UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

 

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý No o

 

Indicate by check mark if the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes ý No o

 

29,630,153 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on April 27, 2004.

 

 

SAFE HARBOR STATEMENT

 

This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward-looking statements may be found in Items 2 and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors that may cause these differences include, but are not limited to:

 

•                                          The cyclicality of the microelectronics industries we serve directly affects our business.

•                                          We operate in a highly competitive industry characterized by rapid technological change.

•                                          We depend on a limited number of customers that operate in highly concentrated industries.

•                                          Our quarterly operating results fluctuate significantly.

•                                          Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.

•                                          Our inability to attract, retain and motivate key employees could have a material adverse effect on our business.

•                                          We are exposed to the risks of operating a global business.

•                                          Our success depends on protection of our intellectual property rights. We may be subject to claims of intellectual property infringement by others.

•                                          We rely on a limited number of suppliers.

•                                          We may not obtain sufficient affordable funds to finance our future needs.

•                                          We are subject to risks of non-compliance with environmental and safety regulations.

•                                          We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our company by another company more difficult.

•                                          The other matters discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Consequently, such forward-looking statements should be regarded solely as the Company’s current plans, estimates and beliefs. The Company does not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.

 

Available Information

 

We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

 

Internet Address

 

We maintain a website where additional information concerning our business and various upcoming events can be found. The address of our website is www.veeco.com. We provide a link on our website, under Investors – Financial Info – SEC Filings, through which investors can access our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. These filings are posted to our Internet site, as soon as reasonably practicable after we electronically file such material with the SEC.

 

2

 

VEECO INSTRUMENTS INC.

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003
	Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure About Market Risk
Item 4.	Controls and Procedures
PART II. OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8–K
SIGNATURES

 

3

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended March 31,
		2004			2003
Net sales		$	94,487		$	65,779
Cost of sales		54,649			34,573
Gross profit		39,838			31,206
Costs and expenses:
Selling, general and administrative expense		20,112			16,915
Research and development expense		14,045			12,158
Amortization expense		4,896			3,142
Other income, net		(286		)	(873		)
Restructuring expense		—			668
Operating income (loss)		1,071			(804		)
Interest expense, net		2,199			1,767
Loss before income taxes		(1,128		)	(2,571		)
Income tax benefit		(424		)	(874		)
Net loss		$	(704	)	$	(1,697	)
Net loss per common share		$	(0.02	)	$	(0.06	)
Diluted net loss per common share		$	(0.02	)	$	(0.06	)
Weighted average shares outstanding		29,569			29,224
Diluted weighted average shares outstanding		29,569			29,224

 

See accompanying notes.

 

4

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

 

		March 31, 2004			December 31, 2003
		(Unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	111,831		$	106,830
Accounts receivable, less allowance for doubtful accounts of $2,609 in 2004 and $2,458 in 2003		76,198			69,890
Inventories		104,394			97,622
Prepaid expenses and other current assets		14,065			15,823
Deferred income taxes		34,511			24,693
Total current assets		340,999			314,858
Property, plant and equipment at cost, less accumulated depreciation of $65,651 in 2004 and $62,503 in 2003		70,903			72,742
Goodwill		72,989			72,989
Purchased technology, less accumulated amortization of $28,978 in 2004 and $25,519 in 2003		82,390			85,849
Other intangible assets, less accumulated amortization of $16,284 in 2004 and $14,846 in 2003		17,633			18,842
Long–term investments		12,461			12,376
Deferred income taxes		9,724			18,136
Other assets, net		927			672
Total assets		$	608,026		$	596,464
Liabilities and shareholders’ equity
Current Liabilities:
Accounts payable		$	25,111		$	19,603
Accrued expenses		36,682			31,616
Deferred profit		2,457			2,140
Income taxes payable		2,454			3,700
Current portion of long-term debt		338			333
Total current liabilities		67,042			57,392
Long-term debt, net of current portion		229,848			229,935
Other non-current liabilities		2,870			2,808
Shareholders’ equity		308,266			306,329
Total liabilities and shareholders’ equity		$	608,026		$	596,464

 

See accompanying notes.

