0001558370-21-005719.txt : 20210504 0001558370-21-005719.hdr.sgml : 20210504 20210504163220 ACCESSION NUMBER: 0001558370-21-005719 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 80 CONFORMED PERIOD OF REPORT: 20210331 FILED AS OF DATE: 20210504 DATE AS OF CHANGE: 20210504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VEECO INSTRUMENTS INC CENTRAL INDEX KEY: 0000103145 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 112989601 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16244 FILM NUMBER: 21889054 BUSINESS ADDRESS: STREET 1: TERMINAL DRIVE CITY: PLAINVIEW STATE: NY ZIP: 11803 BUSINESS PHONE: 516 677-0200 MAIL ADDRESS: STREET 1: TERMINAL DRIVE CITY: PLAINVIEW STATE: NY ZIP: 11803 FORMER COMPANY: FORMER CONFORMED NAME: VACUUM ELECTRONIC MANUFACTURING CORP DATE OF NAME CHANGE: 19700408 10-Q 1 veco-20210331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

OR

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

Commission file number 0-16244

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

    

11-2989601

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

Terminal Drive
Plainview, New York

11803

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code:

(516) 677-0200

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

VECO

The NASDAQ Global Select Market

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

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

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

Large accelerated filer 

    

    

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company

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

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

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

Safe Harbor Statement

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

In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events, including the potential impact of the COVID-19 pandemic on our business, and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.

The risks and uncertainties of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “we,” “us,” and “our,” unless the context indicates otherwise) include, without limitation, those set forth under the heading “Risk Factors” Part 1, Item 1A in our 2020 Form 10-K, and the following:

Risks Related to Our Business, Finance and Operations

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

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

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

Our sales cycle is long and unpredictable;

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

We may be required to take impairment charges on assets;

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

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

We may not have the ability to raise the funds necessary to settle for cash conversions of our 2.70% Convertible Senior Notes due 2023 (the “2023 Notes”), our 3.50% Convertible Senior Notes due 2025 (the “2025 Notes”), or our 3.75% Convertible Senior Notes due 2027 (the “2027 Notes”) (the 2023 Notes, 2025 Notes, and 2027 Notes, together, the “Notes”) or to repurchase the Notes for cash upon a fundamental change, and any future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes;

1

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

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

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

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

Risks Associated with Operating a Global Business

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

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

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

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

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

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

We are subject to foreign currency exchange risks;

Risks Related to Intellectual Property and Cybersecurity

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

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

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

Risks Associated with Our Industry

We face significant competition;

We operate in industries characterized by rapid technological change;

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

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

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

2

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

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

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

General Risk Factors

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

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

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

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

Our income taxes may change.

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

3

PART IFINANCIAL INFORMATION

Item 1. Financial Statements

Veeco Instruments Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)

March 31,

December 31,

    

2021

    

2020

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

140,733

$

129,625

Restricted cash

653

658

Short-term investments

 

186,142

 

189,771

Accounts receivable, net

 

87,491

 

79,991

Contract assets

20,558

21,246

Inventories

 

156,216

 

145,906

Deferred cost of sales

 

596

 

433

Prepaid expenses and other current assets

25,778

19,301

Total current assets

 

618,167

 

586,931

Property, plant, and equipment, net

 

65,207

 

65,271

Operating lease right-of-use assets

29,548

10,275

Intangible assets, net

42,831

46,185

Goodwill

 

181,943

 

181,943

Deferred income taxes

1,440

1,440

Other assets

 

6,106

 

6,019

Total assets

$

945,242

$

898,064

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

42,638

$

33,656

Accrued expenses and other current liabilities

 

51,064

 

44,876

Customer deposits and deferred revenue

 

68,907

 

67,235

Income taxes payable

 

1,086

 

914

Total current liabilities

 

163,695

 

146,681

Deferred income taxes

 

5,236

 

5,240

Long-term debt

 

324,629

 

321,115

Operating lease long-term liabilities

31,421

6,305

Other liabilities

 

7,800

 

10,349

Total liabilities

 

532,781

 

489,690

Stockholders' equity:

Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding.

 

Common stock, $0.01 par value; 120,000,000 shares authorized; 50,182,609 shares issued and outstanding at March 31, 2021 and 49,723,751 shares issued and outstanding at December 31, 2020

 

502

 

497

Additional paid-in capital

 

1,114,959

 

1,113,352

Accumulated deficit

 

(704,827)

 

(707,321)

Accumulated other comprehensive income

 

1,827

 

1,846

Total stockholders' equity

 

412,461

 

408,374

Total liabilities and stockholders' equity

$

945,242

$

898,064

See accompanying Notes to the Consolidated Financial Statements.

