VEECO INSTRUMENTS INC - Quarter Report: 2020 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

For the quarterly period ended September 30, 2020

☐

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

Commission file number 0-16244

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)


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

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

Registrant’s telephone number, including area code:

(516) 677-0200

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


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

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

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

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


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

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

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

As of October 20, 2020, there were 49,612,167 shares of the registrant’s common stock outstanding.

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VEECO INSTRUMENTS INC.

INDEX


Safe Harbor Statement	1

PART I—FINANCIAL INFORMATION	4

Item 1. Financial Statements	4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3. Quantitative and Qualitative Disclosures about Market Risk	38

Item 4. Controls and Procedures	38

PART II—OTHER INFORMATION	39

Item 1. Legal Proceedings	39

Item 1A. Risk Factors	39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3. Defaults Upon Senior Securities	39

Item 4. Mine Safety Disclosures	39

Item 5. Other Information	40

Item 6. Exhibits	40

SIGNATURES	41

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Safe Harbor Statement

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

In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events, including the potential impact of the COVID-19 pandemic on our business, and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.

The risks and uncertainties of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “we,” “us,” and “our,” unless the context indicates otherwise) include, without limitation, those set forth under the heading “Risk Factors” Part 1, Item 1A in our 2019 Form 10-K, and Part 2, Item 1A of our quarterly reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and the following:

●

The unknown duration and economic, operational, and financial impacts of the COVID-19 pandemic and the actions taken or contemplated by governmental authorities or others in response to the pandemic on our business, employees, customers and suppliers, including, among others, (a) changes in customer demand for our products, (b) disruptions in our supply chain, particularly to the extent we rely on a single supplier for certain components, (c) financial challenges confronting major customers in light of reduced end-user demand for their products, (d) operational changes implemented by us, including remote working arrangements, which may put increased strain on our IT systems and create increased vulnerability to cybersecurity incidents, (e) increases in shipping, raw material or other costs, (f) competitive pricing pressures, and (g) prolonged measures to contain the spread of COVID-19 or the premature easing of government-imposed restrictions implemented to contain the spread of COVID-19;

●

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

●

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

●

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

●

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

●

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

●

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

●

We face significant competition;

●

We operate in industries characterized by rapid technological change;

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●

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

●

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

●

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

●

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

●

Our sales cycle is long and unpredictable;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

We may be required to take impairment charges on assets;

●

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

●

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

●

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

●

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

●

Our income taxes may change;

●

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

●

The accounting method for convertible debt securities that may be settled in cash, such as the 2023 and 2027 Notes, could have a material effect on our reported financial results;

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●

The effects of the capped call transactions that we entered in connection with the issuance of the convertible senior notes due 2027, which may include changes in the value of the notes and our common stock;

●

We are subject to foreign currency exchange risks;

●

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

●

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

●

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

●

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

●

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

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

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Veeco Instruments Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)


	September 30,		December 31,
	2020		2019
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	147,588	$	129,294
Restricted cash		664		657
Short-term investments		161,585		115,252
Accounts receivable, net		80,212		45,666
Contract assets		21,342		25,351
Inventories		143,469		133,067
Deferred cost of sales		1,677		445
Prepaid expenses and other current assets		15,948		14,966
Assets held for sale		—		11,180
Total current assets		572,485		475,878
Property, plant, and equipment, net		65,811		75,711
Operating lease right-of-use assets		10,522		14,453
Intangible assets, net		50,016		61,518
Goodwill		181,943		181,943
Deferred income taxes		1,555		1,549
Other assets		7,293		7,036
Total assets	$	889,625	$	818,088

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	33,837	$	21,281
Accrued expenses and other current liabilities		40,667		41,243
Customer deposits and deferred revenue		71,539		54,870
Income taxes payable		891		830
Total current liabilities		146,934		118,224
Deferred income taxes		5,984		5,648
Long-term debt		320,818		300,068
Operating lease long-term liabilities		6,793		10,300
Other liabilities		11,003		9,336
Total liabilities		491,532		443,576
Stockholders' equity:
Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding.		—		—
Common stock, $0.01 par value; 120,000,000 shares authorized; 49,612,167 shares issued and outstanding at September 30, 2020 and 48,994,346 shares issued and outstanding at December 31, 2019		496		490
Additional paid-in capital		1,102,959		1,071,058
Accumulated deficit		(707,219)		(698,930)
Accumulated other comprehensive income		1,857		1,894
Total stockholders' equity		398,093		374,512
Total liabilities and stockholders' equity	$	889,625	$	818,088

See accompanying Notes to the Consolidated Financial Statements.

