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VECO Veeco Instruments

Filed: 4 May 21, 4:32pm

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 March 31, 2021

OR

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 April 28, 2021, there were 50,182,609 shares of the registrant’s common stock outstanding.

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 months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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 2020 Form 10-K, and the following:

Risks Related to Our Business, Finance and Operations

The effects of the COVID-19 pandemic have strained and have threatened to negatively impact our businesses and operations, and the duration and extent to which COVID-19 may impact our future results of operations and overall financial performance remains uncertain;

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

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 required to take impairment charges on assets;

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

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

We may not have the ability to raise the funds necessary to settle for cash conversions of our 2.70% Convertible Senior Notes due 2023 (the “2023 Notes”), our 3.50% Convertible Senior Notes due 2025 (the “2025 Notes”), or our 3.75% Convertible Senior Notes due 2027 (the “2027 Notes”) (the 2023 Notes, 2025 Notes, and 2027 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;

1

The conditional conversion features of the 2023 Notes, 2025 Notes, and 2027 Notes, if triggered, may materially and adversely affect our financial condition and operating results;

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;

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 or our research and development credits carryforwards in the future;

The capped call transactions may affect the value of the 2027 Notes and our common stock;

Risks Associated with Operating a Global Business

We are exposed to risks of operating businesses outside the United States;

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;

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

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;

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

We are subject to foreign currency exchange risks;

Risks Related to Intellectual Property and Cybersecurity

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;

Risks Associated with Our Industry

We face significant competition;

We operate in industries characterized by rapid technological change;

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

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

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

2

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;

General Risk Factors

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

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

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

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

Our income taxes may change.

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.

3

PART IFINANCIAL INFORMATION

Item 1. Financial Statements

Veeco Instruments Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)

March 31,

December 31,

    

2021

    

2020

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

140,733

$

129,625

Restricted cash

653

658

Short-term investments

 

186,142

 

189,771

Accounts receivable, net

 

87,491

 

79,991

Contract assets

20,558

21,246

Inventories

 

156,216

 

145,906

Deferred cost of sales

 

596

 

433

Prepaid expenses and other current assets

25,778

19,301

Total current assets

 

618,167

 

586,931

Property, plant, and equipment, net

 

65,207

 

65,271

Operating lease right-of-use assets

29,548

10,275

Intangible assets, net

42,831

46,185

Goodwill

 

181,943

 

181,943

Deferred income taxes

1,440

1,440

Other assets

 

6,106

 

6,019

Total assets

$

945,242

$

898,064

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

42,638

$

33,656

Accrued expenses and other current liabilities

 

51,064

 

44,876

Customer deposits and deferred revenue

 

68,907

 

67,235

Income taxes payable

 

1,086

 

914

Total current liabilities

 

163,695

 

146,681

Deferred income taxes

 

5,236

 

5,240

Long-term debt

 

324,629

 

321,115

Operating lease long-term liabilities

31,421

6,305

Other liabilities

 

7,800

 

10,349

Total liabilities

 

532,781

 

489,690

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; 50,182,609 shares issued and outstanding at March 31, 2021 and 49,723,751 shares issued and outstanding at December 31, 2020

 

502

 

497

Additional paid-in capital

 

1,114,959

 

1,113,352

Accumulated deficit

 

(704,827)

 

(707,321)

Accumulated other comprehensive income

 

1,827

 

1,846

Total stockholders' equity

 

412,461

 

408,374

Total liabilities and stockholders' equity

$

945,242

$

898,064

See accompanying Notes to the Consolidated Financial Statements.

4

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

Three months ended March 31,

    

2021

    

2020

    

Net sales

$

133,714

$

104,502

Cost of sales

 

78,800

 

58,083

Gross profit

 

54,914

46,419

Operating expenses, net:

Research and development

 

21,844

 

19,195

Selling, general, and administrative

 

20,255

 

18,304

Amortization of intangible assets

 

3,354

 

3,837

Restructuring

 

 

625

Other operating expense (income), net

46

(109)

Total operating expenses, net

45,499

41,852

Operating income (loss)

 

9,415

 

4,567

Interest income

 

136

 

800

Interest expense

 

(6,759)

 

(5,666)

Income (loss) before income taxes

 

2,792

(299)

Income tax expense (benefit)

 

298

 

268

Net income (loss)

$

2,494

$

(567)

Income (loss) per common share:

Basic

$

0.05

$

(0.01)

Diluted

$

0.05

$

(0.01)

Weighted average number of shares:

Basic

 

48,624

 

47,811

Diluted

 

53,050

 

47,811

See accompanying Notes to the Consolidated Financial Statements.

5

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

Three months ended March 31,

    

2021

    

2020

    

Net income (loss)

$

2,494

$

(567)

Other comprehensive income (loss), net of tax:

Available-for-sale securities:

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

 

11

 

201

Currency translation adjustments:

Change in currency translation adjustments

 

(30)

 

(48)

Total other comprehensive income (loss), net of tax

 

(19)

 

153

Total comprehensive income (loss)

$

2,475

$

(414)

See accompanying Notes to the Consolidated Financial Statements.