4

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

Three months ended March 31,

    

2021

    

2020

    

Net sales

$

133,714

$

104,502

Cost of sales

 

78,800

 

58,083

Gross profit

 

54,914

46,419

Operating expenses, net:

Research and development

 

21,844

 

19,195

Selling, general, and administrative

 

20,255

 

18,304

Amortization of intangible assets

 

3,354

 

3,837

Restructuring

 

 

625

Other operating expense (income), net

46

(109)

Total operating expenses, net

45,499

41,852

Operating income (loss)

 

9,415

 

4,567

Interest income

 

136

 

800

Interest expense

 

(6,759)

 

(5,666)

Income (loss) before income taxes

 

2,792

(299)

Income tax expense (benefit)

 

298

 

268

Net income (loss)

$

2,494

$

(567)

Income (loss) per common share:

Basic

$

0.05

$

(0.01)

Diluted

$

0.05

$

(0.01)

Weighted average number of shares:

Basic

 

48,624

 

47,811

Diluted

 

53,050

 

47,811

See accompanying Notes to the Consolidated Financial Statements.

5

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

Three months ended March 31,

    

2021

    

2020

    

Net income (loss)

$

2,494

$

(567)

Other comprehensive income (loss), net of tax:

Available-for-sale securities:

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

 

11

 

201

Currency translation adjustments:

Change in currency translation adjustments

 

(30)

 

(48)

Total other comprehensive income (loss), net of tax

 

(19)

 

153

Total comprehensive income (loss)

$

2,475

$

(414)

See accompanying Notes to the Consolidated Financial Statements.

6

Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three months ended March 31,

    

2021

    

2020

    

Cash Flows from Operating Activities

Net income (loss)

$

2,494

$

(567)

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

Depreciation and amortization

 

6,822

 

7,724

Non-cash interest expense

3,514

3,320

Deferred income taxes

 

(4)

 

115

Share-based compensation expense

 

3,237

 

3,646

Changes in operating assets and liabilities:

Accounts receivable and contract assets

 

(6,811)

 

(27,846)

Inventories and deferred cost of sales

 

(10,474)

 

2,446

Prepaid expenses and other current assets

 

(336)

 

(1,480)

Accounts payable and accrued expenses

 

12,612

 

14,459

Customer deposits and deferred revenue

 

1,672

 

(5,242)

Income taxes receivable and payable, net

 

172

 

124

Other, net

 

(2,413)

 

905

Net cash provided by (used in) operating activities

 

10,485

 

(2,396)

Cash Flows from Investing Activities

Capital expenditures

 

(1,953)

 

(1,070)

Proceeds from the sale of investments

 

55,385

 

71,130

Payments for purchases of investments

 

(52,037)

 

(34,866)

Net cash provided by (used in) investing activities

1,395

35,194

Cash Flows from Financing Activities

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

 

878

 

956

Restricted stock tax withholdings

 

(1,625)

 

(680)

Net cash provided by (used in) financing activities

 

(747)

 

276

Effect of exchange rate changes on cash and cash equivalents

 

(30)

 

(48)

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

 

11,103

 

33,026

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

 

130,283

 

129,951

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

$

141,386

$

162,977

Supplemental Disclosure of Cash Flow Information

Interest paid

$

1,803

$

4,681

Income taxes paid

240

293

Non-cash operating and financing activities

Net transfer of property, plant and equipment to inventory

526

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

20,353

See accompanying Notes to the Consolidated Financial Statements.

7

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature.

Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2021 interim quarters end on April 4, July 4, and October 3, and the 2020 interim quarters ended on March 29, June 28, and September 27. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.

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

Revenue Recognition

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

   

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

8

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

   

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

   

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

   

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

   

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

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

Inventories

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

9

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

Recently Adopted Accounting Standards

The Company adopted ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes in the second quarter of 2020, effective as of the beginning of fiscal year 2020. This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the general principles and simplifying several aspects of ASC 740, Income Taxes, including, but not limited to, requirements related to the following: a) exception to the incremental approach for intraperiod tax allocation; b) the tax basis step-up in goodwill obtained in a transaction that is not a business combination; c) ownership changes in investments - changes from a subsidiary to an equity method investment; d) separate financial statements of entities not subject to tax; e) interim-period accounting for enacted changes in tax law; and f) the year-to-date loss limitation in interim-period tax accounting. The adoption did not have a material impact on the Company’s consolidated financial statements as of the date of adoption.