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net sales	$	112,078	$	108,954	$	315,216	$	306,147
Cost of sales		62,936		66,731		177,761		192,924
Gross profit		49,142		42,223		137,455		113,223
Operating expenses, net:
Research and development		19,129		22,639		57,577		68,901
Selling, general, and administrative		19,415		20,962		55,541		60,620
Amortization of intangible assets		3,831		4,312		11,502		12,773
Restructuring		—		1,828		1,097		3,874
Asset impairment		—		—		281		—
Other operating expense (income), net		(218)		(153)		(502)		(232)
Total operating expenses, net		42,157		49,588		125,496		145,936
Operating income (loss)		6,985		(7,365)		11,959		(32,713)
Interest income		231		1,219		1,458		3,749
Interest expense		(6,425)		(5,549)		(18,131)		(16,491)
Loss on extinguishment of debt		—		—		(3,046)		—
Income (loss) before income taxes		791		(11,695)		(7,760)		(45,455)
Income tax expense (benefit)		211		72		530		407
Net income (loss)	$	580	$	(11,767)	$	(8,290)	$	(45,862)

Income (loss) per common share:
Basic	$	0.01	$	(0.25)	$	(0.17)	$	(0.97)
Diluted	$	0.01	$	(0.25)	$	(0.17)	$	(0.97)

Weighted average number of shares:
Basic		48,341		47,489		48,327		47,361
Diluted		49,174		47,489		48,327		47,361

See accompanying Notes to the Consolidated Financial Statements.

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net income (loss)	$	580	$	(11,767)	$	(8,290)	$	(45,862)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities		(69)		(38)		(16)		8
Foreign currency translation gain (loss)		9		(4)		(21)		8
Total other comprehensive income (loss), net of tax		(60)		(42)		(37)		16

Total comprehensive income (loss)	$	520	$	(11,809)	$	(8,327)	$	(45,846)

See accompanying Notes to the Consolidated Financial Statements.

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Veeco Instruments Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Nine months ended September 30,
	2020		2019
Cash Flows from Operating Activities
Net income (loss)	$	(8,290)	$	(45,862)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		23,021		25,838
Non-cash interest expense		10,282		9,418
Deferred income taxes		330		20
Share-based compensation expense		9,562		11,528
Loss on extinguishment of debt		3,046		—
Asset impairment		281		—
Provision for bad debts		140		—
Changes in operating assets and liabilities:
Accounts receivable and contract assets		(30,677)		(16,308)
Inventories and deferred cost of sales		(10,336)		17,921
Prepaid expenses and other current assets		(982)		(1,276)
Accounts payable and accrued expenses		11,130		(16,000)
Customer deposits and deferred revenue		16,728		(6,705)
Income taxes receivable and payable, net		61		(593)
Other, net		3,295		(986)
Net cash provided by (used in) operating activities		27,591		(23,005)

Cash Flows from Investing Activities
Capital expenditures		(3,331)		(8,189)
Proceeds from the sale of investments		139,531		102,230
Payments for purchases of investments		(185,576)		(148,664)
Proceeds from held for sale assets, net of costs to sell		9,503		645
Net cash provided by (used in) investing activities		(39,873)		(53,978)

Cash Flows from Financing Activities
Proceeds from issuance of 2027 Notes, net of issuance costs		121,946		—
Purchase of capped calls		(10,313)		—
Repurchase of 2023 Notes		(81,240)		—
Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan		2,428		2,609
Restricted stock tax withholdings		(2,217)		(2,771)
Net cash provided by (used in) financing activities		30,604		(162)
Effect of exchange rate changes on cash and cash equivalents		(21)		9
Net increase (decrease) in cash, cash equivalents, and restricted cash		18,301		(77,136)
Cash, cash equivalents, and restricted cash - beginning of period		129,951		213,082
Cash, cash equivalents, and restricted cash - end of period	$	148,252	$	135,946

Supplemental Disclosure of Cash Flow Information
Interest paid	$	8,989	$	9,401
Income taxes paid		248		2,835
Non-cash operating and financing activities
Net transfer of property, plant and equipment to inventory		1,624		4,074
Right-of-use assets obtained in exchange for lease obligations		951		516

See accompanying Notes to the Consolidated Financial Statements.

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature.

Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2020 interim quarters ended on March 29, June 28, and September 27, and the 2019 interim quarters ended on March 31, June 30, and September 29. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.

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

Revenue Recognition

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

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

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

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

In certain cases the Company’s contracts with customers contain a billing retention, typically 10% of the sales price, which is billed by the Company and payable by the customer when field acceptance provisions are completed. Revenue recognized in advance of the amount that has been billed is recorded as a contract asset on the Consolidated Balance Sheets.

