Safe Harbor Statement

This quarterly report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing such forward-looking statements may be found in Part I - Items 1, 2, and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results.

In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2018. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.

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

· Unfavorable market conditions may adversely affect our operating results;

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

· 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;

· We may be unable to successfully integrate the Ultratech business and may not realize the anticipated benefits of the acquisition;

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

· We face significant competition;

· We operate in industries characterized by rapid technological change;

· Our sales to manufacturers are highly dependent on sales of consumer electronics applications, 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 operate in highly concentrated industries;

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

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

· ~~We operate in industries characterized by rapid technological change;~~

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

· ~~We face significant competition;~~

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

· Our sales cycle is long and unpredictable;

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

· Our failure to estimate customer demand accurately could result in inventory obsolescence, liabilities to our suppliers for products no longer needed, ~~and/or~~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 and our ability to adapt to fluctuating order volumes;~~operations;

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

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

· ~~Our acquisition strategy subjects us~~We are exposed to risks associated with ~~evaluating~~business combinations, acquisitions, and ~~pursuing these opportunities and integrating these businesses;~~strategic investments;

· ~~Timing~~We may be unable to obtain required export licenses for the sale of ~~market adoption of LED technology for general lighting is uncertain;~~our products;

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

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

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

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

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

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

· Our income taxes ~~can~~may change;

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

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

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

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

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

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

·We are subject to foreign currency exchange risks;

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

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

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

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

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

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

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

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Veeco Instruments Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)
(unaudited)

	June 30,			December 31,
	2017			2016
	(unaudited)						March 31, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	205,564		$	277,444		$	245,525		$	279,736
Restricted cash							841			847
Short-term investments	97,086			66,787			65,130			47,780
Accounts receivable, net	108,349			58,020			108,219			98,866
Contract assets							1,984			160
Inventories	119,935			77,063			130,964			120,266
Deferred cost of sales	4,439			6,160			1,080			15,994
Prepaid expenses and other current assets	24,909			16,034			29,615			33,437
Total current assets	560,282			501,508			583,358			597,086
Property, plant and equipment, net	82,546			60,646
Property, plant, and equipment, net							83,100			85,058
Intangible assets, net	396,097			58,378			356,311			369,843
Goodwill	303,160			114,908			307,131			307,131
Deferred income taxes	2,528			2,045			3,281			3,047
Other assets	25,056			21,047			28,847			25,310
Total assets	$	1,369,669		$	758,532		$	1,362,028		$	1,387,475

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	46,040		$	22,607		$	58,273		$	50,318
Accrued expenses and other current liabilities	44,305			33,201			54,297			58,068
Customer deposits and deferred revenue	76,985			85,022			94,473			112,032
Income taxes payable	4,316			2,311			1,581			3,846
Current portion of long-term debt	1,013			368
Total current liabilities	172,659			143,509			208,624			224,264
Deferred income taxes	46,291			13,199			36,794			36,845
Long-term debt	270,071			826			278,489			275,630
Other liabilities	11,163			6,403			10,164			10,643
Total liabilities	500,184			163,937			534,071			547,382
Stockholders’ equity:
Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $0.01 par value; 120,000,000 shares authorized; 48,382,213 and 40,714,790 shares issued at June 30, 2017 and December 31, 2016, respectively; 48,382,213 and 40,588,194 shares outstanding at June 30, 2017 and December 31, 2016, respectively.	484			407
Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding.							—			—
Common stock, $0.01 par value; 120,000,000 shares authorized; 48,691,371 and 48,229,251 shares issued at March 31, 2018 and December 31, 2017, respectively; 48,691,371 and 48,144,416 shares outstanding at March 31, 2018 and December 31, 2017, respectively.							487			482
Additional paid-in capital	1,053,138			763,303			1,054,331			1,051,953
Accumulated deficit	(185,877		)	(168,583		)	(228,697		)	(212,870		)
Accumulated other comprehensive income	1,740			1,777			1,836			1,812
Treasury stock, at cost, 126,596 shares at December 31, 2016.	—			(2,309		)
Treasury stock, at cost, 84,835 shares at December 31, 2017.							—			(1,284		)
Total stockholders’ equity	869,485			594,595			827,957			840,093
Total liabilities and stockholders’ equity	$	1,369,669		$	758,532		$	1,362,028		$	1,387,475

See accompanying Notes to the Consolidated Financial Statements.

Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Operations

(in thousands, except per share amounts)
(unaudited)

	Three months ended March 31,
	2018			2017
Net sales	$	158,574		$	94,499
Cost of sales	101,894			59,999
Gross profit	56,680			34,500
Operating expenses, net:
Research and development	24,320			14,989
Selling, general, and administrative	26,383			19,105
Amortization of intangible assets	13,532			2,867
Restructuring	2,695			1,338
Acquisition costs	1,342			1,361
Asset impairment	—			463
Other, net	(157		)	(78		)
Total operating expenses, net	68,115			40,045
Operating income (loss)	(11,435		)	(5,545		)
Interest income	624			793
Interest expense	(5,246		)	(4,135		)
Income (loss) before income taxes	(16,057		)	(8,887		)
Income tax expense (benefit)	(230		)	(10,527		)
Net income (loss)	$	(15,827	)	$	1,640

Income (loss) per common share:
Basic	$	(0.34	)	$	0.04
Diluted	$	(0.34	)	$	0.04

Weighted average number of shares:
Basic	46,963			39,619
Diluted	46,963			40,140

See accompanying Notes to the Consolidated Financial Statements.

Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)

(in thousands)
(unaudited)

	Three months ended March 31,
	2018			2017
Net income (loss)	$	(15,827	)	$	1,640
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities	(8		)	(114		)
Foreign currency translation	32			15
Total other comprehensive income (loss), net of tax	24			(99		)

Total comprehensive income (loss)	$	(15,803	)	$	1,541

See accompanying Notes to the Consolidated Financial Statements.

Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Cash Flows

(in thousands)
(unaudited)

	Three months ended March 31,
	2018			2017
Cash Flows from Operating Activities
Net income (loss)	$	(15,827	)	$	1,640
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	17,726			5,799
Non-cash interest expense	2,859			2,185
Deferred income taxes	(269		)	(6,246		)
Share-based compensation expense	4,537			4,186
Asset impairment	—			463
Provision for bad debts	—			92
Changes in operating assets and liabilities:
Accounts receivable and contract assets	(11,177		)	5,871
Inventories and deferred cost of sales	4,555			13,603
Prepaid expenses and other current assets	3,824			(3,743		)
Accounts payable and accrued expenses	2,009			613
Customer deposits and deferred revenue	(17,559		)	(13,727		)
Income taxes receivable and payable, net	(2,283		)	130
Long-term income tax liability	—			(4,877		)
Other, net	(202		)	343
Net cash provided by (used in) operating activities	(11,807		)	6,332

Cash Flows from Investing Activities
Capital expenditures	(2,259		)	(4,187		)
Proceeds from the sale of investments	34,000			27,411
Payments for purchases of investments	(54,300		)	(219,141		)
Net cash provided by (used in) investing activities	(22,559		)	(195,917		)

Cash Flows from Financing Activities
Cash withholdings for employee stock purchase plans	1,136			585
Restricted stock tax withholdings	(427		)	(461		)
Purchases of common stock	(592		)	—
Proceeds from long-term debt borrowings	—			335,752
Principal payments on long-term debt	—			(89		)
Net cash provided by (used in) financing activities	117			335,787

Effect of exchange rate changes on cash and cash equivalents	32			15
Net increase (decrease) in cash, cash equivalents, and restricted cash	(34,217		)	146,217
Cash, cash equivalents, and restricted cash - beginning of period	280,583			277,444
Cash, cash equivalents, and restricted cash - end of period	$	246,366		$	423,661

Supplemental Disclosure of Cash Flow Information
Interest paid	$	4,674		$	31
Income taxes paid	2,373			672
Non-cash operating and financing activities
Net transfer of property, plant, and equipment to (from) inventory	339			(81		)

See accompanying Notes to the Consolidated Financial Statements.

Veeco Instruments Inc. and Subsidiaries

~~Consolidated Statements of Operations~~

~~(in thousands, except per share amounts)~~

~~(unaudited)~~

Three months ended June 30,

Six months ended June 30,

2017

2016

2017

2016

Net sales

$
115,066

$
75,348

$
209,452

$
153,359

Cost of sales

76,346

43,909

136,533

89,964

Gross profit

38,720

31,439

72,919

63,395

Operating expenses, net:

Research and development

18,619

21,543

33,608

43,653

Selling, general, and administrative

22,698

19,995

41,801

39,834

Amortization of intangible assets

6,354

5,273

9,221

10,524

Restructuring

3,257

2,095

4,595

2,195

Acquisition costs

14,133

—

15,494

—

Asset impairment

675

13,627

1,138

13,627

Other, net

(10
)
159

(87
)
88

Total operating expenses, net

65,726

62,692

105,770

109,921

Operating income (loss)

(27,006
)
(31,253
)
(32,851
)
(46,526
)
Interest income

782

290

1,575

596

Interest expense

(5,061
)
(105
)
(9,196
)
(143
)
Income (loss) before income taxes

(31,285
)
(31,068
)
(40,472
)
(46,073
)
Income tax expense (benefit)

(12,897
)
1,014

(23,179
)
1,542

Net income (loss)

$
(18,388
)
$
(32,082
)
$
(17,293
)
$
(47,615
)

Income (loss) per common share:

Basic

$
(0.43
)
$
(0.82
)
$
(0.42
)
$
(1.22
)
Diluted

$
(0.43
)
$
(0.82
)
$
(0.42
)
$
(1.22
)

Weighted average number of shares:

Basic

42,656

38,965

41,160

39,035

Diluted

42,656

38,965

41,160

39,035

~~See accompanying~~ Notes to the Consolidated Financial ~~Statements.~~

~~Veeco Instruments Inc. and Subsidiaries~~Statements - continued

~~Consolidated Statements of Comprehensive Income (Loss)~~(unaudited)

~~(in thousands)~~

~~(unaudited)~~

Three months ended June 30,

Six months ended June 30,

2017

2016

2017

2016

Net income (loss)

$
(18,388
)
$
(32,082
)
$
(17,293
)
$
(47,615
)
Other comprehensive income, net of tax

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

53

(11
)
(61
)
39

Foreign currency translation

9

(12
)
24

27

Total other comprehensive income, net of tax

62

(23
)
(37
)
66

Comprehensive income (loss)

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

~~See accompanying Notes to the Consolidated Financial Statements.~~

~~Veeco Instruments Inc. and Subsidiaries~~

~~Consolidated Statements of Cash Flows~~

~~(in thousands)~~

~~(unaudited)~~

Six months ended June 30,

2017

2016

Cash Flows from Operating Activities

Net income (loss)

$
(17,293
)
$
(47,615
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

15,620

17,291

Non-cash interest expense

4,887

—

Deferred income taxes

(19,412
)
1,821

Share-based compensation expense

13,806

8,390

Asset impairment

1,138

13,627

Provision for bad debts

92

160

Changes in operating assets and liabilities:

Accounts receivable

(4,956
)
7,584

Inventories and deferred cost of sales

20,496

(14,577
)
Prepaid expenses and other current assets

608

2,404

Accounts payable and accrued expenses

(7,103
)
(9,156
)
Customer deposits and deferred revenue

(12,872
)
(10,378
)
Long-term income tax liability

(4,877
)
—

Other, net

277

(682
)
Net cash provided by (used in) operating activities

(9,589
)
(31,131
)

Cash Flows from Investing Activities

Acquisitions of businesses, net of cash acquired

(399,478
)
—

Capital expenditures

(10,057
)
(9,179
)
Proceeds from the sale of investments

235,586

78,145

Payments for purchases of investments

(219,141
)
(35,533
)
Other

—

(213
)
Net cash provided by (used in) investing activities

(393,090
)
33,220

Cash Flows from Financing Activities

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

1,498

473

Restricted stock tax withholdings

(6,294
)
(665
)
Purchases of common stock

—

(13,349
)
Proceeds from long-term debt borrowings

335,751

—

Principal payments on long-term debt

(180
)
(166
)
Net cash provided by (used in) financing activities

330,775

(13,707
)

Effect of exchange rate changes on cash and cash equivalents

24

27

Net increase (decrease) in cash and cash equivalents

(71,880
)
(11,591
)
Cash and cash equivalents - beginning of period

277,444

269,232

Cash and cash equivalents - end of period

$
205,564

$
257,641

Supplemental Disclosure of Cash Flow Information

Interest paid

$
65

$
103

Income taxes paid

1,422

1,284

Non-cash operating and financing activities

Net transfer of inventory to property, plant and equipment

33

—

~~See accompanying Notes to the Consolidated Financial Statements.~~

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, ~~2016~~2017 (“~~2016~~2017 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. C~~ertain amounts previously reported have been reclassified in the financial statements to conform to the current presentation.~~

Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2018 interim quarters end on April 1, July 1, and September 30, and the 2017 interim quarters ~~end~~ended on April 2, July 2, and October ~~1, and the 2016 interim quarters ended on April 3, July 3, and October 2.~~1. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.

