UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

For the quarterly period ended ~~June~~September 30, 2022

☐

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

Commission file number 0-16244

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)


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

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

Registrant’s telephone number, including area code:

(516) 677-0200

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


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

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

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

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


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

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

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

As of ~~August 1,~~November 2, 2022, there were ~~51,425,233~~51,425,150 shares of the registrant’s common stock outstanding.

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VEECO INSTRUMENTS INC.

INDEX


Safe Harbor Statement	1

PART I—FINANCIAL INFORMATION	4

Item 1. Financial Statements	4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2830

Item 3. Quantitative and Qualitative Disclosures about Market Risk	3840

Item 4. Controls and Procedures	3840

PART II—OTHER INFORMATION	3941

Item 1. Legal Proceedings	3941

Item 1A. Risk Factors	3941

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3942

Item 3. Defaults Upon Senior Securities	3942

Item 4. Mine Safety Disclosures	4042

Item 5. Other Information	4043

Item 6. Exhibits	4043

SIGNATURES	4144

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Safe Harbor Statement

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

In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events, including the potential impact of the COVID-19 pandemic on our business, and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.

The risks and uncertainties of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “we,” “us,” and “our,” unless the context indicates otherwise) include, without limitation, those set forth under the heading “Risk Factors” in Part 1, Item 1A of our 2021 Form 10-K, those included within Item 1A of our quarterly ~~report~~reports on Form 10-Q for the ~~quarter~~quarters ending March 31, 2022 and June 30, 2022, and the following:

Risks Related to Our Business, Finance and Operations

●

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

●

Unfavorable market conditions, coupled with ongoing supply chain challenges and inflationary pressures, have adversely affected, and may continue to adversely affect, our operating results;

●

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

●

Our sales cycle is long and unpredictable;

●

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

●

We may be required to take impairment charges on assets;

●

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

●

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

●

Our current debt facilities, including our 2.70% Convertible Senior Notes due 2023 (the “2023 Notes”), our 3.50% Convertible Senior Notes due 2025 (the “2025 Notes”), or our 3.75% Convertible Senior Notes due 2027 (the “2027 Notes”) (the 2023 Notes, 2025 Notes, and 2027 Notes, together, the “Notes”), and our revolving credit facility (the “Credit Facility”), may contain certain restrictions, covenants and repurchase provisions that

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may limit our ability to raise the funds necessary to meet our working capital needs, which may include the cash conversion of the Notes or repurchase of the Notes for cash upon a fundamental change;

●

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

●

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

●

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

●

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

Risks Associated with Operating a Global Business

●

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

●

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

●

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

●

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

●

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

●

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

●

We are subject to foreign currency exchange risks;

Risks Related to Intellectual Property and Cybersecurity

●

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

●

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

●

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

Risks Associated with Our Industry

●

We face significant competition;

●

We operate in industries characterized by rapid technological change;

●

Certain of our sales are dependent on the demand for consumer electronic products and automobiles, which can experience significant volatility;

●

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

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●

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

●

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;

●

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

●

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;

General Risk Factors

●

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

●

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

●

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

●

Changes in accounting pronouncements or taxation rules, practices, or rates may adversely affect our financial results.

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

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Veeco Instruments Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)


	June 30,		December 31,		September 30,		December 31,
	2022		2021		2022		2021
Assets	(unaudited)				(unaudited)
Current assets:
Cash and cash equivalents	$	116,916	$	119,747	$	169,111	$	119,747
Restricted cash		727		725		557		725
Short-term investments		113,159		104,181		101,862		104,181
Accounts receivable, net		126,881		109,609		142,985		109,609
Contract assets		17,367		18,293		29,865		18,293
Inventories		176,491		170,858		187,737		170,858
Prepaid expenses and other current assets		17,743		25,974		17,586		25,974
Total current assets		569,284		549,387		649,703		549,387
Property, plant, and equipment, net		105,031		99,743		108,416		99,743
Operating lease right-of-use assets		26,405		28,813		25,119		28,813
Intangible assets, net		28,896		33,905		26,391		33,905
Goodwill		181,943		181,943		181,943		181,943
Deferred income taxes		1,639		1,639		1,639		1,639
Other assets		3,454		3,546		3,406		3,546
Total assets	$	916,652	$	898,976	$	996,617	$	898,976

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	47,074	$	44,456	$	51,129	$	44,456
Accrued expenses and other current liabilities		56,918		79,752		65,062		79,752
Customer deposits and deferred revenue		74,560		63,136		122,285		63,136
Income taxes payable		1,598		1,860		1,565		1,860
Current portion of long-term debt		20,120		—		20,144		—
Total current liabilities		200,270		189,204		260,185		189,204
Deferred income taxes		4,774		4,792		4,748		4,792
Long-term debt		254,055		229,438		254,272		229,438
Long-term operating lease liabilities		31,772		32,834		31,266		32,834
Other liabilities		5,044		5,080		5,031		5,080
Total liabilities		495,915		461,348		555,502		461,348
Stockholders' equity:
Preferred stock, $0.01 par value; 500,000 shares authorized; 0 shares issued and outstanding.		—		—
Common stock, $0.01 par value; 120,000,000 shares authorized; 51,425,233 shares issued and outstanding at June 30, 2022 and 50,652,864 shares issued and outstanding at December 31, 2021		515		507
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; 51,420,150 shares issued and outstanding at September 30, 2022 and 50,652,864 shares issued and outstanding at December 31, 2021						515		507
Additional paid-in capital		1,065,590		1,116,921		1,071,097		1,116,921
Accumulated deficit		(645,757)		(681,283)		(630,716)		(681,283)
Accumulated other comprehensive income		389		1,483		219		1,483
Total stockholders' equity		420,737		437,628		441,115		437,628
Total liabilities and stockholders' equity	$	916,652	$	898,976	$	996,617	$	898,976

See accompanying Notes to the Consolidated Financial Statements.

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021
Net sales	$	163,999	$	146,344	$	320,425	$	280,059	$	171,913	$	150,246	$	492,338	$	430,305
Cost of sales		99,732		86,178		190,146		164,978		101,962		87,077		292,109		252,055
Gross profit		64,267		60,166		130,279		115,081		69,951		63,169		200,229		178,250
Operating expenses, net:
Research and development		26,016		22,553		50,133		44,398		27,104		21,999		77,237		66,397
Selling, general, and administrative		22,950		21,466		45,844		41,722		22,144		21,603		67,987		63,325
Amortization of intangible assets		2,505		2,976		5,009		6,330		2,505		2,976		7,514		9,305
Other operating expense (income), net		(27)		(81)		(47)		(36)		634		175		587		138
Total operating expenses, net		51,444		46,914		100,939		92,414		52,387		46,753		153,325		139,165
Operating income		12,823		13,252		29,340		22,667		17,564		16,416		46,904		39,085
Interest income		213		235		302		370		571		95		873		464
Interest expense		(2,848)		(6,820)		(5,740)		(13,578)		(2,886)		(7,107)		(8,626)		(20,685)
Income before income taxes		10,188		6,667		23,902		9,459		15,249		9,404		39,151		18,864
Income tax expense (benefit)		533		319		917		617		208		411		1,125		1,029
Net income	$	9,655	$	6,348	$	22,985	$	8,842	$	15,041	$	8,993	$	38,026	$	17,835

Income per common share:
Basic	$	0.19	$	0.13	$	0.46	$	0.18	$	0.30	$	0.18	$	0.76	$	0.36
Diluted	$	0.18	$	0.12	$	0.43	$	0.17	$	0.27	$	0.17	$	0.70	$	0.33

Weighted average number of shares:
Basic		49,697		48,743		49,702		48,758		49,887		49,021		49,831		48,968
Diluted		59,455		53,942		59,521		53,539		65,151		53,849		65,090		53,606

See accompanying Notes to the Consolidated Financial Statements.

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021
Net income	$	9,655	$	6,348	$	22,985	$	8,842	$	15,041	$	8,993	$	38,026	$	17,835
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities		(224)		(15)		(1,043)		(4)		(113)		(12)		(1,156)		(16)
Change in currency translation adjustments		(48)		(9)		(51)		(39)		(57)		(21)		(108)		(60)
Total other comprehensive income (loss), net of tax		(272)		(24)		(1,094)		(43)		(170)		(33)		(1,264)		(76)

Total comprehensive income	$	9,383	$	6,324	$	21,891	$	8,799	$	14,871	$	8,960	$	36,762	$	17,759

See accompanying Notes to the Consolidated Financial Statements.

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Six months ended June 30,				Nine months ended September 30,
	2022		2021		2022		2021
Cash Flows from Operating Activities
Net income	$	22,985	$	8,842	$	38,026	$	17,835
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		12,749		13,189		19,100		19,634
Non-cash interest expense		477		7,100		719		10,762
Deferred income taxes		(18)		17		(43)		(12)
Share-based compensation expense		10,759		7,605		16,969		11,735
Changes in operating assets and liabilities:
Accounts receivable and contract assets		(16,346)		(21,158)		(44,948)		(12,987)
Inventories		(5,873)		(18,298)		(18,117)		(24,879)
Prepaid expenses and other current assets		8,231		4,489		8,388		9,829
Accounts payable and accrued expenses		(17,613)		14,046		(6,072)		21,786
Customer deposits and deferred revenue		11,424		3,334		59,149		(6,532)
Income taxes receivable and payable, net		(263)		449		(296)		823
Other, net		1,657		1,114		2,499		2,655
Net cash provided by (used in) operating activities		28,169		20,729		75,374		50,649

Cash Flows from Investing Activities
Capital expenditures		(15,420)		(9,082)		(21,771)		(31,453)
Proceeds from the sale of investments		23,335		130,398		44,592		199,475
Payments for purchases of investments		(33,876)		(156,020)		(43,982)		(225,112)
Net cash provided by (used in) investing activities		(25,961)		(34,704)		(21,161)		(57,090)

Cash Flows from Financing Activities
Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan		2,129		1,865		2,909		2,709
Restricted stock tax withholdings		(7,115)		(2,747)		(7,818)		(4,260)
Net cash provided by (used in) financing activities		(4,986)		(882)		(4,909)		(1,551)
Effect of exchange rate changes on cash and cash equivalents		(51)		(39)		(108)		(60)
Net increase (decrease) in cash, cash equivalents, and restricted cash		(2,829)		(14,896)		49,196		(8,052)
Cash, cash equivalents, and restricted cash - beginning of period		120,472		130,283		120,472		130,283
Cash, cash equivalents, and restricted cash - end of period	$	117,643	$	115,387	$	169,668	$	122,231

Supplemental Disclosure of Cash Flow Information
Interest paid	$	5,037	$	4,160	$	7,760	$	9,039
Income taxes paid (refunds received)		1,083		(196)		1,349		(130)
Non-cash activities
Capital expenditures included in accounts payable and accrued expenses		6,464		15,400		6,709		9,133
Net transfer of inventory to property, plant and equipment		237		—		1,235		(253)
Right-of-use assets obtained in exchange for lease obligations		258		20,353		375		20,353

See accompanying Notes to the Consolidated Financial Statements.

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature.

Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2022 interim quarters end on April 3, July 3, and October 2, and the 2021 interim quarters ended on April 4, July 4, and October 3. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.

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

Revenue Recognition

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

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

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

Most of the Company’s revenue is recognized at a point in time when the performance obligation is satisfied. The Company considers many facts when evaluating each of its sales arrangements to determine the timing of revenue recognition, including its contractual obligations and the nature of the customer’s post-delivery acceptance provisions. The Company’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For many of these arrangements, a customer source inspection of the system is performed in the Company’s facility, test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery, or other quality assurance testing is performed internally to ensure system functionality prior to shipment. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When the Company objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery either through customer testing or the Company’s historical experience of its tools meeting specifications, transfer of control of the product to the customer is considered to have occurred and revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date. For new products, new applications of existing products, or for products with substantive customer acceptance provisions where the Company cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue and the associated costs are deferred. The Company recognizes such revenue and costs upon obtaining objective evidence that the acceptance provisions can be achieved, assuming all other revenue recognition criteria have been met.

