UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2019~~2020

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-16244

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)


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

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

Registrant’s telephone number, including area code:

(516) 677-0200

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	VECO	The NASDAQ Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).Yes ☒ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒				Accelerated filer ☐
Non-accelerated filer ☐				Smaller reporting company ☐
				Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~October 23, 2019,~~July 29, 2020, there were ~~48,903,027~~49,619,080 shares of the registrant’s common stock outstanding.

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VEECO INSTRUMENTS INC.

INDEX


Safe Harbor Statement	1

PART I—FINANCIAL INFORMATION	4

Item 1. Financial Statements	4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2527

Item 3. Quantitative and Qualitative Disclosures about Market Risk	3237

Item 4. Controls and Procedures	3337

PART II—OTHER INFORMATION	3338

Item 1. Legal Proceedings	3338

Item 1A. Risk Factors	3438

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3442

Item 3. Defaults Upon Senior Securities	3442

Item 4. Mine Safety Disclosures	3442

Item 5. Other Information	3442

Item 6. Exhibits	3543

SIGNATURES	3544

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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, including the potential impact of the COVID-19 pandemic on our business, and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020. 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, those set forth under the heading “Risk Factors” Part 1, Item 1A in our ~~2018~~2019 Form 10-K, ~~and~~ Part 2, Item 1A inof our quarterly report on Form 10-Q for the quarter ~~ending June 30, 2019,~~ended March 31, 2020, and Part 2, Item 1A in this quarterly report, and the following:

●

The unknown duration and economic, operational, and financial impacts of the COVID-19 pandemic and the actions taken or contemplated by governmental authorities or others in response to the pandemic on our business, employees, customers and suppliers, including, among others, (a) changes in customer demand for our products, (b) disruptions in our supply chain, particularly to the extent we rely on a single supplier for certain components, (c) financial challenges confronting major customers in light of reduced end-user demand for their products, (d) operational changes implemented by us, including remote working arrangements, which may put increased strain on our IT systems and create increased vulnerability to cybersecurity incidents, (e) increases in shipping, raw material or other costs, (f) competitive pricing pressures, and (g) prolonged measures to contain the spread of COVID-19 or the premature easing of government-imposed restrictions implemented to contain the spread of COVID-19;

●

Unfavorable market conditions have adversely affected, and may continue to adversely affect, our operating results;

●

We are exposed to the risks of operating a global business;

●

~~International trade disputes could result in increases in tariffs and other trade restrictions and protectionist measures that could negatively impact our operations;~~

●

Changes in U.S. trade policy and export controls and ongoing trade disputes between the U.S. and China have adversely affected, and may continue to adversely affect, our business, results of operations, and financial condition;

●

Disruptions in our information technology systems or data security incidents could result in significant financial, legal, regulatory, business, and reputational harm to us;

●

We may be unable to effectively enforce and protect our intellectual property rights;

●

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

●

~~The price of our common shares is volatile, has declined significantly, and could further decline;~~

●

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

●

We face significant competition;

●

We operate in industries characterized by rapid technological change;

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●

~~Our~~Certain of our sales ~~to manufacturers~~ are ~~highly~~ dependent on ~~sales of~~the demand for consumer electronics, ~~applications,~~ which can experience significant volatility due to seasonal and other factors;

~~Table of Contents~~

●

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

●

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

●

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 liabilities to our suppliers for products no longer needed;

●

We may be unable to obtain required export licenses for the sale of our products;

●

Our operating results may be adversely affected by tightening credit markets;

●

Our failure to estimate customer demand accurately could result in inventory obsolescence, liabilities to our suppliers for products no longer needed, and 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;

●

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

●

The price of our common shares is volatile and could decrease;

●

We may be required to take impairment charges on assets;

●

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

●

We are exposed to risks associated with business combinations, acquisitions, strategic investments and ~~strategic investments;~~divestitures;

●

We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act and any delays or difficulties 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 may change;

●

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~~2023 and 2027 Notes, could have a material effect on our reported financial results;

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●

The effects of the capped call transactions that we entered in connection with the issuance of the convertible senior notes due 2027, as further discussed in “Risk Factors” in Part 2, Item 1A below;

●

We are subject to foreign currency exchange risks;

●

Our previously announced share repurchase program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock;

●

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

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●

We are exposed to various risks associated with global regulatory requirements;

●

We may be exposed to liabilities under the Foreign Corrupt Practices Act and other similar laws;

●

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

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.

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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,
		2019		2018		2020		2019
		(unaudited)				(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	135,259	$	212,273	$	188,203	$	129,294
Restricted cash	��		687		809		647		657
Short-term investments			95,672		48,189		112,279		115,252
Accounts receivable, net			72,731		66,808		67,291		45,666
Contract assets			20,782		10,397		13,180		25,351
Inventories			135,190		156,311		136,555		133,067
Deferred cost of sales			2,198		3,072		1,676		445
Prepaid expenses and other current assets			23,762		22,221		18,544		14,966
Assets held for sale							—		11,180
Total current assets			486,281		520,080		538,375		475,878
Property, plant, and equipment, net			77,801		80,284		69,170		75,711
Operating lease right-of-use assets			10,472		—		12,981		14,453
Intangible assets, net			72,376		85,149		53,846		61,518
Goodwill			184,302		184,302		181,943		181,943
Deferred income taxes			1,872		1,869		1,555		1,549
Other assets			29,172		29,132		7,200		7,036
Total assets		$	862,276	$	900,816	$	865,070	$	818,088

Liabilities and stockholders' equity
Current liabilities:
Accounts payable		$	34,702	$	39,611	$	25,973	$	21,281
Accrued expenses and other current liabilities			40,641		46,450		42,306		41,243
Customer deposits and deferred revenue			66,031		72,736		58,281		54,870
Income taxes payable			663		1,256		923		830
Total current liabilities			142,037		160,053		127,483		118,224
Deferred income taxes			5,713		5,690		5,844		5,648
Long-term debt			296,810		287,392		317,314		300,068
Operating lease long-term liabilities			6,066		—		9,004		10,300
Other liabilities			9,180		9,906		10,094		9,336
Total liabilities			459,806		463,041		469,739		443,576
Stockholders' equity:
Preferred stock, $0.01 par value; 500,000 shares authorized; 0 shares issued and outstanding.			—		—		—		—
Common stock, $0.01 par value; 120,000,000 shares authorized; 48,903,027 and 48,547,417 shares issued at September 30, 2019 and December 31, 2018, respectively; 48,903,027 and 48,024,685 shares outstanding at September 30, 2019 and December 31, 2018, respectively.			489		485
Common stock, $0.01 par value; 120,000,000 shares authorized; 49,618,908 shares issued and outstanding at June 30, 2020 and 48,994,346 shares issued and outstanding at December 31, 2019							497		490
Additional paid-in capital			1,066,203		1,061,325		1,100,716		1,071,058
Accumulated deficit			(666,058)		(619,983)		(707,799)		(698,930)
Accumulated other comprehensive income			1,836		1,820		1,917		1,894
Treasury stock, at cost, 522,732 shares at December 31, 2018.			—		(5,872)
Total stockholders' equity			402,470		437,775		395,331		374,512
Total liabilities and stockholders' equity		$	862,276	$	900,816	$	865,070	$	818,088

See accompanying Notes to the Consolidated Financial Statements.

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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,
	2019		2018		2019		2018		2020		2019		2020		2019
Net sales	$	108,954	$	126,757	$	306,147	$	443,110	$	98,637	$	97,822	$	203,139	$	197,193
Cost of sales		66,731		80,372		192,924		284,651		56,743		61,537		114,826		126,192
Gross profit		42,223		46,385		113,223		158,459		41,894		36,285		88,313		71,001
Operating expenses, net:
Research and development		22,639		23,544		68,901		72,793		19,254		22,922		38,449		46,262
Selling, general, and administrative		20,962		20,186		60,620		70,842		17,818		19,757		36,123		39,660
Amortization of intangible assets		4,312		4,183		12,773		28,102		3,834		4,243		7,671		8,460
Restructuring		1,828		2,057		3,874		7,669		472		616		1,097		2,046
Acquisition costs		—		249		—		2,906
Asset impairment		—		—		—		252,343		281		—		281		—
Other, net		(153)		39		(232)		325
Other operating expense (income), net										(174)		(44)		(283)		(80)
Total operating expenses, net		49,588		50,258		145,936		434,980		41,485		47,494		83,338		96,348
Operating income (loss)		(7,365)		(3,873)		(32,713)		(276,521)		409		(11,209)		4,975		(25,347)
Interest income		1,219		823		3,749		2,266		427		1,284		1,227		2,529
Interest expense		(5,549)		(5,602)		(16,491)		(16,113)		(6,041)		(5,495)		(11,706)		(10,941)
Loss on extinguishment of debt										(3,046)		—		(3,046)		—
Income (loss) before income taxes		(11,695)		(8,652)		(45,455)		(290,368)		(8,251)		(15,420)		(8,550)		(33,759)
Income tax expense (benefit)		72		301		407		(27,954)		51		145		319		336
Net income (loss)	$	(11,767)	$	(8,953)	$	(45,862)	$	(262,414)	$	(8,302)	$	(15,565)	$	(8,869)	$	(34,095)

Income (loss) per common share:
Basic	$	(0.25)	$	(0.19)	$	(0.97)	$	(5.55)	$	(0.17)	$	(0.33)	$	(0.18)	$	(0.72)
Diluted	$	(0.25)	$	(0.19)	$	(0.97)	$	(5.55)	$	(0.17)	$	(0.33)	$	(0.18)	$	(0.72)

Weighted average number of shares:
Basic		47,489		46,982		47,361		47,283		48,109		47,112		48,147		47,145
Diluted		47,489		46,982		47,361		47,283		48,109		47,112		48,147		47,145

See accompanying Notes to the Consolidated Financial Statements.

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Net income (loss)	$	(11,767)	$	(8,953)	$	(45,862)	$	(262,414)	$	(8,302)	$	(15,565)	$	(8,869)	$	(34,095)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities		(38)		4		8		4		(148)		18		53		45
Foreign currency translation		(4)		(4)		8		(4)
Foreign currency translation gain (loss)										18		2		(30)		13
Total other comprehensive income (loss), net of tax		(42)		—		16		—		(130)		20		23		58

Total comprehensive income (loss)	$	(11,809)	$	(8,953)	$	(45,846)	$	(262,414)	$	(8,432)	$	(15,545)	$	(8,846)	$	(34,037)

See accompanying Notes to the Consolidated Financial Statements.

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Nine months ended September 30,


2019

2018

Cash Flows from Operating Activities

Net income (loss)

$
(45,862)

$
(262,414)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

25,838

41,110

Non-cash interest expense

9,418

8,739

Deferred income taxes

20

(28,872)

Share-based compensation expense

11,528

12,720

Asset impairment

—

252,343

Changes in operating assets and liabilities:

Accounts receivable and contract assets

(16,308)

769

Inventories and deferred cost of sales

17,921

(17,748)

Prepaid expenses and other current assets

(1,276)

10,037

Accounts payable and accrued expenses

(16,000)

(4,006)

Customer deposits and deferred revenue

(6,705)

(47,589)

Income taxes receivable and payable, net

(593)

(3,552)

Other, net

(986)

(915)

Net cash provided by (used in) operating activities

(23,005)

(39,378)

Cash Flows from Investing Activities

Acquisitions of businesses, net of cash acquired

—

(2,662)

Capital expenditures

(8,189)

(5,788)

Proceeds from the sale of investments

102,230

65,365

Payments for purchases of investments

(148,664)

(72,303)

Proceeds from held for sale assets

645

—

Net cash provided by (used in) investing activities

(53,978)

(15,388)

Cash Flows from Financing Activities

Cash withholdings for employee stock purchase plan

2,609

3,007

Taxes paid for restricted stock vestings

(2,771)

(3,029)

Purchases of common stock

—

(11,457)

Net cash provided by (used in) financing activities

(162)

(11,479)

Effect of exchange rate changes on cash and cash equivalents

9

(4)

Net increase (decrease) in cash, cash equivalents, and restricted cash

(77,136)

(66,249)

Cash, cash equivalents, and restricted cash - beginning of period

213,082

280,583

Cash, cash equivalents, and restricted cash - end of period

$
135,946

$
214,334

Supplemental Disclosure of Cash Flow Information

Interest paid

$
9,401

$
9,655

Income taxes paid

2,835

4,269

Non-cash operating and financing activities

Net transfer of inventory to property, plant and equipment

4,074

1,170

Right-of-use assets obtained in exchange for lease obligations

516

—


	Six months ended June 30,
	2020		2019
Cash Flows from Operating Activities
Net income (loss)	$	(8,869)	$	(34,095)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		15,372		17,315
Non-cash interest expense		6,778		6,219
Deferred income taxes		191		10
Share-based compensation expense		6,620		7,745
Loss on extinguishment of debt		3,046		—
Asset impairment		281		—
Changes in operating assets and liabilities:
Accounts receivable and contract assets		(9,454)		6,227
Inventories and deferred cost of sales		(4,520)		8,534
Prepaid expenses and other current assets		(3,578)		(3,957)
Accounts payable and accrued expenses		5,820		(25,955)
Customer deposits and deferred revenue		3,470		11,294
Income taxes receivable and payable, net		93		(587)
Other, net		2,300		(891)
Net cash provided by (used in) operating activities		17,550		(8,141)

Cash Flows from Investing Activities
Capital expenditures		(1,957)		(6,441)
Proceeds from the sale of investments		103,630		40,500
Payments for purchases of investments		(100,265)		(76,108)
Proceeds from held for sale assets, net of costs to sell		9,503		—
Net cash provided by (used in) investing activities		10,911		(42,049)

Cash Flows from Financing Activities
Proceeds from issuance of 2027 Notes, net of issuance costs		121,946		—
Purchase of capped calls		(10,313)		—
Repurchase of 2023 Notes		(81,240)		—
Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan		1,592		1,784
Restricted stock tax withholdings		(1,518)		(2,241)
Net cash provided by (used in) financing activities		30,467		(457)
Effect of exchange rate changes on cash and cash equivalents		(29)		13
Net increase (decrease) in cash, cash equivalents, and restricted cash		58,899		(50,634)
Cash, cash equivalents, and restricted cash - beginning of period		129,951		213,082
Cash, cash equivalents, and restricted cash - end of period	$	188,850	$	162,448

Supplemental Disclosure of Cash Flow Information
Interest paid	$	5,508	$	4,721
Income taxes paid		66		2,618
Non-cash operating and financing activities
Net transfer of property, plant and equipment to inventory		526		3,695
Right-of-use assets obtained in exchange for lease obligations		913		339

See accompanying Notes to the Consolidated Financial Statements.

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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, ~~2018~~2019 (“~~2018~~2019 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.