~~Revenue recognition~~Change in Accounting Policy

~~Veeco recognizes revenue when all~~The Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), as of January 1, 2018, using the full retrospective method. All amounts and disclosures set forth in this Form 10-Q reflect these changes. The most significant financial statement impacts of adopting ASC 606 are the elimination of the ~~following criteria have been met: persuasive evidence~~constraint on revenue associated with the billing retention related to the receipt of ~~an arrangement exists with~~customer final acceptance and the identification of installation services as a ~~customer; delivery~~performance obligation. The elimination of the specified products has occurred or services have been rendered; prices are contractually fixed or determinable; and collectability is reasonably assured. Revenue is recorded including shipping and handling costs and excluding applicable taxesconstraint on revenue related to ~~sales.~~customer final acceptance, which is usually about 10 percent of a system sale, is now generally recognized at the time the Company transfers control of the system to the customer, which is earlier than under the Company’s previous revenue recognition model for certain contracts that were subject to the billing constraint. The new performance obligation related to installation services is now recognized as the installation services are performed, which is later than the Company’s previous revenue recognition model.

The Company applied ASC 606 retrospectively and elected to use the disclosure exemption in the transition guidance under which the Company does not disclose prior period information regarding the amount of the transaction price allocated to remaining performance obligations. The cumulative effect of the adoption was recognized as a decrease to Accumulated deficit of $6.9 million on January 1, 2016. The following tables summarize the impact of adoption on the Company’s previously reported financial position and results:

	December 31, 2017
	As reported			Adjustments			As adjusted
	(in thousands)
Balance Sheet
Contract assets	$	—		$	160		$	160
Deferred cost of sales	16,060			(66		)	15,994
Deferred taxes	2,953			94			3,047
Accrued expenses and other current liabilities	60,339			(2,271		)	58,068
Customer deposits and deferred revenue	108,953			3,079			112,032
Additional paid-in capital	1,053,079			(1,126		)	1,051,953
Accumulated deficit	(213,376		)	506			(212,870		)

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

	Three months ended March 31, 2017
	As reported			Adjustments			As adjusted
	(in thousands, except per share amounts)
Statement of Operations
Net sales	$	94,386		$	113		$	94,499
Cost of sales	60,186			(187		)	59,999
Income tax expense (benefit)	(10,282		)	(245		)	(10,527		)
Net income (loss)	1,095			545			1,640
Diluted earnings (loss) per share	0.03			0.01			0.04

The Company’s adoption of the standard had no impact to cash provided by or used in operating, investing, or financing activities on the Consolidated Statements of Cash Flows.

Revenue Recognition

~~Contracts~~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 ~~accounting units of the multiple-element arrangements~~performance obligations within a contract and to determine how the revenue should be allocated among the ~~accounting units. Veeco~~performance obligations. The Company also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single ~~multiple-element arrangement~~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. ~~Moreover, judgment is used in interpreting the commercial terms and determining when all criteria have been met in order to recognize revenue in the appropriate accounting period.~~

When there are separate units of accounting, ~~Veeco~~the Company allocates revenue to each ~~element~~performance obligation on a relative stand-alone selling price basis. The stand-alone selling prices are determined based on the ~~following~~prices at which the Company separately sells the systems, upgrades, components, spare parts, installation, maintenance, and service plans. For items that are not sold separately, the Company estimates stand-alone selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or the best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Veeco uses BESP for the elements in its arrangements.prices generally using an expected cost plus margin approach. The maximum revenue recognized at a given point on a ~~delivered element~~contract is limited to the amount for which it is probable that isa significant reversal will not ~~contingent upon~~occur in the ~~delivery of additional items.~~future.

~~Veeco~~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 ~~the customer’s creditworthiness,~~ and the nature of the customer’s post-delivery acceptance provisions. ~~Veeco’s~~The Company’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For ~~the majority~~many of ~~the~~these arrangements, a customer source inspection of the system is performed in ~~Veeco’s~~the Company’s facility or test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When ~~Veeco~~the Company objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery, 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, subject to the retention amount constraint described below for certain contracts.~~date. For new products, new applications of existing products, or for products with substantive customer acceptance provisions where ~~Veeco~~the Company cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, and the Company does not have a history of meeting the criteria, revenue and the associated costs are deferred and fully recognized upon obtaining objective evidence that the ~~receipt~~acceptance provisions have been achieved and thus transferring control of ~~final~~the product to the customer, ~~acceptance,~~ assuming all other revenue recognition criteria have been met.

The Company’s system sales arrangements, including certain upgrades, generally do not contain provisions for the right of return, forfeiture, refund, or other purchase price concession. In the rare instances where such provisions are included, all revenue is deferred until such rights expire. The sales arrangements generally include installation. The installation process is not deemed essentialVeeco Instruments Inc. and Subsidiaries

Notes to the functionality of the equipment since it is not complex; it does not require significant changes to the features or capabilities of the equipment or involve constructing elaborate interfaces or connections subsequent to factory acceptance. Veeco has a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage Veeco to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, installation is deemed to be inconsequential or perfunctory relative to the system sale as a whole, and as a result, installation service is not considered a separate element of the arrangement. As such, Veeco records the cost of the installation at the earlier of the time of revenue recognition for the system or when installation services are performed.Consolidated Financial Statements - continued

(unaudited)

In certain cases ~~Veeco’s products are sold~~the Company’s contracts with customers contain a billing retention, typically 10% of the sales price, which is billed by ~~Veeco~~the Company and payable by the customer when field acceptance provisions are completed. ~~The amount~~Revenue recognized in advance of ~~revenue recognized upon delivery of a system or upgrade, if any, is limited to the lower of i)~~ the amount that has been billed ~~that~~ is ~~not contingent upon acceptance provisions or ii)~~recorded as a contract asset on the ~~value of the arrangement consideration allocated to the delivered elements, if such sale is part of a multiple-element arrangement.~~Consolidated Balance Sheets.

The Company recognizes revenue related to maintenance and service contracts ~~ratably~~ over time based upon the ~~applicable~~respective contract term. ~~Veeco~~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 ~~even if~~since the ~~related revenue~~expected amortization period is ~~deferred~~one year or less.

The Company has elected to treat shipping and handling costs as a fulfillment activity and therefore such costs are included in cost of services upon shipment of products. Taxes assessed by governmental authorities that are collected by the Company from a customer are excluded from revenue.

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“2017 Tax Act”), which makes broad and complex changes to the U.S. tax code. Certain income tax effects of the 2017 Tax Act are reflected in the Company’s financial results in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”), which provides SEC staff guidance regarding the ~~above policy.~~application of ASC Topic 740, Income Taxes (“ASC 740”). Refer to Note 10, “Income Taxes,” for further information on the financial statement impact of the 2017 Tax Act.

Because of the complexity of the new global intangible low-taxed income (“GILTI”) rule, the Company is continuing to evaluate this provision of the 2017 Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (“period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (“deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI, and if so, what the impact will be. This assessment depends not only on the Company’s current structure and estimated future results of global operations, but also on its intent and ability to modify its structure and/or business. The Company is not yet able to reasonably estimate the effect of this provision of the 2017 Tax Act; therefore, the Company has not made any deferred tax adjustments related to potential GILTI tax in its consolidated financial statements and has not made a policy election decision regarding whether to record deferred taxes on GILTI.

Recent ~~accounting pronouncements~~Accounting Pronouncements

~~The FASB issued ASU 2014-09, as amended:~~ ~~Revenue from Contracts with Customers~~, which has been codified as Accounting Standards Codification 606 (“ASC 606”). ASC 606 requires the Company’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. ASC 606 outlines a five-step model to make the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adopt ASC 606 for reporting periods beginning after December 15, 2017, but can adopt early for annual periods beginning after December 15, 2016. The Company is still completing its evaluation of the impact of adopting this standard; however, the Company currently expects the most significant financial statement impacts of adopting ASC 606 will be the elimination of the constraint on revenue associated with the billing retention related to the receipt of customer final acceptance as well as the identification of installation services as a performance obligation. The elimination of the constraint on revenue related to customer final acceptance, which is usually about 10 percent of a system sale, will generally be recognized at the time the Company transfers control of the system to the customer, which is earlier than under the Company’s current revenue recognition model for certain contracts that are subject to the billing retention constraint described above. The new performance obligation related to installation services under the new standard will generally be recognized as the installation services are performed, which is later than under the Company’s current revenue recognition model. Taken together, the Company currently believes there will be a net acceleration of a small percentage of its revenue under ASC 606 as compared to its current revenue recognition model. ASC 606 provides for different transition alternatives, and the Company is evaluating which method of adoption to select.

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

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

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

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

consolidated financial statements.

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

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

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

Recently Adopted Accounting Pronouncements

The Company adopted ASU 2016-01, Financial Instruments — Overall, as of January 1, 2018. This ASU requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. For equity investments without readily observable market prices, the Company measures these investments at cost adjusted for changes in observable prices minus impairment. Changes in measurement are included in “Other, net” in the Consolidated Statements of Operations. This ASU has not had a material impact on the consolidated financial statements upon adoption, and the Company will monitor its cost method investments each reporting period for changes in observable market prices, if any, which may be material in future periods.

The Company adopted ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, as of January 1, 2018. This ASU requires the Company to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This ASU has not had a material impact on the consolidated financial statements.

The Company adopted ASU 2016-18, Statement of Cash Flows: Restricted Cash, as of January 1, 2018. This ASU requires the Company to include Restricted cash with Cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the Statement of Cash Flows. This ASU has not had a material impact on the consolidated financial statements.