6

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three months ended March 31,

    

2021

    

2020

    

Cash Flows from Operating Activities

Net income (loss)

$

2,494

$

(567)

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

Depreciation and amortization

 

6,822

 

7,724

Non-cash interest expense

3,514

3,320

Deferred income taxes

 

(4)

 

115

Share-based compensation expense

 

3,237

 

3,646

Changes in operating assets and liabilities:

Accounts receivable and contract assets

 

(6,811)

 

(27,846)

Inventories and deferred cost of sales

 

(10,474)

 

2,446

Prepaid expenses and other current assets

 

(336)

 

(1,480)

Accounts payable and accrued expenses

 

12,612

 

14,459

Customer deposits and deferred revenue

 

1,672

 

(5,242)

Income taxes receivable and payable, net

 

172

 

124

Other, net

 

(2,413)

 

905

Net cash provided by (used in) operating activities

 

10,485

 

(2,396)

Cash Flows from Investing Activities

Capital expenditures

 

(1,953)

 

(1,070)

Proceeds from the sale of investments

 

55,385

 

71,130

Payments for purchases of investments

 

(52,037)

 

(34,866)

Net cash provided by (used in) investing activities

1,395

35,194

Cash Flows from Financing Activities

Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan

 

878

 

956

Restricted stock tax withholdings

 

(1,625)

 

(680)

Net cash provided by (used in) financing activities

 

(747)

 

276

Effect of exchange rate changes on cash and cash equivalents

 

(30)

 

(48)

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

 

11,103

 

33,026

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

 

130,283

 

129,951

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

$

141,386

$

162,977

Supplemental Disclosure of Cash Flow Information

Interest paid

$

1,803

$

4,681

Income taxes paid

240

293

Non-cash operating and financing activities

Net transfer of property, plant and equipment to inventory

526

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

20,353

See accompanying Notes to the Consolidated Financial Statements.

7

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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, 2020 (“2020 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 2021 interim quarters end on April 4, July 4, and October 3, and the 2020 interim quarters ended on March 29, June 28, and September 27. 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

8

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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 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, 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.

Inventories

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 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 less than cost. The Company evaluates usage requirements by analyzing historical usage, anticipated demand, alternative uses of materials, and other qualitative factors. Unanticipated changes in demand for the Company’s products may require a write down of

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

The Company adopted ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes in the second quarter of 2020, effective as of the beginning of fiscal year 2020. This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the general principles and simplifying several aspects of ASC 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 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 entities not subject to tax; e) interim-period accounting for enacted changes in tax law; and f) the year-to-date loss limitation in interim-period tax accounting. The adoption did not have a material impact on the Company’s consolidated financial statements as of the date of adoption.

Recent Accounting Standards Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06: Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This standard simplifies the accounting for convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature, as well as convertible instruments with a beneficial conversion feature. As a result, entities will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce non-cash interest expense for entities that have issued a convertible instrument that was within the scope of those models before the adoption of ASU 2020-06. Additionally, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share, and precludes the use of the treasury stock method for certain debt instruments. The provisions of ASU 2020-06 are applicable for fiscal years beginning after December 15, 2021. The Company’s 2023 Notes, 2025 Notes, and 2027 Notes all are currently accounted for using the separation models for convertible debt with a cash conversion feature, and therefore upon adoption of ASU 2020-06 in the first quarter of 2022, the Company expects a decrease in non-cash interest expense. Additionally, the Company will be required to use the if-converted method when calculating diluted earnings (loss) per share, which will result in an increase in income available to common shareholders, as well as an increase in diluted shares outstanding.

i

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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 if the performance targets have been achieved, or would have been achieved if the reporting date was the end of the contingency period. The Company has determined that it has the ability and intent to settle the principal amount of its convertible senior notes in cash, and the excess of the principal portion in shares of its common stock. As such, the Company accounts for the conversion spread using the treasury stock method, and the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount and if the effect would be dilutive. The computations of basic and diluted income (loss) per share for the three months ended March 31, 2021 and 2020 are as follows:

Three months ended March 31,

    

2021

    

2020

    

(in thousands, except per share amounts)

Net income (loss)

$

2,494

$

(567)

Net income (loss) per common share:

Basic

$

0.05

$

(0.01)

Diluted

$

0.05

$

(0.01)

Basic weighted average shares outstanding

 

48,624

 

47,811

Dilutive effect of share-based awards

1,494

Dilutive effect of the 2027 Notes

 

2,932

 

Diluted weighted average shares outstanding

 

53,050

 

47,811

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

N/A

627

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

878

1,485

Maximum potential shares to be issued for settlement of the 2023, 2025, and 2027 Notes excluded from the diluted calculation as their effect would be antidilutive due to a net loss or the fact that the conversion value of the Notes did not exceed their principal amount

8,811

8,618

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 operating expense (income), net” in the Consolidated Statements of Operations.

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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 March 31, 2021 and December 31, 2020:

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

March 31, 2021

Cash equivalents

Certificate of deposits and time deposits

$

80,062

$

$

$

80,062

Corporate debt

2,002

2,002

Commercial paper

950

950

Money market cash

985

985

Total

$

81,047

$

2,952

$

$

83,999

Short-term investments

U.S. treasuries

$

120,096

$

$

$

120,096

Corporate debt

58,449

58,449

Commercial paper

7,597

7,597

Total

$

120,096

$

66,046

$

$

186,142

December 31, 2020

Cash equivalents

Certificate of deposits and time deposits

$

59,168

$

$

$

59,168

Commercial paper

2,000

2,000

U.S. treasuries

24,997

24,997

Total

$

84,165

$

2,000

$

$

86,165

Short-term investments

U.S. treasuries

$

149,219

$

$

$

149,219

Corporate debt

32,554

32,554

Commercial paper

7,998

7,998

Total

$

149,219

$

40,552

$

$

189,771

There were 0 transfers between fair value measurement levels during the three months ended March 31, 2021.