 

5

 

Veeco Instruments Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2004			2003
Operating Activities
Net loss		$	(704	)	$	(1,697	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		8,083			5,738
Deferred income taxes		(1,361		)	(3,018		)
Other		(17		)	(685		)
Changes in operating assets and liabilities:
Accounts receivable		(5,885		)	(6,229		)
Inventories		(7,135		)	(2,257		)
Accounts payable		5,486			4,789
Accrued expenses, deferred profit and other current liabilities		4,022			(1,922		)
Other, net		1,318			648
Net cash provided by (used in) operating activities		3,807			(4,633		)
Investing Activities
Capital expenditures		(1,408		)	(1,826		)
Proceeds from sale of fixed assets		26			7
Proceeds from sale of assets held for sale		—			1,111
Net purchase of long-term investments		(85		)	(137		)
Net cash used in investing activities		(1,467		)	(845		)
Financing Activities
Proceeds from stock issuance		2,038			45
Repayment of long-term debt, net		(82		)	(79		)
Net cash provided by (used in) financing activities		1,956			(34		)
Effect of exchange rates on cash and cash equivalents		705			(222		)
Net change in cash and cash equivalents		5,001			(5,734		)
Cash and cash equivalents at beginning of period		106,830			214,295
Cash and cash equivalents at end of period		$	111,831		$	208,561

 

See accompanying notes.

 

6

 

VEECO INSTRUMENTS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1—Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

Loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted loss per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. The effect of common equivalent shares of approximately 755,000 and 160,000 for the three months ended March 31, 2004 and 2003, respectively, was antidilutive.

 

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

 

		Three Months Ended March 31,
		2004		2003
Weighted average shares outstanding		29,569		29,224
Dilutive effect of stock options		—		—
Diluted weighted average shares outstanding		29,569		29,224

 

In addition, the effect of the assumed conversion of subordinated convertible notes into approximately 5.7 million common equivalent shares was antidilutive for the three months ended March 31, 2004 and 2003, and therefore is not included in the above diluted weighted average shares outstanding.

 

The Company accounts for its stock option plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No compensation expense is reflected in net income, as all options granted under the stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions, under which compensation expense would be recognized as incurred, of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

 

		March 31,
		2004			2003
		(In thousands, except per share amounts)
Net loss, as reported		$	(704	)	$	(1,697	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,750		)	(4,808		)
Pro forma net loss		$	(3,454	)	$	(6,505	)
Loss per common share:
Net loss per common share, as reported		$	(0.02	)	$	(0.06	)
Net loss per common share, pro forma		$	(0.12	)	$	(0.22	)
Diluted net loss per common share, as reported		$	(0.02	)	$	(0.06	)
Diluted net loss per common share, pro forma		$	(0.12	)	$	(0.22	)

 

 

7

 

Reclassifications

 

Certain amounts in the 2003 consolidated financial statements have been reclassified to conform to the 2004 presentation.

 

Note 2—Balance Sheet Information

 

Inventories

 

Interim inventories have been determined by lower of cost (principally first-in, first-out) or market. Inventories consist of:

 

		March 31, 2004			December 31, 2003
		(In thousands)
Raw materials		$	49,347		$	48,678
Work-in-progress		33,950			30,297
Finished goods		21,097			18,647
		$	104,394		$	97,622

 

Accrued Warranties

 

The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time the related revenue is recognized. Factors that affect the Company’s warranty liability include historical and anticipated rates of warranty claims and costs per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary.

 

Changes in the Company’s product liability during the period are as follows (in thousands):

 

Balance as of January 1, 2004		$	3,904
Warranties issued during the period		1,349
Settlements made during the period		(838		)
Balance as of March 31, 2004		$	4,415

 

Note 3—Segment Information

 

The following represents the reportable product segments of the Company as of and for the three months ended March 31, 2004 and 2003, in thousands:

 

		Process Equipment			Metrology			Unallocated Corporate Amount			Restructuring Charges			Total
Three Months Ended March 31, 2004
Net sales		$	52,929		$	41,558		$	—		$	—		$	94,487
Income (loss) from operations before interest, taxes and amortization		1,944			6,062			(2,039		)	—			5,967
Total assets		312,241			130,083			165,702			—			608,026
Three Months Ended March 31, 2003
Net sales		29,608			36,171			—			—			65,779
Income (loss) from operations before interest, taxes and amortization		510			4,840			(2,344		)	(668		)	2,338
Total assets		$	184,266		$	134,218		$	289,196		$	—		$	607,860

 

Corporate total assets are comprised principally of cash and deferred tax assets

 

8

 

The following table outlines the components of goodwill by business segment at March 31, 2004 and December 31, 2003 (in thousands):

 

		March 31, 2004			December 31, 2003
Process Equipment		$	47,620		$	47,620
Metrology		25,369			25,369
Total		$	72,989		$	72,989

 

Note 4—Comprehensive Loss

 

As defined by the Financial Accounting Standards Board (“FASB”), comprehensive loss is the change in equity of a business enterprise from transactions, other events, and circumstances from nonowner sources during a period. The Company incurred a total comprehensive loss of $0.1 million and $2.1 million for the three months ended March 31, 2004 and 2003, respectively. The Company’s comprehensive loss is comprised of net loss, foreign currency translation adjustments and minimum pension liability.

