Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 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 o ...

```markdown [Safe Harbor Statement](index=4&type=section&id=Safe%20Harbor%20Statement) This section outlines the nature of forward-looking statements, emphasizing their susceptibility to risks and uncertainties that could cause actual results to differ materially from projections, and notes that financial statements involve management estimates and assumptions which may differ from actual outcomes [Forward-Looking Statements](index=4&type=section&id=1.1%20Forward-Looking%20Statements) This section outlines the nature of forward-looking statements within the report, emphasizing that they are subject to risks and uncertainties that could cause actual results to differ materially from projections, and notes that financial statements involve management estimates and assumptions which may differ from actual outcomes - The report contains forward-looking statements, identified by words like "believes," "anticipates," "expects," and "estimates," which are subject to risks and uncertainties that could cause actual results to differ materially from projected results[10](index=10&type=chunk) - Preparation of financial statements requires management to make estimates and assumptions that may ultimately differ from actual results, and operating results for the three and nine months ended September 30, 2019, are not necessarily indicative of the full year's results[11](index=11&type=chunk) [Risks and Uncertainties](index=4&type=section&id=1.2%20Risks%20and%20Uncertainties) Veeco Instruments Inc. faces diverse risks, including unfavorable market conditions, global business operations, international trade disputes, IT system disruptions, intellectual property challenges, stock price volatility, potential asset impairment, intense competition, rapid technological change, dependence on consumer electronics, concentrated customer base, industry cyclicality, order timing, long sales cycles, and supply chain dependencies - Key risks include unfavorable market conditions, global business operations, international trade disputes (U.S. and China), IT system disruptions, and intellectual property enforcement/infringement claims[12](index=12&type=chunk) - The company's common stock price is volatile and could further decline, and there's a risk of additional asset impairment charges[12](index=12&type=chunk) - Operational risks include a concentrated customer base, cyclical industries, fluctuating quarterly results due to order timing, long and unpredictable sales cycles, and reliance on a limited number of suppliers[13](index=13&type=chunk) [PART I—FINANCIAL INFORMATION](index=9&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=9&type=section&id=Item%201.%20Financial%20Statements) This section presents Veeco Instruments Inc.'s unaudited consolidated financial statements, including Balance Sheets, Statements of Operations, Comprehensive Income (Loss), and Cash Flows, along with detailed notes on presentation, accounting policies, and specific financial line items [Consolidated Balance Sheets](index=9&type=section&id=2.1.1%20Consolidated%20Balance%20Sheets) Veeco's consolidated balance sheet shows total assets decreased from $900.8 million to $862.3 million, primarily due to reduced cash, while total liabilities slightly decreased and stockholders' equity declined from $437.8 million to $402.5 million Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Total Assets | $862,276 | $900,816 | $(38,540) | -4.28% | | Cash and cash equivalents | $135,259 | $212,273 | $(77,014) | -36.28% | | Short-term investments | $95,672 | $48,189 | $47,483 | 98.54% | | Total Current Assets | $486,281 | $520,080 | $(33,799) | -6.50% | | Total Liabilities | $459,806 | $463,041 | $(3,235) | -0.70% | | Total Stockholders' Equity | $402,470 | $437,775 | $(35,305) | -8.06% | [Consolidated Statements of Operations](index=11&type=section&id=2.1.2%20Consolidated%20Statements%20of%20Operations) Veeco reported a net loss for both the three and nine months ended September 30, 2019, with significantly decreased net sales, though the nine-month net loss improved from $(262.4) million in 2018 to $(45.9) million in 2019, largely due to the absence of a prior year asset impairment charge Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $108,954 | $126,757 | $306,147 | $443,110 | | Gross profit | $42,223 | $46,385 | $113,223 | $158,459 | | Operating income (loss) | $(7,365) | $(3,873) | $(32,713) | $(276,521) | | Net income (loss) | $(11,767) | $(8,953) | $(45,862) | $(262,414) | | Basic EPS | $(0.25) | $(0.19) | $(0.97) | $(5.55) | | Diluted EPS | $(0.25) | $(0.19) | $(0.97) | $(5.55) | [Consolidated Statements of Comprehensive Income (Loss)](index=12&type=section&id=2.1.3%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) The company reported a total comprehensive loss of $(11.8) million for the three months and $(45.8) million for the nine months ended September 30, 2019, encompassing net loss and minor adjustments from unrealized gains/losses on available-for-sale securities and foreign currency translation Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(11,767) | $(8,953) | $(45,862) | $(262,414) | | Total other comprehensive income (loss), net of tax | $(42) | $0 | $16 | $0 | | Total comprehensive income (loss) | $(11,809) | $(8,953) | $(45,846) | $(262,414) | [Consolidated Statements of Cash Flows](index=13&type=section&id=2.1.4%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2019, Veeco used $23.0 million in operating, $54.0 million in investing, and $0.2 million in financing activities, leading to a $77.1 million net decrease in cash, cash equivalents, and restricted cash, similar to the prior year's significant cash usage Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by (used in) operating activities | $(23,005) | $(39,378) | | Net cash provided by (used in) investing activities | $(53,978) | $(15,388) | | Net cash provided by (used in) financing activities | $(162) | $(11,479) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $(77,136) | $(66,249) | | Cash, cash equivalents, and restricted cash - end of period | $135,946 | $214,334 | [Notes to the Consolidated Financial Statements](index=14&type=section&id=2.1.5%20Notes%20to%20the%20Consolidated%20Financial%20Statements) The notes detail Veeco's accounting policies and financial statement line items, covering revenue recognition, lease accounting, income per share, asset valuations, liability breakdowns, commitments, share-based compensation, income taxes, and segment reporting by end-market and geographic region [Note 1 — Basis of Presentation](index=14&type=section&id=2.1.5.1%20Note%201%20%E2%80%94%20Basis%20of%20Presentation) This note outlines the basis for preparing Veeco's unaudited interim consolidated financial statements under U.S. GAAP and SEC regulations, detailing revenue recognition policies and lease accounting, including the adoption of ASC 842 which recognized ROU assets and lease liabilities without impacting income or cash flow statements - Interim financial statements are prepared in accordance with U.S. GAAP and SEC Regulation S-X, with all necessary adjustments being normal and recurring[30](index=30&type=chunk) - Revenue is recognized upon transfer of control of products or services to the customer, with judgment required for identifying performance obligations and allocating revenue for contracts with multiple deliverables[32](index=32&type=chunk)[33](index=33&type=chunk) - The company adopted ASC 842 (Leases) **effective** January 1, 2019, recognizing ROU assets and lease liabilities of approximately **$14.2 million** each, with **no impact** on the Consolidated Statements of Operations, Comprehensive Income, or Cash Flows[42](index=42&type=chunk)[43](index=43&type=chunk) [Note 2 — Income (Loss) Per Common Share](index=18&type=section&id=2.1.5.2%20Note%202%20%E2%80%94%20Income%20(Loss)%20Per%20Common%20Share) This note details the calculation of basic and diluted income (loss) per common share, which were negative for both periods, leading to the exclusion of potentially dilutive shares from share-based awards and convertible senior notes due to their anti-dilutive effect from the net loss Income (Loss) Per Common Share (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(11,767) | $(8,953) | $(45,862) | $(262,414) | | Basic EPS | $(0.25) | $(0.19) | $(0.97) | $(5.55) | | Diluted EPS | $(0.25) | $(0.19) | $(0.97) | $(5.55) | | Basic weighted average shares outstanding | 47,489 | 46,982 | 47,361 | 47,283 | | Diluted weighted average shares outstanding | 47,489 | 46,982 | 47,361 | 47,283 | - Common share equivalents and potentially dilutive shares (including those from Convertible Senior Notes) were excluded from diluted EPS calculations because the company incurred a net loss, making their effect anti-dilutive[44](index=44&type=chunk) [Note 3 — Assets](index=18&type=section&id=2.1.5.3%20Note%203%20%E2%80%94%20Assets) This note details Veeco's asset composition, including short-term investments (which increased), accounts receivable, inventories (which decreased), property, plant, and equipment, goodwill, intangible assets (which decreased due to amortization), and non-marketable investments measured at cost Short-term Investments (Available-for-Sale) (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :---------------- | :----------- | :----------- | | Estimated Fair Value | $95,672 | $48,189 | | Gross Amortized Cost | $95,680 | $48,205 | | Gross Unrealized Gains | $10 | $0 | | Gross Unrealized Losses | $(18) | $(16) | Inventories (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------- | :----------- | :----------- | | Materials | $78,430 | $90,816 | | Work-in-process | $40,873 | $42,354 | | Finished goods | $15,887 | $23,141 | | Total | $135,190 | $156,311 | Intangible Assets, Net (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :---------------------- | :----------- | :----------- | | Technology | $41,277 | $46,410 | | Customer relationships | $25,077 | $28,469 | | In-process R&D | $0 | $3,180 | | Trademarks and tradenames | $5,993 | $7,011 | | Other | $29 | $79 | | Total Net Intangible Assets | $72,376 | $85,149 | - Goodwill remained unchanged at **$184.3 million** during the nine months ended September 30, 2019[56](index=56&type=chunk) - The company holds non-marketable investments in Kateeva, Inc. (**$21.0 million**) and another entity (**$3.5 million**), measured at cost, with **no observable market price changes** during the nine months ended September 30, 2019[59](index=59&type=chunk) [Note 4 — Liabilities](index=25&type=section&id=2.1.5.4%20Note%204%20%E2%80%94%20Liabilities) This note details Veeco's liabilities, including decreased accrued expenses, stable warranty reserves, utilized and newly provisioned restructuring accruals, customer deposits, deferred revenue, and convertible senior notes whose carrying value increased due to amortization of debt discount and transaction costs Accrued Expenses and Other Current Liabilities (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------- | :----------- | :----------- | | Payroll and related benefits | $14,471 | $20,486 | | Warranty | $7,552 | $7,852 | | Operating lease liabilities | $4,730 | $0 | | Interest | $1,992 | $4,321 | | Professional fees | $2,794 | $2,897 | | Sales, use, and other taxes | $1,497 | $2,670 | | Restructuring liability | $1,617 | $2,213 | | Other | $5,988 | $6,011 | | Total | $40,641 | $46,450 | Changes in Restructuring Accrual (in thousands) | Metric | Dec 31, 2018 Balance | Provision | Payments | Sep 30, 2019 Balance | | :---------------------- | :-------------------- | :-------- | :------- | :------------------- | | Personnel Severance and Related Costs | $2,143 | $3,681 | $(4,207) | $1,617 | | Facility Related Costs and Other | $70 | $193 | $(263) | $0 | | Total | $2,213 | $3,874 | $(4,470) | $1,617 | Convertible Senior Notes Carrying Value (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------- | :----------- | :----------- | | Principal amount | $345,000 | $345,000 | | Unamortized debt discount | $(43,780) | $(52,336) | | Unamortized transaction costs | $(4,410) | $(5,272) | | Net carrying value | $296,810 | $287,392 | - Total interest expense related to the Convertible Senior Notes for the nine months ended September 30, 2019, was **$16.4 million**, including **$9.4 million** in non-cash interest expense[68](index=68&type=chunk) [Note 5 — Commitments and Contingencies](index=27&type=section&id=2.1.5.5%20Note%205%20%E2%80%94%20Commitments%20and%20Contingencies) This note outlines Veeco's commitments and contingencies, including $11.9 million in operating lease obligations, $76.3 million in purchase commitments (mostly due within one year), bank guarantees, and ongoing class action lawsuits related to the Ultratech acquisition, which management believes will not materially adversely affect the company's financial position Operating Lease Commitments (in thousands) | Period | Operating Leases | | :------------- | :--------------- | | 2019 | $1,302 | | 2020 | $5,222 | | 2021 | $2,548 | | 2022 | $1,379 | | 2023 | $865 | | Thereafter | $551 | | Total | $11,867 | - Veeco has purchase commitments of **$76.3 million** at September 30, 2019, with substantially all due within one year[73](index=73&type=chunk) - Outstanding bank guarantees and letters of credit totaled **$7.8 million**, with **$66.4 million** unused, as of September 30, 2019[74](index=74&type=chunk) - The company is **vigorously defending** two class action lawsuits related to the Ultratech acquisition, but does **not believe their ultimate resolution will have a material adverse effect** on its financial position, results of operations, or cash flows[75](index=75&type=chunk)[76](index=76&type=chunk)[77](index=77&type=chunk) [Note 6 — Derivative Financial Instruments](index=29&type=section&id=2.1.5.6%20Note%206%20%E2%80%94%20Derivative%20Financial%20Instruments) Veeco uses monthly forward derivative contracts to mitigate foreign currency exchange rate risks, with fair value changes recorded in 'Other, net' as they are not designated as hedges, and had no outstanding contracts or related gains/losses during the nine months ended September 30, 2019 - Veeco uses monthly forward derivative contracts to mitigate foreign currency exchange rate risks, but these are not designated as hedges[78](index=78&type=chunk) - There were no outstanding derivative contracts at September 30, 2019, and no gains or losses from currency exchange derivatives during the nine months ended September 30, 2019[79](index=79&type=chunk) [Note 7 — Equity](index=30&type=section&id=2.1.5.7%20Note%207%20%E2%80%94%20Equity) This note details changes in stockholders' equity, including common stock, additional paid-in capital, accumulated deficit (which increased significantly due to net losses), and accumulated other comprehensive income (AOCI), which saw minor changes from unrealized gains/losses and foreign currency translation Changes in Stockholders' Equity (in thousands) | Metric | Dec 31, 2018 Balance | Sep 30, 2019 Balance | | :-------------------------- | :-------------------- | :------------------- | | Common Stock Amount | $485 | $489 | | Additional Paid-in Capital | $1,061,325 | $1,066,203 | | Accumulated Deficit | $(619,983) | $(666,058) | | Accumulated Other Comprehensive Income | $1,820 | $1,836 | | Total Stockholders' Equity | $437,775 | $402,470 | - The accumulated deficit increased by **$46.075 million** from December 31, 2018, to September 30, 2019, primarily due to net losses[80](index=80&type=chunk) - Accumulated Other Comprehensive Income (AOCI) increased slightly from **$1,820 thousand** to **$1,836 thousand**, driven by foreign currency translation gains and unrealized gains on available-for-sale securities[81](index=81&type=chunk) [Note 8 — Share-based compensation](index=31&type=section&id=2.1.5.8%20Note%208%20%E2%80%94%20Share-based%20compensation) This note details share-based compensation expense, totaling $11.5 million for the nine months ended September 30, 2019 (a decrease from $12.7 million), and provides activity summaries for stock options and non-vested restricted/performance shares, including grants, vestings, and forfeitures Share-based Compensation Expense (in thousands) | Line Item | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cost of sales | $383 | $513 | $1,448 | $1,603 | | Research and development | $756 | $709 | $2,531 | $2,728 | | Selling, general, and administrative | $2,644 | $1,890 | $7,549 | $7,393 | | Restructuring | $0 | $167 | $0 | $996 | | Total | $3,783 | $3,279 | $11,528 | $12,720 | Non-Vested Restricted and Performance Shares Activity (9 Months Ended Sep 30, 2019) (in thousands) | Metric | Number of Shares | Weighted Average Grant Date Fair Value | | :-------------------------- | :--------------- | :------------------------------------- | | Balance - Dec 31, 2018 | 2,218 | $20.74 | | Granted | 1,048 | $11.41 | | Vested | (721) | $22.29 | | Forfeited | (176) | $19.41 | | Balance - Sep 30, 2019 | 2,344 | $16.02 | [Note 9 — Income Taxes](index=33&type=section&id=2.1.5.9%20Note%209%20%E2%80%94%20Income%20Taxes) Veeco's income tax expense was $0.1 million for three months and $0.4 million for nine months ended September 30, 2019, a significant change from a $28.0 million prior-period tax benefit, primarily due to tax amortization of indefinite-lived intangible assets that cannot offset U.S. deferred tax assets, which are fully offset by a valuation allowance Income Tax Expense (Benefit) (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Loss before income taxes | $(11,695) | $(8,652) | $(45,455) | $(290,368) | | Income tax expense (benefit) | $72 | $301 | $407 | $(27,954) | - The company's U.S. deferred tax assets are **fully offset by a valuation allowance**, as it is not more likely than not that these future benefits will be realized[84](index=84&type=chunk) - Domestic tax expense is primarily attributable to the tax amortization of indefinite-lived intangible assets that cannot offset U.S. deferred tax assets[86](index=86&type=chunk)[87](index=87&type=chunk) [Note 10 — Segment Reporting and Geographic Information](index=34&type=section&id=2.1.5.10%20Note%2010%20%E2%80%94%20Segment%20Reporting%20and%20Geographic%20Information) Veeco operates as a single reportable segment for thin film process equipment, with this note detailing net sales by four end-markets and geographic region, showing significant decreases in China and EMEA offset by increases in the United States and Rest of World - Veeco operates in **one reportable segment**: the design, development, manufacture, and support of thin film process equipment for electronic devices[89](index=89&type=chunk) Sales by End-Market (in thousands) | End-Market | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Advanced Packaging, MEMS & RF Filters | $11,381 | $24,562 | $50,951 | $76,473 | | LED Lighting, Display & Compound Semiconductor | $24,020 | $58,864 | $47,263 | $236,597 | | Front-End Semiconductor | $33,578 | $13,476 | $80,703 | $41,085 | | Scientific & Industrial | $39,975 | $29,855 | $127,230 | $88,955 | | Total | $108,954 | $126,757 | $306,147 | $443,110 | Sales by Geographic Region (in thousands) | Geographic Region | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | $27,915 | $28,861 | $100,014 | $85,555 | | China | $17,034 | $39,200 | $46,846 | $185,050 | | EMEA | $19,128 | $30,685 | $49,280 | $71,836 | | Rest of World | $44,877 | $28,011 | $110,007 | $100,669 | | Total | $108,954 | $126,757 | $306,147 | $443,110 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=37&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Veeco's financial performance and condition, including an executive summary, detailed operating results analysis, and discussion of liquidity and capital resources, highlighting declining sales in some markets offset by growth in others, cost reduction, and strategic R&D investments [Cautionary Statement Regarding Forward Looking Statements](index=37&type=section&id=2.2.1%20Cautionary%20Statement%20Regarding%20Forward%20Looking%20Statements) This statement reiterates that the discussion contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from projections, and investors are cautioned not to place undue reliance on these statements - The discussion contains forward-looking statements, identified by specific terminology, which are subject to risks and uncertainties that could cause actual results to differ materially from projected results[96](index=96&type=chunk) [Executive Summary](index=37&type=section&id=2.2.2%20Executive%20Summary) Veeco, an innovative semiconductor process equipment manufacturer, serves four key markets, experiencing soft sales in Advanced Packaging and LED Lighting but growth in Front-End Semiconductor and