Safe Harbor Statement

This quarterly report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing such forward-looking statements may be found in Part I - Items 1, 2, and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future 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.

In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2016.~~2017. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.

The risks and uncertainties of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “we,” “us,” and “our,” unless the context indicates otherwise) include, without limitation, the following:

· Unfavorable market conditions may adversely affect our operating results;

· A reduction or elimination of foreign government subsidies and economic incentives may adversely affect the future order rate for our MOCVD equipment;

· The cyclicality of the industries we serve directly affects our business;

· We operate in industries characterized by rapid technological change;

· We have a concentrated customer base, located primarily in a limited number of regions, which operate in highly concentrated industries;

· We face significant competition;

· The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly;

· Our sales cycle is long and unpredictable;

· Our backlog is subject to customer cancellation or modification which could result in decreased sales, increased inventory obsolescence, and/or liabilities to our suppliers for products no longer needed;

· Our failure to estimate customer demand accurately could result in inventory obsolescence, liabilities to our suppliers for products no longer needed, and/or manufacturing interruptions or delays which could affect our ability to meet customer demand;

· Our failure to successfully manage our outsourcing activities or failure of our outsourcing partners to perform as anticipated could adversely affect our results of operations and our ability to adapt to fluctuating order volumes;

· We rely on a limited number of suppliers, some of whom are our sole source for particular components;

· Our inability to attract, retain, and motivate employees could have a material adverse effect on our business;

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

· Timing of market adoption of LED technology for general lighting is uncertain;

· Our sales to manufacturers are highly dependent on sales of consumer electronics applications, which can experience significant volatility due to seasonal and other factors and materially adversely impact our future results of operations;

· Our operating results have been, and may continue to be, adversely affected by tightening credit markets;

· We are exposed to the risks of operating a global business, including the need to obtain export licenses for certain of our shipments and political risks in the countries we operate;

· We may be exposed to liabilities under the Foreign Corrupt Practices Act and any determination that we violated these or similar laws could have a material adverse effect on our business;

· We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act and any delays or difficulty in satisfying these requirements or negative reports concerning our internal controls could adversely affect our future results of operations and our stock price;

· Changes in accounting pronouncements or taxation rules or practices may adversely affect our financial results;

· Our income taxes can change;

·�� We may be required to take additional impairment charges on assets;

· We have indebtedness in the form of convertible senior notes which could adversely affect our financial position, prevent us from implementing our strategy, and dilute the ownership interest of our existing shareholders;

· The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, could have a material effect on our reported financial results;

· The price of our common shares is volatile and could decline significantly;

· The enforcement and protection of our intellectual property rights may be expensive and/or divert our limited resources;

· We may be subject to claims of intellectual property infringement by others;

· We are subject to foreign currency exchange risks;

· If we are subject to cyber-attacks we could incur substantial costs and, if such attacks are successful, we could incur significant liabilities, reputational harm, and disruption to our operations;

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

· We are subject to risks of non-compliance with environmental, health, and safety regulations;

· Regulations related to conflict minerals will force us to incur additional expenses, may make our supply chain more complex, and may result in damage to our relationships with customers; ~~and~~

· We have significant operations in locations which could be materially and adversely impacted in the event of a natural disaster, an act of terrorism or other significant ~~disruption.~~disruption; and

· We may not be able to successfully integrate the business of Ultratech with our own or realize the anticipated benefits of the merger.

Consequently, such forward looking statements and estimates should be regarded solely as the current plans and beliefs of Veeco. We do not undertake any obligation to update any forward looking statements to reflect future events or circumstances after the date of such statements.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Veeco Instruments Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)

	September 30,			December 31,			June 30,			December 31,
	2016			2015			2017			2016
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	274,018		$	269,232		$	205,564		$	277,444
Short-term investments	62,835			116,050			97,086			66,787
Accounts receivable, net	50,463			49,524			108,349			58,020
Inventories	86,651			77,469			119,935			77,063
Deferred cost of sales	3,165			2,100			4,439			6,160
Prepaid expenses and other current assets	19,099			22,760			24,909			16,034
Assets held for sale	12,129			5,000
Total current assets	508,360			542,135			560,282			501,508
Property, plant and equipment, net	57,557			79,590			82,546			60,646
Intangible assets, net	61,812			131,674			396,097			58,378
Goodwill	114,908			114,908			303,160			114,908
Deferred income taxes	1,384			1,384			2,528			2,045
Other assets	21,047			21,098			25,056			21,047
Total assets	$	765,068		$	890,789		$	1,369,669		$	758,532

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	27,455		$	30,074		$	46,040		$	22,607
Accrued expenses and other current liabilities	38,421			49,393			44,305			33,201
Customer deposits and deferred revenue	79,699			76,216			76,985			85,022
Income taxes payable	1,825			6,208			4,316			2,311
Current portion of long-term debt	361			340			1,013			368
Total current liabilities	147,761			162,231			172,659			143,509
Deferred income taxes	13,146			11,211			46,291			13,199
Long-term debt	920			1,193			270,071			826
Other liabilities	6,503			1,539			11,163			6,403
Total liabilities	168,330			176,174			500,184			163,937
Stockholders’ equity:
Preferred stock, 500,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $0.01 par value; 120,000,000 shares authorized; 40,837,811 shares issued and 40,596,820 shares outstanding at September 30, 2016; 40,995,694 shares issued and 40,526,902 shares outstanding at December 31, 2015.	408			410
Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding							—			—
Common stock, $0.01 par value; 120,000,000 shares authorized; 48,382,213 and 40,714,790 shares issued at June 30, 2017 and December 31, 2016, respectively; 48,382,213 and 40,588,194 shares outstanding at June 30, 2017 and December 31, 2016, respectively.							484			407
Additional paid-in capital	761,975			767,137			1,053,138			763,303
Accumulated deficit	(163,585		)	(45,058		)	(185,877		)	(168,583		)
Accumulated other comprehensive income	2,266			1,348			1,740			1,777
Treasury stock, at cost, 240,991 shares at September 30, 2016; 468,792 shares at December 31, 2015.	(4,326		)	(9,222		)
Treasury stock, at cost, 126,596 shares at December 31, 2016.							—			(2,309		)
Total stockholders’ equity	596,738			714,615			869,485			594,595
Total liabilities and stockholders’ equity	$	765,068		$	890,789		$	1,369,669		$	758,532

See accompanying Notes to the Consolidated Financial Statements.

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Net sales	$	85,482		$	140,744		$	238,842		$	370,494		$	115,066		$	75,348		$	209,452		$	153,359
Cost of sales	52,027			86,494			141,991			232,038			76,346			43,909			136,533			89,964
Gross profit	33,455			54,250			96,851			138,456			38,720			31,439			72,919			63,395
Operating expenses, net:
Research and development	19,892			19,200			63,545			57,904			18,619			21,543			33,608			43,653
Selling, general, and administrative	18,396			21,905			58,230			69,153			22,698			19,995			41,801			39,834
Amortization of intangible assets	5,261			5,891			15,785			21,832			6,354			5,273			9,221			10,524
Restructuring	1,798			469			3,993			3,509			3,257			2,095			4,595			2,195
Acquisition costs													14,133			—			15,494			—
Asset impairment	56,035			—			69,662			126			675			13,627			1,138			13,627
Other, net	795			207			884			(795		)	(10		)	159			(87		)	88
Total operating expenses, net	102,177			47,672			212,099			151,729			65,726			62,692			105,770			109,921
Operating income (loss)	(68,722		)	6,578			(115,248		)	(13,273		)	(27,006		)	(31,253		)	(32,851		)	(46,526		)
Interest income	283			256			879			787			782			290			1,575			596
Interest expense	(23		)	(95		)	(166		)	(345		)	(5,061		)	(105		)	(9,196		)	(143		)
Income (loss) before income taxes	(68,462		)	6,739			(114,535		)	(12,831		)	(31,285		)	(31,068		)	(40,472		)	(46,073		)
Income tax expense	1,136			1,433			2,677			9,360
Income tax expense (benefit)													(12,897		)	1,014			(23,179		)	1,542
Net income (loss)	$	(69,598	)	$	5,306		$	(117,212	)	$	(22,191	)	$	(18,388	)	$	(32,082	)	$	(17,293	)	$	(47,615	)

Income (loss) per common share:
Basic	$	(1.78	)	$	0.13		$	(2.99	)	$	(0.56	)	$	(0.43	)	$	(0.82	)	$	(0.42	)	$	(1.22	)
Diluted	$	(1.78	)	$	0.13		$	(2.99	)	$	(0.56	)	$	(0.43	)	$	(0.82	)	$	(0.42	)	$	(1.22	)

Weighted average number of shares:
Basic	39,131			40,846			39,193			39,729			42,656			38,965			41,160			39,035
Diluted	39,131			40,979			39,193			39,729			42,656			38,965			41,160			39,035

See accompanying Notes to the Consolidated Financial Statements.

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

Three months ended September 30,

Nine months ended September 30,

2016

2015

2016

2015

Net income (loss)

$
(69,598
)
$
5,306

$
(117,212
)
$
(22,191
)

Other comprehensive income (loss), net of tax

Unrealized gain (loss) on available-for-sale securities

(7
)
(17
)
32

9

Reclassifications from AOCI into net income

—

—

—

(1
)
Minimum pension liability

Reclassifications from AOCI into net income

866

—

866

—

Foreign currency translation

(7
)
(63
)
20

(93
)
Total other comprehensive income (loss), net of tax

852

(80
)
918

(85
)

Comprehensive income (loss)

$
(68,746
)
$
5,226

$
(116,294
)
$
(22,276
)

	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Net income (loss)	$	(18,388	)	$	(32,082	)	$	(17,293	)	$	(47,615	)
Other comprehensive income, net of tax
Unrealized gain (loss) on available-for-sale securities	53			(11		)	(61		)	39
Foreign currency translation	9			(12		)	24			27
Total other comprehensive income, net of tax	62			(23		)	(37		)	66

Comprehensive income (loss)	$	(18,326	)	$	(32,105	)	$	(17,330	)	$	(47,549	)

See accompanying Notes to the Consolidated Financial Statements.

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine months ended September 30,						Six months ended June 30,
	2016			2015			2017			2016
Cash Flows from Operating Activities
Net income (loss)	$	(117,212	)	$	(22,191	)	$	(17,293	)	$	(47,615	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	26,010			30,766			15,620			17,291
Non-cash interest expense							4,887			—
Deferred income taxes	1,529			1,794			(19,412		)	1,821
Share-based compensation expense	12,133			14,038			13,806			8,390
Asset impairment	69,662			126			1,138			13,627
Gain on sale of lab tools	—			(841		)
Provision for bad debts	160			—			92			160
Changes in operating assets and liabilities:
Accounts receivable	(1,184		)	13,484			(4,956		)	7,584
Inventories and deferred cost of sales	(10,909		)	(13,029		)	20,496			(14,577		)
Prepaid expenses and other current assets	3,661			332			608			2,404
Accounts payable and accrued expenses	(13,995		)	368			(7,103		)	(9,156		)
Customer deposits and deferred revenue	3,568			(7,929		)	(12,872		)	(10,378		)
Income taxes receivable and payable, net	80			2,323
Long-term income tax liability							(4,877		)	—
Other, net	2,189			2,609			277			(682		)
Net cash provided by (used in) operating activities	(24,308		)	21,850			(9,589		)	(31,131		)

Cash Flows from Investing Activities
Acquisitions of businesses, net of cash acquired							(399,478		)	—
Capital expenditures	(10,717		)	(11,069		)	(10,057		)	(9,179		)
Proceeds from the sale of investments	131,297			68,647			235,586			78,145
Payments for purchases of investments	(78,376		)	(17,000		)	(219,141		)	(35,533		)
Proceeds from sale of building	693			—
Proceeds from sale of lab tools	—			2,648
Other	(230		)	(662		)	—			(213		)
Net cash provided by investing activities	42,667			42,564
Net cash provided by (used in) investing activities							(393,090		)	33,220

Cash Flows from Financing Activities
Proceeds from stock option exercises	473			1,344
Proceeds (tax withholdings) from stock option exercises and employee stock purchase plan							1,498			473
Restricted stock tax withholdings	(1,184		)	(2,129		)	(6,294		)	(665		)
Purchases of common stock	(13,349		)	—			—			(13,349		)
Proceeds from employee stock purchase plan	719			—
Repayments of long-term debt	(252		)	(233		)
Net cash used in financing activities	(13,593		)	(1,018		)
Proceeds from long-term debt borrowings							335,751			—
Principal payments on long-term debt							(180		)	(166		)
Net cash provided by (used in) financing activities							330,775			(13,707		)

Effect of exchange rate changes on cash and cash equivalents	20			(93		)	24			27
Net increase in cash and cash equivalents	4,786			63,303
Net increase (decrease) in cash and cash equivalents							(71,880		)	(11,591		)
Cash and cash equivalents - beginning of period	269,232			270,811			277,444			269,232
Cash and cash equivalents - end of period	$	274,018		$	334,114		$	205,564		$	257,641

Supplemental Disclosure of Cash Flow Information
Interest paid	$	179		$	104		$	65		$	103
Income taxes paid	1,456			6,040			1,422			1,284
Non-cash operating and financing activities
Net transfer of inventory to property, plant and equipment							33			—

See accompanying Notes to the Consolidated Financial Statements.

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~(unaudited)~~

Note 1 - Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 (“~~2015~~2016 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature. Certain amounts previously reported have been reclassified in the financial statements to conform to the current presentation.

Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2017 interim quarters end on April 2, July 2, and October 1, and the 2016 interim quarters ~~end~~ended on April 3, July 3, and October ~~2, and the 2015 interim quarters ended on March 29, June 28, and September 27.~~2. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.

Revenue recognition

Veeco recognizes revenue when all of the following criteria have been met: persuasive evidence of an arrangement exists with a customer; delivery of the specified products has occurred or services have been rendered; prices are contractually fixed or determinable; and collectability is reasonably assured. Revenue is recorded including shipping and handling costs and excluding applicable taxes related to sales.

Contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, maintenance, and service plans. Judgment is required to properly identify the accounting units of the multiple-element arrangements and to determine how the revenue should be allocated among the accounting units. Veeco also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single, multiple-element arrangement based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria have been met in order to recognize revenue in the appropriate accounting period.

When there are separate units of accounting, Veeco allocates revenue to each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or the best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Veeco uses BESP for the ~~majority of the~~ elements in its arrangements. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.

Veeco considers many facts when evaluating each of its sales arrangements to determine the timing of revenue recognition including its contractual obligations, the customer’s creditworthiness, and the nature of the customer’s post-delivery acceptance provisions. Veeco’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For the majority of the arrangements, a customer source inspection of the system is performed in Veeco’s facility or test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When Veeco objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery, revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date, subject to the retention amount constraint described ~~below.~~below for certain contracts. For new products, new applications of existing products, or for products with substantive customer acceptance provisions

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~

where Veeco cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue and the associated costs are deferred and fully recognized upon the receipt of final customer acceptance, assuming all other revenue recognition criteria have been met.

~~Veeco’s~~The Company’s system sales arrangements, including certain upgrades, generally do not contain provisions for the right of return, forfeiture, refund, or other purchase price ~~concessions.~~concession. In the rare instances where such provisions are included, all revenue is deferred until such rights expire. The sales arrangements generally include installation. The installation process is not deemed essential to the functionality of the equipment since it is not complex; it does not require significant changes to the features or capabilities of the equipment or involve constructing elaborate interfaces or connections subsequent to factory acceptance. Veeco has a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage Veeco to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, installation is deemed to be inconsequential or perfunctory relative to the system sale as a whole, and as a result, installation service is not considered a separate element of the arrangement. As such, Veeco records the cost of the installation at the earlier of the time of revenue recognition for the system or when installation services are performed.

In ~~many~~certain cases Veeco’s products are sold with a billing retention, typically 10% of the sales price, which is billed by Veeco and payable by the customer when field acceptance provisions are completed. The amount of revenue recognized upon delivery of a system or upgrade, if any, is limited to the lower of i) the amount billed that is not contingent upon acceptance provisions or ii) the value of the arrangement consideration allocated to the delivered elements, if such sale is part of a multiple-element arrangement.

Veeco’s contractual terms with customers in Japan generally specify that title and risk and rewards of ownership transfer upon customer acceptance. A distributor is used for almost all sales to customers in Japan. Title passes to the distributor upon shipment; however, due to customary local business practices, generally the risk and rewards of ownership of the systems transfer to the end-customers upon their acceptance. As a result, for customers in Japan, Veeco recognizes revenue upon receipt of written acceptance from the end-customer.

~~Veeco~~The Company recognizes revenue related to maintenance and service contracts ratably over the applicable contract term. Veeco recognizes revenue from the sales of components, spare parts, and specified service engagements at the time of delivery in accordance with the terms of the applicable sales arrangement.

Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred, even if the related revenue is deferred in accordance with the above policy.

Recent accounting pronouncements

~~In May 2014, the~~The FASB issued ~~Accounting Standards Update (“ASU”)~~ASU 2014-09, as amended:Revenue from Contracts with Customers, which has been codified as Accounting Standards Codification 606 (“~~ASC606”~~ASC 606”). ~~ASC606~~ASC 606 requires ~~Veeco’s~~the Company’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which ~~Veeco~~it expects to be entitled in exchange for those goods or services. ~~ASC606~~ASC 606 outlines a five-step model to make the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adopt ~~ASC606~~ASC 606 for reporting periods beginning after December 15, ~~2017. ASC606~~2017, but can adopt early for annual periods beginning after December 15, 2016. The Company is still completing its evaluation of the impact of adopting this standard; however, the Company currently expects the most significant financial statement impacts of adopting ASC 606 will be the elimination of the constraint on revenue associated with the billing retention related to the receipt of customer final acceptance as well as the identification of installation services as a performance obligation. The elimination of the constraint on revenue related to customer final acceptance, which is usually about 10 percent of a system sale, will generally be recognized at the time the Company transfers control of the system to the customer, which is earlier than under the Company’s current revenue recognition model for certain contracts that are subject to the billing retention constraint described above. The new performance obligation related to installation services under the new standard will generally be recognized as the installation services are performed, which is later than under the Company’s current revenue recognition model. Taken together, the Company currently believes there will be a net acceleration of a small percentage of its revenue under ASC 606 as compared to its current revenue recognition model. ASC 606 provides for different transition ~~alternatives. Veeco has not yet determined~~alternatives, and the Company is evaluating which method of adoption will be selected. Veeco is evaluating the impact of adopting ASC606 on its consolidated financial statements and related financial statement disclosures. A preliminary assessment of ASC606 indicates that the billing retention will no longer impact the timing of revenue recognition. As a result, a small portion of revenue for system sales arrangements may be recognized earlier under ASC606 than it is under current U.S. GAAP.

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes~~ to ~~the Consolidated Financial Statements - continued~~select.

~~(unaudited)~~

In January 2016, the FASB issued ASU 2016-01: Financial Instruments — Overall, which requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017; early adoption is permitted. ~~Veeco~~The Company does not expect this ASU will have a material impact on ~~its~~the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02: Leases, which generally requires ~~Veeco’s~~ operating lessee rights and

obligations to be recognized as assets and liabilities on the ~~Balance Sheet.~~balance sheet. In addition, interest on lease liabilities is to be recognized separately from the amortization of right-of-use assets in the Statement of Operations. Further, payments of the principal portion of lease liabilities are to be classified as financing activities while payments of interest on lease liabilities and variable lease payments are to be classified as operating activities in the Statement of Cash Flows. When the standard is adopted, ~~Veeco~~the Company will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early application permitted. ~~Veeco~~The Company is evaluating the anticipated impact of adopting the ASU on ~~its~~the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues, including debt prepayments or debt extinguishment costs. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017. This ASU will not have a material impact on the consolidated financial statements.

~~Veeco~~In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017. The Company is evaluating the anticipated effect the ASU will have on the consolidated financial statements.

The Company is also evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on ~~Veeco’s~~our consolidated financial statements.

~~Change in Accounting Principle~~

~~In March 2016, the FASB issued ASU 2016-09 Stock Compensation:~~ ~~Improvements to Employee Share-Based Payment Accounting~~. Veeco adopted the ASU during the first quarter of 2016. Beginning in 2016, excess tax benefits and deficiencies are recognized as income tax expense or benefit in the income statement in the reporting period incurred. In conjunction with adopting the ASU, Veeco has made an accounting policy election to account for forfeitures when they occur. The ASU transition guidance requires that this election be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the ASU is effective. Accordingly, Veeco recorded a $1.3 million charge to the opening accumulated deficit balance with a corresponding adjustment to additional paid-in capital, resulting in no impact to the opening balance of total stockholders’ equity. In addition, Veeco recorded additional deferred tax assets with an equally offsetting valuation allowance of $2.4 million.

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~

Note 2 - Income (Loss) Per Common Share

The Company considers unvested share-based awards that have non-forfeitable rights to dividends prior to vesting to be participating shares, which are treated as a separate class of security from the Company’s common shares for calculating per share data. Therefore, the Company applies the two-class method when calculating income (loss) per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. However, since the holders of the participating shares are not obligated to fund losses, participating shares are excluded from the calculation of loss per share.

The dilutive effect of the Convertible Senior Notes on income (loss) per share is calculated using the treasury stock method since the Company has both the current intent and ability to settle the principal amount of the Convertible Senior Notes in cash. See Note 5, “Liabilities,” for additional information on the Convertible Senior Notes.

Basic income (loss) per common share is computed using the two-class method by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income per common share is calculated by dividing net income ~~available to common stockholders~~(loss) by the weighted average number of ~~common~~ shares ~~and~~outstanding during the period under the two-class method. Diluted income per share is calculated by dividing net income by the weighted average number of shares used to calculate basic income (loss) per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and non-participating ~~restricted share~~share-based awards ~~and restricted share units~~ is considered in diluted income per ~~common~~ share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share in the periods the performance targets have been achieved. The computations of basic and diluted income (loss) per ~~common~~ share for the three and ~~nine~~six months ended ~~September~~June 30, 2017 and 2016 are as follows:

	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
	(in thousands, except per share amounts)
Net income (loss)	$	(18,388	)	$	(32,082	)	$	(17,293	)	$	(47,615	)

Net income (loss) per common share:
Basic	$	(0.43	)	$	(0.82	)	$	(0.42	)	$	(1.22	)
Diluted	$	(0.43	)	$	(0.82	)	$	(0.42	)	$	(1.22	)

Basic weighted average shares outstanding	42,656			38,965			41,160			39,035
Effect of potentially dilutive share-based awards	—			—			—			—
Diluted weighted average shares outstanding	42,656			38,965			41,160			39,035

Unvested participating shares excluded from basic weighted average shares outstanding since the securityholders are not obligated to fund losses	228			659			228			691

Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive	330			34			294			50

Potentially dilutive non-participating shares excluded from the diluted calculation as their effect would be antidilutive	1,265			2,425			1,462			2,350

Maximum potential shares to be issued for settlement of Convertible Senior Notes excluded from the diluted calculation as their effect would be antidilutive	8,618			—			8,618			—

Note 3 — Business Combinations

Ultratech

On May 26, 2017, the Company completed its acquisition of Ultratech, Inc. (“Ultratech”). Ultratech designs, manufactures, and ~~2015~~markets lithography, laser annealing, and inspection equipment for manufacturers of semiconductor devices, including advanced packaging, MEMS, and atomic layer deposition (“ALD”) applications. Ultratech’s customers are primarily located throughout the United States, EMEA, China, Japan, Taiwan, and Korea. With the addition of Ultratech, the Company establishes itself as a leading equipment supplier in the advanced packaging market, forming a strong technology portfolio to address critical advanced packaging applications. The results of Ultratech’s operations have been included in the consolidated financial statements since the date of acquisition.

Ultratech shareholders received (i) $21.75 per share in cash and (ii) 0.2675 of a share of Veeco common stock for each Ultratech common share outstanding on the acquisition date. The Company plans to finalize the purchase accounting within the measurement period, which may include adjustments to the fair values of assets acquired and liabilities assumed. The preliminary acquisition date fair value of the consideration totaled $633.4 million, net of cash acquired, which consisted of the following:

	Acquisition Date
	(May 26, 2017)
	(in thousands)
Amount paid, net of cash acquired	$	399,478
Fair value of equity issuances (7.4 million shares issued)	233,655
Replacement equity awards attributable to pre-acquisition service	228
Acquisition date fair value	$	633,361

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

	Acquisition Date
	(May 26, 2017)
	(in thousands)
Short-term investments	$	47,161
Accounts receivable	45,465
Inventory and deferred cost of sales	61,680
Prepaid expense and other current assets	7,217
Property, plant, and equipment	19,555
Intangible assets	346,940
Other assets	6,442
Total identifiable assets acquired	534,460

Accounts payable and accrued expenses	40,087
Customer deposits and deferred revenue	4,834
Deferred income taxes	32,478
Other liabilities	11,952
Total liabilities assumed	89,351

Net identifiable assets acquired	445,109
Goodwill	188,252
Net assets acquired	$	633,361

The gross contractual value of the acquired accounts receivable was approximately $46.0 million. The fair value of the accounts receivables is the amount expected to be collected by the Company. Goodwill generated from the acquisition is primarily attributable to expected synergies from future growth and strategic advantages provided through the expansion of product offerings as well as assembled workforce and is not expected to be deductible for income tax purposes. The Company has not yet completed its analysis of the allocation of the above acquired goodwill to the reporting units.

The preliminary classes of intangible assets acquired and the estimated useful life of each class is presented in the table below:

	Acquisition Date
	(May 26, 2017)
	Amount		Useful life
	(in thousands)
Technology	$	158,390	9 years
Customer relationships	116,710		12 years
Backlog	3,080		6 months
In-process research and development	43,340		*
Trademark and tradenames	25,420		7 years
Intangible assets acquired	$	346,940

*In-process research and development will be amortized (or impaired) upon completion (or abandonment) of the development project

The Company determined the estimated fair value of the identifiable intangible assets based on various factors including: cost, discounted cash flow, income method, loss-of-revenue/income method, and relief-from-royalty method in determining the purchase price allocation.

In-process research and development (IPR&D) represents the estimated fair values of incomplete Ultratech research and development projects that had not reached the commercialization stage and meet the criteria for recognition as IPR&D as of the date of the acquisition. In the future, the fair value of each project at the acquisition date will be either amortized or impaired depending on whether the projects are completed or abandoned. The fair value of IPR&D was determined using an income approach, and costs to complete the project and expected commercialization timelines are considered key assumptions. This valuation approach reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. The value of the IPR&D was determined to be $43.3 million, approximately half of which is related to the Company’s lithography technologies and one-third of which is related to the Company’s laser annealing technologies.

For the three and six months ended June 30, 2017, acquisition related costs were approximately $14.1 million and $15.5 million, respectively, including non-cash charges of $4.2 million for the three months ended June 30, 2017 related to accelerated share-based compensation for employee terminations.

The amounts of revenue and income (loss) from continuing operations before income taxes of Ultratech included in the Company’s consolidated statement of operations from the acquisition date to the period ending June 30, 2017 are as follows:

Three months ended September 30,

Nine months ended September 30,

2016

2015

2016

2015

(in thousands, except per share amounts)

Net income (loss)

$
(69,598
)
$
5,306

$
(117,212
)
$
(22,191
)

Net income (loss) per common share:

Basic

$
(1.78
)
$
0.13

$
(2.99
)
$
(0.56
)
Diluted

$
(1.78
)
$
0.13

$
(2.99
)
$
(0.56
)

Basic weighted average shares outstanding

39,131

40,846

39,193

39,729

Effect of potentially dilutive share-based awards

—

133

—

—

Diluted weighted average shares outstanding

39,131

40,979

39,193

39,729

Unvested participating shares excluded from basic weighted average shares outstanding since the securityholders are not obligated to fund losses

469

—

469

1,076

Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive

140

—

45

165

Potentially dilutive non-participating shares excluded from the diluted calculation as their effect would be antidilutive

2,030

2,264

2,042

2,066

	Total
	(in thousands)
Revenue	$	24,050
Loss from operations before income taxes	$	(21,445	)

Loss from operations before income taxes of Ultratech for the period ending June 30, 2017 of $21.4 million includes acquisition costs of $14.1 million, release of inventory fair value step-up related to purchase accounting of $7.4 million, amortization expense on intangible assets of $3.5 million, and restructuring charges of $1.2 million.