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 2020 interim quarters end on March 29, June 28, and September 27, and the 2019 interim quarters ~~end~~ended on March 31, June 30, and September ~~29, and the 2018 interim quarters ended on April 1, July 1, and September 30.~~29. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.

The preparation of financial statements in conformity with U.S GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, actual results may differ from these estimates. In particular, the COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Company’s business and markets, including the Company’s workforce and operations and the operations of the Company’s customers, suppliers, and business partners. The full extent to which the pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including sales, expenses, manufacturing, research and development costs, reserves and allowances, fair value measurements, and asset impairment charges, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

Revenue Recognition

Revenue is recognized upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration the Company expects to receive in exchange for such product or service. The Company’s contracts with customers generally do not contain variable consideration. In the rare instances where variable consideration is included, the Company estimates the amount of variable consideration and determines what portion of that, if any, has a high probability of significant subsequent revenue reversal, and if so, that amount is excluded from the transaction price. The Company’s contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, installation, maintenance, and service plans. Judgment is required to properly identify the performance obligations within a contract and to determine how the revenue should be allocated among the performance obligations. The Company also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single contract 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.

When there are separate units of accounting, the Company allocates revenue to each performance obligation on a relative stand-alone selling price basis. The stand-alone selling prices are determined based on the prices at which the Company separately sells the systems, upgrades, components, spare parts, installation, maintenance, and service plans. For items

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

that are not sold separately, the Company estimates stand-alone selling prices generally using an expected cost plus margin approach.

Most of the Company’s revenue is recognized at a point in time when the performance obligation is satisfied. The Company considers many facts when evaluating each of its sales arrangements to determine the timing of revenue recognition, including its contractual obligations and the nature of the customer’s post-delivery acceptance provisions. The Company’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For many of these arrangements, a customer source inspection of the system is performed in the Company’s facility, test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery, or other quality assurance testing is performed internally to ensure system functionality prior to shipment. 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 the Company objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery either through customer testing or the Company’s historical experience of its tools meeting specifications, transfer of control of the product to the customer is considered to have occurred and revenue is recognized upon system

~~Table of Contents~~

~~Veeco Instruments Inc. and Subsidiaries~~

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

~~(unaudited)~~

delivery since there is no substantive contingency remaining related to the acceptance provisions at that date. For new products, new applications of existing products, or for products with substantive customer acceptance provisions where the Company 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. The Company recognizes such revenue and costs upon obtaining objective evidence that the acceptance provisions can be achieved, assuming all other revenue recognition criteria have been met.

In certain cases the Company’s contracts with customers contain a billing retention, typically 10% of the sales price, which is billed by the Company and payable by the customer when field acceptance provisions are completed. Revenue recognized in advance of the amount that has been billed is recorded as a contract asset on the Consolidated Balance Sheets.

The Company recognizes revenue related to maintenance and service contracts over time based upon the respective contract term. Installation revenue is recognized over time as the installation services are performed. The Company recognizes revenue from the sales of components, spare parts, and specified service engagements at a point in time, which is typically consistent with the time of delivery in accordance with the terms of the applicable sales arrangement.

The Company may receive customer deposits on system transactions. The timing of the transfer of goods or services related to the deposits is either at the discretion of the customer or expected to be within one year from the deposit receipt. As such, the Company does not adjust transaction prices for the time value of money. Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred since the expected amortization period is one year or less.

The Company has elected to treat shipping and handling costs as a fulfillment activity, and the Company includes such costs in cost of services when the Company recognizes revenue for the related goods. Taxes assessed by governmental authorities that are collected by the Company from a customer are excluded from revenue.

~~Leases~~Inventories

~~At contract inception,~~Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Each quarter the Company ~~determines~~assesses the valuation and recoverability of all inventories: materials (raw materials, spare parts, and service inventory); work-in-process; and finished goods. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if ~~an arrangement is a lease, or contains a lease,~~less than cost. The Company evaluates usage requirements by analyzing historical usage, anticipated demand, alternative uses of ~~an identified asset~~materials, and other qualitative factors. Unanticipated changes in demand for ~~which the Company has the right to obtain substantially all of the economic benefits from its use and the right to direct its use. Right-of-use (“ROU”) assets represent~~ the Company’s right to use an underlying asset for the lease term, while lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present valueproducts may require a write down of lease payments over the lease term. The implicit discount rate in the Company’s leases generally cannot readily be determined, and therefore the Company uses its incremental borrowing rate based on information available at lease commencement date in determining the present value of future payments. The Company has options to renew or terminate certain leases. These options are included in the determination of lease term when it is reasonably certain that the Company will exercise such options. The Company does not separate lease and non-lease components in determining ROU assets or lease liabilities for real estate leases. Additionally, the Company does not recognize ROU assets or lease liabilities for leases with original terms or renewals of one year or less.

~~Recently Adopted Accounting Standards~~

~~In February 2016, the FASB issued ASU 2016-02:~~ ~~Leases~~, which, along with subsequent ASUs related to this topic, has been codified as Accounting Standards Codification 842 (“ASC 842”). ASC 842 generally requires operating lessee rights and obligations to be recognized as assets and liabilities on the balance sheet. The new standard, which the Company adopted effective January 1, 2019, offers a transition option whereby companies can recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The Company has adopted using this transition method, and therefore prior period balances have not been

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

~~adjusted.~~ inventory, which would be reflected in cost of sales in the period the revision is made. Inventory acquired as part of a business combination is recorded at fair value on the date of acquisition.

Recently Adopted Accounting Standards

In ~~addition,~~December 2019, the FASB issued ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the general principles and simplifying several aspects of ASC ~~842 provides~~740, Income taxes, including, but not limited to, requirements related to the following: a) exception to the incremental approach for intraperiod tax allocation; b) the tax basis step-up in goodwill obtained in a ~~number~~transaction that is not a business combination; c) ownership changes in investments - changes from a subsidiary to an equity method investment; d) separate financial statements of ~~optional exemptions~~entities not subject to tax; e) interim-period accounting for enacted changes in ~~transition. The~~tax law; and f) the year-to-date loss limitation in interim-period tax accounting. As permitted by ASU 2019-12, the Company ~~has elected certain exemptions whereby prior conclusions regarding lease identification, lease classification, and initial direct costs were not reassessed under~~early-adopted this standard in the ~~new standard.~~second quarter of 2020, effective as of the beginning of fiscal year 2020. The adoption ~~of the standard impacted the Company’s Consolidated Balance Sheets through the recognition of ROU assets and lease liabilities of approximately $14.2 million each as of January 1, 2019, but~~ did not have ana material impact on the ~~Consolidated Statements~~Company’s consolidated financial statements as of ~~Operations, Statements~~the date of ~~Comprehensive Income, or Statements of Cash Flows.~~adoption.

Note 2 — Income (Loss) Per Common Share

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. 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 share-based awards is considered in diluted income per 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~~if the performance targets have been ~~achieved.~~achieved, or would have been achieved if the reporting date was the end of the contingency period. The computations of basic and diluted income (loss) per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 are as follows:


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019

	(in thousands, except per share amounts)								(in thousands, except per share amounts)
Net income (loss)	$	(11,767)	$	(8,953)	$	(45,862)	$	(262,414)	$	(8,302)	$	(15,565)	$	(8,869)	$	(34,095)
Net income (loss) per common share:
Basic	$	(0.25)	$	(0.19)	$	(0.97)	$	(5.55)	$	(0.17)	$	(0.33)	$	(0.18)	$	(0.72)
Diluted	$	(0.25)	$	(0.19)	$	(0.97)	$	(5.55)	$	(0.17)	$	(0.33)	$	(0.18)	$	(0.72)

Basic weighted average shares outstanding		47,489		46,982		47,361		47,283		48,109		47,112		48,147		47,145
Effect of potentially dilutive share-based awards		—		—		—		—		—		—		—		—
Diluted weighted average shares outstanding		47,489		46,982		47,361		47,283		48,109		47,112		48,147		47,145

Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive		403		16		302		17
Common share equivalents excluded from the diluted weighted average shares outstanding since the Company incurred a net loss and their effect would be antidilutive										712		498		671		344
Potentially dilutive shares excluded from the diluted calculation as their effect would be antidilutive		1,874		2,617		1,893		2,469		1,194		1,903		1,132		1,933
Maximum potential shares to be issued for settlement of the Convertible Senior Notes excluded from the diluted calculation as their effect would be antidilutive		8,618		8,618		8,618		8,618
Maximum potential shares to be issued for settlement of the 2023 and 2027 Notes excluded from the diluted calculation as their effect would be antidilutive										15,354		8,618		15,354		8,618

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Note 3 — Assets

Investments

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. 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.

~~Table of Contents~~

~~Veeco Instruments Inc. and Subsidiaries~~

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

~~(unaudited)~~

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:

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 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 30, 2019 and December 31, 2018:~~

Level 1

Level 2

Level 3

Total

(in thousands)
September 30, 2019

Cash equivalents

Certificate of deposits and time deposits

$
59,227

$
—

$
—

$
59,227
U.S. treasuries

24,958

—

—

24,958
Commercial paper

—

10,675

—

10,675
Corporate debt

—

3,001

—

3,001
Total

$
84,185

$
13,676

$
—

$
97,861
Short-term investments

U.S. treasuries

$
81,727

$
—

$
—

$
81,727
Corporate debt

—

5,006

—

5,006
Commercial paper

—

8,939

—

8,939
Total

$
81,727

$
13,945

$
—

$
95,672

December 31, 2018

Cash equivalents

Certificate of deposits and time deposits

$
65,571

$
—

$
—

$
65,571
U.S. treasuries

3,990

—

—

3,990
Total

$
69,561

$
—

$
—

$
69,561
Short-term investments

U.S. treasuries

$
37,184

$
—

$
—

$
37,184
Corporate debt

—

8,516

—

8,516
Commercial paper

—

2,489

—

2,489
Total

$
37,184

$
11,005

$
—

$
48,189

~~There were 0 transfers between fair value measurement levels during the three and nine months ended September 30, 2019.~~

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

~~At September 30, 2019 and December 31, 2018, the amortized cost and fair value of available-for-sale securities consist of:~~

Gross

Gross


Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

(in thousands)
September 30, 2019

U.S. treasuries

$
81,733

$
10

$
(16)

$
81,727
Corporate debt

5,007

—

(1)

5,006
Commercial paper

8,940

—

(1)

8,939
Total

$
95,680

$
10

$
(18)

$
95,672

December 31, 2018

U.S. treasuries

$
37,191

$
—

$
(7)

$
37,184
Corporate debt

8,525

—

(9)

8,516
Commercial paper

2,489

—

—

2,489
Total

$
48,205

$
—

$
(16)

$
48,189

~~Available-for-sale securities in a loss position at September 30, 2019 and December 31, 2018 consist of:~~

September 30, 2019

December 31, 2018




Gross



Gross

Estimated

Unrealized

Estimated

Unrealized

Fair Value

Losses

Fair Value

Losses

(in thousands)
U.S. treasuries

$
81,727

$
(16)

$
37,184

$
(7)
Corporate debt

5,006

(1)

8,516

(9)
Commercial Paper

8,939

(1)

—

—
Total

$
95,672

$
(18)

$
45,700

$
(16)

~~At September 30, 2019 and December 31, 2018, there were 0 short-term investments that had been in a continuous loss position for more than 12 months.~~

The maturities of securities classified as available-for-sale at September 30, 2019 were all due in one year or less. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were 0 realized gains or losses for the three and nine months ended September 30, 2019 and 2018.

~~Accounts Receivable~~

~~Accounts receivable is presented net of an allowance for doubtful accounts of $0.2~~ ~~million and $0.3 million at September 30, 2019 and December 31, 2018, respectively.~~

~~Table of Contents~~

~~Veeco Instruments Inc. and Subsidiaries~~

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

~~(unaudited)~~

~~Inventories~~The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019:

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 30, 2019 and December 31, 2018 consist of the following:


	September 30,		December 31,		Level 1		Level 2		Level 3		Total

	2019		2018		(in thousands)
June 30, 2020
Cash equivalents
Certificate of deposits and time deposits					$	94,303	$	—	$	—	$	94,303
Government money market fund						48,172		—		—		48,172
Commercial paper						—		5,999		—		5,999
Total					$	142,475	$	5,999	$	—	$	148,474
Short-term investments
U.S. treasuries					$	77,746	$	—	$	—	$	77,746
Government agency securities						—		5,995		—		5,995
Corporate debt						—		12,078		—		12,078
Commercial paper						—		16,460		—		16,460
Total					$	77,746	$	34,533	$	—	$	112,279
	(in thousands)
Materials	$	78,430	$	90,816
Work-in-process		40,873		42,354
Finished goods		15,887		23,141
December 31, 2019
Cash equivalents
Certificate of deposits and time deposits					$	67,009	$	—	$	—	$	67,009
Commercial paper						—		10,484		—		10,484
Corporate debt						—		1,000		—		1,000
Total	$	135,190	$	156,311	$	67,009	$	11,484	$	—	$	78,493
Short-term investments
U.S. treasuries					$	105,130	$	—	$	—	$	105,130
Government agency securities						—		1,139		—		1,139
Corporate debt						—		6,002		—		6,002
Commercial paper						—		2,981		—		2,981
Total					$	105,130	$	10,122	$	—	$	115,252

~~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 $13.0 million and $12.8 million at September 30, 2019 and December 31, 2018, respectively.

~~Property, Plant, and Equipment~~

~~Property, plant, and equipment at September 30, 2019 and December 31, 2018 consist of the following:~~

September 30,

December 31,

2019

2018

(in thousands)
Land

$
5,061

$
5,669
Building and improvements

61,633

61,124
Machinery and equipment ⁽¹⁾

138,169

128,385
Leasehold improvements

6,755

9,033
Gross property, plant, and equipment

211,618

204,211
Less: accumulated depreciation and amortization

133,817

123,927
Net property, plant, and equipment

$
77,801

$
80,284

~~(1)~~

~~Machinery and equipment also includes software, furniture and fixtures~~

~~For the three and nine months ended September 30, 2019, depreciation expense was $4.2 million and $13.1 million, respectively, and $4.6 million and $13.0 million for the comparable 2018 periods.~~

~~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 0 ~~changes to goodwill~~transfersbetweenfair value measurement levels during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~

~~Intangible Assets~~

1312

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

At June 30, 2020 and December 31, 2019, the amortized cost and fair value of available-for-sale securities consist of:


			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

	(in thousands)
June 30, 2020
U.S. treasuries	$	77,692	$	58	$	(4)		$	77,746
Government agency securities		5,971		24		—			5,995
Corporate debt		12,069		13		(4)			12,078
Commercial paper		16,459		1		—			16,460
Total	$	112,191	$	96	$	(8)		$	112,279

December 31, 2019
U.S. treasuries	$	105,096	$	38	$	(4)	��	$	105,130
Government agency securities		1,139		—		—			1,139
Corporate debt		6,003		—		(1)			6,002
Commercial paper		2,981		—		—			2,981
Total	$	115,219	$	38	$	(5)		$	115,252

Available-for-sale securities in a loss position at June 30, 2020 and December 31, 2019 consist of:


	June 30, 2020				December 31, 2019
			Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses

		(in thousands)
U.S. treasuries	$	55,320	$	(4)	$	22,943	$	(4)
Corporate debt		4,040		(4)		6,002		(1)
Total	$	59,360	$	(8)	$	28,945	$	(5)

At June 30, 2020 and December 31, 2019, there were 0 short-term investments that had been in a continuous loss position for more than 12 months.