Note 2 - Income (Loss) Per Common Share

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

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

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period under the two-class method. Diluted income per share is calculated by dividing net income by the weighted average number of shares used to calculate basic income (loss) per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and non-participating share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share in the periods the performance targets have been achieved. The computations of basic and diluted income (loss) per share for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ are as follows:

Three months ended June 30,

Six months ended June 30,

2017

2016

2017

2016

(in thousands, except per share amounts)

Net income (loss)

$
(18,388
)
$
(32,082
)
$
(17,293
)
$
(47,615
)

Net income (loss) per common share:

Basic

$
(0.43
)
$
(0.82
)
$
(0.42
)
$
(1.22
)
Diluted

$
(0.43
)
$
(0.82
)
$
(0.42
)
$
(1.22
)

Basic weighted average shares outstanding

42,656

38,965

41,160

39,035

Effect of potentially dilutive share-based awards

—

—

—

—

Diluted weighted average shares outstanding

42,656

38,965

41,160

39,035

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

228

659

228

691

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

330

34

294

50

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

1,265

2,425

1,462

2,350

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

8,618

—

8,618

—

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

	Three months ended March 31,
	2018			2017
	(in thousands, except per share amounts)
Net income (loss)	$	(15,827	)	$	1,640

Net income (loss) per common share:
Basic	$	(0.34	)	$	0.04
Diluted	$	(0.34	)	$	0.04

Basic weighted average shares outstanding	46,963			39,619
Effect of potentially dilutive share-based awards	—			521
Diluted weighted average shares outstanding	46,963			40,140

Unvested participating shares excluded from basic weighted average shares outstanding since the securityholders are not obligated to fund losses	59			N/A

Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive	169			N/A

Potentially dilutive non-participating shares excluded from the diluted calculation as their effect would be antidilutive	2,092			1,499

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

Note 3 — Business Combinations

Ultratech

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

Ultratech shareholders received (i) $21.75 per share in cash and (ii) 0.2675 of a share of Veeco common stock for each Ultratech common share outstanding on the acquisition date. The Company plans to finalize the purchase accounting within the measurement period, which may include adjustments to the fair values of assets acquired and liabilities assumed. The preliminary acquisition date fair valueApproximately $2.7 million of the cash merger consideration ~~totaled $633.4 million, net of cash acquired, which consisted of~~is included in “Accrued expenses and other current liabilities” on the ~~following:~~

Acquisition Date

(May 26, 2017)

(in thousands)

Amount paid, net of cash acquired

$
399,478

Fair value of equity issuances (7.4 million shares issued)

233,655

Replacement equity awards attributable to pre-acquisition service

228

Acquisition date fair value

$
633,361

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

Acquisition Date

(May 26, 2017)

(in thousands)

Short-term investments

$
47,161

Accounts receivable

45,465

Inventory and deferred cost of sales

61,680

Prepaid expense and other current assets

7,217

Property, plant, and equipment

19,555

Intangible assets

346,940

Other assets

6,442

Total identifiable assets acquired

534,460

Accounts payable and accrued expenses

40,087

Customer deposits and deferred revenue

4,834

Deferred income taxes

32,478

Other liabilities

11,952

Total liabilities assumed

89,351

Net identifiable assets acquired

445,109

Goodwill

188,252

Net assets acquired

$
633,361

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

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

Acquisition Date

(May 26, 2017)

Amount

Useful life

(in thousands)

Technology

$
158,390

9 years

Customer relationships

116,710

12 years

Backlog

3,080

6 months

In-process research and development

43,340

*

Trademark and tradenames

25,420

7 years

Intangible assets acquired

$
346,940

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

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

In-process research and development (IPR&D) represents the estimated fair values of incomplete Ultratech research and development projects that had not reached the commercialization stage and meet the criteria for recognition as IPR&DConsolidated Balance Sheets as of the date of the acquisition. In the future, the fair value of each project at the acquisition date will be either amortized or impaired depending on whether the projects are completed or abandoned. The fair value of IPR&D was determined using an income approach,March 31, 2018 and costs to complete the project and expected commercialization timelines are considered key assumptions. This valuation approach reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. The value of the IPR&D was determined to be $43.3 million, approximately half of which is related to the Company’s lithography technologies and one-third of which is related to the Company’s laser annealing technologies.

For the three and six months ended June 30, 2017, acquisition related costs were approximately $14.1 million and $15.5 million, respectively, including non-cash charges of $4.2 million for the three months ended June 30,December 31, 2017, related to ~~accelerated share-based compensation for employee terminations.~~

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

Total

(in thousands)

Revenue

$
24,050

Loss from operations before income taxes

$
(21,445
)

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

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

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Three months ended June 30,

Six months ended June 30,

2017

2016

2017

2016

(in thousands, except per share amounts)

Revenue

$
128,399

$
124,272

$
280,194

$
247,493

Loss from operations

(28,898
)
(54,380
)
(32,852
)
(128,860
)
Diluted earnings per share

$
(0.61
)
$
(1.17
)
$
(0.70
)
$
(2.78
)

	Three months ended March 31,
	2017
	(in thousands, except per share amounts)
Net sales	$	151,908
Loss before income taxes	(13,461		)
Diluted earnings per share	$	(0.07	)

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

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

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

(iii) All acquisition related costs incurred by the Company as well as by Ultratech pre-acquisition have been removed from ~~their respective periods~~the year ended December 31, 2017 and included in the ~~three months~~year ended ~~March~~December 31, 2016, as such expenses would have been incurred in the first quarter following the acquisition.

(iv) All amortization of inventory step-up has been removed from ~~their respective periods~~the year ended December 31, 2017 and recorded in the ~~first two quarters of~~year ended December 31, 2016, as such costs would have been incurred as the corresponding inventory was sold.

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

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

(vii) All shares issued in connection with the acquisition were considered outstanding as of January 1, 2016 for purposes of calculating diluted earnings per share.

Note 4 - 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 ~~acquired.~~purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other, net” in the Consolidated Statements of Operations.

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

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

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

The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)								(in thousands)
June 30, 2017
March 31, 2018
Cash equivalents
U.S. treasuries									$	6,496	$	—	$	—	$	6,496
Total									$	6,496	$	—	$	—	$	6,496

Short-term investments
U.S. treasuries	$	34,951	$	—	$	—	$	34,951	$	42,228	$	—	$	—	$	42,228
Government agency securities	—		62,135		—		62,135
Corporate debt									—		10,522		—		10,522
Commercial paper									—		12,380		—		12,380
Total	$	34,951	$	62,135	$	—	$	97,086	$	42,228	$	22,902	$	—	$	65,130

December 31, 2016
December 31, 2017
Cash equivalents
Corporate debt	$	—	$	1,501	$	—	$	1,501
U.S. treasuries									$	12,490	$	—	$	—	$	12,490
Total	$	—	$	1,501	$	—	$	1,501	$	12,490	$	—	$	—	$	12,490
Short-term investments
U.S. treasuries	$	40,008	$	—	$	—	$	40,008	$	33,895	$	—	$	—	$	33,895
Government agency securities	—		10,012		—		10,012
Corporate debt	—		13,773		—		13,773		—		10,886		—		10,886
Commercial paper	—		2,994		—		2,994		—		2,999		—		2,999
Total	$	40,008	$	26,779	$	—	$	66,787	$	33,895	$	13,885	$	—	$	47,780

There were no transfers between fair value measurement levels during the three ~~and six~~ months ended ~~June 30, 2017.~~March 31, 2018.

At ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the amortized cost and fair value of available-for-sale securities consist of:

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated		Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value		Cost		Gains		Losses			Fair Value
	(in thousands)									(in thousands)
June 30, 2017
March 31, 2018
U.S. treasuries	$	34,986	$	—	$	(35	)	$	34,951	$	42,245	$	—	$	(17	)	$	42,228
Government agency securities	62,181		—		(46		)	62,135
Total	$	97,167	$	—	$	(81	)	$	97,086

December 31, 2016
U.S. treasuries	$	40,013	$	—	$	(5	)	$	40,008
Government agency securities	10,020		—		(8		)	10,012
Corporate debt	13,780		—		(7		)	13,773		10,540		—		(18		)	10,522
Commercial paper	2,994		—		—			2,994		12,379		1		—			12,380
Total	$	66,807	$	—	$	(20	)	$	66,787	$	65,164	$	1	$	(35	)	$	65,130

December 31, 2017
U.S. treasuries										$	33,914	$	—	$	(19	)	$	33,895
Corporate debt										10,894		—		(8		)	10,886
Commercial paper										2,999		—		—			2,999
Total										$	47,807	$	—	$	(27	)	$	47,780

Available-for-sale securities in a loss position at ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 consist of:

	June 30, 2017					December 31, 2016					March 31, 2018					December 31, 2017
			Gross					Gross					Gross					Gross
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
	(in thousands)										(in thousands)
U.S. treasuries	$	34,951	$	(35	)	$	20,002	$	(5	)	$	37,275	$	(17	)	$	33,895	$	(19	)
Government agency securities	62,135		(46		)	10,012		(8		)
Corporate debt	—		—			13,774		(7		)	10,522		(18		)	10,886		(8		)
Total	$	97,086	$	(81	)	$	43,788	$	(20	)	$	47,797	$	(35	)	$	44,781	$	(27	)

At ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, there were no short-term investments that had been in a continuous loss position for more than 12 months.

The ~~contractual~~ maturities of securities classified as available-for-sale at ~~June 30, 2017~~March 31, 2018 were ~~as follows:~~

June 30, 2017

Amortized

Estimated

cost

fair value

(in thousands)

Due in one year or less

$
72,278

$
72,220

Due after one year through two years

24,889

24,866

Total

$
97,167

$
97,086

all due in one year or less. Actual maturities may differ from contractual ~~maturities. Veeco may sell these securities prior to maturity based on the needs of the business. In addition,~~maturities because borrowers may have the right to call or prepay obligations ~~prior to scheduled maturities.~~

with or without call or prepayment penalties. There were ~~minimal realized gains for the three and six months ended June 30, 2017 and~~ no realized gains for the three ~~and six~~ months ended ~~June 30, 2016. The cost of securities liquidated is based on specific identification.~~March 31, 2018 and 2017.

Accounts ~~receivable~~Receivable

Accounts receivable is presented net of an allowance for doubtful accounts of $0.3 million at both ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016.~~2017.

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventories at ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 consist of the following:

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

	June 30,		December 31,		March 31,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Materials	$	58,372	$	46,457	$	70,621	$	59,919
Work-in-process	46,498		25,250		35,211		37,222
Finished goods	15,065		5,356		25,132		23,125
Total	$	119,935	$	77,063	$	130,964	$	120,266

Prepaid ~~expenses~~Expenses and ~~other current assets~~Other Current Assets

Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, and prepaid licenses. Veeco had deposits with its suppliers of ~~$7.9~~$11.5 million and ~~$7.8~~$7.6 million at ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively. Also included within prepaid expenses and other current assets at June 30, 2017 were assets held for sale with a carrying value of $2.3 million related to one of the Company’s properties in St. Paul, Minnesota. The Company determined that the carrying value of this property exceeded the fair value, less cost to sell, and recorded an impairment charge of approximately $0.7 million for the three and six months ended June 30, 2017.

Property, ~~plant,~~Plant, and ~~equipment~~Equipment

Property, plant, and equipment at ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 consist of the following:

	June 30,		December 31,
	2017		2016		March 31, 2018		December 31, 2017
	(in thousands)				(in thousands)
Land	$	5,669	$	5,669	$	5,669	$	5,669
Building and improvements	49,832		50,814		59,972		54,449
Machinery and equipment(1)	122,131		99,370
Machinery and equipment(1)					118,360		126,829
Leasehold improvements	9,486		3,652		9,523		10,073
Gross property, plant and equipment	187,118		159,505
Gross property, plant, and equipment					193,524		197,020
Less: accumulated depreciation and amortization	104,572		98,859		110,424		111,962
Net property, plant, and equipment	$	82,546	$	60,646	$	83,100	$	85,058

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

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, depreciation expense was ~~$3.5~~$4.2 million and ~~$6.4~~$2.9 million, ~~respectively, and $3.4 million and $6.8 million for the comparable 2016 periods.~~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 following table presents~~There were no changes to goodwill during the ~~changes in goodwill balances for the six~~three months ended ~~June 30, 2017:~~March 31, 2018.