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

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

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

Inventories

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

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

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

Recently Adopted Accounting Standards

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

Recent Accounting Standards Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06: Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This standard simplifies the accounting for convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature, as well as convertible instruments with a beneficial conversion feature. As a result, entity’s will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce non-cash interest expense for entities that have issued a convertible instrument that was within the scope of those models before the adoption of ASU 2020-06. Additionally, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share, and precludes the use of the treasury stock method. The provisions of ASU 2020-06 are applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. An entity should adopt the provisions at the beginning of its annual fiscal year. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Note 2 — Income (Loss) Per Common Share

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted income per share is calculated by dividing net income by the weighted average number of shares used to calculate basic income (loss) per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share if the performance targets have been achieved, or would have been achieved if the reporting date was the end of the contingency period. The computations of basic and diluted income (loss) per share for the three and nine months ended September 30, 2020 and 2019 are as follows:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands, except per share amounts)
Net income (loss)	$	580	$	(11,767)	$	(8,290)	$	(45,862)
Net income (loss) per common share:
Basic	$	0.01	$	(0.25)	$	(0.17)	$	(0.97)
Diluted	$	0.01	$	(0.25)	$	(0.17)	$	(0.97)

Basic weighted average shares outstanding		48,341		47,489		48,327		47,361
Effect of potentially dilutive share-based awards		833		—		—		—
Diluted weighted average shares outstanding		49,174		47,489		48,327		47,361

Common share equivalents excluded from the diluted weighted average shares outstanding since the Company incurred a net loss and their effect would be antidilutive		N/A		403		650		302
Potentially dilutive shares excluded from the diluted calculation as their effect would be antidilutive		984		1,874		1,029		1,893
Maximum potential shares to be issued for settlement of the 2023 and 2027 Notes excluded from the diluted calculation as their effect would be antidilutive		15,354		8,618		15,354		8,618

Note 3 — Assets

Investments

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

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

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

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(unaudited)

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

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

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

The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019:


	Level 1		Level 2		Level 3		Total

	(in thousands)
September 30, 2020
Cash equivalents
Certificate of deposits and time deposits	$	64,646	$	—	$	—	$	64,646
U.S. treasuries		9,999		—		—		9,999
Government money market fund		1,180		—		—		1,180
Government agency securities		—		1,050		—		1,050
Total	$	75,825	$	1,050	$	—	$	76,875
Short-term investments
U.S. treasuries	$	125,346	$	—	$	—	$	125,346
Government agency securities		—		6,000		—		6,000
Corporate debt		—		14,248		—		14,248
Commercial paper		—		15,991		—		15,991
Total	$	125,346	$	36,239	$	—	$	161,585

December 31, 2019
Cash equivalents
Certificate of deposits and time deposits	$	67,009	$	—	$	—	$	67,009
Commercial paper		—		10,484		—		10,484
Corporate debt		—		1,000		—		1,000
Total	$	67,009	$	11,484	$	—	$	78,493
Short-term investments
U.S. treasuries	$	105,130	$	—	$	—	$	105,130
Government agency securities		—		1,139		—		1,139
Corporate debt		—		6,002		—		6,002
Commercial paper		—		2,981		—		2,981
Total	$	105,130	$	10,122	$	—	$	115,252

There were no transfers between fair value measurement levels during the nine months ended September 30, 2020.

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(unaudited)

At September 30, 2020 and December 31, 2019, the amortized cost and fair value of available-for-sale securities consist of:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value

	(in thousands)
September 30, 2020
U.S. treasuries	$	125,333	$	17	$	(4)	$	125,346
Government agency securities		5,995		5		—		6,000
Corporate debt		14,254		1		(7)		14,248
Commercial paper		15,986		7		(2)		15,991
Total	$	161,568	$	30	$	(13)	$	161,585

December 31, 2019
U.S. treasuries	$	105,096	$	38	$	(4)	$	105,130
Government agency securities		1,139		—		—		1,139
Corporate debt		6,003		—		(1)		6,002
Commercial paper		2,981		—		—		2,981
Total	$	115,219	$	38	$	(5)	$	115,252

Available-for-sale securities in a loss position at September 30, 2020 and December 31, 2019 consist of:


	September 30, 2020				December 31, 2019
			Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses

		(in thousands)
U.S. treasuries	$	40,111	$	(4)	$	22,943	$	(4)
Corporate debt		10,195		(7)		6,002		(1)
Commercial paper		5,995		(2)		—		—
Total	$	56,301	$	(13)	$	28,945	$	(5)

At September 30, 2020 and December 31, 2019, there were no short-term investments that had been in a continuous loss position for more than 12 months.

The maturities of securities classified as available-for-sale at September 30, 2020 were all due in one year or less, and an allowance for credit loss is considered unnecessary. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were minimal realized gains or losses for the nine months ended September 30, 2020 and no realized gains or losses for the nine months ended September 30, 2019.

Accounts Receivable

Accounts receivable is presented net of an allowance for doubtful accounts of $0.7 million and $0.6 million at September 30, 2020 and December 31, 2019, respectively. The Company considered its current expectations of future economic conditions, including the impact of COVID-19, when estimating its allowance for doubtful accounts.

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(unaudited)

Inventories

Inventories at September 30, 2020 and December 31, 2019 consist of the following:


	September 30,		December 31,
	2020		2019

	(in thousands)
Materials	$	81,842	$	82,155
Work-in-process		56,137		42,575
Finished goods		5,490		8,337
Total	$	143,469	$	133,067

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, prepaid licenses, and other receivables. Veeco had deposits with its suppliers of $5.0 million and $5.9 million at September 30, 2020 and December 31, 2019, respectively.