Scientific & Industrial, while actively reducing spending, streamlining operations, and focusing R&D investments on growth areas - Veeco is an innovative manufacturer of semiconductor process equipment, holding **leading technology positions** in its markets[97](index=97&type=chunk) - Sales in Advanced Packaging, MEMS & RF Filters and LED Lighting, Display & Compound Semiconductor markets **remained soft** in Q3 2019, but the company is positioned for **future growth** in advanced packaging (5G, automotive, big data) and expects **future business** in VCSELs, 3D sensors, laser diodes, and RF devices[99](index=99&type=chunk)[100](index=100&type=chunk) - Sales in Front-End Semiconductor were driven by laser annealing and Low-Defect-Density Ion Beam Deposition (LDD-IBD) for EUV Mask Blank production, with expected **continued growth**[101](index=101&type=chunk) - Scientific & Industrial market sales were supported by Ion Beam systems for data storage and optical coatings, experiencing **growth in 2019** due to demand for improved areal density of magnetic heads[102](index=102&type=chunk) - The company is **reducing spending**, **streamlining operations**, and **focusing R&D investments on growth areas** like Laser Annealing, Advanced Packaging Lithography, Ion Beam, and new markets such as LDD-IBD for EUV mask blanks and MOCVD for Photonics[103](index=103&type=chunk) [Results of Operations](index=39&type=section&id=2.2.3%20Results%20of%20Operations) Veeco's results show declining net sales for both periods ended September 30, 2019, driven by softness in LED Lighting and Advanced Packaging markets, particularly in China, though gross margins increased, and operating expenses decreased due to the absence of a 2018 asset impairment charge, significantly improving operating and net loss [For the three months ended September 30, 2019 and 2018](index=39&type=section&id=2.2.3.1%20For%20the%20three%20months%20ended%20September%2030%2C%202019%20and%202018) For the three months ended September 30, 2019, net sales decreased by 14% to $109.0 million, primarily due to significant declines in LED Lighting and Advanced Packaging markets, particularly in China, resulting in a 9% decrease in gross profit despite increased gross margins, and leading to an operating loss of $(7.4) million and a net loss of $(11.8) million Key Financials (3 Months Ended Sep 30, in thousands) | Metric | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Net sales | $108,954 | $126,757 | $(17,803) | -14% | | Cost of sales | $66,731 | $80,372 | $(13,641) | -17% | | Gross profit | $42,223 | $46,385 | $(4,162) | -9% | | Operating expenses, net | $49,588 | $50,258 | $(670) | -1% | | Operating income (loss) | $(7,365) | $(3,873) | $(3,492) | 90% | | Net income (loss) | $(11,767) | $(8,953) | $(2,814) | 31% | Sales by Market (3 Months Ended Sep 30, in thousands) | Market | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Advanced Packaging, MEMS & RF Filters | $11,381 | $24,562 | $(13,181) | -54% | | LED Lighting, Display & Compound Semiconductor | $24,020 | $58,864 | $(34,844) | -59% | | Front-End Semiconductor | $33,578 | $13,476 | $20,102 | 149% | | Scientific & Industrial | $39,975 | $29,855 | $10,120 | 34% | Sales by Geographic Region (3 Months Ended Sep 30, in thousands) | Region | 2019 | 2018 | Change | % Change | | :------------- | :----------- | :----------- | :------- | :------- | | China | $17,034 | $39,200 | $(22,166) | -57% | | EMEA | $19,128 | $30,685 | $(11,557) | -38% | | Rest of World | $44,877 | $28,011 | $16,866 | 60% | - **Gross margins increased** due to product and region mix of sales, partially offsetting the decrease in sales volume[110](index=110&type=chunk) - Research and development expenses **decreased slightly** due to personnel-related expenses and professional fees from streamlining operations[111](index=111&type=chunk) [For the nine months ended September 30, 2019 and 2018](index=43&type=section&id=2.2.3.2%20For%20the%20nine%20months%20ended%20September%2030%2C%202019%20and%202018) For the nine months ended September 30, 2019, net sales decreased by 31% to $306.1 million, driven by declines in LED Lighting (-80%) and Advanced Packaging (-33%) markets, particularly in China, resulting in a 29% gross profit decrease, but the absence of a $252.3 million 2018 asset impairment charge significantly improved operating loss by 88% and net loss by 83%, despite a shift to tax expense Key Financials (9 Months Ended Sep 30, in thousands) | Metric | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Net sales | $306,147 | $443,110 | $(136,963) | -31% | | Cost of sales | $192,924 | $284,651 | $(91,727) | -32% | | Gross profit | $113,223 | $158,459 | $(45,236) | -29% | | Operating expenses, net | $145,936 | $434,980 | $(289,044) | -66% | | Operating income (loss) | $(32,713) | $(276,521) | $243,808 | -88% | | Net income (loss) | $(45,862) | $(262,414) | $216,552 | -83% | Sales by Market (9 Months Ended Sep 30, in thousands) | Market | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Advanced Packaging, MEMS & RF Filters | $50,951 | $76,473 | $(25,522) | -33% | | LED Lighting, Display & Compound Semiconductor | $47,263 | $236,597 | $(189,334) | -80% | | Front-End Semiconductor | $80,703 | $41,085 | $39,618 | 96% | | Scientific & Industrial | $127,230 | $88,955 | $38,275 | 43% | Sales by Geographic Region (9 Months Ended Sep 30, in thousands) | Region | 2019 | 2018 | Change | % Change | | :------------- | :----------- | :----------- | :------- | :------- | | China | $46,846 | $185,050 | $(138,204) | -75% | | EMEA | $49,280 | $71,836 | $(22,556) | -31% | | United States | $100,014 | $85,555 | $14,459 | 17% | | Rest of World | $110,007 | $100,669 | $9,338 | 9% | - The **significant decrease in operating expenses** and **improvement in net loss** for the nine months ended September 30, 2019, was primarily due to the absence of the **$252.3 million** non-cash intangible asset impairment charge recorded in Q2 2018[122](index=122&type=chunk)[131](index=131&type=chunk) - Income tax expense for the nine months ended September 30, 2019, was **$0.4 million**, compared to a tax benefit of **$28.0 million** in the prior period, mainly due to the absence of refundable alternative minimum tax credits and deferred tax benefits from the intangible asset impairment in 2018[134](index=134&type=chunk)[135](index=135&type=chunk)[136](index=136&type=chunk) [Liquidity and Capital Resources](index=48&type=section&id=2.2.4%20Liquidity%20and%20Capital%20Resources) Veeco's total cash, cash equivalents, restricted cash, and short-term investments decreased to $231.6 million from $261.3 million, as the company used cash in operating, investing, and financing activities, though management believes current cash and projected cash flow will be sufficient to meet obligations for the next twelve months Cash and Investments (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------- | :----------- | :----------- | | Cash and cash equivalents | $135,259 | $212,273 | | Restricted cash | $687 | $809 | | Short-term investments | $95,672 | $48,189 | | Total | $231,618 | $261,271 | - Net cash used in operating activities was **$23.0 million** for the nine months ended September 30, 2019, primarily due to net loss, increases in accounts receivable, and decreases in accounts payable, accrued expenses, and deferred revenue, partially offset by inventory decreases[140](index=140&type=chunk) - Net cash used in investing activities was **$54.0 million**, mainly attributable to net changes in investments and capital expenditures[141](index=141&type=chunk) - Net cash used in financing activities was **$0.2 million**, related to the settlement of taxes for employee equity programs[142](index=142&type=chunk) - Management believes projected cash flow from operations, combined with current cash and short-term investments, will be **sufficient** to meet working capital, contractual obligations, and other cash needs for the next twelve months[137](index=137&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=49&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discusses Veeco's exposure to market risks, including interest rate risk on its investment portfolio (where a 100 basis point increase could decrease fair value by $0.3 million) and currency exchange risk, which has an immaterial impact on consolidated results as most international sales are U.S. dollar denominated [Interest Rate Risk](index=49&type=section&id=2.3.1%20Interest%20Rate%20Risk) Veeco's primary interest rate risk exposure is its fixed-income investment portfolio, valued at approximately $95.7 million, where a hypothetical 100 basis point interest rate increase would result in an estimated $0.3 million decrease in fair value - Veeco's investment portfolio, with a fair value of approximately **$95.7 million** at September 30, 2019, is exposed to interest rate risk[148](index=148&type=chunk) - A 100 basis point increase in interest rates would result in an estimated **$0.3 million decrease** in the fair value of the investment portfolio[148](index=148&type=chunk) [Currency Exchange Risk](index=51&type=section&id=2.3.2%20Currency%20Exchange%20Risk) Veeco's global business exposes it to currency exchange risk, but with most substantial international sales (75% of Q3 2019 net sales) denominated in U.S. dollars, a 10% change in foreign exchange rates would have an immaterial impact on consolidated results - Net sales to customers outside the United States represented approximately **75%** and **67%** of total net sales for the three and nine months ended September 30, 2019, respectively[151](index=151&type=chunk) - Most of Veeco's sales outside the United States are denominated in U.S. dollars, leading to an **immaterial impact** on consolidated results of operations from a 10% change in foreign exchange rates[151](index=151&type=chunk)[152](index=152&type=chunk) [Item 4. Controls and Procedures](index=51&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms that Veeco's management has evaluated and concluded that its disclosure controls and procedures were effective as of September 30, 2019, and that there were no material changes in internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were **effective** as of September 30, 2019[153](index=153&type=chunk) - **No material changes** in internal control over financial reporting occurred during the quarter ended September 30, 2019[154](index=154&type=chunk) [PART II—OTHER INFORMATION](index=51&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=51&type=section&id=Item%201.%20Legal%20Proceedings) Veeco is vigorously defending two class action lawsuits (Wolther v. Maheshwari et al. and Vladimir Gusinsky Revocable Trust v. Peeler, et al.) related to the Ultratech acquisition, alleging false/misleading statements and breach of fiduciary duty, and does not believe their ultimate resolution will materially adversely affect its financial position, results of operations, or cash flows - Two class action lawsuits, Wolther v. Maheshwari et al. and Vladimir Gusinsky Revocable Trust v. Peeler, et al., have been filed against Veeco related to the Ultratech acquisition, alleging false/misleading statements and breach of fiduciary duty[156](index=156&type=chunk)[158](index=158&type=chunk)[159](index=159&type=chunk) - Veeco is **vigorously defending** these legal proceedings and does **not believe their ultimate resolution will have a material adverse effect** on its consolidated financial position, results of operations, or cash flows[158](index=158&type=chunk)[159](index=159&type=chunk)[160](index=160&type=chunk) [Item 1A. Risk Factors](index=53&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the risk factors previously disclosed in the Safe Harbor Statement within this Form 10-Q, as well as in the company's 2018 Form 10-K and the quarterly report on Form 10-Q for the quarter ended June 30, 2019, with no material changes to these risk factors having occurred - There have been **no material changes** to the risk factors previously disclosed in the Safe Harbor Statement, the 2018 Form 10-K, and the Q2 2019 Form 10-Q[161](index=161&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=53&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Veeco's Board authorized a $100 million common stock repurchase program through December 11, 2019, of which $14.3 million had been utilized as of September 30, 2019, with no shares purchased during Q3 2019, and the program remains subject to modification or suspension - Veeco's Board authorized a **$100 million** common stock repurchase program through December 11, 2019[162](index=162&type=chunk) - As of September 30, 2019, **$14.3 million** of the repurchase program had been utilized, with **no shares purchased** during the third quarter of 2019[162](index=162&type=chunk) [Item 3. Defaults Upon Senior Securities](index=53&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities reported for the period - **No defaults** upon senior securities were reported[163](index=163&type=chunk) [Item 4. Mine Safety Disclosures](index=53&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Veeco Instruments Inc - This item is **not applicable**[164](index=164&type=chunk) [Item 5. Other Information](index=53&type=section&id=Item%205.%20Other%20Information) No other information was reported under this item - **No other information** was reported[165](index=165&type=chunk) [Item 6. Exhibits](index=55&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Securities and Exchange Commission, including certifications from the Chief Executive Officer and Chief Financial Officer (pursuant to Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. Section 1350), and various XBRL documents - Exhibits include certifications from the CEO and CFO (31.1, 31.2, 32.1, 32.2) and various XBRL documents (101.INS, 101.XSD, 101.PRE, 101.CAL, 101.DEF, 101.LAB, 104)[167](index=167&type=chunk) [SIGNATURES](index=55&type=section&id=SIGNATURES) The report was duly signed on November 4, 2019, on behalf of Veeco Instruments Inc. by William J. Miller, Ph.D., Chief Executive Officer, and Shubham Maheshwari, Executive Vice President, Chief Financial Officer, and Chief Operating Officer - The report was signed on November 4, 2019, by William J. Miller, Ph.D., CEO, and Shubham Maheshwari, EVP, CFO, and COO[169](index=169&type=chunk)[170](index=170&type=chunk) ```

[Safe Harbor Statement](index=4&type=section&id=Safe%20Harbor%20Statement) This statement highlights that the report contains forward-looking information subject to risks and uncertainties, and financial statements rely on management estimates that may differ from actual results - This report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from projections[9](index=9&type=chunk) - Preparation of financial statements requires management estimates and assumptions, which may ultimately differ from actual results[10](index=10&type=chunk) - Key risks include unfavorable market conditions, global business operations, international trade disputes, IT system disruptions, intellectual property issues, stock price volatility, asset impairment, significant competition, rapid technological change, dependence on consumer electronics, concentrated customer base, industry cyclicality, and U.S.-China trade policy changes[11](index=11&type=chunk)[13](index=13&type=chunk)[17](index=17&type=chunk) [PART I—FINANCIAL INFORMATION](index=9&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=9&type=section&id=Item%201.%20Financial%20Statements) This section presents Veeco Instruments Inc.'s unaudited consolidated financial statements for the periods ended June 30, 2019, and December 31, 2018, including balance sheets, statements of operations, comprehensive income, and cash flows, along with detailed notes on accounting policies and significant accounts [Consolidated Balance Sheets](index=9&type=section&id=Consolidated%20Balance%20Sheets) | Assets (in thousands) | June 30, 2019 (unaudited) | December 31, 2018 | | :---------------------- | :------------------------ | :------------------ | | Cash and cash equivalents | $ 161,715 | $ 212,273 | | Short-term investments | $ 84,495 | $ 48,189 | | Total current assets | $ 491,517 | $ 520,080 | | Total assets | $ 875,863 | $ 900,816 | | Liabilities (in thousands) | June 30, 2019 (unaudited) | December 31, 2018 | | :------------------------ | :------------------------ | :------------------ | | Total current liabilities | $ 149,200 | $ 160,053 | | Long-term debt | $ 293,611 | $ 287,392 | | Total liabilities | $ 464,837 | $ 463,041 | | Total stockholders' equity | $ 411,026 | $ 437,775 | [Consolidated Statements of Operations](index=11&type=section&id=Consolidated%20Statements%20of%20Operations) | (in thousands, except per share amounts) | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $ 97,822 | $ 157,779 | $ 197,193 | $ 316,353 | | Gross profit | $ 36,285 | $ 55,395 | $ 71,001 | $ 112,075 | | Total operating expenses, net | $ 47,494 | $ 316,609 | $ 96,348 | $ 384,723 | | Operating income (loss) | $ (11,209) | $ (261,214) | $ (25,347) | $ (272,648) | | Net income (loss) | $ (15,565) | $ (237,634) | $ (34,095) | $ (253,461) | | Basic income (loss) per common share | $ (0.33) | $ (5.02) | $ (0.72) | $ (5.35) | | Diluted income (loss) per common share | $ (0.33) | $ (5.02) | $ (0.72) | $ (5.35) | [Consolidated Statements of Comprehensive Income (Loss)](index=12&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20%28Loss%29) | (in thousands) | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $ (15,565) | $ (237,634) | $ (34,095) | $ (253,461) | | Total other comprehensive income (loss), net of tax | $ 20 | $ (24) | $ 58 | $ — | | Total comprehensive income (loss) | $ (15,545) | $ (237,658) | $ (34,037) | $ (253,461) | [Consolidated Statements of Cash Flows](index=13&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) | (in thousands) | Six months ended June 30, 2019 | Six months ended June 30, 2018 | | :--------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $ (8,141) | $ (57,440) | | Net cash provided by (used in) investing activities | $ (42,049) | $ (23,831) | | Net cash provided by (used in) financing activities | $ (457) | $ (2,045) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $ (50,634) | $ (83,316) | | Cash, cash equivalents, and restricted cash - end of period | $ 162,448 | $ 197,267 | [Note 1 — Basis of Presentation](index=14&type=section&id=Note%201%20%E2%80%94%20Basis%20of%20Presentation) This note explains that the unaudited consolidated financial statements adhere to U.S. GAAP for interim reporting, including all necessary adjustments, and details revenue recognition policies and the adoption of ASC 842 (Leases) - Unaudited Consolidated Financial Statements are prepared in accordance with U.S. GAAP for interim financial information, with all necessary normal, recurring adjustments included[30](index=30&type=chunk) - Revenue is recognized upon transfer of control of promised products or services, with judgment required for identifying performance obligations and allocating revenue for contracts with multiple deliverables[32](index=32&type=chunk)[33](index=33&type=chunk)[34](index=34&type=chunk) - The Company adopted ASC 842 (Leases) effective January 1, 2019, recognizing approximately **$14.2 million** each in Right-of-Use (ROU) assets and lease liabilities, with no impact on the Consolidated Statements of Operations, Comprehensive Income, or Cash Flows[42](index=42&type=chunk)[43](index=43&type=chunk) [Note 2 — Income (Loss) Per Common Share](index=18&type=section&id=Note%202%20%E2%80%94%20Income%20%28Loss%29%20Per%20Common%20Share) This note provides a detailed breakdown of basic and diluted income (loss) per common share, along with the weighted average shares outstanding for the reported periods | (in thousands, except per share amounts) | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $ (15,565) | $ (237,634) | $ (34,095) | $ (253,461) | | Basic income (loss) per common share | $ (0.33) | $ (5.02) | $ (0.72) | $ (5.35) | | Diluted income (loss) per common share | $ (0.33) | $ (5.02) | $ (0.72) | $ (5.35) | | Basic weighted average shares outstanding | 47,112 | 47,311 | 47,145 | 47,332 | | Diluted weighted average shares outstanding | 47,112 | 47,311 | 47,145 | 47,332 | - Common share equivalents and potentially dilutive shares were excluded from diluted weighted average shares outstanding due to the Company incurring a net loss, making their effect antidilutive[44](index=44&type=chunk) [Note 3 — Assets](index=18&type=section&id=Note%203%20%E2%80%94%20Assets) This note details the composition of the Company's assets, including short-term investments, inventories, and intangible assets, along with non-marketable investments subject to impairment reviews - Short-term investments are classified as available-for-sale, reported