% of our aggregate accounts receivable or net sales are as follows:

 
  Accounts
Receivable
December 31,
  Net Sales
For the Year Ended
December 31,
 
 
  2011   2010   2011   2010   2009  

Customer A

    33 %   *     11 %   *     *  

Customer B

    *     26 %   12 %   12 %   *  

Customer C

    *     20 %   *     17 %   27 %

Customer D

    *     *     *     12 %   *  

Customer E

    *     *     *     *     10 %

*
Less than 10% of aggregate accounts receivable or net sales.

        Both of our reportable product segments sell to these major customers.

        We manufacture and sell our products to companies in different geographic locations. In certain instances, we require deposits for a portion of the sales price in advance of shipment. We perform periodic credit evaluations of our customers' financial condition and, where appropriate, require that letters of credit be provided on certain foreign sales arrangements. Receivables generally are due within 30-60 days, other than receivables generated from customers in Japan where payment terms generally range from 60-90 days. Our net accounts receivable balance is concentrated in the following geographic locations (in thousands):

 
  December 31,  
 
  2011   2010  

Americas

  $ 11,098   $ 13,600  

Europe, Middle East and Africa ("EMEA")

    3,979     17,321  

Asia Pacific(1)

    79,961     119,607  
           

 

  $ 95,038   $ 150,528  
           

(1)
As of December 31, 2011, accounts receivable in China and Singapore amounted to $59.2 million and $15.3 million, respectively. As of December 31, 2010, accounts receivable in China and Singapore amounted to $66.5 million and $48.3 million, respectively. No other country accounted for more than 10% of our accounts receivable as of December 31 for the years presented.

Suppliers

        We currently outsource certain functions to third parties, including the manufacture of all or substantially all of our new MOCVD systems, Data Storage systems and ion sources. We primarily rely on several suppliers for the manufacturing of these systems. We plan to maintain some level of internal manufacturing capability for these systems. The failure of our present suppliers to meet their contractual obligations under our supply arrangements and our inability to make alternative arrangements or resume the manufacture of these systems ourselves could have a material adverse effect on our revenues, profitability, cash flows, and relationships with our customers.

        In addition, certain of the components and sub-assemblies included in our products are obtained from a single source or a limited group of suppliers. Our inability to develop alternative sources, if necessary, could result in a prolonged interruption in supply or a significant increase in the price of one or more components, which could adversely affect our operating results.

Foreign Operations, Geographic Area and Product Segment Information
Foreign Operations, Geographic Area and Product Segment Information

11.   Foreign Operations, Geographic Area and Product Segment Information

        Net sales which are attributed to the geographic location in which the customer facility is located and long-lived tangible assets related to operations in the United States and other foreign countries as of and for the years ended December 31, 2011, 2010 and 2009 are as follows (in thousands):

 
  Net Sales to Unaffiliated Customers   Long-Lived Tangible Assets  
 
  2011   2010   2009   2011   2010   2009  

United States

  $ 100,310   $ 92,414   $ 60,553   $ 67,788   $ 41,072   $ 43,577  

Other

    325     232     177              
                           

Total Americas

    100,635     92,646     60,730     67,788     41,072     43,577  

EMEA(1)

   
57,617
   
92,112
   
49,938
   
203
   
274
   
315
 

Asia Pacific(1)

    820,883     746,134     171,594     20,417     974     815  
                           

Total Other Foreign Countries

    878,500     838,246     221,532     20,620     1,248     1,130  
                           

 

  $ 979,135   $ 930,892   $ 282,262   $ 88,408   $ 42,320   $ 44,707  
                           

(1)
For the year ended December 31, 2011, net sales to customers in China were 66.4% of total net sales. For the year ended December 31, 2010, net sales to customers in Korea, China and Taiwan were 32.3%, 28.7% and 10.9% of total net sales, respectively. For the year ended December 31, 2009, net sales to customers in Korea and China were 35.1% and 11.0% of total net sales, respectively. No other country in EMEA and Asia Pacific accounted for more than 10% of our net sales for the years presented.