12

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

At March 31, 2021 and December 31, 2020, 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)

March 31, 2021

U.S. treasuries

$

120,077

$

20

$

(1)

$

120,096

Corporate debt

58,478

7

(36)

58,449

Commercial paper

7,596

1

7,597

Total

$

186,151

$

28

$

(37)

$

186,142

December 31, 2020

U.S. treasuries

$

149,206

$

14

$

(1)

$

149,219

Corporate debt

 

32,588

(34)

 

32,554

Commercial paper

7,997

1

7,998

Total

$

189,791

$

15

$

(35)

$

189,771

Available-for-sale securities in a loss position at March 31, 2021 and December 31, 2020 consist of:

March 31, 2021

December 31, 2020

    

    

Gross

    

    

Gross

Estimated

Unrealized

Estimated

Unrealized

Fair Value

Losses

Fair Value

Losses

(in thousands)

U.S. treasuries

$

7,522

$

(1)

$

19,991

$

(1)

Corporate debt

 

47,971

 

(36)

 

32,554

 

(34)

Total

$

55,493

$

(37)

$

52,545

$

(35)

At March 31, 2021 and December 31, 2020, there were 0 short-term investments that had been in a continuous loss position for more than 12 months.

The contractual maturities of securities classified as available-for-sale at March 31, 2021 were as follows:

March 31, 2021

Amortized

Estimated

Cost

Fair Value

(in thousands)

Due in one year or less

$

154,211

$

154,214

Due after one year through two years

28,965

 

28,952

Due after two years through three years

2,975

2,976

Total

$

186,151

$

186,142

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 minimal realized gains or losses for the three months ended March 31, 2021 and 0 realized gains or losses for the three months ended March 31, 2020.

Accounts Receivable

Accounts receivable is presented net of an allowance for doubtful accounts of $0.7 million at March 31, 2021 and December 31, 2020. The Company considered its current expectations of future economic conditions, including the impact of COVID-19, when estimating its allowance for doubtful accounts.

13

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Inventories

Inventories at March 31, 2021 and December 31, 2020 consist of the following:

March 31,

December 31,

    

2021

    

2020

(in thousands)

Materials

$

90,115

$

82,679

Work-in-process

 

55,995

 

53,979

Finished goods

 

10,106

 

9,248

Total

$

156,216

$

145,906

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, prepaid licenses, and other receivables. The balance as of March 31, 2021 includes a current receivable of $6.1 million related to landlord reimbursement for leasehold improvements associated with the Company’s new leased facility in San Jose, California expected to be received over the next twelve months. In addition, Veeco had deposits with its suppliers of $6.6 million and $7.2 million at March 31, 2021 and December 31, 2020, respectively.

Property, Plant, and Equipment

Property, plant, and equipment at March 31, 2021 and December 31, 2020 consist of the following:

March 31,

December 31,

    

2021

    

2020

(in thousands)

Land

$

5,061

$

5,061

Building and improvements

 

63,059

 

62,865

Machinery and equipment (1)

 

142,163

 

140,493

Leasehold improvements

 

8,184

 

6,671

Gross property, plant, and equipment

 

218,467

 

215,090

Less: accumulated depreciation and amortization

 

153,260

 

149,819

Net property, plant, and equipment

$

65,207

$

65,271

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

For the three months ended March 31, 2021 and 2020, depreciation expense was $3.5 million and $3.9 million, respectively.

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 and concluded that there were no indicators of impairment during the three months ended March 31, 2021.

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

14

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

basis if such pattern cannot be reliably determined. The Company continues to assess potential triggering events related to the value of its intangible assets and concluded that there were no indicators of impairment during the three months ended March 31, 2021.

The components of purchased intangible assets were as follows:

March 31, 2021

December 31, 2020

Accumulated

Accumulated

    

Gross

    

Amortization

    

    

Gross

    

Amortization

    

Carrying

and

Net

Carrying

and

Net

Amount

Impairment

Amount

Amount

Impairment

Amount

(in thousands)

Technology

$

327,908

$

304,661

$

23,247

$

327,908

$

302,358

$

25,550

Customer relationships

146,465

130,842

15,623

146,465

130,131

16,334

Trademarks and tradenames

30,910

26,953

3,957

30,910

26,614

4,296

Other

 

3,686

 

3,682

 

4

 

3,686

 

3,681

 

5

Total

$

508,969

$

466,138

$

42,831

$

508,969

$

462,784

$

46,185

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

Note 4 — Liabilities

Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities at March 31, 2021 and December 31, 2020 consist of:

March 31,

December 31,

    

2021

    

2020

(in thousands)

Payroll and related benefits

$

29,238

$

26,630

Warranty

5,363

5,058

Operating lease liabilities

4,375

4,148

Interest

4,017

2,574

Professional fees

1,335

1,112

Sales, use, and other taxes

 

3,221

 

2,658

Other

 

3,515

 

2,696

Total

$

51,064

$

44,876

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

15

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

or exceptional component performance can also result in changes to warranty costs. Changes in product warranty reserves for the three months ended March 31, 2021 include:

(in thousands)

Balance - December 31, 2020

$

5,058

Warranties issued

 

1,561

Consumption of reserves

 

(1,310)

Changes in estimate

 

54

Balance - March 31, 2021

$

5,363

Customer Deposits and Deferred Revenue

Customer deposits totaled $52.2 million and $49.3 million at March 31, 2021 and December 31, 2020, 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, 2020

 

$

17,985

Deferral of revenue

 

3,647

Recognition of unearned revenue

 

(4,913)

Balance - March 31, 2021

 

$

16,719

As of March 31, 2021, the Company has approximately $21.8 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 80% 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 due 2023 (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 $125.0 million aggregate principal amount of 3.75% convertible senior notes due 2027 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.

