UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

~~(Mark One)~~☒

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

For the quarterly period ended September 30, ~~2017~~2018

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

Commission file number 0-16244

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

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


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

Registrant’s telephone number, including area code:

(516) 677-0200

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). ~~Yes~~ x.Yes ☒ No o☐

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

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

		Emerging growth company o☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Title of Class		Shares Outstanding
Common Stock		~~as of October 25, 2017~~
par value $0.01 per share		~~48,301,909~~as of October 24, 2018 47,793,001

Table of Contents

VEECO INSTRUMENTS INC.

INDEX

~~VEECO INSTRUMENTS INC.~~

~~INDEX~~

Table of Contents

Safe Harbor Statement

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

In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the nine months ended September 30, ~~2017~~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,~~including, without limitation, those set forth under the heading “Risk Factors” Part 1, Item 1A in our 2017 Form 10-K and Part 2, Item 1A in this quarterly report, and 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;



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

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



Our sales cycle is long and unpredictable;

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

· ~~The cyclicality~~

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



Our failure to successfully manage our outsourcing activities or failure of our outsourcing partners to perform as anticipated could adversely affect our results of operations;

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



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



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



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



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



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



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



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



Our income taxes may change;



We 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;



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;



Table of ~~the industries we serve directly affects our business;~~Contents

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 harm our relationships with customers;

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

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

Our goodwill is sensitive to changes in our stock price and other factors, and we may be required to take additional impairment charges on goodwill.

· ~~We face significant competition;~~

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

· ~~Our sales cycle is long and unpredictable;~~

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

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

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

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

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

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

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

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

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

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

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

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

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

· ~~Our income taxes can change;~~

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

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

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

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

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

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

· ~~We are subject to foreign currency exchange risks;~~

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

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

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

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

· ~~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.~~

We recently discovered an attack on our computer systems that could result in the loss or misuse of confidential information of the Company or that of our customers or others, result in litigiation and potential liability, and damage our reputation.

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.

Table of Contents

PART I—I—FINANCIAL INFORMATION

Item 1. Financial Statements

Veeco Instruments Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)

(unaudited)

September 30,

December 31,

2017

2016

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$
235,268

$
277,444

Short-term investments

85,853

66,787

Accounts receivable, net

113,795

58,020

Inventories

113,681

77,063

Deferred cost of sales

17,594

6,160

Prepaid expenses and other current assets

36,396

16,034

Total current assets

602,587

501,508

Property, plant and equipment, net

84,403

60,646

Intangible assets, net

383,596

58,378

Goodwill

308,529

114,908

Deferred income taxes

2,528

2,045

Other assets

25,263

21,047

Total assets

$
1,406,906

$
758,532

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$
53,716

$
22,607

Accrued expenses and other current liabilities

65,728

33,201

Customer deposits and deferred revenue

107,636

85,022

Income taxes payable

4,171

2,311

Current portion of long-term debt

—

368

Total current liabilities

231,251

143,509

Deferred income taxes

46,268

13,199

Long-term debt

272,825

826

Other liabilities

11,033

6,403

Total liabilities

561,377

163,937

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; 48,294,284 and 40,714,790 shares issued at September 30, 2017 and December 31, 2016, respectively; 48,294,284 and 40,588,194 shares outstanding at September 30, 2017 and December 31, 2016, respectively.

483

407

Additional paid-in capital

1,050,994

763,303

Accumulated deficit

(207,760
)
(168,583
)
Accumulated other comprehensive income

1,812

1,777

Treasury stock, at cost, 126,596 shares at December 31, 2016.

—

(2,309
)
Total stockholders’ equity

845,529

594,595

Total liabilities and stockholders’ equity

$
1,406,906

$
758,532


	September 30,		December 31,
	2018		2017
Assets
Current assets:
Cash and cash equivalents	$	213,506	$	279,736
Restricted cash		828		847
Short-term investments		52,063		47,780
Accounts receivable, net		90,816		98,866
Contract assets		7,441		160
Inventories		149,832		120,266
Deferred cost of sales		2,986		15,994
Prepaid expenses and other current assets		23,400		33,437
Total current assets		540,872		597,086
Property, plant, and equipment, net		80,626		85,058
Intangible assets, net		89,398		369,843
Goodwill		307,131		307,131
Deferred income taxes		2,183		3,047
Other assets		30,356		25,310
Total assets	$	1,050,566	$	1,387,475

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	65,042	$	50,318
Accrued expenses and other current liabilities		40,430		58,068
Customer deposits and deferred revenue		64,443		112,032
Income taxes payable		1,819		3,846
Total current liabilities		171,734		224,264
Deferred income taxes		7,170		36,845
Long-term debt		284,369		275,630
Other liabilities		9,206		10,643
Total liabilities		472,479		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; 48,633,204 and 48,229,251 shares issued at September 30, 2018 and December 31, 2017, respectively; 47,793,001 and 48,144,416 shares outstanding at September 30, 2018 and December 31, 2017, respectively.		486		482
Additional paid-in capital		1,060,733		1,051,953
Accumulated deficit		(475,284)		(212,870)
Accumulated other comprehensive income		1,812		1,812
Treasury stock, at cost, 840,203 and 84,835 shares at September 30, 2018 and December 31, 2017, respectively.		(9,660)		(1,284)
Total stockholders' equity		578,087		840,093
Total liabilities and stockholders' equity	$	1,050,566	$	1,387,475

Table of Contents

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

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,				Nine months ended September 30,
	2017			2016			2017			2016			2018		2017		2018		2017
Net sales	$	131,872		$	85,482		$	341,324		$	238,842		$	126,757	$	129,308	$	443,110	$	336,025
Cost of sales	78,811			52,027			215,344			141,991				80,372		78,779		284,651		215,150
Gross profit	53,061			33,455			125,980			96,851				46,385		50,529		158,459		120,875
Operating expenses, net:
Research and development	24,061			19,892			57,669			63,545				23,544		24,061		72,793		57,669
Selling, general, and administrative	29,771			18,396			71,574			58,230				20,186		29,771		70,842		71,574
Amortization of intangible assets	12,500			5,261			21,722			15,785				4,183		12,500		28,102		21,722
Restructuring	5,010			1,798			9,605			3,993				2,057		5,010		7,669		9,605
Acquisition costs	783			—			16,277			—				249		783		2,906		16,277
Asset impairment	2			56,035			1,139			69,662				—		2		252,343		1,139
Other, net	(140		)	795			(228		)	884				39		(140)		325		(228)
Total operating expenses, net	71,987			102,177			177,758			212,099				50,258		71,987		434,980		177,758
Operating income (loss)	(18,926		)	(68,722		)	(51,778		)	(115,248		)		(3,873)		(21,458)		(276,521)		(56,883)
Interest income	357			283			1,933			879				823		357		2,266		1,932
Interest expense	(5,105		)	(23		)	(14,301		)	(166		)		(5,602)		(5,105)		(16,113)		(14,301)
Income (loss) before income taxes	(23,674		)	(68,462		)	(64,146		)	(114,535		)		(8,652)		(26,206)		(290,368)		(69,252)
Income tax expense (benefit)	(1,790		)	1,136			(24,969		)	2,677				301		(2,466)		(27,954)		(26,334)
Net income (loss)	$	(21,884	)	$	(69,598	)	$	(39,177	)	$	(117,212	)	$	(8,953)	$	(23,740)	$	(262,414)	$	(42,918)

Income (loss) per common share:
Basic	$	(0.47	)	$	(1.78	)	$	(0.91	)	$	(2.99	)	$	(0.19)	$	(0.51)	$	(5.55)	$	(1.00)
Diluted	$	(0.47	)	$	(1.78	)	$	(0.91	)	$	(2.99	)	$	(0.19)	$	(0.51)	$	(5.55)	$	(1.00)

Weighted average number of shares:
Basic	46,941			39,131			43,100			39,193				46,982		46,941		47,283		43,100
Diluted	46,941			39,131			43,100			39,193				46,982		46,941		47,283		43,100

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

~~Veeco Instruments Inc. and Subsidiaries~~

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

~~(in thousands)~~

~~(unaudited)~~

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Net income (loss)

$
(21,884
)
$
(69,598
)
$
(39,177
)
$
(117,212
)
Other comprehensive income, net of tax

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

70

(7
)
10

32

Minimum pension liability

—

866

—

866

Foreign currency translation

1

(7
)
25

20

Total other comprehensive income, net of tax

71

852

35

918

Comprehensive income (loss)

$
(21,813
)
$
(68,746
)
$
(39,142
)
$
(116,294
)

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

~~Veeco Instruments Inc. and Subsidiaries~~

~~Consolidated Statements of Cash Flows~~

~~(in thousands)~~

~~(unaudited)~~

Nine months ended September 30,

2017

2016

Cash Flows from Operating Activities

Net income (loss)

$
(39,177
)
$
(117,212
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

32,295

26,010

Non-cash interest expense

7,641

—

Deferred income taxes

(21,235
)
1,529

Share-based compensation expense

19,976

12,133

Asset impairment

1,139

69,662

Provision for bad debts

99

160

Changes in operating assets and liabilities:

Accounts receivable

(10,409
)
(1,184
)
Inventories and deferred cost of sales

9,486

(10,909
)
Prepaid expenses and other current assets

(331
)
3,661

Accounts payable and accrued expenses

3,165

(13,995
)
Customer deposits and deferred revenue

17,779

3,568

Income taxes receivable and payable, net

(16
)
—

Long-term income tax liability

(4,877
)
80

Other, net

(259
)
2,189

Net cash provided by (used in) operating activities

15,276

(24,308
)

Cash Flows from Investing Activities

Acquisitions of businesses, net of cash acquired

(399,478
)
—

Capital expenditures

(17,403
)
(10,717
)
Proceeds from the sale of investments

307,757

131,297

Payments for purchases of investments

(279,945
)
(78,376
)
Proceeds from held for sale assets

2,284

693

Other

—

(230
)
Net cash provided by (used in) investing activities

(386,785
)
42,667

Cash Flows from Financing Activities

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

2,546

1,192

Restricted stock tax withholdings

(7,797
)
(1,184
)
Purchases of common stock

—

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

335,752

—

Principal payments on long-term debt

(1,193
)
(252
)
Net cash provided by (used in) financing activities

329,308

(13,593
)

Effect of exchange rate changes on cash and cash equivalents

25

20

Net increase (decrease) in cash and cash equivalents

(42,176
)
4,786

Cash and cash equivalents - beginning of period

277,444

269,232

$
235,268

$
274,018

Supplemental Disclosure of Cash Flow Information

Interest paid

$
4,667

$
179

Income taxes paid

1,767

1,456

Non-cash operating and financing activities

Net transfer of inventory to property, plant and equipment

33

—

See accompanying Notes to the Consolidated Financial Statements.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

Three months ended September 30,

Nine months ended September 30,


2018

2017

2018

2017

Net income (loss)

$
(8,953)

$
(23,740)

$
(262,414)

$
(42,918)

Other comprehensive income (loss), net of tax:

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

4

70

4

10

Foreign currency translation

(4)

1

(4)

25

Total other comprehensive income (loss), net of tax

—

71

—

35

Total comprehensive income (loss)

$
(8,953)

$
(23,669)

$
(262,414)

$
(42,883)

See accompanying Notes to the Consolidated Financial Statements.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Nine months ended September 30,


2018

2017

Cash Flows from Operating Activities

Net income (loss)

$
(262,414)

$
(42,918)

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

Depreciation and amortization

41,110

32,295

Non-cash interest expense

8,739

7,641

Deferred income taxes

(28,872)

(22,600)

Share-based compensation expense

12,720

19,976

Asset impairment

252,343

1,139

Provision for bad debts

—

99

Changes in operating assets and liabilities:

Accounts receivable and contract assets

769

(6,360)

Inventories and deferred cost of sales

(17,748)

9,328

Prepaid expenses and other current assets

10,037

(331)

Accounts payable and accrued expenses

(4,006)

3,129

Customer deposits and deferred revenue

(47,589)

19,030

Income taxes receivable and payable, net

(3,552)

(16)

Long-term income tax liability

—

(4,877)

Other, net

(915)

(259)

Net cash provided by (used in) operating activities

(39,378)

15,276

Cash Flows from Investing Activities

Acquisitions of businesses, net of cash acquired

(2,662)

(399,478)

Capital expenditures

(5,788)

(17,403)

Proceeds from the sale of investments

65,365

307,757

Payments for purchases of investments

(72,303)

(279,945)

Proceeds from held for sale assets

—

2,284

Net cash provided by (used in) investing activities

(15,388)

(386,785)

Cash Flows from Financing Activities

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

3,007

2,546

Restricted stock tax withholdings

(3,029)

(7,797)

Proceeds from long-term debt borrowings

—

335,752

Purchases of common stock

(11,457)

—

Principal payments on long-term debt

—

(1,193)

Net cash provided by (used in) financing activities

(11,479)

329,308

Effect of exchange rate changes on cash and cash equivalents

(4)

25

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

(66,249)

(42,176)

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

280,583

277,444

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

$
214,334

$
235,268

Supplemental Disclosure of Cash Flow Information

Interest paid

$
9,655

$
4,667

Income taxes paid

4,269

1,767

Non-cash operating and financing activities

Net transfer of inventory to property, plant and equipment

1,170

33

See accompanying Notes to the Consolidated Financial Statements.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(unaudited)

Note 1 -— Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, ~~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.