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

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

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

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

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Each quarter the Company assesses the valuation and recoverability of all inventories: materials (raw materials, spare parts, and service inventory); work-in-process; and finished goods. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost. The Company evaluates usage requirements by analyzing historical usage, anticipated demand, alternative uses of materials, and other qualitative factors. Unanticipated changes in demand for the Company’s products may require a write down of

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

Recently Adopted Accounting Standards

The Company adopted ASU 2020-06: Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity on January 1, 2022, using the modified retrospective method for all financial instruments that are outstanding as of the adoption date. This standard simplifies the accounting for convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature, as well as convertible instruments with a beneficial conversion feature. As a result, entities will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce non-cash interest expense for entities that have issued a convertible instrument that was within the scope of those models before the adoption of ASU 2020-06, such as the Company’s 2023 Notes, 2025 Notes, and 2027 Notes. Additionally, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share, and precludes the use of the treasury stock method for certain debt instruments, such as the Company’s 2023 Notes, 2025 Notes, and 2027 Notes.

The adoption of ASU 2020-06 resulted in the following adjustments to the Consolidated Balance Sheets:


	December 31, 2021		Adoption of ASU 2020-06		January 1, 2022

	(in thousands)
Balance Sheet line item:
Long-term debt	$	229,438	$	44,260	$	273,698
Additional paid-in capital		1,116,921		(56,801)		1,060,120
Accumulated deficit		(681,283)		12,541		(668,742)

The adoption of ASU 2020-06 resulted in the following adjustments to the Company’s calculations of basic and diluted income per share for the three and ~~six~~nine months ended ~~June~~September 30, 2022:


	Three months ended June 30, 2022						Six months ended June 30, 2022						Three months ended September 30, 2022						Nine months ended September 30, 2022
	Under		Under				Under		Under				Under		Under				Under		Under
	ASU 2020-06		legacy accounting		Difference		ASU 2020-06		legacy accounting		Difference		ASU 2020-06		legacy accounting		Difference		ASU 2020-06		legacy accounting		Difference
Income per common share:
Basic income per common share	$	0.19	$	0.15	$	0.04	$	0.46	$	0.37	$	0.09	$	0.30	$	0.25	$	0.05	$	0.76	$	0.62	$	0.14
Diluted income per common share		0.18		0.14		0.04		0.43		0.33		0.10		0.27		0.24		0.03		0.70		0.57		0.13

The adoption of ASU 2020-06 did not materially impact the Company’s cash flows or compliance with debt covenants.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Note 2 — Income Per Common Share

Basic income per share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted income per share is calculated by dividing net income available to common shareholders by the weighted average number of shares used to calculate basic income per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share if the performance targets have been achieved, or would have been achieved if the reporting date was the end of the contingency period. Upon the adoption of ASU 2020-06 on January 1, 2022, the Company includes the dilutive effect of shares issuable upon conversion of its Notes in the calculation of diluted income per share using the if-converted method. Prior to the adoption of ASU 2020-06, based on the Company’s ability and intent to settle the principal amount of its convertible senior notes in cash, and the excess of the principal portion in shares of its common stock, the Company accounted for the conversion spread using the treasury stock method, and the shares issuable upon conversion of the Notes were not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount and if the effect would be dilutive. The computations of basic and diluted income per share for the three months and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 are as follows:


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021

	(in thousands, except per share amounts)								(in thousands, except per share amounts)
Numerator:
Net income	$	9,655	$	6,348	$	22,985	$	8,842	$	15,041	$	8,993	$	38,026	$	17,835
Interest expense associated with convertible notes		1,273		—		2,546		—		2,549		—		7,639		—
Net income available to common shareholders	$	10,928	$	6,348	$	25,531	$	8,842	$	17,590	$	8,993	$	45,665	$	17,835

Denominator:
Basic weighted average shares outstanding		49,697		48,743		49,702		48,758		49,887		49,021		49,831		48,968
Effect of potentially dilutive share-based awards		816		1,707		877		1,553		801		1,507		796		1,377
Dilutive effect of convertible notes		8,942		3,492		8,942		3,228		14,463		3,321		14,463		3,261
Diluted weighted average shares outstanding		59,455		53,942		59,521		53,539		65,151		53,849		65,090		53,606

Net income per common share:
Basic	$	0.19	$	0.13	$	0.46	$	0.18	$	0.30	$	0.18	$	0.76	$	0.36
Diluted	$	0.18	$	0.12	$	0.43	$	0.17	$	0.27	$	0.17	$	0.70	$	0.33

Potentially dilutive shares excluded from the diluted calculation as their effect would be antidilutive		987		449		645		452		1,016		451		751		447
Maximum potential shares to be issued for settlement of the convertible notes excluded from the diluted calculation as their effect would be antidilutive		6,025		8,811		6,025		8,811		504		8,811		504		8,811

Note 3 — Assets

Investments

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

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other operating expense (income), net” in the Consolidated Statements of Operations.

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

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

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

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

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

~~The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021:~~

Level 1

Level 2

Level 3

Total

(in thousands)
June 30, 2022

Cash equivalents

Certificate of deposits and time deposits

$
46,720

$
—

$
—

$
46,720
Money market cash

319

—

—

319
Total

$
47,039

$
—

$
—

$
47,039
Short-term investments

U.S. treasuries

$
57,008

$
—

$
—

$
57,008
Government agency securities

—

15,183

—

15,183
Corporate debt

—

39,082

—

39,082
Commercial paper

—

1,886

—

1,886
Total

$
57,008

$
56,151

$
—

$
113,159

December 31, 2021

Cash equivalents

Certificate of deposits and time deposits

$
41,544

$
—

$
—

$
41,544
Money market cash

121

—

—

121
Total

$
41,665

$
—

$
—

$
41,665
Short-term investments

U.S. treasuries

$
51,095

$
—

$
—

$
51,095
Government agency securities

—

12,052

—

12,052
Corporate debt

—

40,035

—

40,035
Commercial paper

—

999

—

999
Total

$
51,095

$
53,086

$
—

$
104,181

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021:


	Level 1		Level 2		Level 3		Total

	(in thousands)
September 30, 2022
Cash equivalents
Certificate of deposits and time deposits	$	63,527	$	—	$	—	$	63,527
Commercial paper		—		4,959		—		4,959
Money market cash		15,066		—		—		15,066
Total	$	78,593	$	4,959	$	—	$	83,552
Short-term investments
U.S. treasuries	$	46,353	$	—	$	—	$	46,353
Government agency securities		—		12,879		—		12,879
Corporate debt		—		36,745		—		36,745
Commercial paper		—		5,885		—		5,885
Total	$	46,353	$	55,509	$	—	$	101,862

December 31, 2021
Cash equivalents
Certificate of deposits and time deposits	$	41,544	$	—	$	—	$	41,544
Money market cash		121		—		—		121
Total	$	41,665	$	—	$	—	$	41,665
Short-term investments
U.S. treasuries	$	51,095	$	—	$	—	$	51,095
Government agency securities		—		12,052		—		12,052
Corporate debt		—		40,035		—		40,035
Commercial paper		—		999		—		999
Total	$	51,095	$	53,086	$	—	$	104,181

There were 0no transfers between fair value measurement levels during the three months and ~~six~~nine months ended ~~June~~September 30, 2022.

~~At June 30, 2022 and December 31, 2021, the amortized cost and fair value of available-for-sale securities consist of:~~

Gross

Gross


Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

(in thousands)
June 30, 2022

U.S. treasuries

$
57,697

$
—

$
(689)

$
57,008
Government agency securities

15,291

—

(108)

15,183
Corporate debt

39,659

—

(577)

39,082
Commercial paper

1,886

—

—

1,886
Total

$
114,533

$
—

$
(1,374)

$
113,159

December 31, 2021

U.S. treasuries

$
51,269

$
—

$
(174)

$
51,095
Government agency securities

12,075

—

(23)

12,052
Corporate debt

40,169

—

(134)

40,035
Commercial paper

999

—

—

999
Total

$
104,512

$
—

$
(331)

$
104,181

~~Available-for-sale securities in a loss position at June 30, 2022 and December 31, 2021 consist of:~~

June 30, 2022

December 31, 2021

Continuous Loss Position

Continuous Loss Position

Continuous Loss Position

for Less than 12 Months

for 12 Months or More

for Less than 12 Months




Gross



Gross



Gross

Estimated

Unrealized

Estimated

Unrealized

Estimated

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(in thousands)
U.S. treasuries

$
57,008

$
(689)

$
—

$
—

$
51,095

$
(174)
Government agency securities

12,585

(100)

2,598

(8)

12,052

(23)
Corporate debt

36,313

(508)

2,769

(69)

40,035

(134)
Total

$
105,906

$
(1,297)

$
5,367

$
(77)

$
103,182

$
(331)

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

~~The contractual maturities of securities classified as available-for-sale at June 30, 2022 were as follows:~~

June 30, 2022

Amortized

Estimated

Cost

Fair Value

(in thousands)
Due in one year or less

$
102,309

$
101,262
Due after one year through two years

12,224

11,897
Total

$
114,533

$
113,159

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

At September 30, 2022 and December 31, 2021, the amortized cost and fair value of available-for-sale securities consist of:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value

	(in thousands)
September 30, 2022
U.S. treasuries	$	47,084	$	—	$	(732)	$	46,352
Government agency securities		12,991		—		(112)		12,879
Corporate debt		37,389		—		(643)		36,746
Commercial paper		5,885		—		—		5,885
Total	$	103,349	$	—	$	(1,487)	$	101,862

December 31, 2021
U.S. treasuries	$	51,269	$	—	$	(174)	$	51,095
Government agency securities		12,075		—		(23)		12,052
Corporate debt		40,169		—		(134)		40,035
Commercial paper		999		—		—		999
Total	$	104,512	$	—	$	(331)	$	104,181

Available-for-sale securities in a loss position at September 30, 2022 and December 31, 2021 consist of:


	September 30, 2022								December 31, 2021
	Continuous Loss Position				Continuous Loss Position				Continuous Loss Position
	for Less than 12 Months				for 12 Months or More				for Less than 12 Months
			Gross				Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

		(in thousands)
U.S. treasuries	$	16,973	$	(122)	$	29,379	$	(610)	$	51,095	$	(174)
Government agency securities		8,082		(59)		4,797		(53)		12,052		(23)
Corporate debt		25,980		(423)		10,766		(220)		40,035		(134)
Total	$	51,035	$	(604)	$	44,942	$	(883)	$	103,182	$	(331)

At December 31, 2021, there were no short-term investments that had been in a continuous loss position for more than 12 months.

The contractual maturities of securities classified as available-for-sale at September 30, 2022 were as follows:


	September 30, 2022
	Amortized		Estimated
	Cost		Fair Value

		(in thousands)
Due in one year or less	$	97,762	$	96,468
Due after one year through two years		5,587		5,394
Total	$	103,349	$	101,862

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were 0no realized gains or losses, or unrealized losses from declines in fair value that are other than temporary, for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021.

~~Accounts Receivable~~

Accounts receivable is presented net of an allowance for doubtful accounts of $0.7 million at June 30, 2022 and December 31, 2021. The Company considered its current expectations of future economic conditions, including the impact of COVID-19, when estimating its allowance for doubtful accounts.