Additionally, on November 11, 2020, the Company entered into a privately negotiated exchange agreement with a holder of its outstanding 2023 Notes, under which the Company agreed to retire $125.0 million in aggregate original principal amount of the 2023 Notes, with a carrying amount of $113.1 million, in exchange for the issuance of $132.5 million in

16

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

aggregate principal amount of new 3.50% convertible senior notes due 2025 described below, which had a fair value that approximated the principal amount of notes issued.

2025 Notes

On November 17, 2020, as part of the privately negotiated exchange agreement described above, the Company issued $132.5 million of 3.50% convertible senior notes due 2025 (the “2025 Notes”). The 2025 Notes bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2021. The 2025 Notes mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted.

2027 Notes

On May 18, 2020, the Company completed a private offering of $125.0 million of 3.75% convertible senior notes due 2027 (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 capped calls, discussed below. 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 the Company, redeemed, or converted.

The 2023 Notes, 2025 Notes, and 2027 Notes (collectively, the “Notes”) are unsecured obligations of Veeco and rank senior in right of payment to any of Veeco’s subordinated indebtedness; equal in right of payment to all of Veeco’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Veeco’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Veeco’s subsidiaries.

The 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 rates are 24.9800, 41.6667, and 71.5372 shares of the Company’s common stock per $1,000 principal amount of the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, representing initial effective conversion prices of $40.03, $24.00, and $13.98 per share of common stock, respectively. The conversion rates may be subject to adjustment upon the occurrence of certain specified events.

Holders may convert all or any portion of their notes, in multiples of 1 thousand dollar principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 15, 2022 with respect to the 2023 Notes, October 15, 2024 with respect to the 2025 Notes, and October 1, 2026 with respect to the 2027 Notes, only under the following circumstances:

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

(ii)During the 5 consecutive 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 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Veeco’s common stock and the conversion rate on each such trading day;

(iii)If the Company calls any or all of applicable series of the 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.

17

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

For the calendar quarter ended March 31, 2021, the last reported sales price of common stock during the 30 consecutive trading days, based on the criteria outlined in (i) above, was greater than 130% of the conversion price of the 2027 Notes, and as such the 2027 Notes are convertible by the holders until June 30, 2021.

Holders may convert their notes at any time, regardless of the foregoing circumstances, on or after October 15, 2022 with respect to the 2023 Notes, October 15, 2024 with respect to the 2025 Notes, and October 1, 2026 with respect to the 2027 Notes, until the close of business on the business day immediately preceding the respective maturity date.

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 options, the Company segregated the liability component of the instruments from the equity components. The liability components were measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Notes. The calculation of the fair value of the debt components required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the Notes at a discount rate equal to the estimated borrowing rate for similar non-convertible debt, or 7.0%, 8.0%, and 9.1% with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively. The excess of the aggregate face values of the Notes over the estimated fair values of the liability components of $72.5 million, $21.0 million, and $34.2 million with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, were recognized as debt discounts and recorded as an increase to additional paid-in capital and will be amortized over the expected lives of the Notes using the effective interest rate method. Amortization of the debt discounts are recognized as non-cash interest expense.

The transaction costs of $9.2 million, $1.9 million, and $3.1 million incurred in connection with the issuance of the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected terms of the Notes. Transaction costs allocated to the equity component of $1.9 million, $0.3 million, and $0.8 million with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, reduced the value of the equity components recognized in stockholders' equity.

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 aggregate principal amount of converted 2027 Notes, as the case may be, with such reduction and/or offset subject to a cap based on the 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.

The Capped Call Transactions are separate transactions entered into by the Company with the capped call counterparties, are not part of the terms of the 2027 Notes and do not change the holders’ rights under the 2027 Notes. Holders of the 2027 Notes do not have any rights with respect to the Capped Call Transactions. The cost of the Capped Call Transactions is not expected to be tax-deductible as the Company did not elect to integrate the Capped Call Transactions into the 2027 Notes for tax purposes. The Company used a portion of the net proceeds from the offering of the 2027 Notes to pay for the Capped Call Transactions, and the cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the accompanying consolidated financial statements.

18

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

The carrying value of the 2023 Notes, 2025 Notes and 2027 Notes are as follows:

March 31, 2021

December 31, 2020

  

Principal Amount

  

Unamortized
debt discount/
transaction costs

  

Net carrying value

  

Principal Amount

  

Unamortized
debt discount/
transaction costs

  

Net carrying value

(in thousands)

2023 Notes

$

131,695

$

(10,560)

$

121,135

$

131,695

$

(11,925)

$

119,770

2025 Notes

 

132,500

 

(20,935)

 

111,565

 

132,500

 

(22,097)

 

110,403

2027 Notes

125,000

(33,071)

91,929

125,000

(34,058)

90,942

Net carrying value

$

389,195

$

(64,566)

$

324,629

$

389,195

$

(68,080)

$

321,115

Total interest expense related to the 2023 Notes, 2025 Notes and 2027 Notes is as follows:

Three months ended March 31,

    

2021

    

2020

 

(in thousands)

Cash Interest Expense

 

  

  

Coupon interest expense - 2023 Notes

$

889

$

2,329

Coupon interest expense - 2025 Notes

1,159

Coupon interest expense - 2027 Notes

1,172

Non-cash Interest Expense

 

 

  