The following table presents unaudited pro forma financial information as if the acquisition of Ultratech had occurred on January 1, 2016:

	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
	(in thousands, except per share amounts)
Revenue	$	128,399		$	124,272		$	280,194		$	247,493
Loss from operations	(28,898		)	(54,380		)	(32,852		)	(128,860		)
Diluted earnings per share	$	(0.61	)	$	(1.17	)	$	(0.70	)	$	(2.78	)

The pro-forma results were calculated by combining the results of the Company with the stand-alone results of Ultratech for the pre-acquisition period, and adjusting for the following:

(i) Additional amortization expense related to identified intangibles valued as part of the purchase price allocation that would have been incurred starting on January 1, 2016.

(ii) Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred starting on January 1, 2016.

(iii) All acquisition related costs incurred by the Company as well as by Ultratech pre-acquisition have been removed from their respective periods and included in the three months ended March 31, 2016, as such expenses would have been incurred in the first quarter following the acquisition.

(iv) All amortization of inventory step-up has been removed from their respective periods and recorded in the first two quarters of 2016, as such costs would have been incurred as the corresponding inventory was sold.

(v) Additional interest expense related to the Convertible Senior Notes (see Note 5, “Liabilities”) as if they had been issued on January 1, 2016.

(vi) Income tax expense (benefit) was adjusted for the impact of the above adjustments for each period.

Note 34 - Assets

Investments

~~Marketable securities~~Short-term investments are generally classified as available-for-sale and reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income” in the Consolidated Balance Sheets. These securities may include U.S. treasuries, government agency securities, corporate debt, and commercial paper, all with maturities of greater than three months when ~~purchased.~~acquired. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other, net” in the Consolidated Statements of Operations.

Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. Veeco classifies certain assets based on the following fair value hierarchy:

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~

Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Veeco has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.

The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015:~~2016:

	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)								(in thousands)
September 30, 2016
June 30, 2017
Short-term investments
U.S. treasuries									$	34,951	$	—	$	—	$	34,951
Government agency securities									—		62,135		—		62,135
Total									$	34,951	$	62,135	$	—	$	97,086

December 31, 2016
Cash equivalents
Corporate debt									$	—	$	1,501	$	—	$	1,501
Total									$	—	$	1,501	$	—	$	1,501
Short-term investments
U.S. treasuries	$	40,043	$	—	$	—	$	40,043	$	40,008	$	—	$	—	$	40,008
Government agency securities	—		5,016		—		5,016		—		10,012		—		10,012
Corporate debt	—		13,789		—		13,789		—		13,773		—		13,773
Commercial paper	—		3,987		—		3,987		—		2,994		—		2,994
Total	$	40,043	$	22,792	$	—	$	62,835	$	40,008	$	26,779	$	—	$	66,787

December 31, 2015
Cash equivalents
U.S. treasuries	$	9,999	$	—	$	—	$	9,999
Government agency securities	—		4,998		—		4,998
Commercial paper	—		2,999		—		2,999
Total	9,999		7,997		—		17,996
Short-term investments
U.S. treasuries	94,918		—		—		94,918
Government agency securities	—		12,988		—		12,988
Corporate debt	—		8,144		—		8,144
Total	$	94,918	$	21,132	$	—	$	116,050

There were no transfers between fair value measurement levels during the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017.

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~

At ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the amortized cost and fair value of available-for-sale securities consist of:

			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated		Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value		Cost		Gains		Losses			Fair Value
	(in thousands)									(in thousands)
September 30, 2016
June 30, 2017
U.S. treasuries										$	34,986	$	—	$	(35	)	$	34,951
Government agency securities										62,181		—		(46		)	62,135
Total										$	97,167	$	—	$	(81	)	$	97,086

December 31, 2016
U.S. treasuries	$	40,033	$	10	$	—		$	40,043	$	40,013	$	—	$	(5	)	$	40,008
Government agency securities	5,016		—		—			5,016		10,020		—		(8		)	10,012
Corporate debt	13,799		—		(10		)	13,789		13,780		—		(7		)	13,773
Commercial paper	3,987		—		—			3,987		2,994		—		—			2,994
Total	$	62,835	$	10	$	(10	)	$	62,835	$	66,807	$	—	$	(20	)	$	66,787

December 31, 2015
U.S. treasuries	$	94,935	$	6	$	(23	)	$	94,918
Government agency securities	12,985		3		—			12,988
Corporate debt	8,144		1		(1		)	8,144
Total	$	116,064	$	10	$	(24	)	$	116,050

Available-for-sale securities in a loss position at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 consist of:

	September 30, 2016					December 31, 2015					June 30, 2017					December 31, 2016
			Gross					Gross					Gross					Gross
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
	(in thousands)										(in thousands)
U.S. treasuries											$	34,951	$	(35	)	$	20,002	$	(5	)
Government agency securities	$	—	$	—		$	64,922	$	(23	)	62,135		(46		)	10,012		(8		)
Corporate debt	13,789		(10		)	3,353		(1		)	—		—			13,774		(7		)
Total	$	13,789	$	(10	)	$	68,275	$	(24	)	$	97,086	$	(81	)	$	43,788	$	(20	)

At ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, there were no short-term investments that had been in a continuous loss position for more than 12 months.

The contractual maturities of securities classified as available-for-sale ~~securities~~ at ~~September~~June 30, ~~2016 all contractually mature in one year or less.~~ 2017 were as follows:

	June 30, 2017
	Amortized		Estimated
	cost		fair value
	(in thousands)
Due in one year or less	$	72,278	$	72,220
Due after one year through two years	24,889		24,866
Total	$	97,167	$	97,086

Actual maturities may differ from contractual maturities. Veeco may sell these securities prior to maturity based on the needs of the business. In addition, borrowers may have the right to call or prepay obligations prior to scheduled maturities.

There were minimal realized gains for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015.~~no realized gains for the three and six months ended June 30, 2016. The cost of securities liquidated is based on specific identification.

Accounts receivable

Accounts receivable is presented net of an allowance for doubtful accounts of $0.3 million ~~and $0.2 million~~ at ~~September~~both June 30, ~~2016~~2017 and December 31, ~~2015, respectively.~~

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~2016.

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventories at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 consist of the following:

	September 30,		December 31,		June 30,		December 31,
	2016		2015		2017		2016
	(in thousands)				(in thousands)
Materials	$	50,370	$	42,373	$	58,372	$	46,457
Work-in-process	30,960		30,327		46,498		25,250
Finished goods	5,321		4,769		15,065		5,356
Total	$	86,651	$	77,469	$	119,935	$	77,063

Prepaid expenses and other current assets

Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, and prepaid licenses. Veeco had deposits with its suppliers of ~~$13.1~~$7.9 million and ~~$14.6~~$7.8 million at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

~~Assets~~ Also included within prepaid expenses and other current assets at June 30, 2017 were assets held for sale

~~During~~ with a carrying value of $2.3 million related to one of the ~~second quarter of 2016, the~~Company’s properties in St. Paul, Minnesota. The Company undertook initiatives to streamline operations, enhance efficiency, and reduce costs. As part of that initiative, the Company listed its facility in Yongin-city, South Korea for sale. At that time, Veeco determined that the carrying value of this property exceeded the ~~building exceeded its~~ fair ~~market~~ value, less cost to sell, and recorded an impairment ~~charge. During the third quarter~~charge of ~~2016, Veeco engaged potential buyers and re-evaluated market conditions~~approximately $0.7 million for the ~~building. As a result, Veeco updated its assessment of fair market value~~three and increased the carrying value of the building by $1.6 million, which is still lower than the original pre-impairment carrying value. The increase in the carrying value was recorded as a contra-impairment charge in the Consolidated Statements of Operations.

During the third quarter of 2016, Veeco sold its building in Hyeongok-ri, South Korea, which had been designated as held for sale in the second quarter of 2016, at a price which approximated carrying value. The Company also continues to market one of its properties in St. Paul, Minnesota. The carrying value of assets held for sale reflects Veeco’s estimate of fair value less costs to sell using the sales comparison market approach.six months ended June 30, 2017.

Property, plant, and equipment

Property, plant, and equipment at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 consist of the following:

	September 30,		December 31,		June 30,		December 31,
	2016		2015		2017		2016
	(in thousands)				(in thousands)
Land	$	5,061	$	9,592	$	5,669	$	5,669
Building and improvements	47,242		54,622		49,832		50,814
Machinery and equipment(1)	98,220		110,075		122,131		99,370
Leasehold improvements	3,771		5,554		9,486		3,652
Gross property, plant and equipment	154,294		179,843		187,118		159,505
Less: accumulated depreciation and amortization	96,737		100,253		104,572		98,859
Net property, plant, and equipment	$	57,557	$	79,590	$	82,546	$	60,646

(1) Machinery and equipment also includes software, furniture and fixtures

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, depreciation expense was $3.5 million and ~~$10.2~~$6.4 million, respectively, and ~~$3.2~~$3.4 million and ~~$8.9~~$6.8 million for the comparable ~~2015~~2016 periods. During the second quarter of 2016, and as part of the Company’s efforts to streamline operations, enhance efficiency, and reduce costs, the Company removed certain lab equipment that was no longer required and recorded a non-cash impairment charge of $6.1 million. In addition, during the second quarter of 2016, land and buildings with a net carrying value of $13.7 million were classified as assets held for sale on the Consolidated Balance Sheets. During the third quarter of 2016, the Company decided to significantly reduce future investments in its Atomic Layer Deposition (“ALD”) technology development and, as a result, recorded a charge for impairment of its ALD assets, including a $3.3 million impairment of property, plant, and equipment.

Goodwill

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. ~~There were no~~The following table presents the changes toin goodwill ~~during~~balances for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017:

	Gross carrying		Accumulated
	amount		impairment		Net amount
	(in thousands)
Balance at December 31, 2016	$	238,108	$	123,200	$	114,908
Acquisition	188,252		—		188,252
Balance at June 30, 2017	$	426,360	$	123,200	$	303,160

Intangible assets

Intangible assets consist of purchased technology, customer-related intangible assets, ~~patents,~~in-process research and development, trademarks (both long-lived and indefinite-lived), ~~covenants not-to-compete,~~patents, backlog, and ~~software~~ licenses and are initially recorded at fair value. Long-lived intangibles are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line basis if such pattern cannot be reliably determined.

During the third quarter of 2016, the Company decided to significantly reduce future investments in its ALD technology development and, as a result, recorded a charge for impairment of its ALD assets, including $54.3 million for the full impairment of the intangible purchased ALD technology. The impairment charges were based on projected cash flows that required the use of unobservable inputs.

The components of purchased intangible assets ~~at September 30, 2016 and December 31, 2015 consist of the following:~~were as follows:

	September 30, 2016						December 31, 2015						June 30, 2017						December 31, 2016
			Accumulated						Accumulated						Accumulated						Accumulated
	Gross		Amortization				Gross		Amortization				Gross		Amortization				Gross		Amortization
	Carrying		and		Net		Carrying		and		Net		Carrying		and		Net		Carrying		and		Net
	Amount		Impairment		Amount		Amount		Impairment		Amount		Amount		Impairment		Amount		Amount		Impairment		Amount
	(in thousands)												(in thousands)
Technology	$	222,358	$	185,341	$	37,017	$	222,358	$	120,496	$	101,862	$	307,588	$	118,863	$	188,725	$	149,198	$	113,904	$	35,294
Customer relationships	47,885		27,111		20,774		47,885		22,470		25,415		164,595		31,971		132,624		47,885		28,659		19,226
In-process R&D													43,340		—		43,340		—		—		—
Trademarks and tradenames	2,590		1,910		680		2,730		1,937		793		28,010		2,326		25,684		2,590		1,948		642
Indefinite-lived trademark	2,900		—		2,900		2,900		—		2,900		2,900		—		2,900		2,900		—		2,900
Other	2,026		1,585		441		6,241		5,537		704		3,828		1,004		2,824		2,026		1,710		316
Total	$	277,759	$	215,947	$	61,812	$	282,114	$	150,440	$	131,674	$	550,261	$	154,164	$	396,097	$	204,599	$	146,221	$	58,378

Other intangible assets primarily consist of patents, ~~licenses,~~backlog, and ~~non-compete agreements.~~licenses.

Other assets

Veeco has an ownership interest of less than 20% in a non-marketable investment, Kateeva, Inc. (“Kateeva”). Veeco does not exert significant influence over Kateeva and therefore the investment is carried at cost. There was no change to the $21.0 million carrying value of the investment during the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The investment is

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~

included in “Other assets” on the Consolidated Balance Sheet. The investment is subject to a periodic impairment review; as there are no open-market valuations, the impairment analysis requires judgment. The analysis includes assessments of Kateeva’s financial condition, the business outlook for its products and technology, its projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by Veeco relative to other investors. Fair value of the investment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of the investment. No such events or circumstances are present.

Also included within Other assets at June 30, 2017 are deferred compensation plan assets of approximately $3.1 million representing the cash surrender value of life insurance policies held by the Company related to an executive non-qualified deferred compensation plan that was assumed from Ultratech that allows qualifying executives to defer cash compensation. The related plan liability of approximately $4.4 million is included in “Other liabilities” on the Consolidated Balance Sheet.