~~Inventories~~

~~Inventories at June 30, 2022 and December 31, 2021 consist of the following:~~

June 30,

December 31,

2022

2021

(in thousands)
Materials

$
105,262

$
96,027
Work-in-process

63,370

54,128
Finished goods

7,859

20,703
Total

$
176,491

$
170,858

~~Prepaid Expenses and Other Current Assets~~

Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, prepaid licenses, and other receivables. In addition, Veeco had deposits with its suppliers of $7.4 million and $3.9 million at June 30, 2022 and December 31, 2021, respectively.

~~Property, Plant, and Equipment~~

~~Property, plant, and equipment at June 30, 2022 and December 31, 2021 consist of the following:~~

June 30,

December 31,

2022

2021

(in thousands)
Land

$
5,061

$
5,061
Building and improvements

63,973

63,946
Machinery and equipment ⁽¹⁾

153,794

145,656
Leasehold improvements

50,404

45,979
Gross property, plant, and equipment

273,232

260,642
Less: accumulated depreciation and amortization

168,201

160,899
Net property, plant, and equipment

$
105,031

$
99,743

~~(1)~~

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

For the three and six months ended June 30, 2022, depreciation expense was $4.0 million and $7.7 million, respectively, and $3.5 million and $6.9 million, respectively, for the comparable 2021 periods.

~~Goodwill~~

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Accounts Receivable

Accounts receivable is presented net of an allowance for doubtful accounts of $0.7 million at September 30, 2022 and December 31, 2021. The Company considered its current expectations of future economic conditions, including the impact of COVID-19, when estimating its allowance for doubtful accounts.

Inventories

Inventories at September 30, 2022 and December 31, 2021 consist of the following:


	September 30,		December 31,
	2022		2021

	(in thousands)
Materials	$	120,021	$	96,027
Work-in-process		61,052		54,128
Finished goods		6,664		20,703
Total	$	187,737	$	170,858

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, prepaid licenses, and other receivables. In addition, Veeco had deposits with its suppliers of $7.1 million and $3.9 million at September 30, 2022 and December 31, 2021, respectively.

Property, Plant, and Equipment

Property, plant, and equipment at September 30, 2022 and December 31, 2021 consist of the following:


	September 30,		December 31,
	2022		2021

	(in thousands)
Land	$	5,061	$	5,061
Building and improvements		64,198		63,946
Machinery and equipment ⁽¹⁾		160,365		145,656
Leasehold improvements		50,404		45,979
Gross property, plant, and equipment		280,028		260,642
Less: accumulated depreciation and amortization		171,612		160,899
Net property, plant, and equipment	$	108,416	$	99,743

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

For the three and nine months ended September 30, 2022, depreciation expense was $3.8 million and $11.6 million, respectively, and $3.5 million and $10.3 million, respectively, for the comparable 2021 periods.

Goodwill

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The Company continues to assess potential triggering events related to the value of its goodwill and concluded that there were no indicators of impairment during the ~~six~~nine months ended ~~June~~September 30, 2022.

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Intangible Assets

Intangible assets consist of purchased technology, customer relationships, patents, trademarks and tradenames, licenses, and backlog, and are initially recorded at fair value. Long-lived intangible assets are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line basis if such pattern cannot be reliably determined. The Company continues to assess potential triggering events related to the value of its intangible assets and concluded that there were no indicators of impairment during the three and ~~six~~nine months ended ~~June~~September 30, 2022.

The components of purchased intangible assets were as follows:


	June 30, 2022						December 31, 2021						September 30, 2022						December 31, 2021
			Accumulated						Accumulated						Accumulated						Accumulated
	Gross		Amortization				Gross		Amortization				Gross		Amortization				Gross		Amortization
	Carrying		and		Net		Carrying		and		Net		Carrying		and		Net		Carrying		and		Net
	Amount		Impairment		Amount		Amount		Impairment		Amount		Amount		Impairment		Amount		Amount		Impairment		Amount

	(in thousands)												(in thousands)
Technology	$	327,908	$	313,735	$	14,173	$	327,908	$	310,551	$	17,357	$	327,908	$	315,327	$	12,581	$	327,908	$	310,551	$	17,357
Customer relationships		146,465		134,192		12,273		146,465		132,970		13,495		146,465		134,803		11,662		146,465		132,970		13,495
Trademarks and tradenames		30,910		28,460		2,450		30,910		27,857		3,053		30,910		28,762		2,148		30,910		27,857		3,053
Other		3,686		3,686		—		3,686		3,686		—		3,686		3,686		—		3,686		3,686		—
Total	$	508,969	$	480,073	$	28,896	$	508,969	$	475,064	$	33,905	$	508,969	$	482,578	$	26,391	$	508,969	$	475,064	$	33,905

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

Note 4 — Liabilities

Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities at ~~June~~September 30, 2022 and December 31, 2021 consist of:


	June 30,		December 31,		September 30,		December 31,
	2022		2021		2022		2021

	(in thousands)				(in thousands)
Payroll and related benefits	$	26,644	$	35,712	$	33,920	$	35,712
Warranty		8,540		7,878		8,716		7,878
Operating lease liabilities		4,110		4,437		3,802		4,437
Interest		2,757		2,757		2,732		2,757
Professional fees		2,862		1,467		1,865		1,467
Legal settlement		300		15,000		300		15,000
Sales, use, and other taxes		4,403		4,889		5,317		4,889
Other		7,302		7,612		8,410		7,612
Total	$	56,918	$	79,752	$	65,062	$	79,752

Warranty

Warranties are typically valid for one year from the date of system final acceptance. The Company estimates the costs that may be incurred under the warranty which 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

1516

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

statistics and regional warranty support costs and are affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. Changes in product warranty reserves for the ~~six~~nine months ended ~~June~~September 30, 2022 include:


		(in thousands)		(in thousands)
Balance - December 31, 2021	$	7,878	$	7,878
Warranties issued		4,109		6,195
Consumption of reserves		(3,294)		(5,734)
Changes in estimate		(153)		377
Balance - June 30, 2022	$	8,540
Balance - September 30, 2022			$	8,716

Customer Deposits and Deferred Revenue

Customer deposits totaled ~~$57.8~~$108.9 million and $46.9 million at ~~June~~September 30, 2022 and December 31, 2021, 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)		(in thousands)
Balance - December 31, 2021	$	16,276	$	16,276
Deferral of revenue		5,284		2,908
Recognition of unearned revenue		(4,747)		(5,836)
Balance - June 30, 2022	$	16,813
Balance - September 30, 2022			$	13,348

As of ~~June~~September 30, 2022, the Company has approximately ~~$40.5~~$142.5 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately ~~18%~~24% is expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

Convertible Senior Notes

2023 Notes

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

On May 18, 2020, in connection with the completion of a private offering of $125.0 million aggregate principal amount of 3.75% convertible senior notes due 2027 described below, the Company repurchased and retired approximately $88.3 million in aggregate principal amount of its outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash.

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

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(unaudited)

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

Finally, on November 5, 2021, the Company entered into a privately negotiated note purchase agreement with a holder of its outstanding 2023 Notes, under which the Company agreed to repurchase and retire approximately $111.5 million in aggregate original principal amount of the 2023 Notes, with a carrying amount of $105.5 million, for cash consideration of approximately $115.6 million, and approximately $1.0 million of accrued and unpaid interest.

2025 Notes

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

2027 Notes

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

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

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

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

(i)

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

(ii)

During the 5five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per 1one thousand dollar principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Veeco’s common stock and the conversion rate on each such trading day;

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(unaudited)

(iii)

If the Company calls any or all of applicable series of the Notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or

(iv)

Upon the occurrence of specified corporate events.

For the calendar quarter ended ~~June~~September 30, 2022, the last reported sales price of common stock during the 30 consecutive trading days, based on the criteria outlined in (i) above, was greater than 130% of the conversion price of the 2027 Notes, and as such the 2027 Notes are convertible by the holders until ~~September 30,~~December 31, 2022.

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

Accounting for the Notes after the adoption of ASU 2020-06

The Company adopted ASU 2020-06 on January 1, 2022 as further described in Note 1, “Basis of Presentation”. Following the adoption of ASU 2020-06, the Notes are recorded as a single unit within liabilities in the consolidated balance sheets as the conversion features within the Notes are not derivatives that require bifurcation and the Notes do not involve a substantial premium. Transaction costs of $9.2 million, $1.9 million, and $3.1 million incurred in connection with the issuance of the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, were recorded as direct deductions from the related debt liabilities and recognized as non-cash interest expense using the effective interest method over the expected terms of the Notes.

Accounting for the Notes prior to the adoption of ASU 2020-06

Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion options, prior to the adoption of ASU 2020-06, the Company segregated the liability component of the instruments from the equity components. The liability components were measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Notes. The calculation of the fair value of the debt components required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the Notes at a discount rate equal to the estimated borrowing rate for similar non-convertible debt, or 7.0%, 8.0%, and 9.1% with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively. The excess of the aggregate face values of the Notes over the estimated fair values of the liability components of $72.5 million, $21.0 million, and $34.2 million with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, were recognized as debt discounts and recorded as an increase to additional paid-in capital and were to be amortized over the expected lives of the Notes using the effective interest rate method. Amortization of the debt discounts were recognized as non-cash interest expense.

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

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(unaudited)

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


		June 30, 2022						December 31, 2021						September 30, 2022						December 31, 2021
		Principal Amount		Unamortized transaction costs		Net carrying value		Principal Amount		Unamortized debt discount/ transaction costs		Net carrying value		Principal Amount		Unamortized transaction costs		Net carrying value		Principal Amount		Unamortized debt discount/ transaction costs		Net carrying value

		(in thousands)												(in thousands)
2023 Notes	$	20,173	$	(53)	$	20,120	$	20,173	$	(967)	$	19,206	$	20,173	$	(29)	$	20,144	$	20,173	$	(967)	$	19,206
2025 Notes		132,500		(1,220)		131,280		132,500		(17,302)		115,198		132,500		(1,105)		131,395		132,500		(17,302)		115,198
2027 Notes		125,000		(2,225)		122,775		125,000		(29,966)		95,034		125,000		(2,123)		122,877		125,000		(29,966)		95,034
Net carrying value	$	277,673	$	(3,498)	$	274,175	$	277,673	$	(48,235)	$	229,438	$	277,673	$	(3,257)	$	274,416	$	277,673	$	(48,235)	$	229,438

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


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021

	(in thousands)								(in thousands)
Cash Interest Expense
Coupon interest expense - 2023 Notes	$	136	$	889	$	272	$	1,778	$	136	$	889	$	409	$	2,667
Coupon interest expense - 2025 Notes		1,159		1,159		2,318		2,319		1,159		1,159		3,478		3,478
Coupon interest expense - 2027 Notes		1,172		1,172		2,344		2,344		1,172		1,172		3,516		3,516
Non-cash Interest Expense
Amortization of debt discount/transaction costs- 2023 Notes		24		1,390		48		2,754		24		1,417		73		4,171
Amortization of debt discount/transaction costs- 2025 Notes		114		1,185		226		2,348		115		1,211		341		3,558
Amortization of debt discount/transaction costs- 2027 Notes		101		1,011		202		1,998		103		1,035		305		3,033
Total Interest Expense	$	2,706	$	6,806	$	5,410	$	13,541	$	2,709	$	6,883	$	8,122	$	20,423

The Company determined the 2023 Notes, 2025 notes, and 2027 Notes are Level 2 liabilities in the fair value hierarchy and had an estimated fair value at ~~June~~September 30, 2022 of ~~$20.0~~$19.5 million, ~~$148.0,~~$144.3, and ~~$197.7~~$191.9 million, respectively.