 

Note 5—Restructuring

 

In response to the significant decline in the business environment and market conditions in 2001 and 2002, the Company restructured its business and operations. The actions giving rise to the restructuring charges taken in 2003 described below were implemented in order for Veeco to remain competitive and such actions are expected to benefit Veeco by reducing future operating costs.

 

2003 Merger and Restructuring Charges

 

During the year ended December 31, 2003, the Company incurred a restructuring charge of approximately $4.8 million related to the reduction in work force announced in the fourth quarter of 2002, as a result of the decline in the markets in which the Company operates. This charge included severance related costs for approximately 180 employees, which included management, administration and manufacturing employees located at the Company’s Fort Collins, Colorado, and Plainview and Rochester, New York process equipment operations, the San Diego, Sunnyvale and Santa Barbara, California and Tucson, Arizona metrology facilities, the sales and service offices located in Munich, Germany and Singapore, and the corporate offices in Woodbury, New York. The charge also included costs of vacating facilities in Sunnyvale, California, Munich, Germany, and relocating the office in Japan. As of March 31, 2004, approximately $4.1 million has been paid and approximately $0.7 million remains accrued. The remainder is expected to be paid by the third quarter of 2005.

 

The Company also incurred $0.6 million in merger and acquisition related expenses, which were paid during the fourth quarter of 2003.

 

A reconciliation of the liability for the restructuring charge during 2003 for severance and relocation costs is as follows (in millions):

 

		Process Equipment			Metrology			Unallocated Corporate			Total
Charged to accrual		$	2.3		$	2.1		$	0.4		$	4.8
Add-back from 2002 accrual		0.3			—			—			0.3
Total 2003 accrual		2.6			2.1			0.4			5.1
Cash payments during 2003		1.6			1.6			0.1			3.3
Cash payments during the quarter ended March 31, 2004		0.5			0.5			0.1			1.1
Balance as of March 31, 2004		$	0.5		$	0.0		$	0.2		$	0.7

 

9

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Executive Summary:

 

Veeco designs, manufactures, markets and services a broad line of equipment primarily used by manufacturers in the data storage, semiconductor and compound semiconductor/wireless industries. Veeco’s instruments are also enabling advancements in the growing field of nanoscience and other areas of scientific and industrial research. Our process equipment products precisely deposit or remove (etch) various materials in the manufacturing of advanced thin film magnetic heads (TFMHs) for the data storage industry, semiconductor deposition of mask reticles, and wireless/telecommunications and high brightness light emitting diode devices (“HB-LED”). Our metrology equipment is used to provide critical surface measurements on semiconductor devices and TFMHs. This equipment allows customers to monitor their products throughout the manufacturing process in order to improve yields, reduce costs and improve product quality. Our metrology solutions are also key research instruments used by many universities, scientific laboratories and industrial applications.

 

During the past several years, we have strengthened both the metrology and process equipment product lines through strategic acquisitions. In our metrology business, in June 2003, we purchased the atomic force microscope probe business from NanoDevices Inc. (“NanoDevices”) for approximately $6.0 million in cash, plus a potential future cash earn-out payment of up to $3.0 million based on the achievement of certain operating measures. In our process equipment business, in November 2003, we purchased the TurboDisc business from Emcore Corporation for approximately $63.7 million, including transaction costs, plus a potential future cash earn-out payment of up to $20.0 million based on the achievement of certain operating measures. Also in November 2003, we acquired the precision bar lapping company Advanced Imaging, Inc. (“Aii”) for approximately $61.4 million including transaction costs, plus a potential future cash earn-out payment of up to $9.0 million based on the achievement of certain operating measures. While we believe these acquisitions will be accretive to both sales and profits going forward, gross margin percentages have been historically lower in the process equipment businesses than in the metrology business. Therefore, Veeco’s gross margin percentage may be adversely affected in the future by the higher concentration of process equipment sales.