at fair value, and include U.S. treasuries, government agency securities, corporate debt, and commercial paper[45](index=45&type=chunk) | Inventories (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Materials | $ 85,721 | $ 90,816 | | Work-in-process | $ 36,236 | $ 42,354 | | Finished goods | $ 17,751 | $ 23,141 | | Total Inventories | $ 139,708 | $ 156,311 | | Intangible Assets, Net (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Technology | $ 44,111 | $ 46,410 | | Customer relationships | $ 26,208 | $ 28,469 | | Trademarks and tradenames | $ 6,333 | $ 7,011 | | Total Intangible Assets, Net | $ 76,689 | $ 85,149 | - The Company holds non-marketable investments in Kateeva, Inc. (**$21.0 million**) and another entity (**$3.5 million**) at cost, subject to periodic impairment reviews[59](index=59&type=chunk) [Note 4 — Liabilities](index=24&type=section&id=Note%204%20%E2%80%94%20Liabilities) This note outlines the Company's liabilities, including accrued expenses, warranty obligations, customer deposits, deferred revenue, and long-term debt, providing details on changes and remaining performance obligations | Accrued Expenses and Other Current Liabilities (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Payroll and related benefits | $ 14,768 | $ 20,486 | | Warranty | $ 7,099 | $ 7,852 | | Operating lease liabilities | $ 4,440 | $ — | | Interest | $ 4,321 | $ 4,321 | | Total Accrued Expenses and Other Current Liabilities | $ 42,797 | $ 46,450 | | Warranty Activity (in thousands) | Six months ended June 30, 2019 | | :--------------- | :----------------------------- | | Balance - December 31, 2018 | $ 7,852 | | Warranties issued | $ 2,518 | | Consumption of reserves | $ (3,350) | | Changes in estimate | $ 79 | | Balance - June 30, 2019 | $ 7,099 | | Customer Deposits and Deferred Revenue (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Customer deposits | $ 34,600 | $ 28,300 | | Deferred revenue | $ 49,450 | $ 44,415 | | Total Customer Deposits and Deferred Revenue | $ 84,031 | $ 72,736 | - The Company has **$65.1 million** in remaining performance obligations on contracts with original estimated duration of one year or more, with approximately **64%** expected to be recognized within one year[65](index=65&type=chunk) | Long-term Debt (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Principal amount | $ 345,000 | $ 345,000 | | Net carrying value | $ 293,611 | $ 287,392 | | Fair value | $ 305,300 | N/A | [Note 5 — Commitments and Contingencies](index=29&type=section&id=Note%205%20%E2%80%94%20Commitments%20and%20Contingencies) This note details the Company's operating lease commitments, purchase commitments, outstanding bank guarantees, and ongoing class action lawsuits related to the Ultratech acquisition | Operating Leases (in thousands) | Operating Leases | | :--------------- | :--------------- | | Payments due by period: | | | 2019 | $ 2,450 | | 2020 | $ 5,119 | | 2021 | $ 2,439 | | 2022 | $ 1,356 | | 2023 | $ 865 | | Thereafter | $ 551 | | Total future minimum lease payments | $ 12,780 | - Purchase commitments totaled **$84.5 million** at June 30, 2019, with substantially all due within one year[73](index=73&type=chunk) - Outstanding bank guarantees and letters of credit were **$7.9 million**, with **$66.9 million** unused at June 30, 2019[74](index=74&type=chunk) - The Company is vigorously defending two class action lawsuits related to the Ultratech acquisition, alleging false/misleading statements and breach of fiduciary duty[75](index=75&type=chunk)[76](index=76&type=chunk) [Note 6 — Derivative Financial Instruments](index=30&type=section&id=Note%206%20%E2%80%94%20Derivative%20Financial%20Instruments) This note explains the Company's use of monthly forward derivative contracts to manage foreign currency exchange rate risk, confirming no outstanding contracts or related gains/losses during the reported periods - The Company uses monthly forward derivative contracts to mitigate foreign currency exchange rate risk, not for speculative purposes[78](index=78&type=chunk) - No outstanding derivative contracts at June 30, 2019, or December 31, 2018, and no gains or losses from currency exchange derivatives for the six months ended June 30, 2019[79](index=79&type=chunk) [Note 7 — Equity](index=32&type=section&id=Note%207%20%E2%80%94%20Equity) This note provides a comprehensive breakdown of changes in stockholders' equity, including common stock, treasury stock, additional paid-in capital, accumulated deficit, and accumulated other comprehensive income | (in thousands) | Balance at Dec 31, 2018 | Net loss | Other comprehensive income, net of tax | Share-based compensation expense | Net issuance under employee stock plans | Balance at June 30, 2019 | | :--------------- | :---------------------- | :------- | :------------------------------------- | :------------------------------- | :-------------------------------------- | :----------------------- | | Common Stock (Shares) | 48,547 | — | — | — | 424 | 48,971 | | Common Stock (Amount) | $ 485 | — | — | — | $ 5 | $ 490 | | Treasury Stock (Shares) | 523 | — | — | — | (523) | — | | Treasury Stock (Amount) | $ (5,872) | — | — | — | $ 5,872 | $ — | | Additional Paid-in Capital | $ 1,061,325 | — | — | $ 7,745 | $ (6,121) | $ 1,062,949 | | Accumulated Deficit | $ (619,983) | $ (34,095) | — | — | $ (213) | $ (654,291) | | Accumulated Other Comprehensive Income | $ 1,820 | — | $ 58 | — | — | $ 1,878 | | Total | $ 437,775 | $ (34,095) | $ 58 | $ 7,745 | $ (4,457) | $ 411,026 | | Accumulated Other Comprehensive Income (in thousands) | Balance - December 31, 2018 | Other comprehensive income (loss) | Balance - June 30, 2019 | | :--------------- | :-------------------------- | :-------------------------------- | :---------------------- | | Foreign Currency Translation | $ 1,836 | $ 13 | $ 1,849 | | Unrealized Gains (Losses) on Available for Sale Securities | $ (16) | $ 45 | $ 29 | | Total | $ 1,820 | $ 58 | $ 1,878 | [Note 8 — Share-based compensation](index=34&type=section&id=Note%208%20%E2%80%94%20Share-based%20compensation) This note details the Company's share-based compensation expenses across various functional areas and provides a summary of stock option and restricted stock unit activity | Share-based Compensation Expense (in thousands) | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of sales | $ 595 | $ 536 | $ 1,065 | $ 1,090 | | Research and development | $ 982 | $ 1,065 | $ 1,775 | $ 2,019 | | Selling, general, and administrative | $ 3,011 | $ 2,646 | $ 4,905 | $ 5,503 | | Restructuring | $ — | $ 657 | $ — | $ 829 | | Total | $ 4,588 | $ 4,904 | $ 7,745 | $ 9,441 | | Stock Option Activity (in thousands) | Number of Shares | Weighted Average Exercise Price | | :--------------- | :--------------- | :------------------------------ | | Balance - December 31, 2018 | 1,222 | $ 34.80 | | Expired or forfeited | (69) | $ 33.62 | | Balance - June 30, 2019 | 1,153 | $ 34.87 | | Restricted Stock Unit Activity (in thousands) | Number of Shares | Weighted Average Grant Date Fair Value | | :--------------- | :--------------- | :------------------------------------- | | Balance - December 31, 2018 | 2,218 | $ 20.74 | | Granted | 1,035 | $ 11.41 | | Vested | (589) | $ 22.35 | | Forfeited | (97) | $ 21.79 | | Balance - June 30, 2019 | 2,566 | $ 16.71 | [Note 9 — Income Taxes](index=35&type=section&id=Note%209%20%E2%80%94%20Income%20Taxes) This note explains that the Company's U.S. deferred tax assets are fully offset by a valuation allowance and details the income tax expense or benefit for the reported periods - The Company's U.S. deferred tax assets are fully offset by a valuation allowance due to uncertainty of future benefit realization[86](index=86&type=chunk) | Income Taxes (in thousands) | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Loss before income taxes | $ (15,420) | $ (265,659) | $ (33,759) | $ (281,716) | | Income tax expense (benefit) | $ 145 | $ (28,025) | $ 336 | $ (28,255) | - Income tax expense for Q2 2019 was **$0.1 million** (vs. **$28.0 million** benefit in Q2 2018), primarily due to domestic operations and foreign withholding taxes, offset by intangible asset amortization[88](index=88&type=chunk) - Income tax expense for H1 2019 was **$0.3 million** (vs. **$28.3 million** benefit in H1 2018), driven by similar factors as Q2, with 2018 benefits primarily from refundable alternative minimum tax credits and deferred tax benefit on intangible asset impairment[89](index=89&type=chunk)[90](index=90&type=chunk)[91](index=91&type=chunk) [Note 10 — Segment Reporting and Geographic Information](index=36&type=section&id=Note%2010%20%E2%80%94%20Segment%20Reporting%20and%20Geographic%20Information) This note clarifies that Veeco operates as a single reportable segment, categorizing sales by four end-markets and providing a breakdown of sales by geographic region - Veeco operates as one reportable segment, focusing on the design, development, manufacture, and support of thin film process equipment for electronic devices[92](index=92&type=chunk) - Sales are categorized into four end-markets: Advanced Packaging, MEMS & RF Filters; LED Lighting, Display & Compound Semiconductor; Front-End Semiconductor; and Scientific & Industrial[93](index=93&type=chunk)[94](index=94&type=chunk)[95](index=95&type=chunk)[96](index=96&type=chunk) | Sales by End-Market and Geographic Region (in thousands) | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sales by end-market: | | | | | | Advanced Packaging, MEMS & RF Filters | $ 16,443 | $ 24,758 | $ 39,570 | $ 51,911 | | LED Lighting, Display & Compound Semiconductor | $ 9,692 | $ 87,817 | $ 23,242 | $ 177,733 | | Front-End Semiconductor | $ 24,509 | $ 18,152 | $ 47,126 | $ 27,609 | | Scientific & Industrial | $ 47,178 | $ 27,052 | $ 87,255 | $ 59,100 | | Total Sales | $ 97,822 | $ 157,779 | $ 197,193 | $ 316,353 | | Sales by geographic region: | | | | | | United States | $ 39,784 | $ 32,939 | $ 72,099 | $ 56,694 | | China | $ 19,654 | $ 70,457 | $ 29,813 | $ 145,850 | | EMEA | $ 12,324 | $ 25,405 | $ 30,151 | $ 41,151 | | Rest of World | $ 26,060 | $ 28,978 | $ 65,130 | $ 72,658 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=39&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of Veeco's financial condition and results of operations for the three and six months ended June 30, 2019, compared to the prior year, detailing revenue performance by market and region, changes in expenses, and liquidity [Executive Summary](index=39&type=section&id=Executive%20Summary) This summary highlights Veeco's position as a leading semiconductor process equipment manufacturer and details key sales drivers across its Advanced Packaging, Front-End Semiconductor, and Scientific & Industrial markets - Veeco is a leading manufacturer of semiconductor process equipment, leveraging MOCVD, lithography, laser annealing, ion beam, and single wafer etch & clean technologies[100](index=100&type=chunk) - Sales in Advanced Packaging, MEMS & RF Filter market were driven by Lithography and PSP systems for advanced packaging, including recent traction in DRAM packaging and GPU applications[102](index=102&type=chunk) - Front-End Semiconductor sales were strong due to laser annealing systems and LDD-IBD for EUV Mask Blank Production, while Scientific & Industrial sales were supported by Ion Beam systems for data storage and optical coatings[104](index=104&type=chunk)[105](index=105&type=chunk) [Results of Operations (Three Months Ended June 30)](index=41&type=section&id=Results%20of%20Operations%20%28Three%20Months%20Ended%20June%2030%29) This section analyzes the Company's financial performance for the three months ended June 30, 2019, detailing significant decreases in net sales, gross profit, and net loss, driven by market shifts and reduced operating expenses | (in thousands) | Q2 2019 | Q2 2018 | Change ($) | Change (%) | | :--------------- | :------ | :------ | :--------- | :--------- | | Net sales | $ 97,822 | $ 157,779 | $ (59,957) | (38)% | | Gross profit | $ 36,285 | $ 55,395 | $ (19,110) | (34)% | | Operating income (loss) | $ (11,209) | $ (261,214) | $ 250,005 | (96)% | | Net income (loss) | $ (15,565) | $ (237,634) | $ 222,069 | (93)% | - Net sales decreased by **38%** YoY, primarily due to an **89%** decline in the LED Lighting, Display & Compound Semiconductor market, partially offset by **74%** growth in Scientific & Industrial and **35%** in Front-End Semiconductor[107](index=107&type=chunk)[108](index=108&type=chunk) - Geographically, sales decreased significantly in China (**-72%**) and EMEA (**-51%**), while increasing in the United States (**+21%**)[108](index=108&type=chunk) - Operating expenses decreased by **85%** YoY, largely due to a non-recurring **$252.3 million** asset impairment charge in Q2 2018, alongside reductions in R&D, SG&A, amortization, and restructuring expenses from streamlining efforts[107](index=107&type=chunk)[112](index=112&type=chunk)[113](index=113&type=chunk)[114](index=114&type=chunk)[115](index=115&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk)[118](index=118&type=chunk)[120](index=120&type=chunk) [Results of Operations (Six Months Ended June 30)](index=46&type=section&id=Results%20of%20Operations%20%28Six%20Months%20Ended%20June%2030%29) This section analyzes the Company's financial performance for the six months ended June 30, 2019, highlighting significant decreases in net sales, gross profit, and net loss, driven by market shifts and reduced operating expenses | (in thousands) | H1 2019 | H1 2018 | Change ($) | Change (%) | | :--------------- | :------ | :------ | :--------- | :--------- | | Net sales | $ 197,193 | $ 316,353 | $ (119,160) | (38)% | | Gross profit | $ 71,001 | $ 112,075 | $ (41,074) | (37)% | | Operating income (loss) | $ (25,347) | $ (272,648) | $ 247,301 | (91)% | | Net income (loss) | $ (34,095) | $ (253,461) | $ 219,366 | (87)% | - Net sales decreased by **38%** YoY, primarily due to an **87%** decline in the LED Lighting, Display & Compound Semiconductor market, partially offset by **48%** growth in Scientific & Industrial and **71%** in Front-End Semiconductor[128](index=128&type=chunk) - Geographically, sales decreased significantly in China (**-80%**) and EMEA (**-27%**), while increasing in the United States (**+27%**)[128](index=128&type=chunk) - Operating expenses decreased by **75%** YoY, largely due to a non-recurring **$252.3 million** asset impairment charge in H1 2018, alongside reductions in R&D, SG&A, amortization, and restructuring expenses from streamlining efforts[127](index=127&type=chunk)[132](index=132&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk)[135](index=135&type=chunk)[136](index=136&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk) [Liquidity and Capital Resources](index=50&type=section&id=Liquidity%20and%20Capital%20Resources) This section details the Company's cash position, changes in cash flows from operating and investing activities, and its outlook on meeting future liquidity needs | Cash, Cash Equivalents, Restricted Cash, and Short-term Investments (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Cash and cash equivalents | $ 161,715 | $ 212,273 | | Restricted cash | $ 733 | $ 809 | | Short-term investments | $ 84,495 | $ 48,189 | | Total | $ 246,943 | $ 261,271 | - Net cash used in operating activities improved to **$8.1 million** for H1 2019, compared to **$57.4 million** used in H1 2018, driven by changes in operating assets and liabilities[145](index=145&type=chunk) - Net cash used in investing activities was **$42.0 million** for H1 2019, primarily due to net changes in investments and capital expenditures[146](index=146&type=chunk) - The Company believes its projected cash flow from operations, combined with current cash and short-term investments, will be sufficient to meet its needs for the next twelve months, including interest payments on Convertible Senior Notes due 2023[144](index=144&type=chunk)[148](index=148&type=chunk) [Contractual Obligations and Commitments](index=54&type=section&id=Contractual%20Obligations%20and%20Commitments) This section states that the Company's future contractual payment obligations for goods and services are expected to be funded by cash generated from operations - The Company has commitments under contractual arrangements for future payments for goods and services, expected to be funded by cash generated from operations[150](index=150&type=chunk) [Off-Balance Sheet Arrangements](index=54&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms that the Company has no material off-balance sheet arrangements beyond the disclosed bank guarantees and purchase commitments - The Company does not have any material off-balance sheet arrangements other than disclosed bank guarantees and purchase commitments[151](index=151&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=54&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section outlines the Company's exposure to market risks, specifically interest rate risk related to its investment portfolio and currency exchange risk from global operations, and the strategies used to manage these exposures - Interest rate risk primarily affects the investment portfolio (**$84.5 million** in fixed-income securities); a **100 basis point** increase in interest rates would result in a **$0.2 million** decrease in fair value[152](index=152&type=chunk) - The Company uses monthly forward derivative contracts to mitigate foreign currency exchange rate risk, not for speculative purposes, as a portion of revenues and earnings are exposed to currency fluctuations[153](index=153&type=chunk)[154](index=154&type=chunk) - Net sales to customers outside the U.S. represented **60%** (Q2 2019) and **63%** (H1 2019) of total net sales, but most sales are U.S. dollar denominated, leading to an immaterial impact from a **10%** change in foreign exchange rates[155](index=155&type=chunk)[156](index=156&type=chunk) [Item 4. Controls and Procedures](index=56&type=section&id=Item%204.%20Controls%20and%20Procedures) Management has evaluated and concluded that the Company's disclosure controls and procedures were effective as of June 30, 2019, and there were no material changes in internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures are effective as of June 30, 2019[158](index=158&type=chunk) - There were no changes in internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control during the quarter ended June 30, 2019[159](index=159&type=chunk) [PART II—OTHER INFORMATION](index=56&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=56&type=section&id=Item%201.%20Legal%20Proceedings) This section details ongoing legal proceedings, including two class action lawsuits related to the Ultratech acquisition, which the Company is vigorously defending, and asserts that their ultimate resolution is not expected to materially affect its financial position - The Company is defending a consolidated class action complaint (Wolther v. Maheshwari et al.) alleging false/misleading statements in the registration statement for the Ultratech acquisition[161](index=161&type=chunk) - A derivative action (Vladimir Gusinsky Revocable Trust v. Peeler, et al.) was filed on behalf of Veeco stockholders, asserting claims for breach of fiduciary duty and waste of corporate assets related to the Ultratech acquisition[162](index=162&type=chunk) - The Company does not believe that the ultimate resolution of these or other legal matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows[163](index=163&type=chunk) [Item 1A. Risk Factors](index=56&type=section&id=Item%201A.%20Risk%20Factors) This section updates the Company's risk factors, specifically adding a new risk related to changes in U.S. trade policy, export controls, and ongoing trade disputes with China, which could significantly impact its business, operations, and financial condition - A new risk factor has been added regarding changes in U.S. trade policy and export controls, and ongoing trade disputes between the U.S. and China[164](index=164&type=chunk)[165](index=165&type=chunk)[166](index=166&type=chunk) - These changes, including tariffs, Entity List additions (e.g., Huawei), and restrictions on emerging technologies, could adversely affect demand for products, increase costs, and lead to retaliatory actions by China[166](index=166&type=chunk)[167](index=167&type=chunk)[168](index=168&type=chunk) - The Company faces increasing difficulty in obtaining export licenses and uncertainty regarding the disposition of affected inventory, potentially leading to order cancellations or losses[169](index=169&type=chunk)[170](index=170&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=60&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports on the Company's share repurchase program, noting that no shares were purchased during the second quarter of 2019, with **$14.3 million** utilized out of the **$100 million** authorized program - No shares were purchased during the second quarter of 2019 under the **$100 million** share repurchase program authorized through December 11, 2019[173](index=173&type=chunk) - As of June 30, 2019, **$14.3 million** of the **$100 million** repurchase program had been utilized[173](index=173&type=chunk) [Item 3. Defaults Upon Senior Securities](index=60&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[174](index=174&type=chunk) [Item 4. Mine Safety Disclosures](index=60&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the Company - Mine Safety Disclosures are not applicable[175](index=175&type=chunk) [Item 5. Other Information](index=60&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report under this item - No other information to report[176](index=176&type=chunk) [Item 6. Exhibits](index=61&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Securities and Exchange Commission, including certifications from the Chief Executive Officer and Chief Financial Officer, and various XBRL documents | Exhibit Number | Exhibit Description | Filed or Furnished 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 | ** | | 101.XSD | XBRL Schema. | ** | | 101.PRE | XBRL Presentation. | ** | | 101.CAL | XBRL Calculation. | ** | | 101.DEF | XBRL Definition. | ** | | 101.LAB | XBRL Label. | ** | [SIGNATURES](index=61&type=section&id=SIGNATURES) This section contains the official signatures of the Chief Executive Officer and Chief Financial Officer, certifying the filing of the report on behalf of Veeco Instruments Inc - The report was duly signed on August 5, 2019, by William J. Miller, Ph.D., Chief Executive Officer, and Shubham Maheshwari, Executive Vice President, Chief Financial Officer, and Chief Operating Officer[181](index=181&type=chunk)[182](index=182&type=chunk)