Gross carrying

Accumulated

amount

impairment

Net amount

(in thousands)

Balance at December 31, 2016

$
238,108

$
123,200

$
114,908

Acquisition

188,252

—

188,252

Balance at June 30, 2017

$
426,360

$
123,200

$
303,160

Intangible ~~assets~~Assets

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

The components of purchased intangible assets were as follows:

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

	June 30, 2017						December 31, 2016						March 31, 2018						December 31, 2017
			Accumulated						Accumulated						Accumulated						Accumulated
	Gross		Amortization				Gross		Amortization				Gross		Amortization				Gross		Amortization
	Carrying		and		Net		Carrying		and		Net		Carrying		and		Net		Carrying		and		Net
	Amount		Impairment		Amount		Amount		Impairment		Amount		Amount		Impairment		Amount		Amount		Impairment		Amount
	(in thousands)												(in thousands)
Technology	$	307,588	$	118,863	$	188,725	$	149,198	$	113,904	$	35,294	$	307,588	$	142,209	$	165,379	$	307,588	$	133,121	$	174,467
Customer relationships	164,595		31,971		132,624		47,885		28,659		19,226		164,595		42,703		121,892		164,595		39,336		125,259
In-process R&D	43,340		—		43,340		—		—		—		43,340		—		43,340		43,340		—		43,340
Trademarks and tradenames	28,010		2,326		25,684		2,590		1,948		642		30,910		5,370		25,540		30,910		4,321		26,589
Indefinite-lived trademark	2,900		—		2,900		2,900		—		2,900
Other	3,828		1,004		2,824		2,026		1,710		316		3,686		3,526		160		3,686		3,498		188
Total	$	550,261	$	154,164	$	396,097	$	204,599	$	146,221	$	58,378	$	550,119	$	193,808	$	356,311	$	550,119	$	180,276	$	369,843

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

Other ~~assets~~Assets

Veeco has an ownership interest of less than 20% in a non-marketable investment, Kateeva, Inc. (“Kateeva”)., over which Veeco does not exert significant influence. The carrying value of the investment was $21.0 million at March 31, 2018 and December 31, 2017. Additionally, during the three months ended March 31, 2018, the Company made a separate non-marketable investment of $3.5 million. The Company does not exert significant influence over ~~Kateeva~~this investment, and its ownership interest is less than 20%. Neither equity investment has a readily observable market price, and therefore the ~~investment is carried~~Company has elected to measure these investments at ~~cost. There was no change to the $21.0 million carrying value of the investment during the six months ended June 30, 2017.~~cost, adjusted for changes in observable market prices minus impairment. The ~~investment is~~investments are included in “Other assets” on the Consolidated Balance ~~Sheet. The~~Sheets. There were no changes in observable market prices for either investment isfor the three months ended March 31, 2018. These investments are subject to a periodic impairment ~~review;~~reviews; as there are no open-market valuations, the impairment ~~analysis requires~~analyses require judgment. The ~~analysis includes~~analyses include assessments of ~~Kateeva’s~~the companies’ financial condition, the business ~~outlook~~outlooks for ~~its~~their products and ~~technology, its~~technologies, their projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by Veeco relative to other investors. Fair value of the investment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of the investment. No such events or circumstances are present.

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

Note 5 - Liabilities

Accrued ~~expenses~~Expenses and ~~other current liabilities~~Other Current Liabilities

The components of accrued expenses and other current liabilities at ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 consist of:

	June 30,		December 31,		March 31,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Payroll and related benefits	$	23,016	$	18,780	$	30,890	$	32,996
Warranty	6,741		4,217		6,455		6,532
Interest					2,148		4,430
Professional fees	2,943		1,827		3,654		3,942
Installation	1,386		1,382
Merger consideration payable					2,662		2,662
Sales, use, and other taxes	1,806		1,282		1,493		2,144
Restructuring liability	1,373		1,796		1,390		1,520
Interest	4,244		—
Other	2,796		3,917		5,605		3,842
Total	$	44,305	$	33,201	$	54,297	$	58,068

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

Warranty

Warranties are typically valid for one year from the date of system final acceptance, and Veeco estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and are affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. Changes in product warranty reserves for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 include:

	(in thousands)			(in thousands)
Balance - December 31, 2016	$	4,217
Balance - December 31, 2017				$	6,532
Warranties issued	2,809			1,647
Addition from Ultratech acquisition	1,889
Consumption of reserves	(2,673		)	(1,908		)
Changes in estimate	499			184
Balance - June 30, 2017	$	6,741
Balance - March 31, 2018				$	6,455

Restructuring ~~accruals~~Accruals

During the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. During ~~the second and third quarters of 2016,~~2017, the Company ~~undertook~~substantially completed restructuring activities as part of its initiative to streamline operations, enhance ~~efficiency,~~efficiencies, and reduce ~~costs. As a result of these actions, the Company notified approximately 50 employees of their termination from the Company.~~costs, as well as reducing future investments in certain technology development. In addition, during ~~the third quarter of 2016,~~2017, the Company ~~decided~~began the Ultratech acquisition integration process to ~~significantly reduce future investments~~enhance efficiencies, resulting in its ALD technology development, which impacted approximately 25 additional employees. Over the next few quarters, the Company expects to incur additional restructuring costs of $1 million to $3 million as it finalizes all of these activities.employee terminations and other facility costs.

Personnel

Severance and

Facility

Related Costs

Closing Costs

Total

(in thousands)

Balance - December 31, 2016

$
1,796

$
—

$
1,796

Provision

1,405

2,349

3,754

Payments

(2,079
)
(2,098
)
(4,177
)
Balance - June 30, 2017

$
1,122

$
251

$
1,373

	Personnel
	Severance and			Facility
	Related Costs			Related Costs			Total
	(in thousands)
Balance - December 31, 2017	$	1,520		$	—		$	1,520
Provision	655			1,868			2,523
Payments	(785		)	(1,868		)	(2,653		)
Balance - March 31, 2018	$	1,390		$	—		$	1,390

Included within restructuring expense in the Consolidated Statements of Operations for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 is approximately ~~$0.8~~$0.2 million of non-cash charges related to accelerated share-based compensation for employee terminations.

Customer ~~deposits~~Deposits and Deferred Revenue

Customer deposits totaled ~~$25.0~~$45.7 million and ~~$22.2~~$41.5 million at ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, 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:

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

~~Mortgage Payable~~

	(in thousands)
Balance - December 31, 2017	$	70,536
Deferral of revenue	5,360
Recognition of unearned revenue	(27,100		)
Balance - March 31, 2018	$	48,796

~~The~~As of March 31, 2018, the Company has ~~a mortgage note payable associated~~approximately $133.2 million of remaining performance obligations on contracts with ~~its property in St. Paul, Minnesota,~~an original estimated duration of one year or more, of which during the second quarter of 2017 was designated an asset held for sale. The carrying value of the property exceeds the carrying value of the mortgage note, which was $1.0 million and $1.2 million at June 30, 2017 and December 31, 2016, respectively. The annual interest rate on the note is 7.91%, and the final payment is due on January 1, 2020. The Company determined the mortgage is a Level 3 liability in the fair-value hierarchy and, using a discounted cash flow model, estimated its fair value as $1.0 million and $1.2 million at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, the remaining principle balance on the mortgage note is included in “Current portion of long-term debt” on the Consolidated Balance Sheet as the associated assetapproximately 76% is expected to be ~~sold~~recognized within one year, with the ~~next twelve months.~~remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

Convertible Senior Notes

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

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

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

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

~~following circumstances:~~

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

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

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

~~(iv)~~ ~~Upon the occurrence of specified corporate events.~~

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

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

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

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

	June 30,			March 31,			December 31,
	2017			2018			2017
	(in thousands)			(in thousands)
Principal amount	$	345,000		$	345,000		$	345,000
Unamortized debt discount	(68,072		)	(60,424		)	(63,022		)
Unamortized transaction costs	(6,857		)	(6,087		)	(6,348		)
Net carrying value	$	270,071		$	278,489		$	275,630

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

Three months
ended June 30,

Six months ended
June 30,

2017

2017

(in thousands)

Cash Interest Expense

Coupon interest expense

$
2,329

$
4,244

Non-Cash Interest Expense

Amortization of debt discount

2,455

4,440

Amortization of transaction costs

247

447

Total Interest Expense

$
5,031

$
9,131

	Three months		Three months
	ended March 31,		ended March 31,
	2018		2017
	(in thousands)
Cash Interest Expense
Coupon interest expense	$	2,329	$	1,915
Non-Cash Interest Expense
Amortization of debt discount	2,598		1,985
Amortization of transaction costs	261		200
Total Interest Expense	$	5,188	$	4,100

The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as ~~$354.0~~$314.1 million at ~~June 30, 2017.~~March 31, 2018.

Other Liabilities

The Company maintains an executive non-qualified deferred compensation plan that was assumed from Ultratech that allows qualifying executives to defer cash compensation. At both March 31, 2018 and December 31, 2017, plan assets approximated $3.4 million representing the cash surrender value of life insurance policies and is included within “Other assets” in the Consolidated Balance Sheets, while plan liabilities approximated $4.5 million and $4.7 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities ~~at June 30, 2017~~also included ~~deferred compensation of $4.4 million,~~

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

asset retirement obligations at March 31, 2018 and December 31, 2017 of $3.3 million, medical and dental benefits of ~~$2.5~~$2.1 million and $2.2 million, respectively, and acquisition related accruals of ~~$1.0 million. At December 31, 2016, other liabilities primarily consisted of a non-current income tax payable of $4.9 million.~~$0.2 million, and $0.4 million, respectively.

Note 6 - Commitments and Contingencies

Minimum ~~lease commitments~~Lease Commitments

At ~~June 30, 2017, Veeco’s~~March 31, 2018, the Company’s total future minimum lease payments under non-cancelable operating leases ~~(exclusive of renewal options) are payable as follows:~~have not changed significantly from the disclosure in the 2017 Form 10-K.

Operating
Leases

(in thousands)

Payments due by period:

2017

$
3,528

2018

5,433

2019

4,994

2020

4,756

2021

1,799

Thereafter

4,493

Total

$
25,003

Purchase ~~commitments~~Commitments

Veeco has purchase commitments of ~~$144.5~~$160.4 million at ~~June 30, 2017,~~March 31, 2018, substantially all of which become due within one year.

Bank ~~guarantees~~Guarantees

Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At ~~June 30, 2017,~~March 31, 2018, outstanding bank guarantees and letters of credit totaled ~~$4.1~~$7.2 million, and unused bank guarantees and letters of credit of ~~$67.2~~$66.3 million were available to be drawn upon.

Legal ~~proceedings~~Proceedings

On ~~March 17,~~September 21, 2017, Blueblade Capital Opportunities LLC et al., on behalf of purported beneficial owners of 440,100 shares of Ultratech common stock, filed an action against Ultratech ~~shareholder~~in Delaware Court of Chancery requesting an appraisal of the value of their Ultratech stock pursuant to 8 Del. C. §262. The Company believes that the merger price, which was the product of arms-length negotiations, was fair and reasonable, and intends to contest the appraisal claim. Discovery in the matter has commenced and a trial on the action is scheduled to begin in December 2018.

~~Case No. 4:17-cv-01468-PJH, on behalf~~alleging infringement of ~~itself and all other Ultratech shareholders against Ultratech, its directors at the time the acquisition was announced, Veeco, and Merger Sub.~~patents relating to wafer carrier technology used in MOCVD equipment. The complaint alleges ~~among other things,~~ that ~~in connection with~~SGL infringes Veeco’s ~~proposed acquisition of Ultratech,~~patents by making and selling certain wafer carriers to Veeco’s competitor, Advanced Micro-Fabrication Equipment, Inc. (“AMEC”). On November 2, 2017, the ~~defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares, agreed to unreasonable deal-protection measures, and potentially engaged in supposed self-dealing.~~

~~On March 22, 2017, two other Ultratech shareholders filed a purported class action complaint in the~~U.S. District Court ~~captioned~~ ~~De Letter et al. v. Ultratech, Inc., et al.~~~~, Case No. 3:17-cv-01542-WHA, on behalf of themselves and all other Ultratech shareholders against Ultratech and its directors at~~granted the ~~time~~Company’s motion for a preliminary injunction prohibiting SGL from shipping wafer carriers using the ~~acquisition was announced. The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech,~~Company’s patented technology without the ~~defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares and potentially engaged in supposed self-dealing.~~Company’s express authorization.

On ~~May 28,~~July 13, 2017, AMEC filed a patent infringement complaint against Veeco Instruments Shanghai Co., Ltd. (“Veeco Shanghai”) with the Fujian High Court in China, alleging that the Company’s MOCVD products infringed a Chinese utility model patent relating to the synchronous movement engagement mechanism in a chemical vapor deposition reactor and seeking injunctive relief and monetary damages against Veeco Shanghai. On December 7, 2017, without providing notice to Veeco and without hearing Veeco’s position on alleged infringement, the Fujian High Court issued a preliminary injunction, applicable in China, that requires Veeco Shanghai to stop importing, making, selling, and offering to sell Veeco EPIK 700 model MOCVD systems and to stop importing, selling, and offering to sell wafer carriers used as supplies for the EPIK 700 MOCVD system.