        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, thermal deposition sources and other types of deposition systems. These systems are primarily sold to customers in the high-brightness light emitting diode ("HB LED") and solar industries, as well as to scientific research customers. This segment has product development and marketing sites in Somerset, New Jersey and St. Paul, Minnesota. During 2011 we discontinued our CIGS solar systems business, located in Tewksbury, Massachusetts and Clifton Park, New York. The Data Storage segment consists of the ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, and dicing and slicing products sold primarily to customers in the data storage industry. This segment has product development and marketing sites in Plainview, New York, Ft. Collins, Colorado and Camarillo, California.

        We evaluate the performance of our reportable segments based on income (loss) from 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 expenses, asset impairment charges, inventory write-offs, equity-based compensation expense and other non-recurring items. 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 years ended December 31, 2011, 2010 and 2009, and goodwill and total assets as of December 31, 2011 and 2010 (in thousands):

 
  LED & Solar   Data Storage   Unallocated
Corporate
  Total  

Year ended December 31, 2011

                         

Net sales

  $ 827,797   $ 151,338   $   $ 979,135  
                   

Segment profit (loss)

  $ 267,059   $ 38,358   $ (8,987 ) $ 296,430  

Interest expense, net

            824     824  

Amortization expense

    3,227     1,424     83     4,734  

Equity-based compensation expense

    3,473     1,458     7,876     12,807  

Restructuring expense

    204     12     1,072     1,288  

Asset impairment charge

    584             584  

Inventory write-offs

    758             758  

Loss on extinguishment of debt

            3,349     3,349  
                   

Income (loss) from continuing operations, before income taxes

  $ 258,813   $ 35,464   $ (22,191 ) $ 272,086  
                   

Year ended December 31, 2010

                         

Net sales

  $ 795,565   $ 135,327   $   $ 930,892  
                   

Segment profit (loss)

  $ 300,311   $ 33,910   $ (18,675 ) $ 315,546  

Interest expense, net

            6,572     6,572  

Amortization expense

    1,948     1,522     233     3,703  

Equity-based compensation expense

    1,764     1,140     5,865     8,769  

Restructuring credit

        (179 )       (179 )
                   

Income (loss) from continuing operations, before income taxes

  $ 296,599   $ 31,427   $ (31,345 ) $ 296,681  
                   

Year ended December 31, 2009

                         

Net sales

  $ 205,003   $ 77,259   $   $ 282,262  
                   

Segment profit (loss)

  $ 38,836   $ (3,208 ) $ (10,598 ) $ 25,030  

Interest expense, net

            6,850     6,850  

Amortization expense

    1,946     1,599     432     3,977  

Equity-based compensation expense

    924     1,020     5,169     7,113  

Restructuring expense

    838     3,006     635     4,479  

Asset impairment charge

        304         304  

Inventory write-offs

        1,526         1,526  
                   

Income (loss) from continuing operations, before income taxes

  $ 35,128   $ (10,663 ) $ (23,684 ) $ 781  
                   

 

 
  LED & Solar   Data Storage   Unallocated
Corporate
  Total  

As of December 31, 2011

                         

Goodwill

  $ 55,828   $   $   $ 55,828  

Total assets

  $ 319,457   $ 57,203   $ 559,403   $ 936,063  

As of December 31, 2010

                         

Goodwill

  $ 52,003   $   $   $ 52,003  

Total assets

  $ 323,096   $ 61,691   $ 763,247   $ 1,148,034  

        Corporate total assets are comprised principally of cash and cash equivalents, short-term investments and restricted cash as of December 31, 2011 and 2010.