~~Contracts~~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 income 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)

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)


		Three months ended September 30, 2017						Nine months ended September 30, 2017
		As reported		Adjustments		As adjusted		As reported		Adjustments		As adjusted
	(in thousands, except per share amounts)
Statement of Operations
Net sales		$	131,872	$	(2,564)	$	129,308	$	341,324	$	(5,299)	$	336,025
Cost of sales			78,811		(32)		78,779		215,344		(194)		215,150
Income tax expense (benefit)			(1,790)		(676)		(2,466)		(24,969)		(1,365)		(26,334)
Net income (loss)			(21,884)		(1,856)		(23,740)		(39,177)		(3,741)		(42,918)
Diluted earnings (loss) per share			(0.47)		(0.04)		(0.51)		(0.91)		(0.09)		(1.00)

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

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~~.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. ~~The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.~~prices generally using an expected cost plus margin approach.

~~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, revenue and the associated costs are ~~deferred~~deferred. The Company recognizes such revenue and ~~fully recognized~~costs upon obtaining objective evidence that the ~~receipt of customer~~ acceptance provisions can be achieved, 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~~Table 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 essentialContents

Veeco 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 expected amortization period is one year or less.

The Company has elected to treat shipping and handling costs as a fulfillment activity, and such costs are included in cost of services when the Company recognizes revenue for the related ~~revenue is deferred~~goods. 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.

~~Recent~~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 ~~pronouncements~~

~~The FASB issued ASU 2014-09,~~policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as ~~amended:~~ ~~Revenue from Contracts with Customers~~~~, which has been codified as Accounting Standards Codification 606~~a current-period expense when incurred (“~~ASC 606”~~period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (“deferred method”). ~~ASC 606 requires~~The Company’s selection of an accounting policy with respect to the ~~Company’s revenue recognition~~new GILTI tax rules will depend, in part, on analyzing its global income to ~~depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which~~determine whether it expects to ~~be entitled~~have future U.S. inclusions in ~~exchange for those goods~~ 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 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.business. The Company is ~~still completing its evaluation~~not yet able to reasonably estimate the effect of this provision of the ~~impact of adopting this standard; however,~~2017 Tax Act; therefore, 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~~has not made any deferred tax adjustments related to ~~the receipt of customer final acceptance as well as the identification of installation services as~~potential GILTI tax in its consolidated financial statements and has not made a ~~performance obligation. The elimination of the constraint~~policy election decision regarding whether to record deferred taxes 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.GILTI.

~~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.Recent Accounting Pronouncements

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. In addition, ~~interest on lease liabilities is~~in July 2018, the FASB issued ASU 2018-11: Leases, Targeted Improvements, which adds a transition option whereby companies can recognize a cumulative-effect adjustment to be

~~recognized separately from~~ the ~~amortization~~opening balance of ~~right-of-use assets~~retained earnings in the ~~Statement~~period 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 activitiesadoption rather than 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~~presented. The Company plans to adopt using ~~a modified retrospective approach. ASU 2016-02 is~~this transition option. These ASUs are effective for fiscal

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

years beginning after December 15, ~~2018, with early application permitted.~~2018. The Company is evaluating the ~~anticipated~~ impact of adopting ~~the ASU~~these ASUs on the consolidated financial statements.

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

~~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. This ASU will not have a material impact 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. The Company measures equity investments without readily observable market prices 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 equity 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.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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 nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 are as follows:

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

(in thousands, except per share amounts)

Net income (loss)

$
(21,884
)
$
(69,598
)
$
(39,177
)
$
(117,212
)

Net income (loss) per common share:

Basic

$
(0.47
)
$
(1.78
)
$
(0.91
)
$
(2.99
)
Diluted

$
(0.47
)
$
(1.78
)
$
(0.91
)
$
(2.99
)

Basic weighted average shares outstanding

46,941

39,131

43,100

39,193

Effect of potentially dilutive share-based awards

—

—

—

—

Diluted weighted average shares outstanding

46,941

39,131

43,100

39,193

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

166

469

166

469

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

220

140

275

45

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

1,956

2,030

1,628

2,042

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

—

Three months ended September 30,

Nine months ended September 30,


2018

2017

2018

2017

(in thousands, except per share amounts)

Net income (loss)

$
(8,953)

$
(23,740)

$
(262,414)

$
(42,918)

Net income (loss) per common share:

Basic

$
(0.19)

$
(0.51)

$
(5.55)

$
(1.00)

Diluted

$
(0.19)

$
(0.51)

$
(5.55)

$
(1.00)

Basic weighted average shares outstanding

46,982

46,941

47,283

43,100

Effect of potentially dilutive share-based awards

—

—

—

—

Diluted weighted average shares outstanding

46,982

46,941

47,283

43,100

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

2

166

2

166

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

16

220

17

275

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

2,617

1,956

2,469

1,628

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

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. Ultratech also ~~designs,~~develops, manufactures, sells, and ~~markets 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. In connection with the Company’s continued finalization of purchase accounting, during the three months ended September 30, 2017, the Company decreased the fair value of acquired inventory and property, plant and equipment by $4.1Approximately $2.7 million and $1.2 million, respectively, resulting in a corresponding increase in goodwill. The Company plans to finalize the purchase accounting within the measurement period, which may include additional adjustments to the fair values of assets acquired and liabilities assumed. The preliminary acquisition date fair value 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)

Cash consideration, net of cash acquired

$
404,489

Equity consideration (7.2 million shares issued)

228,644

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

57,570

Prepaid expense and other current assets

7,217

Property, plant, and equipment

18,332

Intangible assets

346,940

Other assets

6,442

Total identifiable assets acquired

529,127

Accounts payable and accrued expenses

40,123

Customer deposits and deferred revenue

4,834

Deferred income taxes

32,478

Other liabilities

11,952

Total liabilities assumed

89,387

Net identifiable assets acquired

439,740

Goodwill

193,621

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 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

8 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 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 Ultratech’s lithography technologies and one-third of which is related to Ultratech’s laser annealing technologies.

For the three and nine months ended September 30, 2017, acquisition related costs were approximately $0.8 million and $16.3 million, respectively, including non-cash charges of $4.2 million for the nine months ended September 30,December 31, 2017, related to ~~accelerated share-based compensation for employee terminations.~~shareholder appraisal proceedings that were subsequently settled and paid during the third quarter of 2018.

~~The amounts~~

Table of ~~revenue~~Contents

Veeco Instruments Inc. and ~~income (loss) from operations before income taxes of Ultratech included in~~Subsidiaries

Notes to the ~~Company’s consolidated statement of operations for the three and nine months ended September 30, 2017 are as follows:~~Consolidated Financial Statements - continued

(unaudited)

Three months ended
September 30, 2017

Nine months ended
September 30, 2017

(in thousands)

Revenue

$
21,236

$
45,286

Loss from operations before income taxes

$
(21,556
)
$
(44,374
)

Loss from operations before income taxes of Ultratech for the three month period ended September 30, 2017 of $21.6 million includes acquisition costs of $0.8 million, release of inventory fair value step-up related to purchase accounting of $1.9 million, amortization expense on intangible assets of $9.6 million, and restructuring charges of $2.1 million. Loss from operations before income taxes of Ultratech for the nine month period ended September 30, 2017 of $44.4 million includes acquisition costs of $16.3 million, release of inventory fair value step-up related to purchase accounting of $9.2 million, amortization expense on intangible assets of $13.1 million, and restructuring charges of $3.3 million.

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

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

(in thousands, except per share amounts)

Revenue

$
131,872

$
134,093

$
412,066

$
381,586

Loss from operations

(14,957
)
(74,197
)
(45,309
)
(187,499
)
Diluted earnings per share

$
(0.40
)
$
(1.67
)
$
(1.01
)
$
(4.34
)


	Three months ended September 30,		Nine months ended September 30,
	2017		2017
	(in thousands, except per share amounts)
Net sales	$	129,308	$	406,767
Loss before income taxes		(24,847)		(72,091)
Diluted earnings per share	$	(0.49)	$	(1.23)

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~~

(i)

Additional amortization expense related to identified 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 the year ended December 31, 2017 and included in the year ended 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 the year ended December 31, 2017 and recorded in the 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 the Notes 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.

During the second quarter of 2018, the Company lowered its projected results for the Ultratech asset group and determined that the revised projections were significantly lower than projected results at the time of the ~~purchase price allocation~~acquisition and that ~~would have been incurred starting on January 1, 2016.~~these revised projections required the Company to assess the Ultratech asset group for impairment. See Note 4, “Assets” - Intangible Assets, for additional information.

~~(ii)~~ ~~Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred starting on January 1, 2016.~~Note 4 — Assets

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

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

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

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

~~Note 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.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

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

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

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

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

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

Level 1

Level 2

Level 3

Total

(in thousands)

September 30, 2017

Cash equivalents

Corporate debt

$
—

$
1,500

$
—

$
1,500

Total

$
—

$
1,500

$
—

$
1,500

Short-term investments

U.S. treasuries

$
58,806

$
—

$
—

$
58,806

Corporate debt

—

10,911

—

10,911

Commercial paper

—

16,136

—

16,136

Total

$
58,806

$
27,047

$
—

$
85,853

December 31, 2016

Cash equivalents

Corporate debt

$
—

$
1,501

$
—

$
1,501

Total

$
—

$
1,501

$
—

$
1,501

Short-term investments

U.S. treasuries

$
40,008

$
—

$
—

$
40,008

Government agency securities

—

10,012

—

10,012

Corporate debt

—

13,773

—

13,773

Commercial paper

—

2,994

—

2,994

Total

$
40,008

$
26,779

$
—

$
66,787


	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2018
Short-term investments
U.S. treasuries	$	36,527	$	—	$	—	$	36,527
Corporate debt		—		8,561		—		8,561
Commercial paper		—		6,975		—		6,975
Total	$	36,527	$	15,536	$	—	$	52,063
December 31, 2017
Cash equivalents
U.S. treasuries	$	12,490	$	—	$	—	$	12,490
Total	$	12,490	$	—	$	—	$	12,490
Short-term investments
U.S. treasuries	$	33,895	$	—	$	—	$	33,895
Corporate debt		—		10,886		—		10,886
Commercial paper		—		2,999		—		2,999
Total	$	33,895	$	13,885	$	—	$	47,780

There were no transfers between fair value measurement levels during the three and nine months ended September 30, ~~2017.~~2018.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated				Gross		Gross
	Cost		Gains		Losses			Fair Value		Amortized		Unrealized		Unrealized		Estimated
	(in thousands)									Cost		Gains		Losses		Fair Value
September 30, 2017
										(in thousands)
September 30, 2018
U.S. treasuries	$	58,816	$	3	$	(13	)	$	58,806	$	36,538	$	1	$	(12)	$	36,527
Corporate debt	10,912		1		(2		)	10,911			8,573		—		(12)		8,561
Commercial paper	16,135		1		—			16,136			6,975		—		—		6,975
Total	$	85,863	$	5	$	(15	)	$	85,853	$	52,086	$	1	$	(24)	$	52,063

December 31, 2016
December 31, 2017
U.S. treasuries	$	40,013	$	—	$	(5	)	$	40,008	$	33,914	$	—	$	(19)	$	33,895
Government agency securities	10,020		—		(8		)	10,012
Corporate debt	13,780		—		(7		)	13,773			10,894		—		(8)		10,886
Commercial paper	2,994		—		—			2,994			2,999		—		—		2,999
Total	$	66,807	$	—	$	(20	)	$	66,787	$	47,807	$	—	$	(27)	$	47,780

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

September 30, 2017

December 31, 2016

Gross

Gross

Estimated

Unrealized

Estimated

Unrealized

Fair Value

Losses

Fair Value

Losses

(in thousands)

U.S. treasuries

$
41,864

$
(13
)
$
20,002

$
(5
)
Government agency securities

—

—

10,012

(8
)
Corporate debt

7,909

(2
)
13,774

(7
)
Total

$
49,773

$
(15
)
$
43,788

$
(20
)


	September 30, 2018				December 31, 2017
			Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses
	(in thousands)
U.S. treasuries	$	29,621	$	(12)	$	33,895	$	(19)
Corporate debt		8,561		(12)		10,886		(8)
Total	$	38,182	$	(24)	$	44,781	$	(27)

At September 30, ~~2017~~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 maturities of securities classified as available-for-sale ~~securities~~ at September 30, ~~2017~~2018 were all ~~contractually mature~~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 no realized gains or losses for the three and nine months ended September 30, 2018 and minimal realized gains for the three and nine months ~~ended~~ending September 30, ~~2017 and no realized gains for the three and nine months ended September 30, 2016. The cost of securities liquidated is based on specific identification.~~2017.