 

We currently maintain manufacturing facilities in Arizona, California, Colorado, Minnesota, New Jersey, and New York, with sales and service locations around the world. Each of our products is currently manufactured in only one location, since we believe that the technological know-how and precision needed to make each of our products requires specialized expertise.

 

Highlights of the First Quarter of 2004:

 

•                  Orders of $117.1 million, up from $72.7 million in the first quarter of 2003. The order growth included $35.9 million from companies acquired in 2003 and $8.4 million (11.5%) from Veeco’s base business.

•                  Sales of $94.5 million, up from $65.8 million in the first quarter of 2003. The sales growth includes $19.7 million from companies acquired in 2003 and $9.0 million (13.7%) from Veeco’s base business.

•                  Net loss of $0.7 million, compared with a net loss of $1.7 million in the first quarter of 2003.

•                  Cash generation of $5.0 million, compared with a cash use of $5.7 million in the first quarter of 2003. The cash generation included $3.8 million generated from operations.

 

Outlook/Opportunities

 

The last several years have been challenging for Veeco, its customers and peers due to the prolonged economic downturn and several years of under-investment in technology. In the first quarter of 2004, Veeco experienced a significant improvement in orders in data storage, compound semiconductor/wireless, and research products, driven by increased capital expenditure across these markets. Overall, worldwide economic conditions appear to have improved. Consumer spending on many types of electronics has increased and various worldwide economies, such as those in the Asia-Pacific region, are experiencing growth. The Company reviews a number of indicators to predict the strength of our markets going forward. These include plant utilization trends, capacity requirements, and capital spending trends.

 

Technology changes are continuing in all of Veeco’s markets: the continued ramp of 80 GB hard drives in data storage; the increased use of Veeco’s automated AFMs for sub 130 nanometer semiconductor applications; the opportunity for Veeco’s Metal Organic Chemical Vapor Deposition (“MOCVD”) and Molecular Beam Epitaxy (“MBE”) to further penetrate the emerging wireless and HB-LED market; and the continued funding of nanoscience research. Veeco expects that its business will continue to improve in 2004 as compared to 2003, and that its newer technologies (MOCVD and precision bar lapping) will add over $80 million in revenue for 2004 compared with only a minimal contribution to Veeco’s 2003 performance due to the fact that these acquisitions were consummated near the end of the year. However, there can be no assurance, that Veeco’s performance expectations will be realized.

 

10

 

Results of Operations:

 

Three Months Ended March 31, 2004 and 2003

 

The following tables show selected items of Veeco’s Consolidated Statements of Operations, percentages of sales, and comparisons between the three months ended March 31, 2004 and 2003 and the analysis of sales and orders for the same periods between our segments, industries, and regions (in $000’s):

 

 

		Three Months ended March 31,											Dollar Inc/(Dec) Year to year
		2004						2003
Net sales		$		94,487		100.0	%	$	65,779		100.0	%	$	28,708
Cost of sales		54,649				57.8		34,573			52.6		20,076
Gross profit		39,838				42.2		31,206			47.4		8,632
Operating expenses:
Selling, general and administrative expense		20,112				21.3		16,915			25.7		3,197
Research and development expense		14,045				14.9		12,158			18.5		1,887
Amortization expense		4,896				5.2		3,142			4.8		1,754
Other income, net		(286			)	(0.3	)	(873		)	(1.3	)	587
Merger and restructuring expenses		—				—		668			1.0		(668		)
Total operating expenses		38,767				41.1		32,010			48.7		6,757
Operating income (loss)		1,071				1.1		(804		)	(1.3	)	1,875
Interest expense, net		2,199				2.3		1,767			2.6		432
Loss from operations before income taxes		(1,128			)	(1.2	)	(2,571		)	(3.9	)	1,443
Income tax benefit		(424			)	(0.5	)	(874		)	(1.3	)	450
Net loss		$	(704		)	(0.7	)%	$	(1,697	)	(2.6	)%	$	993

 

11

 