On February 8, 2018, Veeco, AMEC, and SGL announced that they had mutually agreed to settle the pending litigation among the parties and to amicably resolve all pending disputes, including AMEC’s lawsuit against Veeco before the Fujian High Court in China and Veeco’s lawsuit against SGL before the U.S. District Court ~~dismissed both cases.~~for the Eastern District of New York. As part of the settlement, all legal actions worldwide (in court, patent offices, and otherwise), between Veeco, AMEC, and

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

~~Veeco~~SGL, and their affiliates, were dismissed and/or otherwise withdrawn. As a result, all business processes, including sales, service, and importation, were resumed promptly following the settlement.

The Company is involved in various other legal proceedings arising in the normal course of business. ~~Veeco~~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.

Receivable Purchase Agreement

In December 2017, the Company entered into a Receivable Purchase Agreement with a financial institution to sell certain of its trade receivables from customers without recourse, up to $23.0 million at any point in time for a term of one year. There were no sales of accounts receivable under the agreement for the three months ended March 31, 2018, and as of March 31, 2018, the Company maintained $23.0 million available under the agreement for additional sales of trade receivables.

Note 7 — 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 entered into monthly forward derivative contracts with the intent of mitigating a portion of this risk. The Company only used 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 were recorded as “Other, net” in the Company’s Consolidated Statements of Operations. The Company executed derivative transactions with highly rated financial institutions to mitigate counterparty risk.

A summary of the foreign exchange derivatives outstanding on March 31, 2018 and December 31, 2017 is as follows:

March 31, 2018

December 31, 2017

Fair

Maturity

Notional

Fair

Maturity

Notional

Value

Dates

Amounts

Value

Dates

Amounts

(in thousands)

Foreign currency exchange forwards

—

April 2018

5,062

—

January 2018

622

The following table shows the gains and (losses) from currency exchange derivatives during the three months ended March 31, 2018 and 2017, which are included in “Other, net” in the Consolidated Statements of Operations, as well as the weighted average notional amount of derivatives outstanding for each period:

	Three months ended March 31, 2018				Three months ended March 31, 2017
			Weighted average				Weighted average
	Gains (losses)		notional amount		Gains (losses)		notional amount
	(in thousands)
Foreign currency exchange forwards	$	17	$	930	$	—	$	—

Note 8 - Equity

Accumulated Other Comprehensive Income (“AOCI”)

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

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Unrealized

Foreign Currency

Gains (Losses) on
Available for Sale

Translation

Securities

Total

(in thousands)

Balance - December 31, 2016

$
1,797

$
(20
)
$
1,777

Other comprehensive income (loss)

24

(61
)
(37
)
Balance - June 30, 2017

$
1,821

$
(81
)
$
1,740

			Unrealized
			Gains (Losses) on
	Foreign Currency		Available for Sale
	Translation		Securities			Total
	(in thousands)
Balance - December 31, 2017	$	1,839	$	(27	)	$	1,812
Other comprehensive income (loss)	32		(8		)	24
Balance - March 31, 2018	$	1,871	$	(35	)	$	1,836

There were minimal reclassifications from AOCI into net income for the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018.

For the six months ended June 30, 2017, Additional Paid-in Capital increased approximately $233.8 million related to 7.4 million shares issued for the Ultratech merger consideration, $49.3 million related to the issuance of the Convertible Senior Notes including deferred tax impact, and $6.7 million related to on-going share-based compensation activities.

Note 89 - Share-based compensation

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

Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three ~~and six~~ months ended ~~June 30, 2017~~March 31, 2018 and ~~2016:~~2017:

Three months ended June 30,

Six months ended June 30,

2017

2016

2017

2016

(in thousands)

Cost of sales

$
500

$
486

$
1,157

$
1,032

Research and development

708

940

1,137

2,039

Selling, general, and administrative

3,368

2,576

6,468

5,319

Restructuring

841

—

841

—

Acquisition costs

4,203

—

4,203

—

Total

$
9,620

$
4,002

$
13,806

$
8,390

	Three months ended March 31,
	2018		2017
	(in thousands)
Cost of sales	$	554	$	657
Research and development	954		429
Selling, general, and administrative	2,857		3,100
Restructuring	172		—
Total	$	4,537	$	4,186

For the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, equity activity related to stock options was as follows:

Number of

Weighted
Average

Shares

Exercise Price

(in thousands)

Balance - December 31, 2016

1,576

$
35.18

Granted

—

—

Exercised

(18
)
30.03

Expired or forfeited

(120
)
37.14

Balance - June 30, 2017

1,438

35.08

			Weighted
	Number of		Average
	Shares		Exercise Price
	(in thousands)
Balance - December 31, 2017	1,394		$	34.97
Expired or forfeited	(53	)	35.45
Balance - March 31, 2018	1,341		$	34.95

For the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, equity activity related to non-vested restricted shares and performance shares was as follows:

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

			Weighted Average				Weighted Average
	Number of		Grant Date		Number of		Grant Date
	Shares		Fair Value		Shares		Fair Value
	(in thousands)				(in thousands)
Balance - December 31, 2016	1,949		$	23.85
Balance - December 31, 2017					1,880		$	25.41
Granted	649		29.67		759		19.69
Assumed from Ultratech	338		31.75
Performance award adjustments					(5	)	32.67
Vested	(549	)	25.98		(44	)	28.46
Forfeited	(130	)	25.95		(55	)	25.87
Balance - June 30, 2017	2,257		25.94

Balance - March 31, 2018					2,535		$	23.62

Note 910 - 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 ~~June 30, 2017,~~March 31, 2018, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that ~~that~~ it is more likely than not that these future benefits will be ~~realized before they expire.~~realized.

At the end of each interim reporting period, the effective tax rate is aligned towith expectations for the full year. This estimate is used to determine the income tax provision on a year-to-date basis and may change in subsequent interim periods. ~~The~~If necessary, the year-to-date tax benefit for interim period losses is limited to the amount that could be recognizable at the end of the fiscal year. ~~Income (loss)~~

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The 2017 Tax Act makes broad and complex changes to the U.S. tax code that affects the Company’s 2018 financial results, including, but not limited to, a reduction in the U.S. federal corporate income tax rate from 35 percent to 21 percent; current U.S. taxation of global intangible low-taxed income (“GILTI”) of non-U.S. operations; additional limitations on the deductibility of executive compensation; and limitations on the deductibility of interest.

The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with SAB 118, which provides SEC staff guidance for the application of ASC 740 in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s 2017 financial results reflect the income tax effects of the 2017 Tax Act, including provisional amounts for specific income tax effects of the 2017 Tax Act for which the accounting under ASC 740 is incomplete but for which a reasonable estimate could be determined. The Company is still in the process of evaluating the impacts of the 2017 Tax Act and considers the amounts previously recorded to be provisional, except for the impact of the change in tax rate on the Company’s deferred tax assets and liabilities as of December 31, 2017, for which the accounting is complete. The Company has not adjusted these estimates during the three months ended March 31, 2018 and will complete its analysis and finalize the amounts within the measurement period as provided by SAB 118.

Loss before income taxes and ~~income tax expense (benefit) for the three and six months ended June 30, 2017 and 2016 were as follows:~~

Three months ended June 30,

Six months ended June 30,

2017

2016

2017

2016

(in thousands)

Loss before income taxes

$
(31,285
)
$
(31,068
)
$
(40,472
)
$
(46,073
)
Income tax expense (benefit)

$
(12,897
)
$
1,014

$
(23,179
)
$
1,542

~~The net~~ income tax benefit for the three months ended ~~June 30,~~March 31, 2018 and 2017 were as follows:

	Three months ended March 31,
	2018			2017
Loss before income taxes	$	(16,057	)	$	(8,887	)
Income tax benefit	$	(230	)	$	(10,527	)

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

The Company’s tax benefit for the three months ended March 31, 2018 was ~~comprised of~~$0.2 million compared to $10.5 million for the comparable prior period. The 2018 tax benefit included a ~~net benefit of $15.4~~$0.1 million ~~related~~tax expense relating to the Company’s ~~U.S.~~domestic operations and a ~~net~~$0.3 million tax ~~expense of $2.5 million related~~benefit relating to the Company’s non-U.S. operations, compared to 2017 when its benefit included $4.3 million related to domestic operations and $6.2 million related to non-U.S. operations. The ~~net~~current period domestic tax expense is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The current period non-U.S. tax benefit is primarily attributable to the amortization of intangible assets, offset by tax expense on non-U.S operation profits incurred during the period, as well as foreign withholding taxes on unremitted earnings as of March 31, 2018. The domestic tax benefit for the comparable period is primarily attributable to an income tax benefit for ~~the six months ended June 30, 2017 was comprised of a net benefit of $19.5 million and $3.7 million related to the Company’s U.S. and non-U.S. operations, respectively.~~

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

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

For the three and six months ended June 30, 2016, the Company did not provide a current tax benefit on U.S. pre-tax losses since the Company could not conclude that it is more likely than not that the benefits would be realized. The tax expense is primarily related to indefinite-lived intangible assets that are amortized for tax purposes but not for financial reporting purposes, as well as taxes attributed to the profitable non-U.S. operations. The deferred tax liability created by the tax deductible expense cannot be used to offset existing deferred tax assets.

Note 1011 - Segment Reporting and Geographic Information

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

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

~~Lighting, Display & Power Electronics~~

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

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

Advanced Packaging, MEMS & RF ~~(Mobility)~~Filters

Advanced Packaging includes a portfolio of wafer-level assembly technologies that enable the miniaturization and performance improvement of electronic products, such as smartphones, smartwatches, tablets, and laptops. Micro-Electro Mechanical Systems (“MEMS”) includes tiny mechanical devices such as sensors, switches, mirrors, and actuators embedded in semiconductor chips used in vehicles, smartphones, tablets, and games. RF Filters refers to RF filters used in smartphones, tablets, and mobile devices.

LED Lighting, Display & Compound Semiconductor

LED Lighting refers to Light Emitting Diode (“LED”) and semiconductor illumination sources used in various applications including, but not limited to, displays such as backlights, general lighting, automotive running lights, and headlamps. Display refers to LEDs used for displays and Organic Light Emitting Diode (“OLED”) displays found in outdoor display/signage applications, TVs, smartphones, wearable devices, and tablets. Compound Semiconductor includes Photonics, Power Electronics, and Radio Frequency (“RF”) ~~includes~~Devices. Photonics refers to laser diodes, Vertical Cavity Surface Emitting Lasers (“VCSEL”) in 3D sensing and communications, and various other optical devices. Power Electronics refers to semiconductor devices ~~that make use~~such as rectifiers, inverters, and converters for the control and conversion of ~~radio waves (RF fields) for wireless broadcasting and/or communications.~~

~~Scientific & Industrial~~

~~Scientific~~electric power. RF devices refers to ~~advanced materials research at university research institutions, industry research institutions, industry consortiums,~~radio frequency emitting and ~~government research agencies. Industrial refers to large-scale product manufacturing~~receiving devices that enable wireless communications. Such devices include power amplifiers, switches, and transceivers for applications ~~including high powered lasers, data storage,~~such as mobile (including handsets and ~~optical coatings: thin layers~~base stations), defense, automobile, and the Internet of ~~material deposited on a lens or mirror that alters how light reflects and transmits.~~Things.

Front-End Semiconductor

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

Scientific & Industrial

Scientific refers to advanced materials research at university research institutions, industry research institutions, industry consortiums, and government research agencies. Industrial refers to large-scale product manufacturing applications

Veeco Instruments Inc. and Subsidiaries

Notes to the ~~photomask market, which is an opaque plate~~Consolidated Financial Statements - continued

(unaudited)

including data storage and optical coatings: thin layers of material deposited on a lens or mirror that ~~allows~~alters how light ~~to shine through in a defined pattern for use in lithography.~~reflects and transmits.