Accounts ~~receivable~~Receivable

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

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Inventories

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


	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Materials	$	59,767	$	46,457	$	84,864	$	59,919
Work-in-process	37,884		25,250			41,423		37,222
Finished goods	16,030		5,356			23,545		23,125
Total	$	113,681	$	77,063	$	149,832	$	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 ~~$6.7~~$8.9 million and ~~$7.8~~$7.6 million at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. ~~Additionally, included within prepaid expenses and other current assets at September 30, 2017 was a non-trade receivable of approximately $12.8 million.~~

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

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

September 30,

December 31,

2017

2016

(in thousands)

Land

$
5,669

$
5,669

Building and improvements

50,367

50,814

Machinery and equipment(1)

126,631

99,370

Leasehold improvements

10,471

3,652

Gross property, plant and equipment

193,138

159,505

Less: accumulated depreciation and amortization

108,735

98,859

Net property, plant, and equipment

$
84,403

$
60,646


	September 30,		December 31,
	2018		2017
	(in thousands)
Land	$	5,669	$	5,669
Building and improvements		59,547		54,449
Machinery and equipment (1)		126,126		126,829
Leasehold improvements		8,802		10,073
Gross property, plant, and equipment		200,144		197,020
Less: accumulated depreciation and amortization		119,518		111,962
Net property, plant, and equipment	$	80,626	$	85,058

~~(1)~~

⁽¹⁾

Machinery and equipment also includes software, furniture and fixtures

For the three and nine months ended September 30, ~~2017,~~2018, depreciation expense was $4.6 million and $13.0 million, respectively, and $4.2 million and $10.6 million ~~respectively, and $3.5 million and $10.2 million~~ for the comparable ~~2016~~2017 periods.

Goodwill

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The ~~following table presents~~Company is required to assess goodwill annually for impairment, which it does at the beginning of the fourth quarter, or on an interim basis whenever certain events occur or circumstances change, such as an adverse change in business climate, a decline in the adjusted market capitalization of the Company below the book value of the Company’s equity for an extended period of time, or other events that would more likely than not indicate that the fair value of the Company’s single goodwill reporting unit is less than its carrying amount. There were no changes into goodwill ~~balances for~~during the nine months ended September 30, ~~2017:~~2018.

As the Company maintains a single goodwill reporting unit, it determines the fair value of its reporting unit based upon the Company’s adjusted market capitalization. The adjusted market capitalization is calculated by multiplying the

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Gross carrying

Accumulated

amount

impairment

Net amount

(in thousands)

Balance at December 31, 2016

$
238,108

$
123,200

$
114,908

Acquisition

193,621

—

193,621

Balance at September 30, 2017

$
431,729

$
123,200

$
308,529

average closing share price of the Company’s common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium.

Based on the most recent annual impairment test as of October 1, 2018, the Company determined that the fair value of its single goodwill reporting unit exceeded its carrying amount by approximately $60 million. However, this analysis is sensitive to changes in the Company’s stock price and absent other qualitative factors, the Company may be required to record a goodwill impairment charge in future periods if the stock price declines subsequent to its annual measurement date and remains depressed for an extended period of time.

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.

During the second quarter of 2018, the Company lowered its projected results for the Ultratech asset group, which were significantly below the projected results at the time of the acquisition. The reduced projections were based on lower than expected unit volume of certain smartphones, which incorporate advanced packaging methods such as Fan-Out Wafer Level Packaging (“FOWLP”), and a delay in the adoption of FOWLP advanced packaging by other electronics manufacturers, both of which slowed orders and reduced revenue projections for the Company’s advanced packaging lithography systems. In addition, there has been a delay in the build out of 28nm facilities by companies in China who were expected to purchase the Company’s Laser Spike Anneal (“LSA”) systems. Taken together, the reduced projections identified during the second quarter of 2018 required the Company to assess the Ultratech asset group for impairment. As a result of the analysis, which included projected cash flows that required the use of unobservable inputs, the Company recorded non-cash impairment charges of $216.4 million and $35.9 million related to definite-lived intangible assets and in-process research and development assets, respectively, during the second quarter of 2018.

The components of purchased intangible assets were as follows:

September 30, 2017

December 31, 2016

Weighted

Accumulated

Accumulated

Average Remaining

Gross

Amortization

Gross

Amortization

Amortization

Carrying

and

Net

Carrying

and

Net

Period

Amount

Impairment

Amount

Amount

Impairment

Amount

(in years)

(in thousands)

Technology

7.5

$
307,588

$
125,154

$
182,434

$
149,198

$
113,904

$
35,294

Customer relationships

11.6

164,595

35,653

128,942

47,885

28,659

19,226

In-process R&D

—

43,340

—

43,340

—

—

—

Trademarks and tradenames

6.6

28,010

3,272

24,738

2,590

1,948

642

Indefinite-lived trademark

—

2,900

—

2,900

2,900

—

2,900

Other

0.5

3,686

2,444

1,242

2,026

1,710

316

Total

9.0

$
550,119

$
166,523

$
383,596

$
204,599

$
146,221

$
58,378


	September 30, 2018						December 31, 2017
			Accumulated						Accumulated
	Gross		Amortization				Gross		Amortization
	Carrying		and		Net		Carrying		and		Net
	Amount		Impairment		Amount		Amount		Impairment		Amount
	(in thousands)
Technology	$	320,888	$	273,821	$	47,067	$	307,588	$	133,121	$	174,467
Customer relationships		164,595		134,760		29,835		164,595	��	39,336		125,259
In-process R&D		30,040		25,000		5,040		43,340		—		43,340
Trademarks and tradenames		30,910		23,560		7,350		30,910		4,321		26,589
Other		3,686		3,580		106		3,686		3,498		188
Total	$	550,119	$	460,721	$	89,398	$	550,119	$	180,276	$	369,843

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

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Based on the revised intangible asset values resulting from the impairment recorded during the period ended June 30, 2018, the remaining estimated annual amortization expense, excluding in-process R&D, is expected to be as follows:

Amortization

(in thousands)
2018

$
4,184
2019

16,554
2020

15,628
2021

12,506
2022

10,172
Thereafter

25,314
Total

$
84,358

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 over Kateeva and therefore the investment is carried at cost. There was no change to the $21.0 million~~influence. The carrying value of the investment was $21.0 million at September 30, 2018 and December 31, 2017. Additionally, during the nine months ended September 30, ~~2017.~~2018, the Company made a separate non-marketable investment of $3.5 million. The Company does not exert significant influence over this investment, and its ownership interest is less than 20%. Neither equity investment has a readily observable market price, and therefore the Company has elected to measure these investments at cost, adjusted for changes in observable market prices minus impairment. The investments are included in “Other assets” on the Consolidated Balance Sheets. ~~The~~There were no changes in observable market prices for either investment isfor the nine months ended September 30, 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 September 30, 2017 are deferred compensation plan assets of approximately $3.3 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 $4.5 million is included in “Other liabilities” on the Consolidated Balance Sheet.Note 5 — Liabilities

~~Note 5 -~~Accrued Expenses and Other Current Liabilities

~~Accrued expenses and other current liabilities~~

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


	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Payroll and related benefits	$	27,816	$	18,780	$	18,498	$	32,996
Warranty						7,371		6,532
Interest						1,992		4,430
Professional fees						3,457		3,942
Merger consideration payable	17,844		—			—		2,662
Warranty	6,555		4,217
Professional fees	3,349		1,827
Installation	1,418		1,382
Sales, use, and other taxes	1,961		1,282			532		2,144
Restructuring liability	1,893		1,796			2,901		1,520
Interest	2,307		—
Other	2,585		3,917			5,679		3,842
Total	$	65,728	$	33,201	$	40,430	$	58,068

~~Warranty~~

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Warranty

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

(in thousands)

Balance - December 31, 2016

$
4,217

Warranties issued

4,314

Addition from Ultratech acquisition

1,889

Consumption of reserves

(4,741
)
Changes in estimate

876

Balance - September 30, 2017

$
6,555

(in thousands)
Balance - December 31, 2017

$
6,532
Warranties issued

5,249
Consumption of reserves

(5,161)
Changes in estimate

751
Balance - September 30, 2018

$
7,371

Restructuring ~~accruals~~Accruals

During ~~2016,~~2017, the Company ~~undertook~~initiated certain restructuring activities ~~as part of~~related to its ~~initiative~~efforts to streamline operations, enhance efficiencies, and reduce costs, as well as ~~reducing future~~reduced its investments in certain technology ~~development, which together impacted approximately 75 employees.~~development. In addition, during 2017, the Company began the Ultratech acquisition integration process to enhance efficiencies, resulting in ~~additional employee terminations~~reductions in headcount and other facility ~~closing~~ costs. During the nine months ended September 30, 2018, additional accruals were recognized and payments were made related to these restructuring initiatives.

During the second quarter of 2018, the Company initiated plans to further reduce excess capacity associated with the manufacture and support of the Company's advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into its San Jose, California facility. As a result of this and other cost saving initiatives, the Company announced headcount reductions of approximately 40 employees and recorded restructuring charges related to these actions of $2.4 million for the nine months ended September 30, 2018, consisting principally of personnel severance and related costs. The Company expects the consolidation to be completed in the first quarter of 2019.

During the third quarter of 2018, the Company initiated additional restructuring activities to further reduce costs, including headcount reductions impacting approximately 35 employees and recorded restructuring charges related to these actions of $1.1 million, consisting principally of personnel severance and related costs. The Company expects this initiative to be completed by the end of 2018 and to provide approximately $5 million in annualized savings. Over the next few quarters, the Company expects to incur additional restructuring costs of $1 million to $5$2 million as it ~~finalizes~~completes all of these ~~activities.~~restructuring initiatives.

	Personnel
	Severance and			Facility						Personnel		Facility
	Related Costs			Closing Costs			Total			Severance and		Related Costs
	(in thousands)									Related Costs		and Other		Total
Balance - December 31, 2016	$	1,796		$	—		$	1,796
										(in thousands)
Balance - December 31, 2017										$	1,520	$	—	$	1,520
Provision	3,628			4,269			7,897				3,930		2,743		6,673
Payments	(3,531		)	(4,269		)	(7,800		)		(2,898)		(2,394)		(5,292)
Balance - September 30, 2017	$	1,893		$	—		$	1,893
Balance - September 30, 2018										$	2,552	$	349	$	2,901

Included within restructuring expense in the Consolidated Statements of Operations for the nine months ended September 30, ~~2017~~2018 is approximately ~~$1.7~~$1.0 million of non-cash charges related to accelerated share-based compensation for employee terminations.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Customer ~~deposits~~Deposits and Deferred Revenue

Customer deposits totaled ~~$27.6~~$20.0 million and ~~$22.2~~$41.5 million at September 30, ~~2017~~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:


	(in thousands)
Balance - December 31, 2017	$	70,536
Deferral of revenue		7,166
Recognition of previously deferred revenue		(33,224)
Balance - September 30, 2018	$	44,478

As of September 30, 2018, the Company has approximately $63.0 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 64% is expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

~~Mortgage Payable~~

At December 31, 2016, the Company had a mortgage note payable associated with its property in St. Paul, Minnesota, which, during the third quarter of 2017 was fully extinguished in connection with the sale of the building. The carrying value of the property exceeded the carrying value of the mortgage note of $1.2 million at December 31, 2016. The annual interest rate on the note was 7.91%. The Company determined the mortgage was a Level 3 liability in the fair-value hierarchy and, using a discounted cash flow model, estimated its fair value as $1.2 million at December 31, 2016.