The ~~components~~maturities of ~~purchased~~securities classified as available-for-sale at June 30, 2020 were all due in one year or less, and an allowance for credit loss is considered unnecessary. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were 0 realized gains or losses for the six months ended June 30, 2020 and 2019.

Accounts Receivable

Accounts receivable is presented net of an allowance for doubtful accounts of $0.6 million at June 30, 2020 and December 31, 2019. The Company considered its current expectations of future economic conditions, including the impact of COVID-19, when estimating its allowance for doubtful accounts. As a result of this assessment, 0 increase to the Company’s allowance for doubtful accounts was deemed necessary.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Inventories

Inventories at June 30, 2020 and December 31, 2019 consist of the following:


	June 30,		December 31,
	2020		2019

	(in thousands)
Materials	$	76,977	$	82,155
Work-in-process		52,380		42,575
Finished goods		7,198		8,337
Total	$	136,555	$	133,067

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 $5.2 million and $5.9 million at June 30, 2020 and December 31, 2019, respectively.

Assets Held for Sale

In the fourth quarter of 2019, the Company determined that one of its non-core product lines (the “disposal group”) met the held for sale criteria, and as such, the related assets were presented as “Assets held for sale” on the Consolidated Balance Sheets as of December 31, 2019. During the three months ended June 30, 2020, the Company completed the sale of this product line for approximately $11.4 million, with approximately 85% of the transaction price received upon closing, and 15% held in escrow for a period of 18 months and included within “Other Assets” in the Consolidated Balance Sheets. Long-lived assets and definite-lived intangible assets were not depreciated or amortized while classified as held for sale. The sale of this disposal group does not represent a strategic shift that will have a material effect on the Company’s operations and financial results, nor is it considered a component of the Company, and as such it did not meet the criteria to be reported as discontinued operations.

For the year ended December 31, 2019, the Company recorded a non-cash impairment charge on these assets held for sale of $4.0 million in order to measure the disposal group at the lower of its carrying value or fair value less costs to sell, which resulted in a corresponding held for sale valuation allowance on its assets held for sale in the Consolidated Balance Sheet. During the three and six months ended June 30, 2020, the Company recorded additional impairment charges of $0.3 million related to the finalization of the sale of this disposal group. The major classes of assets and liabilities that were sold are as follows:


	September 30, 2019						December 31, 2018
			Accumulated						Accumulated
	Gross		Amortization				Gross		Amortization
	Carrying		and		Net		Carrying		and		Net
	Amount		Impairment		Amount		Amount		Impairment		Amount
	(in thousands)
Technology	$	350,928	$	309,651	$	41,277	$	337,218	$	290,808	$	46,410
Customer relationships		164,595		139,518		25,077		164,595		136,126		28,469
In-process R&D		—		—		—		13,710		10,530		3,180
Trademarks and tradenames		30,910		24,917		5,993		30,910		23,899		7,011
Other		3,686		3,657		29		3,686		3,607		79
Total	$	550,119	$	477,743	$	72,376	$	550,119	$	464,970	$	85,149
Net assets sold:													(in thousands)
Inventories													$	6,311
Property, plant, and equipment, net														372
Intangible assets, net														6,546
Goodwill														2,359
Deferred revenue														(59)
Total net assets sold													$	15,529
Net proceeds after costs to sell														(11,228)
Total loss on sale of disposal group													$	4,301

~~Other intangible assets primarily consist of patents, licenses, and backlog.~~

~~Other Assets~~

The Company has a non-marketable investment in Kateeva, Inc. (“Kateeva”), with a carrying value of $21.0 million at September 30, 2019 and December 31, 2018. Additionally, the Company has a non-marketable investment in a separate entity, with a carrying value of $3.5 million at September 30, 2019 and December 31, 2018. The Company does not exert significant influence over these investments, and its ownership interest is less than 20%. Neither equity investment has a readily observable market price, and therefore the Company has elected to measure these investments at cost, adjusted for changes in observable market prices minus impairment. The investments are included in “Other assets” on the Consolidated Balance Sheets. There were 0 changes in observable market prices for either investment for the nine months ended September 30, 2019. These investments are subject to periodic impairment reviews; as there are no open-market valuations, the impairment analyses require judgment. The analyses include assessments of the companies’ financial condition, the business outlooks for their products and technologies, their 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.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Property, Plant, and Equipment

Property, plant, and equipment at June 30, 2020 and December 31, 2019 consist of the following:


	June 30,		December 31,
	2020		2019

	(in thousands)
Land	$	5,061	$	5,061
Building and improvements		62,732		61,884
Machinery and equipment ⁽¹⁾		137,192		137,692
Leasehold improvements		6,795		6,703
Gross property, plant, and equipment		211,780		211,340
Less: accumulated depreciation and amortization		142,610		135,629
Net property, plant, and equipment	$	69,170	$	75,711

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

For the three and six months ended June 30, 2020, depreciation expense was $3.8 million and $7.7 million, respectively, and $4.3 million and $8.9 million for the comparable 2019 periods.

Goodwill

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The Company continues to assess potential triggering events related to the value of its goodwill, including the COVID-19 pandemic, and concluded that there were no indicators of impairment during the six months ended June 30, 2020.

Intangible Assets

Intangible assets consist of purchased technology, customer relationships, patents, trademarks and tradenames, and backlog, and are initially recorded at fair value. Long-lived intangible assets 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. The Company continues to assess potential triggering events related to the value of its intangible assets, including the COVID-19 pandemic, and concluded that there were no indicators of impairment during the six months ended June 30, 2020.

The components of purchased intangible assets were as follows:


	June 30, 2020						December 31, 2019
			Accumulated						Accumulated
	Gross		Amortization				Gross		Amortization
	Carrying		and		Net		Carrying		and		Net
	Amount		Impairment		Amount		Amount		Impairment		Amount

	(in thousands)
Technology	$	327,908	$	297,062	$	30,846	$	327,908	$	291,766	$	36,142
Customer relationships		146,465		128,448		18,017		146,465		126,764		19,701
Trademarks and tradenames		30,910		25,935		4,975		30,910		25,256		5,654
Other		3,686		3,678		8		3,686		3,665		21
Total	$	508,969	$	455,123	$	53,846	$	508,969	$	447,451	$	61,518

Other intangible assets primarily consist of patents, licenses, and backlog.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Note 4 — Liabilities

Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 consist of:


	September 30,		December 31,		June 30,		December 31,
	2019		2018		2020		2019

	(in thousands)				(in thousands)
Payroll and related benefits	$	14,471	$	20,486	$	21,267	$	15,174
Warranty		7,552		7,852		5,518		7,067
Operating lease liabilities		4,730		—		4,104		4,196
Interest		1,992		4,321		3,750		4,321
Professional fees		2,794		2,897		1,171		2,443
Sales, use, and other taxes		1,497		2,670		2,533		811
Restructuring liability		1,617		2,213		1,233		2,841
Other		5,988		6,011		2,730		4,390
Total	$	40,641	$	46,450	$	42,306	$	41,243

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, ~~2019~~2020 include:


	(in thousands)			(in thousands)
Balance - December 31, 2018	$	7,852
Balance - December 31, 2019			$	7,067
Warranties issued		4,551		1,614
Consumption of reserves		(4,517)		(3,280)
Changes in estimate		(334)		117
Balance - September 30, 2019	$	7,552
Balance - June 30, 2020			$	5,518

Restructuring Accruals

~~During~~The Company continued to record restructuring charges during the second quarter of 2018, the Company initiated plans to further reduce excess capacity associated with the manufacture and support of the Company's advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into its San Jose, California facility. Asyear ended December 31, 2019 as a result of ~~this~~its efforts to further streamline operations, enhance efficiencies, and ~~other cost saving initiatives,~~reduce costs. In the second half of 2019, the Company ~~announced headcount reductions of~~executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate its resources to the Company’s highest priority projects. In addition, the Company delayered the organization. Collectively, these actions impacted approximately 4060 employees. During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, additional accruals were recognized and payments were made related to these restructuring initiatives.

The following table shows the amounts incurred and paid for restructuring activities during the six months ended June 30, 2020, and the remaining accrued balance of restructuring costs at June 30, 2020, which is included in “Accrued

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

expenses and other current liabilities” in the Consolidated Balance Sheets, and principally consists of personnel severance and related costs:





	(in thousands)
Balance - December 31, 2019	$	2,841
Provision		1,097
Payments		(2,705)
Balance - June 30, 2020	$	1,233

Customer Deposits and Deferred Revenue

Customer deposits totaled $39.9 million and $26.6 million at June 30, 2020 and December 31, 2019, respectively. Deferred revenue represents amounts billed, other than deposits, in excess of the revenue that can be recognized on a particular contract at the balance sheet date. Changes in deferred revenue were as follows:


	(in thousands)
Balance - December 31, 2019	$	28,249
Deferral of revenue		6,180
Recognition of previously deferred revenue		(16,054)
Balance - June 30, 2020	$	18,375

As of June 30, 2020, the Company has approximately $25.0 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 81% is expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

Convertible Senior Notes

2023 Notes

On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes (the “2023 Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The 2023 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 2023 Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted.

On May 18, 2020, in connection with the completion of a private offering of $125 million aggregate principal amount of 3.75% convertible senior notes described below, the Company repurchased and retired approximately $88.3 million in aggregate principal amount of its outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash. The Company accounted for the partial settlement of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $3.0 million for the three and six months ended June 30, 2020.

2027 Notes

On May 18, 2020, the Company completed a private offering of $125.0 million of 3.75% convertible senior notes (the “2027 Notes”). The Company received net proceeds of approximately $121.9 million, after deducting underwriting discounts and fees and expenses payable by the Company. Additionally, the Company used approximately $10.3 million of cash to purchase the capped calls, discussed below. The 2027 Notes bear interest at a rate of 3.75% per year, payable

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2020. The 2027 Notes mature on June 1, 2027 (the “Maturity Date”), unless earlier purchased by the Company, redeemed, or converted.

The 2027 Notes are unsecured obligations of the Company and rank senior in right of payment to any of the Company’s subordinated indebtedness; equal in right of payment to all of the Company’s unsecured indebtedness that is not subordinated (including the Company’s unsecured trade payables and the 2023 Notes); effectively subordinated in right of payment to any of the Company’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 the Company’s subsidiaries.

The 2027 Notes are convertible at the option of the holders upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is 71.5372 shares of the Company’s common stock per $1,000 principal amount of 2027 Notes, representing an initial effective conversion price of $13.98 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 2027 Notes, but will not be adjusted for accrued but unpaid interest.

Holders may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 1, 2026 only under the following circumstances:

(i)

During any calendar quarter commencing after the calendar quarter ending September 30, 2020 (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 5 business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per 1 thousand dollar principal amount of 2027 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day;

(iii)

If the Company calls any or all of the 2027 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 1, 2026, 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 2027 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 industry high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the 2027 Notes at a discount rate of 9.10%, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the aggregate face value of the 2027 Notes over the estimated fair value of the liability component of $34.2 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 2027 Notes using the effective interest rate method. Amortization of the debt discount is recognized as non-cash interest expense.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

The Company continued to record restructuring charges during the three and nine months ended September 30, 2019 as a result of the Company’s efforts to streamline operations, enhance efficiencies, and reduce costs. Changes in the restructuring accrual were as follows:

Personnel

Facility


Severance and

Related Costs

Related Costs

and Other

Total

(in thousands)
Balance - December 31, 2018

$
2,143

$
70

$
2,213
Provision

3,681

193

3,874
Payments

(4,207)

(263)

(4,470)
Balance - September 30, 2019

$
1,617

$
—

$
1,617

~~Customer Deposits~~The transaction costs of $3.1 million incurred in connection with the issuance of the 2027 Notes were allocated to the liability and ~~Deferred Revenue~~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 2027 Notes. Transaction costs allocated to the equity component of $0.8 million reduced the value of the equity component recognized in stockholders' equity.

~~Customer deposits totaled $31.6 million and $28.3 million at September 30, 2019 and December 31, 2018, respectively. Deferred revenue represents amounts billed, other than deposits,~~In connection with the offering of the 2027 Notes, on May 13, 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions��), pursuant to capped call confirmations, covering the total principal amount of the 2027 Notes for an aggregate premium of $10.3 million. The Capped Call Transactions are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of the 2027 Notes and/or offset any cash payments the Company is required to make in excess of the ~~revenue that can~~aggregate principal amount of converted 2027 Notes, as the case may be, ~~recognized~~with such reduction and/or offset subject to a cap based on ~~a particular contract at~~ the ~~balance sheet date. Changes in deferred revenue were as follows:~~capped price of the Capped Call Transactions. The Capped Call Transactions exercise price is equal to the initial conversion price of the 2027 Notes, and the capped price of the Capped Call Transactions is approximately $18.46 per share and is subject to certain adjustments under the terms of the capped call confirmations.

(in thousands)
Balance - December 31, 2018

$
44,415
Deferral of revenue

4,717
Recognition of previously deferred revenue

(14,744)
Balance - September 30, 2019

$
34,388

~~As of September 30, 2019,~~The Capped Call Transactions are separate transactions entered into by the Company ~~has approximately $49.5 million~~with the capped call counterparties, are not part of ~~remaining performance obligations on contracts~~the terms of the 2027 Notes and will not change the holders’ rights under the 2027 Notes. Holders of the 2027 Notes will not have any rights with ~~an original estimated duration~~respect to the Capped Call Transactions. The cost of ~~one year or more, of which approximately 86%~~the Capped Call Transactions is not expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

~~Convertible Senior Notes~~

~~On January 10, 2017,~~tax-deductible as the Company ~~issued $345.0 million~~did not elect to integrate the Capped Call Transactions into the respective convertible notes for tax purposes. The cost of ~~2.70% convertible senior unsecured notes (the “Convertible Senior Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by~~ the ~~Company,~~Capped Call Transactions was recorded as a reduction of ~~approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually~~the Company’s additional paid-in capital 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 (the “Maturity Date”), unless earlier purchased by~~ the ~~Company, redeemed, or converted.~~accompanying consolidated financial statements.