Sales by end-market and geographic region for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ were as follows:

	Three months ended June 30,				Six months ended June 30,				Three months ended March 31,
	2017		2016		2017		2016		2018		2017
	(in thousands)								(in thousands)
Sales by end-market
Lighting, Display & Power Electronics	$	56,199	$	24,762	$	110,393	$	47,705
Advanced Packaging, MEMS & RF	21,426		17,045		32,983		40,308
Advanced Packaging, MEMS & RF Filters									$	27,153	$	10,912
LED Lighting, Display & Compound Semiconductor									89,916		55,148
Front-End Semiconductor									9,457		1,158
Scientific & Industrial	27,033		31,779		54,209		62,582		32,048		27,281
Front-End Semiconductor	10,408		1,762		11,867		2,764
Total	$	115,066	$	75,348	$	209,452	$	153,359	$	158,574	$	94,499
Sales by geographic region
United States	$	21,245	$	20,734	$	38,533	$	47,446	$	23,754	$	17,046
China	26,287		24,582		66,613		33,383		75,395		40,521
EMEA(1)	18,002		14,834		40,069		42,296
EMEA(1)									15,745		22,440
Rest of World	49,532		15,198		64,237		30,234		43,680		14,492
Total	$	115,066	$	75,348	$	209,452	$	153,359	$	158,574	$	94,499

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

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

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

Cautionary Statement Regarding Forward Looking Statements

Our discussion below constitutes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “targets,” “plans,” “intends,” “will,” and similar expressions related to the future are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made.

Executive Summary

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

~~Together with Ultratech, we design, manufacture, and market~~supports semiconductor/compound semiconductor process equipment aligned to meet the demands of key global trends such as enhanced mobility, increased connectivity, and energy ~~conservation, mobility,~~efficiency. Our primary technologies include metal organic chemical vapor deposition (“MOCVD”), advanced packaging lithography, wet etch and ~~connectivity. Our MOCVD, lithography,~~clean, laser annealing, ion beam deposition and ~~single~~etch, molecular beam epitaxy, 3D wafer ~~etch~~inspection, and ~~clean~~atomic layer deposition. These technologies play an integral role in producing LEDs for solid-state lighting and displays and in the fabrication and packaging of advanced semiconductor devices. With equipment designed to ~~maximize~~optimize performance, yield, and cost of ownership, we hold technology leadership positions in ~~all~~many of these served markets.

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

Sales in the Lighting, Display & Power Electronics market were driven by the continued roll-out of MOCVD systems for the LED industry. The largest applications for LEDs are solid state lighting, followed by TV displays. Over the past few quarters demand has increased for larger LCD TV displays, which require relatively more LEDs to backlight than smaller display sizes. We have also seen an increase in LED demand for fine-pitch digital signage. These trends have driven an increase in demand for our MOCVD equipment and build-up in our MOCVD backlog. As a result, we believe that our MOCVD shipments have the potential to be higher in the second half of the year relative to the first half of 2017. Our broad portfolio of MOCVD technologies has been developed to support the most significant industry trends, including developing mid-power LEDs, utilizing larger wafer sizes, and optimizing cost-of-ownership. Our TurboDisc® ~~EPIK~~™ ~~700 GaN MOCVD system continues to win new business for blue LEDs. Our TurboDisc K475i~~™ ~~AsP MOCVD system targets red-orange-yellow LEDs, laser diodes, and high-efficiency triple junction photovoltaic solar cells and continues to gain market momentum.~~

~~Increased sales into~~are: Advanced Packaging, MEMS & RF ~~were driven primarily by the inclusion of Ultratech sales to Advanced Packaging customers.~~ Filters; LED Lighting, Display & Compound Semiconductor; Front-End Semiconductor; and Scientific & Industrial.

Sales in the Advanced Packaging, MEMS & RF ~~markets continue~~Filters market were driven by shipments of lithography systems to ~~be influenced by the mobility trend and increasing functionality~~Outsourced Semiconductor Assembly & Test companies (“OSATs”) in ~~mobile devices. Our versatile PSP product architecture, combined with Ultratech’s Advanced Packaging lithography tools, positions us well for a multitude~~support of advanced packaging processes ~~including WLFO (wafer level fan out)~~such as Fan-Out Wafer Level Packaging (“FOWLP”), Copper Pillar, and ~~3D TSV (thru silicon via)~~Chip on Wafer on Substrate (“CoWoS”). Additionally, we continue to ship Wet Etch and Clean systems to foundry customers in support of advanced packaging and MEMS applications. We anticipate OSATs will continue to add capacity in the future driven by broader technology trends such as artificial intelligence (“AI”), mobile connectivity, autonomous vehicles, big data processing, and 5G infrastructure deployment.

Sales ~~from~~in the LED Lighting, Display & Compound Semiconductor market were driven by the shipment of MOCVD systems into China for general lighting. We also sell MOCVD systems for other applications, including Photonics and RF device applications. We expect growth in this market to be driven by fine-pitch digital signage, automotive lighting, 3D sensing Vertical Cavity Surface Emitting Lasers (“VCSELs”) and laser diodes, 5G RF devices, and power electronics, and have focused our R&D efforts accordingly, where our technology differentiation can provide a significant advantage for our customers. Our broad portfolio of MOCVD and Wet Etch and Clean technologies has been developed to support these applications. We expect margins in the second half of 2018 to be higher than the first half as a result of a shift in our product mix in the LED market.

We continue to build momentum in the Front-End Semiconductor market with sales and orders for our 3D inspection systems and Ion Beam Etch systems for Spin Torque Transfer Magnetic Random Access Memory (“STT-MRAM”). We have received follow-on orders for our 3D inspection system in a 3D NAND application and are in various stages of evaluation with several other NAND, DRAM, and Logic customers. We have partnered with a large semiconductor capital equipment manufacturer to bring our STT-MRAM solution to market to initially enable applications where non-volatility and low power consumption are required, such as Internet of Things (“IoT”).

Sales in the Scientific & Industrial ~~markets~~market were supported by shipments of ~~AD&E~~Ion Beam deposition systems for optical coatings and data storage ~~and optical~~ applications, ~~and by~~as well as MBE shipments ~~of MBE systems~~ to universities and government laboratories. While equipment demand from each individual market may fluctuate quarter to quarter, the diverse customer base has historically provided a relatively stable revenue stream for the ~~company on a combined basis.~~Company.

Results of Operations

For the three months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for ~~2017~~2018 and ~~2016~~2017 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, including the Ultratech business acquired.~~segment.

	Three months ended June 30,								Change				Three months ended March 31,								Change
	2017				2016				Period to Period				2018				2017				Period to Period
	(dollars in thousands)												(dollars in thousands)
Net sales	$	115,066		100%	$	75,348		100%	$	39,718		53%	$	158,574		100%	$	94,499		100%	$	64,075		68%
Cost of sales	76,346			66%	43,909			58%	32,437			74%	101,894			64%	59,999			63%	41,895			70%
Gross profit	38,720			34%	31,439			42%	7,281			23%	56,680			36%	34,500			37%	22,180			64%
Operating expenses, net:
Research and development	18,619			16%	21,543			29%	(2,924		)	(14)%	24,320			15%	14,989			16%	9,331			62%
Selling, general, and administrative	22,698			20%	19,995			27%	2,703			14%	26,383			17%	19,105			20%	7,278			38%
Amortization	6,354			6%	5,273			7%	1,081			21%
Amortization of intangible assets													13,532			9%	2,867			3%	10,665			372%
Restructuring	3,257			3%	2,095			3%	1,162			55%	2,695			2%	1,338			1%	1,357			101%
Acquisition costs	14,133			12%	—			0%	14,133			100%	1,342			1%	1,361			1%	(19		)	(1)%
Asset impairment	675			1%	13,627			18%	(12,952		)	(95)%	—			—	463			—	(463		)	*
Other, net	(10		)	(0)%	159			0%	(169		)	(106)%	(157		)	—	(78		)	—	(79		)	*
Total operating expenses, net	65,726			57%	62,692			83%	3,034			5%	68,115			43%	40,045			42%	28,070			70%
Operating income (loss)	(27,006		)	(23)%	(31,253		)	(41)%	4,247			(14)%	(11,435		)	(7)%	(5,545		)	(6)%	(5,890		)	*
Interest income (expense), net	(4,279		)	(4)%	185			0%	(4,464		)	*	(4,622		)	(3)%	(3,342		)	(4)%	(1,280		)	*
Income (loss) before income taxes	(31,285		)	(27)%	(31,068		)	(41)%	(217		)	1%	(16,057		)	(10)%	(8,887		)	(9)%	(7,170		)	*
Income tax expense (benefit)	(12,897		)	(11)%	1,014			1%	(13,911		)	*	(230		)	—	(10,527		)	(11)%	10,297			*
Net income (loss)	$	(18,388	)	(16)%	$	(32,082	)	(43)%	$	13,694		(43)%	$	(15,827	)	(10)%	$	1,640		2%	$	(17,467	)	*

* Not meaningful

Net Sales

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

	Three months ended June 30,						Change				Three months ended March 31,						Change
	2017			2016			Period to Period				2018			2017			Period to Period
	(dollars in thousands)										(dollars in thousands)
Sales by market
Lighting, Display & Power Electronics	$	56,199	49%	$	24,762	33%	$	31,437		127%
Advanced Packaging, MEMS & RF	21,426		19%	17,045		23%	4,381			26%
Advanced Packaging, MEMS & RF Filters											$	27,153	17%	$	10,912	12%	$	16,241		149%
LED Lighting, Display & Compound Semiconductor											89,916		57%	55,148		58%	34,768			63%
Front-End Semiconductor											9,457		6%	1,158		1%	8,299			717%
Scientific & Industrial	27,033		23%	31,779		42%	(4,746		)	(15)%	32,048		20%	27,281		29%	4,767			17%
Front-End Semiconductor	10,408		9%	1,762		2%	8,646			491%
Total	$	115,066	100%	$	75,348	100%	$	39,718		53%	$	158,574	100%	$	94,499	100%	$	64,075		68%
Sales by geographic region
United States	$	21,245	18%	$	20,734	27%	$	511		2%	$	23,754	15%	$	17,046	18%	$	6,708		39%
China	26,287		23%	24,582		33%	1,705			7%	75,395		47%	40,521		43%	34,874			86%
EMEA	18,002		16%	14,834		20%	3,168			21%	15,745		10%	22,440		24%	(6,695		)	(30)%
Rest of World	49,532		43%	15,198		20%	34,334			226%	43,680		28%	14,492		15%	29,188			201%
Total	$	115,066	100%	$	75,348	100%	$	39,718		53%	$	158,574	100%	$	94,499	100%	$	64,075		68%

* Not meaningful

Total sales increased across all market categories for the three months ended ~~June 30, 2017~~March 31, 2018 against the comparable prior year period, ~~primarily due to~~driven by increased sales ~~in Lighting, Display & Power Electronics as we continue~~ to ~~see ongoing improvements in~~ LED ~~industry conditions,~~manufacturers, as well as additional sales from the Ultratech business acquired in May 2017, ~~spread across all markets. The increase was partially offset by decreased sales~~primarily in the ~~Scientific~~Advanced Packaging, MEMS & ~~Industrial~~RF Filters and Front-End Semiconductor markets. Pricing was not a significant driver of the change in total sales. By geography, sales increased in ~~all geographic regions.~~the China, Rest of World, and United States regions, offset by a decrease in the EMEA region. The most significant ~~increase~~increases occurred in the China and Rest of World ~~region,~~regions, which was largely attributable to the increased sales in the LED Lighting, Display & ~~Power Electronics~~Compound Semiconductor market, as well as additional sales from the Ultratech business acquired. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies.

Orders increased to ~~$122.7~~$154.5 million for the three months ended ~~June 30, 2017~~March 31, 2018 from ~~$67.7~~$107.3 million for the comparable prior year period. The increase in orders was primarily attributable to an increase ~~of over 180%~~ in orders in ~~Lighting, Display & Power Electronics, as well as~~the Front-End Semiconductor and Advanced Packaging, MEMS, and RF Filters markets of $30.9 million and $17.1 million, respectively, including additional bookings from the Ultratech ~~business acquired in May 2017 largely in Advanced Packaging, MEMS, and RF.~~business.