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:

September 30,

2017

(in thousands)

Principal amount

$
345,000

Unamortized debt discount

(65,570
)
Unamortized transaction costs

(6,605
)
Net carrying value

$
272,825


	September 30,		December 31,
	2018		2017
	(in thousands)
Principal amount	$	345,000	$	345,000
Unamortized debt discount		(55,082)		(63,022)
Unamortized transaction costs		(5,549)		(6,348)
Net carrying value	$	284,369	$	275,630

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


	Three months ended September 30,		Nine months ended September 30,		Three months ended September 30,				Nine months ended September 30,
	2017		2017		2018		2017		2018		2017
	(in thousands)				(in thousands)
Cash Interest Expense
Coupon interest expense	$	2,329	$	6,573	$	2,329	$	2,329	$	6,986	$	6,573
Non-Cash Interest Expense
Amortization of debt discount	2,502		6,942			2,697		2,502		7,940		6,942
Amortization of transaction costs	252		699			271		252		799		699
Total Interest Expense	$	5,083	$	14,214	$	5,297	$	5,083	$	15,725	$	14,214

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as ~~$330.9~~$292.0 million at September 30, ~~2017.~~

~~Other Liabilities~~2018.

Other ~~liabilities~~Liabilities

As part of the acquisition of Ultratech, the Company assumed an executive non-qualified deferred compensation plan that allowed qualifying executives to defer cash compensation. The plan was frozen at the time of acquisition and no further contributions have been made. At September 30, 2018 and December 31, 2017, plan assets approximated $3.6 million and $3.4 million, respectively, representing the cash surrender value of life insurance policies and is included ~~deferred compensation of $4.5~~within “Other assets” in the Consolidated Balance Sheets, while plan liabilities approximated $3.9 million and $4.7 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities also include asset retirement obligations of $3.2 million and $3.3 million at September 30, 2018 and December 31, 2017, respectively, and medical and dental benefits of ~~$2.5~~$2.1 million and ~~acquisition related accruals of $0.7 million. At December 31, 2016, other liabilities primarily consisted of a non-current income tax payable of $4.9 million.~~$2.2 million, respectively.

Note 6 -— Commitments and Contingencies

Minimum ~~lease commitments~~Lease Commitments

At September 30, ~~2017, Veeco’s~~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

$
1,678

2018

5,474

2019

5,002

2020

4,763

2021

1,807

Thereafter

4,505

Total

$
23,229

Purchase ~~commitments~~Commitments

Veeco has purchase commitments of ~~$151.7~~$114.0 million at September 30, ~~2017,~~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 September 30, ~~2017,~~2018, outstanding bank guarantees and letters of credit totaled ~~$3.7~~$6.9 million, and unused bank guarantees and letters of credit of ~~$67.9~~$64.0 million were available to be drawn upon.

Legal ~~proceedings~~Proceedings

On ~~September 21, 2017, Blueblade Capital Opportunities LLC~~June 8, 2018, an Ultratech shareholder who received Veeco stock as part of the consideration for the Ultratech acquisition filed a purported class action complaint in the Superior Court of the State of California, County of Santa Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of ~~purported beneficial owners of 440,100~~himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech ~~common stock, filed an action against Ultratech in Delaware Court of Chancery requesting an appraisal~~acquisition (the “Wolther Action”). The complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the ~~value~~Securities Act 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. Discovery1933 for, among other things, alleged false/misleading statements in the ~~matter has commenced.~~

~~On April 12, 2017, the Company filed a patent infringement complaint in the U.S. District Court for the Eastern District of New York against SGL Carbon, LLC~~registration statement and ~~SGL Carbon SE (collectively, “SGL”), alleging infringement of patents relating to wafer carrier technology used in MOCVD equipment. The complaint alleges that SGL infringes Veeco’s~~ patents by making and selling certain wafer carriers to Veeco’s competitor, Advanced Micro-Fabrication Equipment, Inc. (“AMEC”). On November 2, 2017, the U.S. District Court granted the Company’s motion for a preliminary injunction prohibiting SGL from shipping wafer carriers using the Company’s patented technology without the Company’s express authorization. The Company continues to seek a post-trial permanent injunction and monetary damages against SGL.

On 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 patentprospectus relating to the ~~synchronous movement engagement mechanism~~Ultratech acquisition, relating primarily to the alleged failure to disclose delays in ~~a chemical vapor deposition reactor~~the advanced packaging business, increased MOCVD competition in China, and ~~seeking injunctive relief~~an intellectual property dispute. On August 2 and ~~monetary damages against~~August 8, 2018, two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These three cases are expected to be consolidated. Veeco ~~Shanghai. The Company~~ believes ~~this complaint is~~these lawsuits are without merit and intends to vigorously ~~defend against~~contest these allegations. The Company has filed a petition for invalidation of this patent with the Chinese Patent Reexamination Board (“PRB”). The Fujian High Court has suspended the infringement case against Veeco pending the outcome of the invalidation proceeding at the PRB.matters.

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

Table of Contents

~~Note 7~~Veeco Instruments Inc. and Subsidiaries

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

(unaudited)

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 nine months ended September 30, 2018, and as of September 30, 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 September 30, 2018 and December 31, 2017 is as follows:

September 30, 2018

December 31, 2017

Fair Value

Maturity Dates

Notional Amount

Fair Value

Maturity Dates

Notional Amount

(in thousands)
Foreign currency exchange forwards

$
(2)

October 2018

$
4,584

$
—

January 2018

$
622

The following table shows the gains and (losses) from currency exchange derivatives during the three and nine months ended September 30, 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 September 30, 2018

Three months ended September 30, 2017


Gains
(Losses)

Weighted average
notional amount

Gains
(Losses)

Weighted average
notional amount

(in thousands)

Foreign currency exchange forwards

$
132

$
4,448

$
(10)

$
361

Nine months ended September 30, 2018

Nine months ended September 30, 2017


Gains
(Losses)

Weighted average
notional amount

Gains
(Losses)

Weighted average
notional amount

(in thousands)
Foreign currency exchange forwards

$
348

$
2,869

$
(9)

$
317

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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:

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)

25

10

35

Balance - September 30, 2017

$
1,822

$
(10
)
$
1,812


			Unrealized
	Foreign		Gains (Losses) on
	Currency		Available for Sale
	Translation		Securities		Total
	(in thousands)
Balance - December 31, 2017	$	1,839	$	(27)	$	1,812
Other comprehensive income (loss)		(4)		4		—
Balance - September 30, 2018	$	1,835	$	(23)	$	1,812

There were minimal reclassifications from AOCI into net income for the nine months ended September 30, ~~2017.~~

For the nine months ended September 30, 2017, Additional Paid-in Capital increased approximately $228.8 million related to 7.2 million shares issued for the Ultratech merger consideration, $47.5 million related to the issuance of the Convertible Senior Notes including deferred tax impact, and $11.4 million related to on-going share-based compensation activities.2018.

Note ~~8 -~~9 — Share-based compensation

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

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


	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
	(in thousands)								(in thousands)
Cost of sales	$	740	$	607	$	1,898	$	1,639	$	513	$	740	$	1,603	$	1,898
Research and development	849		993		1,986		3,032			709		849		2,728		1,986
Selling, general, and administrative	3,714		2,143		10,182		7,462			1,890		3,714		7,393		10,182
Restructuring	867		—		1,707		—			167		867		996		1,707
Acquisition costs	—		—		4,203		—			—		—		—		4,203
Total	$	6,170	$	3,743	$	19,976	$	12,133	$	3,279	$	6,170	$	12,720	$	19,976

For the nine months ended September 30, ~~2017,~~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

(129
)
37.03

Balance - September 30, 2017

1,429

35.07


		Weighted
	Number of	Average
	Shares	Exercise Price
	(in thousands)
Balance - December 31, 2017	1,394	$	34.97
Expired or forfeited	(147)		36.50
Balance - September 30, 2018	1,247		34.79

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

For the nine months ended September 30, ~~2017,~~2018, equity activity related to non-vested restricted shares and performance shares was as follows:

Weighted
Average

Number of

Grant Date

Shares

Fair Value

(in thousands)

Balance - December 31, 2016

1,949

$
23.85

Granted

642

29.35

Assumed from Ultratech

338

31.75

Vested

(695
)
27.12

Forfeited

(173
)
26.39

Balance - September 30, 2017

2,061

25.85


		Weighted
		Average
	Number of	Grant Date
	Shares	Fair Value
	(in thousands)
Balance - December 31, 2017	1,880	$	25.41
Granted	835		19.31
Performance award adjustments	(5)		32.67
Vested	(508)		26.44
Forfeited	(253)		24.83
Balance - September 30, 2018	1,949		22.59

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 September 30, ~~2017,~~2018, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized.

At the end of each interim reporting period, the effective tax rate is aligned with expectations for the full year. This estimate is used to determine the income tax provision on a year-to-date basis and may change in subsequent interim periods. If necessary, 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. During the second quarter of 2018, the Company recognized an income tax benefit of $1.6 million related to the alternative minimum tax credits that became refundable in accordance with the 2017 Tax Act. 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 tax benefit of alternative minimum tax credits and 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 will complete its analysis and finalize the amounts by the end of the fourth quarter of 2018, which is within the measurement period as provided by SAB 118.

During the second quarter of 2018, the Company also recognized a tax benefit of $25.3 million primarily due to the intangible asset impairment charge of $252.3 million incurred during the quarter. See Note 4, “Assets” - IntangibleAssets, for additional information.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Loss before income taxes and income tax ~~expense (benefit)~~benefit for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 were as follows:

	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016			Three months ended September 30,				Nine months ended September 30,
	(in thousands)												2018		2017		2018		2017
Income (loss) before income taxes	$	(23,674	)	$	(68,462	)	$	(64,146	)	$	(114,535	)
													(in thousands)
Loss before income taxes													$	(8,652)	$	(26,206)	$	(290,368)	$	(69,252)
Income tax expense (benefit)	$	(1,790	)	$	1,136		$	(24,969	)	$	2,677		$	301	$	(2,466)	$	(27,954)	$	(26,334)

The ~~net income~~Company’s tax ~~benefit~~expense for the three months ended September 30, ~~2017~~2018 was ~~comprised of~~$0.3 million, compared to a ~~net~~tax benefit of ~~$2.2~~$2.5 million for the comparable prior period. The 2018 tax expense is mainly related to the Company’s ~~U.S.~~non-U.S. operations, ~~and~~compared to 2017 when the benefit included a ~~net tax~~$2.8 million benefit related to domestic operations, offset by a $0.3 million expense ~~of $0.4 million~~ related to the Company’s non-U.S. operations. The ~~net~~prior period domestic tax benefit is primarily attributable to an income tax benefit for losses incurred during the three months ended September 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 prior period non-U.S. tax expense is attributable to the profitable non-U.S. operations.

The Company’s tax benefit for the nine months ended September 30, ~~2017~~2018 was ~~comprised of~~$28.0 million, compared to $26.3 million for the comparable prior period. The 2018 tax benefit included a ~~net~~$1.1 million benefit ~~of $21.6 million and $3.4 million~~ related to the Company’s ~~U.S.~~domestic operations and a $26.9 million benefit related to the Company’s non-U.S. operations, ~~respectively.~~

compared to 2017 when the benefit included a $22.7 million benefit related to domestic operations and a $3.6 million benefit related to non-U.S. operations. The ~~net income~~current period domestic tax benefit ~~from the Company’s U.S. operations was~~is primarily attributable to arefundable alternative minimum tax credits in accordance with 2017 Tax Act, offset by the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The current period foreign tax benefit ~~of $2.2 million and $23.5 million~~is primarily attributable to the asset impairment charge incurred during the period. The prior period domestic tax benefit is primarily attributable to an income tax benefit for losses incurred during the ~~three and~~ nine months ended September 30, 2017, ~~respectively. Under the intraperiod tax allocation rules,~~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 operations during~~in fiscal ~~2017. The tax benefit related to the issuance of the Convertible Senior Notes will not recur in future years. This benefit was partially~~2017, offset by a deferred provision ~~of approximately $1.9 million~~ related to tax amortization on indefinite-lived intangible ~~assets for the nine months ended September 30, 2017.~~

assets. The ~~net income~~prior period non-U.S. tax benefit ~~of $3.4 million for the nine months ended September 30, 2017, from the Company’s non-U.S. operations was~~is primarily attributable to the ~~Company’s determination in the first quarter~~remeasurement 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~~which included the ~~first quarter, which is comprised of a~~ reversal of a ~~$4.9 million~~previously established non-U.S. 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~~were determined to be ~~realizable. This benefit was partially~~realizable, offset by ~~a current year~~ tax expense ~~of approximately $3.1 million~~ attributed to the profitable non-U.S. ~~operations, of which approximately $0.4 million was recorded during the three months ended September 30, 2017.~~operations.