Assets Held for Sale

In the fourth quarter of 2019, the Company determined that one of its non-core product lines (the “disposal group”) met the held for sale criteria, and as such, the related assets were presented as “Assets held for sale” on the Consolidated Balance Sheets as of December 31, 2019. During the second quarter of 2020, the Company completed the sale of this product line for approximately $11.4 million, with approximately 85% of the transaction price received upon closing, and 15% held in escrow for a period of 18 months and included within “Other Assets” in the Consolidated Balance Sheets. Long-lived assets and definite-lived intangible assets were not depreciated or amortized while classified as held for sale. The sale of this disposal group does not represent a strategic shift that will have a material effect on the Company’s operations and financial results, nor is it considered a component of the Company, and as such it did not meet the criteria to be reported as discontinued operations.

For the year ended December 31, 2019, the Company recorded a non-cash impairment charge on these assets held for sale of $4.0 million in order to measure the disposal group at the lower of its carrying value or fair value less costs to sell, which resulted in a corresponding held for sale valuation allowance on its assets held for sale in the Consolidated Balance Sheet. During the second quarter of 2020, the Company recorded additional impairment charges of $0.3 million related to the finalization of the sale of this disposal group. The major classes of assets and liabilities that were sold are as follows:



Net assets sold:	(in thousands)
Inventories	$	6,311
Property, plant, and equipment, net		372
Intangible assets, net		6,546
Goodwill		2,359
Deferred revenue		(59)
Total net assets sold	$	15,529
Net proceeds after costs to sell		(11,228)
Total loss on sale of disposal group	$	4,301

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(unaudited)

Property, Plant, and Equipment

Property, plant, and equipment at September 30, 2020 and December 31, 2019 consist of the following:


	September 30,		December 31,
	2020		2019

	(in thousands)
Land	$	5,061	$	5,061
Building and improvements		62,796		61,884
Machinery and equipment ⁽¹⁾		137,587		137,692
Leasehold improvements		6,795		6,703
Gross property, plant, and equipment		212,239		211,340
Less: accumulated depreciation and amortization		146,428		135,629
Net property, plant, and equipment	$	65,811	$	75,711

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

For the three and nine months ended September 30, 2020, depreciation expense was $3.8 million and $11.5 million, respectively, and $4.2 million and $13.1 million for the comparable 2019 periods.

Goodwill

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The Company continues to assess potential triggering events related to the value of its goodwill, including the COVID-19 pandemic, and concluded that there were no indicators of impairment during the nine months ended September 30, 2020.

Intangible Assets

Intangible assets consist of purchased technology, customer relationships, patents, trademarks and tradenames, and backlog, and are initially recorded at fair value. Long-lived intangible assets are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line basis if such pattern cannot be reliably determined. The Company continues to assess potential triggering events related to the value of its intangible assets, including the COVID-19 pandemic, and concluded that there were no indicators of impairment during the nine months ended September 30, 2020.

The components of purchased intangible assets were as follows:


	September 30, 2020						December 31, 2019
			Accumulated						Accumulated
	Gross		Amortization				Gross		Amortization
	Carrying		and		Net		Carrying		and		Net
	Amount		Impairment		Amount		Amount		Impairment		Amount

	(in thousands)
Technology	$	327,908	$	299,710	$	28,198	$	327,908	$	291,766	$	36,142
Customer relationships		146,465		129,290		17,175		146,465		126,764		19,701
Trademarks and tradenames		30,910		26,274		4,636		30,910		25,256		5,654
Other		3,686		3,679		7		3,686		3,665		21
Total	$	508,969	$	458,953	$	50,016	$	508,969	$	447,451	$	61,518

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

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(unaudited)

Note 4 — Liabilities

Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities at September 30, 2020 and December 31, 2019 consist of:


	September 30,		December 31,
	2020		2019

	(in thousands)
Payroll and related benefits	$	21,755	$	15,174
Warranty		5,141		7,067
Operating lease liabilities		4,177		4,196
Interest		3,189		4,321
Professional fees		963		2,443
Sales, use, and other taxes		2,466		811
Restructuring liability		671		2,841
Other		2,305		4,390
Total	$	40,667	$	41,243

Warranty

Warranties are typically valid for one year from the date of system final acceptance, and Veeco estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and are affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. Changes in product warranty reserves for the nine months ended September 30, 2020 include:


		(in thousands)
Balance - December 31, 2019	$	7,067
Warranties issued		2,747
Consumption of reserves		(4,771)
Changes in estimate		98
Balance - September 30, 2020	$	5,141

Restructuring Accruals

The Company recorded restructuring charges during the year ended December 31, 2019 as a result of its efforts to further streamline operations, enhance efficiencies, and reduce costs. In the second half of 2019, the Company executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate its resources to the Company’s highest priority projects. In addition, the Company delayered the organization. Collectively, these actions impacted approximately 60 employees. During the nine months ended September 30, 2020, additional accruals were recognized and payments were made related to these restructuring initiatives.