The carrying value of the ~~Convertible Senior~~2023 Notes and 2027 Notes are as follows:


		June 30, 2020						December 31, 2019
		2023 Notes		2027 Notes		Total		2023 Notes		2027 Notes		Total

		(in thousands)
Principal amount	$	256,695	$	125,000	$	381,695	$	345,000	$	—	$	345,000
Unamortized debt discount		(25,816)		(33,773)		(59,589)		(40,820)		—		(40,820)
Unamortized transaction costs		(2,601)		(2,191)		(4,792)		(4,112)		—		(4,112)
Net carrying value	$	228,278	$	89,036	$	317,314	$	300,068	$	—	$	300,068

Total interest expense related to the 2023 Notes and 2027 Notes is as follows:


	September 30,		December 31,		Three months ended June 30,				Six months ended June 30,
	2019		2018		2020		2019		2020		2019

	(in thousands)				(in thousands)
Principal amount	$	345,000	$	345,000
Unamortized debt discount		(43,780)		(52,336)
Unamortized transaction costs		(4,410)		(5,272)
Net carrying value	$	296,810	$	287,392
Cash Interest Expense
Coupon interest expense - 2023 Notes					$	2,070	$	2,329	$	4,399	$	4,658
Coupon interest expense - 2027 Notes						573		—		573		—
Non-cash Interest Expense
Amortization of debt discount - 2023 Notes						2,729		2,851		5,746		5,650
Amortization of debt discount - 2027 Notes						425		—		425		—
Amortization of transaction costs - 2023 Notes						275		287		579		569
Amortization of transaction costs - 2027 Notes						28		—		28		—
Total Interest Expense					$	6,100	$	5,467	$	11,750	$	10,877

1619

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

Three months ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)

Cash Interest Expense









Coupon interest expense

$
2,329

$
2,329

$
6,986

$
6,986

Non-Cash Interest Expense









Amortization of debt discount

2,906

2,697

8,556

7,940

Amortization of transaction costs

293

271

862

799

Total Interest Expense

$
5,528

$
5,297

$
16,404

$
15,725

The Company determined the ~~Convertible Senior~~2023 Notes ~~is a~~ and 2027 Notes are Level 2 ~~liability~~ liabilities in the fair value hierarchy and had an estimated ~~its~~ fair value ~~as $309.2~~at June 30, 2020 of $235.4 million ~~at September 30, 2019.~~and $141.5 million, respectively.

Other Liabilities

As part of the acquisition of Ultratech, the Company assumed an executive non-qualified deferred compensation plan that allowed qualifying executives to defer cash compensation. The plan was frozen at the time of acquisition and 0 further contributions have been made. At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, plan assets approximated ~~$3.5~~$2.1 million and ~~$3.2~~$2.7 million, respectively, representing the cash surrender value of life insurance policies and is included within “Other assets” in the Consolidated Balance Sheets, while plan liabilities approximated ~~$3.0~~$2.2 million and ~~$3.5~~$3.1 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities at both June 30, 2020 and December 31, 2019 also included medical and dental benefits for former executives of $2.0 million, ~~and $2.2 million at September 30, 2019 and December 31, 2018, respectively, and~~ asset retirement obligations of $3.2 million, and income tax payables of $1.4 and $1.0 million, respectively. Additionally, as a result of the Coronavirus, Aid, Relief, and Economic Security Act, the Company has accrued for and defered the deposit and payment of its share of social security taxes, resulting in a liability of $1.4 million at ~~both September~~June 30, ~~2019 and December 31, 2018.~~2020, which is included within “Other liabilities” in the Consolidated Balance Sheets.

Note 5 — Commitments and Contingencies

Leases

The Company’s operating leases primarily include real estate leases for properties used for manufacturing, R&D activities, sales and service, and administration, as well as certain equipment leases. Some leases may include options to renew for a period of up to 5 years, while others may include options to terminate the lease. The weighted average remaining lease term of the Company’s operating leases as of ~~September~~June 30, ~~2019~~2020 was 32.9 years, and the weighted average discount rate used in determining the present value of future lease payments was 6.0%.

~~Table~~The following table provides the maturities of ~~Contents~~

~~Veeco Instruments Inc. and Subsidiaries~~

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

~~(unaudited)~~lease liabilities at June 30, 2020:

~~Minimum lease commitments at September 30, 2019 for property and equipment under operating lease agreements are payable as follows:~~

Operating

Leases

(in thousands)
Payments due by period:

2019

$
1,302
2020

5,222
2021

2,548
2022

1,379
2023

865
Thereafter

551
Total future minimum lease payments

11,867
Less: Imputed interest

(1,071)
Total

10,796

Reported as of September 30, 2019

Other current liabilities

4,730
Operating lease liabilities

6,066
Total

$
10,796

~~Minimum lease commitments at December 31, 2018 for property and equipment under operating lease agreements were payable as follows:~~


	Operating		Operating
	Leases		Leases
	(in thousands)		(in thousands)
Payments due by period:
2019	$	5,143
2020		5,056	$	2,295
2021		2,432		5,211
2022		1,812		4,976
2023		1,066		1,337
2024				551
Thereafter		548		—
Total future minimum lease payments				14,370
Less: Imputed interest				(1,262)
Total	$	16,057	$	13,108

Reported as of June 30, 2020
Accrued expenses and other current liabilities			$	4,104
Operating lease long-term liabilities				9,004
Total			$	13,108

Operating lease cost for both the three ~~and nine~~ months ended ~~September~~June 30, 2020 and 2019 ~~were $1.3 million~~was $1.4 million. Operating lease cost for the six months ended June 30, 2020 and ~~$4.1~~2019 was $2.7 and $2.8 million, respectively. Variable lease cost for the three and nine months ended September 30, 2019 were $0.4 million and $1.4 million, respectively. Additionally, the Company has an immaterial amount of short term leases. Lease expense for the three and nine months ended September 30, 2018 was $1.7 million and $5.5 million, respectively. Operating cash outflows from operating leases for the nine months ended September 30, 2019 was $5.0 million.

~~Purchase Commitments~~

~~Veeco has purchase commitments of $76.3 million at September 30, 2019, substantially all of which become due within one year.~~

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

and six months ended June 30, 2020 was $0.4 and $0.9 million, respectively, and $0.4 and $1.0 million for the comparable 2019 periods. Additionally, the Company has an immaterial amount of short-term leases. Operating cash outflows from operating leases for the six months ended June 30, 2020 and 2019 were $3.5 million and $3.7 million, respectively.

Purchase Commitments

Veeco has purchase commitments of $86.3 million at June 30, 2020, 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, ~~2019,~~2020, outstanding bank guarantees and letters of credit totaled ~~$7.8~~$5.9 million, and unused bank guarantees and letters of credit of ~~$66.4~~$25.9 million were available to be drawn upon.

Legal Proceedings

On June 8, 2018, an Ultratech shareholder who received Veeco stock as part of the consideration for the Ultratech acquisition filed a purported class action complaint in the Superior Court of the State of California, County of Santa Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, 2 purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the Securities Act of 1933 for, among other things, alleged false/misleading statements in the registration statement and prospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. Veeco is defending this matter vigorously.

On December 21, 2018, a purported Veeco stockholder filed a derivative action in the Superior Court of the State of California, County of Santa Clara, captioned Vladimir Gusinsky Revocable Trust v. Peeler, et al., Case No. 18CV339925, on behalf of nominal defendant Veeco. The complaint seeks to assert claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against current and former Veeco directors premised on purported misstatements and omissions in the registration statement relating to the Ultratech acquisition. Veeco is defending this matter vigorously.

The Company is involved in various other legal proceedings arising in the normal course of business. The Company 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 6 — Derivative Financial Instruments

The Company is exposed to financial market risks arising from changes in currency exchange rates. Changes in currency exchange rates could affect the Company’s foreign currency denominated monetary assets and liabilities and forecasted cash flows. The Company enters into monthly forward derivative contracts from time to time with the intent of mitigating a portion of this risk. The Company only uses derivative financial instruments in the context of hedging and not for speculative purposes and had not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other operating expense (income), net” in the Company’s Consolidated ~~Statements of Operations. The Company executes derivative transactions with highly rated financial institutions to mitigate counterparty risk.~~

1921

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Statements of Operations. The Company executes derivative transactions with highly rated financial institutions to mitigate counterparty risk.

The Company did not have any outstanding derivative contracts at ~~September~~June 30, ~~2019~~2020 or December 31, ~~2018.~~2019. Additionally, the Company did not have any gains or losses from currency exchange derivatives during the ~~nine~~six months ended ~~September~~June 30, ~~2019. The following table shows the gains~~2020 and (losses) from currency exchange derivatives during the three and nine months ended September 30, 2018, which are included in “Other, net” in the Consolidated Statements of Operations, as well as the weighted average notional amount of derivatives outstanding for the period:2019.

Three months ended September 30, 2018

Nine months ended September 30, 2018


Gains
(Losses)

Weighted average
notional amount

Gains
(Losses)

Weighted average
notional amount

(in thousands)

Foreign currency exchange forwards

$
132

$
4,448

$
348

$
2,869

~~Note 7 — Equity~~

~~Statement of Stockholders’ Equity~~

~~The following tables present the changes in Stockholders’ Equity:~~

Accumulated


Additional

Other

Common Stock

Treasury Stock

Paid-in

Accumulated

Comprehensive

Shares

Amount

Shares

Amount

Capital

Deficit

Income

Total

(in thousands)
Balance at December 31, 2018

48,547

$
485

523

$
(5,872)

$
1,061,325

$
(619,983)

$
1,820

$
437,775
Net loss

—

—

—

—

—

(18,530)

—

(18,530)
Other comprehensive income, net of tax

—

—

—

—

—

—

38

38
Share-based compensation expense

—

—

—

—

3,157

—

—

3,157
Net issuance under employee stock plans

128

2

(523)

5,872

(6,303)

(213)

—

(642)
Balance at March 31, 2019

48,675

$
487

—

$
—

$
1,058,179

$
(638,726)

$
1,858

$
421,798
Net loss

—

—

—

—

—

(15,565)

—

(15,565)
Other comprehensive income, net of tax

—

—

—

—

—

—

20

20
Share-based compensation expense

—

—

—

—

4,588

—

—

4,588
Net issuance under employee stock plans

296

3

—

—

182

—

—

185
Balance at June 30, 2019

48,971

$
490

—

$
—

$
1,062,949

$
(654,291)

$
1,878

$
411,026
Net loss

—

—

—

—

—

(11,767)

—

(11,767)
Other comprehensive income, net of tax

—

—

—

—

—

—

(42)

(42)
Share-based compensation expense

—

—

—

—

3,783

—

—

3,783
Net issuance under employee stock plans

(68)

(1)

—

—

(529)

—

—

(530)
Balance at September 30, 2019

48,903

$
489

—

$
—

$
1,066,203

$
(666,058)

$
1,836

$
402,470

~~Table of Contents~~

~~Veeco Instruments Inc. and Subsidiaries~~

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

~~(unaudited)~~

Accumulated


Additional

Other

Common Stock

Treasury Stock

Paid-in

Accumulated

Comprehensive

Shares

Amount

Shares

Amount

Capital

Deficit

Income

Total

(in thousands)
Balance at December 31, 2017

48,229

$
482

85

$
(1,284)

$
1,051,953

$
(212,870)

$
1,812

$
840,093
Net loss

—

—

—

—

—

(15,827)

—

(15,827)
Other comprehensive income, net of tax

—

—

—

—

—

—

24

24
Share-based compensation expense

—

—

—

—

4,537

—

—

4,537
Net issuance under employee stock plans

462

5

(115)

1,728

(2,159)

—

—

(426)
Purchases of common stock

—

—

30

(444)

—

—

—

(444)
Balance at March 31, 2018

48,691

$
487

—

$
—

$
1,054,331

$
(228,697)

$
1,836

$
827,957
Net loss

—

—

—

—

—

(237,634)

—

(237,634)
Other comprehensive income, net of tax

—

—

—

—

—

—

(24)

(24)
Share-based compensation expense

—

—

—

—

4,904

—

—

4,904
Net issuance under employee stock plans

43

—

(57)

865

(1,273)

—

—

(408)
Purchases of common stock

—

—

57

(865)

—

—

—

(865)
Balance at June 30, 2018

48,734

$
487

—

$
—

$
1,057,962

$
(466,331)

$
1,812

$
593,930
Net loss

—

—

—

—

—

(8,953)

—

(8,953)
Other comprehensive income, net of tax

—

—

—

—

—

—

—

—
Share-based compensation expense

—

—

—

—

3,279

—

—

3,279
Net issuance under employee stock plans

(101)

(1)

(23)

340

(508)

—

—

(169)
Purchases of common stock

—

—

863

(10,000)

—

—

—

(10,000)
Balance at September 30, 2018

48,633

$
486

840

$
(9,660)

$
1,060,733

$
(475,284)

$
1,812

$
578,087

Note 7 — Equity

~~Accumulated Other Comprehensive Income (“AOCI”)~~Statement of Stockholders’ Equity

The following ~~table presents~~tables present the changes in ~~the balances of each component of AOCI, net of tax:~~Stockholders’ Equity:


			Unrealized											Accumulated
			Gains (Losses)							Additional				Other
	Foreign		on Available				Common Stock			Paid-in		Accumulated		Comprehensive
	Currency		for Sale				Shares	Amount		Capital		Deficit		Income		Total

	Translation		Securities		Total		(in thousands)
	(in thousands)
Balance - December 31, 2018	$	1,836	$	(16)	$	1,820
Other comprehensive income (loss)		8		8		16
Balance - September 30, 2019	$	1,844	$	(8)	$	1,836
Balance at December 31, 2019							48,994	$	490	$	1,071,058	$	(698,930)	$	1,894	$	374,512
Net loss							—		—		—		(567)		—		(567)
Other comprehensive income (loss), net of tax							—		—		—		—		153		153
Share-based compensation expense							—		—		3,646		—		—		3,646
Net issuance under employee stock plans							434		4		(684)		—		—		(680)
Balance at March 31, 2020							49,428	$	494	$	1,074,020	$	(699,497)	$	2,047	$	377,064
Net loss							—		—		—		(8,302)		—		(8,302)
Other comprehensive income (loss), net of tax							—		—		—		—		(130)		(130)
Share-based compensation expense							—		—		2,974		—		—		2,974
Net issuance under employee stock plans							191		3		752		—		—		755
Extinguishment of equity component of repurchased 2023 Notes							—		—		(80)		—		—		(80)
Equity component of 2027 Notes							—		—		33,363		—		—		33,363
Purchase of capped calls							—		—		(10,313)		—		—		(10,313)
Balance at June 30, 2020							49,619	$	497	$	1,100,716	$	(707,799)	$	1,917	$	395,331

~~There were minimal reclassifications from AOCI into net income for the three and nine months ended September 30, 2019 and 2018.~~

~~Note 8 — 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.