For the three and nine months ended September 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 ~~10 -~~11 — 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 hasone 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~~following four end-markets:

Advanced Packaging, MEMS & RF Filters

Advanced Packaging includes a ~~result~~portfolio of wafer-level assembly technologies that enable the ~~acquisition~~miniaturization and performance improvement of ~~Ultratech,~~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.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the ~~Company’s four key markets are now:~~ Consolidated Financial Statements - continued

(unaudited)

LED Lighting, Display & Compound Semiconductor (formerly 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.

~~LED Lighting, Display & Compound Semiconductor~~

LED Lighting refers to Light Emitting Diode (“LED”) and semiconductor illumination sources used in various applications including, but not limited to, displays such as backlights, general lighting, automotive running lights, and headlamps. Display refers to LEDs used for displays and Organic Light Emitting Diode (“OLED”) displays found in outdoor display/signage applications, TVs, smartphones, wearable devices, and tablets. Compound Semiconductor includes Photonics, Power Electronics, and Radio Frequency (“RF”) Devices. Photonics refers to laser diodes, Vertical Cavity Surface Emitting Lasers (“VCSEL”) in 3D sensing and communications, and various other optical devices. Power Electronics refers to semiconductor devices such as rectifiers, inverters, and converters for the control and conversion of electric power. RF devices refers to radio frequency emitting and receiving devices that enable wireless communications. Such devices include power amplifiers, switches, and transceivers for applications such as mobile (including handsets and base stations), defense, ~~automotive,~~automobile, and the ~~internet~~Internet of ~~things.~~Things.

~~Advanced Packaging, MEMS & RF Filters~~Front-End Semiconductor

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 FiltersFront-End Semiconductor refers to ~~RF filters used~~the early steps in ~~smartphones, tablets,~~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 ~~mobile devices.~~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 including data storage and optical coatings: thin layers of material deposited on a lens or mirror that alters how light reflects and transmits.

~~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.

Sales by end-market and geographic region for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 were as follows:

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

(in thousands)

Sales by end-market

LED Lighting, Display & Compound Semiconductor

$
59,721

$
49,427

$
170,546

$
97,985

Advanced Packaging, MEMS & RF

22,775

12,092

55,756

52,400

Scientific & Industrial

33,145

20,997

86,917

82,726

Front-End Semiconductor

16,231

2,966

28,105

5,731

Total

$
131,872

$
85,482

$
341,324

$
238,842

Sales by geographic region

United States

$
34,723

$
19,104

$
73,256

$
66,550

China

15,197

21,238

81,811

54,621

EMEA(1)

17,243

19,703

57,312

61,999

Rest of World

64,709

25,437

128,945

55,672

Total

$
131,872

$
85,482

$
341,324

$
238,842


	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
	(in thousands)
Sales by end-market
Advanced Packaging, MEMS & RF Filters	$	24,562	$	21,478	$	76,473	$	54,216
LED Lighting, Display & Compound Semiconductor		58,864		57,647		236,597		167,105
Front-End Semiconductor		13,476		16,256		41,085		27,736
Scientific & Industrial		29,855		33,927		88,955		86,968
Total	$	126,757	$	129,308	$	443,110	$	336,025
Sales by geographic region
United States	$	28,861	$	34,914	$	85,555	$	72,820
China		39,200		12,956		185,050		81,121
EMEA(1)		30,685		16,948		71,836		54,140
Rest of World		28,011		64,490		100,669		127,944
Total	$	126,757	$	129,308	$	443,110	$	336,025

⁽¹⁾

~~(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.

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Note 12 — Subsequent Events

The Company recently discovered an attack on its computer systems by what appears to be a highly-sophisticated actor. The Company has notified law enforcement of the attack and has retained forensic experts to assist with the investigation. At this time, the Company does not know if or when it will be able to determine the extent of the breach or the potential impact to the Company, whether it will be able to identify who is responsible for this attack or whether it will be able to pursue legal action or other remedies to protect any compromised information or recover damages related to the attack. This attack, including the expenses incurred to address it, may have an adverse effect on the Company’s results of operations and/or financial condition. In addition, this attack could result in the loss or misuse of confidential information of the Company or that of its customers or others, result in litigation and potential liability, damage the Company’s reputation and/or otherwise harm its business.

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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 front-end semiconductor manufacturing and advanced packaging. Ultratech also designs, manufactures, and markets atomic layer deposition (“ALD”) equipment for scientific and industrial applications. Ultratech’s customers are primarily located throughout the United States, EMEA, China, Japan, Taiwan, Singapore, 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 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. Our four key markets are: Advanced Packaging, MEMS & RF Filters; LED Lighting, Display & Compound Semiconductor; Front-End Semiconductor; and Scientific & Industrial.

Sales in the Advanced Packaging, MEMS & ~~RF; Scientific~~RF Filters market were driven by shipments of lithography systems and upgrades to Outsourced Semiconductor Assembly & ~~Industrial;~~Test companies (“OSATs”), Independent Device Manufacturers (“IDMs”) and ~~Front-End Semiconductor.~~foundry customers in support of advanced packaging processes such as Fan-Out Wafer Level Packaging (“FOWLP”) and Copper Pillar. Additionally, we continue to ship Wet Etch and Clean systems to foundry customers and IDMs in support of advanced packaging and RF Filter 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 in the LED Lighting, Display & Compound Semiconductor market were primarily driven by the ~~continued~~ shipment of MOCVD systems into China for general lighting and ~~PSP~~backlighting. However, orders for LED systems remained soft this quarter as customers digest recently added capacity for general lighting and backlighting. In addition to ~~customers~~overcapacity in ~~Europe,~~this market, a more competitive landscape in China ~~and Southeast Asia, along with a large MBE system shipment~~has emerged. It is unclear when orders will improve in the ~~Solar application space. The largest applications~~LED market for ~~LEDs are solid state~~general lighting ~~followed~~and backlighting. We also shipped MOCVD systems and Wet Etch and Clean Systems for Display, Photonics, and RF device applications. We expect growth in these markets to be driven 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~~signage, automotive lighting, 3D sensing Vertical Cavity Surface Emitting Lasers (“VCSELs”) and laser diodes, 5G RF devices, and power electronics. We focus our R&D efforts accordingly and where our technology differentiation can provide a significant advantage for our ~~MOCVD equipment and build-up in our MOCVD backlog.~~customers. Our broad portfolio of MOCVD and Wet Etch and Clean technologies has been developed to support these applications.

We continue to build momentum in 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~~Front-End Semiconductor market ~~momentum. During the quarter we released our latest MOCVD system, the EPIK868, offering a lower cost and higher productivity solution~~with two additional orders for our ~~customers. The EPIK868 was designed to meet the needs of our customers in China, demonstrating our long-term commitment to this region.~~Low Defect Density Ion Beam Deposition (“LDD-IBD”) system for Extreme Ultraviolet (“EUV”) Mask Blank Production. We believe ~~that~~these system orders reflect the ~~expected profits from increased revenues may be partially offset by lower margins based on the current competitive environment.~~

Sales in the Advanced Packaging, MEMS & RF markets continue to be influenced by the mobility trend and increasing functionality in mobile devices and were driven by Ultratech and PSP sales in Advanced Packaging and continued PSP salesongoing adoption of EUV Lithography for MEMs and RF Filter applications. Sales into the Advanced Packaging market have slowed, largely tied to large Lithography system purchases in 2016 and early 2017, combined with delays in FOWLP (Fan Out Wafer Level Packaging) adoption by some smartphone manufacturers and weak smartphone sales. We remain well positioned for growth as FOWLP and other advance packaging applications grow over the longer term. Our versatile PSP product architecture has allowed us to continue to generate solid business in the MEMs and RF Filter portion of this category.advanced node, front-end semiconductor manufacturing.

Sales in the Scientific & Industrial ~~markets~~market were supported primarily by shipments of ~~AD&E~~Ion Beam deposition systems for ~~optical coatings and~~ data storage applications as well as ~~shipments~~optical coatings. Demand for our Ion Beam products for Data Storage is being driven by the requirements to improve areal density of ~~MBE systems to universities~~ magnetic heads for hard disk drive manufacturers, as well as an overall projected volume increase of thin film magnetic heads. These two factors taken together are driving additional capacity

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and ~~laboratories.~~equipment upgrades. While equipment demand from

each individual market may fluctuate quarter to quarter, the diverse customer base in this market segment has historically provided a relatively stable revenue stream for the ~~company on a combined basis.~~Company.

~~Sales~~During the third quarter of 2018, we initiated additional restructuring activities to further reduce costs, including headcount reductions impacting approximately 35 employees and recorded restructuring charges related to these actions of $1.1 million, consisting principally of personnel severance and related costs. We expect this initiative to be completed by the end of 2018 and to provide approximately $5 million in ~~the Front-End Semiconductor market were primarily driven by Ultratech’s Laser Annealing systems and AD&E’s Photomask systems.~~annualized savings.

Results of Operations

For the three months ended September 30, ~~2017~~2018 and ~~2016~~2017

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 September 30,

Change

2017

2016

Period to Period

(dollars in thousands)

Net sales

$
131,872

100%

$
85,482

100%

$
46,390

54%

Cost of sales

78,811

60%

52,027

61%

26,784

51%

Gross profit

53,061

40%

33,455

39%

19,606

59%

Operating expenses, net:

Research and development

24,061

18%

19,892

23%

4,169

21%

Selling, general, and administrative

29,771

23%

18,396

22%

11,375

62%

Amortization

12,500

9%

5,261

6%

7,239

138%

Restructuring

5,010

4%

1,798

2%

3,212

179%

Acquisition costs

783

1%

—

0%

783

*

Asset impairment

2

0%

56,035

66%

(56,033
)
(100)%

Other, net

(140
)
(0)%

795

1%

(935
)
(118)%

Total operating expenses, net

71,987

55%

102,177

120%

(30,190
)
(30)%

Operating income (loss)

(18,926
)
(14)%

(68,722
)
(80)%

49,796

*

Interest income (expense), net

(4,748
)
(4)%

260

0%

(5,008
)
*

Income (loss) before income taxes

(23,674
)
(18)%

(68,462
)
(80)%

44,788

*

Income tax expense (benefit)

(1,790
)
(1)%

1,136

1%

(2,926
)
*

Net income (loss)

$
(21,884
)
(17)%

$
(69,598
)
(81)%

$
47,714

*


	Three Months Ended September 30,								Change
	2018				2017				Period to Period
	(dollars in thousands)
Net sales	$	126,757	100	%	$	129,308	100	%	$	(2,551)	(2)	%
Cost of sales		80,372	63	%		78,779	61	%		1,593	2	%
Gross profit		46,385	37	%		50,529	39	%		(4,144)	(8)	%
Operating expenses, net:
Research and development		23,544	19	%		24,061	19	%		(517)	(2)	%
Selling, general, and administrative		20,186	16	%		29,771	23	%		(9,585)	(32)	%
Amortization of intangible assets		4,183	3	%		12,500	10	%		(8,317)	(67)	%
Restructuring		2,057	2	%		5,010	4	%		(2,953)	(59)	%
Acquisition costs		249	0	%		783	1	%		(534)	(68)	%
Asset impairment		—	0	%		2	0	%		(2)	*
Other, net		39	0	%		(140)	0	%		179	*
Total operating expenses, net		50,258	40	%		71,987	56	%		(21,729)	(30)	%
Operating income (loss)		(3,873)	(3)	%		(21,458)	(17)	%		17,585	(82)	%
Interest income (expense), net		(4,779)	(4)	%		(4,748)	(4)	%		(31)	1	%
Income (loss) before income taxes		(8,652)	(7)	%		(26,206)	(20)	%		17,554	(67)	%
Income tax expense (benefit)		301	0	%		(2,466)	(2)	%		2,767	*
Net income (loss)	$	(8,953)	(7)	%	$	(23,740)	(18)	%	$	14,787	(62)	%

*Not meaningful

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Net Sales

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

Three months ended September 30,

Change

2017

2016

Period to Period

(dollars in thousands)