[Filing Information](index=1&type=section&id=Filing%20Information) This section details the Quarterly Report on Form 10-Q for Veeco Instruments Inc. for the period ended March 31, 2019, including its filer status and common stock information - The document is a Quarterly Report on Form 10-Q for the period ended March 31, 2019, filed by Veeco Instruments Inc[2](index=2&type=chunk) - Veeco Instruments Inc. is classified as a **Large Accelerated Filer**[4](index=4&type=chunk) Common Stock Information | 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 | - As of April 25, 2019, there were **48,675,196 shares of common stock outstanding**[4](index=4&type=chunk) [Safe Harbor Statement](index=4&type=section&id=Safe%20Harbor%20Statement) This statement highlights that the report contains forward-looking information subject to risks and uncertainties, which may cause actual results to differ materially - This report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from projected results[8](index=8&type=chunk) - The preparation of financial statements requires management to make estimates and assumptions, which may ultimately differ from actual results[9](index=9&type=chunk) - Key risks include unfavorable market conditions, global business operations, international trade disputes, IT system disruptions, intellectual property issues, stock price volatility, potential impairment charges, significant competition, rapid technological change, dependence on consumer electronics, concentrated customer base, and industry cyclicality[10](index=10&type=chunk)[12](index=12&type=chunk)[15](index=15&type=chunk) [PART I—FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) This part presents Veeco Instruments Inc.'s unaudited consolidated financial statements and management's discussion and analysis for the three months ended March 31, 2019 [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Veeco Instruments Inc.'s unaudited consolidated financial statements for the three months ended March 31, 2019, including the Balance Sheets, Statements of Operations, Statements of Comprehensive Income (Loss), Statements of Cash Flows, and detailed notes, prepared in accordance with U.S. GAAP for interim reporting [Consolidated Balance Sheets](index=7&type=section&id=Consolidated%20Balance%20Sheets) This section provides a snapshot of Veeco Instruments Inc.'s financial position, detailing assets, liabilities, and equity as of March 31, 2019, and December 31, 2018 Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2019 | December 31, 2018 | Change | | :------------------------ | :------------- | :---------------- | :----------- | | Total Assets | $885,594 | $900,816 | $(15,222) | | Total Liabilities | $463,796 | $463,041 | $755 | | Total Stockholders' Equity | $421,798 | $437,775 | $(15,977) | | Cash and cash equivalents | $169,439 | $212,273 | $(42,834) | | Short-term investments | $67,215 | $48,189 | $19,026 | | Inventories | $148,103 | $156,311 | $(8,208) | | Long-term debt | $290,473 | $287,392 | $3,081 | [Consolidated Statements of Operations](index=8&type=section&id=Consolidated%20Statements%20of%20Operations) This section presents Veeco Instruments Inc.'s financial performance, including net sales, gross profit, operating income, and net income for the three months ended March 31, 2019 and 2018 Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change | Change (%) | | :------------------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net sales | $99,371 | $158,574 | $(59,203) | (37)% | | Cost of sales | $64,655 | $101,894 | $(37,239) | (37)% | | Gross profit | $34,716 | $56,680 | $(21,964) | (39)% | | Operating income (loss) | $(14,140) | $(11,435) | $(2,705) | 24% | | Net income (loss) | $(18,530) | $(15,827) | $(2,703) | 17% | | Basic EPS | $(0.40) | $(0.34) | $(0.06) | 17.6% | | Diluted EPS | $(0.40) | $(0.34) | $(0.06) | 17.6% | [Consolidated Statements of Comprehensive Income (Loss)](index=9&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20%28Loss%29) This section outlines Veeco Instruments Inc.'s comprehensive income or loss, including net income and other comprehensive income components for the three months ended March 31, 2019 and 2018 Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Net income (loss) | $(18,530) | $(15,827) | $(2,703) | | Other comprehensive income (loss), net of tax | $38 | $24 | $14 | | Total comprehensive income (loss) | $(18,492) | $(15,803) | $(2,689) | [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section details Veeco Instruments Inc.'s cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2019 and 2018 Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net cash provided by (used in) operating activities | $(22,291) | $(11,807) | $(10,484) | | Net cash provided by (used in) investing activities | $(20,938) | $(22,559) | $1,621 | | Net cash provided by (used in) financing activities | $379 | $117 | $262 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $(42,839) | $(34,217) | $(8,622) | | Cash, cash equivalents, and restricted cash - end of period | $170,243 | $246,366 | $(76,123) | [Notes to the Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies, estimates, and specific financial items [Note 1 — Basis of Presentation](index=11&type=section&id=Note%201%20%E2%80%94%20Basis%20of%20Presentation) This note describes the accounting principles and policies used in preparing the unaudited interim financial statements, including revenue recognition and lease accounting standards - Unaudited interim financial statements are prepared in accordance with **U.S. GAAP** for interim information and **SEC Regulation S-X**[26](index=26&type=chunk) - Revenue is recognized upon the **transfer of control** of promised products or services to the customer, requiring judgment for multiple deliverables and stand-alone selling prices[28](index=28&type=chunk)[29](index=29&type=chunk) - Most revenue is recognized at a **point in time**, typically upon system delivery after contractual acceptance provisions are met or objectively demonstrated[30](index=30&type=chunk)[31](index=31&type=chunk) - The company adopted **ASC 842 (Leases)** effective January 1, 2019, recognizing approximately **$14.2 million** each in Right-of-Use (ROU) assets and lease liabilities, with **no impact on the income or cash flow statements**[37](index=37&type=chunk)[38](index=38&type=chunk) [Note 2 — Income (Loss) Per Common Share](index=15&type=section&id=Note%202%20%E2%80%94%20Income%20%28Loss%29%20Per%20Common%20Share) This note details the calculation of basic and diluted earnings per share, including the treatment of potentially dilutive securities during periods of net loss Income (Loss) Per Common Share (in thousands, except per share amounts) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $(18,530) | $(15,827) | | Basic EPS | $(0.40) | $(0.34) | | Diluted EPS | $(0.40) | $(0.34) | | Basic weighted average shares outstanding | 46,848 | 46,963 | | Diluted weighted average shares outstanding | 46,848 | 46,963 | | Potentially dilutive shares excluded (antidilutive) | 2,426 | 2,092 | | Convertible Senior Notes shares excluded (antidilutive) | 8,618 | 8,618 | - Due to a net loss, common share equivalents and potential shares from Convertible Senior Notes were **excluded from diluted EPS calculation** as their effect would be antidilutive[39](index=39&type=chunk) [Note 3 — Assets](index=15&type=section&id=Note%203%20%E2%80%94%20Assets) This note provides a breakdown of Veeco Instruments Inc.'s assets, including short-term investments, inventories, intangible assets, and non-marketable investments - Short-term investments are primarily classified as **available-for-sale** and reported at fair value, consisting of U.S. treasuries, government agency securities, corporate debt, and commercial paper[40](index=40&type=chunk)[42](index=42&type=chunk) Fair Value of Cash Equivalents and Short-term Investments (March 31, 2019, in thousands) | Asset Type | Level 1 | Level 2 | Total | | :-------------------- | :--------- | :--------- | :--------- | | Cash equivalents | $86,780 | $11,257 | $98,037 | | Short-term investments | $51,726 | $15,489 | $67,215 | Inventories (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :-------------- | :------------- | :---------------- | | Materials | $84,711 | $90,816 | | Work-in-process | $36,299 | $42,354 | | Finished goods | $27,093 | $23,141 | | Total | $148,103 | $156,311 | Intangible Assets (Net, in thousands) | Category | March 31, 2019 | December 31, 2018 | | :---------------------- | :------------- | :---------------- | | Technology | $43,690 | $46,410 | | Customer relationships | $27,338 | $28,469 | | In-process R&D | $3,180 | $3,180 | | Trademarks and tradenames | $6,671 | $7,011 | | Other | $52 | $79 | | Total | $80,931 | $85,149 | - The company holds non-marketable investments in Kateeva, Inc. (**$21.0 million**) and another entity (**$3.5 million**), measured at cost and subject to periodic impairment reviews[52](index=52&type=chunk) [Note 4 — Liabilities](index=20&type=section&id=Note%204%20%E2%80%94%20Liabilities) This note details Veeco Instruments Inc.'s liabilities, including accrued expenses, warranty reserves, restructuring accruals, and the carrying value of convertible senior notes Accrued Expenses and Other Current Liabilities (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :------------------------ | :------------- | :---------------- | | Payroll and related benefits | $17,722 | $20,486 | | Warranty | $7,226 | $7,852 | | Operating lease liabilities | $4,797 | — | | Interest | $1,992 | $4,321 | | Professional fees | $3,059 | $2,897 | | Sales, use, and other taxes | $1,256 | $2,670 | | Restructuring liability | $1,720 | $2,213 | | Other | $6,268 | $6,011 | | Total | $44,040 | $46,450 | - Warranty reserves **decreased** from **$7.852 million** at December 31, 2018, to **$7.226 million** at March 31, 2019[55](index=55&type=chunk) - Restructuring accruals totaled **$1.720 million** at March 31, 2019, reflecting ongoing cost-saving initiatives and headcount reductions[56](index=56&type=chunk)[58](index=58&type=chunk) Convertible Senior Notes Carrying Value (in thousands) | Component | March 31, 2019 | December 31, 2018 | | :------------------------ | :------------- | :---------------- | | Principal amount | $345,000 | $345,000 | | Unamortized debt discount | $(49,537) | $(52,336) | | Unamortized transaction costs | $(4,990) | $(5,272) | | Net carrying value | $290,473 | $287,392 | - Total interest expense related to the Convertible Senior Notes was **$5.410 million** for the three months ended March 31, 2019, including **$3.081 million** in non-cash interest expense[61](index=61&type=chunk) [Note 5 — Commitments and Contingencies](index=22&type=section&id=Note%205%20%E2%80%94%20Commitments%20and%20Contingencies) This note outlines Veeco Instruments Inc.'s contractual obligations, including operating lease commitments, purchase commitments, and ongoing legal proceedings Operating Lease Commitments (March 31, 2019, in thousands) | Period (Payments due) | Operating Leases | | :-------------------- | :--------------- | | 2019 (excluding Q1) | $4,144 | | 2020 | $5,233 | | 2021 | $2,431 | | 2022 | $1,334 | | 2023 | $853 | | Thereafter | $548 | | Total future minimum lease payments | $14,543 | | Less: Imputed interest | $(1,364) | | Total | $13,179 | - The weighted average remaining lease term for operating leases is **3 years**, with a weighted average discount rate of **6.0%**[63](index=63&type=chunk) - Purchase commitments totaled **$90.5 million** at March 31, 2019, with substantially all due within one year[66](index=66&type=chunk) - The company is **vigorously defending** two class action lawsuits related to the Ultratech acquisition, alleging misstatements and breach of fiduciary duty, but does not believe they will have a **material adverse effect**[68](index=68&type=chunk)[69](index=69&type=chunk)[70](index=70&type=chunk) [Note 6 — Derivative Financial Instruments](index=24&type=section&id=Note%206%20%E2%80%94%20Derivative%20Financial%20Instruments) This note describes Veeco Instruments Inc.'s use of derivative contracts to manage foreign currency exchange risk, emphasizing their non-speculative nature - The company uses monthly forward derivative contracts to **mitigate foreign currency exchange risk**, not for speculative purposes[71](index=71&type=chunk) - There were **no outstanding derivative contracts** or gains/losses from currency exchange derivatives for the three months ended March 31, 2019[72](index=72&type=chunk) [Note 7 — Equity](index=25&type=section&id=Note%207%20%E2%80%94%20Equity) This note details changes in Veeco Instruments Inc.'s stockholders' equity, including common stock, additional paid-in capital, accumulated deficit, and comprehensive income Changes in Stockholders' Equity (in thousands) | Item | Balance at Dec 31, 2018 | Q1 2019 Activity | Balance at Mar 31, 2019 | | :---------------------------------- | :---------------------- | :--------------- | :---------------------- | | Common Stock (Amount) | $485 | $2 | $487 | | Treasury Stock (Amount) | $(5,872) | $5,872 | $0 | | Additional Paid-in Capital | $1,061,325 | $(3,146) | $1,058,179 | | Accumulated Deficit | $(619,983) | $(18,743) | $(638,726) | | Accumulated Other Comprehensive Income | $1,820 | $38 | $1,858 | | Total Stockholders' Equity | $437,775 | $(15,977) | $421,798 | - Accumulated Other Comprehensive Income (AOCI) **increased by $38 thousand**, primarily due to unrealized gains on available-for-sale securities and foreign currency translation[75](index=75&type=chunk) [Note 8 — Share-based compensation](index=26&type=section&id=Note%208%20%E2%80%94%20Share-based%20compensation) This note outlines Veeco Instruments Inc.'s share-based compensation expense across various line items and changes in non-vested restricted and performance shares Share-based Compensation Expense (in thousands) | Line Item | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :---------------------------- | :-------------------------------- | :-------------------------------- | | Cost of sales | $470 | $554 | | Research and development | $792 | $954 | | Selling, general, and administrative | $1,895 | $2,857 | | Restructuring | $0 | $172 | | Total | $3,157 | $4,537 | - Total share-based compensation expense **decreased by $1.38 million (30.4%)** year-over-year[77](index=77&type=chunk) - Non-vested restricted and performance shares **increased** from **2,218 thousand shares** at December 31, 2018, to **2,938 thousand shares** at March 31, 2019, due to new grants offset by vesting and forfeitures[78](index=78&type=chunk) [Note 9 — Income Taxes](index=27&type=section&id=Note%209%20%E2%80%94%20Income%20Taxes) This note details Veeco Instruments Inc.'s loss before income taxes and income tax expense or benefit, explaining the drivers for domestic and non-U.S. tax positions Loss Before Income Taxes and Income Tax Expense (Benefit) (in thousands) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Loss before income taxes | $(18,340) | $(16,057) | | Income tax expense (benefit) | $190 | $(230) | - The domestic tax expense is primarily attributable to the **tax amortization of indefinite-lived intangible assets**, which is not available to offset U.S. deferred tax assets due to a valuation allowance[81](index=81&type=chunk) - The non-U.S. tax expense in Q1 2019 is primarily due to **non-U.S. operation profits** and foreign withholding taxes on unremitted earnings, partially offset by intangible asset amortization[81](index=81&type=chunk)[82](index=82&type=chunk) [Note 10 — Segment Reporting and Geographic Information](index=28&type=section&id=Note%2010%20%E2%80%94%20Segment%20Reporting%20and%20Geographic%20Information) This note provides insights into Veeco Instruments Inc.'s single operating segment, categorizing sales by end-market and geographic region for performance analysis - Veeco operates and measures its results in **one operating segment**: the design, development, manufacture, and support of thin film process equipment[83](index=83&type=chunk) - Sales are categorized into four end-markets: **Advanced Packaging, MEMS & RF Filters**; **LED Lighting, Display & Compound Semiconductor**; **Front-End Semiconductor**; and **Scientific & Industrial**[84](index=84&type=chunk)[85](index=85&type=chunk)[86](index=86&type=chunk)[87](index=87&type=chunk) Sales by End-Market (in thousands) | End-Market | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change | Change (%) | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Advanced Packaging, MEMS & RF Filters | $23,127 | $27,153 | $(4,026) | (15)% | | LED Lighting, Display & Compound Semiconductor | $13,550 | $89,916 | $(76,366) | (85)% | | Front-End Semiconductor | $22,617 | $9,457 | $13,160 | 139% | | Scientific & Industrial | $40,077 | $32,048 | $8,029 | 25% | | Total | $99,371 | $158,574 | $(59,203) | (37)% | Sales by Geographic Region (in thousands) | Geographic Region | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | United States | $32,315 | $23,754 | $8,561 | 36% | | China | $10,159 | $75,395 | $(65,236) | (87)% | | EMEA | $17,827 | $15,745 | $2,082 | 13% | | Rest of World | $39,070 | $43,680 | $(4,610) | (11)% | | Total | $99,371 | $158,574 | $(59,203) | (37)% | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of Veeco's financial condition and results of operations for the three months ended March 31, 2019, highlighting significant declines in net sales and gross profit, increased net loss, and details on liquidity and capital resources [Cautionary Statement Regarding Forward Looking Statements](index=30&type=section&id=Cautionary%20Statement%20Regarding%20Forward%20Looking%20Statements) This statement advises readers that the discussion contains forward-looking statements subject to risks and uncertainties, and actual results may differ materially - The discussion contains forward-looking statements, identified by specific terminology, which are subject to risks and uncertainties[90](index=90&type=chunk) - Readers are cautioned not to place undue reliance on forward-looking statements, as actual results may differ materially[90](index=90&type=chunk) [Executive Summary](index=30&type=section&id=Executive%20Summary) This summary introduces Veeco as a leading manufacturer of semiconductor and thin film process equipment, outlining key drivers and applications across its four market segments - Veeco is a leading manufacturer of innovative semiconductor and thin film process equipment, with revenue categorized into **four key market segments**[91](index=91&type=chunk)[92](index=92&type=chunk) - Sales in Advanced Packaging, MEMS & RF Filter market were driven by **Lithography and PSP systems** for advanced packaging processes, with encouraging traction in **DRAM packaging**[93](index=93&type=chunk) - Sales in LED Lighting, Display & Compound Semiconductor market were driven by **display and photonics applications**, with future business expected from **3D