		Sales											Orders
		Three Months ended March 31,						Dollar and Percentage Inc/(Dec) Year to Year					Three Months ended March 31,						Dollar and Percentage Inc/(Dec) Year to Year					Book to Bill Ratio
		2004			2003								2004			2003								2004		2003
Segment Analysis
Process Equipment		$	52,929		$	29,608		$	23,321		78.8	%	$	85,168		$	38,314		$	46,854		122.3	%	1.61			1.29
Metrology		41,558			36,171			5,387			14.9		31,893			34,431			(2,538		)	(7.4	)	0.77			0.95
Total		$	94,487		$	65,779		$	28,708		43.6	%	$	117,061		$	72,745		$	44,316		60.9	%	1.24			1.11
Industry Analysis
Data Storage		$	31,456		$	19,053		$	12,403		65.1	%	$	44,948		$	29,700		$	15,248		51.3	%	1.43			1.56
Compound Semiconductor/wireless		20,654			6,196			14,458			233.3		38,981			10,461			28,520			272.6		1.89			1.69
Semiconductor		13,304			11,297			2,007			17.8		10,063			11,802			(1,739		)	(14.7	)	0.76			1.04
Research and Industrial		29,073			29,233			(160		)	(0.5	)	23,069			20,782			2,287			11.0		0.79			0.71
Total		$	94,487		$	65,779		$	28,708		43.6	%	$	117,061		$	72,745		$	44,316		60.9	%	1.24			1.11
Regional Analysis
US		$	34,459		$	25,104		$	9,355		37.3	%	$	44,073		$	29,575		$	14,498		49.0	%	1.28			1.18
Europe		13,335			11,975			1,360			11.4		12,704			8,887			3,817			43.0		0.95			0.74
Japan		19,136			15,520			3,616			23.3		16,525			18,080			(1,555		)	(8.6	)	0.86			1.16
Asia Pacific		27,557			13,180			14,377			109.1		43,759			16,203			27,556			170.1		1.59			1.23
Total		$	94,487		$	65,779		$	28,708		43.6	%	$	117,061		$	72,745		$	44,316		60.9	%	1.24			1.11

 

Net sales of $94.5 million for the first quarter of 2004 were up 43.6% from the comparable 2003 period. By segment, process equipment sales were up $23.3 million or 78.8%, while metrology sales increased by $5.4 million or 14.9%. The improvement in process equipment sales is principally attributable to increases in the data storage and compound semiconductor markets. While $19.6 million of the $23.3 million increase is attributable to the acquisitions of the TurboDisc business and Aii, Veeco’s historic process equipment business experienced a 13.7% increase in net sales in the first quarter of 2004 when compared to the first quarter of 2003. The $5.4 million improvement in metrology sales is principally attributable to increased optical metrology sales to the scientific research market and increased automated AFM sales to the semiconductor market. By region, there continues to be a shift in sales from the U.S. to the Asia Pacific region, although all regional sales have increased due to the TurboDisc business and Aii acquisitions, particularly the Asia Pacific region, which saw a $10.2 million increase in sales in the first quarter of 2004 due to the acquired companies. The Company believes that there will continue to be quarter-to-quarter variations in the geographic distribution of sales.

 

Orders of $117.1 million for the first quarter of 2004 were a $44.3 million, or a 60.9% increase over the comparable 2003 period. By segment, the 122.3% improvement in process equipment orders was driven by a total of $35.9 million in orders for TurboDisc and Aii systems plus a net $11.0 million increase in deposition and etch product orders. The 7.4% reduction in metrology orders was due to a $0.9 reduction in AFM and a $1.6 million decrease in optical metrology products, where there were a large number of slider crown systems ordered in the first quarter of 2003 that did not recur in 2004.

 

The Company’s book/bill ratio for the first quarter of 2004, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.24. During the quarter ended March 31, 2004, the Company experienced order cancellations of $0.2 million and the rescheduling of order delivery dates by customers. Due to changing business conditions and customer requirements, the Company may continue to experience cancellations and/or rescheduling of orders.

 

Gross profit for the quarter ended March 31, 2004, was 42.2%, including a $1.5 million reduction in gross profit related to the acquisitions of TurboDisc and Aii. This charge was the result of purchase accounting adjustments due to the required capitalization of profit in inventory and permanent elimination of certain deferred revenue.  Excluding the impact of this purchase accounting adjustment, gross profit as a percentage of net sales was 43.7% in the first quarter of 2004, compared to 47.4% in the first quarter of 2003. This decrease was partially due to an 11.0% mix shift from the higher margin metrology segment to the lower margin process equipment segment, largely due to the 2003 acquisitions. Excluding the purchase accounting charges, process equipment margins decreased from 38.8% to 36.5%. The New York data storage equipment gross margin was impacted by a greater number of bifurcated sales in the first quarter of 2004 as compared to the first quarter of 2003, which results in the deferral of gross profit until final field acceptance.