Capped Call Transactions

In connection with the offering of the 2027 Notes, on May 13, 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”), pursuant to capped call confirmations, covering the total principal amount of the 2027 Notes for an aggregate premium of $10.3 million. The Capped Call Transactions are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of the 2027 Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted 2027 Notes, as the case may be, with such reduction and/or offset subject to a cap based on the capped price of the Capped Call Transactions. The Capped Call Transactions exercise price is equal to the initial conversion price of the 2027 Notes, and the capped price of the Capped Call Transactions is approximately $18.46 per share and is subject to certain adjustments under the terms of the capped call confirmations.

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

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(unaudited)

Notes to pay for the Capped Call Transactions, and the cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the accompanying consolidated financial statements.

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

~~(unaudited)~~

Revolving Credit Facility

On December 16, 2021, the Company entered into a loan and security agreement providing for a senior secured revolving credit facility in an aggregate principal amount of $150 million (the “Credit Facility”), including a $15 million letter of credit sublimit. The Credit Facility is guaranteed by the Company’s direct material U.S. subsidiaries, subject to customary exceptions. Borrowings under the Credit Facility are secured by a first-priority lien on substantially all of the assets of the Company, subject to customary exceptions. The Credit Facility has a term of five years, maturing on December 16, 2026, or earlier if certain liquidity measures are not met prior to the 2025 Notes maturing. Subject to certain conditions and the receipt of commitments from the lenders, the Loan and Security Agreement allows for revolving commitments under the Credit Facility to be increased by up to $75 million. The existing lenders under the Credit Facility are entitled, but not obligated, to provide such incremental commitments.

Borrowings will bear interest at a floating rate which can be, at the Company’s option, either (a) an alternate base rate plus an applicable rate ranging from 0.50% to 1.25% or (b) a Secured Overnight Financing Rate (“SOFR”) (with a floor of 0.00%) for the specified interest period plus an applicable rate ranging from 1.50% to 2.25%, in each case, depending on the Company’s Secured Net Leverage Ratio (as defined in the Loan and Security Agreement). The Company will pay an unused commitment fee ranging from 0.25% to 0.35% based on unused capacity under the Credit Facility and the Company’s Secured Net Leverage Ratio. The Company may use the proceeds of borrowings under the Credit Facility to pay transaction fees and expenses, provide for its working capital needs and reimburse drawings under letters of credit and for other general corporate purposes.

The Loan and Security Agreement contains customary affirmative covenants for transactions of this type, including, among others, the provision of financial and other information to the administrative agent, notice to the administrative agent upon the occurrence of certain material events, preservation of existence, maintenance of properties and insurance, compliance with laws, including environmental laws, the provision of additional guarantees, and an affiliate transactions covenant, subject to certain exceptions. The Loan and Security Agreement contains customary negative covenants, including, among others, restrictions on the ability to merge and consolidate with other companies, incur indebtedness, refinance our existing convertible notes, grant liens or security interests on assets, make investments, acquisitions, loans, or advances, pay dividends, and sell or otherwise transfer assets.

The Loan and Security Agreement contains financial maintenance covenants that require the Borrower to maintain an Interest Coverage Ratio (as defined in the Loan and Security Agreement) of not less than 3.00 to 1.00, a Total Net Leverage Ratio (as defined in the Loan and Security Agreement) of not more than 4.50 to 1.00, and a Secured Net Leverage Ratio (as defined in the Loan and Security Agreement) of not more than 2.50 to 1.00, in each case, tested at the end of each fiscal quarter commencing with the fiscal quarter ending June 30, 2022. The Loan and Security Agreement also provides for a number of customary events of default, including, among others: payment defaults to the lenders; voluntary and involuntary bankruptcy proceedings; covenant defaults; material inaccuracies of representations and warranties; certain change of control events; material money judgments; and other customary events of default. The occurrence of an event of default could result in the acceleration of obligations and the termination of lending commitments under the Loan and Security Agreement.

~~NaN~~No amounts were outstanding under the Credit Facility as of ~~June~~September 30, 2022 or December 31, 2021.

Other Liabilities

Other liabilities at ~~June~~September 30, 2022 and December 31, 2021 included (i) medical and dental benefits for former executives of $1.8 million; (ii) asset retirement obligations of $2.8 million; and (iii) income tax payables of $0.4 million.

2021

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(unaudited)

Note 5 — Commitments and Contingencies

Leases

The Company’s operating leases primarily include real estate leases for properties used for manufacturing, R&D activities, sales and service, and administration, as well as certain equipment leases. Some leases may include options to renew for a period of up to 5 years, while others may include options to terminate the lease. The weighted average remaining lease term of the Company’s operating leases as of ~~June~~September 30, 2022 was 12 years, and the weighted average discount rate used in determining the present value of future lease payments was 5.6%.

The following table provides the maturities of lease liabilities at ~~June~~September 30, 2022:


	Operating		Operating
	Leases		Leases
	(in thousands)		(in thousands)
Payments due by period:
2022	$	2,296	$	952
2023		4,069		4,097
2024		3,864		3,877
2025		3,307		3,292
2026		3,488		3,480
Thereafter		35,961		35,961
Total future minimum lease payments		52,985		51,659
Less: Imputed interest		(17,103)		(16,591)
Total	$	35,882	$	35,068

Reported as of June 30, 2022
Reported as of September 30, 2022
Accrued expenses and other current liabilities	$	4,110	$	3,802
Long-term operating lease liabilities		31,772		31,266
Total	$	35,882	$	35,068

Operating lease cost for the three and ~~six~~nine months ended ~~June~~September 30, 2022 were $1.8 million and ~~$3.7~~$5.5 million, respectively, and $1.8 million and ~~$3.1~~$4.8 million, respectively, for the comparable 2021 periods. Variable lease cost for the three and ~~six~~nine months ended ~~June~~September 30, 2022 were $0.5 million and ~~$1.0~~$1.5 million, respectively, and $0.4 million and ~~$0.9~~$1.3 million, respectively, for the comparable 2021 periods. Additionally, the Company has an immaterial amount of short-term leases. Operating cash outflows from operating leases for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 were ~~$3.8~~$5.7 million and ~~$3.3~~$4.9 million, respectively.

Receivable Purchase Agreement

In December 2020, 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 $15.0 million at any point in time. Pursuant to this agreement, the Company sold $7.8 million of receivables during the three months ended September 30, 2022, all of which was outstanding at September 30, 2022 as defined in the receivable purchase agreement, and $7.2 million was available under the agreement for additional sales of receivables. The Company did not sell any receivables under this agreement for the nine months ended September 30, 2021. The net sale of accounts receivable under the agreement is reflected as a reduction of accounts receivable in the Company’s Consolidated Balance Sheet at the time of sale and any fees for the sale of trade receivables were not material for the periods presented.

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Notes to the Consolidated Financial Statements - continued

(unaudited)

Purchase Commitments

Veeco has purchase commitments of ~~$252.1~~$299.4 million at ~~June~~September 30, 2022, substantially all of which become due within one year.

Bank Guarantees

Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At ~~June~~September 30, 2022, outstanding bank guarantees and standby letters of credit totaled ~~$7.8~~$7.0 million, and unused bank guarantees and letters of credit of ~~$14.4~~$14.7 million were available to be drawn upon.

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~~Veeco Instruments Inc. and Subsidiaries~~

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

~~(unaudited)~~

Legal Proceedings

On June 8, 2018, an Ultratech shareholder who received Veeco stock as part of the consideration for the Ultratech acquisition filed a purported class action complaint in the Superior Court of the State of California, County of Santa Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, 2two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the Securities Act of 1933 for, among other things, alleged false/misleading statements in the registration statement and prospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased ~~MOCVD~~metal organic chemical vapor deposition (“MOCVD”) competition in China, and an intellectual property dispute. In October 2021, Veeco and the court-appointed class representatives signed an agreement to settle the Wolther Action on a class-wide basis for $15.0 million, subject to court approval and class members’ opportunity to object and opt-out. On June 27, 2022, the court granted final approval to the class action settlement. The settlement amount has been funded by insurance carriers. The corresponding receivable and liability had been included within “Prepaid expenses and other current assets” and “Accrued expenses and other current liabilities”, respectively, in the Consolidated Balance Sheets as of December 31, 2021.

On December 21, 2018, a purported Veeco stockholder filed a derivative action in the Superior Court of the State of California, County of Santa Clara, captioned Vladimir Gusinsky Revocable Trust v. Peeler, et al., Case No. 18CV339925, on behalf of nominal defendant ~~Veeco.~~Veeco (the “Derivative Action”). The complaint seeks to assert claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against current and former Veeco directors premised on purported misstatements and omissions in the registration statement relating to the Ultratech acquisition. On January 25, 2021, the court granted the defendants’ demurrer without leave to amend effecting the dismissal of the case. On March 26, 2021, plaintiff filed its notice of appeal of the trial court’s order granting defendants’ demurrer without leave to amend. In April 2022, Veeco and plaintiff reached an agreement to settle the Derivative Action subject to court approval. As part of the settlement and subject to court approval, Veeco will make certain revisions to its internal Disclosure Committee Charter and its director education program. The agreement also provides that, subject to court approval, plaintiff will receive $0.3 million for fees and expenses. This amount will be funded by insurance that Veeco maintains in the normal course of its business. ~~The parties are in~~On September 12, 2022, the ~~process of requesting the court’s~~court issued an order granting preliminary approval of the ~~settlement.~~proposed settlement (the “Preliminary Approval Order”). The Preliminary Approval Order set the final settlement approval hearing for November 17, 2022.

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

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Notes to the Consolidated Financial Statements - continued

(unaudited)

Note 6 — Derivative Financial Instruments

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

The Company did not have any outstanding derivative contracts at September 30, 2022 or December 31, 2021. Additionally, the Company did not have any gains or losses from currency exchange derivatives during the nine months ended September 30, 2022 and 2021.

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Notes to the Consolidated Financial Statements - continued

(unaudited)

The Company did not have any outstanding derivative contracts at June 30, 2022 or December 31, 2021. Additionally, the Company did 0t have any gains or losses from currency exchange derivatives during the six months ended June 30, 2022 and 2021.