Sales by market

LED Lighting, Display & Compound Semiconductor

$
59,721

45%

$
49,427

58%

$
10,294

21%

Advanced Packaging, MEMS & RF

22,775

17%

12,092

14%

10,683

88%

Scientific & Industrial

33,145

25%

20,997

25%

12,148

58%

Front-End Semiconductor

16,231

13%

2,966

3%

13,265

447%

Total

$
131,872

100%

$
85,482

100%

$
46,390

54%

Sales by geographic region

United States

$
34,723

26%

$
19,104

22%

$
15,619

82%

China

15,197

12%

21,238

25%

(6,041
)
(28)%

EMEA

17,243

13%

19,703

23%

(2,460
)
(12)%

Rest of World

64,709

49%

25,437

30%

39,272

154%

Total

$
131,872

100%

$
85,482

100%

$
46,390

54%


	Three Months Ended September 30,								Change
	2018				2017				Period to Period
	(dollars in thousands)
Sales by market
Advanced Packaging, MEMS & RF Filters	$	24,562	19	%	$	21,478	17	%	$	3,084	14	%
LED Lighting, Display & Compound Semiconductor		58,864	46	%		57,647	44	%		1,217	2	%
Front-End Semiconductor		13,476	11	%		16,256	13	%		(2,780)	(17)	%
Scientific & Industrial		29,855	24	%		33,927	26	%		(4,072)	(12)	%
Total	$	126,757	100	%	$	129,308	100	%	$	(2,551)	(2)	%
Sales by geographic region
United States	$	28,861	23	%	$	34,914	27	%	$	(6,053)	(17)	%
China		39,200	31	%		12,956	10	%		26,244	203	%
EMEA		30,685	24	%		16,948	13	%		13,737	81	%
Rest of World		28,011	22	%		64,490	50	%		(36,479)	(57)	%
Total	$	126,757	100	%	$	129,308	100	%	$	(2,551)	(2)	%

~~Total sales~~

Sales increased ~~across all market categories~~in the Advanced Packaging, MEMS & RF Filters and LED Lighting, Display & Compound Semiconductor markets for the three months ended September 30, ~~2017~~2018 against the comparable prior year period, ~~driven~~offset by ~~ongoing improvements~~decreases in ~~LED industry conditions, as well as additional sales from~~ the ~~Ultratech business acquired in May 2017, spread across all~~Front-End Semiconductor and Scientific & Industrial markets. Pricing was not a significant driver of the change in total sales. By geography, sales increased in the ~~United States~~China and ~~Rest of World~~EMEA regions, offset by decreases in ~~China~~the Rest of World and ~~EMEA.~~United States regions. The most significant increase occurred in the ~~Rest of World~~China region, which was largely attributable to the increased sales in the LED Lighting, Display & Compound Semiconductor market. However, we do not expect significant new orders for this market in ~~Malaysia, as well as additional sales from~~this region in the ~~Ultratech business acquired. Additionally, increased~~near future. Sales decreased in Rest of World due to a reduction of sales in the ~~United States were primarily attributable to increased sales~~LED lighting, Display & Compound Semiconductor market in ~~the Scientific & Industrial market, as well as additional sales from the Ultratech business acquired.~~Malaysia. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies.

Orders ~~increased~~decreased to ~~$161.9~~$100.3 million for the three months ended September 30, ~~2017~~2018 from ~~$118.0~~$161.9 million for the comparable prior year period. The ~~increase~~decrease in orders was primarily attributable to ~~increases~~a decrease in orders in the LED Lighting, Display & Compound Semiconductor market, offset by an increase in orders in the Front-End Semiconductor and Scientific & Industrial ~~markets, including additional bookings from the Ultratech acquisition.~~markets.

One of the performance measures we use as a leading indicator of the business is the book-to-bill ratio. The ratio is defined as orders recorded in a given period divided by revenue recognized in the same period. ~~A ratio greater than one indicates we are adding orders faster than we are recognizing revenue.~~ For the three months ended September 30, ~~2017,~~2018, the ratio was ~~1.2,~~0.8, compared to ~~1.4~~1.2 for the comparable prior period. Our backlog at September 30, ~~2017~~2018 was ~~$299.2~~$275.5 million, ~~which was higher than the backlog~~compared to $305.1 million at June 30, ~~2017 of $269.5 million.~~2018. During the three months ended September 30, ~~2017,~~2018, we recorded backlog adjustments of approximately ~~$0.1~~$3.1 million relating to orders that no longer met our bookings criteria.

Gross Profit

In the third quarter of ~~2017,~~2018, gross profit ~~increased~~decreased compared to the third quarter of ~~2016~~2017 due to a ~~sharp increase~~decrease in sales volume, ~~including the acquisition of Ultratech.~~as well as decreased gross margins. Gross margins ~~remained relatively consistent for the three months ended September 30, 2017 against the comparable prior period, as the increase in gross margins~~decreased principally due to product and region mix of sales in the period was offset by an inventory fair value step-up that was recorded in connection with the purchase accounting relating to the Ultratech acquisition. Given the current competitive environment in MOCVD business, we may see a decline in gross margins as we move beyond this calendar year.periods.

Research and ~~development~~Development

Table of ~~2017 compared~~Contents

comparable prior period primarily related to the third quarter of 2016 primarily as a result of the addition of the acquired Ultratech related research and development projects, partially offset by our decision to significantly reduce investments in certain 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.

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

Selling, general, and administrative expenses ~~increased~~decreased primarily ~~due~~related to personnel-related expenses, including a reduction in incentive compensation, and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs.

We recently discovered an attack on our computer systems by what appears to be a highly-sophisticated actor. We have notified law enforcement of the attack and have retained forensic experts to assist with the investigation. At this time, we do not know if or when we will be able to determine the extent of the breach or the potential impact to the Company, whether we will be able to identify who is responsible for this attack or whether we will be able to pursue legal action or other remedies to protect any compromised information or recover damages related to the attack. This attack, including the expenses incurred to address it, may have an adverse effect on our results of operations and/or financial condition. In addition, this attack could result in the loss or misuse of confidential information of the ~~acquired Ultratech related selling, general~~Company or that of our customers or others, result in litigation and ~~administrative costs, as well as increased professional and legal fees.~~potential liability, damage our reputation and/or otherwise harm our business.

Amortization ~~expense~~Expense

The ~~increase~~decrease 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 certain technology assets in the prior year as well as certain other~~ intangible assets ~~becoming fully amortized~~ during ~~2016.~~the second quarter of 2018.

Restructuring ~~expense~~Expense

~~approximately 75 employees.~~development. In addition, during 2017, we began the Ultratech acquisition integration process to enhance efficiencies, resulting in ~~additional employee terminations~~reductions in headcount and other facility ~~closing~~ costs. During the nine months ended September 30, 2018, payments against prior period accruals were made related to these restructuring initiatives.

During the second quarter of 2018, we initiated plans to further reduce excess capacity associated with the manufacture and support of our advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into our San Jose, California facility. As a result of this and other cost saving initiatives, we announced headcount reductions of approximately 40 employees and recorded restructuring charges related to these actions of $0.7 million for the three months ended September 30, 2018, consisting principally of personnel severance and related costs. We expect the consolidation to be completed in the first quarter of 2019.

During the third quarter of 2018, we initiated additional restructuring activities to further reduce costs, including headcount reductions impacting approximately 35 employees and recorded restructuring charges related to these actions of $1.1 million, consisting principally of personnel severance and related costs. We expect this initiative to be completed by the end of 2018 and to provide approximately $5 million in annualized savings. Over the next few quarters, we expect to incur additional restructuring costs of $1 million to $5$2 million as ~~it finalizes~~we complete all of these ~~activities.~~restructuring initiatives.

~~Acquisition costs~~Interest Income (Expense)

~~Acquisition costs are non-recurring charges incurred in connection with the acquisition~~We recorded net interest expense of ~~the Ultratech business.~~

~~Asset Impairment~~

~~During the third quarter of 2016 we decided to significantly reduce investments in certain technologies and recorded non-cash asset impairment charges of $57.6~~$4.8 million ~~partially offset by an adjustment to our assessment of the fair market value of an asset then held as available-for-sale of $1.6 million.~~

~~Interest Income (Expense)~~

~~For~~for the three months ended September 30, ~~2017, we recorded net interest expense of~~2018, compared to $4.7 million ~~compared with net interest income of $0.3 million in~~for the comparable prior year period. ~~The change primarily relates~~Included in interest expense for the three months ended September 30, 2018 and 2017 were non-cash charges of $3.0 million and $2.8 million, respectively, related to the amortization of debt discount and transaction costs of the Convertible Senior ~~Notes issued in January 2017.~~Notes.

Income Taxes

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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.

Our tax ~~benefit~~expense for the three months ended September 30, ~~2017~~2018 was ~~$1.8~~$0.3 million compared to a tax ~~expense~~benefit of ~~$1.1~~$2.5 million for the comparable prior period. The ~~2017~~2018 tax ~~benefit included a $2.2 million benefit relating to our domestic operations and a $0.4 million~~ expense ~~relating~~is mainly related to our non-U.S. operations, compared to ~~2016~~2017 when our ~~expense~~benefit included ~~$0.3~~a $2.8 million benefit related to domestic operations ~~and $0.8~~offset by $0.3 million expense related to our non-U.S. operations. The ~~current~~prior period domestic tax benefit is primarily attributable to an income tax benefit for losses incurred during the three months ended September 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~~prior 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 nine months ended September 30, ~~2017~~2018 and ~~2016~~2017

The following table presents ~~operating results as a percentage~~revenue and expense line items reported in our Consolidated Statements of ~~net sales, as well as~~Operations for 2018 and 2017 and the 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.~~

Nine months ended September 30,

Change

2017

2016

Period to Period

(dollars in thousands)

Net sales

$
341,324

100%

$
238,842

100%

$
102,482

43%

Cost of sales

215,344

63%

141,991

59%

73,353

52%

Gross profit

125,980

37%

96,851

41%

29,129

30%

Operating expenses, net

Research and development

57,669

17%

63,545

27%

(5,876
)
(9)%

Selling, general, and administrative

71,574

21%

58,230

24%

13,344

23%

Amortization

21,722

6%

15,785

7%

5,937

38%

Restructuring

9,605

3%

3,993

2%

5,612

141%

Acquisition costs

16,277

5%

—

0%

16,277

*

Asset impairment

1,139

0%

69,662

29%

(68,523
)
(98)%

Other, net

(228
)
(0)%

884

0%

(1,112
)
(126)%

Total operating expenses, net

177,758

52%

212,099

89%

(34,341
)
(16)%

Operating income (loss)

(51,778
)
(15)%

(115,248
)
(48)%

63,470

*

Interest income (expense), net

(12,369
)
(4)%

713

0%

(13,082
)
*

Income (loss) before income taxes

(64,146
)
(19)%

(114,535
)
(48)%

50,389

*

Income tax expense (benefit)

(24,969
)
(7)%

2,677

1%

(27,646
)
*

Net income (loss)

$
(39,177
)
(11)%

$
(117,212
)
(49)%

$
78,035

*


	Nine Months Ended September 30,								Change
	2018				2017				Period to Period
	(dollars in thousands)
Net sales	$	443,110	100	%	$	336,025	100	%	$	107,085	32	%
Cost of sales		284,651	64	%		215,150	64	%		69,501	32	%
Gross profit		158,459	36	%		120,875	36	%		37,584	31	%
Operating expenses, net:
Research and development		72,793	16	%		57,669	17	%		15,124	26	%
Selling, general, and administrative		70,842	16	%		71,574	21	%		(732)	(1)	%
Amortization of intangible assets		28,102	6	%		21,722	6	%		6,380	29	%
Restructuring		7,669	2	%		9,605	3	%		(1,936)	(20)	%
Acquisition costs		2,906	1	%		16,277	5	%		(13,371)	(82)	%
Asset impairment		252,343	57	%		1,139	0	%		251,204	*
Other, net		325	0	%		(228)	0	%		553	*
Total operating expenses, net		434,980	98	%		177,758	53	%		257,222	145	%
Operating income (loss)		(276,521)	(62)	%		(56,883)	(17)	%		(219,638)	*
Interest income (expense), net		(13,847)	(3)	%		(12,369)	(4)	%		(1,478)	12	%
Income (loss) before income taxes		(290,368)	(66)	%		(69,252)	(21)	%		(221,116)	*
Income tax expense (benefit)		(27,954)	(6)	%		(26,334)	(8)	%		(1,620)	6	%
Net income (loss)	$	(262,414)	(59)	%	$	(42,918)	(13)	%	$	(219,496)	*