Note 45 - Liabilities

Accrued expenses and other current liabilities

The components of accrued expenses and other current liabilities at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 consist of:

September 30,

December 31,

2016

2015

(in thousands)

Payroll and related benefits

$
22,830

$
30,917

Warranty

4,849

8,159

Professional fees

1,795

2,224

Installation

1,826

1,110

Sales, use, and other taxes

953

1,132

Restructuring liability

2,053

824

Other

4,115

5,027

Total

$
38,421

$
49,393

~~Other liabilities include accruals for costs related to customer training, royalties, and travel.~~

	June 30,		December 31,
	2017		2016
	(in thousands)
Payroll and related benefits	$	23,016	$	18,780
Warranty	6,741		4,217
Professional fees	2,943		1,827
Installation	1,386		1,382
Sales, use, and other taxes	1,806		1,282
Restructuring liability	1,373		1,796
Interest	4,244		—
Other	2,796		3,917
Total	$	44,305	$	33,201

Warranty

Warranties are typically valid for one year from the date of system final acceptance, and Veeco estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and are 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.Changes in product warranty reserves for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 include:

(in thousands)

Balance - December 31, 2015

$
8,159

Warranties issued

3,223

Consumption of reserves

(5,739
)
Changes in estimate

(794
)
Balance - September 30, 2016

$
4,849

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~

	(in thousands)
Balance - December 31, 2016	$	4,217
Warranties issued	2,809
Addition from Ultratech acquisition	1,889
Consumption of reserves	(2,673		)
Changes in estimate	499
Balance - June 30, 2017	$	6,741

Restructuring accruals

During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. During the second and third quarters of 2016, the Company undertook ~~additional~~ restructuring activities as part of its initiative to streamline operations, enhance efficiency, and reduce costs. As a result of these actions, the Company notified approximately 50 employees of their termination from the ~~Company and recorded restructuring charges related to these actions of $2.9 million, consisting of $2.8 million of personnel severance and related costs and $0.1 million of facility closing costs.~~Company. In addition, during the third quarter of 2016, the Company decided to significantly reduce future investments in its ALD technology development, which ~~impacts~~impacted approximately 25 additional employees. ~~As a result, the Company recorded personnel severance and related restructuring charges of $0.9 million in the third quarter of 2016.~~ Over the next few quarters, the Company expects to incur additional restructuring costs of $4$1 million to $7$3 million as it finalizes all of these activities.

	Personnel
	Severance and			Facility
	Related Costs			Closing Costs			Total
	(in thousands)
Balance - December 31, 2016	$	1,796		$	—		$	1,796
Provision	1,405			2,349			3,754
Payments	(2,079		)	(2,098		)	(4,177		)
Balance - June 30, 2017	$	1,122		$	251		$	1,373

Personnel

Severance and

Facility

Related Costs

Closing Costs

Total

(in thousands)

Balance - December 31, 2015

$
824

$
—

$
824

Provision

3,721

274

3,995

Changes in estimate

(2
)
—

(2
)
Payments

(2,490
)
(274
)
(2,764
)
Balance - September 30, 2016

$
2,053

$
—

$
2,053

Included within restructuring expense in the Consolidated Statements of Operations for the six months ended June 30, 2017 is approximately $0.8 million of non-cash charges related to accelerated share-based compensation for employee terminations.

Customer deposits

Customer deposits totaled ~~$25.8~~$25.0 million and ~~$28.2~~$22.2 million at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

~~Long-term debt~~Mortgage Payable

~~Debt consists of~~The Company has a mortgage note payable associated with aits property in St. Paul, Minnesota, which, during the second quarter of 2017 was designated an asset held for sale. The carrying value of ~~$1.3~~the property exceeds the carrying value of the mortgage note, which was $1.0 million and ~~$1.5~~$1.2 million at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. ~~The mortgage note payable is secured by certain land and buildings. One of the buildings is currently held for sale.~~ The annual interest rate on the ~~mortgage~~note is 7.91%, and the final payment is due on January 1, 2020. ~~Veeco estimated~~The Company determined the mortgage ~~fair value as $1.3 million~~is a Level 3 liability in the fair-value hierarchy and, ~~$1.6 million at September 30, 2016 and December 31, 2015, respectively,~~ using a discounted cash flow ~~model.~~model, estimated its fair value as $1.0 million and $1.2 million at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, the remaining principle balance on the mortgage note is included in “Current portion of long-term debt” on the Consolidated Balance Sheet as the associated asset is expected to be sold within the next twelve months.

Convertible Senior Notes

On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes due (the “Convertible Senior Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The Convertible Senior Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted.

The Convertible Senior Notes are unsecured obligations of Veeco and rank senior in right of payment to any of Veeco’s subordinated indebtedness; equal in right of payment to all of Veeco’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Veeco’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Veeco’s subsidiaries.

The Convertible Senior Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is 24.9800 shares of the Company’s common stock per $1,000 principal amount of Convertible Senior Notes, representing an initial effective conversion price of $40.03 per share of common stock. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the indenture governing the Convertible Senior Notes, dated January 18, 2017 between the Company and U.S. Bank National Association, as trustee (the “Indenture”), but will not be adjusted for accrued but unpaid interest.

Holders may convert all or any portion of their notes, in multiples of one thousand dollar principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 15, 2022 only under the

following circumstances:

(i) During any calendar quarter (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

(ii) During the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per one thousand dollar principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Veeco’s common stock and the conversion rate on each such trading day;

(iii) If the Company calls any or all of the Convertible Senior Notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or

(iv) Upon the occurrence of specified corporate events.

On or after October 15, 2022, until the close of business on the business day immediately preceding the Maturity Date, holders may convert their notes at any time, regardless of the foregoing circumstances.

Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion option, the Company segregated the liability component of the instrument from the equity component. The liability component was measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Convertible Senior Notes. The calculation of the fair value of the debt component required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the Convertible Senior Notes at a discount rate of 7.00%, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the aggregate face value of the Convertible Senior Notes over the estimated fair value of the liability component of $72.5 million was recognized as a debt discount and recorded as an increase to additional paid-in capital, and will be amortized over the expected life of the Convertible Senior Notes using the effective interest rate method. Amortization of the debt discount is recognized as non-cash interest expense.

The transaction costs of $9.2 million incurred in connection with the issuance of the Convertible Senior Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected term of the Convertible Senior Notes. Transaction costs allocated to the equity component of $1.9 million reduced the value of the equity component recognized in stockholders’ equity.

The carrying value of the Convertible Senior Notes is as follows:

	June 30,
	2017
	(in thousands)
Principal amount	$	345,000
Unamortized debt discount	(68,072		)
Unamortized transaction costs	(6,857		)
Net carrying value	$	270,071

Total interest expense related to the Convertible Senior Notes is as follows:

	Three months ended June 30,		Six months ended June 30,
	2017		2017
	(in thousands)
Cash Interest Expense
Coupon interest expense	$	2,329	$	4,244
Non-Cash Interest Expense
Amortization of debt discount	2,455		4,440
Amortization of transaction costs	247		447
Total Interest Expense	$	5,031	$	9,131

The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $354.0 million at June 30, 2017.

Other Liabilities

Other liabilities ~~primarily consist~~at June 30, 2017 included deferred compensation of ~~income taxes payable~~$4.4 million, asset retirement obligations of $3.3 million, medical and dental benefits of $2.5 million, and acquisition related accruals of $1.0 million. At December 31, 2016, other liabilities ~~not expected to be paid within one year. Non-current~~primarily consisted of a non-current income ~~taxes~~tax payable ~~were~~of $4.9 ~~million and less than $0.1 million at September 30, 2016 and December 31, 2015, respectively.~~million.

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~

Note 56 - Commitments and Contingencies

Minimum lease commitments

At ~~September~~June 30, ~~2016,~~2017, Veeco’s total future minimum lease payments under non-cancelable operating leases ~~have not changed significantly from the disclosure in the 2015 Form 10-K.~~(exclusive of renewal options) are payable as follows:

	Operating Leases
	(in thousands)
Payments due by period:
2017	$	3,528
2018	5,433
2019	4,994
2020	4,756
2021	1,799
Thereafter	4,493
Total	$	25,003

Purchase commitments

Veeco has purchase commitments of ~~$60.1~~$144.5 million at ~~September~~June 30, ~~2016,~~2017, substantially all of which become due within one year.

Bank guarantees

Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At ~~September~~June 30, ~~2016,~~2017, outstanding bank guarantees and letters of credit totaled ~~$5.3~~$4.1 million, and unused bank guarantees and letters of credit of ~~$59.8~~$67.2 million were available to be drawn upon.

Legal proceedings

Case No. 4:17-cv-01468-PJH, on behalf of itself and all other Ultratech shareholders against Ultratech, its directors at the time the acquisition was announced, Veeco, and Merger Sub. The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech, the defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares, agreed to unreasonable deal-protection measures, and potentially engaged in supposed self-dealing.

On March 22, 2017, two other Ultratech shareholders filed a purported class action complaint in the District Court, captioned De Letter et al. v. Ultratech, Inc., et al., Case No. 3:17-cv-01542-WHA, on behalf of themselves and all other Ultratech shareholders against Ultratech and its directors at the time the acquisition was announced. The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech, the defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares and potentially engaged in supposed self-dealing.

On May 28, 2017, the District Court dismissed both cases.

Veeco is involved in various other legal proceedings arising in the normal course of business. Veeco does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

Note 67 - Equity

Accumulated Other Comprehensive Income (“AOCI”)

The following table presents the changes in the balances of each component of AOCI, net of tax:

Unrealized

Foreign Currency

Minimum Pension

Gains (Losses) on
Available for Sale

Translation

Liability

Securities

Total

(in thousands)

Balance - December 31, 2015

$
2,246

$
(866
)
$
(32
)
$
1,348

Other comprehensive income, before taxes

20

1,290

14

1,324

Provision for income taxes

—

(424
)
18

(406
)
Other comprehensive income, net of tax

20

866

32

918

Balance - September 30, 2016

$
2,266

$
—

$
—

$
2,266

			Unrealized
	Foreign Currency		Gains (Losses) on Available for Sale
	Translation		Securities			Total
	(in thousands)
Balance - December 31, 2016	$	1,797	$	(20	)	$	1,777
Other comprehensive income (loss)	24		(61		)	(37		)
Balance - June 30, 2017	$	1,821	$	(81	)	$	1,740

Late in 2015, the Company began the process to terminate a defined benefit plan it had acquired in the year 2000. The plan had been frozen as of September 30, 1991, and no further benefits have been accrued by participants since that date. In connection with the termination, responsibilityThere were minimal reclassifications from AOCI into net income for the ~~payment of benefits under~~six months ended June 30, 2017.

For the ~~plan was transferred~~six months ended June 30, 2017, Additional Paid-in Capital increased approximately $233.8 million related to ~~an insurance company during~~7.4 million shares issued for the ~~third quarter of 2016. As a result, the Company reclassified the minimum pension liability of $1.3~~Ultratech merger consideration, $49.3 million ~~and the $0.4 million income tax benefit from AOCI to “Other, net” and “Income tax expense,” respectively, on the Consolidated Statements of Operations.~~

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes~~related to the ~~Consolidated Financial Statements - continued~~issuance of the Convertible Senior Notes including deferred tax impact, and $6.7 million related to on-going share-based compensation activities.

~~(unaudited)~~

Note 78 - Share-based compensation

Restricted share awards are issued to employees that are subject to specified restrictions and a risk of forfeiture. The restrictions typically lapse over one to five years and may entitle holders to dividends and voting rights. Other types of share-based compensation include performance share awards, performance share units, and restricted share units (collectively with restricted share awards, “restricted shares”), as well as options to purchase common stock.

Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016:

Three months ended September 30,

Nine months ended September 30,

2016

2015

2016

2015

(in thousands)

Cost of sales

$
607

$
787

$
1,639

$
2,102

Research and development

993

1,044

3,032

2,739

Selling, general, and administrative

2,143

3,288

7,462

9,197

Total

$
3,743

$
5,119

$
12,133

$
14,038

	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Cost of sales	$	500	$	486	$	1,157	$	1,032
Research and development	708		940		1,137		2,039
Selling, general, and administrative	3,368		2,576		6,468		5,319
Restructuring	841		—		841		—
Acquisition costs	4,203		—		4,203		—
Total	$	9,620	$	4,002	$	13,806	$	8,390

For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, equity activity related to stock options was as follows:

	Number of		Weighted Average		Number of		Weighted Average
	Shares		Exercise Price		Shares		Exercise Price
	(in thousands)				(in thousands)
Balance - December 31, 2015	2,064		$	32.91
Balance - December 31, 2016					1,576		$	35.18
Granted	—		—		—		—
Exercised	(193	)	12.12		(18	)	30.03
Expired or forfeited	(170	)	34.28		(120	)	37.14
Balance - September 30, 2016	1,701		$	35.13
Balance - June 30, 2017					1,438		35.08

For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, equity activity related to non-vested restricted shares and performance shares was as follows:

Weighted Average

Number of

Grant Date

Shares

Fair Value

(in thousands)

Balance - December 31, 2015

1,398

$
31.97

Granted

1,138

17.13

Released

(208
)
33.10

Forfeited

(173
)
28.33

Balance - September 30, 2016

2,155

$
24.31

			Weighted Average
	Number of		Grant Date
	Shares		Fair Value
	(in thousands)
Balance - December 31, 2016	1,949		$	23.85
Granted	649		29.67
Assumed from Ultratech	338		31.75
Vested	(549	)	25.98
Forfeited	(130	)	25.95
Balance - June 30, 2017	2,257		25.94

Note 89 - Income Taxes

Income taxes are estimated for each of the jurisdictions in which the Company operates. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. ~~A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized.~~ Realization of net

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~

deferred tax assets is dependent on future taxable income. At June 30, 2017, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that that it is more likely than not that these future benefits will be realized before they expire.

At the end of each interim reporting period, the effective tax rate is aligned to expectations for the full year. This estimate is used to determine the income tax provision on a year-to-date basis and may change in subsequent interim periods. The year-to-date tax benefit for interim period losses is limited to the amount that could be recognizable at the end of the fiscal year. Income (loss) before income taxes and income tax expense (benefit) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 were as follows:

	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
	(in thousands)
Loss before income taxes	$	(31,285	)	$	(31,068	)	$	(40,472	)	$	(46,073	)
Income tax expense (benefit)	$	(12,897	)	$	1,014		$	(23,179	)	$	1,542

Three months ended September 30,

Nine months ended September 30,

2016

2015

2016

2015

(in thousands)

Loss before income taxes

$
(68,462
)
$
6,739

$
(114,535
)
$
(12,831
)
Income tax expense

$
1,136

$
1,433

$
2,677

$
9,360

The net income tax benefit for the three months ended June 30, 2017 was comprised of a net benefit of $15.4 million related to the Company’s U.S. operations, and a net tax expense of $2.5 million related to the Company’s non-U.S. operations. The net income tax benefit for the six months ended June 30, 2017 was comprised of a net benefit of $19.5 million and $3.7 million related to the Company’s U.S. and non-U.S. operations, respectively.