Note 7 — Equity

Statement of Stockholders’ Equity

The following tables present the changes in Stockholders’ Equity:


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

	(in thousands)											(in thousands)
Balance at December 31, 2021	50,653	$	507	$	1,116,921	$	(681,283)	$	1,483	$	437,628	50,653	$	507	$	1,116,921	$	(681,283)	$	1,483	$	437,628
Cumulative effect of change in accounting principle - adoption of ASU 2020-06	—		—		(56,801)		12,541		—		(44,260)	—		—		(56,801)		12,541		—		(44,260)
Net income	—		—		—		13,330		—		13,330	—		—		—		13,330		—		13,330
Other comprehensive income (loss), net of tax	—		—		—		—		(822)		(822)	—		—		—		—		(822)		(822)
Share-based compensation expense	—		—		4,481		—		—		4,481	—		—		4,481		—		—		4,481
Net issuance under employee stock plans	590		6		(6,793)		—		—		(6,787)	590		6		(6,793)		—		—		(6,787)
Balance at March 31, 2022	51,243	$	513	$	1,057,808	$	(655,412)	$	661	$	403,570	51,243	$	513	$	1,057,808	$	(655,412)	$	661	$	403,570
Net income	—		—		—		9,655		—		9,655	—		—		—		9,655		—		9,655
Other comprehensive income (loss), net of tax	—		—		—		—		(272)		(272)	—		—		—		—		(272)		(272)
Share-based compensation expense	—		—		6,278		—		—		6,278	—		—		6,278		—		—		6,278
Net issuance under employee stock plans	182		2		1,504		—		—		1,506	182		2		1,504		—		—		1,506
Balance at June 30, 2022	51,425	$	515	$	1,065,590	$	(645,757)	$	389	$	420,737	51,425	$	515	$	1,065,590	$	(645,757)	$	389	$	420,737
Net income (loss)												—		—		—		15,041		—		15,041
Other comprehensive income (loss), net of tax												—		—		—		—		(170)		(170)
Share-based compensation expense												—		—		6,210		—		—		6,210
Net issuance under employee stock plans												(5)		—		(703)		—		—		(703)
Balance at September 30, 2022												51,420	$	515	$	1,071,097	$	(630,716)	$	219	$	441,115


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

	(in thousands)											(in thousands)
Balance at December 31, 2020	49,724	$	497	$	1,113,352	$	(707,321)	$	1,846	$	408,374	49,724	$	497	$	1,113,352	$	(707,321)	$	1,846	$	408,374
Net income	—		—		—		2,494		—		2,494	—		—		—		2,494		—		2,494
Other comprehensive income (loss), net of tax	—		—		—		—		(19)		(19)	—		—		—		—		(19)		(19)
Share-based compensation expense	—		—		3,237		—		—		3,237	—		—		3,237		—		—		3,237
Net issuance under employee stock plans	459		5		(1,630)		—		—		(1,625)	459		5		(1,630)		—		—		(1,625)
Balance at March 31, 2021	50,183	$	502	$	1,114,959	$	(704,827)	$	1,827	$	412,461	50,183	$	502	$	1,114,959	$	(704,827)	$	1,827	$	412,461
Net income	—		—		—		6,348		—		6,348	—		—		—		6,348		—		6,348
Other comprehensive income (loss), net of tax	—		—		—		—		(24)		(24)	—		—		—		—		(24)		(24)
Share-based compensation expense	—		—		4,367		—		—		4,367	—		—		4,367		—		—		4,367
Net issuance under employee stock plans	166		1		582		—		—		583	166		1		582		—		—		583
Balance at June 30, 2021	50,349	$	503	$	1,119,908	$	(698,479)	$	1,803	$	423,735	50,349	$	503	$	1,119,908	$	(698,479)	$	1,803	$	423,735
Net income (loss)												—		—		—		8,993		—		8,993
Other comprehensive income (loss), net of tax												—		—		—		—		(33)		(33)
Share-based compensation expense												—		—		4,131		—		—		4,131
Net issuance under employee stock plans												(28)		—		(1,513)		—		—		(1,513)
Balance at September 30, 2021												50,321	$	503	$	1,122,526	$	(689,486)	$	1,770	$	435,313

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Accumulated Other Comprehensive Income (“AOCI”)

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


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

	(in thousands)						(in thousands)
Balance - December 31, 2021	$	1,814	$	(331)	$	1,483	$	1,814	$	(331)	$	1,483
Other comprehensive income (loss)		(51)		(1,043)		(1,094)		(108)		(1,156)		(1,264)
Balance - June 30, 2022	$	1,763	$	(1,374)	$	389
Balance - September 30, 2022							$	1,706	$	(1,487)	$	219

There were minimal reclassifications from AOCI into net income for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021.

Note 8 — Share-based Compensation

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

Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021:


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021

	(in thousands)								(in thousands)
Cost of sales	$	1,251	$	650	$	2,189	$	1,146	$	1,195	$	620	$	3,384	$	1,765
Research and development		1,863		1,132		3,120		1,949		1,819		1,007		4,939		2,957
Selling, general, and administrative		3,164		2,585		5,450		4,510		3,196		2,504		8,646		7,013
Total	$	6,278	$	4,367	$	10,759	$	7,605	$	6,210	$	4,131	$	16,969	$	11,735

For the ~~six~~nine months ended ~~June~~September 30, 2022, equity activity related to stock options was as follows:


		Weighted			Weighted
	Number of	Average		Number of	Average
	Shares	Exercise Price		Shares	Exercise Price
	(in thousands)			(in thousands)
Balance - December 31, 2021	443	$	32.15	443	$	32.15
Expired	(261)		32.93	(266)		32.95
Balance - June 30, 2022	182		31.02
Balance - September 30, 2022				177		30.94

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

For the ~~six~~nine months ended ~~June~~September 30, 2022, equity activity related to non-vested restricted shares and performance shares was as follows:


		Weighted			Weighted
		Average			Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
	(in thousands)			(in thousands)
Balance - December 31, 2021	2,083	$	17.33	2,083	$	17.33
Granted	1,012		31.33	1,060		30.84
Performance award adjustments	85		14.03	85		14.03
Vested	(678)		15.71	(787)		15.21
Forfeited	(63)		19.38	(73)		19.85
Balance - June 30, 2022	2,439		23.42
Balance - September 30, 2022				2,368		23.88

Note 9 — Income Taxes

Income taxes are estimated for each of the jurisdictions in which the Company operates. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Realization of net deferred tax assets is dependent on future taxable income. At ~~June~~September 30, 2022, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized. The Company will maintain this valuation allowance until there is sufficient positive evidence to support its reversal. The Company believes there is a reasonable possibility within the next twelve months that sufficient positive evidence may become available to allow management to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets with a corresponding decrease to income tax expense for the period the release is recorded. Additionally, if the valuation allowance is released and the Company continues to earn profits, the Company’s effective tax rate would likely increase in future periods compared to its current rates.

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.

Income before income taxes and income tax expense (benefit) for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 were as follows:


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021

	(in thousands)								(in thousands)
Income before income taxes	$	10,188	$	6,667	$	23,902	$	9,459	$	15,249	$	9,404	$	39,151	$	18,864
Income tax expense (benefit)	$	533	$	319	$	917	$	617	$	208	$	411	$	1,125	$	1,029

The Company’s tax expense for the three months ended ~~June~~September 30, 2022 was ~~$0.5~~$0.2 million, compared to ~~$0.3~~$0.4 million for the comparable prior period. The 2022 tax expense included an expense of ~~$0.4~~$0.1 million related to the Company’s non-U.S. operations and $0.1 million related to the Company’s domestic operations. The 2021 tax expense included an expense of ~~$0.2~~$0.4 million related to the Company’s non-U.S. operations and ~~$0.1 million~~minimal expense related to the Company’s domestic operations. For the three months ended ~~June~~September 30, 2022 and 2021, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized. The domestic tax expense for both periods is primarily attributable to state income taxes and the tax amortization of indefinite lived intangible assets that is not available to offset U.S. deferred tax assets. The

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

foreign tax expense for both periods is primarily attributable to non-US operations profits and foreign withholding taxes on unremitted earnings, offset by the amortization of intangible assets.

The Company’s tax expense for the ~~six~~nine months ended ~~June~~September 30, 2022 was ~~$0.9~~$1.1 million, compared to ~~$0.6~~$1.0 million for the comparable prior period. The 2022 tax expense included an expense of ~~$0.7~~$0.8 million related to the Company’s non-U.S. operations and ~~$0.2~~$0.3 million related to the Company’s domestic operations. The 2021 tax expense included an expense of ~~$0.4~~$0.8 million related to the Company’s non-U.S. operations and $0.2 million related to the Company’s domestic operations. For the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized. The domestic tax expense for both periods is primarily attributable to state income taxes and the tax amortization of indefinite lived intangible assets that is not available to offset U.S. deferred tax assets. The foreign tax expense for both periods is primarily attributable to non-US operations profits and foreign withholding taxes on unremitted earnings, offset by the amortization of intangible assets.

Inflation Reduction Act and CHIP Act

The Inflation Reduction Act of 2022 (the “IRA Act”) was signed into U.S. law on August 16, 2022. The Act includes various tax provisions, including an excise tax on stock repurchases, expanded tax credits for clean energy incentives, and a corporate alternative minimum tax that generally applies to U.S. corporations with average adjusted financial statement income over a three year period in excess of $1 billion. The Company does not expect the IRA Act to materially impact its financial statements.

The CHIPS and Science Act of 2022 (the “CHIP Act”) was signed into U.S. law on August 9, 2022. The Act includes a 25% advanced investment tax credit for certain investments in semiconductor manufacturing. While the Company is still evaluating the impact of this act, the CHIP Act may benefit the Company for qualified investments placed in service after December 31, 2022.

Note 10 — Segment Reporting and Geographic Information

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

Veeco serves the following 4four end-markets:

Semiconductor

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

Compound Semiconductor

The Compound Semiconductor market includes Photonics, Power Electronics, RF Filters and Amplifiers, and Solar applications. Photonics refers to light source technologies and laser-based solutions for 3D sensing, datacom and telecom applications. This includes micro-LED, laser diodes, edge emitting lasers and vertical cavity surface emitting lasers (“VCSELs”). Power Electronics refers to semiconductor devices such as rectifiers, inverters and converters for the

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

control and conversion of electric power in applications such as fast or wireless charging of consumer electronics and automotive applications. RF power amplifiers and filters (including surface acoustic wave (“SAW”) and bulk acoustic wave (“BAW”) filters) are used in 5G communications infrastructure, smartphones, tablets, and mobile devices. They make use of radio waves for wireless broadcasting and/or communications. Solar refers to power obtained by harnessing the energy of the sun through the use of compound semiconductor devices such as photovoltaics.

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~~Veeco Instruments Inc. and Subsidiaries~~

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

~~(unaudited)~~

Data Storage

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

Scientific & Other

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

Sales by end-market and geographic region for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 were as follows:


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021

	(in thousands)								(in thousands)
Sales by end-market
Semiconductor	$	97,521	$	53,689	$	175,141	$	105,321	$	100,387	$	76,320	$	275,528	$	181,641
Compound Semiconductor		31,122		24,231		68,231		48,982		28,094		23,273		96,325		72,255
Data Storage		21,548		52,025		43,143		93,005		27,702		39,256		70,845		132,261
Scientific & Other		13,808		16,399		33,910		32,751		15,730		11,397		49,640		44,148
Total	$	163,999	$	146,344	$	320,425	$	280,059	$	171,913	$	150,246	$	492,338	$	430,305
Sales by geographic region
United States	$	57,940	$	66,969	$	105,410	$	112,132	$	53,747	$	48,776	$	159,157	$	160,908
EMEA⁽¹⁾		27,234		8,939		48,660		22,563		17,562		13,564		66,221		36,128
China		28,497		20,880		58,878		40,887		36,193		27,261		95,071		68,148
Rest of APAC		49,345		49,460		106,267		104,337		64,259		60,589		170,526		164,926
Rest of World		983		96		1,210		140		152		56		1,363		195
Total	$	163,999	$	146,344	$	320,425	$	280,059	$	171,913	$	150,246	$	492,338	$	430,305

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

Cautionary Statement Regarding Forward Looking Statements

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

Executive Summary

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

COVID-19 Update and Attendant Challenges

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

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

We serve a global and highly interconnected customer base across the Asia-Pacific region, Europe, and North America. Our net sales to customers located outside of the United States represented approximately ~~67%~~68% of our total net sales for the ~~six~~nine months ended ~~June~~September 30, 2022, and 62% and 68% for the years ended December 31, 2021 and 2020, respectively, and we expect that net sales to customers outside the United States will continue to represent a significant percentage of our total net sales. As a result, our business will be adversely impacted by further deterioration in global economic conditions, particularly in markets in Asia and Europe.

We are also seeing the effects of the macroeconomic inflationary cost environment and supply chain disruptions due to strained transportation capacity, labor shortages, high global demand and other factors. These effects include longer lead times and increased costs. We are taking proactive steps to manage the impact on our business, including buying in advance and re-sourcing components on a more frequent basis. We continue to monitor our global supply chain and may experience additional disruptions in future periods, which could cause continued challenges in our ability to obtain raw materials or components required to manufacture our products.