*Not Meaningful

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Net Sales

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


	Nine months ended September 30,						Change				Nine Months Ended September 30,								Change
	2017			2016			Period to Period				2018				2017				Period to Period
	(dollars in thousands)										(dollars in thousands)
Sales by market
Advanced Packaging, MEMS & RF Filters											$	76,473	17	%	$	54,216	16	%	$	22,257	41	%
LED Lighting, Display & Compound Semiconductor	$	170,546	51%	$	97,132	41%	$	73,414		76%		236,597	53	%		167,105	50	%		69,492	42	%
Advanced Packaging, MEMS & RF	55,756		16%	52,400		22%	3,356			6%
Front-End Semiconductor												41,085	10	%		27,736	8	%		13,349	48	%
Scientific & Industrial	86,917		25%	83,510		35%	3,407			4%		88,955	20	%		86,968	26	%		1,987	2	%
Front-End Semiconductor	28,105		8%	5,800		2%	22,305			385%
Total	$	341,324	100%	$	238,842	100%	$	102,482		43%	$	443,110	100	%	$	336,025	100	%	$	107,085	32	%
Sales by geographic region
United States	$	73,256	21%	$	66,550	28%	$	6,706		10%	$	85,555	19	%	$	72,820	22	%	$	12,735	17	%
China	81,811		24%	54,621		23%	27,190			50%		185,050	42	%		81,121	24	%		103,929	128	%
EMEA	57,312		17%	61,999		26%	(4,687		)	(8)%		71,836	16	%		54,140	16	%		17,696	33	%
Rest of World	128,945		38%	55,672		23%	73,273			132%		100,669	23	%		127,944	38	%		(27,275)	(21)	%
Total	$	341,324	100%	$	238,842	100%	$	102,482		43%	$	443,110	100	%	$	336,025	100	%	$	107,085	32	%

Total sales increased across all market categories for the nine months ended September 30, ~~2017~~2018 against the comparable prior year period, driven by ~~ongoing improvements in~~increased sales to LED ~~industry conditions,~~manufacturers, as well as additional sales from the Ultratech business acquired in May 2017, ~~spread across all~~primarily in the Advanced Packaging, MEMS & RF Filters and Front-End Semiconductor markets. Pricing was not a significant driver of the change in total sales. ~~Sales also~~By geography, sales increased ~~across~~in the United States, China, and EMEA regions, offset by a decrease in sales in the Rest of World region. The most ~~geographical regions, primarily due~~significant increases occurred in the China region, which was largely attributable to the increased sales in the LED Lighting, Display & Compound Semiconductor market, as well as additional sales from the Ultratech ~~acquisition. Increased sales~~business acquired. However, we do not expect significant new orders for this market in this region in the ~~Rest of World region was principally driven by a significant increase in sales to customers located in Malaysia.~~near future. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies.

Orders ~~increased~~decreased to ~~$391.9~~$386.9 million for the nine months ended September 30, ~~2017~~2018 from ~~$247.3~~$391.9 million for the comparable prior year period. The ~~increase~~decrease in orders was primarily attributable to ~~an increase of over 80%~~a decrease in orders in the LED, Lighting, Display & Compound Semiconductor market, ~~as well as a 41%~~partially offset by an increase in orders in all other market categories, including additional bookings from the ~~Scientific & Industrial market.~~Ultratech 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 nine months ended September 30, ~~2017 and September 30, 2016,~~2018, the book-to-bill ratio was ~~1.1.~~0.9, compared to 1.2 for the comparable prior period. Our backlog at September 30, ~~2017~~2018 was ~~$299.2~~$275.5 million, ~~which was higher than the backlog~~compared to $334.3 million at December 31, ~~2016 of $209.2 million.~~2017. During the nine months ended September 30, ~~2017,~~2018, we increased backlog by approximately ~~$41.6~~$2.9 million relating to ~~backlog acquired~~the adoption of ASC Topic 606, Revenue from ~~Ultratech,~~Contracts with Customers, while adjusting for a decrease in backlog of approximately ~~$1.7~~$5.4 million relating to orders that no longer met our bookings criteria.

Gross Profit

~~For~~In the nine months ended September 30, ~~2017,~~2018, gross profit increased compared to ~~2016~~2017 due to ~~a sharp~~an increase in sales volume, including from the ~~addition~~acquisition of ~~the~~ Ultratech, acquisition, 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 as well as product and region mix of sales in the period. Given the current competitive environment in MOCVD business, we may see a decline inwhile gross margins ~~as we move beyond this calendar year.~~remained consistent.

Research and ~~development~~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~~increased for the nine months ended September 30, ~~2017 compared to 2016~~2018 against the comparable prior period primarily as a result of ~~our decision to significantly reduce investments~~the addition of the acquired Ultratech research and development related projects, offset by reductions in ~~certain technology, as well as decreases in other~~ personnel-related expenses and professional fees as a result of our initiative to streamline operations, enhance efficiencies, and reduce costs.

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Selling, General, and Administrative

Selling, general, and administrative expenses remained consistent with prior period, as increases due to the addition of the acquired Ultratech related selling, general, and administrative costs were offset by reductions to personnel-related expenses, including a reduction in incentive compensation, and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs. ~~These decreases were partially offset~~

We recently discovered an attack on our computer systems by ~~the addition~~what appears to be a highly-sophisticated actor. We have notified law enforcement of the ~~acquired Ultratech~~attack and have retained forensic experts to assist with the investigation. At this time, we do not know if or when we will be able to determine the extent of the breach or the potential impact to the Company, whether we will be able to identify who is responsible for this attack or whether we will be able to pursue legal action or other remedies to protect any compromised information or recover damages related ~~research~~to the attack. This attack, including the expenses incurred to address it, may have an adverse effect on our results of operations and/or financial condition. In addition, this attack could result in the loss or misuse of confidential information of the Company or that of our customers or others, result in litigation and ~~development projects.~~potential liability, damage our reputation and/or otherwise harm our business.

~~Selling, general, and administrative~~

Selling, general, and administrative expenses increased for the nine months ended September 30, 2017 compared to 2016 primarily due to the addition of the acquired Ultratech related selling, general and administrative costs.

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~~Ultratech. Amortization expense is expected to decrease in future quarters due to the impairment of ~~certain technology assets in the prior year as well as certain other~~ intangible assets ~~becoming fully amortized~~of $252.3 million during ~~2016.~~the second quarter of 2018.

Restructuring ~~expense~~Expense

During ~~2016,~~2017, we ~~undertook~~initiated certain restructuring activities ~~as part of~~related to our ~~initiative~~efforts to streamline operations, enhance efficiencies, and reduce costs, as well as ~~reducing future~~reduced our investments in certain technology ~~development, which together impacted approximately 75 employees.~~development. In addition, during 2017, we began the Ultratech acquisition integration process to enhance efficiencies, resulting in ~~additional employee terminations~~reductions in headcount and other facility ~~closing~~ costs. During the nine months ended September 30, 2018, payments against prior period accruals were made related to these restructuring initiatives.

During the second quarter of 2018, we initiated plans to further reduce excess capacity associated with the manufacture and support of our advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into our San Jose, California facility. As a result of this and other cost saving initiatives, we announced headcount reductions of approximately 40 employees and recorded restructuring charges related to these actions of $2.4 million for the nine months ended September 30, 2018, consisting principally of personnel severance and related costs. We expect the consolidation to be completed in the first quarter of 2019.

Acquisition ~~costs~~Costs

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

Asset impairment

During the second quarter of 2018, we lowered our projected results for the Ultratech asset group, which ~~included $4.2~~were significantly below the projected results at the time of the acquisition. The reduced projections were based on lower than expected unit volume of certain smartphones, which incorporate advanced packaging methods such as Fan-Out Wafer

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Level Packaging (“FOWLP”), and a delay in the adoption of FOWLP advanced packaging by other electronics manufacturers, both of which slowed orders and reduced revenue projections for our advanced packaging lithography systems. In addition, there has been a delay in the build out of 28nm facilities by companies in China who were expected to purchase our LSA systems. Taken together, the reduced projections identified during the second quarter of 2018 required us to assess the Ultratech asset group for impairment. As a result of the analysis, during the second quarter of 2018 we recorded a $252.3 million on non-cash ~~charges related to accelerated share-based compensation for employee terminations~~intangible asset impairment charge.

Interest Income (Expense)

We recorded net interest expense of $13.8 million for the nine months ended September 30, ~~2017.~~

~~Asset Impairment expense~~

~~During the nine months ended September 30, 2016, we recorded non-cash impairment charges of $57.6~~2018, compared to $12.4 million relating to our decision to significantly reduce investments in certain technologies, $5.9 million relating to our assessments of the fair market value of assets held for sale, and $6.1 million relating to the disposal of certain lab equipment. Impairment charges for the ~~nine months ended September 30, 2017 primarily relate to assessments of the fair market value of assets held for sale.~~

~~Interest Income (Expense)~~

~~For the nine months ended September 30, 2017, we recorded~~comparable prior period. The increase in net interest expense ~~of $12.4 million compared with net interest income of $0.7 million in the prior year period. The change~~is primarily ~~relates~~attributable to the Convertible Senior Notes issued in January ~~2017.~~

~~Income Taxes~~

~~At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable~~2017 that were outstanding for the full ~~year. This estimate is used~~period in 2018, compared to ~~determine~~a partial period in 2017. Included in interest expense for the ~~income tax provision or benefit on a year-to-date basis~~nine months ended September 30, 2018 and ~~may change in subsequent interim periods.~~2017 were non-cash charges of $8.7 million and $7.6 million, respectively, related to the amortization of debt discount and transaction costs of the Convertible Senior Notes.

Income Taxes

Our tax benefit for the nine months ended September 30, ~~2017~~2018 was ~~$25.0~~$28.0 million compared to ~~a tax expense of $2.7~~$26.3 million for the comparable prior period. The ~~2017~~2018 tax benefit included ~~$21.6~~a $1.1 million ~~relating~~benefit related to our domestic operations and ~~$3.4~~a $26.9 million ~~relating~~benefit related to our non-U.S. operations, compared to ~~2016~~2017 when our ~~expense~~benefit included ~~$1.2~~a $22.7 million benefit related to our domestic operations and ~~$1.5~~a $3.6 million benefit related to our non-U.S. operations. The current period domestic tax benefit is primarily attributable to refundable alternative minimum tax credits in accordance with the 2017 Tax Act, offset by the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The current period foreign tax benefit is primarily attributable to the intangible asset impairment charge incurred during the period. The prior period domestic tax benefit is primarily attributable to an income tax benefit for losses incurred during the nine months ended September 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~~prior period non-U.S. tax benefit is primarily attributable to the remeasurement 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~~were 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.~~

Liquidity and Capital Resources

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


	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Cash and cash equivalents	$	235,268	$	277,444	$	213,506	$	279,736
Restricted cash						828		847
Short-term investments	85,853		66,787			52,063		47,780
Total	$	321,121	$	344,231	$	266,397	$	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 September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, cash and cash equivalents of ~~$194.7~~$132.4 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 September 30, 2018, we had $92.1 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 net operating loss carryforwards. Approximately $27.2 million of undistributed earnings would be subject to foreign withholding taxes of approximately $2.7 million if distributed back to the United States. At September 30, 2017, we had $143.9 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.

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A summary of the cash flow activity atfor the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 is as follows:

Cash Flows from Operating Activities


	Nine months ended September 30,						Nine Months Ended September 30,
	2017			2016			2018		2017
	(in thousands)						(in thousands)
Net income (loss)	$	(39,177	)	$	(117,212	)	$	(262,414)	$	(42,918)
Non-cash items:
Depreciation and amortization	32,295			26,010				41,110		32,295
Non-cash interest expense	7,641			—				8,739		7,641
Deferred income taxes	(21,235		)	1,529				(28,872)		(22,600)
Share-based compensation expense	19,976			12,133				12,720		19,976
Asset impairment	1,139			69,662				252,343		1,139
Provision for bad debts	99			160				—		99
Changes in operating assets and liabilities	14,538			(16,590		)		(63,004)		19,644
Net cash provided by (used in) operating activities	$	15,276		$	(24,308	)	$	(39,378)	$	15,276

Net cash ~~provided by~~used in operating activities was ~~$15.3~~$39.4 million for the nine months ended September 30, ~~2017~~2018 and was due to the net loss of ~~$39.2~~$262.4 million plus adjustments for non-cash items of ~~$39.9~~$286.0 million, offset by ~~an increase~~a decrease in cash flow from ~~operating activities due to~~ changes in operating assets and liabilities of ~~$14.5~~$63.0 million. The changes in operating assets and liabilities were largely attributable to an increase in inventory and a decrease in customer deposits and deferred revenue.