Amortization of debt discount/transaction costs- 2023 Notes

 

1,365

 

3,320

Amortization of debt discount/transaction costs- 2025 Notes

1,162

Amortization of debt discount/transaction costs- 2027 Notes

987

Total Interest Expense

$

6,734

$

5,649

The Company determined the 2023 Notes, 2025 notes, and 2027 Notes are Level 2 liabilities in the fair value hierarchy and had an estimated fair value at March 31, 2021 of $132.3 million, $155.3, and $215.1 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 March 31, 2021 and December 31, 2020, plan assets approximated $2.5 million and $2.4 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 $2.5 million at December 31, 2020 and was included within “Other liabilities” in the Consolidated Balance Sheets. The plan was terminated and fully liquidated during the first quarter of 2021. Other liabilities at March 31, 2021 and December 31, 2020 also included (i) medical and dental benefits for former executives of $1.9 million; (ii) asset retirement obligations of $2.7 million; and (iii) income tax payables of $1.4 million. Additionally, as a result of the Coronavirus, Aid, Relief, and Economic Security Act, the Company has accrued for and deferred the deposit and payment of its share of social security taxes, resulting in a liability of $3.5 million at both March 31, 2021 and December 31, 2020, of which $1.7 million is included within “Accrued expenses and other current liabilities”, and $1.8 million is included within “Other liabilities” in the Consolidated Balance Sheets for both periods.

19

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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 March 31, 2021 was 12 years, and the weighted average discount rate used in determining the present value of future lease payments was 5.7%.

The following table provides the maturities of lease liabilities at March 31, 2021:

Operating

    

Leases

(in thousands)

Payments due by period:

2021

$

3,559

2022

4,335

2023

3,170

2024

2,896

2025

2,506

Thereafter

38,367

Total future minimum lease payments

54,833

Less: Imputed interest

(19,037)

Total

$

35,796

Reported as of March 31, 2021

Accrued expenses and other current liabilities

$

4,375

Operating lease long-term liabilities

31,421

Total

$

35,796

Operating lease cost for the three months ended March 31, 2021 and 2020 was $1.3 million and $1.4 million, respectively. Variable lease cost for the three months ended March 31, 2021 and 2020 was $0.4 million and $0.5 million, respectively. Additionally, the Company has an immaterial amount of short-term leases. Operating cash outflows from operating leases for the three months ended March 31, 2021 and 2020 were $1.7 million and $1.3 million, respectively.

Purchase Commitments

Veeco has purchase commitments of $158.8 million at March 31, 2021, 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 March 31, 2021, outstanding bank guarantees and standby letters of credit totaled $7.2 million, and unused bank guarantees and letters of credit of $25.1 million were available to be drawn upon.

20

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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.

The Company did not have any outstanding derivative contracts at March 31, 2021 or December 31, 2020. Additionally, the Company did not have any gains or losses from currency exchange derivatives during the three months ended March 31, 2021 and 2020.

21

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Note 7 — Equity

Statement of Stockholders’ Equity

The following tables present the changes in Stockholders’ Equity:

    

    

    

    

    

Accumulated

    

Additional

Other

Common Stock

Paid-in

Accumulated

Comprehensive

Shares

Amount

Capital

Deficit

Income

Total

(in thousands)

Balance at December 31, 2020

 

49,724

$

497

$

1,113,352

$

(707,321)

$

1,846

$

408,374

Net income (loss)

 

 

 

 

2,494

 

 

2,494

Other comprehensive income (loss), net of tax

 

 

 

 

 

(19)

 

(19)

Share-based compensation expense

 

 

 

3,237

 

 

 

3,237

Net issuance under employee stock plans

 

459

5

(1,630)

(1,625)

Balance at March 31, 2021

 

50,183

$

502

$

1,114,959

$

(704,827)

$

1,827

$

412,461

    

    

    

    

    

Accumulated

    

Additional

Other

Common Stock

Paid-in

Accumulated

Comprehensive

Shares

Amount

Capital

Deficit

Income

Total

(in thousands)

Balance at December 31, 2019

 

48,994

$

490

$

1,071,058

$

(698,930)

$

1,894

$

374,512

Net income (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

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, 2020

1,866

(20)

1,846

Other comprehensive income (loss)

 

(30)

 

11

 

(19)

Balance - March 31, 2021

$

1,836

$

(9)

$

1,827

There were minimal reclassifications from AOCI into net income for the three months ended March 31, 2021 and 2020.

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.

22

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020:

Three months ended March 31,

    

2021

    

2020

(in thousands)

Cost of sales

 

$

495

 

$

521

Research and development

817

874

Selling, general, and administrative

1,925

2,251

Total

$

3,237

$

3,646

For the three months ended March 31, 2021, equity activity related to stock options was as follows:

Weighted 

Number of

Average

    

Shares

    

Exercise Price

(in thousands)

Balance - December 31, 2020

730

35.26

Expired or forfeited

(33)

35.37

Balance - March 31, 2021

697

35.26

For the three months ended March 31, 2021, equity activity related to non-vested restricted shares and performance shares was as follows:

    

    

Weighted

Average

Number of

Grant Date

Shares

Fair Value

(in thousands)

Balance - December 31, 2020

2,040

12.73

Granted

813

23.97

Vested

(204)

8.95

Forfeited

(39)

13.15

Balance - March 31, 2021

2,610

16.52

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 March 31, 2021, 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.