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

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pandemic, we have taken the following steps, among others, to keep our employees safe, minimize the spread of the virus, and serve our customers:

●

maintain flexible health and safety protocols in response to local circumstances at our manufacturing facilities, including extensively and frequently disinfecting our facilities and providing protective equipment;

●

continue remote working arrangements for employees that do not need to be physically present on the manufacturing floor or at customer facilities;

●

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

●

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

●

proactively identify gaps in our supply chain and re-source components in order to maintain our customer shipment commitments and mitigate single points of failure;

●

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

●

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

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

Business Update

Macroeconomic challenges across the industry have been well publicized, including supply chain constraints, an inflationary environment with a potential recession ahead, and new China-export regulations, all of which are contributing to a difficult environment with increased uncertainty.

Longer lead times and parts shortages and allocations have required that we plan further ahead than usual, and we have undertaken efforts to increase our purchase commitments to secure critical components in a timely manner. While we have been able to meet our financial targets and fulfill our customers’ most critical demands, material lead times continue to be a challenge with respect to our supply chain, limiting our ability to fulfill some of our customers’ demands in a timely manner, as many of our peers have also been experiencing. We are also experiencing increasing labor, logistics, and material costs, creating additional gross margin pressures. We expect supply shortages and related challenges to persist throughout the remainder of the year and into 2023, and we continue to monitor our supply chain and work with our suppliers to identify and mitigate potential gaps in an effort to ensure continuity of supply. Additionally, we have seen a slow down in our book and turn business, as well as instances where customers have requested order cancellations, delayed shipments, or delayed payments. Consequently, we are monitoring the situation very closely and balancing the risk associated with macro-economic uncertainty and the investments we are making to maintain our growth trajectory.

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Furthermore, the US Department of Commerce, Bureau of Industry and Security (“BIS”), recently issued new China-export regulations which have broadened the requirements under which export licenses will be required. Notably, semiconductor equipment sold to factories in China manufacturing logic devices at or below 16/14nm, DRAM at or below 18nm ½ pitch, or NAND at or above 128 layers, will require export licenses, as will US persons supporting these operations, with a presumption of denial. In addition, a new export classification code – 3B090 – has been created for certain deposition equipment, for which licenses will now be required for sale into China (again with a presumption of denial). Furthermore, certain China-based companies have been added to the BIS Unverified List, and changes have been made to the BIS Entity List, further restricting sales to the named entities. Recent order activity has led to significant backlog in China, which may be subject to these regulations. While the export regulation landscape is fluid and evolving, we believe at this time that the substantial majority of this backlog will not be negatively affected by the new regulations.

While we work to overcome these macroeconomic challenges, we continue to serve our customers in the following four end-markets: Semiconductor; Compound Semiconductor; Data Storage; and Scientific & Other. We are seeing the following trends in each of these markets as follows:

Sales in the Semiconductor market grew ~~significantly~~ both from the prior quarter and from the year ago quarter, driven by our laser annealing systems for logic devices, ~~and~~ lithography systems for Advanced ~~Packaging.~~Packaging, and our ion beam deposition system for EUV mask blank production. We continue to build momentum for our laser annealing solutions with advanced node logic customers. We ~~continue to innovate~~are innovating and have been working with DRAM manufacturers and existing logic customers on their next manufacturing nodes. ~~We also continue to deliver~~Demand for our laser annealing systems tois increasingly coming from trailing node ~~logic manufacturers.~~customers primarily in China, in addition to advanced node customers. Our lithography systems for Advanced Packaging are aligned with longer-term growth of FOWLP and other Advanced Packaging applications. WeOrder activity has slowed in the third quarter; however, we continue to view our APAdvanced Packaging lithography product line as a key enabler for our customers as they seek to improve device performance. Additionally, the ongoing adoption of EUV Lithography for advanced node, semiconductor manufacturing continues to drive demand for our mask blank systems. Overall, our technology and market strategy are well aligned with trends such as artificial intelligence, mobile connectivity and high-performance computing that drive the Semiconductor market. ~~We expect continued growth in this market.~~

We address the Compound Semiconductor market with a broad portfolio of technologies including ~~primarily~~ Wet Processing and MOCVD, along with MBE and Ion Beam, all of which have been developed to support emerging applications such as 5G driven RF device/filter manufacturing, Gallium Nitride power electronics, and photonics

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applications including edge-emitting lasers and micro-LEDs. Sales in the Compound Semiconductor market decreased from the prior quarter ~~and~~but increased ~~significantly~~ from the year ago ~~quarter. We~~quarter, as we shipped systems for photonics and RF Device ~~applications, and we expect future growth to come from MOCVD and other system shipments in the Photonics market.~~applications.

~~Sales~~After a multi-year period of growth, and based on reduced order activity in 2021, Data Storage performance in 2022 is playing out as we expected as customers slow the pace of capacity additions. In the Data Storage market, ~~have been growing for several years, primarily driven by shipments~~the mix of ~~Ion Beam systems. Demand for our Ion Beam products was driven by cloud-based storage growth. In order to be successful,~~ hard disk drive ~~manufacturers are required~~shipments for PCs, servers and cloud datacenters has been transitioning for some time. Overall number of drives shipping has been declining in the consumer markets, but in the growing enterprise markets, the capacity and number of magnetic heads per hard drive has been increasing, in response to ~~increase drive capacity by manufacturing drives with an increasing~~a 30% growth rate in data stored each year in cloud and datacenter applications. In fact, the absolute number of heads shipped has been steadily increasing for years and increasing aerial density. After multiple years of customers accelerating their capacity additions, we expect a period of slowing capacity adds by our data storage customers, resulting in an expected revenue decline in our data storage business in 2022 from recent levels. However, with data proliferationis forecasted to ~~grow, we~~ continue to ~~gain confidence that 2023~~increase. In addition, complexity of heads has been increasing and is expected to continue to increase as disk drive makers advance their technology roadmaps. Veeco’s ion beam equipment is used to manufacture our customers magnetic heads and based on the aforementioned industry dynamics, we believe the Data Storage market will ~~be a~~provide growth ~~year~~ over ~~2022~~the long term. In fact, based on strong order activity with customers ~~and the long lead-time~~today, absent a shift in market dynamics ~~in this market.~~including customer cancellations or delays, we expect 2023 Data Storage revenue to meaningfully grow over 2022.

Sales in the Scientific & Other market are largely driven by sales to governments, universities, and research institutions. ~~While revenue decreased~~Revenue increased both from the prior quarter and the year ago quarter, consistent with near term strength we are seeing ~~near term strength due to~~from pent-up demand in the research ~~market, and~~market. We expect long-term growth to be in line with GDP.

Macroeconomic challenges across the industry, including in particular supply chain constraints, have been well publicized. Parts shortages have required that we plan further ahead than usual, and we have undertaken efforts to increase our purchase commitments to secure critical components in a timely manner. While we have been able to meet our financial targets for the quarter and fulfil our customers’ most critical demands, material lead times continue to be a challenge with respect to our supply chain, limiting our ability to fulfil some of our customers’ demands in a timely manner, as many of our peers have also been experiencing. Additionally, we are experiencing increasing labor, logistics, and material costs, creating additional gross margin pressures. We expect supply shortages and related challenges to persist throughout 2022, and we continue to monitor our supply chain and work with our suppliers to identify and mitigate potential gaps in an effort to ensure continuity of supply.

Finally, our growth strategy includes placing evaluation systems with select customers in the Semiconductor and Compound Semiconductor markets. These customer evaluations have been performing well, ~~as evidenced by three customers having recently signed off on our tools meeting the specified acceptance criteria. This~~and this evaluation program

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will continue to be a focus as we execute on our growth strategy. In the near term, given ~~strong~~our backlog, ~~in our semiconductor and compound semiconductor markets,~~ along with our customer engagements and order activity, we continue to expect revenue growth in 2022, despite the ongoing ~~supply chain challenges, as we make progress toward our long-term financial target model.~~macroeconomic challenges.

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Results of Operations

For the three months ended ~~June~~September 30, 2022 and 2021

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for the indicated periods in 2022 and 2021 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.


	Three Months Ended June 30,						Change			Three Months Ended September 30,						Change
	2022			2021			Period to Period			2022			2021			Period to Period

	(dollars in thousands)									(dollars in thousands)
Net sales	$	163,999	100%	$	146,344	100%	$	17,655	12%	$	171,913	100%	$	150,246	100%	$	21,667	14%
Cost of sales		99,732	61%		86,178	59%		13,554	16%		101,962	59%		87,077	58%		14,885	17%
Gross profit		64,267	39%		60,166	41%		4,101	7%		69,951	41%		63,169	42%		6,782	11%
Operating expenses, net:
Research and development		26,016	16%		22,553	15%		3,463	15%		27,104	16%		21,999	15%		5,105	23%
Selling, general, and administrative		22,950	14%		21,466	15%		1,484	7%		22,144	13%		21,603	14%		541	3%
Amortization of intangible assets		2,505	2%		2,976	2%		(471)	(16)%		2,505	1%		2,976	2%		(471)	(16)%
Other operating expense (income), net		(27)	-		(81)	-		54	*		634	-		175	-		459	*
Total operating expenses, net		51,444	31%		46,914	32%		4,530	10%		52,387	30%		46,753	31%		5,634	12%
Operating income		12,823	8%		13,252	9%		(429)	(3)%		17,564	10%		16,416	11%		1,148	7%
Interest income (expense), net		(2,635)	(2)%		(6,585)	(4)%		3,950	(60)%		(2,315)	(1)%		(7,012)	(5)%		4,697	(67)%
Income before income taxes		10,188	6%		6,667	5%		3,521	53%		15,249	9%		9,404	6%		5,845	62%
Income tax expense (benefit)		533	-		319	-		214	67%		208	-		411	-		(203)	(49)%
Net income	$	9,655	6%	$	6,348	4%	$	3,307	52%	$	15,041	9%	$	8,993	6%	$	6,048	67%

*	Not meaningful

Net Sales

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


	Three Months Ended June 30,						Change			Three Months Ended September 30,						Change
	2022			2021			Period to Period			2022			2021			Period to Period

	(dollars in thousands)									(dollars in thousands)
Sales by end-market
Semiconductor	$	97,521	60%	$	53,689	37%	$	43,832	82%	$	100,387	59%	$	76,320	51%	$	24,067	32%
Compound Semiconductor		31,122	19%		24,231	17%		6,891	28%		28,094	16%		23,273	15%		4,821	21%
Data Storage		21,548	13%		52,025	35%		(30,477)	(59)%		27,702	16%		39,256	26%		(11,554)	(29)%
Scientific & Other		13,808	8%		16,399	11%		(2,591)	(16)%		15,730	9%		11,397	8%		4,333	38%
Total	$	163,999	100%	$	146,344	100%	$	17,655	12%	$	171,913	100%	$	150,246	100%	$	21,667	14%
Sales by geographic region
United States	$	57,940	35%	$	66,969	46%	$	(9,029)	(13)%	$	53,747	31%	$	48,776	33%	$	4,971	10%
EMEA		27,234	17%		8,939	6%		18,295	205%		17,562	10%		13,564	9%		3,998	29%
China		28,497	17%		20,880	14%		7,617	36%		36,193	21%		27,261	18%		8,932	33%
Rest of APAC		49,345	30%		49,460	34%		(115)	(0)%		64,259	38%		60,589	40%		3,670	6%
Rest of World		983	1%		96	-		887	*		152	-		56	-		96	*
Total	$	163,999	100%	$	146,344	100%	$	17,655	12%	$	171,913	100%	$	150,246	100%	$	21,667	14%

*	Not meaningful

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Sales increased for the three months ended ~~June~~September 30, 2022 against the comparable prior year period ~~primarily~~ in the Semiconductor, ~~and~~ Compound Semiconductor, and Scientific & Other markets, partially offset by a decline in the Data Storage market. By geography, sales increased ~~in the EMEA and China regions, partially offset by a decline in the United States.~~across all regions. Sales in the Rest of APAC region for the three months ended ~~June~~September 30, 2022 included sales in Taiwan, Japan, and ~~Japan~~Singapore of ~~$28.0~~$34.0 million, $12.3 million, and ~~$11.0~~$8.9 million, respectively. Sales in the Rest of APAC region for the three months ended ~~June~~September 30, 2021 included sales in Taiwan, ~~and~~ South Korea, and Japan of ~~$15.2~~$19.2 million, $14.3 million, and ~~$14.7~~$13.7 million, respectively. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies. In light of the global nature of our business, we are impacted by conditions in the various countries in which we and our customers operate.