												Accumulated
								Additional				Other
	Common Stock			Treasury Stock				Paid-in		Accumulated		Comprehensive
	Shares	Amount		Shares		Amount		Capital		Deficit		Income		Total

	(in thousands)
Balance at December 31, 2018	48,547	$	485		523	$	(5,872)	$	1,061,325	$	(619,983)	$	1,820	$	437,775
Net loss	—		—		—		—		—		(18,530)		—		(18,530)
Other comprehensive income (loss), net of tax	—		—		—		—		—		—		38		38
Share-based compensation expense	—		—		—		—		3,157		—		—		3,157
Net issuance under employee stock plans	128		2		(523)		5,872		(6,303)		(213)		—		(642)
Balance at March 31, 2019	48,675	$	487		—	$	—	$	1,058,179	$	(638,726)	$	1,858	$	421,798
Net loss	—		—		—		—		—		(15,565)		—		(15,565)
Other comprehensive income (loss), net of tax	—		—		—		—		—		—		20		20
Share-based compensation expense	—		—		—		—		4,588		—		—		4,588
Net issuance under employee stock plans	296		3		—		—		182		—		—		185
Balance at June 30, 2019	48,971	$	490		—	$	—	$	1,062,949	$	(654,291)	$	1,878	$	411,026

2122

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Accumulated Other Comprehensive Income (“AOCI”)

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


			Unrealized
			Gains (Losses)
	Foreign		on Available
	Currency		for Sale
	Translation		Securities		Total

	(in thousands)
Balance - December 31, 2019	$	1,861	$	33	$	1,894
Other comprehensive income (loss)		(30)		53		23
Balance - June 30, 2020	$	1,831	$	86	$	1,917

There were minimal reclassifications from AOCI into net income for the three and six months ended June 30, 2020 and 2019.

Note 8 — Share-based Compensation

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, ~~2019~~2020 and ~~2018:~~2019:


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019

	(in thousands)								(in thousands)
Cost of sales	$	383	$	513	$	1,448	$	1,603	$	474	$	595	$	995	$	1,065
Research and development		756		709		2,531		2,728		613		982		1,486		1,775
Selling, general, and administrative		2,644		1,890		7,549		7,393		1,887		3,011		4,139		4,905
Restructuring		—		167		—		996
Total	$	3,783	$	3,279	$	11,528	$	12,720	$	2,974	$	4,588	$	6,620	$	7,745

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, equity activity related to stock options was as follows:


		Weighted			Weighted
	Number of	Average		Number of	Average
	Shares	Exercise Price		Shares	Exercise Price
	(in thousands)			(in thousands)
Balance - December 31, 2018	1,222	$	34.80
Balance - December 31, 2019				1,119		34.88
Expired or forfeited	(69)		33.62	(324)		33.96
Balance - September 30, 2019	1,153		34.87
Balance - June 30, 2020				795		35.25

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, equity activity related to non-vested restricted shares and performance shares was as follows:


		Weighted			Weighted
		Average			Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
	(in thousands)			(in thousands)
Balance - December 31, 2018	2,218	$	20.74
Balance - December 31, 2019				2,257		16.20
Granted	1,048		11.41	983		9.32
Performance award adjustments	(25)		28.91	(45)		31.34
Vested	(721)		22.29	(572)		15.95
Forfeited	(176)		19.41	(348)		15.47
Balance - September 30, 2019	2,344		16.02
Balance - June 30, 2020				2,275		13.10

Note 9 — 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. Realization of net deferred tax assets is dependent on future taxable income. At ~~September~~June 30, ~~2019,~~2020, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized.

At the end of each interim reporting period, the effective tax rate is aligned with 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. ~~If necessary,~~

Loss before income taxes and income tax expense (benefit) for the ~~year-to-date~~three and six months ended June 30, 2020 and 2019 were as follows:


	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019

	(in thousands)
Loss before income taxes	$	(8,251)	$	(15,420)	$	(8,550)	$	(33,759)
Income tax expense (benefit)	$	51	$	145	$	319	$	336

The Company’s tax expense for both the three months ended June 30, 2020 and 2019 was $0.1 million. The 2020 tax expense included a $0.1 million expense related to the Company’s domestic operations offset by a minimal benefit related to the Company’s non-U.S. operations, compared to 2019 when the expense included a $0.1 million expense related to the Company’s domestic operations and minimal expense related to the Company’s non-U.S. operations. Although there was a domestic pre-tax loss for the three months ended June 30, 2020 and 2019, the Company did not provide a current tax benefit on domestic pre-tax losses, as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for ~~interim period losses~~both periods is ~~limited~~primarily attributable to the ~~amount~~tax amortization of indefinite-lived intangible assets that ~~could be recognizable at the end of the fiscal year.~~is not available to offset U.S. deferred tax assets.

2224

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

~~Loss before income taxes and income tax expense (benefit) for the three and nine months ended September 30, 2019 and 2018 were as follows:~~

Three months ended September 30,

Nine months ended September 30,


2019

2018

2019

2018

(in thousands)

Loss before income taxes

$
(11,695)

$
(8,652)

$
(45,455)

$
(290,368)

Income tax expense (benefit)

$
72

$
301

$
407

$
(27,954)

The Company’s tax expense for both the ~~three~~six months ended ~~September~~June 30, 2020 and 2019 was ~~$0.1 million, compared to~~ $0.3 ~~million for the comparable prior period.~~million. The ~~2019~~2020 tax expense included a ~~$0.1~~$0.2 million expense related to the Company’s domestic operations and ~~minimal~~a $0.1 million expense related to the Company’s non-U.S. operations, compared to ~~2018~~2019 when the expense ~~was mainly~~included a $0.1 million expense related to ~~the Company’s~~domestic operations and a $0.2 million expense related to non-U.S. operations. Although there was a domestic pre-tax loss for the ~~three~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018, the Company~~Veeco did not provide a current tax benefit on domestic pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The current period domestic tax expense ~~for the current period~~ is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.

The Company’s tax expense for the nine months ended September 30, 2019 was $0.4 million, compared to a tax benefit of $28.0 million for the comparable prior period. The 2019 tax expense included a $0.2 million expense related to the Company’s domestic operations, and $0.2 million expense related to the Company’s non-U.S. operations, compared to 2018 when the benefit included a $1.1 million benefit related to the Company’s domestic operations, and a $26.9 million benefit related to the Company’s non-U.S. operations. Although there was a domestic pre-tax loss for the nine months ended September 30, 2019 and 2018, the Company did not provide a current tax benefit on domestic pre-tax losses, as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for the current period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The non-U.S. tax expense for the nine months ended September 30, 2019 is primarily attributable to tax expense on non-U.S operation profits and foreign withholding taxes on unremitted earnings as of September 30, 2019, offset by a tax benefit related to the amortization of intangible assets.

The domestic tax benefit for the nine months ended September 30, 2018 is primarily attributable to refundable alternative minimum tax credits in accordance with the 2017 Tax Act, offset by the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The non-U.S. tax benefit for the nine months ended September 30, 2018 is primarily attributable to the deferred tax benefit recognized on the intangible asset impairment charge incurred during the period.

Note 10 — Segment Reporting and Geographic Information

Veeco operates and measures its results in 1 operating segment and therefore has 1 reportable segment: the design, development, manufacture, and support of thin film process equipment primarily sold to make electronic devices.

Veeco categorizes its sales into the following 4 end-markets:

Front-End Semiconductor

Front-End Semiconductor refers to the early steps in the process of integrated circuit fabrication where the microchips are created but still remain on the silicon wafer. This category includes Laser Spike Anneal, Ion Beam etch for front-end semiconductor applications, and Ion Beam deposition for EUV mask blanks.

Advanced Packaging, MEMS & RF Filters

Advanced Packaging includes a portfolio of wafer-level assembly technologies that enable ~~the miniaturization and~~improved performance ~~improvement~~ of electronic products, such as smartphones, ~~smartwatches, tablets,~~high-end servers, and ~~laptops.~~graphical processors. 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. RF Filters refers to RF filters used in smartphones, tablets, and mobile devices.

~~Table of Contents~~

~~Veeco Instruments Inc. and Subsidiaries~~

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

~~(unaudited)~~

LED Lighting, Display & Compound Semiconductor

LED 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 headlamps. Display refers to LEDs used for displays and Organic Light Emitting Diode ~~(“OLED”)~~ displays found in outdoor display/signage applications, TVs, smartphones, wearable devices, and tablets. Compound Semiconductor includes Photonics, Power Electronics, and Radio Frequency (“RF”) Devices. Photonics refers to laser diodes, Vertical Cavity Surface Emitting Lasers ~~(“VCSEL”)~~ in 3D sensing and communications, and various other optical devices. Power Electronics refers to semiconductor devices such as rectifiers, inverters, and converters for the control and conversion of electric power. RF devices refers to radio frequency emitting and receiving devices that enable wireless communications. Such devices include power amplifiers, switches, and transceivers for applications such as mobile (including handsets and base stations), defense, automobile, and the Internet of Things.

~~Front-End Semiconductor~~

Scientific & Industrial

Scientific refers to advanced materials research at university research institutions, industry research institutions, industry consortiums, and government research agencies. Industrial refers to large-scale product manufacturing applications including data storage and optical coatings: thin layers of material deposited on a lens or mirror that alters how light reflects and transmits.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Sales by end-market and geographic region for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 were as follows:


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019

	(in thousands)								(in thousands)
Sales by end-market
Front-End Semiconductor									$	17,759	$	24,509	$	49,125	$	47,126
Advanced Packaging, MEMS & RF Filters	$	11,381	$	24,562	$	50,951	$	76,473		21,454		16,443		30,042		39,570
LED Lighting, Display & Compound Semiconductor		24,020		58,864		47,263		236,597		16,017		9,692		31,419		23,242
Front-End Semiconductor		33,578		13,476		80,703		41,085
Scientific & Industrial		39,975		29,855		127,230		88,955		43,407		47,178		92,553		87,255
Total	$	108,954	$	126,757	$	306,147	$	443,110	$	98,637	$	97,822	$	203,139	$	197,193
Sales by geographic region
United States	$	27,915	$	28,861	$	100,014	$	85,555	$	29,632	$	39,784	$	69,268	$	72,099
China		17,034		39,200		46,846		185,050		17,393		19,654		27,865		29,813
EMEA⁽¹⁾		19,128		30,685		49,280		71,836		26,130		12,324		42,280		30,151
Rest of World		44,877		28,011		110,007		100,669		25,482		26,060		63,726		65,130
Total	$	108,954	$	126,757	$	306,147	$	443,110	$	98,637	$	97,822	$	203,139	$	197,193

(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.

2426

Table of Contents

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 are an innovative manufacturer of semiconductor process equipment. Our proven ion beam, laser annealing, lithography, MOCVD and single wafer etch & clean technologies play an integral role in the fabrication and packaging of advanced semiconductor devices. With equipment designed to optimize performance, yield and cost of ownership, Veeco holds leading technology positions in the markets we serve. To learn more about Veeco’s systems and service offerings, visit www.veeco.com.

COVID-19 Update

As a result of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to contain the virus, such as travel bans and restrictions, limits on gatherings, quarantines, shelter-in-place orders, and business shutdowns. We have important manufacturing operations in the U.S. and sales and support operations in China, Germany, Japan, Malaysia, Philippines, Singapore, South Korea, Thailand, Taiwan and the United Kingdom, all of which have been affected by the COVID-19 pandemic.

Measures providing for business shutdowns generally exclude certain essential services, and those essential services include critical infrastructure and the businesses that support that critical infrastructure. Our operations are considered part of the critical and essential infrastructure defined by applicable government authorities, and, although governmental measures to contain the pandemic may be modified or extended, our manufacturing facilities remain open. We believe our diverse product offerings and the critical nature of certain of our products for infrastructure insulate us, to some extent, from the adverse effects of the pandemic; however, a prolonged economic downturn will adversely affect our customers, which could have a material adverse effect on our revenues, particularly if customers from whom we derive a significant amount of revenue reduce or delay purchases to mitigate the impacts of the pandemic or fail to make payments to us on time or at all.

We serve a global and highly interconnected customer base across the Asia-Pacific region, Europe, and North America. Our net sales to customers located outside of the United States represented approximately 70%, 77%, and 80% of our total net sales in 2019, 2018, and 2017, respectively, and we expect that net sales to customers outside the United States will continue to represent a significant percentage of our total net sales. As a result, our business will be adversely impacted by further deterioration in global economic conditions, particularly in markets in Asia and Europe.

To date, we have not yet experienced any significant interruptions to our supply chain as a result of the COVID-19 pandemic. We continue to monitor our global supply chain and may experience disruptions in future periods, primarily as a result of financial challenges confronting companies in our supply chain and restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, any of which could cause a disruption in our ability to obtain raw materials or components required to manufacture our products.

Like many in our industry, we are managing through the effects of the COVID-19 pandemic. Although the full extent of the COVID-19 pandemic’s impact on our business, results of operations, supply chains and growth can not be predicted or quantified, we proactively identified potential challenges to our business and have been executing business continuity activities to manage disruptions in our business and continue to provide critical infrastructure to our customers. In

Table of Contents

response to the pandemic, we have taken, or intend to take, the following steps, among others, to keep our employees safe and minimize the spread of the virus, while continuing to serve our customers:

●

implemented rigorous health and safety protocols at our manufacturing facilities, including extensively and frequently disinfecting our facilities, limiting access to our facilities, checking temperatures of individuals entering our facilities, staggering shifts to minimize employee overlap in gowning areas, and providing protective equipment;

●

mandated remote working arrangements for employees that do not need to be physically present on the manufacturing floor or at customer facilities, which has impacted approximately 52% of our global workforce;

●

implemented virtual meetings, customer demos, and factory acceptances to enable customers to review data and performance of their system in our factory remotely via live video;

●

performing service and support activities remotely to resolve customer issues and enable our customers to maintain their operations;

●

proactively identified gaps in our supply chain and re-sourced a number of components in order to maintain our customer shipment commitments and mitigate single points of failure;

●

monitoring our IT systems and implementing contingency and disaster recovery plans to support our IT infrastructure to ensure that our systems remain continuously operative; and

●

continuing to monitor and, if necessary, reduce our operating expenses and capital expenditures to maintain financial flexibility and profit margins.