The following table shows the amounts incurred and paid for restructuring activities during the nine months ended September 30, 2020, and the remaining accrued balance of restructuring costs at September 30, 2020, which is included

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(unaudited)

in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheets, and principally consists of personnel severance and related costs:





	(in thousands)
Balance - December 31, 2019	$	2,841
Provision		1,097
Payments		(3,267)
Balance - September 30, 2020	$	671

Customer Deposits and Deferred Revenue

Customer deposits totaled $54.3 million and $26.6 million at September 30, 2020 and December 31, 2019, respectively. Deferred revenue represents amounts billed, other than deposits, in excess of the revenue that can be recognized on a particular contract at the balance sheet date. Changes in deferred revenue were as follows:


	(in thousands)
Balance - December 31, 2019	$	28,249
Deferral of revenue		7,391
Recognition of previously deferred revenue		(18,370)
Balance - September 30, 2020	$	17,270

As of September 30, 2020, the Company has approximately $27.3 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 72% is expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

Convertible Senior Notes

2023 Notes

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

On May 18, 2020, in connection with the completion of a private offering of $125 million aggregate principal amount of 3.75% convertible senior notes described below, the Company repurchased and retired approximately $88.3 million in aggregate principal amount of its outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash. The Company accounted for the partial settlement of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $3.0 million for the nine months ended September 30, 2020.

2027 Notes

On May 18, 2020, the Company completed a private offering of $125.0 million of 3.75% convertible senior notes (the “2027 Notes”). The Company received net proceeds of approximately $121.9 million, after deducting underwriting discounts and fees and expenses payable by the Company. Additionally, the Company used approximately $10.3 million of cash to purchase the capped calls, discussed below. The 2027 Notes bear interest at a rate of 3.75% per year, payable

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(unaudited)

semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2020. The 2027 Notes mature on June 1, 2027 (the “Maturity Date”), unless earlier purchased by the Company, redeemed, or converted.

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

The 2027 Notes are convertible at the option of the holders upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is 71.5372 shares of the Company’s common stock per $1,000 principal amount of 2027 Notes, representing an initial effective conversion price of $13.98 per share of common stock. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the indenture governing the 2027 Notes, but will not be adjusted for accrued but unpaid interest.

Holders may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 1, 2026 only under the following circumstances:

(i)

During any calendar quarter commencing after the calendar quarter ending September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

(ii)

During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per one thousand dollar principal amount of 2027 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day;

(iii)

If the Company calls any or all of the 2027 Notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or

(iv)

Upon the occurrence of specified corporate events.

On or after October 1, 2026, until the close of business on the business day immediately preceding the Maturity Date, holders may convert their notes at any time, regardless of the foregoing circumstances.

Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion option, the Company segregated the liability component of the instrument from the equity component. The liability component was measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the 2027 Notes. The calculation of the fair value of the debt component required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and industry high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the 2027 Notes at a discount rate of 9.10%, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the aggregate face value of the 2027 Notes over the estimated fair value of the liability component of $34.2 million was recognized as a debt discount and recorded as an increase to additional paid-in capital and will be amortized over the expected life of the 2027 Notes using the effective interest rate method. Amortization of the debt discount is recognized as non-cash interest expense.

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(unaudited)

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

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

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

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


		September 30, 2020						December 31, 2019
		2023 Notes		2027 Notes		Total		2023 Notes		2027 Notes		Total

		(in thousands)
Principal amount	$	256,695	$	125,000	$	381,695	$	345,000	$	—	$	345,000
Unamortized debt discount		(23,488)		(32,889)		(56,377)		(40,820)		—		(40,820)
Unamortized transaction costs		(2,366)		(2,134)		(4,500)		(4,112)		—		(4,112)
Net carrying value	$	230,841	$	89,977	$	320,818	$	300,068	$	—	$	300,068

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


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Cash Interest Expense
Coupon interest expense - 2023 Notes	$	1,733	$	2,329	$	6,060	$	6,986
Coupon interest expense - 2027 Notes		1,172		—		1,745		—
Non-cash Interest Expense
Amortization of debt discount - 2023 Notes		2,328		2,906		8,074		8,556
Amortization of debt discount - 2027 Notes		884		—		1,310		—
Amortization of transaction costs - 2023 Notes		235		293		813		862
Amortization of transaction costs - 2027 Notes		57		—		85		—
Total Interest Expense	$	6,409	$	5,528	$	18,087	$	16,404

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(unaudited)

The Company determined the 2023 Notes and 2027 Notes are Level 2 liabilities in the fair value hierarchy and had an estimated fair value at September 30, 2020 of $235.9 million and $134.8 million, respectively.