Recent Accounting Standards Not Yet Adopted

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

i

10

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Note 2 — Income (Loss) Per Common Share

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted income per share is calculated by dividing net income by the weighted average number of shares used to calculate basic income (loss) per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share if the performance targets have been achieved, or would have been achieved if the reporting date was the end of the contingency period. The Company has determined that it has the ability and intent to settle the principal amount of its convertible senior notes in cash, and the excess of the principal portion in shares of its common stock. As such, the Company accounts for the conversion spread using the treasury stock method, and the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount and if the effect would be dilutive. The computations of basic and diluted income (loss) per share for the three months ended March 31, 2021 and 2020 are as follows:

Three months ended March 31,

    

2021

    

2020

    

(in thousands, except per share amounts)

Net income (loss)

$

2,494

$

(567)

Net income (loss) per common share:

Basic

$

0.05

$

(0.01)

Diluted

$

0.05

$

(0.01)

Basic weighted average shares outstanding

 

48,624

 

47,811

Dilutive effect of share-based awards

1,494

Dilutive effect of the 2027 Notes

 

2,932

 

Diluted weighted average shares outstanding

 

53,050

 

47,811

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

N/A

627

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

878

1,485

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

8,811

8,618

Note 3 — Assets

Investments

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

11

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

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

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

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

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

The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020:

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

March 31, 2021

Cash equivalents

Certificate of deposits and time deposits

$

80,062

$

$

$

80,062

Corporate debt

2,002

2,002

Commercial paper

950

950

Money market cash

985

985

Total

$

81,047

$

2,952

$

$

83,999

Short-term investments

U.S. treasuries

$

120,096

$

$

$

120,096

Corporate debt

58,449

58,449

Commercial paper

7,597

7,597

Total

$

120,096

$

66,046

$

$

186,142

December 31, 2020

Cash equivalents

Certificate of deposits and time deposits

$

59,168

$

$

$

59,168

Commercial paper

2,000

2,000

U.S. treasuries

24,997

24,997

Total

$

84,165

$

2,000

$

$

86,165

Short-term investments

U.S. treasuries

$

149,219

$

$

$

149,219

Corporate debt

32,554

32,554

Commercial paper

7,998

7,998

Total

$

149,219

$

40,552

$

$

189,771

There were no transfers between fair value measurement levels during the three months ended March 31, 2021.

12

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

At March 31, 2021 and December 31, 2020, the amortized cost and fair value of available-for-sale securities consist of:

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

(in thousands)

March 31, 2021

U.S. treasuries

$

120,077

$

20

$

(1)

$

120,096

Corporate debt

58,478

7

(36)

58,449

Commercial paper

7,596

1

7,597

Total

$

186,151

$

28

$

(37)

$

186,142

December 31, 2020

U.S. treasuries

$

149,206

$

14

$

(1)

$

149,219

Corporate debt

 

32,588

(34)

 

32,554

Commercial paper

7,997

1

7,998

Total

$

189,791

$

15

$

(35)

$

189,771

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

March 31, 2021

December 31, 2020

    

    

Gross

    

    

Gross

Estimated

Unrealized

Estimated

Unrealized

Fair Value

Losses

Fair Value

Losses

(in thousands)

U.S. treasuries

$

7,522

$

(1)

$

19,991

$

(1)

Corporate debt

 

47,971

 

(36)

 

32,554

 

(34)

Total

$

55,493

$

(37)

$

52,545

$

(35)

At March 31, 2021 and December 31, 2020, there were 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 March 31, 2021 were as follows:

March 31, 2021

Amortized

Estimated

Cost

Fair Value

(in thousands)

Due in one year or less

$

154,211

$

154,214

Due after one year through two years

28,965

 

28,952

Due after two years through three years

2,975

2,976

Total

$

186,151

$

186,142

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were minimal realized gains or losses for the three months ended March 31, 2021 and no realized gains or losses for the three months ended March 31, 2020.

Accounts Receivable

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

13

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Inventories

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

March 31,

December 31,

    

2021

    

2020

(in thousands)

Materials

$

90,115

$

82,679

Work-in-process

 

55,995

 

53,979

Finished goods

 

10,106

 

9,248

Total

$

156,216

$

145,906

Prepaid Expenses and Other Current Assets

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

Property, Plant, and Equipment

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

March 31,

December 31,

    

2021

    

2020

(in thousands)

Land

$

5,061

$

5,061

Building and improvements

 

63,059

 

62,865

Machinery and equipment (1)

 

142,163

 

140,493

Leasehold improvements

 

8,184

 

6,671

Gross property, plant, and equipment

 

218,467

 

215,090

Less: accumulated depreciation and amortization

 

153,260

 

149,819

Net property, plant, and equipment

$

65,207

$

65,271

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

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

Goodwill

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The Company continues to assess potential triggering events related to the value of its goodwill and concluded that there were no indicators of impairment during the three months ended March 31, 2021.