Gross Profit

For the three months ended ~~June~~September 30, 2022, gross profit increased against the comparable prior period primarily due to an increase in sales volume, partially offset by a decrease in gross margins. Gross margins decreased principally due to increased logistics costs, as well as an increase in spending as we invested in service infrastructure and capacity expansion to meet the growing demands for our semiconductor product ~~lines and supporting our evaluation systems at customers.~~lines. We expect our gross margins to fluctuate each period due to product mix and other factors.

Research and Development

The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses increased for the three months ended ~~June~~September 30, 2022 against the comparable prior period primarily due to personnel-related expenses as we invest in new research and development and additional applications for our technology in order to be ~~well positioned~~well-positioned to capitalize on emerging global megatrends and support longer term growth in Semiconductor and Compound Semiconductor markets.

Selling, General, and Administrative

Selling, general, and administrative expenses increased for the three months ended ~~June~~September 30, 2022 against the comparable prior period primarily due to higher variable expenses associated with the increase in revenue, profitability, and order in-take. However, expenses as a percentage of revenue have decreased when compared to the prior year period. Given the uncertainty regarding the impacts on our business resulting from the COVID-19 pandemic, we are focused on the proactive management of expenses. In future periods, we may incur additional selling, general and administrative expenses to support our responses to the COVID-19 pandemic. In addition, we are currently experiencing duplicate operating expenses for the transition from our existing facility in San Jose, California to our new leased facility, and will continue to do so until this transition is ~~completed over the next few quarters.~~completed.

Amortization Expense

Amortization expense decreased compared to the comparable prior year period primarily due to changes in amortization expense to reflect expected cash flows of certain intangible assets, as well as certain other intangible assets becoming fully amortized in 2021.

Interest Income (Expense)

We recorded net interest expense of ~~$2.6~~$2.3 million for the three months ended ~~June~~September 30, 2022, compared to ~~$6.6~~$7.0 million for the comparable prior year period. The decrease in interest expense was primarily related to the adoption of ASU 2020-06, as non-cash charges related to the amortization of debt discount and transaction costs of the 2023 Notes, 2025 Notes, and 2027 Notes decreased approximately ~~$3.3~~$3.4 million for the three months ended ~~June~~September 30, 2022 against the comparable prior period. Additionally, cash interest expense on the Notes decreased approximately $0.8 million from the comparable prior period due to the partial repurchase of the 2023 Notes in November 2021.

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Income Taxes

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

Our tax expense for the three months ended ~~June~~September 30, 2022 was ~~$0.5~~$0.2 million, compared to ~~$0.3~~$0.4 million for the comparable prior year period. The 2022 tax expense included an expense of ~~$0.4~~$0.1 million related to our non-U.S. operations and $0.1 million related to our domestic operations, compared to the comparable period in 2021 when the expense included a ~~$0.2~~$0.4 million expense related to our non-U.S. operations and ~~$0.1 million~~minimal expense related to our domestic operations.

The domestic tax expense for both periods is primarily attributable to state income taxes and the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The foreign tax expense for both periods is primarily attributable to non-U.S operations profits and foreign withholding taxes on unremitted earnings, offset by the amortization of intangible assets. For the three months ended ~~June~~September 30, 2022 and 2021, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized. We will maintain this valuation allowance until there is sufficient positive evidence to support its reversal. We believe there is a reasonable possibility within the next twelve months that sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets with a corresponding decrease to income tax expense for the period the release is recorded. Additionally, if the valuation allowance is released and we continue to earn profits, our effective tax rate would likely increase in future periods compared to our current rates.

For the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021


	Six Months Ended June 30,						Change			Nine Months Ended September 30,						Change
	2022			2021			Period to Period			2022			2021			Period to Period

	(dollars in thousands)									(dollars in thousands)
Net sales	$	320,425	100%	$	280,059	100%	$	40,366	14%	$	492,338	100%	$	430,305	100%	$	62,033	14%
Cost of sales		190,146	59%		164,978	59%		25,168	15%		292,109	59%		252,055	59%		40,054	16%
Gross profit		130,279	41%		115,081	41%		15,198	13%		200,229	41%		178,250	41%		21,979	12%
Operating expenses, net:
Research and development		50,133	16%		44,398	16%		5,735	13%		77,237	16%		66,397	15%		10,840	16%
Selling, general, and administrative		45,844	14%		41,722	15%		4,122	10%		67,987	14%		63,325	15%		4,662	7%
Amortization of intangible assets		5,009	2%		6,330	2%		(1,321)	(21)%		7,514	2%		9,305	2%		(1,791)	(19)%
Other operating expense (income), net		(47)	-		(36)	-		(11)	*		587	-		138	-		449	*
Total operating expenses, net		100,939	32%		92,414	33%		8,525	9%		153,325	31%		139,165	32%		14,160	10%
Operating income (loss)		29,340	9%		22,667	8%		6,673	29%		46,904	10%		39,085	9%		7,819	20%
Interest income (expense), net		(5,438)	(2)%		(13,208)	(5)%		7,770	(59)%		(7,753)	(2)%		(20,221)	(5)%		12,468	(62)%
Income (loss) before income taxes		23,902	7%		9,459	3%		14,443	153%		39,151	8%		18,864	4%		20,287	108%
Income tax expense (benefit)		917	-		617	-		300	49%		1,125	-		1,029	-		96	9%
Net income (loss)	$	22,985	7%	$	8,842	3%	$	14,143	160%	$	38,026	8%	$	17,835	4%	$	20,191	113%

*	Not meaningful

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Net Sales

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


	Six Months Ended June 30,						Change			Nine Months Ended September 30,						Change
	2022			2021			Period to Period			2022			2021			Period to Period

	(dollars in thousands)									(dollars in thousands)
Sales by end-market
Semiconductor	$	175,141	55%	$	105,321	38%	$	69,820	66%	$	275,528	56%	$	181,641	42%	$	93,887	52%
Compound Semiconductor		68,231	21%		48,982	17%		19,249	39%		96,325	20%		72,255	17%		24,070	33%
Data Storage		43,143	13%		93,005	33%		(49,862)	(54)%		70,845	14%		132,261	31%		(61,416)	(46)%
Scientific & Other		33,910	11%		32,751	12%		1,159	4%		49,640	10%		44,148	10%		5,492	12%
Total	$	320,425	100%	$	280,059	100%	$	40,366	14%	$	492,338	100%	$	430,305	100%	$	62,033	14%
Sales by geographic region
United States	$	105,410	33%	$	112,132	40%	$	(6,722)	(6)%	$	159,157	32%	$	160,908	38%	$	(1,751)	(1)%
EMEA		48,660	15%		22,563	8%		26,097	116%		66,221	13%		36,128	8%		30,093	83%
China		58,878	19%		40,887	15%		17,991	44%		95,071	20%		68,148	16%		26,923	40%
Rest of APAC		106,267	33%		104,337	37%		1,930	2%		170,526	35%		164,926	38%		5,600	3%
Rest of World		1,210	-		140	-		1,070	*		1,363	-		195	-		1,168	*
Total	$	320,425	100%	$	280,059	100%	$	40,366	14%	$	492,338	100%	$	430,305	100%	$	62,033	14%

*	Not meaningful

Sales increased for the ~~six~~nine months ended ~~June~~September 30, 2022 against the comparable prior year period, primarily in the Semiconductor and Compound Semiconductor markets, partially offset by a decline in the Data Storage market. By geography, sales increased in the EMEA and China regions, partially offset by a decline in the United States. Sales in the Rest of APAC region for the ~~six~~nine months ended ~~June~~September 30, 2022 included sales in Taiwan, Singapore and Japan of ~~$45.2~~$79.1 million, ~~$25.9~~$34.8 million, and ~~$15.2~~$27.6 million, respectively. Sales in the Rest of APAC region for the ~~six~~nine months ended ~~June~~September 30, 2021 included sales in Taiwan and South Korea ~~and Thailand~~ of ~~$33.8 million, $25.6~~$53.0 million and ~~$13.2~~$39.9 million, respectively. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies. In light of the global nature of our business, we are impacted by conditions in the various countries in which we and our customers operate.

Gross Profit

For the ~~six~~nine months ended ~~June~~September 30, 2022, gross profit increased against the comparable prior period primarily due to an increase in sales volume. Gross margins remained relatively flat, as increases in margins due to product and region mix of sales in the period were offset by increased logistics costs, as well as an increase in spending as we invested in service infrastructure and capacity expansion to meet the growing demands for our semiconductor product ~~lines and supporting our evaluation systems at customers.~~lines. We expect our gross margins to fluctuate each period due to product mix and other factors.

Research and Development

The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses increased for the ~~six~~nine months ended ~~June~~September 30, 2022 against the comparable prior period primarily due to personnel-related expenses as we invest in new research and development and additional applications for our technology in order to be ~~well positioned~~well-positioned to capitalize on emerging global megatrends and support longer term growth in Semiconductor and Compound Semiconductor markets.

~~Table of Contents~~

Selling, General, and Administrative

Selling, general, and administrative expenses increased for the ~~six~~nine months ended ~~June~~September 30, 2022 against the comparable prior period primarily due to higher variable expenses associated with the increase in revenue, profitability,

Table of Contents

and order in-take. However, expenses as a percentage of revenue have decreased when compared to the prior year period. Given the uncertainty regarding the impacts on our business resulting from the COVID-19 pandemic, we are focused on the proactive management of expenses. In future periods, we may incur additional selling, general and administrative expenses to support our responses to the COVID-19 pandemic. In addition, we are currently experiencing duplicate operating expenses for the transition from our existing facility in San Jose, California to our new leased facility, and will continue to do so until this transition is ~~completed over the next few quarters.~~completed.

Amortization Expense

Interest Income (Expense)

We recorded net interest expense of ~~$5.4~~$7.8 million for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~$13.2~~$20.2 million for the comparable prior year period. The decrease in interest expense was primarily related to the adoption of ASU 2020-06, as non-cash charges related to the amortization of debt discount and transaction costs of the 2023 Notes, 2025 Notes, and 2027 Notes decreased approximately ~~$6.6~~$10.0 million for the ~~six~~nine months ended ~~June~~September 30, 2022 against the comparable prior period. Additionally, cash interest expense on the Notes decreased approximately ~~$1.5~~$2.3 million from the comparable prior period due to the partial repurchase of the 2023 Notes in November 2021.

Income Taxes

Our tax expense for the ~~six~~nine months ended ~~June~~September 30, 2022 was ~~$0.9~~$1.1 million, compared to ~~$0.6~~$1.0 million for the comparable prior year period. The 2022 tax expense included an expense of ~~$0.7~~$0.8 million related to our non-U.S. operations and ~~$0.2~~$0.3 million related to our domestic operations, compared to the comparable period in 2021 when the expense included a ~~$0.4~~$0.8 million expense related to our non-U.S. operations and $0.2 million related to our domestic operations.