The net income tax benefit from the Company’s U.S. operations was primarily attributable to a tax benefit of $16.4 million and $21.3 million for losses incurred during the three and six months ended June 30, 2017, respectively. Under the intraperiod tax allocation rules, the deferred tax liability created upon the issuance of the Convertible Senior Notes and recorded through Additional Paid-in Capital is treated as a source of income, which enables the Company to recognize a benefit for the U.S. loss before income taxes through continuing operations during fiscal 2017. The tax benefit related to the issuance of the Convertible Senior Notes will not recur in future years. When calculating the income tax benefit for the six months ended June 30, 2017, the Company was subject to a loss limitation rule as the year-to-date ordinary loss exceeded the full-year expected ordinary loss. The tax benefit for the year-to-date ordinary loss was limited to the amount that we expect to be able to recognize for the full year. This benefit was partially offset by a deferred provision of approximately $1.0 million and $1.9 million related to tax amortization on indefinite-lived intangible assets for the three and six months ended June 30, 2017, respectively.

The net income tax benefit of $3.7 million for the six months ended June 30, 2017, from the Company’s non-U.S. operations was primarily attributable to the Company’s determination in the first quarter of 2017 that it was more likely than not that it will meet the requirements of an existing foreign tax incentive agreement. As a result, the Company remeasured this uncertain tax position and recognized a $6.3 million benefit during the first quarter, which is comprised of a reversal of a $4.9 million tax liability established in previous periods and the recognition of a deferred tax benefit of $1.4 million related to certain foreign net operating losses generated in prior years that are now determined to be realizable. This benefit was partially offset by a current year tax expense of approximately $2.7 million attributed to the profitable non-U.S. operations, of which approximately $2.5 million was recorded during the three months ended June 30, 2017.

For the three and six months ended ~~September~~June 30, 2016, the $1.1 million net expense for income taxes included $0.3 million relating to Veeco’s U.S. operations and $0.8 million relating to Veeco’s non-U.S. operations. For the nine months ended September 30, 2016, the $2.7 million net expense for income taxes included $1.2 million relating to Veeco’s U.S. operations and $1.5 million relating to Veeco’s non-U.S. operations. For the three and nine months ended September 30, 2016, VeecoCompany did not provide a current tax benefit on U.S. pre-tax losses assince the ~~amounts are~~Company could not ~~realizable on a more-likely-than-not basis.~~conclude that it is more likely than not that the benefits would be realized. The ~~U.S.~~ tax expense is primarily related to ~~U.S. tax amortization expense of~~ indefinite-lived intangible assets that isare amortized for tax purposes but not ~~available~~for financial reporting purposes, as well as taxes attributed to the profitable non-U.S. operations. The deferred tax liability created by the tax deductible expense cannot be used to offset existing deferred tax assets.

For three and nine months ended September 30, 2015, Veeco did not provide a current tax benefit on U.S. pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The U.S. tax expense is primarily related to withholding taxes and is also related to U.S. tax amortization expense of indefinite-lived intangible assets that is not available to offset existing deferred tax assets.

Note 910 - Segment Reporting and Geographic Information

Veeco operates and measures its results in one operating segment and ~~therefore~~continues to do so with the integration of Ultratech’s business activities. As a result, the Company has one reportable segment: the design, development, manufacture, and support of ~~thin film~~semiconductor process equipment primarily sold to make electronic devices.

Veeco categorizes its ~~sales~~revenue by the key markets into which it sells. As a result of the ~~following~~acquisition of Ultratech, the Company’s four ~~end-markets:~~key markets are now: Lighting, Display & Power Electronics; Advanced Packaging, MEMS & RF; Scientific & Industrial, which now includes Data Storage, which was formerly a separate category; and Front-End Semiconductor, which was formerly included in the Scientific & Industrial market category.

Lighting, Display & Power Electronics

Lighting refers to Light Emitting Diode (“LED”); and semiconductor illumination sources used in various applications including, but not limited to, displays such as backlights, general lighting, automotive running lights, and head lamps.

Display refers to ~~LED~~LEDs used for displays ~~including~~and Organic Light Emitting Diode (“OLED”) displays found in outdoor display/signage ~~applications.~~applications, smartphones, wearable devices, and tablets. Power Electronics refers to ~~GaN-on-Silicon~~ semiconductor devices such as rectifiers, inverters, and converters for the control and conversion of electric power.

Advanced Packaging, MEMS & RF (Mobility)

Advanced Packaging includes a portfolio of wafer-level assembly technologies that enable the miniaturization and performance improvement of electronic products, such as smartphones, smartwatches, tablets, and laptops. Micro-Electro Mechanical Systems (“MEMS”) includes tiny mechanical devices such as sensors, switches, mirrors, and actuators embedded in semiconductor chips used in vehicles, smartphones, tablets, and games. Radio Frequency (“RF”) includes semiconductor devices that make use of radio waves (RF fields) for wireless broadcasting and/or communications.

Scientific & Industrial

Scientific refers to advanced materials research at university research institutions, industry research institutions, industry

~~Veeco Instruments Inc. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements - continued~~

~~(unaudited)~~

consortiums, and government research agencies. Industrial refers to large-scale product manufacturing applications including high powered lasers, data storage, and optical coatings: thin layers of material deposited on a lens or mirror that alters how light reflects and ~~transmits; extreme ultraviolet (“EUV”) photomask: an opaque plate that allows light~~transmits.

Front-End Semiconductor

Front-End Semiconductor refers to ~~shine through in a defined pattern for use in photolithography; front end semiconductor:~~the early steps in the process of integrated circuit fabrication where the microchips are created but still remain on the silicon ~~wafer; and high power lasers such as fiber lasers used for industrial materials processing.~~

~~Data Storage~~

~~The Data Storage end-market refers~~wafer. This includes the photomask market, which is an opaque plate that allows light to ~~the archiving of data~~shine through in ~~electromagnetic or other forms~~a defined pattern for use ~~by a computer or device, including hard disk drives used~~ in ~~large capacity storage applications.~~lithography.

Sales by end-market and geographic region for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 were as follows:

	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
	(in thousands)								(in thousands)
Sales by end-market
Lighting, Display & Power Electronics	$	49,427	$	94,302	$	97,132	$	240,751	$	56,199	$	24,762	$	110,393	$	47,705
Advanced Packaging, MEMS & RF	12,092		13,541		52,400		40,545		21,426		17,045		32,983		40,308
Scientific & Industrial	13,938		14,897		48,675		46,493		27,033		31,779		54,209		62,582
Data Storage	10,025		18,004		40,635		42,705
Front-End Semiconductor									10,408		1,762		11,867		2,764
Total	$	85,482	$	140,744	$	238,842	$	370,494	$	115,066	$	75,348	$	209,452	$	153,359
Sales by geographic region
United States	$	19,104	$	19,405	$	66,550	$	67,006	$	21,245	$	20,734	$	38,533	$	47,446
China	21,238		81,156		54,621		191,874		26,287		24,582		66,613		33,383
EMEA(1)	19,703		21,304		61,999		51,618		18,002		14,834		40,069		42,296
Rest of World	25,437		18,879		55,672		59,996		49,532		15,198		64,237		30,234
Total	$	85,482	$	140,744	$	238,842	$	370,494	$	115,066	$	75,348	$	209,452	$	153,359

(1) EMEA consists of Europe, the Middle East, and Africa

For geographic reporting, sales are attributed to the location in which the customer facility is located.

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

Cautionary Statement Regarding Forward Looking Statements

Our discussion below constitutes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future 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. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made.

Executive Summary

~~We create~~On May 26, 2017, we completed the acquisition of Ultratech. Ultratech designs, manufactures, and markets lithography, laser annealing, and inspection equipment for manufacturers of semiconductor devices, including advanced packaging, MEMS, and atomic layer deposition (“ALD”) applications. Ultratech’s customers are primarily located throughout the United States, EMEA, China, Japan, Taiwan, and Korea. The results of Ultratech’s operations have been included in the consolidated financial statements since the date of acquisition.

Together with Ultratech, we design, manufacture, and market semiconductor process equipment ~~that enables technologies for a cleaner, more productive and connected world. We design, develop, manufacture, market, and service thin film process equipment~~aligned to meet the demands of key global trends such as ~~improving~~ energy ~~efficiency, enhancing~~conservation, mobility, and ~~increasing~~ connectivity. Our MOCVD, lithography, laser annealing, ion beam, and single wafer etch and clean technologies play an integral role in producing LEDs for solid-state lighting and displays and in the fabrication of advanced semiconductor devices. With equipment ~~is used~~designed to ~~make electronic devices which enable~~maximize performance, yield, and cost of ownership, we hold technology leadership positions in all these ~~trends, including light emitting diodes (“LEDs”), micro-electromechanical systems (“MEMS”), wireless devices, power electronics, hard disk drives (“HDDs”), and semiconductors.~~served markets.

We develop highly differentiated, “best-in-class” equipment for critical performance steps in thin film processing. Our products provide leading technology solutions with competitive cost-of-ownership. Core competencies in advanced thin film technologies and decadescategorize our revenue by the key markets into which we sell. As a result of ~~specialized process know-how help us stay at~~ the ~~forefront~~acquisition of ~~these rapidly advancing industries.~~

~~Our solutions sell into~~Ultratech, our four key ~~end-markets:~~markets are now: Lighting, Display & Power Electronics; Advanced Packaging, MEMS & RF; Scientific & ~~Industrial;~~Industrial, which now includes Data Storage, which was formerly a separate category; and ~~Data Storage.~~Front-End Semiconductor, which was formerly included in the Scientific & Industrial market category.

Sales in the Lighting, Display & Power Electronics ~~markets~~market were driven by the continued roll-out of MOCVD systems for the LED industry. The largest applications for LEDs are solid state lighting, followed by TV displays. Over the past few quarters demand has increased ~~in the third quarter, reflecting~~for larger LCD TV displays, which require relatively more LEDs to backlight than smaller display sizes. We have also seen an improvement in LED industry conditions. Following a prolonged period of weakness, demand for TV display backlighting has started to stabilize and consume excess LED capacity. As a result, LED chip manufacturers have begun to make capital investments to support ongoing growthincrease in LED demand for ~~general lighting, signage,~~fine-pitch digital signage. These trends have driven an increase in demand for our MOCVD equipment and ~~automotive applications. While we have limited long-term visibility,~~build-up in our MOCVD backlog. As a result, we believe ~~these trends are positive for metal organic chemical vapor deposition (“MOCVD”) demand~~that our MOCVD shipments have the potential to be higher in the ~~near term.~~second half of the year relative to the first half of 2017. Our broad portfolio of MOCVD technologies has been developed to support the most significant industry trends, including developing mid-power LEDs, utilizing larger wafer sizes, and optimizing cost-of-ownership. Our TurboDisc® ~~EPIK™~~ EPIK™ 700 ~~Gallium-Nitride (“GaN”)~~GaN MOCVD system continues to win new business for blue LEDs. Our ~~recently introduced~~ TurboDisc ~~K475i™ Arsenic-Phosphide (“AsP”)~~K475i™ AsP MOCVD system targets red-orange-yellow LEDs, laser diodes, and high-efficiency triple junction photovoltaic solar cells and ~~has quickly gained~~continues to gain market momentum.

~~Following record~~Increased sales ininto Advanced Packaging, MEMS & RF were driven primarily by the ~~first half~~inclusion of ~~the year,~~Ultratech sales to Advanced Packaging customers. Sales in the Advanced Packaging, MEMS & RF markets ~~declined in the third quarter. RF applications represented the largest portion of sales in these markets as customers made incremental investments to support next generation mobile devices. We~~ continue to ~~focus on expanding into~~be influenced by the ~~advanced packaging markets with our Precision Surface Processing (“PSP”) product family.~~mobility trend and increasing functionality in mobile devices. Our versatile PSP product architecture, iscombined with Ultratech’s Advanced Packaging lithography tools, positions us well ~~suited~~ for a multitude of advanced packaging ~~process schemes,~~processes, including WLFO (wafer level fan out) and 3D TSV (thru silicon via) applications.

Sales ~~in the~~from Scientific & Industrial ~~market~~markets were comprised of a broad range of customers, spanning multiple product lines. Our SPECTOR ion beam deposition products represented the largest component of these sales. SPECTOR is used by optical coating suppliers to manufacture a variety of products including laser mirrors, optical fibers, and anti-reflective coatings. We continue to win a majority of research opportunities, supported by ~~our molecular beam epitaxy (“MBE”) GENXplor R&D product. Our~~shipments of AD&E systems for data storage and optical applications and by shipments of MBE systems ~~enable~~to universities and ~~research consortia~~laboratories. While equipment demand from each individual market may fluctuate quarter to ~~conduct advanced materials research. Our MBE systems are also used for production applications, such as fiber lasers, where high volume throughput~~

~~and low cost of ownership are required. The~~quarter, the diverse customer base ~~represented by~~has historically provided a relatively stable revenue stream for the ~~Industrial & Scientific markets support ongoing demand for our products; however, sales can be highly variable quarter to quarter.~~

Sales in the Data Storage market were lower in the third quarter, although disk drive manufacturers continued to make incremental investments to upgrade their installed base of equipment. This mature market is facing softening demand for personal computers in the near term andcompany on a shift from HDDs to solid state drives in the longer term. Accordingly, our customers in the HDD industry are not expected to make significant investments in new capacity. This is consistent with recent experience that investments are being made on an “as-needed”combined basis. ~~Orders are expected to continue to fluctuate from quarter to quarter.~~

Results of Operations

For the three months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016

The following table presents ~~operating results as a percentage~~revenue and expense line items reported in our Consolidated Statements of ~~net sales, as well as~~Operations for 2017 and 2016 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business ~~segment.~~segment, represented by our single operating segment, including the Ultratech business acquired.