23

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Income (loss) before income taxes and income tax expense (benefit) for the three months ended March 31, 2021 and 2020 were as follows:

Three months ended March 31,

 

    

2021

    

2020

 

(in thousands)

 

Income (loss) before income taxes

$

2,792

$

(299)

Income tax expense (benefit)

 

$

298

 

$

268

The Company’s tax expense for both the three months ended March 31, 2021 and 2020 was $0.3 million. The 2021 and 2020 tax expense each included an expense of $0.2 million related to the Company’s non-U.S. operations and $0.1 million related to the Company’s domestic operations. For the three months ended March 31, 2021 and 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. The domestic tax expense for 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 foreign tax expense for both periods is primarily attributable to non-U.S operations profits and foreign withholding taxes on unremitted earnings, offset by the amortization of intangible assets.

Note 10 — Segment Reporting and Geographic Information

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

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

Semiconductor

The Semiconductor market refers to early process steps in logic and memory applications where silicon wafers are processed. There are many different process steps in forming patterned wafers, such as deposition, etching, masking, and doping, where the microchips are created but remain on the silicon wafer. This market includes mask blank production for extreme ultraviolet (“EUV”) lithography. This market also includes Advanced Packaging which refers to a portfolio of wafer-level assembly technologies that enable improved performance of electronic products, such as smartphones, high-end servers, and graphical processors.

Compound Semiconductor

The Compound Semiconductor market includes Photonics, Power Electronics, RF Filters and Amplifiers, and Solar applications. Photonics refers to light source technologies and laser-based solutions for 3D sensing, datacom and telecom applications. This includes micro-LED, laser diodes, edge emitting lasers and vertical cavity surface emitting lasers (“VCSELs”). Power Electronics refers to semiconductor devices such as rectifiers, inverters and converters for the control and conversion of electric power in applications such as fast or wireless charging of consumer electronics and automotive applications. RF power amplifiers and filters (including surface acoustic wave (“SAW”) and bulk acoustic wave (“BAW”) filters) are used in 5G communications infrastructure, smartphones, tablets, and mobile devices. They make use of radio waves for wireless broadcasting and/or communications. Solar refers to power obtained by harnessing the energy of the sun through the use of compound semiconductor devices such as photovoltaics.

24

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Data Storage

Data Storage refers to the Hard Disk Drive (“HDD”) market, for which our systems enable customers to manufacture thin film magnetic heads for hard disk drives as part of large capacity storage applications.

Scientific & Other

Scientific & Other refers to advanced materials research and a range of manufacturing applications including optical coatings (laser mirrors, optical filters, and anti-reflective coatings).

Sales by end-market and geographic region for the three months ended March 31, 2021 and 2020 were as follows:

Three months ended March 31,

    

2021

2020

    

(in thousands)

Sales by end-market

Semiconductor

$

51,631

$

37,423

Compound Semiconductor

24,751

18,430

Data Storage

 

40,980

 

38,883

Scientific & Other

 

16,352

 

9,766

Total

$

133,714

$

104,502

Sales by geographic region

United States

$

45,162

$

39,635

EMEA(1)

13,625

16,150

China

20,007

10,472

Rest of APAC

54,877

37,943

Rest of World

 

43

 

302

Total

$

133,714

$

104,502

(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.

25

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 68%, 70%, and 77% of our total net sales in 2020, 2019, and 2018, 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

26

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;

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 end-markets into which we sell. Our four end-markets are: Semiconductor; Compound Semiconductor; Data Storage; and Scientific & Other.

Sales in the Semiconductor market were driven by our laser annealing systems and lithography systems for Advanced Packaging. We continue to build momentum for our laser annealing solutions with advanced node logic customers, and a memory manufacturer is evaluating our laser annealing system for their manufacturing process as well. We are currently production tool of record at multiple leading-edge customers for their most advanced nodes, including a recent third application win at one of these customers. Recently we shipped multiple evaluation systems to both an existing customer, as well as a new leading-edge logic customer for their next nodes. Our lithography systems for Advanced Packaging are aligned with longer-term growth of FOWLP and other Advanced Packaging applications. Additionally, the ongoing adoption of EUV Lithography for advanced node, semiconductor manufacturing continues to drive requirements for our mask blank deposition systems. Overall, we believe that our technology and market strategy is well aligned with trends such as artificial intelligence, mobile connectivity and high performance computing that drive the Semiconductor market.

27

We address the Compound Semiconductor market with a broad portfolio of technologies including Wet Processing, MOCVD, MBE, and Ion Beam, which have been developed to support emerging applications such as 5G driven RF device manufacturing, photonics applications including edge-emitting lasers and micro-LEDs, and GaN-based power electronics. Sales in the Compound Semiconductor market were driven by equipment shipments for RF Filters, RF Devices, and power electronics, as well as sales to the Photonics market.

Sales in the Data Storage market have been growing for several years, primarily driven by shipments of Ion Beam systems. Demand for our Ion Beam products for data storage is being driven by 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 drives and are manufacturing drives with an 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 requirements and equipment upgrades. Additionally, recent trends in the work from home environment and the importance of cloud computing are also providing tailwinds to this market. We have good near-term visibility in this market, which we believe will remain healthy through 2021. With data proliferation showing no signs of slowing, we feel confident about the long-term prospects of our data storage business. However, after multiple years of customers accelerating their capacity additions, including in 2021, our visibility is limited at this time.

Sales in the Scientific & Other market are largely driven by sales to governments, universities, and research institutions. We are beginning to see signs of a recovery in this market and recently shipped systems for optical coatings and other research applications.