Cash Flows from Investing Activities


	Nine months ended September 30,						Nine Months Ended September 30,
	2017			2016			2018		2017
	(in thousands)						(in thousands)
Acquisitions of businesses, net of cash acquired	$	(399,478	)	$	—		$	(2,662)	$	(399,478)
Capital expenditures	(17,403		)	(10,717		)		(5,788)		(17,403)
Changes in investments, net	27,812			52,921				(6,938)		27,812
Other	2,284			463
Proceeds from held for sale assets								—		2,284
Net cash provided by (used in) investing activities	$	(386,785	)	$	42,667		$	(15,388)	$	(386,785)

The cash used in investing activities during the nine months ended September 30, 2018 was attributable to net changes in investments as well as capital expenditures. The net cash used in investing activities during the nine months ended September 30, 2017 was primarily attributable to the net cash used in the acquisition of Ultratech 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 $2 million to $5 million.~~2017.

Cash Flows from Financing Activities

Nine months ended September 30,

2017

2016

(in thousands)

Settlement of equity awards, net of withholding taxes

$
(5,251
)
$
8

Purchases of common stock

—

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

335,752

—

Repayments of long-term debt

(1,193
)
(252
)
Net cash provided by (used in) financing activities

$
329,308

$
(13,593
)


	Nine Months Ended September 30,
	2018		2017
	(in thousands)
Settlement of equity awards, net of withholding taxes	$	(22)	$	(5,251)
Purchases of common stock		(11,457)		—
Proceeds from long-term debt borrowings		—		335,752
Repayments of long-term debt		—		(1,193)
Net cash provided by (used in) financing activities	$	(11,479)	$	329,308

The cash used in financing activities for the nine months ended September 30, 2018 was related to purchases of common stock and the net cash used to settle taxes related to employee equity programs. The cash provided by financing activities

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for the nine months ended September 30, 2017 was primarily related to the net cash proceeds received from the issuance of the Convertible Senior Notes in January 2017. The cash used in financing activities for the nine months ended September 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,~~us, 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 ~~$85.9~~$52.1 million at September 30, ~~2017.~~2018. These securities are subject to interest rate risk and, based on our investment portfolio at September 30, ~~2017,~~2018, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of $0.2 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.

~~From time to time, we manage 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 third quarter of 2017, we~~purposes and had ~~an immaterial amount of~~not designated our foreign exchange derivatives ~~designated~~ as hedges. Accordingly, ~~most foreign exchange derivatives are recorded in our Consolidated Balance Sheets 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.

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Our net sales to customers located outside of the United States represented approximately ~~74%~~77% and ~~79%~~81% of our total net sales for the three and nine months ended September 30, ~~2017,~~2018, respectively, and ~~78%~~73% and ~~72%~~78% for the comparable ~~2016~~2017 periods. We expect that net sales to customers outside the United States will continue to represent a large percentage of our total net sales. Our sales denominated in currencies other than the U.S. dollar represented 1%2% and 2%1% of total net sales in the three and nine months ended September 30, ~~2017, respectively,~~2018, and 2%1% and 4%2% for the comparable ~~2016~~2017 periods.

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~~Over Financial Reporting

Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective as of September 30, ~~2017.~~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~~Over Financial Reporting

On May 26, 2017, 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 revising internal controls where necessary. See Note 3 to the Consolidated Financial

~~Statements —~~ ~~Business Combinations~~~~, for further details. There were no other changes in internal control for~~During the quarter ended September 30, ~~2017~~2018, there were no changes in internal control that have materially affected or are reasonably likely to materially affect internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

~~On April 12, 2017, the Company filed a patent infringement complaint in the U.S. District Court for the Eastern District of New York against SGL Carbon, LLC~~registration statement and SGL Carbon SE (collectively, “SGL”), alleging infringement of patents relating to wafer carrier technology used in MOCVD equipment. The complaint alleges that SGL infringes Veeco’s patents by making and selling certain wafer carriers to Veeco’s competitor, Advanced Micro-Fabrication Equipment, Inc. (“AMEC”). On November 2, 2017, the U.S. District Court granted the Company’s motion for a preliminary injunction prohibiting SGL from shipping wafer carriers using the Company’s patented technology without the Company’s express authorization. The Company continues to seek a post-trial permanent injunction and monetary damages against SGL.

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~~10‑Q and in Part I — Item 1A of our ~~2016~~2017 Form ~~10-K~~.10‑K. There have been no material changes from the risk factors previously disclosed in our ~~2016~~2017 Form ~~10-K.~~10‑K, other than the additional risk factors described below.

Our goodwill is sensitive to changes in our stock price and other factors, and we may be required to take additional impairment charges on goodwill.

We are required to assess goodwill annually for impairment, which we do at the beginning of the fourth quarter, or on an interim basis whenever certain events occur or circumstances change, such as an adverse change in business climate, if there is a decline in the adjusted market capitalization of the Company below the book value of the Company’s equity for an extended period of time, or other events that would more likely than not indicate that the fair value of the Company’s single goodwill reporting unit is less than its carrying amount. There were no changes to goodwill during the nine months ended September 30, 2018.

As the Company maintains a single goodwill reporting unit, we determine the fair value of the reporting unit based upon the Company’s adjusted market capitalization. We calculate the adjusted market capitalization by multiplying the average closing share price of our common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium.

Based on the most recent annual impairment test as of October 1, 2018, we determined that the fair value of the Company’s single goodwill reporting unit exceeded its carrying amount by approximately $60 million. However, this analysis is sensitive to changes in our stock price and absent other qualitative factors, we may be required to record a goodwill impairment charge in future periods if the stock price declines subsequent to our annual measurement date and remains depressed for an extended period of time. Any such goodwill, or other impairment charge, could have a material adverse effect on our results of operations.

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We recently discovered an attack on our computer systems by what appears to be a highly-sophisticated actor. We have notified law enforcement of the attack and have retained forensic experts to assist with the investigation. At this time, we do not know if or when we will be able to determine the extent of the breach or the potential impact to the Company, whether we will be able to identify who is responsible for this attack or whether we will be able to pursue legal action or other remedies to protect any compromised information or recover damages related to the attack. This attack, including the expenses incurred to address it, may have an adverse effect on our results of operations and/or financial condition. In addition, this attack could result in the loss or misuse of confidential information of the Company or that of our customers or others, result in litigation and potential liability, damage our reputation and/or otherwise harm our business.

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

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

Total

Approximate

Number of

Dollar

Shares Purchased

Value of Shares

as Part of

That May Yet Be

Publicly

Purchased

Total

Average Price

Announced

Under the

Number of

Paid

Plans or

Period

Shares Purchased

Per Share

Programs

(in thousands, except average price paid per share)

July 2, 2018 - July 29, 2018

14.75

95,140

July 30, 2018 - September 2, 2018

763

11.39

763

86,437

September 3, 2018 - September 30, 2018

11.86

85,673

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 September 30, ~~2017, $22.3~~2018, $14.3 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~~Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

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

~~Exhibit~~		~~Incorporated by Reference~~			~~Filed or~~ ~~Furnished~~
~~Number~~	~~Exhibit Description~~	~~Form~~	~~Exhibit~~	~~Filing Date~~	~~Herewith~~
~~10.1~~	~~Veeco Amended and Restated 2010 Stock Incentive Plan, effective March 3, 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.~~				**


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

10.1	Amendment dated August 29, 2018 to Employment Agreement between the Company and John R. Peeler.	8-K	10.1	9/4/2018
10.2	Letter Agreement dated August 29, 2018 between the Company and William J. Miller, Ph.D.	8-K	10.2	9/4/2018
10.3	Letter Agreement dated August 29, 2018 between the Company and Shubham Maheshwari.	8-K	10.3	9/4/2018
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

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*		~~Filed herewith~~
**		~~Filed herewith electronically~~

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November ~~3, 2017.~~1, 2018.


Veeco Instruments Inc.

By:	/S/ WILLIAM J. MILLER, Ph.D
	~~By:~~William J. Miller, Ph.D
~~/S/ JOHN R. PEELER~~	Chief Executive Officer
			~~John R. Peeler~~
		~~Chairman and Chief Executive Officer~~

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


Safe Harbor Statement	1

PART I—FINANCIAL INFORMATION	3 4

Item 1. Financial Statements	4
	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	26
Item 3. Quantitative and Qualitative Disclosures about Market Risk	35
~~Item 4. Controls and Procedures~~	35 37

~~PART II—OTHER INFORMATION~~Item 4. Controls and Procedures	37 38

PART II—OTHER INFORMATION	39

Item 1. Legal Proceedings	39
	37
Item 1A. Risk Factors	39
	37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37
~~Item 3. Defaults Upon Senior Securities~~	37
~~Item 4. Mine Safety Disclosures~~	37
~~Item 5. Other Information~~	38
~~Item 6. Exhibits~~	39 40

~~SIGNATURES~~Item 3. Defaults Upon Senior Securities	40
	40
Item 4. Mine Safety Disclosures	40

Item 5. Other Information	40

Item 6. Exhibits	41

SIGNATURES	42

	Acquisition Date
	(May 26, 2017)
	(in thousands)
Cash consideration, net of cash acquired	$	404,489
Equity consideration (7.2 million shares issued)	228,644
Replacement equity awards attributable to pre-acquisition service	228
Acquisition date fair value	$	633,361

	Acquisition Date
	(May 26, 2017)
	Amount		Useful life
	(in thousands)
Technology	$	158,390	8 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

	Three months ended September 30, 2017			Nine months ended September 30, 2017
	(in thousands)
Revenue	$	21,236		$	45,286
Loss from operations before income taxes	$	(21,556	)	$	(44,374	)

	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2017
Cash equivalents
Corporate debt	$	—	$	1,500	$	—	$	1,500
Total	$	—	$	1,500	$	—	$	1,500
Short-term investments
U.S. treasuries	$	58,806	$	—	$	—	$	58,806
Corporate debt	—		10,911		—		10,911
Commercial paper	—		16,136		—		16,136
Total	$	58,806	$	27,047	$	—	$	85,853

December 31, 2016
Cash equivalents
Corporate debt	$	—	$	1,501	$	—	$	1,501
Total	$	—	$	1,501	$	—	$	1,501
Short-term investments
U.S. treasuries	$	40,008	$	—	$	—	$	40,008
Government agency securities	—		10,012		—		10,012
Corporate debt	—		13,773		—		13,773
Commercial paper	—		2,994		—		2,994
Total	$	40,008	$	26,779	$	—	$	66,787

	Gross carrying		Accumulated
	amount		impairment		Net amount
	(in thousands)
Balance at December 31, 2016	$	238,108	$	123,200	$	114,908
Acquisition	193,621		—		193,621
Balance at September 30, 2017	$	431,729	$	123,200	$	308,529

		September 30, 2017						December 31, 2016
	Weighted			Accumulated						Accumulated
	Average Remaining	Gross		Amortization				Gross		Amortization
	Amortization	Carrying		and		Net		Carrying		and		Net
	Period	Amount		Impairment		Amount		Amount		Impairment		Amount
	(in years)	(in thousands)
Technology	7.5	$	307,588	$	125,154	$	182,434	$	149,198	$	113,904	$	35,294
Customer relationships	11.6	164,595		35,653		128,942		47,885		28,659		19,226
In-process R&D	—	43,340		—		43,340		—		—		—
Trademarks and tradenames	6.6	28,010		3,272		24,738		2,590		1,948		642
Indefinite-lived trademark	—	2,900		—		2,900		2,900		—		2,900
Other	0.5	3,686		2,444		1,242		2,026		1,710		316
Total	9.0	$	550,119	$	166,523	$	383,596	$	204,599	$	146,221	$	58,378

	Operating Leases
	(in thousands)
Payments due by period:
2017	$	1,678
2018	5,474
2019	5,002
2020	4,763
2021	1,807
Thereafter	4,505
Total	$	23,229


	Three months ended September 30, 2018				Three months ended September 30, 2017
	Gains (Losses)		Weighted average notional amount		Gains (Losses)		Weighted average notional amount
	(in thousands)
Foreign currency exchange forwards	$	132	$	4,448	$	(10)	$	361


	Nine months ended September 30, 2018				Nine months ended September 30, 2017
	Gains (Losses)		Weighted average notional amount		Gains (Losses)		Weighted average notional amount
	(in thousands)
Foreign currency exchange forwards	$	348	$	2,869	$	(9)	$	317

			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)	25		10			35
Balance - September 30, 2017	$	1,822	$	(10	)	$	1,812

	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	(129	)	37.03
Balance - September 30, 2017	1,429		35.07

			Weighted Average
	Number of		Grant Date
	Shares		Fair Value
	(in thousands)
Balance - December 31, 2016	1,949		$	23.85
Granted	642		29.35
Assumed from Ultratech	338		31.75
Vested	(695	)	27.12
Forfeited	(173	)	26.39
Balance - September 30, 2017	2,061		25.85