Other Liabilities

As part of the acquisition of Ultratech, the Company assumed an executive non-qualified deferred compensation plan that allowed qualifying executives to defer cash compensation. The plan was frozen at the time of acquisition and no further contributions have been made. At September 30, 2020 and December 31, 2019, plan assets approximated $2.2 million and $2.7 million, respectively, representing the cash surrender value of life insurance policies and is included within “Other assets” in the Consolidated Balance Sheets, while plan liabilities approximated $2.3 million and $3.1 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities at September 30, 2020 and December 31, 2019 also included (i) medical and dental benefits for former executives of $1.9 million and $2.0 million, respectively; (ii) asset retirement obligations of $2.7 million and $3.2 million, respectively; and (iii) income tax payables of $1.4 and $1.0 million, respectively. Additionally, as a result of the Coronavirus, Aid, Relief, and Economic Security Act, the Company has accrued for and defered the deposit and payment of its share of social security taxes, resulting in a liability of $2.6 million at September 30, 2020, which is included within “Other liabilities” in the Consolidated Balance Sheets.

Note 5 — Commitments and Contingencies

Leases

The Company’s operating leases primarily include real estate leases for properties used for manufacturing, R&D activities, sales and service, and administration, as well as certain equipment leases. Some leases may include options to renew for a period of up to 5 years, while others may include options to terminate the lease. The weighted average remaining lease term of the Company’s operating leases as of September 30, 2020 was 2.6 years, and the weighted average discount rate used in determining the present value of future lease payments was 6.0%.

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(unaudited)

The following table provides the maturities of lease liabilities at September 30, 2020:


	Operating
	Leases
	(in thousands)
Payments due by period:
2020	$	1,274
2021		4,659
2022		4,394
2023		1,035
2024		551
Thereafter		—
Total future minimum lease payments		11,913
Less: Imputed interest		(943)
Total	$	10,970

Reported as of September 30, 2020
Accrued expenses and other current liabilities	$	4,177
Operating lease long-term liabilities		6,793
Total	$	10,970

Operating lease cost for both the three months ended September 30, 2020 and 2019 was $1.3 million. Operating lease cost for both the nine months ended September 30, 2020 and 2019 was $4.1 million. Variable lease cost for the three and nine months ended September 30, 2020 was $0.4 and $1.3 million, respectively, and $0.4 and $1.4 million for the comparable 2019 periods. Additionally, the Company has an immaterial amount of short-term leases. Operating cash outflows from operating leases for the nine months ended September 30, 2020 and 2019 were $4.8 million and $5.0 million, respectively.

Purchase Commitments

Veeco has purchase commitments of $103.6 million at September 30, 2020, substantially all of which become due within one year.

Bank Guarantees

Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At September 30, 2020, outstanding bank guarantees and standby letters of credit totaled $5.8 million, and unused bank guarantees and letters of credit of $26.3 million were available to be drawn upon.

Legal Proceedings

On June 8, 2018, an Ultratech shareholder who received Veeco stock as part of the consideration for the Ultratech acquisition filed a purported class action complaint in the Superior Court of the State of California, County of Santa Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). On August 2 and August 8, 2018, two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These cases have been consolidated with the Wolther Action, and a consolidated complaint was filed on December 11, 2018. The consolidated complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the Securities Act of 1933 for, among other things, alleged false/misleading statements in the registration statement

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(unaudited)

and prospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. Veeco is defending this matter vigorously.

On December 21, 2018, a purported Veeco stockholder filed a derivative action in the Superior Court of the State of California, County of Santa Clara, captioned Vladimir Gusinsky Revocable Trust v. Peeler, et al., Case No. 18CV339925, on behalf of nominal defendant Veeco. The complaint seeks to assert claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against current and former Veeco directors premised on purported misstatements and omissions in the registration statement relating to the Ultratech acquisition. Veeco is defending this matter vigorously.

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

Note 6 — Derivative Financial Instruments

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

The Company did not have any outstanding derivative contracts at September 30, 2020 or December 31, 2019. Additionally, the Company did not have any gains or losses from currency exchange derivatives during the nine months ended September 30, 2020 and 2019.

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Note 7 — Equity

Statement of Stockholders’ Equity

The following tables present the changes in Stockholders’ Equity:


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

	(in thousands)
Balance at December 31, 2019	48,994	$	490	$	1,071,058	$	(698,930)	$	1,894	$	374,512
Net income (loss)	—		—		—		(567)		—		(567)
Other comprehensive income (loss), net of tax	—		—		—		—		153		153
Share-based compensation expense	—		—		3,646		—		—		3,646
Net issuance under employee stock plans	434		4		(684)		—		—		(680)
Balance at March 31, 2020	49,428	$	494	$	1,074,020	$	(699,497)	$	2,047	$	377,064
Net income (loss)	—		—		—		(8,302)		—		(8,302)
Other comprehensive income (loss), net of tax	—		—		—		—		(130)		(130)
Share-based compensation expense	—		—		2,974		—		—		2,974
Net issuance under employee stock plans	191		2		753		—		—		755
Extinguishment of equity component of repurchased 2023 Notes	—		—		(80)		—		—		(80)
Equity component of 2027 Notes	—		—		33,363		—		—		33,363
Purchase of capped calls	—		—		(10,313)		—		—		(10,313)
Balance at June 30, 2020	49,619	$	496	$	1,100,717	$	(707,799)	$	1,917	$	395,331
Net income (loss)	—		—		—		580		—		580
Other comprehensive income, net of tax	—		—		—		—		(60)		(60)
Share-based compensation expense	—		—		2,942		—		—		2,942
Net issuance under employee stock plans	(7)		—		(700)		—		—		(700)
Balance at September 30, 2020	49,612	$	496	$	1,102,959	$	(707,219)	$	1,857	$	398,093


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

	(in thousands)
Balance at December 31, 2018	48,547	$	485		523	$	(5,872)	$	1,061,325	$	(619,983)	$	1,820	$	437,775
Net income (loss)	—		—		—		—		—		(18,530)		—		(18,530)
Other comprehensive income (loss), net of tax	—		—		—		—		—		—		38		38
Share-based compensation expense	—		—		—		—		3,157		—		—		3,157
Net issuance under employee stock plans	128		2		(523)		5,872		(6,303)		(213)		—		(642)
Balance at March 31, 2019	48,675	$	487		—	$	—	$	1,058,179	$	(638,726)	$	1,858	$	421,798
Net income (loss)	—		—		—		—		—		(15,565)		—		(15,565)
Other comprehensive income (loss), net of tax	—		—		—		—		—		—		20		20
Share-based compensation expense	—		—		—		—		4,588		—		—		4,588
Net issuance under employee stock plans	296		3		—		—		182		—		—		185
Balance at June 30, 2019	48,971	$	490		—	$	—	$	1,062,949	$	(654,291)	$	1,878	$	411,026
Net income (loss)	—		—		—		—		—		(11,767)		—		(11,767)
Other comprehensive income, net of tax	—		—		—		—		—		—		(42)		(42)
Share-based compensation expense	—		—		—		—		3,783		—		—		3,783
Net issuance under employee stock plans	(68)		(1)		—		—		(529)		—		—		(530)
Balance at September 30, 2019	48,903	$	489		—	$	—	$	1,066,203	$	(666,058)	$	1,836	$	402,470

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Accumulated Other Comprehensive Income (“AOCI”)

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


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

	(in thousands)
Balance - December 31, 2019	$	1,861	$	33	$	1,894
Other comprehensive income (loss)		(21)		(16)		(37)
Balance - September 30, 2020	$	1,840	$	17	$	1,857

There were minimal reclassifications from AOCI into net income for the three and nine months ended September 30, 2020 and 2019.

Note 8 — Share-based Compensation

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

Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Cost of sales	$	389	$	383	$	1,384	$	1,448
Research and development		674		756		2,161		2,531
Selling, general, and administrative		1,879		2,644		6,017		7,549
Total	$	2,942	$	3,783	$	9,562	$	11,528

For the nine months ended September 30, 2020, equity activity related to stock options was as follows:


		Weighted
	Number of	Average
	Shares	Exercise Price
	(in thousands)
Balance - December 31, 2019	1,119		34.88
Expired or forfeited	(339)		33.94
Balance - September 30, 2020	780		35.28

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

For the nine months ended September 30, 2020, equity activity related to non-vested restricted shares and performance shares was as follows:


		Weighted
		Average
	Number of	Grant Date
	Shares	Fair Value
	(in thousands)
Balance - December 31, 2019	2,257		16.20
Granted	1,006		9.40
Performance award adjustments	(51)		30.94
Vested	(775)		15.97
Forfeited	(366)		15.38
Balance - September 30, 2020	2,071		12.76

Note 9 — Income Taxes

Income taxes are estimated for each of the jurisdictions in which the Company operates. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Realization of net deferred tax assets is dependent on future taxable income. At September 30, 2020, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized.

At the end of each interim reporting period, the effective tax rate is aligned with expectations for the full year. This estimate is used to determine the income tax provision on a year-to-date basis and may change in subsequent interim periods.

Income (loss) before income taxes and income tax expense (benefit) for the three and nine months ended September 30, 2020 and 2019 were as follows:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Income (loss) before income taxes	$	791	$	(11,695)	$	(7,760)	$	(45,455)
Income tax expense (benefit)	$	211	$	72	$	530	$	407

The Company’s tax expense for the three months ended September 30, 2020 was $0.2 million compared to $0.1 million for the comparable prior period. The 2020 tax expense included a $0.2 million expense related to the Company’s non-U.S. operations and minimal expense related to the Company’s domestic operations, compared to 2019 when the expense included a $0.1 million expense related to the Company’s domestic operations and minimal expense related to the Company’s non-U.S. operations.