Overall, our laser annealing, 5G RF, and data storage products are all performing well for us today, and we expect them to provide revenue growth in the near term, through 2021. Long-term revenue growth for 2022 and beyond is expected to come from the Semiconductor and Compound Semiconductor markets. As such, we have been making strategic investments in R&D and inventory, including evaluation systems, in these markets, as well as improving our service capabilities to support these anticipated growth opportunities.

28

Results of Operations

For the three months ended March 31, 2021 and 2020

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2021 and 2020 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.

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2021 and 2020 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 March 31,

Change

2021

2020

Period to Period

(dollars in thousands)

Net sales

    

$

133,714

    

100%

$

104,502

    

100%

$

29,212

    

28%

    

Cost of sales

 

78,800

 

59%

 

58,083

 

56%

 

20,717

 

36%

Gross profit

 

54,914

 

41%

 

46,419

 

44%

 

8,495

 

18%

Operating expenses, net:

 

  

 

  

 

  

 

 

  

 

Research and development

 

21,844

 

16%

 

19,195

 

18%

 

2,649

 

14%

Selling, general, and administrative

 

20,255

 

15%

 

18,304

 

18%

 

1,951

 

11%

Amortization of intangible assets

 

3,354

 

3%

 

3,837

 

4%

 

(483)

 

(13)%

Restructuring

 

 

-

 

625

 

1%

 

(625)

 

*

Other operating expense (income), net

 

46

 

-

 

(109)

 

-

 

155

 

*

Total operating expenses, net

 

45,499

 

34%

 

41,852

 

40%

 

3,647

 

9%

Operating income (loss)

 

9,415

 

7%

 

4,567

 

4%

 

4,848

 

106%

Interest income (expense), net

 

(6,623)

 

(5)%

 

(4,866)

 

(5)%

 

(1,757)

 

36%

Income (loss) before income taxes

 

2,792

 

2%

 

(299)

 

-

 

3,091

 

*

Income tax expense (benefit)

 

298

 

-

 

268

 

-

 

30

 

*

Net income (loss)

$

2,494

 

2%

$

(567)

 

(1)%

$

3,061

 

*

*

Not meaningful

Net Sales

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

Three Months Ended March 31,

Change

 

2021

2020

Period to Period

 

(dollars in thousands)

 

Sales by end-market

    

  

    

  

  

    

  

  

    

  

    

Semiconductor

$

51,631

 

39%

$

37,423

 

36%

$

14,208

 

38%

Compound Semiconductor

 

24,751

 

18%

 

18,430

 

18%

 

6,321

 

34%

Data Storage

 

40,980

 

31%

 

38,883

 

37%

 

2,097

 

5%

Scientific & Other

 

16,352

 

12%

 

9,766

 

9%

 

6,586

 

67%

Total

$

133,714

 

100%

$

104,502

 

100%

$

29,212

 

28%

Sales by geographic region

 

  

 

  

 

  

 

  

 

  

 

United States

$

45,162

 

34%

$

39,635

 

38%

$

5,527

 

14%

EMEA

 

13,625

 

10%

 

16,150

 

15%

 

(2,525)

 

(16)%

China

20,007

15%

10,472

10%

9,535

 

91%

Rest of APAC

 

54,877

 

41%

 

37,943

 

37%

 

16,934

 

45%

Rest of World

 

43

 

-

 

302

 

-

 

(259)

 

(86)%

Total

$

133,714

 

100%

$

104,502

 

100%

$

29,212

 

28%

Sales increased for the three months ended March 31, 2021 against the comparable prior year period across all markets. By geography, sales increased in the United States, China, and Rest of APAC regions. The increase in sales in the Rest of APAC region was primarily driven by shipments to data storage customers. Sales in the Rest of APAC region for the three months ended March 31, 2021 included sales in Taiwan, South Korea, and Thailand of $18.6 million, $10.8

29

million, and $9.2 million, respectively. Sales in the Rest of APAC region for the three months ended March 31, 2020 included sales in Taiwan and Singapore of $15.6 million and $14.4 million, respectively. Pricing was not a significant driver of the change in total sales. 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

For the three months ended March 31, 2021, gross profit increased against the comparable prior period primarily due to an increase in sales volume, partially offset by decreased gross margins. Gross margins decreased principally due to product and region mix of sales in the period and an increase in spending to support higher business activity. 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 increased for the three months ended March 31, 2021 against the comparable prior period primarily due to personnel-related expenses as we selectively invest in new research and development and developing additional applications for our technology in order to be well positioned to capitalize on emerging global megatrends and support longer term growth in Semiconductor and Compound Semiconductor markets. However, expenses as a percentage of revenue have decreased when compared to the prior period.

Selling, General, and Administrative

Selling, general, and administrative expenses increased for the three months ended March 31, 2021 against the comparable prior period primarily due to higher variable expenses associated with the increase in revenue and order in-take. However, expenses as a percentage of revenue have decreased when compared to the prior period. Given 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. In addition, we expect a period of duplicate operating expenses until the transition from our existing facility in San Jose, California to our new leased facility is completed over the next one to two years.

Amortization Expense

Amortization expense decreased compared to prior period primarily due to changes in amortization expense to reflect expected cash flows of certain intangible assets.

 

Interest Income (Expense)

We recorded net interest expense of $6.6 million for the three months ended March 31, 2021, compared to $4.9 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 and the 2025 Notes in November 2020, partially offset by the partial repurchase and exchange of the 2023 Notes. Included in interest expense for the three months ended March 31, 2021 were non-cash charges of $3.5 million related to the amortization of debt discount and transaction costs of the 2023 Notes, 2025 Notes, and 2027 Notes, while the three months ended March 31, 2020 included non-cash charges of $3.3 million related to the amortization of debt discount and transaction costs of the 2023 Notes. Additionally, interest income decreased approximately $0.7 million for the three months ended March 31, 2021 compared to the prior period, primarily as a result of lower interest rates, and we expect interest income to remain depressed as a result.