	Three months ended September 30,									Change					Three months ended June 30,								Change
	2016					2015				Period to Period					2017				2016				Period to Period
	(dollars in thousands)														(dollars in thousands)
Net sales	$	85,482		100	%	$	140,744	100	%	$	(55,262	)	(39	)%	$	115,066		100%	$	75,348		100%	$	39,718		53%
Cost of sales	52,027			61	%	86,494		61	%	(34,467		)	(40	)%	76,346			66%	43,909			58%	32,437			74%
Gross profit	33,455			39	%	54,250		39	%	(20,795		)	(38	)%	38,720			34%	31,439			42%	7,281			23%
Operating expenses, net:
Research and development	19,892			23	%	19,200		14	%	692			4	%	18,619			16%	21,543			29%	(2,924		)	(14)%
Selling, general, and administrative	18,396			22	%	21,905		16	%	(3,509		)	(16	)%	22,698			20%	19,995			27%	2,703			14%
Amortization	5,261			6	%	5,891		4	%	(630		)	(11	)%	6,354			6%	5,273			7%	1,081			21%
Restructuring	1,798			2	%	469		0	%	1,329			*		3,257			3%	2,095			3%	1,162			55%
Acquisition costs															14,133			12%	—			0%	14,133			100%
Asset impairment	56,035			66	%	—		0	%	56,035			*		675			1%	13,627			18%	(12,952		)	(95)%
Other, net	795			1	%	207		0	%	588			*		(10		)	(0)%	159			0%	(169		)	(106)%
Total operating expenses, net	102,177			120	%	47,672		34	%	54,505			114	%	65,726			57%	62,692			83%	3,034			5%
Operating income (loss)	(68,722		)	(80	)%	6,578		5	%	(75,300		)	*		(27,006		)	(23)%	(31,253		)	(41)%	4,247			(14)%
Interest income, net	260			0	%	161		0	%	99			61	%
Interest income (expense), net															(4,279		)	(4)%	185			0%	(4,464		)	*
Income (loss) before income taxes	(68,462		)	(80	)%	6,739		5	%	(75,201		)	*		(31,285		)	(27)%	(31,068		)	(41)%	(217		)	1%
Income tax expense	1,136			1	%	1,433		1	%	(297		)	(21	)%
Income tax expense (benefit)															(12,897		)	(11)%	1,014			1%	(13,911		)	*
Net income (loss)	$	(69,598	)	(81	)%	$	5,306	4	%	$	(74,904	)	*		$	(18,388	)	(16)%	$	(32,082	)	(43)%	$	13,694		(43)%

* Not meaningful

Net Sales

The following is an analysis of sales by market and by region:

	Three months ended September 30,								Change					Three months ended June 30,						Change
	2016				2015				Period to Period					2017			2016			Period to Period
	(dollars in thousands)													(dollars in thousands)
Saless by market
Sales by market
Lighting, Display & Power Electronics	$	49,427	58	%	$	94,302	67	%	$	(44,875	)	(48	)%	$	56,199	49%	$	24,762	33%	$	31,437		127%
Advanced Packaging, MEMS & RF	12,092		14	%	13,541		10	%	(1,449		)	(11	)%	21,426		19%	17,045		23%	4,381			26%
Scientific & Industrial	13,938		16	%	14,897		10	%	(959		)	(6	)%	27,033		23%	31,779		42%	(4,746		)	(15)%
Data Storage	10,025		12	%	18,004		13	%	(7,979		)	(44	)%
Front-End Semiconductor														10,408		9%	1,762		2%	8,646			491%
Total	$	85,482	100	%	$	140,744	100	%	$	(55,262	)	(39	)%	$	115,066	100%	$	75,348	100%	$	39,718		53%
Sales by geographic region
United States	$	19,104	22	%	$	19,405	14	%	$	(301	)	(2	)%	$	21,245	18%	$	20,734	27%	$	511		2%
China	21,238		25	%	81,156		58	%	(59,918		)	(74	)%	26,287		23%	24,582		33%	1,705			7%
EMEA	19,703		23	%	21,304		15	%	(1,601		)	(8	)%	18,002		16%	14,834		20%	3,168			21%
Rest of World	25,437		30	%	18,879		13	%	6,558			35	%	49,532		43%	15,198		20%	34,334			226%
Total	$	85,482	100	%	$	140,744	100	%	$	(55,262	)	(39	)%	$	115,066	100%	$	75,348	100%	$	39,718		53%

~~The overall~~* Not meaningful

Total sales ~~decline was~~increased for the three months ended June 30, 2017 against the comparable prior year period, primarily due to ~~reduced~~increased sales in Lighting, Display & Power Electronics ~~which~~as we continue to see ongoing improvements in LED industry conditions, as well as additional sales from the Ultratech business acquired in May 2017, spread across all markets. The increase was ~~driven~~partially offset by ~~an oversupply~~decreased sales in the Scientific & Industrial markets. Pricing was not a significant driver of ~~LED units~~the change in ~~this market, and a decline in Data Storage, which was a result of demand variability associated with this mature market.~~total sales. By geography, sales increased in all geographic regions. The most significant increase occurred in the ~~largest sales decline was in China,~~Rest of World region, which was attributable to the ~~decline~~increased sales in the Lighting, Display & Power Electronics ~~partially offset by increases in Rest of World.~~market, as well as additional sales from the Ultratech business acquired. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies.

~~Bookings~~Orders increased to ~~$118.0~~$122.7 million for the three months ended ~~September~~June 30, ~~2016~~2017 from ~~$51.7~~$67.7 million for the comparable prior year period. The increase in ~~bookings~~orders was primarily attributable to ~~improvements~~an increase of over 180% in ~~the~~orders in Lighting, Display & Power Electronics, ~~market~~ as ~~we are seeing some improvement~~well as additional bookings from the Ultratech business acquired in ~~LED industry conditions. We expect continued variations~~May 2017 largely in ~~quarter-to-quarter results,~~Advanced Packaging, MEMS, and ~~we expect Data Storage demand to generally be weak as customers make limited technology purchases.~~RF.

One of the performance measures we use as a leading indicator of the business is the book-to-bill ratio. The ratio is defined as orders recorded in a given period divided by revenue recognized in the same period. A ratio greater than one indicates we are adding orders faster than we are recognizing revenue. For the three months ended ~~September~~June 30, ~~2016,~~2017, the ~~book-to-bill~~ ratio was ~~about 1.4.~~1.1, compared to 0.9 for the comparable prior period. Our backlog ~~increased from $144.2 million~~ at June 30, ~~2016~~2017 was $269.5 million, which was higher than the backlog at March 31, 2017 of $221.1 million. During the three months ended June 30, 2017, we recorded backlog adjustments of approximately $41.6 million relating to ~~$176.5~~backlog acquired from Ultratech, as well as $0.8 million ~~at September 30, 2016.~~relating to orders that no longer met our bookings criteria.

Gross Profit

In the ~~third~~second quarter of ~~2016,~~2017, gross profit ~~decreased~~increased compared to ~~2015~~the second quarter of 2016 due to a sharp ~~decline~~increase in sales ~~volume.~~volume, including the acquisition of Ultratech, partially offset by decreased gross margins. Gross margins ~~remained steady despite the decline in overall sales volume~~decreased principally due to ~~a favorable~~an inventory fair value step-up that was recorded in connection with the purchase accounting relating to the Ultratech acquisition, as well as product and region mix of ~~products sold~~sales in the period and ~~from~~ the ~~benefits associated with ongoing cost reduction activities.~~temporary impact of our manufacturing consolidation efforts.

Research and development ~~expenses~~

~~Selling, general, and administrative expenses~~

~~Selling, general, and administrative expenses decreased primarily due to reductions~~significantly reduce investments in ~~personnel and~~our Atomic Layer Deposition (“ALD”) technology, as well as decreases in other personnel-related expenses ~~equity compensation,~~ and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce ~~costs in response~~costs. These decreases were partially offset by the addition of the acquired Ultratech related research and development projects.

Selling, general, and administrative

Selling, general, and administrative expenses increased primarily due to ~~market conditions.~~the addition of the acquired Ultratech related selling, general and administrative costs.

Amortization expense

The ~~decrease~~increase in amortization expense is a result of the additional intangibles acquired as part of the acquisition of Ultratech, offset by the lower amortization resulting from the impairment of the ALD technology asset in the prior year as well as certain other intangible assets becoming fully amortized ~~including~~during 2016.

Restructuring expense

During the ~~backlog~~three months ended June 30, 2017, additional accruals were recognized and ~~trademark/tradename assets associated with~~payments made related to previous years’ restructuring initiatives. During the ~~December 2014 Precision Surface Processing (“PSP”) acquisition.~~second and third quarters of 2016, we undertook restructuring activities as part of our initiative to streamline operations, enhance efficiency, and reduce costs. As a result of these actions,we notified approximately 50 employees of their termination from the Company. In addition, during the third quarter of 2016, we decided to significantly reduce future investments in our Atomic Layer Deposition (“ALD”) technology development and, as a result, recorded a charge for impairment of the ALD assets, including a non-cash $54.3 million impairment of intangible purchased technology. As a result, going forward we expect there will be a significant decline in amortization expense.

~~Restructuring expense~~

During the third quarter of 2016, we undertook additional restructuring activities as part of our initiative to streamline operations, enhance efficiency, and reduce costs that was announced during the second quarter of 2016. As a result of these actions, we notified approximately 10 additional employees of their termination. We also incurred restructuring costs associated with our decision to reduce future investments in our ALD technology development, which impacts approximately 25 additional employees. WeFinally, during the three months ended June 30, 2017, the Company incurred ~~$1.7~~non-cash charges of approximately $0.8 million ~~of personnel severance and~~ related ~~costs and $0.1 million of facility closing costs.~~to share-based compensation. Over the next few quarters, we expect to incur additional restructuring costs of $4$1 to $7$3 million as we finalize all of these activities.

~~Asset impairment expense~~Acquisition costs

~~As a result of our decision to significantly reduce future investments~~Acquisition costs are non-recurring charges incurred in ~~our ALD technology development, during~~connection with the ~~third quarter of 2016 we recorded non-cash asset impairment charges of $57.6 million, the vast majority of which relates to the impairment~~acquisition of the ~~intangible ALD technology asset. In addition, we engaged potential buyers and re-evaluated market conditions~~Ultratech business, which included $4.2 million on non-cash charges related to accelerated share-based compensation for employee terminations for the sale of a building that was previously impaired when it was designated as held for sale during the second quarter of 2016. Our updated assessment of fair market value for the building required us to increase the carrying value of the building, which is still lower than the original pre-impairment carrying value, and record a contra-impairment charge of $1.6 million.three months ended June 30, 2017.

Income ~~tax expense~~Taxes

At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods. The year-to-date tax benefit for interim period losses is limited to the amount that could be recognizable at the end of the fiscal year.

Our tax ~~expense~~benefit for the three months ended ~~September~~June 30, ~~2016 and 2015~~2017 was ~~$1.1~~$ 12.9 million ~~and $1.4 million, respectively. The 2016~~compared to a tax expense of $1.0 million for the comparable prior period. The 2017 tax benefit included ~~$0.3~~a $15.4 million benefit relating to our ~~U.S.~~domestic operations and ~~$0.8~~a $2.5 million expense relating to our non-U.S. operations, compared to ~~2015~~2016 when our expense included ~~$0.4~~$0.5 million ~~benefit~~ related to ~~U.S.~~domestic operations and ~~$1.8~~$0.5 million ~~expense~~ related to our non-U.S. operations. The ~~decrease~~current period domestic tax benefit is primarily attributable to an income tax benefit for losses incurred during the three months ended June 30, 2017, as the deferred tax liability created by the issuance of the Convertible Senior Notes is treated as a source of income in ~~our expense in 2016 was primarily~~fiscal 2017, offset by a deferred provision related to ~~reduced pretax income from our~~tax amortization on indefinite-lived intangible assets. The current period non-U.S. ~~operations,~~tax expense is attributable to the profitable non-U.S. operations. The tax expense for the comparable period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset ~~by an increase in our~~ U.S. deferred tax ~~expense.~~assets.

For the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016

The following table presents operating results as a percentage of net sales, as well as period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business ~~segment.~~segment, including the Ultratech business acquired.