        Other Segment Data (in thousands):

 
  Year ended December 31,  
 
  2011   2010   2009  

Depreciation and amortization expense:

                   

LED & Solar

  $ 8,320   $ 5,506   $ 5,753  

Data Storage

    3,245     3,581     4,448  

Unallocated Corporate

    1,327     1,702     2,026  
               

Total depreciation and amortization expense

  $ 12,892   $ 10,789   $ 12,227  
               

Expenditures for long-lived assets:

                   

LED & Solar

  $ 56,141   $ 8,086   $ 6,656  

Data Storage

    2,703     572     192  

Unallocated Corporate

    1,520     2,066     612  
               

Total expenditures for long-lived assets

  $ 60,364   $ 10,724   $ 7,460  
               
Defined Contribution Benefit Plan
Defined Contribution Benefit Plan

12.   Defined Contribution Benefit Plan

        We maintain a defined contribution benefit plan under Section 401(k) of the Internal Revenue Code. Almost all of our domestic full-time employees are eligible to participate in this plan. Under the plan during 2011, we provided matching contributions of fifty cents for every dollar employees contribute up to a maximum of $3,000. During 2012, we will provide matching contributions of fifty cents for every dollar employees contribute, up to the lesser of 3% of the employee's eligible compensation or $7,500. Generally, the plan calls for vesting of Company contributions over the initial five years of a participant's employment. We maintain a similar type of contribution plan at one of our foreign subsidiaries. Our contributions to these plans in 2011, 2010 and 2009 were $2.1 million, $1.7 million and $0.9 million, respectively.

Cost Method Investment
Cost Method Investment

13.   Cost Method Investment

        On September 28, 2010, Veeco completed an investment in, a rapidly developing organic light emitting diode (OLED) equipment company. Veeco has invested in this company's Round B funding extension totaling $3 million, resulting in 7.8% ownership of the preferred shares, and 5.6% ownership of the company. During 2011, Veeco invested and additional $1.2 million in this company. Since we do not exhibit significant influence on such company, this investment is treated under the cost method in accordance with applicable accounting guidance. The fair value of this investment is not estimated because there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment, and we are exempt from estimating interim fair values because the investment does not meet the definition of a publicly traded company. This investment is recorded in other assets in our Consolidated Balance Sheets as of December 31, 2011 and 2010.

Schedule II-Valuation and Qualifying Accounts (in thousands)
Schedule II-Valuation and Qualifying Accounts (in thousands)

Schedule II—Valuation and Qualifying Accounts (in thousands)

COL. A   COL. B   COL. C   COL. D   COL. E  
 
   
  Additions    
   
 
Description   Balance at
Beginning of
Period
  Charged to
Costs and
Expenses
  Charged to
Other
Accounts
  Deductions   Balance at
End of
Period
 

Deducted from asset accounts:

                               

Year ended December 31, 2011:

                               

Allowance for doubtful accounts

  $ 512   $   $   $ (44 ) $ 468  

Valuation allowance on net deferred tax assets

    1,644             121     1,765  
                       

 

  $ 2,156   $   $   $ 77   $ 2,233  
                       

Deducted from asset accounts:

                               

Year ended December 31, 2010:

                               

Allowance for doubtful accounts

  $ 438   $ 40   $ 34   $   $ 512  

Valuation allowance on net deferred tax assets

    84,723         (2,663 )   (80,416 )   1,644  
                       

 

  $ 85,161   $ 40   $ (2,629 ) $ (80,416 ) $ 2,156  
                       

Deducted from asset accounts:

                               

Year ended December 31, 2009:

                               

Allowance for doubtful accounts

  $ 583   $ (52 ) $   $ (93 ) $ 438  

Valuation allowance on net deferred tax assets

    78,706     6,017             84,723  
                       

 

  $ 79,289   $ 5,965   $   $ (93 ) $ 85,161  
                       
Description of Business and Significant Accounting Policies (Policies)
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include allowance for doubtful accounts, inventory obsolescence, purchase accounting allocations, recoverability and useful lives of property, plant and equipment and identifiable intangible assets, recoverability of goodwill, recoverability of deferred tax assets, liabilities for product warranty, accruals for contingencies and equity-based payments, including forfeitures and liabilities for tax uncertainties. Actual results could differ from those estimates.
The accompanying Consolidated Financial Statements include the accounts of Veeco and its subsidiaries. Intercompany items and transactions have been eliminated in consolidation.