While these steps have been effective so far, there could be additional challenges ahead that may impact either our operations or those of our customers, which could have a negative effect on our financial performance, including productivity and capacity impacts as a result of the ongoing pandemic. We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers and suppliers. As a result, we may incur additional expenses in future periods in response to the pandemic, which could adversely affect our financial position, results of operations, or cash flows. In addition, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees and customers, and mitigate the impact of the pandemic on our business.

Business Update

We categorize our revenue by the key market segments into which we sell. Our four key markets are: Front-End Semiconductor; Advanced Packaging, MEMS & RF Filters; LED Lighting, Display & Compound Semiconductor; ~~Front-End Semiconductor;~~ and Scientific & Industrial.

Sales of Lithography and PSP systems to Integrated Device Manufacturer (“IDM”) and Outsourced Semiconductor and Test (“OSAT”) customers in the Advanced Packaging, MEMS & RF Filter market remained soft in the third quarter. However, we remain well positioned for future growth in the advanced packaging market, supported by technology mega-trends such as mobile connectivity and 5G infrastructure, automotive electronics, and big data processing, as well as other Advanced Packaging applications. We are in the advanced stages of a product development initiative which improves the performance of our lithography systems to meet our customers’ next-generation requirements.

Sales in the LED Lighting, Display & Compound Semiconductor market also remained soft in the third quarter. We continue to work with our beta customer who recently received our advanced MOCVD system for ROY LEDs and other Photonics applications including VCSELs. We expect future business in this market to come from more applications in VCSELs, 3D sensors, laser diodes, and RF devices. Our broad portfolio of MOCVD and PSP technologies have been developed to support these emerging applications.

Sales in the Front-End Semiconductor market were driven by shipments of our laser annealing systems and upgrades. Customers appear to be ramping production at their current nodes, such as ~~well~~7nm and 5nm. Looking ahead, we continue to work with our customers with our laser annealing technology, as they develop their “next nodes”. In the EUV market, customers appear to be moving ahead with their leading node EUV lithography plans, continuing to drive requirements for our ~~Low-Defect-Density Ion Beam Deposition (“LDD-IBD”) system for Extreme Ultraviolet (“EUV”) Mask Blank production.~~mask blank systems. We believe demand for these two product lines, driven by the development and release of advanced node semiconductors, will continue to provide future growth opportunities for us.

Sales in the Advanced Packaging, MEMS and RF Filter market were strong in the second quarter as customers added capacity and upgraded their existing install base to further enable their advanced packaging processes. We believe our advanced packaging lithography systems and our wet etch and clean systems are an ideal fit for our advanced packaging and RF customers’ current and future requirements.

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Sales in the LED Lighting, Display & Compound Semiconductor market remained soft in the second quarter. Our broad portfolio of MOCVD and PSP technologies have been developed to support emerging applications such as 5G driven RF device manufacturing, photonics devices including 3D sensing laser diodes and mini/microLEDs, and GaN-based power electronics. We continue to work with customers to penetrate these markets.

Sales in the Scientific & Industrial market were ~~supported~~primarily driven by shipments of Ion Beam systems for data storage ~~applications as well as a variety of high-end optical coating~~ applications. Demand for our Ion Beam products for Data Storage is being driven by ~~the requirements~~big data and cloud-based storage growth. In order to be successful, hard disk drive manufacturers are required to improve areal density of magnetic heads for hard disk ~~drive manufacturers as well as~~drives and are manufacturing drives with an ~~overall projected volume increase~~increasing number of thin film magnetic heads. These two factors taken together along, with new innovations by HDD manufacturers such as heat assisted magnetic recording and microwave assisted magnetic recording, are driving additional capacity and equipment upgrades. ~~The Scientific & Industrial market has historically provided a relatively stable revenue stream for~~Given recent trends, the ~~Company, however, in 2019 we have experienced growth in the Data Storage~~importance of cloud computing and work from home environment are also providing tailwinds to this market.

~~Finally, we~~Global trade policies have ~~been taking steps~~recently become more restrictive, resulting in increased tensions, which have impacted and are expected to ~~reduce spending, focus~~continue to impact our ~~R&D investments~~business. The U.S. government has implemented controls over transactions involving Chinese entities, and possibly others, that potentially pose a threat to ~~improve~~U.S. national security. Foreign customers affected by these U.S. government sanctions or threats of sanctions may respond by developing their own solutions to replace our ~~ability to serve~~products or by utilizing our ~~customers, and rationalize investments~~foreign competitors’ products. We have seen evidence of this behavior during the second quarter of 2020 in ~~certain product lines. At the same time, we have been preparing for growth by investing in~~transactions across our product lines, including our MOCVD and Wet Etch & Clean products. We are experiencing challenges closing new orders in China due to the current trade-restriction environment and have lost several orders that ~~serve~~we were anticipating. This has impacted our ~~existing markets, such~~second quarter results and in the near term we expect revenue from customers in China to decrease as ~~Laser Annealing, Advanced Packaging Lithography, and Ion Beam, while also investing in products~~a percentage of our overall revenue. The degree to ~~penetrate new markets, such as LDD-IBD for EUV mask blanks and MOCVD for the Photonics market including VCSELs.~~which this environment will impact us is unclear.

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Results of Operations

For the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for ~~2019~~2020 and ~~2018~~2019 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.


	Three Months Ended September 30,						Change			Three Months Ended June 30,						Change
	2019			2018			Period to Period			2020			2019			Period to Period

	(dollars in thousands)									(dollars in thousands)
Net sales	$	108,954	100%	$	126,757	100%	$	(17,803)	(14)%	$	98,637	100%	$	97,822	100%	$	815	1%
Cost of sales		66,731	61%		80,372	63%		(13,641)	(17)%		56,743	58%		61,537	63%		(4,794)	(8)%
Gross profit		42,223	39%		46,385	37%		(4,162)	(9)%		41,894	42%		36,285	37%		5,609	15%
Operating expenses, net:
Research and development		22,639	21%		23,544	19%		(905)	(4)%		19,254	20%		22,922	23%		(3,668)	(16)%
Selling, general, and administrative		20,962	19%		20,186	16%		776	4%		17,818	18%		19,757	20%		(1,939)	(10)%
Amortization of intangible assets		4,312	4%		4,183	3%		129	3%		3,834	4%		4,243	4%		(409)	(10)%
Restructuring		1,828	2%		2,057	2%		(229)	(11)%		472	-		616	1%		(144)	(23)%
Acquisition costs		—	-		249	-		(249)	*
Other, net		(153)	-		39	-		(192)	*
Asset impairment											281	-		—	-		281	*
Other operating expense (income), net											(174)	-		(44)	-		(130)	*
Total operating expenses, net		49,588	46%		50,258	40%		(670)	(1)%		41,485	42%		47,494	49%		(6,009)	(13)%
Operating income (loss)		(7,365)	(7)%		(3,873)	(3)%		(3,492)	90%		409	-		(11,209)	(11)%		11,618	*
Interest income (expense), net		(4,330)	(4)%		(4,779)	(4)%		449	(9)%		(5,614)	(6)%		(4,211)	(4)%		(1,403)	33%
Loss on extinguishment of debt											(3,046)	(3)%		—	-		(3,046)	*
Income (loss) before income taxes		(11,695)	(11)%		(8,652)	(7)%		(3,043)	35%		(8,251)	(8)%		(15,420)	(16)%		7,169	(46)%
Income tax expense (benefit)		72	-		301	-		(229)	*		51	-		145	-		(94)	(65)%
Net income (loss)	$	(11,767)	(11)%	$	(8,953)	(7)%	$	(2,814)	31%	$	(8,302)	(8)%	$	(15,565)	(16)%	$	7,263	(47)%

*	Not meaningful

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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
	2019			2018			Period to Period			2020			2019			Period to Period

	(dollars in thousands)									(dollars in thousands)
Sales by market
Front-End Semiconductor										$	17,759	18%	$	24,509	25%	$	(6,750)	(28)%
Advanced Packaging, MEMS & RF Filters	$	11,381	10%	$	24,562	19%	$	(13,181)	(54)%		21,454	22%		16,443	17%		5,011	30%
LED Lighting, Display & Compound Semiconductor		24,020	22%		58,864	46%		(34,844)	(59)%		16,017	16%		9,692	10%		6,325	65%
Front-End Semiconductor		33,578	31%		13,476	11%		20,102	149%
Scientific & Industrial		39,975	37%		29,855	24%		10,120	34%		43,407	44%		47,178	48%		(3,771)	(8)%
Total	$	108,954	100%	$	126,757	100%	$	(17,803)	(14)%	$	98,637	100%	$	97,822	100%	$	815	1%
Sales by geographic region
United States	$	27,915	25%	$	28,861	23%	$	(946)	(3)%	$	29,632	30%	$	39,784	40%	$	(10,152)	(26)%
China		17,034	16%		39,200	31%		(22,166)	(57)%		17,393	18%		19,654	20%		(2,261)	(12)%
EMEA		19,128	18%		30,685	24%		(11,557)	(38)%		26,130	26%		12,324	13%		13,806	112%
Rest of World		44,877	41%		28,011	22%		16,866	60%		25,482	26%		26,060	27%		(578)	(2)%
Total	$	108,954	100%	$	126,757	100%	$	(17,803)	(14)%	$	98,637	100%	$	97,822	100%	$	815	1%

��

Sales ~~decreased~~remained consistent for the three months ended ~~September~~June 30, ~~2019~~2020 against the comparable prior year period, ~~principally~~as increases in the Advanced Packaging, MEMS & RF Filters and LED Lighting, Display & Compound Semiconductor ~~and Advanced Packaging, MEMS & RF Filters~~ markets were partially offset by ~~increases~~decreases in the Front-End Semiconductor and Scientific & Industrial markets. Pricing was not a

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significant driver of the change in total sales. By geography, sales ~~decreased~~increased in the ~~China,~~ EMEA ~~and United States regions,~~region, partially offset by ~~an increase~~decreases in the ~~Rest of World region. The most significant decrease occurred in the~~United States and China region, which was largely attributable to the decreased sales in the LED Lighting, Display & Compound Semiconductor market. We do not expect significant new orders for this market in this region in the near future.regions. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies. In light of the global nature of our business, we are impacted by conditions in the various countries in which we and our customers operate. Several markets continue to remain challenged in light of ongoing restrictions on business and travel, and decreased business and consumer spending generally, resulting from the COVID-19 pandemic.

Gross Profit

In the ~~third~~second quarter of 2020, gross profit increased compared to the second quarter of 2019 ~~gross profit decreased compared to the third quarter of 2018~~primarily due to ~~a decrease in sales volume, partially offset by~~ increased gross margins. Gross margins increased principally due to reductions in inventory reserves and manufacturing expenses. We expect our gross margins to fluctuate each period due to product mix and ~~region mix of sales in the periods.~~other factors.

Research and Development

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 decreased ~~slightly~~ for the three months ended ~~September~~June 30, ~~2019~~2020 against the comparable prior period primarily related to personnel-related expenses and professional fees as a result of our continued initiative to streamline operations, enhance efficiency, and reduce costs. In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions.

Selling, General, and Administrative

Selling, general, and administrative expenses ~~increased slightly~~decreased for the three months ended June 30, 2020 against the comparable prior period primarily related to personnel-related expenses as a result of our continued initiative to streamline operations, enhance efficiency, and reduce costs. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions. Given the the uncertainty regarding the impacts on our business resulting from the

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COVID-19 pandemic, we are focused on the proactive management of expenses. In future periods, we may incur additional selling, general and administrative expenses to support our responses to the COVID-19 pandemic.

Amortization Expense

Amortization expense ~~remained consistent with~~decreased compared to prior period primarily due to the ~~comparable prior year period.~~sale of a non-core product line, including related intangible assets, as well as changes in amortization expense to reflect expected cash flows of certain intangible assets.

Restructuring Expense

~~During~~We continued to record restructuring charges during the second quarter of 2018, we initiated plans to further reduce excess capacity associated with the manufacture and support of our advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into our San Jose, California facility. Asyear ended December 31, 2019 as a result of ~~this~~our efforts to further streamline operations, enhance efficiencies, and ~~other cost saving initiatives,~~reduce costs. In the second half of 2019, we ~~announced headcount reductions of~~executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. In addition, we delayered the organization. Collectively, these actions impacted approximately 4060 employees. During the three months ended ~~September~~June 30, ~~2019,~~2020, additional accruals were recognized and payments were made related to these restructuring ~~activities.~~

~~We continued to record restructuring charges in the third quarter of 2019 as a result of our efforts to streamline operations, enhance efficiencies, and reduce costs.~~

~~Acquisition Costs~~

Acquisition costs incurred during 2018 were non-recurring charges incurred in connection with the acquisition of the Ultratech business, as well as legal and professional fees incurred in connection with certain integration activities.initiatives.

Interest Income (Expense)

We recorded net interest expense of ~~$4.3~~$5.6 million for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$4.8~~$4.2 million for the comparable prior year period. The increase in interest expense was primarily related to the issuance of the 2027 Notes in May 2020, partially offset by the partial repurchase of the 2023 Notes. Included in interest expense for the three months ended ~~September~~June 30, ~~2019 and 2018~~2020 were non-cash charges of ~~$3.2~~$3.5 million ~~and $3.0 million, respectively,~~ related to the amortization of debt discount and transaction costs of the ~~Convertible Senior~~2023 and 2027 Notes, while the three months ended June 30, 2019 included non-cash charges of $3.1 million related to the amortization of debt discount and transaction costs of the 2023 Notes. Additionally, interest income decreased approximately $0.8 million for the three months ended June 30, 2020 compared to the prior period, primarily as a result of lower interest rates, and we expect interest income to remain depressed as a result.

~~Table~~Loss on Extinguishment of ~~Contents~~Debt

On May 18, 2020, in connection with the completion of a private offering of $125 million aggregate principal amount of 3.75% convertible senior notes described below, we repurchased and retired approximately $88.3 million in aggregate principal amount of our outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash. We accounted for the repurchase of the $88.3 million of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $3.0 million for the three months ended June 30, 2020.

Income 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.

~~Our~~We incurred a tax expense of $0.1 million for the three months ended ~~September~~June 30, ~~2019 was $0.1 million compared to $0.3 million for the comparable prior period.~~2020 and 2019. The ~~2019~~2020 tax expense included an expense of $0.1 million related to our domestic operations ~~and~~offset by a minimal ~~expense~~benefit related to our non-U.S. operations, compared to ~~2018~~2019 when the expense ~~mainly~~included a $0.1 million expense related to ~~our~~the Company’s domestic operations and minimal expense related to the Company’s non-U.S. operations. Although there was a domestic pre-tax loss for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, we did not provide a current tax benefit on domestic pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for ~~the current period~~both periods is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.