 

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There was also a less favorable mix of products in the first quarter of 2004 as compared to the first quarter of 2003. Metrology gross margins decreased from 54.5% to 52.9%. The first quarter 2004 metrology gross margin was consistent with the average 2003 metrology gross margin, but below the first quarter of 2003 which had a favorable product mix.

 

Selling, general and administrative expenses were $20.1 million, or 21.3% of sales in the first quarter of 2004, compared with $16.9 million, or 25.7% in the first quarter of 2003. Of the $3.2 million increase, $2.3 million was due to the TurboDisc and Aii acquisitions, with the balance attributable to higher selling expenses related to the increase in sales.

 

Research and development expense totaled $14.0 million in the first quarter of 2004, an increase of $1.9 million from the first quarter of 2003, also due to the spending in the newly acquired TurboDisc and Aii divisions. As a percentage of sales, research and development decreased in the first quarter of 2004 to 14.9% from 18.5% for the first quarter of 2003.

 

Other income, net, of $0.3 million for the first quarter of 2004 was principally due to foreign exchange gains, compared to a gain of $0.9 million in the first quarter of 2003, which was principally from the sale of a laboratory tool.

 

Restructuring expenses for the first quarter of 2003 of $0.7 million were primarily due to severance for layoffs that were related to the actions announced in the fourth quarter of 2002. There were no merger or restructuring expenses in the first quarter of 2004.

 

Net Interest expense in the first quarter of 2004 was $2.2 million compared to $1.8 million in the first quarter of 2003. The change is due to the reduction in interest income resulting from lower cash balances as a result of the acquisitions completed in the fourth quarter of 2003.

 

Income taxes for the quarter ended March 31, 2004, amounted to a benefit of $0.4 million, or 37.6% of loss before income taxes as compared with a benefit of $0.9 million, or 34.0% of loss before income taxes in 2003.

 

Liquidity and Capital Resources

 

The Company had a net increase in cash of $5.0 million in the three months ended March 31, 2004. Cash provided by operations was $3.8 million for this period, as compared to cash used in operations of $4.6 million for the comparable 2003 period. Net loss adjusted for non-cash items provided operating cash flows of $6.0 million for the three months ended March 31, 2004, compared to $0.3 million for the comparable 2003 period. The amount of net loss adjusted for non-cash items for the three months ended March 31, 2004, was offset by an increase in net operating assets and liabilities of $2.2 million. Accounts receivable for the three months ended March 31, 2004, increased by $5.9 million, primarily as a result of a higher sales volumes. During the three months ended March 31, 2004, inventories increased by approximately $7.1 million, principally related to the build up of work-in-process and finished goods for products to be shipped in the second quarter of 2004. During the three months ended March 31, 2004, accounts payable increased by $5.5 million, principally as a result of higher purchase volumes to meet shipment demand. Accrued expenses and other current liabilities increased $4.0 million during the three months ended March 31, 2004 due to accrued interest of $2.2 million for the required semi-annual interest payment of the subordinated notes and a $2.6 million increase in customer deposits partially offset by other smaller items that net to a reduction of $0.8 million.

 

Cash used in investing activities of $1.5 million for the three months ended March 31, 2004, resulted from capital expenditures of $1.4 million and net purchases of long-term investments of $0.1 million.

 

The Company believes that existing cash balances together with cash generated from operations and amounts available under the Company’s $100.0 million revolving credit facility will be sufficient to meet the Company’s projected working capital and other cash flow requirements for the next twelve months, as well as the Company’s contractual obligations, over the next three years. The Company believes it will be able to meet its obligation to repay the outstanding $220 million subordinated notes that mature on December 21, 2008 through a combination of conversion of the notes outstanding, refinancing, cash generated from operations, and/or other means.

 

The Company is potentially liable for payment of earn-out features to the former owners of the businesses acquired in 2003 based on revenue targets achieved by the acquired businesses. The maximum amount of these contingent liabilities is $9 million to the former shareholders of Aii over a three-year period, $3 million to Nanodevices, Inc, over a three-year period, and $20 million to Emcore Corporation, the former owner of TurboDisc, over a two-year period. Any amounts payable are to be paid during the first quarter of 2005, 2006, and 2007 to the former owners of Aii and to Nanodevices, respectively, and during the first quarter of 2005 and 2006 to Emcore. Each payment is based on a set percentage of revenues in excess of certain targets for the preceding fiscal year. Therefore, it is not possible to calculate the amounts, if any, that may be due for each year.