Intangible Assets

Intangible assets consist of purchased technology, customer relationships, patents, trademarks and tradenames, and backlog, and are initially recorded at fair value. Long-lived intangible assets are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line

14

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

The components of purchased intangible assets were as follows:

March 31, 2021

December 31, 2020

Accumulated

Accumulated

    

Gross

    

Amortization

    

    

Gross

    

Amortization

    

Carrying

and

Net

Carrying

and

Net

Amount

Impairment

Amount

Amount

Impairment

Amount

(in thousands)

Technology

$

327,908

$

304,661

$

23,247

$

327,908

$

302,358

$

25,550

Customer relationships

146,465

130,842

15,623

146,465

130,131

16,334

Trademarks and tradenames

30,910

26,953

3,957

30,910

26,614

4,296

Other

 

3,686

 

3,682

 

4

 

3,686

 

3,681

 

5

Total

$

508,969

$

466,138

$

42,831

$

508,969

$

462,784

$

46,185

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

Note 4 — Liabilities

Accrued Expenses and Other Current Liabilities

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

March 31,

December 31,

    

2021

    

2020

(in thousands)

Payroll and related benefits

$

29,238

$

26,630

Warranty

5,363

5,058

Operating lease liabilities

4,375

4,148

Interest

4,017

2,574

Professional fees

1,335

1,112

Sales, use, and other taxes

 

3,221

 

2,658

Other

 

3,515

 

2,696

Total

$

51,064

$

44,876

Warranty

Warranties are typically valid for one year from the date of system final acceptance, and Veeco estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and are affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures

15

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

(in thousands)

Balance - December 31, 2020

$

5,058

Warranties issued

 

1,561

Consumption of reserves

 

(1,310)

Changes in estimate

 

54

Balance - March 31, 2021

$

5,363

Customer Deposits and Deferred Revenue

Customer deposits totaled $52.2 million and $49.3 million at March 31, 2021 and December 31, 2020, respectively. Deferred revenue represents amounts billed, other than deposits, in excess of the revenue that can be recognized on a particular contract at the balance sheet date. Changes in deferred revenue were as follows:

(in thousands)

Balance - December 31, 2020

 

$

17,985

Deferral of revenue

 

3,647

Recognition of unearned revenue

 

(4,913)

Balance - March 31, 2021

 

$

16,719

As of March 31, 2021, the Company has approximately $21.8 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 80% is expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

Convertible Senior Notes

2023 Notes

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

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

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

16

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

2025 Notes

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

2027 Notes

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

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

The Notes are convertible at the option of the holders upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rates are 24.980041.6667, 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 one thousand dollar principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 15, 2022 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 five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per one thousand dollar principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Veeco’s common stock and the conversion rate on each such trading day;

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

(iv)Upon the occurrence of specified corporate events.

17

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

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

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

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

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

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

18

Table of Contents

Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

March 31, 2021

December 31, 2020

  

Principal Amount

  

Unamortized
debt discount/
transaction costs

  

Net carrying value

  

Principal Amount

  

Unamortized
debt discount/
transaction costs

  

Net carrying value

(in thousands)

2023 Notes

$

131,695

$

(10,560)

$

121,135

$

131,695

$

(11,925)

$

119,770

2025 Notes

 

132,500

 

(20,935)

 

111,565

 

132,500

 

(22,097)

 

110,403

2027 Notes

125,000

(33,071)

91,929

125,000

(34,058)

90,942

Net carrying value

$

389,195

$

(64,566)

$

324,629

$

389,195

$

(68,080)

$

321,115

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

Three months ended March 31,

    

2021

    

2020

 

(in thousands)

Cash Interest Expense

 

  

  

Coupon interest expense - 2023 Notes

$

889

$

2,329

Coupon interest expense - 2025 Notes

1,159

Coupon interest expense - 2027 Notes

1,172

Non-cash Interest Expense

 

 

  

Amortization of debt discount/transaction costs- 2023 Notes

 

1,365

 

3,320

Amortization of debt discount/transaction costs- 2025 Notes

1,162

Amortization of debt discount/transaction costs- 2027 Notes