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For the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Nine Months Ended September 30,

Change

2019

2018

Period to Period

(dollars in thousands)
Net sales

$
306,147

100%

$
443,110

100%

$
(136,963)

(31)%

Cost of sales

192,924

63%

284,651

64%

(91,727)

(32)%

Gross profit

113,223

37%

158,459

36%

(45,236)

(29)%

Operating expenses, net:









Research and development

68,901

23%

72,793

16%

(3,892)

(5)%

Selling, general, and administrative

60,620

20%

70,842

16%

(10,222)

(14)%

Amortization of intangible assets

12,773

4%

28,102

6%

(15,329)

(55)%

Restructuring

3,874

1%

7,669

2%

(3,795)

(49)%

Acquisition costs

—

-

2,906

1%

(2,906)

*

Asset impairment

—

-

252,343

57%

(252,343)

*

Other, net

(232)

-

325

-

(557)

*

Total operating expenses, net

145,936

48%

434,980

98%

(289,044)

(66)%

Operating income (loss)

(32,713)

(11)%

(276,521)

(62)%

243,808

(88)%

Interest income (expense), net

(12,742)

(4)%

(13,847)

(3)%

1,105

(8)%

Income (loss) before income taxes

(45,455)

(15)%

(290,368)

(66)%

244,913

(84)%

Income tax expense (benefit)

407

-

(27,954)

(6)%

28,361

*

Net income (loss)

$
(45,862)

(15)%

$
(262,414)

(59)%

$
216,552

(83)%

*

Six Months Ended June 30,

Change

2020

2019

Period to Period

(dollars in thousands)
Net sales

$
203,139

100%

$
197,193

100%

$
5,946

3%

Cost of sales

114,826

57%

126,192

64%

(11,366)

(9)%

Gross profit

88,313

43%

71,001

36%

17,312

24%

Operating expenses, net:









Research and development

38,449

19%

46,262

23%

(7,813)

(17)%

Selling, general, and administrative

36,123

18%

39,660

20%

(3,537)

(9)%

Amortization of intangible assets

7,671

4%

8,460

4%

(789)

(9)%

Restructuring

1,097

1%

2,046

1%

(949)

(46)%

Asset Impairment

281

-

—

-

281

*

Other operating expense (income), net

(283)

-

(80)

-

(203)

*

Total operating expenses, net

83,338

41%

96,348

49%

(13,010)

(14)%

Operating income (loss)

4,975

2%

(25,347)

(13)%

30,322

(120)%

Interest income (expense), net

(10,479)

(5)%

(8,412)

(4)%

(2,067)

25%

Loss on extinguishment of debt

(3,046)

(1)%

—

-

(3,046)

*

Income (loss) before income taxes

(8,550)

(4)%

(33,759)

(17)%

25,209

(75)%

Income tax expense (benefit)

319

-

336

-

(17)

*

Net income (loss)

$
(8,869)

(4)%

$
(34,095)

(17)%

$
25,226

(74)%

~~Not meaningful~~

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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
	2019			2018			Period to Period			2020			2019			Period to Period

	(dollars in thousands)									(dollars in thousands)
Sales by market
Front-End Semiconductor										$	49,125	24%	$	47,126	24%	$	1,999	4%
Advanced Packaging, MEMS & RF Filters	$	50,951	17%	$	76,473	17%	$	(25,522)	(33)%		30,042	15%		39,570	20%		(9,528)	(24)%
LED Lighting, Display & Compound Semiconductor		47,263	15%		236,597	54%		(189,334)	(80)%		31,419	15%		23,242	12%		8,177	35%
Front-End Semiconductor		80,703	26%		41,085	9%		39,618	96%
Scientific & Industrial		127,230	42%		88,955	20%		38,275	43%		92,553	46%		87,255	44%		5,298	6%
Total	$	306,147	100%	$	443,110	100%	$	(136,963)	(31)%	$	203,139	100%	$	197,193	100%	$	5,946	3%
Sales by geographic region
United States	$	100,014	33%	$	85,555	19%	$	14,459	17%	$	69,268	34%	$	72,099	37%	$	(2,831)	(4)%
China		46,846	15%		185,050	42%		(138,204)	(75)%		27,865	14%		29,813	15%		(1,948)	(7)%
EMEA		49,280	16%		71,836	16%		(22,556)	(31)%		42,280	21%		30,151	15%		12,129	40%
Rest of World		110,007	36%		100,669	23%		9,338	9%		63,726	31%		65,130	33%		(1,404)	(2)%
Total	$	306,147	100%	$	443,110	100%	$	(136,963)	(31)%	$	203,139	100%	$	197,193	100%	$	5,946	3%

Sales ~~decreased~~increased for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 against the comparable prior year period principally in the LED Lighting, Display & Compound Semiconductor, Scientific & Industrial, and Front-End Semiconductor markets, partially offset by a decrease in the Advanced Packaging, MEMS & RF Filters ~~markets, partially offset~~market. Sales in the Scientific & Industrial market were primarily driven by ~~increases~~shipments of Ion Beam systems for data storage applications, while sales in the Front-End Semiconductor ~~and Scientific & Industrial markets.~~market were driven by shipments of our laser annealing systems, as well as our LDD-IBD system for EUV Mask Blank production. Pricing was not a significant driver of the change in total sales. By geography, sales ~~decreased~~increased in the ~~China and~~ EMEA ~~regions,~~region, partially offset by ~~increases~~decreases in China and the ~~United States and Rest of World~~other remaining regions. The most significant decrease occurred in the China region, which was largely attributable to the decreased sales in the LED Lighting, Display & Compound Semiconductor market. We do not expect significant new orders for this market in this region in the near future. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies. In light of the

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global nature of our business, we are impacted by conditions in the various countries in which we and our customers operate. Several markets continue to remain challenged in light of ongoing restrictions on business and travel, and decreased business and consumer spending generally, resulting from the COVID-19 pandemic.

Gross Profit

InFor the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, gross profit ~~decreased compared to 2018~~increased against the comparable prior period due to ~~a decrease~~an increase in sales volume ~~partially offset by~~and increased gross margins. Gross margins increased principally due to product and region mix of sales in the ~~periods.~~periods, as well as reductions in inventory reserves and manufacturing expenses. We expect our gross margins to fluctuate each period due to product mix and other factors.

Research and Development

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 decreased for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 against the comparable prior period primarily related to personnel-related expenses and professional fees as a result of our continued initiative to streamline operations, enhance efficiency, and reduce costs. In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions.

Selling, General, and Administrative

Selling, general, and administrative expenses decreased for the six months ended June 30, 2020 against the comparable prior period primarily related to personnel-related expenses ~~and professional fees~~ as a result of our continued initiative to streamline operations, enhance efficiency, and reduce costs. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions. Given the the uncertainty regarding the impacts on our business resulting from the COVID-19 pandemic, we are focused on the proactive management of expenses. In future periods, we may incur additional selling, general and administrative expenses to support our responses to the COVID-19 pandemic.

Amortization Expense

~~The decrease~~Amortization expense decreased compared to prior period primarily due to the sale of a non-core product line, including related intangible assets, as well as changes in amortization expense ~~is a result~~to reflect expected cash flows of ~~the impairment of~~certain intangible ~~assets during the second quarter of 2018.~~assets.

~~Table of Contents~~

Restructuring Expense

~~During~~We continued to record restructuring charges during the second quarter of 2018, we initiated plans to further reduce excess capacity associated with the manufacture and support of our advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into our San Jose, California facility. Asyear ended December 31, 2019 as a result of ~~this~~our efforts to further streamline operations, enhance efficiencies, and ~~other cost saving initiatives,~~reduce costs. In the second half of 2019, we ~~announced headcount reductions of~~executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. In addition, we delayered the organization. Collectively, these actions impacted approximately 4060 employees. During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, additional accruals were recognized and payments were made related to these restructuring ~~activities.~~

~~We continued to record restructuring charges in 2019 as a result of our efforts to streamline operations, enhance efficiencies, and reduce costs.~~

~~Acquisition Costs~~initiatives.

~~Asset impairment~~

During the second quarter of 2018, we lowered our projected results for the Ultratech asset group, which were significantly below the projected results at the time of the acquisition. The reduced projections were based on lower than expected unit volume of certain smartphones, which incorporate advanced packaging methods such as FOWLP, and a delay in the adoption of FOWLP advanced packaging by other electronics manufacturers, both of which slowed orders and reduced revenue projections for our advanced packaging lithography systems. In addition, there has been a delay in the build out of 28nm facilities by companies in China who were expected to purchase our LSA systems. Taken together, the reduced projections identified during the second quarter of 2018 required us to assess the Ultratech asset group for impairment. As a result of the analysis, during the second quarter of 2018 we recorded a $252.3 million non-cash intangible asset impairment charge.

Interest Income (Expense)

We recorded net interest expense of ~~$12.7~~$10.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$13.8~~$8.4 million for the comparable prior year period. The increase in interest expense was primarily related to the issuance of the 2027 Notes in May 2020, partially offset by the partial repurchase of the 2023 Notes. Included in interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2019 and 2018~~2020 were non-cash charges of ~~$9.4~~$6.8 million ~~and $8.7 million, respectively,~~ related to the amortization of debt discount and transaction costs of the ~~Convertible Senior~~2023 and 2027 Notes, while the six months ended June 30, 2019 included non-cash charges of $6.2 million related to the amortization of debt discount and transaction costs of the 2023 Notes. Additionally, interest

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income decreased approximately $1.3 million for the six months ended June 30, 2020 compared to the prior period, primarily as a result of lower interest rates, and we expect interest income to remain depressed as a result.

Loss on Extinguishment of Debt

Income Taxes

Our tax expense for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 was ~~$0.4 million compared to a tax benefit of $28.0 million for the comparable prior period.~~$0.3 million. The ~~2019~~2020 tax expense included an expense of $0.2 million related to our domestic operations and ~~$0.2~~$0.1 million related to our non-U.S. operations, compared to ~~2018~~2019 when the ~~benefit~~expense included a ~~$1.1~~$0.1 million ~~benefit~~expense related to our domestic operations and ~~a $26.9~~$0.2 million ~~benefit~~ related to our non-U.S. operations. Although there was a domestic pre-tax loss for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, we did not provide a current tax benefit on domestic pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for ~~the current period~~both periods is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The current period non-U.S. tax expense is primarily attributable to tax expense on non-U.S operation profits and foreign withholding taxes on unremitted earnings as of September 30, 2019, offset by a tax benefit related to the amortization of intangible assets.

The comparable period domestic tax benefit is primarily attributable to refundable alternative minimum tax credits in accordance with the 2017 Tax Act, offset by the tax amortization of indefinite-lived intangible assets that is not available

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~~to offset U.S. deferred tax assets. The comparable period non-U.S. tax benefit is primarily attributable to the intangible asset impairment charge incurred during the period.~~

Liquidity and Capital Resources

Our cash and cash equivalents, restricted cash, and short-term investments are as follows:


	September 30,		December 31,		June 30,		December 31,
	2019		2018		2020		2019

	(in thousands)				(in thousands)
Cash and cash equivalents	$	135,259	$	212,273	$	188,203	$	129,294
Restricted cash		687		809		647		657
Short-term investments		95,672		48,189		112,279		115,252
Total	$	231,618	$	261,271	$	301,129	$	245,203

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, cash and cash equivalents of ~~$41.7~~$68.5 million and ~~$66.9~~$73.0 million, respectively, were held outside the United States. As of ~~September~~June 30, ~~2019,~~2020, we had ~~$13.8~~$11.3 million of accumulated undistributed earnings generated by our non-U.S. subsidiaries for which the U.S. repatriation tax has been provided and did not require the use of cash due to the use of net operating loss carryforwards. Approximately ~~$8.0~~$5.6 million of undistributed earnings will be subject to foreign withholding taxes if distributed back to the United States.

We believe that our projected cash flow from operations, combined with our cash and ~~short term~~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 scheduled interest payments on our ~~Convertible Senior Notes due 2023.~~convertible senior notes, purchase commitments and payments in respect of operating leases. However, the COVID-19 pandemic, together with other dynamics in the marketplace, has resulted in wider credit spreads and significantly increased borrowing costs and, in certain cases, limited the ability of companies to access the capital markets and other sources of financing on attractive terms or at all.

Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our business model, our current cash and short-term investments and the recent steps we have taken to rationalize expenses, leave us well-positioned to manage our business through this crisis as it continues to unfold.

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A summary of the cash flow activity for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 is as follows:

~~Cash Flows from Operating Activities~~


	Nine Months Ended September 30,				Six Months Ended June 30,
	2019		2018		2020		2019

	(in thousands)				(in thousands)
Net income (loss)	$	(45,862)	$	(262,414)	$	(8,869)	$	(34,095)
Non-cash items:
Depreciation and amortization		25,838		41,110		15,372		17,315
Non-cash interest expense		9,418		8,739		6,778		6,219
Deferred income taxes		20		(28,872)		191		10
Share-based compensation expense		11,528		12,720		6,620		7,745
Loss on extinguishment of debt						3,046		—
Asset impairment		—		252,343		281		—
Changes in operating assets and liabilities		(23,947)		(63,004)		(5,869)		(5,335)
Net cash provided by (used in) operating activities	$	(23,005)	$	(39,378)	$	17,550	$	(8,141)

Net cash ~~used in~~provided by operating activities was ~~$23.0~~$17.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and was due to the net loss of ~~$45.9~~$8.9 million ~~plus adjustments for non-cash items of $46.8 million, offset by~~and a decrease in cash flow from changes in operating assets and liabilities of ~~$23.9~~$5.9 million, offset by adjustments for non-cash items of $32.3 million. The changes in operating assets and liabilities were largely attributable to 1) increases in accounts receivable, inventories, and ~~decreases in accounts payable, accrued~~prepaid expenses and other current assets, and 2) a decrease in deferred revenue, partially offset by ~~decreases~~3) increases in ~~inventory.~~accounts payable and customer deposits, and 4) a decrease in contract assets.

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Cash Flows from Investing Activities


	Nine Months Ended September 30,				Six Months Ended June 30,
	2019		2018		2020		2019

	(in thousands)				(in thousands)
Acquisitions of businesses, net of cash acquired	$	—	$	(2,662)
Capital expenditures	$	(8,189)	$	(5,788)	$	(1,957)	$	(6,441)
Changes in investments, net		(46,434)		(6,938)		3,365		(35,608)
Proceeds from held for sale assets		645		—
Proceeds from held for sale assets, net of costs to sell						9,503		—
Net cash provided by (used in) investing activities	$	(53,978)	$	(15,388)	$	10,911	$	(42,049)

The cash ~~used in~~provided by investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was primarily attributable to the net ~~changes in investments as well as~~proceeds from sale of a non-core product line, partially offset by capital expenditures.