The domestic tax expense for both periods is primarily attributable to state income taxes and the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The foreign tax expense for both periods is primarily attributable to non-U.S operations profits and foreign withholding taxes on unremitted earnings, offset by the amortization of intangible assets. For the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized. We will maintain this valuation allowance until there is sufficient positive evidence to support its reversal. We believe there is a reasonable possibility within the next twelve months that sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets with a corresponding decrease to income tax expense for the period the release is recorded. Additionally, if the valuation allowance is released and we continue to earn profits, our effective tax rate would likely increase in future periods compared to our current rates.

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Liquidity and Capital Resources

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


	June 30,		December 31,		September 30,		December 31,
	2022		2021		2022		2021

	(in thousands)				(in thousands)
Cash and cash equivalents	$	116,916	$	119,747	$	169,111	$	119,747
Restricted cash		727		725		557		725
Short-term investments		113,159		104,181		101,862		104,181
Total	$	230,802	$	224,653	$	271,530	$	224,653

At ~~June~~September 30, 2022 and December 31, 2021, cash and cash equivalents of ~~$40.1~~$47.4 million and $38.3 million, respectively, were held outside the United States. As of ~~June~~September 30, 2022, we had ~~$16.2~~$16.8 million of accumulated undistributed earnings generated by our non-U.S. subsidiaries for which the U.S. repatriation tax has been provided and did not require the use of cash due to the use of net operating loss carryforwards. Approximately ~~$6.2~~$6.8 million of undistributed earnings will be subject to foreign withholding taxes if distributed back to the United States.

We believe that our projected cash flow from operations, combined with our cash and short-term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months, including scheduled interest payments on our convertible senior notes, purchase commitments, and payments in respect of operating leases. Although there is uncertainty related to the anticipated impact of the COVID-19 outbreak on our future results, we believe our business model, our current cash and short-term investments, and our proactive management of expenses, leave us well-positioned to manage our business through this crisis as it continues to unfold.

A summary of the cash flow activity for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 is as follows:

Cash Flows from Operating Activities


	Six Months Ended June 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)				(in thousands)
Net income	$	22,985	$	8,842	$	38,026	$	17,835
Non-cash items:
Depreciation and amortization		12,749		13,189		19,100		19,634
Non-cash interest expense		477		7,100		719		10,762
Deferred income taxes		(18)		17		(43)		(12)
Share-based compensation expense		10,759		7,605		16,969		11,735
Changes in operating assets and liabilities		(18,783)		(16,024)		603		(9,305)
Net cash provided by (used in) operating activities	$	28,169	$	20,729	$	75,374	$	50,649

Net cash provided by operating activities was ~~$28.2~~$75.4 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and was due to net income of ~~$23.0~~$38.0 million, adjustments for non-cash items of ~~$24.0~~$36.7 million, ~~partially offset by a decrease~~and an increase in cash flow from changes in operating assets and liabilities of ~~$18.8~~$0.6 million. The changes in operating assets and liabilities were largely attributable to 1) increases in accounts ~~receivable;~~receivable and inventories; 2) decreases in accrued expenses; partially offset by 3) increases in customer deposits; and 4) decreases in prepaid expenses and other current assets.

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Cash Flows from Investing Activities


	Six Months Ended June 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)				(in thousands)
Capital expenditures	$	(15,420)	$	(9,082)	$	(21,771)	$	(31,453)
Changes in investments, net		(10,541)		(25,622)		610		(25,637)
Net cash provided by (used in) investing activities	$	(25,961)	$	(34,704)	$	(21,161)	$	(57,090)

The cash used in investing activities during the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 was primarily attributable capital expenditures. We experienced ~~increased~~a high level of capital expenditures in both 2022 and 2021 as we ~~finalize the~~ build-out of our newly leased facility in San Jose, California. We expect a period of some duplicate operating expenses until the transition from our pre-existing facility to our new facility is completed. The cash used in investing activities during the six months ended June 30, 2021 was primarily attributable to the net changes in investments, as well as capital expenditures associated with the San Jose facility build-out.

Cash Flows from Financing Activities


	Six Months Ended June 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)				(in thousands)
Settlement of equity awards, net of withholding taxes	$	(4,986)	$	(882)	$	(4,909)	$	(1,551)
Net cash provided by (used in) financing activities	$	(4,986)	$	(882)	$	(4,909)	$	(1,551)

The cash used in financing activities for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 was related to cash used to settle taxes related to employee equity programs, partially offset by cash received under the Employee Stock Purchase Plan.

Convertible Senior Notes

We have $20.2 million outstanding principal balance of 2.70% convertible senior notes that bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted. In addition, we have $132.5 million outstanding principal balance of 3.50% convertible senior notes that bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted. Finally, we have $125.0 million outstanding principal balance of 3.75% convertible senior notes that bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted. The 2027 Notes are currently convertible by shareholders until September 30, 2022.

We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on these debts. In addition, we have access to a $150.0 million revolving credit facility (including an ability to request an additional $75.0 million, for a total commitment of no more than $225.0 million) to provide for our working capital needs and reimburse drawings under letters of credit and for other general corporate purposes. The Company has no immediate plans to draw down on the facility, which expires in December of 2026. Interest under the ~~Facility~~facility is variable based on the Company’s secured net leverage ratio and is expected to bear interest based on SOFR plus a range of 150 to 225 basis points, if drawn. There is a yearly commitment fee of 25 to 35 basis points, based on the Company’s secured net leverage ratio, charged on the unused portion of the Facility.

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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates primarily relates to our investment portfolio. We centrally manage our investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately ~~$113.2~~$101.9 million at ~~June~~September 30, 2022. These securities are subject to interest rate risk and, based on our investment portfolio at ~~June~~September 30, 2022, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of ~~$0.7~~$0.6 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.

Currency Exchange Risk

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

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

Our net sales to customers located outside of the United States represented approximately ~~65%~~69% and ~~67%~~68% of our total net sales for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, and ~~54%~~67% and ~~60%~~62% for the comparable 2021 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 approximately 3% of total net sales for both the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective as of ~~June~~September 30, 2022. The disclosure controls and procedures are designed to ensure that the information required to be disclosed in this report filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the quarter ended ~~June~~September 30, 2022, 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 June 8, 2018, an Ultratech shareholder who received Veeco stock as part of the consideration for the Ultratech acquisition filed a purported class action complaint in the Superior Court of the State of California, County of Santa Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the Securities Act of 1933 for, among other things, alleged false/misleading statements in the registration statement and prospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. In October 2021, Veeco and the court-appointed class representatives signed an agreement to settle the Wolther Action on a class-wide basis for $15.0 million, subject to court approval and class members’ opportunity to object and opt-out. The settlement amount has been funded by insurance carriers. On June 27, 2022, the court granted final approval to the class action settlement.

Item 1A. Risk Factors

Information regarding risk factors appears in the Safe Harbor Statement at the beginning of this quarterly report on Form 10-Q, in Part I — Item 1A of our 2021 Form 10-K, and in Part 2, Item 1A of our quarterly ~~report~~reports on Form 10-Q for the ~~quarter~~quarters ending March 31, 2022 and June 30 2022. There have been no material changes from the risk factors previously ~~disclosed.~~disclosed, except as follows:

The U.S. government has implemented, and may continue to implement, several changes in trade policy which have adversely affected and could continue to adversely affect the Company’s ability to sell and service its products to and for customers located in China and in certain other countries.

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On October 7, 2022, the U.S. Commerce Department, Bureau of Industry and Security (“BIS”) announced new rules aimed in part at restricting China’s ability to obtain advanced computing chips and manufacture advanced semiconductors. These new rules include heightened restrictions on U.S. companies, and on defined “U.S. Persons”, who may facilitate semiconductor development and production at facilities in China which manufacture, or have the potential to manufacture, certain advanced integrated circuits. In addition, a new export classification code – 3B090 – has been created for certain deposition equipment, for which licenses will now be required for sale into China (with a presumption of denial). BIS explained that the new rules are designed to curtail China’s use of these items in the development of weapons of mass destruction, artificial intelligence and supercomputing-enhanced war fighting, and in technologies that enable human rights violations. Previous changes in trade policy by the U.S. government have included, without limitation, the elimination of license exception CIV, the implementation of new regulations governing the sale of equipment to defined “Military End Users” and for defined “Military End Uses”, and the addition of several companies to the U.S. Commerce Department’s Unverified List and Entity List (including Semiconductor Manufacturing International Corporation and certain related entities).

The effect of these changes, among others, is that U.S. companies are now required to obtain export licenses – now at times with a presumption of denial -- before providing commodities, software, and technology (which are subject to the regulations) to customers for whom licensing requirements did not previously apply. These changes have had, and will likely continue to have, a negative effect on our ability to sell and service certain equipment in China. The heightened export restrictions may also inhibit technical discussions with existing or prospective customers, negatively impacting our ability to pursue sales opportunities. The administrative processing, attendant delays and risk of ultimately not obtaining required export approvals pose a particular disadvantage to the Company relative to our non-U.S. competitors who are not required to comply with U.S. export controls. This difficulty and uncertainty has adversely affected our ability to compete for and win business from customers in China. Foreign customers affected by these and future U.S. government sanctions or threats of sanctions may respond by developing their own solutions to replace our products or by utilizing our foreign competitors’ products. This “trade war” with China, together with the prospect of additional governmental action related to export controls restrictions, international sanctions, and/or tariffs, has adversely affected, and is likely to continue to adversely affect, demand for our products and the results of our operations and financial condition.

The changes in U.S. trade policy and export controls, as well as sanctions imposed by the U.S. against certain Chinese companies, have triggered retaliatory action by China and could trigger further retaliation. In addition, China has provided, and is expected to continue to provide, significant assistance, financial and otherwise, to its domestic industries, including some of our competitors. We face increasing competition as a result of significant investment in the semiconductor industry by the Chinese government and various state-owned or affiliated entities that is intended to advance China's stated national policy objectives. In addition, the Chinese government may restrict us from participating in the China market or may prevent us from competing effectively with Chinese companies.

Further, we hold inventory of products that may be affected by the recent U.S. government actions, including potential order cancellations. While we continue to take steps to mitigate our exposure to this developing situation, if the sale of these products is delayed or we are unable to return or dispose of our inventory on favorable economic terms, we may incur additional carrying costs for the inventory or otherwise record charges associated with this inventory.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

Not Applicable.

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Item 5. Other Information

None.

Item 6. Exhibits

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

Exhibit

Incorporated by Reference

Filed or
Furnished
Number

Exhibit Description

Form

Exhibit

Filing Date

Herewith

10.1

Amendment No. 1 to the Veeco Instruments Inc. 2019 Stock Incentive Plan.

S-8

4.8

5/20/2022

31.1

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

*
31.2

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

*
32.1

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

*
32.2

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

*
101.INS

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

*
101.XSD

XBRL Schema.

**
101.PRE

XBRL Presentation.

**
101.CAL

XBRL Calculation.

**
101.DEF

XBRL Definition.

**
101.LAB

XBRL Label.

**
104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

**


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

31.1	Certification of Chief Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.				*
31.2	Certification of Chief Financial Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.				*
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.				*
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.				*
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.				*
101.XSD	XBRL Schema.				**
101.PRE	XBRL Presentation.				**
101.CAL	XBRL Calculation.				**
101.DEF	XBRL Definition.				**
101.LAB	XBRL Label.				**
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).				**

* Filed herewith

** Filed herewith electronically

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on ~~August 8,~~November 7, 2022.


	Veeco Instruments Inc.

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

	By:	/s/ JOHN P. KIERNAN
		John P. Kiernan
		Senior Vice President and Chief Financial Officer

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