We recognize revenue based on current accounting guidance provided by the Securities and Exchange Commission ("SEC") and the Financial Accounting Standards Board ("FASB"). Our revenue transactions include sales of products under multiple-element arrangements. Revenue under these arrangements is allocated to each element based upon its estimated selling price.

        We consider a broad array of facts and circumstances when evaluating each of our sales arrangements in determining when to recognize revenue, including specific terms of the purchase order, contractual obligations to the customer, the complexity of the customer's post-delivery acceptance provisions, customer creditworthiness and the installation process. Management also considers the party responsible for installation, whether there are process specification requirements which need to be demonstrated before final sign off and payment, whether Veeco can replicate the field testing conditions and procedures in our factory and our past experience with demonstrating and installing a particular system. Sales arrangements are reviewed on a case-by-case basis; however, the Company's revenue recognition protocol for established systems is as described below.

        System revenue is generally recognized upon shipment or delivery provided title and risk of loss has passed to the customer, evidence of an arrangement exists, prices are contractually fixed or determinable, collectability is reasonably assured and there are no material uncertainties regarding customer acceptance. Revenue from installation services is recognized at the time acceptance is received from the customer. If the arrangement does not meet all the above criteria, the entire amount of the sales arrangement is deferred until the criteria have been met or all elements have been delivered to the customer or been completed.

        For those transactions on which we recognize systems revenue, either at the time of shipment or delivery, our sales and contractual arrangements with customers do not contain provisions for right of return or forfeiture, refund or other purchase price concessions. In the rare instances where such provisions are included, the Company defers all revenue until customer acceptance is achieved. In cases where products are sold with a retention of 10% to 20%, which is typically payable by the customer when installation and field acceptance provisions are completed, the customer has the right to withhold this payment until such provisions have been achieved. We defer the greater of the retention amount or the estimated selling price of the installation on systems that we recognize revenue at the time of shipment or delivery.

        For new products, new applications of existing products or for products with substantive customer acceptance provisions where performance cannot be fully assessed prior to meeting agreed upon specifications at the customer site, revenue is deferred as deferred profit in the accompanying Consolidated Balance Sheets and fully recognized upon completion of installation and receipt of final customer acceptance.

        Our systems are principally sold to manufacturers in the HB-LED, the data storage, solar and other industries. Sales arrangements for these systems generally include customer acceptance criteria based upon Veeco and/or customer specifications. Prior to shipment a customer source inspection of the system is performed in our facility or test data is sent to the customer documenting that the system is functioning within agreed upon specifications. Such source inspection or test data replicates the acceptance testing that will be performed at the customer's site prior to final acceptance of the system. Customer acceptance provisions include reassembly and installation of the system at the customer site, which includes performing functional or mechanical test procedures (i.e. hardware checks, leak testing, gas flow monitoring and quality control checks of the basic features of the product). Additionally, a material demonstration process may be performed to validate the functionality of the product. Upon meeting the agreed upon specifications the customer approves final acceptance of the product.

        Veeco generally is required to install these products and demonstrate compliance with acceptance tests at the customer's facility. Such installations typically are not considered complex and the installation process is not deemed essential to the functionality of the equipment because it does not involve significant changes to the features or capabilities of the equipment or involve building complex interfaces or connections. We have a demonstrated history of completing such installations in a timely, consistent manner and can reliably estimate the costs of such. In such cases, the test environment at our facilities prior to shipment replicates the customer's environment. While there are others in the industry with sufficient knowledge about the installation process for our systems as a practical matter, most customers engage the Company to perform the installation services.

        In Japan, where our contractual terms with customers generally specify risk of loss and title transfers upon customer acceptance, revenue is recognized and the customer is billed upon receipt of written customer acceptance.

        Revenue related to maintenance and service contracts is recognized ratably over the applicable contract term. Component and spare part revenue is recognized at the time of shipment or delivery in accordance with the terms of the applicable sales arrangement.