30

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 tax expense for the three months ended March 31, 2021 was $0.3 million, consistent with the comparable prior period. The 2021 and 2020 tax expense included an expense of $0.1 million related to our domestic operations and $0.2 million related to our non-U.S. operations.

For the three months ended March 31, 2021 and 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. The domestic tax expense for 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 foreign tax expense for both periods is primarily attributable to non-U.S operations profits and foreign withholding taxes on unremitted earnings, offset by the amortization of intangible assets.

Liquidity and Capital Resources

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

March 31,

December 31,

    

2021

    

2020

(in thousands)

Cash and cash equivalents

$

140,733

$

129,625

Restricted cash

 

653

 

658

Short-term investments

 

186,142

 

189,771

Total

$

327,528

$

320,054

At March 31, 2021 and December 31, 2020, cash and cash equivalents of $49.6 million and $40.2 million, respectively, were held outside the United States. As of March 31, 2021, we had $13.7 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 $6.2 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 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, purchase commitments, and payments in respect of operating leases. 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 our proactive management of expenses, leave us well-positioned to manage our business through this crisis as it continues to unfold.

31

A summary of the cash flow activity for the three months ended March 31, 2021 and 2020 is as follows:

Three Months Ended March 31,

    

    

2021

    

2020

    

(in thousands)

Net income (loss)

$

2,494

$

(567)

Non-cash items:

Depreciation and amortization

 

6,822

 

7,724

Non-cash interest expense

 

3,514

 

3,320

Deferred income taxes

 

(4)

 

115

Share-based compensation expense

 

3,237

 

3,646

Changes in operating assets and liabilities

 

(5,578)

 

(16,634)

Net cash provided by (used in) operating activities

$

10,485

$

(2,396)

Net cash provided by operating activities was $10.5 million for the three months ended March 31, 2021 and was due to net income of $2.5 million and adjustments for non-cash items of $13.6 million, partially offset by a decrease in cash flow from changes in operating assets and liabilities of $5.6 million. The changes in operating assets and liabilities were largely attributable to increases in accounts receivable and inventories, partially offset by increases in accounts payable, accrued expenses, and customer deposits.

Cash Flows from Investing Activities

Three Months Ended March 31,

    

2021

    

2020

    

(in thousands)

Capital expenditures

$

(1,953)

$

(1,070)

Changes in investments, net

 

3,348

 

36,264

Net cash provided by (used in) investing activities

$

1,395

$

35,194

The cash provided by investing activities during the three months ended March 31, 2021 and 2020 were primarily attributable to net changes of investments, partially offset by capital expenditures. We expect capital expenditures associated with the build-out of the new leased facility in San Jose, California to total between $30 million and $40 million over the next one-to-two years. In addition, we expect a period of duplicate operating expenses until the transition from our existing facility to our new facility is completed.

Cash Flows from Financing Activities

Three Months Ended March 31,

    

2021

    

2020

    

(in thousands)

Settlement of equity awards, net of withholding taxes

(747)

276

Net cash provided by (used in) financing activities

$

(747)

$

276

The cash used in financing activities for the three months ended March 31, 2021 was related to cash used to settle taxes related to employee equity programs, partially offset by cash received under the Employee Stock Purchase Plan. The cash provided by financing activities for the three months ended March 31, 2020 was related to cash received under the Employee Stock Purchase Plan, partially offset by cash used to settle taxes related to employee equity programs.

Convertible Senior Notes

We have $131.7 million outstanding principal balance of 2.70% convertible senior notes that bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted. In addition, we have $132.5 million outstanding principal balance of 3.50% convertible senior notes that bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2025, unless earlier

32

purchased by the Company, redeemed, or converted. Finally, we have $125.0 million outstanding principal balance of 3.75% convertible senior notes that bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted. The 2027 Notes are currently convertible by shareholders until June 30, 2021.

We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on these debts, as well as the payment in cash of principal amounts of any notes that are converted.

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.

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 financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately $186.1 million at March 31, 2021. These securities are subject to interest rate risk and, based on our investment portfolio at March 31, 2021, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of $0.9 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 66% of our total net sales for the three months ended March 31, 2021, respectively, and 62% for the comparable 2020 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

33

denominated in currencies other than the U.S. dollar represented 3% of total net sales in both the three months ended March 31, 2021 and 2020.

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

Evaluation of Disclosure Controls and Procedures

Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective as of March 31, 2021. The disclosure controls and procedures are designed to ensure that the information required to be disclosed in this report filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2021, 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

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, 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.

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.

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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, in Part I — Item 1A of our 2020 Form 10-K. There have been no material changes from the risk factors previously disclosed.

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

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

10.1

Form of Notice of Performance Restricted Stock Unit Award and related terms and conditions pursuant to the Veeco 2019 Stock Incentive Plan, effective March 2021.

*

10.2

Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2019 Stock Incentive Plan, effective March 2021.

*

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

36

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 May 4, 2021.

Veeco Instruments Inc.

By:

/S/ WILLIAM J. MILLER, Ph.D.

William J. Miller, Ph.D.

Chief Executive Officer

By:

/s/ JOHN P. KIERNAN

John P. Kiernan

Senior Vice President and Chief Financial Officer

37