sensors, VCSELs, laser diodes, and RF devices**[94](index=94&type=chunk) - Front-End Semiconductor sales were primarily driven by **laser annealing systems** for advanced-node foundry processes and increasing adoption of **LDD-IBD for EUV Mask Blank Production**[95](index=95&type=chunk) - Scientific & Industrial sales were supported by **Ion Beam systems** for data storage and optical coatings, and **MBE systems** for research, driven by demand for improved areal density in magnetic heads[96](index=96&type=chunk) [Results of Operations](index=31&type=section&id=Results%20of%20Operations) This section analyzes Veeco Instruments Inc.'s financial performance, detailing changes in net sales, gross profit, and operating expenses for the three months ended March 31, 2019 [Net Sales](index=31&type=section&id=Net%20Sales) This section analyzes the significant decrease in net sales, particularly in the LED Lighting, Display & Compound Semiconductor market and China, for the three months ended March 31, 2019 Net Sales by Market (in thousands) | End-Market | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | Change (%) | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Advanced Packaging, MEMS & RF Filters | $23,127 | $27,153 | $(4,026) | (15)% | | LED Lighting, Display & Compound Semiconductor | $13,550 | $89,916 | $(76,366) | (85)% | | Front-End Semiconductor | $22,617 | $9,457 | $13,160 | 139% | | Scientific & Industrial | $40,077 | $32,048 | $8,029 | 25% | | Total | $99,371 | $158,574 | $(59,203) | (37)% | Net Sales by Geographic Region (in thousands) | Geographic Region | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | United States | $32,315 | $23,754 | $8,561 | 36% | | China | $10,159 | $75,395 | $(65,236) | (87)% | | EMEA | $17,827 | $15,745 | $2,082 | 13% | | Rest of World | $39,070 | $43,680 | $(4,610) | (11)% | | Total | $99,371 | $158,574 | $(59,203) | (37)% | - The significant decrease in sales was primarily in the **LED Lighting, Display & Compound Semiconductor market**, particularly in **China**, where no significant new orders are expected in the near future[99](index=99&type=chunk)[100](index=100&type=chunk) [Gross Profit](index=33&type=section&id=Gross%20Profit) This section examines the decline in gross profit, attributing it to lower sales volume and reduced gross margins resulting from changes in product and region mix Gross Profit (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | Change (%) | | :---------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Gross profit | $34,716 | $56,680 | $(21,964) | (39)% | - Gross profit **decreased** due to lower sales volume and reduced gross margins, primarily resulting from changes in product and region mix of sales[101](index=101&type=chunk) [Research and Development](index=33&type=section&id=Research%20and%20Development) This section details the decrease in R&D expenses, primarily driven by lower personnel-related costs and professional fees as part of cost-saving initiatives Research and Development Expense (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :------- | :--------- | | R&D | $23,340 | $24,320 | $(980) | (4)% | - R&D expenses **decreased** primarily due to lower personnel-related expenses and professional fees, reflecting initiatives to streamline operations and reduce costs[102](index=102&type=chunk) [Selling, General, and Administrative](index=33&type=section&id=Selling%2C%20General%2C%20and%20Administrative) This section reports a decrease in SG&A expenses, mainly due to reduced personnel-related costs and professional fees from ongoing cost-saving initiatives Selling, General, and Administrative Expense (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | SG&A | $19,902 | $26,383 | $(6,481) | (25)% | - SG&A expenses **decreased** primarily due to reduced personnel-related expenses and professional fees from cost-saving initiatives[103](index=103&type=chunk) [Amortization Expense](index=33&type=section&id=Amortization%20Expense) This section explains the significant decrease in amortization expense, which is a direct result of intangible asset impairment recorded in the prior year Amortization of Intangible Assets (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | Change (%) | | :---------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Amortization | $4,218 | $13,532 | $(9,314) | (69)% | - The decrease in amortization expense is a result of the **impairment of intangible assets** recorded during the second quarter of 2018[104](index=104&type=chunk) [Restructuring Expense](index=33&type=section&id=Restructuring%20Expense) This section details the ongoing restructuring charges incurred in Q1 2019, reflecting efforts to streamline operations, enhance efficiencies, and reduce costs Restructuring Expense (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | Change (%) | | :------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Restructuring | $1,430 | $2,695 | $(1,265) | (47)% | - Restructuring charges continued in Q1 2019 as part of ongoing efforts to streamline operations, enhance efficiencies, and reduce costs, including facility consolidation and headcount reductions[105](index=105&type=chunk)[106](index=106&type=chunk) [Interest Income (Expense)](index=33&type=section&id=Interest%20Income%20%28Expense%29) This section reports on net interest income and expense, including non-cash charges related to the amortization of debt discount and transaction costs for Convertible Senior Notes Net Interest Income (Expense) (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | Change (%) | | :---------------------- | :-------------------------------- | :-------------------------------- | :------- | :--------- | | Interest income (expense), net | $(4,200) | $(4,622) | $422 | (9)% | - Non-cash charges related to the amortization of debt discount and transaction costs for Convertible Senior Notes were **$3.1 million** in Q1 2019 and **$2.9 million** in Q1 2018[107](index=107&type=chunk) [Income Taxes](index=33&type=section&id=Income%20Taxes) This section explains the income tax expense or benefit, detailing the domestic tax expense from intangible asset amortization and non-U.S. tax expense from operation profits Income Tax Expense (Benefit) (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Income tax expense (benefit) | $190 | $(230) | $420 | - The Q1 2019 tax expense included **$0.1 million** related to domestic operations and **$0.1 million** related to non-U.S. operations[109](index=109&type=chunk) - Domestic tax expense is primarily due to the **tax amortization of indefinite-lived intangible assets** not available to offset U.S. deferred tax assets[110](index=110&type=chunk) - Non-U.S. tax expense in Q1 2019 is primarily attributable to **non-U.S. operation profits** and foreign withholding taxes on unremitted earnings, offset by intangible asset amortization[110](index=110&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses Veeco Instruments Inc.'s ability to meet its financial obligations, detailing cash, investments, and cash flows from operating, investing, and financing activities [Cash, Cash Equivalents, Restricted Cash, and Short-term Investments](index=35&type=section&id=Cash%2C%20Cash%20Equivalents%2C%20Restricted%20Cash%2C%20and%20Short-term%20Investments) This section provides a summary of Veeco Instruments Inc.'s cash and investment balances, including amounts held outside the United States, and management's outlook on liquidity Cash and Investments (in thousands) | Metric | March 31, 2019 | December 31, 2018 | Change | | :---------------------- | :------------- | :---------------- | :----------- | | Cash and cash equivalents | $169,439 | $212,273 | $(42,834) | | Restricted cash | $804 | $809 | $(5) | | Short-term investments | $67,215 | $48,189 | $19,026 | | Total | $237,458 | $261,271 | $(23,813) | - At March 31, 2019, **$65.7 million** of cash and cash equivalents were held outside the United States[111](index=111&type=chunk) - Management believes projected cash flow from operations, combined with current cash and short-term investments, will be **sufficient to meet working capital requirements and contractual obligations** for the next twelve months[111](index=111&type=chunk) [Cash Flows from Operating Activities](index=35&type=section&id=Cash%20Flows%20from%20Operating%20Activities) This section analyzes the increase in net cash used in operating activities, attributing it to the net loss and unfavorable changes in operating assets and liabilities Net Cash Provided by (Used in) Operating Activities (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net cash provided by (used in) operating activities | $(22,291) | $(11,807) | $(10,484) | - Net cash used in operating activities **increased** due to the net loss and unfavorable changes in operating assets and liabilities, including decreases in accounts payable and customer deposits, and increases in accounts receivable and prepaid expenses, partially offset by decreases in inventory[112](index=112&type=chunk) [Cash Flows from Investing Activities](index=36&type=section&id=Cash%20Flows%20from%20Investing%20Activities) This section details cash used in investing activities, primarily driven by net changes in investments and capital expenditures for the three months ended March 31, 2019 Net Cash Provided by (Used in) Investing Activities (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :------- | | Capital expenditures | $(2,180) | $(2,259) | $79 | | Changes in investments, net | $(18,758) | $(20,300) | $1,542 | | Net cash provided by (used in) investing activities | $(20,938) | $(22,559) | $1,621 | - Cash used in investing activities was primarily attributable to **net changes in investments** and **capital expenditures**[113](index=113&type=chunk) [Cash Flows from Financing Activities](index=36&type=section&id=Cash%20Flows%20from%20Financing%20Activities) This section reports on cash provided by financing activities, mainly from employee equity programs, offset by tax withholdings related to these programs Net Cash Provided by (Used in) Financing Activities (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net proceeds from employee equity programs | $379 | $709 | $(330) | | Purchases of common stock | $0 | $(592) | $592 | | Net cash provided by (used in) financing activities | $379 | $117 | $262 | - Cash provided by financing activities was related to cash proceeds from the employee stock purchase plan, offset by cash used for tax withholdings related to employee equity programs[114](index=114&type=chunk) [Convertible Senior Notes](index=36&type=section&id=Convertible%20Senior%20Notes) This section describes the $345.0 million 2.70% convertible senior unsecured notes issued in 2017, maturing in 2023, and management's confidence in meeting interest payments - The company issued **$345.0 million** of **2.70% convertible senior unsecured notes** on January 10, 2017, maturing on January 15, 2023[115](index=115&type=chunk) - Management believes it has **sufficient capital resources and cash flows from operations** to support scheduled interest payments on this debt[115](index=115&type=chunk) [Contractual Obligations and Commitments](index=36&type=section&id=Contractual%20Obligations%20and%20Commitments) This section states that the company has commitments for future payments for goods and services, expected to be funded by cash generated from operations - The company has commitments under contractual arrangements for future payments for goods and services, which are expected to be funded with cash generated from operations[116](index=116&type=chunk) [Off-Balance Sheet Arrangements](index=36&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms that the company has no material off-balance sheet arrangements other than disclosed bank guarantees and purchase commitments - The company does not have any material off-balance sheet arrangements other than disclosed bank guarantees and purchase commitments[117](index=117&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=36&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section details Veeco's exposure to market risks, specifically interest rate risk related to its investment portfolio and currency exchange risk from its global operations, and the strategies used to mitigate these risks [Interest Rate Risk](index=36&type=section&id=Interest%20Rate%20Risk) This section discusses the company's exposure to interest rate risk from its fixed-income investment portfolio and quantifies the potential impact of rate changes - The company's investment portfolio, primarily fixed-income securities, had a fair value of approximately **$67.2 million** at March 31, 2019, exposing it to interest rate risk[118](index=118&type=chunk) - A **100 basis point increase** in interest rates would result in an estimated **$0.2 million decrease** in the fair value of the investment portfolio[119](index=119&type=chunk) [Currency Exchange Risk](index=38&type=section&id=Currency%20Exchange%20Risk) This section outlines the company's exposure to currency exchange rate fluctuations from global operations and its use of derivative contracts to mitigate this risk - The company conducts business worldwide, exposing its revenues, earnings, and foreign investments to changes in currency exchange rates[120](index=120&type=chunk) - Monthly forward derivative contracts are used to **mitigate a portion of this risk**, not for speculative purposes[121](index=121&type=chunk) - Net sales to customers outside the United States represented approximately **67% of total net sales** for Q1 2019, but sales denominated in non-U.S. dollars were only **6% of total net sales**[122](index=122&type=chunk) - A **10% change in foreign exchange rates** would have an **immaterial impact** on consolidated results, as most sales outside the U.S. are denominated in U.S. dollars[123](index=123&type=chunk) [Item 4. Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that Veeco's disclosure controls and procedures were effective as of March 31, 2019. The adoption of ASC 842 (Leases) led to the implementation of additional internal controls, but no other material changes to internal control over financial reporting occurred during the quarter [Management's Report on Internal Control Over Financial Reporting](index=38&type=section&id=Management%27s%20Report%20on%20Internal%20Control%20Over%20Financial%20Reporting) This section states that the principal executive and financial officers concluded that disclosure controls and procedures were effective as of March 31, 2019 - The principal executive and financial officers concluded that disclosure controls and procedures were **effective** as of March 31, 2019[124](index=124&type=chunk) [Changes in Internal Control Over Financial Reporting](index=38&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section reports the implementation of additional internal controls due to ASC 842 adoption, with no other material changes to internal control over financial reporting during the quarter - Additional internal controls were implemented due to the adoption of **ASC 842 (Leases)** on January 1, 2019[125](index=125&type=chunk) - No other changes in internal control over financial reporting materially affected or are reasonably likely to materially affect internal control over financial reporting for the quarter ended March 31, 2019[125](index=125&type=chunk) [PART II—OTHER INFORMATION](index=38&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) This part covers legal proceedings, risk factors, equity security sales, and other disclosures for Veeco Instruments Inc. for the reporting period [Item 1. Legal Proceedings](index=38&type=section&id=Item%201.%20Legal%20Proceedings) This section details two ongoing class action lawsuits related to the Ultratech acquisition, alleging misstatements in the registration statement and breach of fiduciary duty. The company is vigorously defending these matters and does not believe their ultimate resolution will have a material adverse effect on its financial position, results of operations, or cash flows - Two class action lawsuits, the 'Wolther Action' and a derivative action, are ongoing, stemming from the **Ultratech acquisition**[128](index=128&type=chunk)[129](index=129&type=chunk) - The lawsuits allege false/misleading statements in the registration statement and prospectus, and claims for **breach of fiduciary duty** and **waste of corporate assets**[128](index=128&type=chunk)[129](index=129&type=chunk) - Veeco is **vigorously defending** these matters and does not believe their ultimate resolution will have a **material adverse effect** on its consolidated financial position, results of operations, or cash flows[128](index=128&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk) [Item 1A. Risk Factors](index=40&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the comprehensive risk factors previously disclosed in the Safe Harbor Statement within this report and in Part I — Item 1A of the company's 2018 Form 10-K, stating that there have been no material changes to these risks - Information regarding risk factors appears in the **Safe Harbor Statement** at the beginning of this report and in **Part I — Item 1A of the 2018 Form 10-K**[131](index=131&type=chunk) - There have been **no material changes** from the risk factors previously disclosed in the 2018 Form 10-K[131](index=131&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=40&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports on Veeco's share repurchase program, authorized for up to $100 million through December 2019. No shares were repurchased during the first quarter of 2019, with $14.3 million of the program utilized as of March 31, 2019 - Veeco's Board of Directors authorized a program to repurchase up to **$100 million** of common stock through December 11, 2019[132](index=132&type=chunk) - **No shares were purchased** during the first quarter of 2019[132](index=132&type=chunk) - As of March 31, 2019, **$14.3 million** of the **$100 million program** had been utilized[132](index=132&type=chunk) [Item 3. Defaults Upon Senior Securities](index=40&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities during the reporting period - There were **no defaults** upon senior securities[133](index=133&type=chunk) [Item 4. Mine Safety Disclosures](index=40&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that the disclosure requirements for mine safety are not applicable to Veeco Instruments Inc. - This item is **not applicable**[134](index=134&type=chunk) [Item 5. Other Information](index=40&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report under this item for the current period - **No other information** is reported under this item[135](index=135&type=chunk) [Item 6. Exhibits](index=41&type=section&id=Item%206.%20Exhibits) This section provides a list of exhibits filed with the Securities and Exchange Commission, including various forms of restricted stock unit awards, amendments to letter agreements, and certifications from the Chief Executive Officer and Chief Financial Officer - The exhibits include forms of Notice of Performance Restricted Stock Unit Award, Notice of Restricted Stock Award, amendments to letter agreements for William J. Miller and Shubham Maheshwari, and certifications from the CEO and CFO[137](index=137&type=chunk) [SIGNATURES](index=42&type=section&id=SIGNATURES) This section confirms the official signing of the report by Veeco Instruments Inc.'s principal executive and financial officers on May 6, 2019 - The report was duly signed on behalf of Veeco Instruments Inc. on **May 6, 2019**[140](index=140&type=chunk) - Signatories include **William J. Miller, Ph.D., Chief Executive Officer**, and **Shubham Maheshwari, Executive Vice President, Chief Financial Officer, and Chief Operating Officer**[141](index=141&type=chunk)