 

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Application of Critical Accounting Policies

 

General: Veeco’s discussion and analysis of its financial condition and results of operations are based upon Veeco’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Veeco to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, intangible assets and other long lived assets, income taxes, warranty obligations, restructuring costs and contingent litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company considers certain accounting policies related to revenue recognition, the valuation of inventories, the impairment of goodwill and indefinite-lived intangible assets and the impairment of long lived assets to be critical policies due to the estimation processes involved in each.

 

Revenue Recognition: Effective January 1, 2000, the Company changed its method for accounting for revenue recognition in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements. In December 2003, the SEC issued SAB No. 104, Revenue Recognition, which updates the guidance provided in SAB 101, integrates the related Frequently Asked Questions, and recognizes the role of the FASB’s Emerging Issues Task Force (“EITF”) consensus on Issue 00-21. SAB 104 deletes certain interpretive material no longer necessary, and conforms the remaining interpretative material retained to the pronouncements issued by the EITF on various revenue recognition topics, including EITF 00-21. It further clarifies that a company should first refer to EITF 00-21 in order to determine if there is more than one unit of accounting and then to refer to SAB 104 for revenue recognition for the unit of accounting. The Company recognizes revenue when persuasive evidence of an arrangement exists, the seller’s price is fixed or determinable and collectibility is reasonably assured. For products produced according to the Company’s published specifications, where no installation is required or installation is deemed perfunctory and no substantive customer acceptance provisions exist, revenue is recognized when title passes to the customer, generally upon shipment. For products produced according to a particular customer’s specifications, revenue is recognized when the product has been tested and it has been demonstrated that it meets the customer’s specifications and title passes to the customer. The amount of revenue recorded is reduced by the amount of any customer retention (generally 10% to 20%), which is not payable by the customer until installation is completed and final customer acceptance is achieved. Installation is not deemed to be essential to the functionality of the equipment since installation does not involve significant changes to the features or capabilities of the equipment or building complex interfaces and connections. In addition, the equipment could be installed by the customer or other vendors and generally the cost of installation approximates only 1% to 2% of the sales value of the related equipment. 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 customer specifications at the customer site, revenue is recognized upon completion of installation and receipt of final customer acceptance. Since title to goods generally passes to the customer upon shipment and 80% to 90% of the contract amount becomes payable at that time, inventory is relieved and accounts receivable is recorded for the amount billed at the time of shipment. The profit on the amount billed for these transactions is deferred and recorded as deferred profit in the accompanying balance sheets. At March 31, 2004 and December 31, 2003, $2.5 million and $2.1 million, respectively, are recorded in deferred profit. Service and maintenance contract revenues are recorded as deferred revenue, which is included in other accrued expenses, and recognized as revenue on a straight-line basis over the service period of the related contract. The Company provides for warranty costs at the time the related revenue is recognized.

 

Inventory Valuation: 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. The Company’s policy is to assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts. Obsolete inventory or inventory in excess of management’s estimated usage for the next 18 to 24 month’s 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 Veeco’s future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses and ultimate realization of excess inventory.

 

Goodwill and Indefinite-Lived Intangible Asset Impairment: The Company has significant intangible assets related to goodwill and other acquired intangibles. In assessing the recoverability of the Company’s goodwill and other indefinite-lived intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If it is determined that impairment indicators are present and that the assets will not be fully recoverable, their carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic 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 levels for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Changes in strategy and/or market conditions could significantly impact these assumptions, and thus Veeco may be required to record impairment charges for the assets not previously recorded.

 

14

 

Long Lived Asset Impairment: The carrying values of long-lived assets are periodically reviewed to determine if any impairment indicators are present. If it is determined that such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining depreciation period, their carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic 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 is identifiable cash flows that are largely independent of the cash flows generated by other asset groups.

 

Deferred Taxes: As part of the process of preparing Veeco’s consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, 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 sheet. The measurement of deferred tax assets is adjusted by a valuation allowance to recognize the extent to which, more likely than not, the future tax benefits will be recognized.

 

At March 31, 2004, we have deferred tax assets, net of valuation allowances, of $44.2 million. We believe it is more likely than not that we will be able to realize these assets through the reduction of future taxable income.