One of the performance measures we use as a leading indicator of the business is the book-to-bill ratio. The ratio is defined as orders recorded in a given period divided by revenue recognized in the same period. A ratio greater than one indicates we are adding orders faster than we are recognizing revenue. For the three months ended ~~June 30, 2017,~~March 31, 2018, the ratio was ~~1.1,~~1.0, compared to ~~0.9~~1.1 for the comparable prior period. Our backlog at ~~June 30, 2017 was $269.5 million, which was higher than the backlog at~~ March 31, ~~2017 of $221.1 million.~~2018 was $331.1 million, compared to $334.3 million at December 31, 2017. During the three months ended ~~June 30, 2017,~~March 31, 2018, we ~~recorded~~increased backlog ~~adjustments of~~by approximately ~~$41.6~~$2.9 million relating to the adoption of ASC Topic 606, Revenue from Contracts with Customers, while adjusting for a decrease in backlog ~~acquired from Ultratech, as well as $0.8~~of approximately $2.0 million relating to orders that no longer met our bookings criteria.

Gross Profit

In the ~~second~~first quarter of ~~2017,~~2018, gross profit increased compared to the ~~second~~first quarter of ~~2016~~2017 due to ~~a sharp~~an increase in sales volume, including the acquisition of Ultratech, partially offset by decreased gross ~~margins. Gross~~ margins ~~decreased principally due to an inventory fair value step-up that was recorded~~as a result of a shift in ~~connection with the purchase accounting relating to the Ultratech acquisition, as well as~~our product ~~and region~~ mix ~~of sales~~ in the ~~period and~~LED market. We expect gross margins in the ~~temporary impact~~second half of ~~our manufacturing consolidation efforts.~~2018 to be higher than the first half.

Research and ~~development~~Development

Research and development expenses ~~decreased in~~increased for the ~~second quarter of 2017 compared to~~three months ended March 31, 2018 against the ~~second quarter of 2016~~comparable prior period, primarily as a result of our decision to significantly reduce investments in our Atomic Layer Deposition (“ALD”) technology, as well as decreases in other personnel-related expenses and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs. These decreases were partially offset by the addition of the acquired Ultratech ~~related~~ research and development ~~projects.~~related projects, as well as increased consulting fees.

Selling, ~~general,~~General, and ~~administrative~~Administrative

Selling, general, and administrative expenses increased primarily due to the addition of the acquired Ultratech related selling, general, and administrative ~~costs.~~costs, as well as increased professional and legal fees.

Amortization ~~expense~~Expense

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

~~Restructuring expense~~

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

Acquisition ~~costs~~Costs

Acquisition costs are non-recurring charges incurred in connection with the acquisition of the Ultratech business, ~~which~~as well as legal and professional fees incurred in connection with certain integration activities.

Restructuring Expense

During the three months ended March 31, 2018, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. Restructuring expense for the quarter ended March 31, 2018 included ~~$4.2 million on~~ non-cash charges of $0.2 million related to accelerated share-based compensation for employee terminations. During 2017, we substantially completed restructuring activities as part of our initiative to streamline operations, enhance efficiencies, and reduce costs, as well as reducing future investments in certain technology development. In addition, during 2017, we began the Ultratech acquisition integration process to enhance efficiencies, resulting in additional employee terminations and other facility costs.

Interest Income (Expense)

We recorded net interest expense of $4.6 million for the three months ended ~~June 30,~~March 31, 2018, compared to $3.3 million for the comparable prior period. The increase in net interest expense is primarily attributable to the Convertible Senior Notes issued in January 2017 that were outstanding for the full period in 2018, compared to a partial period in 2017. Included in interest expense for the three months ended March 31, 2018 and 2017 were non-cash charges of $2.9 million and $2.2 million, respectively, related to the Convertible Senior Notes.

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“2017 Tax Act”), which makes broad and complex changes to the U.S. tax code. Certain income tax effects of the 2017 Tax Act are reflected in our financial results in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”). SAB 118 provides SEC staff guidance regarding the application of ASC Topic 740, Income Taxes (“ASC 740”), and the disclosures required due to the enactment of the 2017 Tax Act. Refer to Note 10, “Income Taxes,” in the Notes to the Consolidated Financial Statements for further information on the financial statement impact of the 2017 Tax Act.

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

Our tax benefit for the three months ended ~~June 30, 2017~~March 31, 2018 was ~~$ 12.9~~$0.2 million compared to ~~a tax expense of $1.0~~$10.5 million for the comparable prior period. The ~~2017~~2018 tax benefit included a ~~$15.4~~$0.1 million ~~benefit~~tax expense relating to our domestic operations and a ~~$2.5~~$0.3 million ~~expense~~tax benefit relating to our non-U.S. operations, compared to ~~2016~~2017 when our ~~expense~~benefit included ~~$0.5~~$4.3 million related to domestic operations and ~~$0.5~~$6.2 million related to our non-U.S. operations. The current period domestic tax expense is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.

The current period non-U.S. tax benefit is primarily attributable to the amortization of intangible assets, offset by tax expense on non-U.S operation profits incurred during the period, as well as foreign withholding taxes on unremitted earnings as of March 31, 2018. The domestic tax benefit for the comparable period is primarily attributable to an income tax benefit for losses incurred during ~~the three months ended June 30, 2017,~~such period, as the deferred tax liability created by the issuance of the Convertible Senior Notes is treated as a source of income in fiscal 2017, offset by a deferred provision related to tax amortization on indefinite-lived intangible assets. The ~~current period non-U.S. tax expense is attributable to the profitable non-U.S. operations. The tax expense for the~~ comparable ~~period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets.~~

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

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

Six months ended June 30,

Change

2017

2016

Period to Period

(dollars in thousands)

Net sales

$
209,452

100%

$
153,359

100%

$
56,093

37%

Cost of sales

136,533

65%

89,964

59%

46,569

52%

Gross profit

72,919

35%

63,395

41%

9,524

15%

Operating expenses, net:

Research and development

33,608

16%

43,653

28%

(10,045
)
(23)%

Selling, general, and administrative

41,801

20%

39,834

26%

1,967

5%

Amortization

9,221

4%

10,524

7%

(1,303
)
(12)%

Restructuring

4,595

2%

2,195

1%

2,400

109%

Acquisition costs

15,494

7%

—

0%

15,494

100%

Asset impairment

1,138

1%

13,627

9%

(12,489
)
(92)%

Other, net

(87
)
(0)%

88

0%

(175
)
(199)%

Total operating expenses, net

105,770

50%

109,921

72%

(4,151
)
(4)%

Operating income (loss)

(32,851
)
(16)%

(46,526
)
(30)%

13,675

*

Interest income (expense), net

(7,621
)
(4)%

453

0%

(8,074
)
*

Income (loss) before income taxes

(40,472
)
(19)%

(46,073
)
(30)%

5,601

*

Income tax expense (benefit)

(23,179
)
(11)%

1,542

1%

(24,721
)
*

Income (loss) from continuing operations

$
(17,293
)
(8)%

$
(47,615
)
(31)%

$
30,322

*

* Not Meaningful

~~Net Sales~~

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

Six months ended June 30,

Change

2017

2016

Period to Period

(dollars in thousands)

Market Analysis

Lighting, Display & Power Electronics

$
110,393

52%

$
47,705

31%

$
62,688

131%

Advanced Packaging, MEMS & RF

32,983

16%

40,308

26%

(7,325
)
(18)%

Scientific & Industrial

54,209

26%

62,582

41%

(8,373
)
(13)%

Front-End Semiconductor

11,867

6%

2,764

2%

9,103

329%

Total Sales

$
209,452

100%

$
153,359

100%

$
56,093

37%

Regional Analysis

United States

$
38,533

18%

$
47,446

30%

$
(8,913
)
(19)%

China

66,613

32%

33,383

22%

33,230

100%

EMEA

40,069

19%

42,296

28%

(2,227
)
(5)%

Rest of World

64,237

31%

30,234

20%

34,003

112%

Total Sales

$
209,452

100%

$
153,359

100%

$
56,093

37%

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

Orders increased to $230.0 million for the six months ended June 30, 2017 from $129.3 million for the comparable prior year period. The increase in orders was primarily attributable to an increase of over 170% in orders in Lighting, Display & Power Electronics, as well as a 49% increase in the Advanced Packaging, MEMS, and RF market primarily related to the Ultratech business acquired.

One of the performance measures we use as a leading indicator of the business is the book-to-bill ratio. The ratio is defined as orders recorded in a given period divided by revenue recognized in the same period. A ratio greater than one indicates we are adding orders faster than we are recognizing revenue. For the six months ended June 30, 2017, the ratio was 1.1, compared to 0.8 for the comparable prior period. Our backlog at June 30, 2017 was $269.5 million, which was higher than the backlog at December 31, 2016 of $209.2 million. During the six months ended June 30, 2017, we recorded backlog adjustments of approximately $41.6 million relating to backlog acquired from Ultratech, as well as $1.6 million relating to ~~orders that no longer met our bookings criteria.~~

~~Gross Profit~~

For the six months ended June 30, 2017, gross profit increased compared to 2016 due to a sharp increase in sales volume, including the addition of the Ultratech business acquired in May 2017, partially offset by decreased gross margins. Gross margins decreased principally due to an inventory fair value step-up that was recorded in connection with the purchase accounting relating to the Ultratech acquisition.

~~Research and development~~

The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses decreased for the six months ended June 30, 2017 compared to 2016 primarily as a result of our decision to significantly reduce investments in our Atomic Layer Deposition (“ALD”) technology, as well as decreases in other personnel-related expenses and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs. These decreases were partially offset by the addition of the acquired Ultratech related research and development projects.

~~Selling, general, and administrative~~

Selling, general, and administrative expenses increased for the six months ended June 30, 2017 compared to 2016 primarily due to the addition of the acquired Ultratech related selling, general and administrative costs, partially offset by a decrease in personnel-related expenses as a result of our initiative to streamline operations, enhance efficiency, and reduce costs.

~~Amortization expense~~

The slight decrease in amortization expense is a result of the impairment of the ALD technology asset in the prior year as well as certain other intangible assets becoming fully amortized during 2016, offset by increased amortization expense related to the additional intangibles acquired as part of the Ultratech business acquisition.

~~Restructuring expense~~

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

~~Acquisition costs~~

Acquisition costs are non-recurring charges incurred in connection with the acquisition of the Ultratech business, which included $4.2 million on non-cash charges related to accelerated share-based compensation for employee terminations for the six months ended June 30, 2017.

~~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. The year-to-date tax benefit for interim period losses is limited to the amount that could be recognizable at the end of the fiscal year.

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

Liquidity and Capital Resources

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

	June 30,		December 31,		March 31,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Cash and cash equivalents	$	205,564	$	277,444	$	245,525	$	279,736
Restricted cash					841		847
Short-term investments	97,086		66,787		65,130		47,780
Total	$	302,650	$	344,231	$	311,496	$	328,363

~~A portion of our cash and cash equivalents is held by our subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar.~~ At ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, cash and cash equivalents of ~~$152.2~~$180.5 million and ~~$149.2~~$214.3 million, respectively, were held outside the United States. ~~In order to fund continued international growth, it is~~As of March 31, 2018, we had $143.3 million of accumulated undistributed earnings generated by our ~~current intention to permanently reinvest~~non-U.S. subsidiaries for which the ~~cash~~U.S. repatriation tax has been provided and ~~cash equivalent balances held in China, Taiwan, and Malaysia, and our current forecasts do~~did not require ~~repatriation~~the use of ~~these funds~~cash due to the use of foreign tax and R&D credit carryforwards. Approximately $38.1 million of undistributed earnings will be subject to foreign withholding taxes of approximately $3.2 million if distributed back to the ~~United States. At June 30, 2017, we had $134.0 million in cash held outside the United States on which we may have to pay significant~~ U.S. income taxes to repatriate or utilize net operating loss carryforwards. Additionally, local government regulations may restrict our ability to move cash balances under certain circumstances. We currently do not expect such regulations and restrictions to impact our ability to make acquisitions, pay vendors, or conduct operations. We believe that our projected cash flow from operations, 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 ~~the~~ scheduled interest payments on our Convertible Senior Notes ~~issued in January 2017.~~due 2023.