Nine months ended September 30,

Change

2016

2015

Period to Period

(dollars in thousands)

Net sales

$
238,842

100
%
$
370,494

100
%
$
(131,652
)
(36
)%
Cost of sales

141,991

59
%
232,038

63
%
(90,047
)
(39
)%
Gross profit

96,851

41
%
138,456

37
%
(41,605
)
(30
)%
Operating expenses, net:

Research and development

63,545

27
%
57,904

16
%
5,641

10
%
Selling, general, and administrative

58,230

24
%
69,153

19
%
(10,923
)
(16
)%
Amortization

15,785

7
%
21,832

6
%
(6,047
)
(28
)%
Restructuring

3,993

2
%
3,509

1
%
484

14
%
Asset impairment

69,662

29
%
126

0
%
69,536

*

Other, net

884

0
%
(795
)
0
%
1,679

*

Total operating expenses, net

212,099

89
%
151,729

41
%
60,370

40
%
Operating income (loss)

(115,248
)
(48
)%
(13,273
)
(4
)%
(101,975
)
*

Interest income (expense), net

713

0
%
442

0
%
271

61
%
Income (loss) before income taxes

(114,535
)
(48
)%
(12,831
)
(3
)%
(101,704
)
*

Income tax provision (benefit)

2,677

1
%
9,360

3
%
(6,683
)
71
%
Income (loss) from continuing operations

$
(117,212
)
(49
)%
$
(22,191
)
(6
)%
$
(95,021
)
*

	Six months ended June 30,								Change
	2017				2016				Period to Period
	(dollars in thousands)
Net sales	$	209,452		100%	$	153,359		100%	$	56,093		37%
Cost of sales	136,533			65%	89,964			59%	46,569			52%
Gross profit	72,919			35%	63,395			41%	9,524			15%
Operating expenses, net:
Research and development	33,608			16%	43,653			28%	(10,045		)	(23)%
Selling, general, and administrative	41,801			20%	39,834			26%	1,967			5%
Amortization	9,221			4%	10,524			7%	(1,303		)	(12)%
Restructuring	4,595			2%	2,195			1%	2,400			109%
Acquisition costs	15,494			7%	—			0%	15,494			100%
Asset impairment	1,138			1%	13,627			9%	(12,489		)	(92)%
Other, net	(87		)	(0)%	88			0%	(175		)	(199)%
Total operating expenses, net	105,770			50%	109,921			72%	(4,151		)	(4)%
Operating income (loss)	(32,851		)	(16)%	(46,526		)	(30)%	13,675			*
Interest income (expense), net	(7,621		)	(4)%	453			0%	(8,074		)	*
Income (loss) before income taxes	(40,472		)	(19)%	(46,073		)	(30)%	5,601			*
Income tax expense (benefit)	(23,179		)	(11)%	1,542			1%	(24,721		)	*
Income (loss) from continuing operations	$	(17,293	)	(8)%	$	(47,615	)	(31)%	$	30,322		*

* Not Meaningful

Net Sales

The following is an analysis of sales by market and by region:

	Nine months ended September 30,								Change					Six months ended June 30,						Change
	2016				2015				Period to Period					2017			2016			Period to Period
	(dollars in thousands)													(dollars in thousands)
Market Analysis
Lighting, Display & Power Electronics	$	97,132	41	%	$	240,751	65	%	$	(143,619	)	(60	)%	$	110,393	52%	$	47,705	31%	$	62,688		131%
Advanced Packaging, MEMS & RF	52,400		22	%	40,545		11	%	11,855			29	%	32,983		16%	40,308		26%	(7,325		)	(18)%
Scientific & Industrial	48,675		20	%	46,493		13	%	2,182			5	%	54,209		26%	62,582		41%	(8,373		)	(13)%
Data Storage	40,635		17	%	42,705		11	%	(2,070		)	(5	)%
Front-End Semiconductor														11,867		6%	2,764		2%	9,103			329%
Total Sales	$	238,842	100	%	$	370,494	100	%	$	(131,652	)	(36	)%	$	209,452	100%	$	153,359	100%	$	56,093		37%
Regional Analysis
United States	$	66,550	28	%	$	67,006	18	%	$	(456	)	(1	)%	$	38,533	18%	$	47,446	30%	$	(8,913	)	(19)%
China	54,621		23	%	191,874		52	%	(137,253		)	(72	)%	66,613		32%	33,383		22%	33,230			100%
EMEA	61,999		26	%	51,618		14	%	10,381			20	%	40,069		19%	42,296		28%	(2,227		)	(5)%
Rest of World	55,672		23	%	59,996		16	%	(4,324		)	(7	)%	64,237		31%	30,234		20%	34,003			112%
Total Sales	$	238,842	100	%	$	370,494	100	%	$	(131,652	)	(36	)%	$	209,452	100%	$	153,359	100%	$	56,093		37%

~~The overall~~Total sales ~~decline was~~increased for the six months ended June 30, 2017 against the comparable prior year period, primarily due to ~~reduced~~increased sales in Lighting, Display & Power Electronics ~~driven by an oversupply of~~as we continue to see ongoing improvements in LED ~~units in the market.~~industry conditions. The ~~decrease~~increase was partially offset by ~~increased~~decreased sales ~~into~~in the Advanced Packaging, MEMS & RF and Scientific & Industrial markets. Pricing was not a significant driver of the change in total sales. By geography, sales ~~decreased~~increased in ~~all regions, except EMEA. The largest sales decline was in~~ China and Rest of World, which was attributable to the ~~decline~~increased sales in the Lighting, Display & Power ~~Electronics.~~Electronics market, as well as additional sales from the Ultratech business acquired in May 2017. This increase was partially offset by decreases in the other geographic regions. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies.

~~Bookings decreased~~Orders increased to ~~$247.3~~$230.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 from ~~$277.3~~$129.3 million for the comparable prior year period. The ~~decrease~~increase in ~~bookings~~orders was primarily attributable to ~~weak activity~~an increase of over 170% in ~~the~~orders in Lighting, Display & Power Electronics, ~~market~~as well as a 49% increase in the ~~first half~~Advanced Packaging, MEMS, and RF market primarily related to the Ultratech business acquired.

One of ~~2016 driven~~the performance measures we use as a leading indicator of the business is the book-to-bill ratio. The ratio is defined as orders recorded in a given period divided by ~~an oversupply of LED units~~revenue recognized in the ~~market. Beginning in the third quarter of 2016,~~same period. A ratio greater than one indicates we are ~~seeing some improvement in LED industry conditions. While there may continue to be quarter-to-quarter variations,~~adding orders faster than we ~~also expect Data Storage demand to generally be weak as customers make limited technology purchases.~~

are recognizing revenue. For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, the ~~book-to-bill~~ ratio was ~~1.04.~~1.1, compared to 0.8 for the comparable prior period. Our backlog ~~decreased slightly from $186.0~~at June 30, 2017 was $269.5 million, which was higher than the backlog at December 31, ~~2015 to $176.5 million at September~~2016 of $209.2 million. During the six months ended June 30, ~~2016, which includes a~~2017, we recorded backlog ~~adjustment~~adjustments of approximately ~~$17.6~~$41.6 million relating to ~~a partial cancellation of a prior period sales order.~~backlog acquired from Ultratech, as well as $1.6 million relating to orders that no longer met our bookings criteria.

Gross Profit

For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, gross profit ~~decreased~~increased compared to ~~2015~~2016 due to a sharp ~~decline~~increase in sales volume, including the addition of the Ultratech business acquired in May 2017, partially offset by ~~improved~~decreased gross margins. Gross margins ~~increased despite the decline in overall sales volume~~decreased principally due to ~~a favorable mix of products sold~~an inventory fair value step-up that was recorded in connection with the ~~period and from~~purchase accounting relating to the ~~benefits associated with ongoing cost reduction activities.~~Ultratech acquisition.

Research and development ~~expenses~~

The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses ~~increased due to the additional use of third party contractors to accelerate the development of products~~decreased for the ~~Lighting, Display & Power Electronics market,~~six months ended June 30, 2017 compared to 2016 primarily as a result of our decision to significantly reduce investments in our Atomic Layer Deposition (“ALD”) technology, as well as decreases in other personnel-related expenses and ~~depreciation~~professional fees as a result of ~~research~~our initiative to streamline operations, enhance efficiency, and ~~development-related property, plant, and equipment,~~reduce costs. These decreases were partially offset by ~~decreased incentive compensation. We expect~~the addition of the acquired Ultratech related research and development ~~expenses expect to decline in the fourth quarter as certain development programs are completed. We expect to fund research and development programs that position the Company for future growth.~~projects.

Selling, general, and administrative ~~expenses~~

Selling, general, and administrative expenses ~~decreased~~increased for the six months ended June 30, 2017 compared to 2016 primarily due to ~~reductions in sales commissions, incentive compensation, as a result~~the addition of the ~~decline in our financial performance as well as~~acquired Ultratech related selling, general and administrative costs, partially offset by a decrease in personnel-related expenses as a result of our initiative to streamline operations, enhance efficiency, and reduce ~~costs in response to market conditions.~~costs.

Amortization expense

The slight decrease in amortization expense is a result of ~~certain intangible assets become fully amortized, including~~ the backlog and trademark/tradename assets associated with the December 2014 Precision Surface Processing (“PSP”) acquisition. In addition, during the third quarter of 2016, we decided to significantly reduce future investments in our ALD technology development and, as a result, recorded a charge for impairment of the ALD technology asset in the prior year as well as certain other intangible assets ~~including a non-cash $54.3 million impairment~~becoming fully amortized during 2016, offset by increased amortization expense related to the additional intangibles acquired as part of ~~intangible purchased technology. As a result, going forward, we expect there will be a significant decline in amortization expense.~~the Ultratech business acquisition.

Restructuring expense

During the ~~nine~~three months ended ~~September~~June 30, 2017, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. During the second and third quarters of 2016, we undertook restructuring activities as part of our initiative to streamline operations, enhance efficiency, and reduce costs. As a result of these actions, we notified approximately 50 employees of their ~~termination. During~~termination from the ~~first nine months of 2016, we recorded restructuring charges of $3.1 million, consisting of $2.8 million of personnel severance and related costs and $0.3 million of facility closing costs.~~Company. In addition, during the third quarter of 2016, we decided to significantly reduce ~~our~~ future investments in our ALD technology development, ~~and, as a result, recorded personnel severance and related restructuring~~which impacts approximately 25 additional employees. Finally, during the three months ended June 30, 2017, the Company incurred non-cash charges of ~~$0.9 million.~~approximately $0.8 million related to share-based compensation. Over the next few quarters, we expect to incur additional restructuring costs of $4$1 to $7$3 million as we finalize all of these activities.

~~Asset Impairment expense~~Acquisition costs

~~As a result of our decision to significantly reduce future investments~~Acquisition costs are non-recurring charges incurred in ~~our ALD technology development, during third quarter we recorded non-cash asset impairment charges of $57.6 million,~~connection with the ~~vast majority of which relates to the impairment~~acquisition of the ~~intangible ALD technology asset. We evaluated~~Ultratech business, which included $4.2 million on non-cash charges related to accelerated share-based compensation for employee terminations for the market conditions for all of our assets held for sale and made adjustments to the carrying value of the assets to match their fair market value, less cost to sell. As a result, we recorded net non-cash impairment charges of approximately $5.9 million. Additionally, we removed certain lab equipment that was no longer required from our facilities and recorded a non-cash impairment of $6.1 million.six months ended June 30, 2017.

Income ~~tax expense~~Taxes

Our tax ~~expense~~benefit for the ~~nine~~six months ended ~~September~~June 30, ~~2016 and 2015~~2017 was ~~$2.7~~$23.2 million ~~and $9.4 million, respectively. The 2016~~compared to a tax expense of $1.5 million for the comparable prior period. The 2017 tax benefit included ~~$1.2~~$19.5 million relating to our ~~U.S.~~domestic operations and ~~$1.5~~$3.7 million relating to our non-U.S. operations, compared to ~~2015~~2016 when our expense included ~~$4.9~~$0.9 million related to ~~U.S.~~domestic operations and ~~$4.5~~$0.6 million related to our non-U.S. operations. The ~~decrease~~current period domestic tax benefit is primarily attributable to an income tax benefit for losses incurred during the six months ended June 30, 2017, as the deferred tax liability created by the issuance of the Convertible Senior Notes is treated as a source of income in ~~our expense in 2016 was primarily~~fiscal 2017, offset by a deferred provision related to tax amortization on indefinite-lived intangible assets. The current period non-U.S. tax benefit is primarily attributable to the remeasurement of an uncertain tax position, which included the reversal of a ~~significant reduction~~previously established non-U.S. tax liability and the recognition of a deferred tax benefit related to certain foreign net operating losses generated in ~~our withholding taxes included in our 2015 U.S.~~prior years that are now determined to be realizable, offset by tax expense ~~as well as reduced pretax income from our~~attributed to the profitable non-U.S. ~~operations in 2016.~~operations. The tax expense for the comparable period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.

Liquidity and Capital Resources

We believe that our projected cash flow from operations, combined with our cash and short term investments, will be sufficient to meet our projected working capital, contractual obligations, and other cash flow needs for the next twelve months. Our cash and cash equivalents, ~~as well as~~ short-term investments, ~~at September~~and restricted cash are as follows:

	June 30,		December 31,
	2017		2016
	(in thousands)
Cash and cash equivalents	$	205,564	$	277,444
Short-term investments	97,086		66,787
Total	$	302,650	$	344,231

A portion of our cash and cash equivalents is held by our subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. At June 30, ~~2016~~2017 and December 31, ~~2015 were:~~

September 30,

December 31,

2016

2015

(in thousands)

Cash and cash equivalents

$
274,018

$
269,232

Short-term investments

62,835

116,050

Total

$
336,853

$
385,282

~~At September 30,~~ 2016, ~~and December 31, 2015,~~ cash and cash equivalents of ~~$161.5~~$152.2 million and ~~$135.3~~$149.2 million, respectively, were held outside the United States. ItIn order to fund continued international growth, it is our current intention to permanently reinvest the cash and cash equivalent balances held in China, Taiwan, and Malaysia, and our current forecasts do not require repatriation of ~~the~~these funds back to the United States. At ~~September~~June 30, ~~2016,~~2017, we had ~~$108.4~~$134.0 million in cash held outside the United States on which we may have to pay significant U.S. income taxes to ~~repatriate.~~repatriate or utilize net operating loss carryforwards. Additionally, local government regulations may restrict our ability to move cash balances ~~to meet cash needs~~ under certain circumstances. We currently do not expect such regulations and restrictions to impact our ability to make acquisitions, pay vendors, or conduct operations. We believe that our projected cash flow from operations, ~~throughout~~combined with our ~~global organization, or make acquisitions.~~cash and short term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months, including the scheduled interest payments on our Convertible Senior Notes issued in January 2017.

A summary of the cash flow activity at June 30, 2017 and December 31, 2016 is as follows:

Cash Flows from Operating Activities

	Nine months ended September 30,						Six months ended June 30,
	2016			2015			2017			2016
	(in thousands)						(in thousands)
Net income (loss)	$	(117,212	)	$	(22,191	)	$	(17,293	)	$	(47,615	)
Non-cash items:
Depreciation and amortization	26,010			30,766			15,620			17,291
Non-cash interest expense							4,887			—
Deferred income taxes	1,529			1,794			(19,412		)	1,821
Share-based compensation expense	12,133			14,038			13,806			8,390
Asset impairment	69,662			126			1,138			13,627
Other	160			(841		)
Provision for bad debts							92			160
Changes in operating assets and liabilities	(16,590		)	(1,842		)	(8,427		)	(24,805		)
Net cash provided by (used in) operating activities	$	(24,308	)	$	21,850		$	(9,589	)	$	(31,131	)

~~Cash~~Net cash used in operating activities was $9.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016 reflects~~2017 and was due to the net ~~income adjusted~~loss of $17.3 million plus adjustments for ~~the effect~~non-cash items of ~~non-cash charges and changes~~$16.1 million, offset by a decrease in ~~working capital components. Non-cash charges included depreciation, amortization, share-based compensation expense, asset impairment, and deferred taxes. Cash~~cash flow from operating activities ~~was negatively impacted by~~due to changes in ~~inventory, accounts payable~~operating assets and ~~accrued expenses, and accounts receivable, partially offset by changes in customer deposits and deferred revenue and prepaid expenses and other current assets.~~liabilities of $8.4 million.