Cash Flows from Financing Activities


	Nine Months Ended September 30,				Six Months Ended June 30,
	2019		2018		2020		2019

	(in thousands)				(in thousands)
Proceeds from issuance of 2027 Notes, net of issuance costs					$	121,946	$	—
Purchase of capped calls						(10,313)		—
Repurchase of 2023 Notes						(81,240)		—
Settlement of equity awards, net of withholding taxes	$	(162)	$	(22)		74		(457)
Purchases of common stock		—		(11,457)
Net cash provided by (used in) financing activities	$	(162)	$	(11,479)	$	30,467	$	(457)

The cash ~~used in~~provided by financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was primarily related to the net cash proceeds received from the issuance of the 2027 Notes, partially offset by the cash used to ~~settle taxes related to employee equity programs.~~repurchase the 2023 Notes as well as the purchase of the capped call transactions.

Convertible Senior Notes

On January 10, 2017, we issued $345.0 million of 2.70% convertible senior unsecured notes (the ~~“Convertible Senior~~“2023 Notes”). We received net proceeds, after deducting underwriting discounts and fees and expenses payable by us, of approximately ~~$335.8~~

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$335.8 million. The ~~Convertible Senior~~2023 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~~2023 Notes mature on January 15, 2023, unless earlier purchased by ~~the Company,~~us, redeemed, or converted. On May 18, 2020, in connection with the completion of a private offering of $125 million aggregate principal amount of 3.75% convertible senior notes described below, we repurchased and retired approximately $88.3 million in aggregate principal amount of our outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash.

On May 18, 2020, we issued $125.0 million of 3.75% convertible senior notes (the “2027 Notes”). We received net proceeds of approximately $121.9 million, after deducting underwriting discounts and fees and expenses payable by us. Additionally, we used approximately $10.3 million of cash to purchase the capped calls. The 2027 Notes bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2020. The 2027 Notes mature on June 1, 2027, unless earlier purchased by us, redeemed, or converted.

We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on ~~this debt.~~the 2023 and 2027 Notes.

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 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 bank guarantees and purchase commitments disclosed in the preceding footnotes.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates primarily relates to our investment portfolio. We centrally manage our investment portfolios considering investment opportunities and risks, tax consequences, and overall

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financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately ~~$95.7~~$112.3 million at ~~September~~June 30, ~~2019.~~2020. These securities are subject to interest rate risk and, based on our investment portfolio at ~~September~~June 30, ~~2019,~~2020, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of ~~$0.3~~$0.6 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.

Currency Exchange Risk

We conduct business on a worldwide basis and, as such, a portion of our revenues, 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.

Changes in currency exchange rates could affect our foreign currency denominated monetary assets and liabilities and forecasted cash flows. We enter into monthly forward derivative contracts from time to time with the intent of mitigating a portion of this risk. We only use derivative financial instruments in the context of hedging and not for speculative purposes and had not designated our foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other, net” in our Consolidated Statements of Operations. We execute derivative transactions with highly rated financial institutions to mitigate counterparty risk.

Our net sales to customers located outside of the United States represented approximately ~~75%~~70% and ~~67%~~66% of our total net sales for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, and ~~77%~~60% and ~~81%~~63% for the comparable ~~2018 periods.~~2019 period. 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 3%5% and 4% of total net sales in the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, and 2%4% and 1%5% for the comparable ~~2018 periods.~~2019 period.

A 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of 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 as of ~~September~~June 30, ~~2019.~~2020. 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.

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Changes in Internal Control Over Financial Reporting

As a result of the COVID-19 pandemic, certain of our employees began working remotely in March 2020 but these remote working arrangements did not have a material effect on our internal control over financial reporting. During the quarter ended ~~September~~June 30, ~~2019,~~2020, there were no changes in internal control that have materially affected or are reasonably likely to materially affect internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the Securities Act of 1933 for, among other things, alleged false/misleading statements in the registration statement and prospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. Veeco is defending this matter vigorously.

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 ~~2018~~2019 Form ~~10-K, and Part 2, Item 1A of our quarterly report on Form 10-Q for the quarter ending June 30, 2019.~~10-K. There have been no material changes from the risk factors previously ~~disclosed.~~disclosed in our 2019 Form 10-K, except for as disclosed in our quarterly report on Form 10-Q for the quarter ended March 31, 2020 and the following.

The following risk factors are added:

We may not have the ability to raise the funds necessary to settle for cash conversions of our 3.75% Convertible Senior Notes due 2027 (the “2027 Notes”) or our 2.70% Convertible Senior Notes due 2023 (the “2023 Notes”) (the 2027 Notes and 2023 Notes, together, the “Notes”) or to repurchase the Notes for cash upon a fundamental change, and any future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.

As of June 30, 2020, we had $256.7 million in principal amounts outstanding in 2023 Notes and $125.0 million in principal amounts outstanding in 2027 Notes.

Holders of the 2027 Notes will have the right to require us to repurchase all or any portion of their 2027 Notes upon the occurrence of a fundamental change before the maturity date at a fundamental change repurchase price equal to 100% of the principal amount of the 2027 Notes to be repurchased, plus accrued and unpaid interest, if

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any, to, but excluding, the fundamental change repurchase date, as described in the 2027 Notes and the related indenture. In addition, upon conversion of the 2027 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2027 Notes being converted. Our 2023 Notes contain similar provisions concerning the holders’ rights to require us to repurchase their 2023 Notes and to pay cash to settle conversions of their 2023 Notes. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Notes surrendered therefor or pay cash with respect to the Notes being converted.

In addition, our ability to repurchase or to pay cash upon conversion of the Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness that exist at the time of repurchase. Our failure to repurchase the Notes at a time when the repurchase is required by the respective indenture or to pay any cash upon conversion of the Notes as required by the respective indenture would constitute a default under the indenture for that series of convertible notes and could also lead to a default under the indenture for the other series of convertible notes. A default under either indenture or the fundamental change itself could lead to a default under any of our future indebtedness. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or to pay cash upon conversion of the Notes.

The conditional conversion feature of the 2027 Notes, if triggered, may materially and adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the 2027 Notes is triggered, holders of 2027 Notes will be entitled to convert the 2027 Notes at any time during specified periods at their option. If one or more holders elect to convert the 2027 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert the 2027 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2027 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

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

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an entity must separately account for the liability and equity components of certain convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date, and the value of the equity component is treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we are required to record a greater amount of non-cash interest expense as a result of the amortization of the discounted carrying value of the Notes to their face amount over the respective terms of the Notes. We report lower net income (or higher net loss) in our financial results because ASC 470-20 requires interest to include both the amortization of the debt discount and the instrument’s coupon interest rate, which could adversely affect our financial results, the trading price of our common stock and the trading price of the Notes.

In addition, under certain circumstances, including our ability and intent to settle the convertible debt instruments in cash, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted income per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted income per share purposes, the transaction is accounted for as if the number of shares of

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common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that we will meet the criteria to utilize the treasury stock method in the future. If we are unable to utilize the treasury stock method, we would be required to apply the if-converted method. Under that method, diluted income per share would generally be calculated assuming that all the notes were converted solely into shares of our common stock at the beginning of the reporting period, unless the result would be anti-dilutive. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted income per share would be adversely affected.

In July 2019, the FASB issued an exposure draft that proposes to change the accounting for the convertible debt instruments described above. Under the exposure draft, an entity may no longer be required to separately account for the liability and equity components of convertible debt instruments. This could have the impact of reducing non-cash interest expense, and thereby increasing net income (or reducing net loss). Additionally, as currently proposed, the treasury stock method for calculating earnings per share will no longer be allowed for convertible debt instruments whose principal amount may be settled using shares. Rather, the if-converted method may be required, which could adversely affect our diluted net income (loss) per share. We cannot be sure that the proposed changes in this exposure draft will be adopted, or will be adopted in their current format. We also cannot be sure whether other changes may be made to the current accounting standards related to the Notes, or otherwise, that could have an adverse impact on our financial statements. Furthermore, the accounting treatment described above is preliminary based on the exposure draft and has not been subject to review or audit by our independent registered public accounting firm as these proposed rules have not been finalized.

Issuance of our common stock, if any, upon conversion of the Notes, as well as the capped call transactions and the hedging activities of the option counterparties, may impair or reduce our ability to utilize our net operating loss carryforwards in the future.

Pursuant to U.S. federal and state tax rules, a corporation is generally permitted to deduct from taxable income in any year net operating losses (“NOLs”) carried forward from prior years.

As of June 30, 2020, we had U.S. federal NOL carryforwards of approximately $270.4 million, of which $6.4 million has an indefinite carryforward period, with the remaining expiring in varying amounts between 2033 and 2037, if not utilized. If we were to experience a “change in ownership” under Section 382 of the Internal Revenue Code (“Section 382”), the NOL carry forward limitations under Section 382 would impose an annual limit on the amount of the future taxable income that may be offset by our NOL generated prior to the change in ownership. If an ownership change were to occur, we may be unable to use a significant portion of our NOL to offset future taxable income. In connection with a prior acquisition, we have $120.8 million of historical U.S. federal NOLs that are subject to an existing annual limitation under Section 382.

We did not initially experience an ownership change as a result of the issuance of the 2027 Notes. Nonetheless, the shares of common stock, if any, issued upon conversion of the 2027 Notes will, upon such issuance, be taken into account determining the cumulative change in our ownership for Section 382 purposes. As a result, any conversion of the 2027 Notes that we elect to settle in shares may materially increase the risk that we could experience an ownership change in the future.

In connection with the pricing of the 2027 Notes, we entered into capped call transactions with one of the initial purchasers and other financial institutions (the “option counterparties”). Veeco was advised that the option counterparties were expected to establish hedge positions with respect to the capped call transactions and thereafter to modify their hedge positions from time to time by, among other things, purchasing, selling or otherwise effecting transactions with respect to our common stock or other securities of ours as described under “Risk factors—The capped call transactions may affect the value of the Notes and our common stock.”

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The capped call transactions may affect the value of the Notes and our common stock.

We have entered into capped call transactions with the option counterparties. The capped call transactions were expected generally to reduce the potential dilution upon conversion of the notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap.

In connection with establishing its initial hedge of the capped call transactions, the option counterparties or their affiliates expect to enter into various derivative transactions with respect to our common stock and/or purchase our common stock concurrently with or shortly after the pricing of the notes. This activity could increase (or reduce the size of any decrease in) the market price of our common stock or the notes at that time.

In addition, the option counterparties or their affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2027 Notes (and are likely to do so during any observation period related to a conversion of the 2027 Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock, the Notes, which could affect the ability of the noteholders to convert the Notes, and, to the extent the activity occurs during any observation period related to a conversion of the 2027 Notes, it could affect the number of shares and value of the consideration that noteholders will receive upon conversion of the 2027 Notes.

Our issuance of preferred stock could adversely affect holders of our common stock.

Our board of directors is authorized to issue series of preferred stock without any action on the part of our holders of common stock. Our board of directors also has the power, without stockholder approval, to set the terms of any such series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or if we liquidate, dissolve or wind up our business and other terms. Therefore, if noteholders receive common stock upon conversion of the Notes and we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of a holder of our common stock or the price of our common stock could be adversely affected.

We do not currently intend to pay dividends on our common stock, and, consequently, our

stockholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.

We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Since we do not intend to pay dividends, our stockholders’ ability to receive a return on their investment will depend on any future appreciation in the market value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which our stockholders initially purchased shares.

If securities or industry analysts issue an adverse or misleading opinion regarding our stock, our stock price and trading volume and the value of the Notes could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issues an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our operating results fail to meet the expectations of analysts, our stock price and the value of the Notes would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume and the value of the Notes to decline.

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

On December 11, 2017, Veeco’s Board of Directors authorized a program to repurchase up to $100 million of the Company’s outstanding common stock to be completed through December 11, 2019. We did not purchase any shares during the third quarter of 2019. At September 30, 2019, $14.3 million of the $100 million had been utilized. 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.None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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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.


~~Exhibit~~		~~Incorporated by Reference~~			~~Filed or~~ ~~Furnished~~
~~Number~~	~~Exhibit Description~~	~~Form~~	~~Exhibit~~	~~Filing Date~~	~~Herewith~~

~~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 Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.~~				**
~~101.XSD~~	~~XBRL Schema.~~				**
~~101.PRE~~	~~XBRL Presentation.~~				**
~~101.CAL~~	~~XBRL Calculation.~~				**
~~101.DEF~~	~~XBRL Definition.~~				**
~~101.LAB~~	~~XBRL Label.~~				**
~~104~~	~~Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).~~


Exhibit		Incorporated by Reference			Filed or Furnished
Number	Exhibit Description	Form	Exhibit	Filing Date	Herewith

4.1	Indenture, dated as of May 18, 2020, between Veeco Instruments Inc. and U.S. Bank National Association, as trustee.	8-K	4.1	5/18/2020
4.2	Form of 3.75% Convertible Senior Notes due 2027 (included in Exhibit 4.1).	8-K	4.2	5/18/2020
10.1	Form of Capped Call Confirmation.	8-K	10.1	5/18/2020
10.2	Agreement and General Release dated May 7, 2020 between Veeco and John R. Peeler.				*
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 Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.				**
101.XSD	XBRL Schema.				**
101.PRE	XBRL Presentation.				**
101.CAL	XBRL Calculation.				**
101.DEF	XBRL Definition.				**
101.LAB	XBRL Label.				**
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Filed herewith

** Filed herewith electronically

Table of Contents

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 4, 2019.~~August 3, 2020.


	Veeco Instruments Inc.

	By:	/S/ WILLIAM J. MILLER, Ph.D.
		William J. Miller, Ph.D.
		Chief Executive Officer

	By:	/s/ ~~SHUBHAM MAHESHWARI~~JOHN P. KIERNAN
		~~Shubham Maheshwari~~John P. Kiernan
		~~Executive~~Senior Vice President ~~Chief Financial Officer,~~ and Chief ~~Operating~~Financial Officer

3544


	Personnel		Facility
	Severance and		Related Costs
	Related Costs		and Other		Total
	(in thousands)
Balance - December 31, 2018	$	2,143	$	70	$	2,213
Provision		3,681		193		3,874
Payments		(4,207)		(263)		(4,470)
Balance - September 30, 2019	$	1,617	$	—	$	1,617


	(in thousands)
Balance - December 31, 2018	$	44,415
Deferral of revenue		4,717
Recognition of previously deferred revenue		(14,744)
Balance - September 30, 2019	$	34,388


	Three months ended September 30, 2018				Nine months ended September 30, 2018
	Gains (Losses)		Weighted average notional amount		Gains (Losses)		Weighted average notional amount
	(in thousands)
Foreign currency exchange forwards	$	132	$	4,448	$	348	$	2,869