PART I [Business Overview](index=3&type=section&id=Item%201.%20Business) Veeco Instruments Inc. is a leading manufacturer of semiconductor and thin-film process equipment, focusing on MOCVD, MBE, lithography, laser annealing, ion beam, and single-wafer etch and clean technologies - Veeco is a leading manufacturer of innovative semiconductor and thin-film process equipment, with products including MOCVD, MBE, lithography, laser annealing, ion beam, and single-wafer etch and clean technologies[11](index=11&type=chunk) - The company focuses on innovation, penetrating new markets through sales channels and application support, and enhancing profitability by optimizing manufacturing costs[12](index=12&type=chunk) [Business Description and Overview](index=3&type=section&id=Business%20Description%20and%20Overview) Veeco, founded in 1989 and headquartered in Plainview, New York, is a leading manufacturer of semiconductor and thin-film process equipment - Veeco, founded in 1989 and headquartered in Plainview, New York, is a leading manufacturer of semiconductor and thin-film process equipment[11](index=11&type=chunk) - Company technology plays a critical role in manufacturing advanced semiconductor devices such as LEDs, communication and 3D sensing lasers, and mobile RF filters[11](index=11&type=chunk) [Markets](index=4&type=section&id=Markets) The company's products are sold into four primary markets: advanced packaging, MEMS and RF filters; LED lighting, display and compound semiconductors; front-end semiconductors; and scientific and industrial - Company products are sold into four primary markets: advanced packaging, MEMS and RF filters; LED lighting, display and compound semiconductors; front-end semiconductors; and scientific and industrial[12](index=12&type=chunk) [Advanced Packaging, MEMS & RF Filters](index=4&type=section&id=Advanced%20Packaging,%20MEMS%20%26%20RF%20Filters) This market is driven by demand for higher performance, smaller size, and lower power consumption in mobile devices, consumer electronics, and high-performance computing - Advanced packaging market is driven by demand for higher performance, smaller size, and lower power consumption in mobile devices, consumer electronics, and high-performance computing[15](index=15&type=chunk) - Veeco's lithography and Precision Surface Processing (PSP) wet etch and clean systems play a role in advanced packaging[15](index=15&type=chunk) - RF filters are one of the fastest-growing MEMS applications, benefiting the company's PSP, IBE, and MBE systems[17](index=17&type=chunk) [LED Lighting, Display & Compound Semiconductor](index=4&type=section&id=LED%20Lighting,%20Display%20%26%20Compound%20Semiconductor) The LED industry has experienced multiple growth cycles, with future growth expected from compound semiconductor markets like optoelectronics, 3D sensing, Micro-LED displays, 5G RF infrastructure, and power electronics - LED industry has experienced multiple growth cycles, with future growth expected from optoelectronics, 3D sensing, Micro-LED displays, 5G RF infrastructure, and power electronics compound semiconductor markets[18](index=18&type=chunk) - Company's MOCVD technology is central to GaN-based LED manufacturing, but general lighting and backlight markets are not expected to contribute significantly to future revenue[19](index=19&type=chunk)[20](index=20&type=chunk) - GaN-based power electronics devices are expected to achieve higher performance through MOCVD systems, and the company anticipates benefiting from their transition from development to production[23](index=23&type=chunk) [Front-End Semiconductor](index=6&type=section&id=Front-End%20Semiconductor) This market involves early process steps for forming transistors on silicon, where Veeco's laser spike annealing and ion beam etch systems are critical - Front-end semiconductor market involves early process steps for forming transistors on silicon[26](index=26&type=chunk) - Company's Laser Spike Annealing (LSA) systems enable precise doping in semiconductor manufacturing, and Ion Beam Etch (IBE) is used for STT-MRAM applications[26](index=26&type=chunk) - Ion Beam Deposition (IBD) products have been used to manufacture extreme ultraviolet (EUV) photomasks, with future growth dependent on overall adoption of EUV lithography technology[26](index=26&type=chunk) [Scientific & Industrial](index=8&type=section&id=Scientific%20%26%20Industrial) This market encompasses advanced materials research and diverse manufacturing applications, including high-power fiber lasers, infrared detectors, and hard disk drive thin-film magnetic heads - Scientific and industrial market includes advanced materials research and broad manufacturing applications such as high-power fiber lasers, infrared detectors, hard disk drive (HDD) thin-film magnetic heads, and optical coatings[28](index=28&type=chunk) - MBE systems are used for materials science research and specialized product manufacturing, while IBD tools are used to produce high-quality optical thin films[29](index=29&type=chunk)[30](index=30&type=chunk) [System Products](index=8&type=section&id=System%20Products) Veeco offers a comprehensive portfolio of advanced process equipment, including MOCVD, lithography, wet etch, laser annealing, ion beam, MBE, 3D wafer inspection, and ALD systems [Metal Organic Chemical Vapor Deposition Systems](index=8&type=section&id=Metal%20Organic%20Chemical%20Vapor%20Deposition%20Systems) Veeco is a leading supplier of MOCVD systems for manufacturing GaN-based and As/P-based devices, offering cost savings through high uptime and wafer uniformity - Veeco is a leading supplier of MOCVD systems for manufacturing GaN-based and As/P-based devices such as LEDs and power electronics products[32](index=32&type=chunk) - TurboDisc EPIK series MOCVD systems provide cost savings to customers through high uptime, low maintenance costs, and excellent wafer uniformity[32](index=32&type=chunk) - Propel™ PowerGaN™ MOCVD systems support the development of efficient GaN-based power electronics devices with 200mm technology and single-wafer reactor technology[32](index=32&type=chunk) [Advanced Packaging Lithography](index=8&type=section&id=Advanced%20Packaging%20Lithography) The company leads the advanced packaging lithography equipment market, optimizing productivity for 200mm and 300mm applications with industry-low cost of ownership - Company is a leader in the advanced packaging lithography equipment market, with products designed to optimize productivity for 200mm and 300mm advanced packaging applications[33](index=33&type=chunk) - Tools support applications such as RDLs, copper pillars, micro-bumps, FOWLP, interposers, and TSVs, offering the industry's lowest cost of ownership[33](index=33&type=chunk) [Precision Surface Processing Systems (Wet Etch and Clean)](index=10&type=section&id=Precision%20Surface%20Processing%20Systems%20(Wet%20Etch%20and%20Clean)) Veeco provides single-wafer wet etch and clean systems targeting high-growth areas in advanced packaging, MEMS, LED, and compound semiconductor markets - Offers single-wafer wet etch and clean, surface preparation systems, targeting high-growth areas in advanced packaging, MEMS, LED, and compound semiconductor markets[34](index=34&type=chunk) - WaferStorm platform utilizes ImmJET™ technology, and WaferEtch platform provides high uniformity, selective etching, and significantly reduces cost of ownership for TSV backside thinning[34](index=34&type=chunk) [Laser Annealing Systems](index=10&type=section&id=Laser%20Annealing%20Systems) Laser Spike Annealing (LSA) systems address the need for millisecond annealing in CMOS logic ICs, while next-generation MELT technology targets nanosecond thermal annealing for advanced logic devices - Laser Spike Annealing (LSA) systems meet industry demand for millisecond annealing, addressing challenges in manufacturing ultra-shallow junctions and highly activated source/drain contacts in CMOS logic integrated circuits[35](index=35&type=chunk) - Company has developed next-generation Melt Annealing (MELT) technology for nanosecond thermal annealing in 7nm and below advanced logic devices to improve source/drain contact resistance[36](index=36&type=chunk) [Ion Beam Deposition and Etch Systems](index=10&type=section&id=Ion%20Beam%20Deposition%20and%20Etch%20Systems) NEXUS IBD systems deposit high-purity thin films, NEXUS IBE systems etch precise features, and SPECTOR systems are for high-precision optical coatings - NEXUS IBD systems are used for depositing high-purity thin films, and NEXUS IBE systems are used for etching precise complex features, primarily in data storage, semiconductor, and telecommunications equipment manufacturing[37](index=37&type=chunk) - SPECTOR ion beam sputtering systems are developed for high-precision optical coatings, offering advanced optical thickness monitoring and productivity[38](index=38&type=chunk) [Molecular Beam Epitaxy Systems](index=11&type=section&id=Molecular%20Beam%20Epitaxy%20Systems) Veeco is a leading global supplier of MBE systems for precise atomic-layer thin crystal deposition, critical for compound semiconductor device manufacturing and various applications - Veeco is a leading global supplier of MBE systems for precise deposition of atomic-layer thin crystal layers, a critical step in compound semiconductor device manufacturing[38](index=38&type=chunk)[39](index=39&type=chunk) - MBE systems are applied in high-power fiber lasers, infrared detectors, mobile phones, radar systems, high-efficiency solar cells, and fundamental materials science research[39](index=39&type=chunk) [3D Wafer Inspection Systems](index=11&type=section&id=3D%20Wafer%20Inspection%20Systems) Superfast 3D wafer inspection systems, based on coherent gradient sensing, detect patterned wafer defects in 3D integration schemes to improve lithography and deposition processes - Superfast 3D wafer inspection systems, based on coherent gradient sensing (CGS), are used to detect patterned wafer defects in 3D integration schemes (such as vertical NAND, HAR DRAM, logic FinFET) to improve lithography and deposition processes[40](index=40&type=chunk) [Atomic Layer Deposition and Other Deposition Systems](index=11&type=section&id=Atomic%20Layer%20Deposition%20and%20Other%20Deposition%20Systems) Veeco offers a full suite of ALD systems for scientific and industrial market applications, including optics, semiconductors, MEMS, nanostructures, and biomedicine - Veeco offers a full suite of ALD systems for scientific and industrial market applications such as optics, semiconductor/nanoelectronics, MEMS, nanostructures, and biomedicine[41](index=41&type=chunk) [Sales and Service](index=11&type=section&id=Sales%20and%20Service) The company sells products and services globally through facilities in the US, Europe, and Asia Pacific, with service revenue consistently contributing to net sales - Company sells products and services globally through facilities in the US, Europe, and Asia Pacific[42](index=42&type=chunk) Service Revenue as a Percentage of Net Sales | Year | Parts, Upgrades, Service, and Support as % of Net Sales | | :--- | :--- | | 2018 | 28% | | 2017 | 27% | | 2016 | 28% | [Customers](index=11&type=section&id=Customers) Veeco sells to a diverse global customer base, including LED, MEMS, OSAT, HDD, and semiconductor manufacturers, but relies on a few major customers for a significant portion of sales - Company products are sold to numerous global LED, MEMS, OSAT, HDD, and semiconductor manufacturers, as well as research centers and universities[43](index=43&type=chunk) - Company relies on a few major customers, with sales to Focus Lighting Tech Co. exceeding **10% of total net sales in 2018**, and OSRAM Opto Semiconductors exceeding **10% in 2017 and 2016**[43](index=43&type=chunk)[44](index=44&type=chunk) [Research and Development](index=13&type=section&id=Research%20and%20Development) R&D activities focus on timely creation of new products and enhancement of existing ones to maintain competitive position and align with customer needs - R&D activities focus on timely creation of new products and enhancement of existing products to maintain competitive position and align with customer needs[45](index=45&type=chunk) [Suppliers](index=13&type=section&id=Suppliers) The company outsources some functions, including manufacturing of certain systems, while retaining internal manufacturing capabilities - Company outsources some functions to third parties, including manufacturing of certain systems, but retains a degree of internal manufacturing capability[46](index=46&type=chunk) [Backlog](index=13&type=section&id=Backlog) The company's backlog decreased from **$334.3 million** in 2017 to **$288.3 million** in 2018, influenced by new accounting standards and order reclassification Backlog Changes | Date | Backlog Amount (Millions of US Dollars) | | :--- | :--- | | December 31, 2018 | 288.3 | | December 31, 2017 | 334.3 | - In 2018, backlog increased by approximately **$2.9 million** due to the adoption of ASC Topic 606, while decreasing by approximately **$6.0 million** due to orders no longer meeting booking criteria[47](index=47&type=chunk) [Competition](index=13&type=section&id=Competition) The company faces intense competition across all its markets from established and smaller rivals, some with greater resources, with customer choices driven by system performance and cost - Company faces intense competition in all its served markets from established and smaller competitors, some with stronger financial, engineering, and marketing resources[48](index=48&type=chunk) - Key factors for customer tool selection include system performance, precision, repeatability, ease of use, reliability, cost of ownership, and technical service and support[48](index=48&type=chunk) - Major competitors include AMEC, Aixtron, Applied Materials, and Canon[49](index=49&type=chunk) [Intellectual Property](index=13&type=section&id=Intellectual%20Property) The company's success relies partly on proprietary technology, holding over 800 patents, but its business success primarily depends on employee expertise, innovation, and customer satisfaction - Company's success partly relies on proprietary technology, holding over **800 US and international patents** and pending applications[50](index=50&type=chunk) - Company believes no single patent or license is critical to its operations, with business success primarily dependent on employee technical expertise, innovation, customer satisfaction, and experience[51](index=51&type=chunk) [Employees](index=14&type=section&id=Employees) As of December 31, 2018, Veeco had 1,043 employees across various departments and maintains good employee relations with plans to attract and retain talent Employee Composition as of December 31, 2018 | Department | Number of Employees | | :--- | :--- | | Manufacturing and Test | 302 | | Sales and Marketing | 95 | | Service and Product Support | 221 | | Engineering and R&D | 281 | | Information Technology, Administrative, and Finance | 144 | | **Total** | **1,043** | - Company believes its employee relations are good and has adequate plans to attract, motivate, and retain employees[52](index=52&type=chunk) [Available Information](index=14&type=section&id=Available%20Information) The company's SEC filings, including 10-K, 10-Q, 8-K, and proxy statements, are freely available on its investor relations website - Company's SEC filings, including 10-K, 10-Q, 8-K, and proxy statements, are freely available on the company website's investor relations section[53](index=53&type=chunk) [Risk Factors](index=14&type=section&id=Item%201A.%20Risk%20Factors) The company faces multiple risks, including market volatility, global operations and trade policy uncertainties, cybersecurity threats, intellectual property protection challenges, stock price fluctuations, financial performance impacts, operational and supply chain disruptions, M&A integration difficulties, increasingly complex regulatory compliance, environmental health and safety liabilities, and uncontrollable events like natural disasters - Volatile market conditions, technology shifts, new competitors, production capacity, end-user demand, international trade barriers, and macroeconomic conditions may adversely affect the company's operating results[55](index=55&type=chunk) - Majority of company sales are from outside the US, exposing it to global business risks such as political, social, legal, trade disputes, cyberattacks, and regional economic downturns[58](index=58&type=chunk)[59](index=59&type=chunk) - In November 2018, the company discovered a sophisticated computer system attack that could lead to the disclosure of proprietary and confidential information, resulting in financial, legal, and reputational damage[63](index=63&type=chunk) [Market and Economic Conditions Risks](index=14&type=section&id=Market%20and%20Economic%20Conditions%20Risks) Adverse market conditions can lead to reduced product demand, order changes, asset impairments, increased price competition, inventory obsolescence, and higher operating costs - Adverse market conditions may lead to reduced product demand, order rescheduling or cancellation, asset impairment, increased price competition, inventory obsolescence, and higher operating costs[55](index=55&type=chunk) [Global Operations and Trade Policy Risks](index=16&type=section&id=Global%20Operations%20and%20Trade%20Policy%20Risks) Operating globally, the company faces risks from foreign government favoritism, international trade disputes, diverse legal systems, regional economic downturns, and political instability - Majority of company sales are from non-US markets, facing risks such as foreign government favoritism towards local companies, international trade disputes (e.g., tariffs), differing legal systems, regional economic downturns, and political instability[58](index=58&type=chunk)[59](index=59&type=chunk) [Information Technology and Data Security Risks](index=18&type=section&id=Information%20Technology%20and%20Data%20Security%20Risks) High reliance on IT systems exposes the company to risks of system disruptions, data breaches, and cyberattacks, potentially causing financial, legal, regulatory, and reputational harm - Company is highly dependent on information technology systems, facing risks of system disruptions, data breaches, and cyberattacks, which could lead to financial, legal, regulatory, and reputational damage[61](index=61&type=chunk)[62](index=62&type=chunk) - In November 2018, the company discovered a highly sophisticated attack on its computer systems, potentially leading to the disclosure of proprietary and confidential information, as well as employee personal information[63](index=63&type=chunk) [Intellectual Property Risks](index=18&type=section&id=Intellectual%20Property%20Risks) The company may struggle to effectively enforce and protect its intellectual property, facing risks of patent circumvention, invalidation, or reverse engineering, with outsourcing increasing technology leakage risks - Company may be unable to effectively enforce and protect its intellectual property, facing risks of patents being circumvented, invalidated, or reverse-engineered by others[65](index=65&type=chunk) - Outsourcing strategies increase the risk of technology leakage and misappropriation of trade secrets, and intellectual property litigation could result in significant costs and management distraction[67](index=67&type=chunk)[68](index=68&type=chunk) [Financial Performance and Stock Volatility Risks](index=20&type=section&id=Financial%20Performance%20and%20Stock%20Volatility%20Risks) The company's common stock price is highly volatile, influenced by macroeconomic factors, competition, order changes, product performance, analyst expectations, strategic transactions, and litigation, potentially leading to asset impairments - Company's common stock price is highly volatile, potentially influenced by macroeconomic factors, competition, order changes, product performance, analyst expectations, strategic transactions, and litigation[70](index=70&type=chunk)[71](index=71&type=chunk) - Company may need to record additional asset impairments, such as the **$122.8 million goodwill impairment** recorded in Q4 2018, and **$252.3 million intangible asset impairment** related to the Ultratech acquisition in Q2 2018[73](index=73&type=chunk)[74](index=74&type=chunk) [Operational and Supply Chain Risks](index=22&type=section&id=Operational%20and%20Supply%20Chain%20Risks) Intense competition necessitates continuous innovation, while high dependence on consumer electronics and a concentrated customer base lead to demand volatility, long sales cycles, and risks of inventory obsolescence and supply disruptions - Company faces intense competition, requiring continuous innovation and timely new product development to remain competitive[75](index=75&type=chunk)[77](index=77&type=chunk) - High dependence on sales to consumer electronics applications leads to demand volatility, and high customer concentration increases business risk[80](index=80&type=chunk)[82](index=82&type=chunk) - Industry cyclicality, long and unpredictable sales cycles, customer order cancellations or modifications, and failure to accurately forecast customer demand can lead to obsolete inventory, supplier liabilities, and manufacturing disruptions[87](index=87&type=chunk)[89](index=89&type=chunk)[90](index=90&type=chunk)[95](index=95&type=chunk) - Reliance on limited suppliers and outsourced activities may lead to supply disruptions, increased costs, and impaired operational efficiency[96](index=96&type=chunk)[97](index=97&type=chunk)[101](index=101&type=chunk) [Acquisition and Integration Risks](index=31&type=section&id=Acquisition%20and%20Integration%20Risks) Future acquisitions and investments involve risks of integration difficulties, management distraction, loss of key employees, failure to achieve expected synergies, and potential asset impairments - Future acquisitions and investments involve risks of integration difficulties, management distraction, loss of key employees, failure to achieve expected synergies, and potential asset impairments[103](index=103&type=chunk) [Regulatory and Legal Compliance Risks](index=32&type=section&id=Regulatory%20and%20Legal%20Compliance%20Risks) The company must comply with global laws and regulations, including privacy, labor, tax, corporate governance, and anti-corruption laws, with non-compliance potentially leading to significant fines and reputational damage - Company must comply with laws and regulations across multiple global jurisdictions, including privacy, labor laws, tax, corporate governance, and anti-corruption laws (e.g., FCPA), with non-compliance potentially leading to significant fines and reputational damage[123](index=123&type=chunk)[124](index=124&type=chunk) - Changes in accounting standards or tax rules may significantly impact financial performance, such as the **2017 Tax Cuts and Jobs Act**[106](index=106&type=chunk)[107](index=107&type=chunk) - Company has debt in the form of convertible senior notes, which may affect its financial condition, strategic implementation, and dilute existing shareholder equity[110](index=110&type=chunk)[112](index=112&type=chunk) [Environmental, Health, and Safety Risks](index=37&type=section&id=Environmental,%20Health,%20and%20Safety%20Risks) Non-compliance with EHS regulations can result in significant remediation liabilities, fines, and suspension of product development or use, while operations involving hazardous materials pose risks of fire, explosion, or environmental spills - Non-compliance with environmental, health, and safety regulations may lead to significant remediation liabilities, fines, and suspension of product development or use[125](index=125&type=chunk)[127](index=127&type=chunk) - Operations involving hazardous materials pose risks of fire, explosion, or environmental spills, which could lead to operational disruptions and claims[127](index=127&type=chunk) [Catastrophic Events and Disruptions Risks](index=39&type=section&id=Catastrophic%20Events%20and%20Disruptions%20Risks) Global operations are vulnerable to natural disasters, terrorism, or other major disruptions like earthquakes, floods, or pandemics, leading to increased costs and business interruptions - Company's global operations may be affected by natural disasters, acts of terrorism, or other major disruptions (e.g., earthquakes, floods, pandemics), leading to increased costs and business interruptions[128](index=128&type=chunk) [Unresolved Staff Comments](index=39&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments in this report - There are no unresolved staff comments in this report[129](index=129&type=chunk) [Properties](index=39&type=section&id=Item%202.