 

We record valuation allowances 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. Should we determine that we are unable to use all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income tax expense, thereby reducing net income in the period such determination was made.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

 

Veeco’s net sales to foreign customers represented approximately 63.5% of Veeco’s total net sales for the three months ended March 31, 2004, and 61.8% for the comparable 2003 period. The Company expects that net sales to foreign customers will continue to represent a large percentage of Veeco’s total net sales. Veeco’s net sales denominated in foreign currencies represented approximately 46.8% of Veeco’s total net sales for the three months ended March 31, 2004, and 32.8% for the comparable 2003 period. The aggregate foreign currency exchange gain included in determining the consolidated results of operations was approximately $0.1 and $0.2 million, net of approximately $0.2 and ($0.2) million of hedging gains (losses) on forward exchange contracts, for the three months ended March 31, 2004 and 2003 respectively. Veeco is exposed to financial market risks, including changes in foreign currency exchange rates. The changes in currency exchange rates that have the largest impact on translating Veeco’s international operating profit are the Japanese Yen and the Euro. To mitigate these risks, Veeco uses derivative financial instruments. Veeco does not use derivative financial instruments for speculative or trading purposes. The Company enters into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known currency exposures. The average notional amount of such contracts was approximately $5.1 million for the three months ended March 31, 2004. As of March 31, 2004, the Company had entered into forward contracts for the month of April for the notional amount of approximately $20.7 million, which approximates the fair market value on March 31, 2004. Additionally, the Company has entered into a forward contract on March 18, 2004, in the notional amount of $0.5 million which approximates the fair market value on March 31, 2004. This contract will be settled on or about June 15, 2004.

 

15

 

Item 4. Controls and Procedures.

 

The Company’s senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures under the supervision of and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings.

 

Subsequent to that evaluation there have been no significant changes in our internal controls or other factors that could significantly affect these controls after such evaluation.

 

16

 

Part II.

 

Item 6. Exhibits and Reports on Form 8-K.

 

(a)                                  Exhibits

 

Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.

 

Number		Description		Incorporated by Referenceto the Following Document:
10.1		Seventh Amendment dated as of February 5, 2004 to the Credit Agreement, dated April 19, 2001 among Veeco Instruments Inc., Fleet National Bank, as administrative agent, JPMorgan Chase Bank, as syndication agent, HSBC Bank USA, as documentation agent and the lenders named therein.		Annual Report on Form 10-K for the Year Ended December 31, 2003, Exhibit 10.8
10.2		Letter Agreement dated January 21, 2004 between the Company and John P. Kiernan.		Annual Report on Form 10-K for the Year Ended December 31, 2003, Exhibit 10.38
31.1		Certification of Chief Executive Officer pursuant to 13a – 14(a) or Rule 15d – 14(a) of the Securities and Exchange Act of 1934.		*
31.2		Certification of Chief Financial Officer pursuant to 13a – 14(a) or Rule 15d – 14(a) of the Securities and Exchange Act of 1934.		*
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		*
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		*

 

*                                         Filed herewith

 

(b)                                 Reports on Form 8-K.

 

The Registrant filed a Current Report on Form 8-K on April 26, 2004 in connection with the issuance of its press release announcing the results of the first quarter ended March 31, 2004.

 

17

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 3, 2004

 

 

	Veeco Instruments Inc.
	By:	/s/ EDWARD H. BRAUN
		Edward H. Braun Chairman and Chief Executive Officer
	By:	/s/ JOHN F. REIN, JR.
		John F. Rein, Jr. Executive Vice President, Chief Financial Officer and Secretary

 

18

 

INDEX TO EXHIBITS

 

Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.

 

Number		Description		Incorporated by Reference to the Following Document:
10.1		Seventh Amendment dated as of February 5, 2004 to the Credit Agreement, dated April 19, 2001 among Veeco Instruments Inc., Fleet National Bank, as administrative agent, JPMorgan Chase Bank, as syndication agent, HSBC Bank USA, as documentation agent and the lenders named therein.		Annual Report on Form 10-K for the Year Ended December 31, 2003, Exhibit 10.8
10.2		Letter Agreement dated January 21, 2004 between the Company and John P. Kiernan.		Annual Report on Form 10-K for the Year Ended December 31, 2003, Exhibit 10.38
31.1		Certification of Chief Executive Officer pursuant to 13a – 14(a) or Rule 15d – 14(a) of the Securities and Exchange Act of 1934.		*
31.2		Certification of Chief Financial Officer pursuant to 13a – 14(a) or Rule 15d – 14(a) of the Securities and Exchange Act of 1934.		*
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		*
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		*

 

*                                         Filed herewith