Cash Flows from Investing Activities

	Nine months ended September 30,						Six months ended June 30,
	2016			2015			2017			2016
	(in thousands)						(in thousands)
Acquisitions of businesses, net of cash acquired							$	(399,478	)	$	—
Capital expenditures	$	(10,717	)	$	(11,069	)	(10,057		)	(9,179		)
Changes in investments, net	52,921			51,647			16,445			42,612
Proceeds from sale of lab tools	—			2,648
Other	463			(662		)	—			(213		)
Net cash provided by investing activities	$	42,667		$	42,564
Net cash provided by (used in) investing activities							$	(393,090	)	$	33,220

~~Cash provided by~~The net cash used in investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2016 is~~2017 was primarily ~~attributed~~attributable to the net ~~liquidations~~cash used in the acquisition of ~~short-term investments, offset by~~Ultratech as well as capital expenditures. As part of our efforts to streamline operations, enhance efficiency, and reduce costs, we are making certain investments in our facilities to support the consolidation activities, and, in 2017, we expect to incur ~~additional~~future capital expenditures ~~of $6 to $9 million over the next few quarters~~ related to these ~~activities.~~activities of approximately $5 million to $10 million.

Cash Flows from Financing Activities

	Nine months ended September 30,						Six months ended June 30,
	2016			2015			2017			2016
	(in thousands)						(in thousands)
Settlement of equity awards, net of withholding taxes	$	(711	)	$	(785	)	$	(4,796	)	$	(192	)
Proceeds from employee stock purchase plan	719			$	—
Purchases of common stock	(13,349		)	—			—			(13,349		)
Proceeds from long-term debt borrowings							335,751			—
Repayments of long-term debt	(252		)	(233		)	(180		)	(166		)
Net cash used in financing activities	$	(13,593	)	$	(1,018	)
Net cash provided by (used in) financing activities							$	330,775		$	(13,707	)

~~Cash flows~~The cash provided by financing activities for the six months ended June 30, 2017 was primarily related to the net cash proceeds received from the issuance of the Convertible Senior Notes in January 2017. The cash used in financing activities ~~during~~for the ~~nine~~six months ended ~~September~~June 30, 2016 iswas primarily ~~a result of our purchases of common shares as part of~~related to the s~~hare buyback~~share repurchase program, ~~initiated during the fourth quarter of~~which commenced in November 2015. There were no share repurchases in 2017.

~~Off-Balance Sheet Arrangements~~Convertible Senior Notes

On January 10, 2017, we issued $345.0 million of 2.70% convertible senior unsecured notes due (the “Convertible Senior Notes”). We received net proceeds, after deducting underwriting discounts and ~~Contractual Obligations~~fees and expenses payable by the Company, of approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The Convertible Senior Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted. We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on this debt.

~~Off-Balance Sheet Arrangements~~Business Combination

~~We do not have any off-balance sheet arrangements that have, or are reasonably likely~~As discussed above, on May 26, 2017, the Company acquired 100% of Ultratech, Inc., a leading supplier of lithography, laser-processing, and inspection systems used to ~~have, a current or future material effect on our financial condition,~~manufacture semiconductor devices and LEDs. The results of Ultratech’s operations ~~liquidity, capital expenditures or capital resources other than operating leases, bank guarantees, and purchase commitments disclosed~~have been included in the ~~preceding footnotes.~~consolidated financial statements since the date of acquisition.

Contractual Obligations and Commitments

We have commitments under certain contractual arrangements to make future payments for goods and services. These contractual arrangements secure the rights to various assets and services to be used in the future in the normal course of business. We expect to fund these contractual arrangements with cash generated from ~~operations.~~operations in the normal course of business.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, expenses, and results of operations, liquidity, capital expenditures or capital resources other than operating leases, bank guarantees, and purchase commitments disclosed in the preceding footnotes.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to market rate risk for changes in interest ~~rate changes~~rates primarily relates to our investment portfolio. We centrally manage our investment ~~portfolio~~portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our ~~short term~~ investment portfolio includes ~~fixed income~~fixed-income securities with a fair value of ~~$62.8~~approximately $97.1 million at ~~September~~June 30, ~~2016.~~2017. These securities are subject to interest rate ~~risk;~~risk and, based on our investment portfolio at June 30, 2017, a 100 basis point increase in interest rates would result in a decrease in the fair value of the ~~September 30, 2016 investment~~ portfolio of ~~$0.2~~$0.6 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we ~~would~~will not realize the losses in the Consolidated Statements of Operations unless the individual ~~fixed income~~fixed-income securities are sold prior to ~~maturity~~recovery or athe loss ~~position~~ is determined to be other-than-temporary.

Currency Exchange Risk

We conduct business on a worldwide basis ~~exposing~~and, as such, a portion of our revenues, ~~operating costs,~~earnings, and net investments in foreign affiliates is exposed to changes in currency exchange rates. The economic impact of currency exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions, and other factors. These changes, if material, could cause us to adjust our financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.

We ~~may manage~~have managed our risks and exposures to currency exchange rates through the use of derivative financial ~~instruments.~~instruments (e.g., forward contracts). We ~~only~~mainly use derivative financial instruments in the context of hedging and generally do not use them for speculative purposes. During the ~~nine months ended September 30, 2016 and 2015,~~second quarter of 2017, we did not ~~own~~designate foreign exchange derivatives as hedges, consistent with 2016. Accordingly, all foreign exchange derivatives, if any, ~~derivatives.~~are recorded in our Consolidated Balance Sheet at fair value and changes in fair value from these contracts are recorded in “Other, net” in our Consolidated Statements of Operations.

Our net sales to customers located outside of the United States represented approximately ~~78% and 72%~~82% of our total net sales for the three and ~~nine~~six months ended ~~September~~June 30, 2016, respectively and ~~86%~~73% and ~~82%~~70% for the comparable ~~2015~~2016 periods. We expect that net sales to customers outside the United States will continue to represent a large percentage of our total net sales. Our sales denominated in currencies other than the U.S. dollar represented 2% and 4%3% of total net sales in the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, respectively, and 2%3% and 4% for the comparable ~~2015~~2016 periods.

A 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of ~~operations.~~operations since most of our sales outside the United States are denominated in U.S. dollars.

Item 4. Controls and Procedures

Management’s Report on Internal Control Over Financial Reporting

Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective ~~at September~~as of June 30, ~~2016.~~2017. The disclosure controls and procedures are designed to ensure that the information required to be disclosed in this report filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and

reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

~~During~~On May 26, 2017, we completed the ~~three months ended September 30, 2016, there~~acquisition of Ultratech, Inc., and are integrating the acquired business into our overall internal control over financial reporting process. Management is in the process of assessing the internal control over financial reporting and is implementing or revising internal controls where necessary. See Note 3 to the Condensed Consolidated

Financial Statements — Business Combinations, for further details. There were no other changes in internal control for the quarter ended June 30, 2017 that have materially affected or are reasonably likely to materially affect internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

On March 17, 2017, an Ultratech shareholder filed a purported class action complaint in the U.S. District Court for the Northern District of California (the “District Court”), captioned The Vladimir Gusinsky Rev. Trust v. Ultratech, Inc., et al., Case No. 4:17-cv-01468-PJH, on behalf of itself and all other Ultratech shareholders against Ultratech, its directors at the time the acquisition was announced, Veeco, and Merger Sub. The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech, the defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares, agreed to unreasonable deal-protection measures, and potentially engaged in supposed self-dealing.

~~Information regarding~~On March 22, 2017, two other Ultratech shareholders filed a purported class action complaint in the District Court, captioned De Letter et al. v. Ultratech, Inc., et al., Case No. 3:17-cv-01542-WHA, on behalf of themselves and all other Ultratech shareholders against Ultratech and its directors at the time the acquisition was announced. The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech, the defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares and potentially engaged in supposed self-dealing.

On May 28, 2017, the District Court dismissed both cases.

Veeco is involved in various other legal proceedings ~~appears~~arising in the ~~Commitments and Contingencies Note to~~normal course of business. Veeco does not believe that the ~~Consolidated Financial Statements in this quarterly report~~ultimate resolution of these matters will have a material adverse effect on ~~Form 10-Q and in Part I — Item 3~~its consolidated financial position, results of ~~our~~ ~~2015 Form 10-K~~.operations, or cash flows.

Item 1A. Risk Factors

Information regarding risk factors appears in the Safe Harbor Statement at the beginning of this quarterly report on Form 10-Q and in Part I — Item 1A of our ~~2015~~2016 Form 10-K. There have been no material changes from the risk factors previously disclosed in our ~~2015~~2016 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On October 28, 2015, our Board of Directors authorized a program to repurchase up to $100 million of our common stock to be completed through October 28, 2017. At ~~March 31, 2016,~~June 30, 2017, $22.3 million of the $100 million had been utilized. No repurchases occurred ~~during~~after the ~~second and third~~first quarter of 2016. Repurchases may be made from time to time on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. The timing and amount of future repurchases, if any, will depend upon market conditions, SEC regulations, and other factors. The repurchases would be funded using available cash balances and cash generated from operations. The program does not obligate us to acquire any particular amount of common stock and may be modified or suspended at any time at our discretion.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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

~~Number~~	~~Description~~	~~Incorporated by Reference to the~~ ~~Following Document:~~
~~10.1~~	~~Form of Notice of Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective June 2016.~~	*
~~10.2~~	~~Form of Notice of Critical Priorities Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective June 2016.~~	*
~~31.1~~	~~Certification of Chief Executive Officer pursuant to Rule 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 Rule 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.~~	*
~~101.INS~~	~~XBRL Instance~~	**
~~101.SCH~~	~~XBRL Schema~~	**
~~101.PRE~~	~~XBRL Presentation~~	**
~~101.CAL~~	~~XBRL Calculation~~	**
~~101.DEF~~	~~XBRL Definition~~	**
~~101.LAB~~	~~XBRL Label~~	**

					Filed or
Exhibit		Incorporated by Reference			Furnished
Number	Exhibit Description	Form	Exhibit	Filing Date	Herewith
10.1	Amendment dated June 12, 2017 to Employment Agreement between Veeco and John R. Peeler.				*
10.2	Form of Amended and Restated Indemnification Agreement entered into between Veeco and each of its directors and executive officers, (August 2017).				*
10.3	Ultratech, Inc. 1993 Stock Option/Stock Issuance Plan (as Amended and Restated as of May 31, 2011).	S-8	4.6	5/26/2017
31.1	Certification of Chief Executive Officer pursuant to Rule 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 Rule 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.				*
101.INS	XBRL Instance.				**
101.XSD	XBRL Schema.				**
101.PRE	XBRL Presentation.				**
101.CAL	XBRL Calculation.				**
101.DEF	XBRL Definition.				**
101.LAB	XBRL Label.				**

~~Filed herewith~~

* Filed herewith

** Filed herewith electronically

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, on ~~November 1, 2016.~~August 3, 2017.

	Veeco Instruments Inc.

	By:	/S/ JOHN R. PEELER
		John R. Peeler
		Chairman and Chief Executive Officer

	By:	/s/ SHUBHAM MAHESHWARI
		Shubham Maheshwari
		Executive Vice President and Chief Financial Officer

3238

Delaware ~~(State or other jurisdiction of incorporation or organization)~~		11-2989601
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

Terminal Drive
Plainview, New York ~~(Address of principal executive offices)~~		11803
(Address of Principal Executive Offices)		(Zip Code)

Large accelerated filer	o	Accelerated filer x	~~Accelerated filer~~ o
Non-accelerated filer
~~Non-accelerated filer~~ o (Do not check if a smaller reporting company)	Smaller reporting company	o

		Emerging growth company	o

Title of Class	Shares Outstanding
Common Stock	as of ~~October 20, 2016~~	July 26, 2017
par value $0.01 per share	~~40,608,880~~	48,420,617

Safe Harbor Statement	1

PART I—FINANCIAL INFORMATION	3

Item 1. Financial Statements	3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2125

Item 3. Quantitative and Qualitative Disclosures about Market Risk	2934

Item 4. Controls and Procedures	2934

PART II—OTHER INFORMATION	3036

Item 1. Legal Proceedings	3036

Item 1A. Risk Factors	3036

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3036

Item 3. Defaults Upon Senior Securities	3036

Item 4. Mine Safety Disclosures	3036

Item 5. Other Information	3036

Item 6. Exhibits	3137

SIGNATURES	3238

	(in thousands)
Balance - December 31, 2015	$	8,159
Warranties issued	3,223
Consumption of reserves	(5,739		)
Changes in estimate	(794		)
Balance - September 30, 2016	$	4,849

						Unrealized
	Foreign Currency		Minimum Pension			Gains (Losses) on Available for Sale
	Translation		Liability			Securities			Total
	(in thousands)
Balance - December 31, 2015	$	2,246	$	(866	)	$	(32	)	$	1,348

Other comprehensive income, before taxes	20		1,290			14			1,324
Provision for income taxes	—		(424		)	18			(406		)
Other comprehensive income, net of tax	20		866			32			918

Balance - September 30, 2016	$	2,266	$	—		$	—		$	2,266

			Weighted Average
	Number of		Grant Date
	Shares		Fair Value
	(in thousands)
Balance - December 31, 2015	1,398		$	31.97
Granted	1,138		17.13
Released	(208	)	33.10
Forfeited	(173	)	28.33
Balance - September 30, 2016	2,155		$	24.31