%20Properties) Veeco's headquarters, primary R&D, manufacturing, sales, and service facilities are located in the US, Singapore, and Taiwan, including owned and leased properties, deemed sufficient for current needs Major Owned Facilities | Location | Approximate Area (Square Feet) | Purpose | | :--- | :--- | :--- | | Plainview, NY | 80,000 | Corporate Headquarters; R&D; Sales & Service; Administration | | Somerset, NJ | 80,000 | R&D; Manufacturing; Sales & Service; Administration | | St. Paul, MN | 43,000 | R&D; Manufacturing; Sales & Service; Administration | | Somerset, NJ | 38,000 | R&D; Sales & Service; Administration | Major Leased Facilities | Location | Approximate Area (Square Feet) | Purpose | Lease Expiration | | :--- | :--- | :--- | :--- | | San Jose, CA | 100,000 | R&D; Manufacturing; Sales & Service; Administration | 2021 | | Somerset, NJ | 57,000 | Warehouse | 2022 | | Horsham, PA | 49,000 | R&D; Manufacturing; Sales & Service; Administration | 2024 | | Singapore | 23,000 | R&D; Manufacturing; Sales & Service; Administration | 2023 | | Waltham, MA | 19,000 | R&D; Sales & Service; Administration | 2023 | | Hsinchu City, Taiwan | 13,000 | Sales & Service; Administration | 2020 | - Company also leases offices in China, Germany, Japan, Malaysia, Philippines, South Korea, and the UK, and believes existing facilities are sufficient for current needs[130](index=130&type=chunk) [Legal Proceedings](index=41&type=section&id=Item%203.%20Legal%20Proceedings) The company faces two class action and derivative lawsuits related to the Ultratech acquisition, alleging false/misleading statements in the registration statement, which the company believes are without merit and will vigorously defend - In June 2018, an Ultratech shareholder filed a class action lawsuit (Wolther v. Maheshwari et al.) alleging false/misleading statements in the registration statement and prospectus related to the Ultratech acquisition, primarily concerning delays in the advanced packaging business, increased MOCVD competition in China, and intellectual property disputes[132](index=132&type=chunk) - In December 2018, a Veeco shareholder filed a derivative lawsuit (Vladimir Gusinsky Revocable Trust v. Peeler, et al.) alleging breach of fiduciary duty, waste of corporate assets, and unjust enrichment by current and former directors, also based on the Ultratech acquisition registration statement[133](index=133&type=chunk) - Company believes both lawsuits are without merit and intends to vigorously defend them; it does not believe other legal proceedings in the normal course of business will have a material adverse effect on its financial condition, results of operations, or cash flows[132](index=132&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk) [Mine Safety Disclosures](index=41&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine safety disclosures are not applicable to this report - Mine safety disclosures are not applicable to this report[135](index=135&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=42&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Veeco's common stock trades on the Nasdaq Stock Market under "VECO"; the company has not paid dividends, with future policy determined by the board. Stock repurchases were made in 2018, 2017, and 2016, with **$14.3 million** used from a **$100 million** repurchase plan authorized in 2017 - Company's common stock is listed on the Nasdaq Stock Market under the symbol "VECO" and has not paid dividends[138](index=138&type=chunk) Stock Repurchase Summary | Fiscal Year | Shares Repurchased (Millions) | Amount Repurchased (Millions of US Dollars) | | :--- | :--- | :--- | | 2018 | 1.0 | 11.3 | | 2017 | 0.2 | 3.0 | | 2016 | 0.7 | 13.1 | - On December 11, 2017, the Board of Directors authorized a plan to repurchase up to **$100 million** of common stock, with **$14.3 million** utilized as of December 31, 2018[139](index=139&type=chunk) [Issuer Purchases of Equity Securities](index=42&type=section&id=Issuer%20Purchases%20of%20Equity%20Securities) The company repurchased common stock in 2018, 2017, and 2016, utilizing **$14.3 million** from a **$100 million** repurchase plan authorized in 2017 Issuer Purchases of Equity Securities Details | Fiscal Year | Shares Repurchased (Millions) | Amount Repurchased (Millions of US Dollars) | | :--- | :--- | :--- | | 2018 | 1.0 | 11.3 | | 2017 | 0.2 | 3.0 | | 2016 | 0.7 | 13.1 | - On December 11, 2017, the Board of Directors authorized a plan to repurchase up to **$100 million** of common stock, with **$14.3 million** utilized as of December 31, 2018[139](index=139&type=chunk) [Stock Performance Graph](index=43&type=section&id=Stock%20Performance%20Graph) This section presents a comparison of the cumulative total return for Veeco's common stock against the S&P Smallcap 600 and RDG MidCap Technology indices, assuming a **$100 investment** on December 31, 2013 Stock Performance Comparison (Assuming **$100 Investment** on December 31, 2013) | Year | Veeco Instruments Inc. | S&P Smallcap 600 | RDG MidCap Technology | | :--- | :--- | :--- | :--- | | 2013 | 100.00 | 100.00 | 100.00 | | 2014 | 105.99 | 105.76 | 93.93 | | 2015 | 62.47 | 103.67 | 84.05 | | 2016 | 88.57 | 131.20 | 83.59 | | 2017 | 45.12 | 148.56 | 87.28 | | 2018 | 22.52 | 135.96 | 79.60 | [Selected Financial Data](index=44&type=section&id=Item%206.%20Selected%20Financial%20Data) The company reported selected financial data for five years ending December 31, 2018, showing **net sales growth to $542 million** in 2018 but an expanded **net loss of $407 million**, primarily due to asset impairments, with cash and total assets declining Selected Operating Data (Years Ended December 31) | Metric | 2018 (Thousands of US Dollars) | 2017 (Thousands of US Dollars) | 2016 (Thousands of US Dollars) | 2015 (Thousands of US Dollars) | 2014 (Thousands of US Dollars) | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | 542,082 | 475,686 | 331,702 | 477,038 | 392,873 | | Operating Income (Loss) | (415,502) | (71,868) | (120,162) | (23,232) | (79,209) | | Net Income (Loss) | (407,088) | (51,396) | (122,027) | (31,978) | (66,940) | | Basic Income (Loss) Per Share | (8.63) | (1.16) | (3.10) | (0.80) | (1.70) | | Diluted Income (Loss) Per Share | (8.63) | (1.16) | (3.10) | (0.80) | (1.70) | Selected Balance Sheet Data (As of December 31) | Metric | 2018 (Thousands of US Dollars) | 2017 (Thousands of US Dollars) | 2016 (Thousands of US Dollars) | 2015 (Thousands of US Dollars) | 2014 (Thousands of US Dollars) | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents | 212,273 | 279,736 | 277,444 | 269,232 | 270,811 | | Short-Term Investments | 48,189 | 47,780 | 66,787 | 116,050 | 120,572 | | Working Capital | 360,027 | 372,822 | 365,374 | 379,904 | 387,254 | | Total Assets | 900,816 | 1,387,475 | 763,988 | 890,789 | 929,455 | | Long-Term Debt (Less Current Installments) | 287,392 | 275,630 | 826 | 1,193 | 1,533 | | Total Stockholders' Equity | 437,775 | 840,093 | 601,704 | 714,615 | 738,932 | - Company retrospectively adopted the new revenue accounting standard (ASC 606) on January 1, 2018[144](index=144&type=chunk) - Ultratech was acquired in Q2 2017, and its operating results have been included in the consolidated financial statements since the acquisition date[145](index=145&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=45&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes Veeco's financial condition and operating results for the year ended December 31, 2018, focusing on market sales performance, gross margin, operating expenses, asset impairments, interest income/expense, and income tax changes, noting significant net loss expansion due to impairments despite net sales growth - Company adopted the new revenue accounting standard ASC Topic 606 on January 1, 2018, and operating results for 2017 and 2016 have been restated under the new standard[154](index=154&type=chunk) 2018 vs. 2017 Operating Results Comparison | Metric (Thousands of US Dollars) | 2018 | 2017 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 542,082 | 475,686 | 66,396 | 14% | | Cost of Sales | 348,363 | 299,458 | 48,905 | 16% | | Gross Profit | 193,719 | 176,228 | 17,491 | 10% | | Research and Development Expenses | 97,755 | 81,987 | 15,768 | 19% | | Selling, General, and Administrative Expenses | 92,060 | 100,250 | (8,190) | (8)% | | Amortization of Intangible Assets | 32,351 | 35,475 | (3,124) | (9)% | | Restructuring Charges | 8,556 | 11,851 | (3,295) | (28)% | | Acquisition Costs | 2,959 | 17,786 | (14,827) | (83)% | | Asset Impairment | 375,172 | 1,139 | 374,033 | * | | Operating Income (Loss) | (415,502) | (71,868) | (343,634) | * | | Net Income (Loss) | (407,088) | (51,396) | (355,692) | * | - **Net sales growth in 2018** was primarily due to additional sales from the Ultratech acquisition in May 2017, especially in the advanced packaging, MEMS, and RF filters markets[158](index=158&type=chunk) [Executive Summary](index=45&type=section&id=Executive%20Summary) Veeco is a leading manufacturer of innovative semiconductor and thin-film process equipment, with its technologies playing a key role in LED and advanced semiconductor device manufacturing across four main markets - Veeco is a leading manufacturer of innovative semiconductor and thin-film process equipment, with its MOCVD, lithography, laser annealing, ion beam, and single-wafer etch and clean technologies playing a critical role in LED and advanced semiconductor device manufacturing[148](index=148&type=chunk) - Company revenue is categorized into four key markets: advanced packaging, MEMS and RF filters; LED lighting, display and compound semiconductors; front-end semiconductors; and scientific and industrial[149](index=149&type=chunk) - In 2018, the advanced packaging market was soft due to mobile supply chain overcapacity, but lithography systems for DRAM packaging performed encouragingly; the LED market saw order slowdowns due to capacity digestion and increased competition, with future focus shifting to non-general lighting applications like 3D sensors and VCSELs; the front-end semiconductor market was driven by laser annealing and LDD-IBD systems for EUV photomask production; and the scientific and industrial market was supported by ion beam systems for data storage and optical coatings, as well as MBE systems[150](index=150&type=chunk)[151](index=151&type=chunk)[152](index=152&type=chunk)[153](index=153&type=chunk) [Results of Operations](index=46&type=section&id=Results%20of%20Operations) The company adopted the new revenue accounting standard ASC Topic 606 on January 1, 2018, with prior years' operating results restated accordingly - Company adopted the new revenue accounting standard ASC Topic 606 on January 1, 2018, and operating results for 2017 and 2016 have been restated under the new standard[154](index=154&type=chunk) [Years Ended December 31, 2018 and 2017](index=46&type=section&id=Years%20Ended%20December%2031,%202018%20and%202017) This section provides a detailed comparison of operating results for 2018 and 2017, highlighting changes in net sales, gross profit, operating expenses, and significant asset impairments 2018 vs. 2017 Operating Results Comparison | Metric (Thousands of US Dollars) | 2018 | 2017 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 542,082 | 475,686 | 66,396 | 14% | | Cost of Sales | 348,363 | 299,458 | 48,905 | 16% | | Gross Profit | 193,719 | 176,228 | 17,491 | 10% | | Research and Development Expenses | 97,755 | 81,987 | 15,768 | 19% | | Selling, General, and Administrative Expenses | 92,060 | 100,250 | (8,190) | (8)% | | Amortization of Intangible Assets | 32,351 | 35,475 | (3,124) | (9)% | | Restructuring Charges | 8,556 | 11,851 | (3,295) | (28)% | | Acquisition Costs | 2,959 | 17,786 | (14,827) | (83)% | | Asset Impairment | 375,172 | 1,139 | 374,033 | * | | Operating Income (Loss) | (415,502) | (71,868) | (343,634) | * | | Net Income (Loss) | (407,088) | (51,396) | (355,692) | * | [Net Sales](index=46&type=section&id=Net%20Sales) Total sales increased by **14% in 2018**, primarily driven by the Ultratech acquisition and significant growth in China, though future LED market orders are not expected to increase substantially 2018 vs. 2017 Sales by Market | Market (Thousands of US Dollars) | 2018 | 2017 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Advanced Packaging, MEMS & RF Filters | 90,775 | 67,406 | 23,369 | 35% | | LED Lighting, Display & Compound Semiconductor | 249,974 | 248,615 | 1,359 | 1% | | Front-End Semiconductor | 62,582 | 40,319 | 22,263 | 55% | | Scientific & Industrial | 138,751 | 119,346 | 19,405 | 16% | | **Total** | **542,082** | **475,686** | **66,396** | **14%** | 2018 vs. 2017 Sales by Geographic Region | Geographic Region (Thousands of US Dollars) | 2018 | 2017 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | United States | 125,659 | 93,433 | 32,226 | 34% | | China | 194,032 | 106,674 | 87,358 | 82% | | Europe, Middle East, and Africa | 89,102 | 72,979 | 16,123 | 22% | | Rest of World | 133,289 | 202,600 | (69,311) | (34)% | | **Total** | **542,082** | **475,686** | **66,396** | **14%** | - **Total sales growth in 2018** was primarily due to additional sales from the Ultratech acquisition in May 2017, especially in the advanced packaging, MEMS, and RF filters markets[158](index=158&type=chunk) - **Sales in China grew significantly by 82%**, mainly attributed to sales growth in the LED lighting, display and compound semiconductor, and front-end semiconductor markets, though new orders in the LED lighting, display and compound semiconductor market are not expected to increase significantly in the future[158](index=158&type=chunk) [Gross Profit](index=47&type=section&id=Gross%20Profit) Gross margin decreased in 2018 due to product mix changes in the LED market, but gross profit increased by **10%** due to higher sales volume, including the Ultratech acquisition - **Gross margin decreased in 2018** compared to 2017, primarily due to product mix changes in the LED market, but **gross profit increased by 10%** due to higher sales volume, including the Ultratech acquisition[159](index=159&type=chunk) [Research and Development](index=47&type=section&id=Research%20and%20Development) R&D expenses increased by **19% in 2018** compared to 2017, primarily due to the full-year inclusion of Ultratech acquisition projects - **R&D expenses increased by 19% in 2018** compared to 2017, primarily due to the full-year inclusion of Ultratech acquisition projects in R&D expenditures[160](index=160&type=chunk) [Selling, General, and Administrative](index=47&type=section&id=Selling,%20General,%20and%20Administrative) SG&A expenses decreased by **8% in 2018**, offset by reduced personnel and professional service costs despite increased Ultratech acquisition-related expenses, while a November 2018 cyberattack may incur future costs - **Selling, general, and administrative expenses decreased by 8% in 2018** compared to 2017; despite increased Ultratech acquisition-related costs, this was offset by reductions in personnel-related expenses (including incentive compensation) and professional service fees[161](index=161&type=chunk) - In November 2018, the company discovered a highly sophisticated attack on its computer systems, potentially leading to the disclosure of proprietary and confidential information, as well as employee personal information, with related costs and potential impacts possibly adversely affecting operating results and financial condition[162](index=162&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk) [Amortization Expense](index=49&type=section&id=Amortization%20Expense) Amortization expense slightly decreased in 2018, as increased amortization from the Ultratech acquisition was offset by reduced amortization due to a **$252.3 million intangible asset impairment** in Q2 2018 - **Amortization expense slightly decreased in 2018** compared to 2017; increased intangible asset amortization from the Ultratech acquisition was offset by reduced amortization due to a **$252.3 million intangible asset impairment** in Q2 2018[166](index=166&type=chunk) [Restructuring Expense](index=49&type=section&id=Restructuring%20Expense) Restructuring expenses decreased by **28% to $8.6 million in 2018**, primarily related to initiatives for streamlining operations, improving efficiency, and reducing costs, including layoffs for business integration - **Restructuring expenses were $8.6 million in 2018**, a **28% decrease** from 2017, primarily related to initiatives for streamlining operations, improving efficiency, and reducing costs[156](index=156&type=chunk)[167](index=167&type=chunk) - In Q2 2018, the company recorded **$2.8 million in restructuring charges** for approximately **40 layoffs** to integrate advanced packaging lithography and 3D wafer inspection businesses[168](index=168&type=chunk) - In Q3 2018, the company further laid off approximately **35 employees**, incurring **$1.2 million in restructuring charges**, expected to result in annual savings of approximately **$5.0 million**[169](index=169&type=chunk) [Acquisition Costs](index=49&type=section&id=Acquisition%20Costs) Acquisition costs decreased by **83% to $3.0 million in 2018**, primarily consisting of non-recurring expenses related to the Ultratech acquisition and legal/professional fees for integration activities - **Acquisition costs were $3.0 million in 2018**, an **83% decrease** from 2017, primarily consisting of non-recurring expenses related to the Ultratech acquisition and legal and professional fees for integration activities[156](index=156&type=chunk)[170](index=170&type=chunk) [Asset Impairment](index=49&type=section&id=Asset%20Impairment) In 2018, the company recorded **$252.3 million in non-cash intangible asset impairment** in Q2 due to declining Ultratech asset group performance, and **$122.8 million in goodwill impairment** in Q4 due to a significant stock price