 Cash and cash equivalents include cash and highly liquid investments with maturities of three months or less when purchased. Such items may include cash in operating bank accounts, liquid money market accounts, treasury bills, commercial paper, Federal Deposit Insurance Corporation ("FDIC") insured corporate bonds and certificates of deposit placed through an account registry service ("CDARS") with maturities of three months or less when purchased. CDARS, commercial paper and treasury bills classified as cash equivalents are carried at cost, which approximates fair market value.
We determine the appropriate balance sheet classification of our investments at the time of purchase and evaluate the classification at each balance sheet date. As part of our cash management program, we maintain a portfolio of marketable securities which are classified as available-for-sale. These securities include FDIC insured corporate bonds, treasury bills, commercial paper and CDARS with maturities of greater than three months when purchased in principal amounts that, when aggregated with interest to accrue over the term, will not exceed FDIC limits. Securities classified as available-for-sale are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss) and reported in equity. Net realized gains and losses are included in net income (loss) attributable to Veeco.
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of accounts receivable, short-term investments and cash and cash equivalents. We perform ongoing credit evaluations of our customers and, where appropriate, require that letters of credit be provided on certain foreign sales arrangements. We maintain allowances for potential credit losses and make investments with strong, higher credit quality issuers and continuously monitor the amount of credit exposure to any one issuer.
 Inventories are stated at the lower of cost (principally first-in, first-out method) or market. Management evaluates the need to record adjustments for impairment of inventory on a quarterly basis. Our policy is to assess the valuation of all inventories, including raw materials, work in process, finished goods, and spare parts and other service inventory. Obsolete or slow-moving inventory, based upon historical usage, or inventory in excess of management's estimated usage for the next 12 months' requirements is written down to its estimated market value, if less than its cost. Inherent in the estimates of market value are management's estimates related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses and ultimate realization of excess inventory.

 We account for goodwill and intangible assets with indefinite useful lives in accordance with relevant accounting guidance related to goodwill and other intangible assets, which states that goodwill and intangible assets with indefinite useful lives should not be amortized, but instead tested for impairment at least annually at the reporting unit level. Our policy is to perform this annual impairment test in the fourth quarter, using a measurement date of October 1st, of each fiscal year or more frequently if impairment indicators arise. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets.

        Pursuant to the aforementioned guidance we are required to determine if it is appropriate to use the operating segment, as defined under guidance for segment reporting, as the reporting unit, or one level below the operating segment, depending on whether certain criteria are met. We have identified two reporting units that are required to be reviewed for impairment. The reporting units are Data Storage and LED & Solar. In identifying the reporting units management considered the economic characteristics of operating segments including the products and services provided, production processes, types or classes of customer and product distribution.

        We perform this impairment test by first comparing the fair value of our reporting units to their respective carrying amount. When determining the estimated fair value of a reporting unit, we utilize a discounted future cash flow approach since reported quoted market prices are not available for our reporting units. Developing the estimate of the discounted future cash flow requires significant judgment and projections of future financial performance. The key assumptions used in developing the discounted future cash flows are the projection of future revenues and expenses, working capital requirements, residual growth rates and the weighted average cost of capital. In developing our financial projections, we consider historical data, current internal estimates and market growth trends. Changes to any of these assumptions could materially change the fair value of the reporting unit. We reconcile the aggregate fair value of our reporting units to our adjusted market capitalization as a supporting calculation. The adjusted market capitalization is calculated by multiplying the average share price of our common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium.

        If the carrying value of the reporting units exceed the fair value we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any.

Intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, covenants not-to-compete, software licenses and deferred financing costs. Purchased technology consists of the core proprietary manufacturing technologies associated with the products and offerings obtained through acquisition and are initially recorded at fair value. Customer-related intangible assets, patents, trademarks and covenants not-to-compete are initially recorded at fair value and software licenses and deferred financing costs are initially recorded at cost. Intangible assets with definitive useful lives are amortized using the straight-line method over their estimated useful lives for periods ranging from 2 years to 17 years.

        Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

        Long-lived assets, such as property, plant, and equipment and intangible assets with definite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, a historical or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flow expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Investee companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, the Company's share of the earnings or losses of such investee companies is not included in the Consolidated Balance Sheet or Statement of Operations. However, impairment charges are recognized in the Consolidated Statement of Operations. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded.
We believe the carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, reflected in the consolidated financial statements approximate fair value due to their short-term maturities. The fair value of our debt, including current maturities, is estimated using a discounted cash flow analysis, based on the estimated current incremental borrowing rates for similar types of securities.

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 consolidated results of operations was approximately $(1.0) million, $1.3 million and $(0.7) million in 2011, 2010 and 2009, respectively. Included in the aggregate foreign currency exchange (loss) gain were gains relating to forward contracts of $0.5 million, $0.1 million and $0.1 million in 2011, 2010 and 2009, respectively. These amounts were recognized and are included in other, net in the accompanying Consolidated Statements of Operations.

        As of 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. 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 $3.6 million, entered into in December 2011 for January 2012, will be settled in January 2012.

        The weighted average notional amount of derivative contracts outstanding during the year ended December 31, 2011 was approximately $10.3 million.

Certain of our international subsidiaries operate using local functional currencies. Foreign currency denominated assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and income and expense accounts and cash flow items are translated at average monthly exchange rates during the respective periods. Net exchange gains or losses resulting from the translation of foreign financial statements and the effect of exchange rates on intercompany transactions of a long-term investment nature are recorded as a separate component of equity in accumulated other comprehensive income. Any foreign currency gains or losses related to transactions are included in operating results.
Environmental compliance costs include ongoing maintenance, monitoring and similar costs. Such costs are expensed as incurred. Environmental remediation costs are accrued when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated.
Research and development costs are charged to expense as incurred and include expenses for the development of new technology and the transition of technology into new products or services.
We estimate the costs that may be incurred under the warranty we provide for our products and record a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Our warranty obligation is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. The carrying value of our deferred tax assets is adjusted by a partial valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net deferred tax assets consist primarily of net operating loss and tax credit carry forwards, and timing differences between the book and tax treatment of inventory, acquired intangible assets and other asset valuations. Realization of these net deferred tax assets is dependent upon our ability to generate future taxable income.

        We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under the relevant accounting guidance, factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.

        Relevant accounting guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under such guidance, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

The cost of advertising is expensed as of the first showing of each advertisement. We incurred $1.4 million, $1.3 million and $0.6 million in advertising expenses during 2011, 2010 and 2009, respectively.
Shipping and handling costs are costs that are incurred to move, package and prepare our products for shipment and then to move the products to the customer's designated location. These costs are generally comprised of payments to third-party shippers. Shipping and handling costs are included in cost of sales in our Consolidated Statements of Operations.

 Equity-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as expense over the employee requisite service period. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in the model are assumptions related to risk-free interest rate, dividend yield, expected stock-price volatility and expected option term.

        The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The dividend yield assumption is based on our historical and future expectation of dividend payouts. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and expected option term assumptions require a level of judgment which make them critical accounting estimates.

        We use an expected stock-price volatility assumption that is a combination of both historical volatility, calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option and implied volatility, utilizing market data of actively traded options on our common stock, which are obtained from public data sources. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility and that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock.

        The expected option term, representing the period of time that options granted are expected to be outstanding, is estimated using a lattice-based model incorporating historical post vest exercise and employee termination behavior.

        We estimate forfeitures using historical experience, which is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Because of the significant amount of judgment used in these calculations, it is reasonably likely that circumstances may cause the estimate to change.

        With regard to the expected option term assumption, we consider the exercise behavior of past grants and model the pattern of aggregate exercises.

Income (Loss) Per Common Share Attributable to Veeco (Tables)
Schedule of basic and diluted net income (loss) per common share and the weighted average shares

 

 

 
  Year ended December 31,  
 
  2011   2010   2009  

Net income (loss)

  $ 127,987   $ 361,760   $ (15,632 )

Net loss attributable to noncontrolling interest

            (65 )
               

Net income (loss) from continuing operations attributable to Veeco

  $ 127,987   $ 361,760   $ (15,567 )