A summary of the cash flow activity ~~at June 30,~~for the three months ended March 31, 2018 and 2017 ~~and December 31, 2016~~ is as follows:

Cash Flows from Operating Activities

	Six months ended June 30,						Three months ended March 31,
	2017			2016			2018			2017
	(in thousands)						(in thousands)
Net income (loss)	$	(17,293	)	$	(47,615	)	$	(15,827	)	$	1,640
Non-cash items:
Depreciation and amortization	15,620			17,291			17,726			5,799
Non-cash interest expense	4,887			—			2,859			2,185
Deferred income taxes	(19,412		)	1,821			(269		)	(6,246		)
Share-based compensation expense	13,806			8,390			4,537			4,186
Asset impairment	1,138			13,627			—			463
Provision for bad debts	92			160
Other							—			92
Changes in operating assets and liabilities	(8,427		)	(24,805		)	(20,833		)	(1,787		)
Net cash provided by (used in) operating activities	$	(9,589	)	$	(31,131	)	$	(11,807	)	$	6,332

Net cash used in operating activities was ~~$9.6~~$11.8 million for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 and was due to ~~the~~ net loss of ~~$17.3~~$15.8 million plus adjustments for non-cash items of ~~$16.1~~$24.8 million, offset by a decrease in cash flow from operating activities due to changes in operating assets and liabilities of ~~$8.4~~$20.8 million. The changes in operating assets and liabilities were largely attributable to increases in accounts receivable and decreases in customer deposits and deferred revenue.

Cash Flows from Investing Activities

	Six months ended June 30,						Three months ended March 31,
	2017			2016			2018			2017
	(in thousands)						(in thousands)
Acquisitions of businesses, net of cash acquired	$	(399,478	)	$	—
Capital expenditures	(10,057		)	(9,179		)	$	(2,259	)	$	(4,187	)
Changes in investments, net	16,445			42,612			(20,300		)	(191,730		)
Other	—			(213		)
Net cash provided by (used in) investing activities	$	(393,090	)	$	33,220		$	(22,559	)	$	(195,917	)

The ~~net~~ cash used in investing activities during the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 was ~~primarily~~ attributable to ~~the~~ net ~~cash used~~changes in ~~the acquisition of Ultratech~~investments as well as capital expenditures. AsIn 2017, as part of our efforts to streamline operations, enhance efficiency, and reduce costs, we ~~are making~~made certain investments in our facilities to support the consolidation activities. These activities ~~and,~~were substantially completed in ~~2017, we expect to incur future capital expenditures related to these activities of approximately $5 million to $10 million.~~2017.

Cash Flows from Financing Activities

	Six months ended June 30,						Three months ended March 31,
	2017			2016			2018			2017
	(in thousands)						(in thousands)
Settlement of equity awards, net of withholding taxes	$	(4,796	)	$	(192	)
Net proceeds from employee equity programs							$	709		$	124
Purchases of common stock	—			(13,349		)	(592		)	—
Proceeds from long-term debt borrowings	335,751			—			—			335,752
Repayments of long-term debt	(180		)	(166		)	—			(89		)
Net cash provided by (used in) financing activities	$	330,775		$	(13,707	)	$	117		$	335,787

The cash provided by financing activities for the ~~six~~three months ended ~~June 30,~~March 31, 2018 was related to the net proceeds from employee equity programs, partially offset by purchases of common stock. The cash provided by financing activities for the three months ended March 31, 2017 was primarily related to the net cash proceeds received from the issuance of the Convertible Senior Notes in January 2017. The cash used in financing activities for the six months ended June 30, 2016 was primarily related to the share repurchase program, which commenced in November 2015. There were no share repurchases in 2017.

Convertible Senior Notes

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

~~Business Combination~~

As discussed above, on May 26, 2017, the Company acquired 100% of Ultratech, Inc., a leading supplier of lithography, laser-processing, and inspection systems used to manufacture semiconductor devices and LEDs. The results of Ultratech’s operations have been included in the consolidated financial statements since the date of acquisition.

Contractual Obligations and Commitments

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

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to market rate risk for changes in interest 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 ~~$97.1~~$65.1 million at ~~June 30, 2017.~~March 31, 2018. These securities are subject to interest rate risk and, based on our investment portfolio at ~~June 30, 2017,~~March 31, 2018, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of ~~$0.6~~$0.4 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.

~~We have managed our risks and exposures to~~Changes in currency exchange rates ~~through~~could affect our foreign currency denominated monetary assets and liabilities and forecasted cash flows. We entered into monthly forward derivative contracts with the ~~use~~intent of ~~derivative financial instruments (e.g., forward contracts).~~mitigating a portion of this risk. We ~~mainly use~~only used derivative financial instruments in the context of hedging and ~~generally do~~ not ~~use them~~ for speculative ~~purposes. During the second quarter of 2017, we did~~purposes and had not ~~designate~~designated our foreign exchange derivatives as ~~hedges, consistent with 2016.~~hedges. Accordingly, ~~all foreign exchange derivatives, if any, are recorded in our Consolidated Balance Sheet at fair value and~~ changes in fair value from these contracts ~~are~~were recorded inas “Other, net” in our Consolidated Statements of Operations. We executed derivative transactions with highly rated financial institutions to mitigate counterparty risk.

Our net sales to customers located outside of the United States represented approximately 85% and 82% of our total net sales for the three ~~and six~~ months ended ~~June 30, 2016, respectively~~March 31, 2018 and ~~73% and 70% for the comparable 2016 periods.~~2017, respectively. We expect that net sales to customers outside the United States will continue to represent a large percentage of our total net sales. Our net sales denominated in currencies other than the U.S. dollar represented 2%approximately 1% and 3% of total net sales infor the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, ~~respectively, and 3% and 4% for the comparable 2016 periods.~~respectively.

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

Item 4. Controls and Procedures

Management’s Report on Internal Control Over Financial Reporting

Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective as of ~~June 30, 2017.~~March 31, 2018. 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

On ~~May 26, 2017,~~January 1, 2018, we completed the acquisition of Ultratech, Inc., and are integrating the acquired business into our overall internal control over financial reporting process. Management is in the process of assessing the internal control over financial reporting and is implementing or revisingadopted ASC 606, Revenue from Contracts with Customers. We implemented additional internal controls ~~where necessary. See Note 3~~around the adoption of this new accounting standard to ~~the Condensed Consolidated~~ensure we adequately evaluated our contracts and properly

~~Financial Statements —~~ ~~Business Combinations~~~~, for further details.~~assessed the impact on our financial statements. There were no other changes in internal control ~~for the quarter ended June 30, 2017~~ that have materially affected or are reasonably likely to materially affect internal control over financial ~~reporting.~~reporting for the quarter ended March 31, 2018.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

On April 12, 2017, the Company filed a ~~purported class action~~patent infringement complaint in the U.S. District Court for the ~~Northern~~Eastern District of ~~California (the “District Court”~~New York against SGL Carbon, LLC and SGL Carbon SE (collectively, “SGL”), ~~captioned~~ ~~The Vladimir Gusinsky Rev. Trust v. Ultratech, Inc., et al.~~~~, Case No. 4:17-cv-01468-PJH, on behalf~~alleging infringement of ~~itself and all other Ultratech shareholders against Ultratech, its directors at the time the acquisition was announced, Veeco, and Merger Sub.~~patents relating to wafer carrier technology used in MOCVD equipment. The complaint alleges ~~among other things,~~ that ~~in connection with~~SGL infringes Veeco’s ~~proposed acquisition of Ultratech,~~patents by making and selling certain wafer carriers to Veeco’s competitor, Advanced Micro-Fabrication Equipment, Inc. (“AMEC”). On November 2, 2017, the ~~defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares, agreed to unreasonable deal-protection measures, and potentially engaged in supposed self-dealing.~~

On February 8, 2018, Veeco, AMEC, and SGL announced that they had mutually agreed to settle the pending litigation among the parties and to amicably resolve all pending disputes, including AMEC’s lawsuit against Veeco before the Fujian High Court in China and Veeco’s lawsuit against SGL before the U.S. District Court for the Eastern District of New York. As part of the settlement, all legal actions worldwide (in court, patent offices, and otherwise), between Veeco, AMEC, and SGL, and their affiliates, were dismissed ~~both cases.~~and/or otherwise withdrawn. As a result, all business processes, including sales, service, and importation, were resumed promptly following the settlement.

~~Veeco~~The Company is involved in various other legal proceedings arising in the normal course of business. ~~Veeco~~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.

Item 1A. Risk Factors

Information regarding risk factors appears in the Safe Harbor Statement at the beginning of this quarterly report on Form 10-Q and in Part I — Item 1A of our ~~2016~~2017 Form 10-K. There have been no material changes from the risk factors previously disclosed in our ~~2016~~2017 Form 10-K.

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

Share repurchase activity during the first quarter of 2018 is as follows:

				Total Number of	Approximate Dollar
				Shares Purchased as	Value of Shares That
				Part of Publicly	May Yet Be Purchased
	Total Number of	Average Price		Announced	Under the
Period	Shares Purchased	Paid Per Share		Plans or Programs	Plans or Programs
	(in thousands, except average price paid per share)
January 1, 2018 - January 28, 2018	—	$	—	—	$	96,982
January 29, 2018 - March 4, 2018	30	14.69		30	96,539
March 5, 2018 - April 1, 2018	—	—		—	96,539

On ~~October 28, 2015, our~~December 11, 2017, Veeco’s Board of Directors authorized a program to repurchase up to $100 million of ~~our~~the Company’s outstanding common stock to be completed through ~~October 28, 2017.~~December 11, 2019. At ~~June 30, 2017, $22.3~~March 31, 2018, $3.5 million of the $100 million had been utilized. ~~No repurchases occurred after the first quarter of 2016.~~ Repurchases may be made from time to time on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. The timing and amount of future repurchases, if any, will depend upon market conditions, SEC regulations, and other factors. The repurchases would be funded using available cash balances and cash generated from operations. The program does not obligate us to acquire any particular amount of common stock and may be modified or suspended at any time at our discretion.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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

Filed or
Exhibit

Incorporated by Reference

Furnished
Number

Exhibit Description

Form

Exhibit

Filing Date

Herewith
10.1

Amendment dated June 12, 2017 to Employment Agreement between Veeco and John R. Peeler.

*
10.2

Form of Amended and Restated Indemnification Agreement entered into between Veeco and each of its directors and executive officers, (August 2017).

*
10.3

Ultratech, Inc. 1993 Stock Option/Stock Issuance Plan (as Amended and Restated as of May 31, 2011).

S-8

4.6

5/26/2017

31.1

Certification of Chief Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.

*
31.2

Certification of Chief Financial Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.

*
32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

*
32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

*
101.INS

XBRL Instance.

**
101.XSD

XBRL Schema.

**
101.PRE

XBRL Presentation.

**
101.CAL

XBRL Calculation.

**
101.DEF

XBRL Definition.

**
101.LAB

XBRL Label.

**

					Filed or
Exhibit		Incorporated by Reference			Furnished
Number	Exhibit Description	Form	Exhibit	Filing Date	Herewith
10.1	Form of Notice of Performance Share Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective March 2018.				*
10.2	Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco 2010 Stock Incentive Plan, effective March 2018.				*
31.1	Certification of Chief Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.				*
31.2	Certification of Chief Financial Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.				*
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.				*
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.				*
101.INS	XBRL Instance.				**
101.XSD	XBRL Schema.				**
101.PRE	XBRL Presentation.				**
101.CAL	XBRL Calculation.				**
101.DEF	XBRL Definition.				**
101.LAB	XBRL Label.				**

* Filed herewith

** Filed herewith electronically

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on ~~August 3, 2017.~~May 7, 2018.

	Veeco Instruments Inc.

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

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

3836

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)

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

		Emerging growth company	o

Title of Class		Shares Outstanding
Common Stock		as of ~~July 26, 2017~~April 30, 2018
par value $0.01 per share		~~48,420,617~~48,691,999

Safe Harbor Statement	1

PART I—FINANCIAL INFORMATION	3

Item 1. Financial Statements	3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3. Quantitative and Qualitative Disclosures about Market Risk	34
	31
Item 4. Controls and Procedures	3431

PART II—OTHER INFORMATION	3632

Item 1. Legal Proceedings	36
	32
Item 1A. Risk Factors	36
	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
	32
Item 3. Defaults Upon Senior Securities	36
	33
Item 4. Mine Safety Disclosures	36
	33
Item 5. Other Information	36
	33
Item 6. Exhibits	3734

SIGNATURES	3836

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

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

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

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

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

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