decline - In Q2 2018, the company recorded a **$252.3 million non-cash intangible asset impairment charge** due to anticipated performance decline of the Ultratech asset group[171](index=171&type=chunk) - In Q4 2018, the company recorded a **$122.8 million goodwill impairment charge** due to a significant decline in its stock price, following a goodwill impairment test[172](index=172&type=chunk) [Interest Income (Expense)](index=50&type=section&id=Interest%20Income%20(Expense)) Net interest expense increased by **7% to $18.3 million in 2018**, primarily due to full-year interest on convertible senior notes issued in January 2017, including **$11.8 million in non-cash expenses** - **Net interest expense was $18.3 million in 2018**, a **7% increase** from 2017, primarily due to full-year interest on convertible senior notes issued in January 2017[173](index=173&type=chunk) - Interest expense included **$11.8 million in non-cash expenses** for the amortization of debt discount and issuance costs related to the convertible senior notes[173](index=173&type=chunk) [Income Taxes](index=50&type=section&id=Income%20Taxes) Income tax benefit was **$26.7 million in 2018**, mainly from intangible asset impairment and the 2017 Tax Cuts and Jobs Act, while 2017 saw a **$37.6 million benefit** from domestic losses and the same tax act - **Income tax benefit was $26.7 million in 2018**, primarily including **$25.2 million** related to intangible asset impairment and **$1.7 million** related to the 2017 Tax Cuts and Jobs Act[176](index=176&type=chunk) - **Income tax benefit was $37.6 million in 2017**, primarily including **$25.3 million** related to domestic losses and **$11.3 million** related to the 2017 Tax Cuts and Jobs Act[177](index=177&type=chunk) - Company has finalized accounting for the 2017 Tax Cuts and Jobs Act under SAB 118, recording additional income tax benefits and deferred tax asset adjustments[174](index=174&type=chunk)[175](index=175&type=chunk) [Years Ended December 31, 2017 and 2016](index=52&type=section&id=Years%20Ended%20December%2031,%202017%20and%202016) This section details the operating results comparison for 2017 and 2016, showing significant increases in net sales and gross profit, alongside changes in operating expenses and asset impairments 2017 vs. 2016 Operating Results Comparison | Metric (Thousands of US Dollars) | 2017 | 2016 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 475,686 | 331,702 | 143,984 | 43% | | Cost of Sales | 299,458 | 198,604 | 100,854 | 51% | | Gross Profit | 176,228 | 133,098 | 43,130 | 32% | | Research and Development Expenses | 81,987 | 81,016 | 971 | 1% | | Selling, General, and Administrative Expenses | 100,250 | 77,642 | 22,608 | 29% | | Amortization of Intangible Assets | 35,475 | 19,219 | 16,256 | 85% | | Restructuring Charges | 11,851 | 5,640 | 6,211 | 110% | | Acquisition Costs | 17,786 | — | 17,786 | * | | Asset Impairment | 1,139 | 69,520 | (68,381) | (98)% | | Operating Income (Loss) | (71,868) | (120,162) | 48,294 | (40)% | | Net Income (Loss) | (51,396) | (122,027) | 70,631 | (58)% | [Net Sales](index=52&type=section&id=Net%20Sales_2017_2016) Total sales increased by **43% in 2017** compared to 2016, driven by growth in LED, front-end semiconductor, and scientific & industrial markets, along with **$65.3 million** from the Ultratech acquisition 2017 vs. 2016 Sales by Market | Market (Thousands of US Dollars) | 2017 | 2016 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Advanced Packaging, MEMS & RF Filters | 67,406 | 67,484 | (78) | (0)% | | LED Lighting, Display & Compound Semiconductor | 248,615 | 145,701 | 102,914 | 71% | | Front-End Semiconductor | 40,319 | 8,427 | 31,892 | 378% | | Scientific & Industrial | 119,346 | 110,090 | 9,256 | 8% | | **Total** | **475,686** | **331,702** | **143,984** | **43%** | 2017 vs. 2016 Sales by Geographic Region | Geographic Region (Thousands of US Dollars) | 2017 | 2016 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | United States | 93,433 | 85,582 | 7,851 | 9% | | China | 106,674 | 84,604 | 22,070 | 26% | | Europe, Middle East, and Africa | 72,979 | 84,181 | (11,202) | (13)% | | Rest of World | 202,600 | 77,335 | 125,265 | 162% | | **Total** | **475,686** | **331,702** | **143,984** | **43%** | - **Total sales increased by 43% in 2017** compared to 2016, primarily due to sales growth in the LED lighting, display and compound semiconductor, front-end semiconductor, and scientific and industrial markets, as well as approximately **$65.3 million** in additional sales from the Ultratech acquisition in May 2017[181](index=181&type=chunk) - **Sales in the Rest of World region grew significantly by 162%**, primarily attributed to sales growth in the LED lighting, display and compound semiconductor market in Malaysia and additional sales from the Ultratech acquisition[181](index=181&type=chunk) [Gross Profit](index=53&type=section&id=Gross%20Profit_2017_2016) Gross profit increased by **32% in 2017** due to higher sales volume, including the Ultratech acquisition, but was partially offset by a lower gross margin from selling inventory with fair value step-up related to the acquisition - **Gross profit increased by 32% in 2017** compared to 2016, primarily due to higher sales volume, including the Ultratech acquisition, but was partially offset by a decrease in gross margin due to selling inventory that included a fair value step-up related to the Ultratech acquisition[182](index=182&type=chunk) [Research and Development](index=53&type=section&id=Research%20and%20Development_2017_2016) R&D expenses remained relatively flat in 2017, as increased projects from the Ultratech acquisition were offset by reduced investment in certain technologies and lower personnel and professional service costs - **R&D expenses in 2017 were largely flat** compared to 2016; increased R&D projects from the Ultratech acquisition were offset by the company's reduction in certain technology investments and decreases in personnel-related and professional service expenses[183](index=183&type=chunk) [Selling, General, and Administrative](index=53&type=section&id=Selling,%20General,%20and%20Administrative_2017_2016) SG&A expenses increased in 2017 due to higher costs related to the Ultratech acquisition and increased professional and legal fees - **Selling, general, and administrative expenses increased in 2017** primarily due to higher costs related to the Ultratech acquisition and increased professional and legal fees[184](index=184&type=chunk) [Amortization Expense](index=53&type=section&id=Amortization%20Expense_2017_2016) Amortization expense increased due to additional intangible assets from the Ultratech acquisition, partially offset by reduced amortization from prior year asset impairments and fully amortized intangible assets - **Amortization expense increased** due to additional intangible assets from the Ultratech acquisition, partially offset by reduced amortization from certain technology asset impairments in the prior year and other intangible assets being fully amortized in 2016[185](index=185&type=chunk) [Restructuring Expense](index=53&type=section&id=Restructuring%20Expense_2017_2016) Restructuring expenses increased by **110% to $11.9 million in 2017**, primarily related to initiatives for streamlining operations, improving efficiency, and reducing costs, including layoffs and facility closures from the Ultratech acquisition integration - **Restructuring expenses were $11.9 million in 2017**, a **110% increase** from 2016, primarily related to initiatives for streamlining operations, improving efficiency, and reducing costs, as well as layoffs and facility closure costs during the Ultratech acquisition integration process[180](index=180&type=chunk)[186](index=186&type=chunk) [Acquisition Costs](index=53&type=section&id=Acquisition%20Costs_2017_2016) Acquisition costs were **$17.8 million in 2017**, primarily non-recurring expenses related to the Ultratech acquisition, including **$4.2 million in non-cash accelerated equity incentive compensation** - **Acquisition costs were $17.8 million in 2017**, primarily non-recurring expenses related to the Ultratech acquisition, including **$4.2 million in non-cash accelerated equity incentive compensation**[187](index=187&type=chunk) [Asset Impairment](index=55&type=section&id=Asset%20Impairment_2017_2016) In 2016, the company recorded **$57.6 million in non-cash impairment** for reduced technology investments, **$5.7 million** for assets held for sale, and **$6.2 million** for disposed lab equipment - In 2016, the company recorded **$57.6 million in non-cash impairment charges** related to reduced investment in certain technologies; **$5.7 million** related to fair market value assessment of assets held for sale; and **$6.2 million** related to the disposal of certain laboratory equipment[188](index=188&type=chunk) [Interest Income (Expense)](index=55&type=section&id=Interest%20Income%20(Expense)_2017_2016) Net interest expense was **$17.1 million in 2017**, including **$10.4 million in non-cash interest expense**, a significant change from **$1.0 million in net interest income in 2016**, primarily due to convertible senior notes issued in January 2017 - **Net interest expense was $17.1 million in 2017**, including **$10.4 million in non-cash interest expense**, while 2016 saw **$1.0 million in net interest income**, with the change primarily related to convertible senior notes issued in January 2017[189](index=189&type=chunk) [Income Taxes](index=55&type=section&id=Income%20Taxes_2017_2016) Income tax benefit was **$37.6 million in 2017**, mainly from domestic losses and the 2017 Tax Cuts and Jobs Act, while 2016 saw a **$2.8 million expense** from US tax amortization and profitable overseas operations - **Income tax benefit was $37.6 million in 2017**, primarily including **$25.3 million** related to domestic losses and **$11.3 million** related to the 2017 Tax Cuts and Jobs Act[190](index=190&type=chunk) - **Income tax expense was $2.8 million in 2016**, primarily including **$1.9 million** in US tax amortization expense and **$1.3 million** in net tax expense from profitable overseas operations[191](index=191&type=chunk) [Liquidity and Capital Resources](index=55&type=section&id=Liquidity%20and%20Capital%20Resources) The company's cash, restricted cash, and short-term investments totaled **$261.3 million** as of December 31, 2018, with **$66.9 million** held outside the US, and expects sufficient liquidity for future needs Cash and Cash Equivalents, Restricted Cash, and Short-Term Investments (Thousands of US Dollars) | Metric | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Cash and Cash Equivalents | 212,273 | 279,736 | | Restricted Cash | 809 | 847 | | Short-Term Investments | 48,189 | 47,780 | | **Total** | **261,271** | **328,363** | - As of December 31, 2018, the company held **$66.9 million in cash and cash equivalents outside the US**, compared to **$214.3 million in 2017**[192](index=192&type=chunk) - Company expects its cash flows from operating activities, cash, and short-term investments to be sufficient to meet working capital needs, contractual obligations, and other cash flow requirements for the next twelve months[193](index=193&type=chunk) [Cash Flows from Operating Activities](index=57&type=section&id=Cash%20Flows%20from%20Operating%20Activities) Net cash outflow from operating activities was **$37.7 million in 2018**, primarily due to net loss and changes in operating assets and liabilities, contrasting with a **$35.0 million inflow in 2017** Cash Flows from Operating Activities (Thousands of US Dollars) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net Income (Loss) | (407,088) | (51,396) | | Adjustments for Non-Cash Items | 425,400 | 50,800 | | Changes in Operating Assets and Liabilities | (56,036) | 35,577 | | **Net Cash from Operating Activities** | **(37,738)** | **34,993** | - **Net cash outflow from operating activities was $37.7 million in 2018**, primarily due to net loss and a decrease in cash flow from changes in operating assets and liabilities[194](index=194&type=chunk) - **Net cash inflow from operating activities was $35.0 million in 2017**, primarily due to adjustments for non-cash items and an increase in cash flow from changes in operating assets and liabilities[195](index=195&type=chunk) [Cash Flows from Investing Activities](index=57&type=section&id=Cash%20Flows%20from%20Investing%20Activities) Net cash outflow from investing activities was **$18.3 million in 2018**, mainly for capital expenditures, net investment changes, and final Ultratech acquisition payments, a significant reduction from **$357.8 million in 2017** Cash Flows from Investing Activities (Thousands of US Dollars) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Business Acquisitions (Net of Cash Acquired) | (2,662) | (401,828) | | Capital Expenditures | (12,654) | (24,272) | | Net Change in Investments | (2,981) | 65,980 | | Proceeds from Assets Held for Sale | — | 2,284 | | **Net Cash from Investing Activities** | **(18,297)** | **(357,836)** | - **Net cash outflow from investing activities was $18.3 million in 2018**, primarily for capital expenditures, net changes in investments, and the final payment for the Ultratech acquisition[196](index=196&type=chunk) - **Net cash outflow from investing activities was $357.8 million in 2017**, primarily for the Ultratech acquisition and capital expenditures[196](index=196&type=chunk) [Cash Flows from Financing Activities](index=58&type=section&id=Cash%20Flows%20from%20Financing%20Activities) Net cash outflow from financing activities was **$11.5 million in 2018**, mainly for stock repurchases, contrasting with a **$325.9 million inflow in 2017** from convertible senior notes Cash Flows from Financing Activities (Thousands of US Dollars) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Settlement of Equity Awards (Net of Tax Withheld) | (5) | (5,749) | | Purchases of Common Stock | (11,457) | (2,869) | | Proceeds from Long-Term Debt Borrowings | — | 335,752 | | Repayments of Long-Term Debt | — | (1,194) | | **Net Cash from Financing Activities** | **(11,462)** | **325,940** | - **Net cash outflow from financing activities was $11.5 million in 2018**, primarily for the stock repurchase program[198](index=198&type=chunk) - **Net cash inflow from financing activities was $325.9 million in 2017**, primarily from net proceeds of convertible senior notes issued in January 2017[198](index=198&type=chunk) [Convertible Senior Notes](index=58&type=section&id=Convertible%20Senior%20Notes) On January 10, 2017, the company issued **$345 million** of **2.70% convertible senior notes**, due January 15, 2023, with net proceeds of approximately **$335.8 million**, and expects sufficient resources for interest payments - On January 10, 2017, the company issued **$345 million of 2.70% convertible senior notes**, with net proceeds of approximately **$335.8 million**, due January 15, 2023[199](index=199&type=chunk) - Company believes it has sufficient capital resources and operating cash flows to support periodic interest payments on this debt[199](index=199&type=chunk) [Business Combination](index=58&type=section&id=Business%20Combination) On May 26, 2017, the company completed the acquisition of Ultratech, Inc., whose operating results have been included in the consolidated financial statements since the acquisition date - On May 26, 2017, the company completed the acquisition of Ultratech, Inc., and its operating results have been included in the consolidated financial statements since the acquisition date[200](index=200&type=chunk) [Contractual Obligations and Commitments](index=58&type=section&id=Contractual%20Obligations%20and%20Commitments) As of December 31, 2018, total contractual obligations and commitments amounted to **$490.2 million**, primarily comprising long-term debt principal, debt cash interest, operating leases, and purchase commitments Contractual Obligations and Commitments as of December 31, 2018 (Thousands of US Dollars) | Type | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-Term Debt Principal Payments | 345,000 | — | — | 345,000 | — | | Debt Cash Interest | 37,648 | 9,315 | 18,630 | 9,703 | — | | Operating Leases | 16,057 | 5,143 | 7,488 | 2,878 | 548 | | Purchase Commitments | 91,466 | 91,466 | — | — | — | | **Total** | **490,171** | **105,924** | **26,118** | **357,581** | **548** | - Unrecognized tax benefits totaled **$1.5 million** as of December 31, 2018, and are not included in the table[203](index=203&type=chunk) - Purchase commitments are primarily for inventory required for product manufacturing, offset by **$12.8 million in supplier deposits**[204](index=204&type=chunk) [Off-Balance Sheet Arrangements](index=59&type=section&id=Off-Balance%20Sheet%20Arrangements) The company has no off-balance sheet arrangements that materially affect its financial condition, operating results, or liquidity, other than operating leases, bank guarantees, and purchase commitments - Company has no off-balance sheet arrangements that materially affect its financial condition, results of operations, or liquidity, other than operating leases, bank guarantees, and purchase commitments reflected in the aforementioned contractual obligations and commitments table[205](index=205&type=chunk) [Application of Critical Accounting Policies](index=59&type=section&id=Application%20of%20Critical%20Accounting%20Policies) The preparation of financial statements requires significant management judgment in applying and interpreting existing accounting literature or developing estimates - Preparation of financial statements requires a high degree of management judgment in applying and interpreting existing accounting literature or developing estimates[206](index=206&type=chunk) [Revenue Recognition](index=59&type=section&id=Revenue%20Recognition) The company adopted ASC 606 on January 1, 2018, recognizing revenue when control transfers to customers at an amount reflecting expected consideration, with most revenue recognized at a point in time, typically upon system delivery - Company adopted ASC 606 on January 1, 2018, using the full retrospective method; revenue is recognized when control transfers to the customer, at an amount reflecting the consideration expected to be received[208](index=208&type=chunk)[209](index=209&type=chunk) - Contracts typically contain multiple performance obligations, requiring judgment on revenue allocation; most revenue is recognized at a point in time when performance obligations are satisfied, with system sales revenue typically recognized upon system delivery[209](index=209&type=chunk)[211](index=211&type=chunk) - Maintenance and service contract revenue is recognized over the contract term, installation revenue is recognized as services are performed, and parts and spare parts sales revenue is recognized upon delivery[213](index=213&type=chunk) [Inventory Valuation](index=61&type=section&id=Inventory%20Valuation) Inventory is measured at the lower of cost or net realizable value using the FIFO method, with quarterly assessments for obsolescence or excess of estimated usage - Inventory is measured at the lower of cost or net realizable value, with cost determined using the first-in, first-out (FIFO) method; the company assesses the valuation and recoverability of all inventory quarterly, writing down obsolete or excess inventory[216](index=216&type=chunk) [Goodwill and Intangible Assets](index=63&type=section&id=Goodwill%20and%20Intangible%20Assets) Goodwill is tested for impairment annually in the fourth quarter or when impairment indicators arise, with fair value determined by adjusted market capitalization, while long-lived assets are tested for recoverability based on discounted cash flow or market value - Goodwill is tested for impairment at least annually in the beginning of the fourth quarter, or when impairment indicators arise; the company determines the fair value of reporting units based on adjusted market capitalization[217](index=217&type=chunk)[218](index=218&type=chunk) - Long-lived assets, including identifiable intangible assets, are tested for recoverability when impairment indicators arise, with fair value determined based on discounted cash flow models or market values[219](index=219&type=chunk) - Intangible assets related to in-process research and development (IPR&D) projects are considered indefinite-lived until R&D is completed or abandoned[221](index=221&type=chunk) [Income Taxes](index=63&type=section&id=Income%20Taxes) The company uses the balance sheet method for income tax accounting, reflecting deferred taxes for temporary differences and net operating loss carryforwards, and records a valuation allowance to reduce deferred tax assets to their likely realizable amount - Company accounts for income taxes using the balance s