The Company’s tax expense for the nine months ended September 30, 2020 was $0.5 million, compared to $0.4 million for the comparable prior period. The 2020 tax expense included a $0.2 million expense related to the Company’s domestic operations and a $0.3 million expense related to the Company’s non-U.S. operations, compared to 2019 when the expense included a $0.2 million expense related to domestic operations and a $0.2 million expense related to non-U.S. operations. Although there was a domestic pre-tax loss for the nine months ended September 30, 2020 and 2019, Veeco did not provide a current tax benefit on domestic pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The current period domestic tax expense is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The non-U.S. tax expense for the nine months ended September 30, 2020 is primarily attributable to tax expense on non-U.S. operation profits and foreign

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

withholding taxes on unremitted earnings as of September 30, 2020, offset by a tax benefit related to the amortization of intangible assets.

Note 10 — Segment Reporting and Geographic Information

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

Veeco categorizes its sales into the following four end-markets:

Front-End Semiconductor

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

LED Lighting, Display & Compound Semiconductor

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

Scientific & Industrial

Scientific refers to advanced materials research at university research institutions, industry research institutions, industry consortiums, and government research agencies. Industrial refers to large-scale product manufacturing applications including data storage and optical coatings: thin layers of material deposited on a lens or mirror that alters how light reflects and transmits.

Advanced Packaging, MEMS & RF Filters

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

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Veeco Instruments Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - continued

(unaudited)

Sales by end-market and geographic region for the three and nine months ended September 30, 2020 and 2019 were as follows:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

	(in thousands)
Sales by end-market
Front-End Semiconductor	$	20,789	$	33,578	$	69,914	$	80,703
LED Lighting, Display & Compound Semiconductor		20,098		24,020		51,516		47,263
Scientific & Industrial		52,479		39,975		145,033		127,230
Advanced Packaging, MEMS & RF Filters		18,712		11,381		48,753		50,951
Total	$	112,078	$	108,954	$	315,216	$	306,147
Sales by geographic region
United States	$	39,602	$	27,915	$	108,869	$	100,014
China		10,464		17,034		38,328		46,846
EMEA⁽¹⁾		14,991		19,128		57,271		49,280
Rest of World		47,021		44,877		110,748		110,007
Total	$	112,078	$	108,954	$	315,216	$	306,147

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

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

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

Cautionary Statement Regarding Forward Looking Statements

Our discussion below contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, as amended, that are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “scheduled,” “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this discussion include, but are not limited to, those regarding anticipated growth and trends in our businesses and markets, industry outlooks and demand drivers, our investment and growth strategies, our development of new products and technologies, our business outlook for the current and future periods, the impact of the COVID-19 pandemic and the affects thereof on our operations and financial results, and other statements that are not historical facts. These statements and their underlying assumptions are subject to risks and uncertainties and are not guarantees of future performance. Factors that could cause actual results to differ materially from those expressed or implied by such statements include, without limitation: the level of demand for our products; global economic and industry conditions; the effects of regional or global health epidemics, including the effects of the COVID-19 pandemic on the Company’s operations and on those of our customers and suppliers; global trade issues, including the ongoing trade disputes between the U.S. and China, and changes in trade and export license policies; our dependency on third-party outsourcing partners; the timing of customer orders; our ability to develop, deliver and support new products and technologies; our ability to expand our current markets, increase market share and develop new markets; the concentrated nature of our customer base; our ability to obtain and protect intellectual property rights in key technologies; our ability to achieve the objectives of operational and strategic initiatives and attract, motivate and retain key employees; the variability of results among products and segments, and our ability to accurately forecast future results, market conditions, and customer requirements; the impact of our indebtedness, including our convertible senior notes and our capped call transactions; and other risks and uncertainties described in our SEC filings on Forms 10-K, 10-Q and 8-K. All forward-looking statements speak only to management’s expectations, estimates, projections and assumptions as of the date of this filing or, in the case of any document referenced herein or incorporated by reference, the date of that document. The Company does not undertake any obligation to update or publicly revise any forward-looking statements to reflect events, circumstances or changes in expectations after the date of this filing.

Executive Summary

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

COVID-19 Update

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

Measures providing for business shutdowns generally exclude certain essential services, and those essential services include critical infrastructure and the businesses that support that critical infrastructure. Our operations are considered part of the critical and essential infrastructure defined by applicable government authorities, and, although governmental measures to contain the pandemic may be modified or extended, our manufacturing facilities remain open. We believe our diverse product offerings and the critical nature of certain of our products for infrastructure insulate us, to some extent, from the adverse effects of the pandemic; however, a prolonged economic downturn will adversely affect our customers, which could have a material adverse effect on our revenues, particularly if customers from whom we derive a

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significant amount of revenue reduce or delay purchases to mitigate the impacts of the pandemic or fail to make payments to us on time or at all.

We serve a global and highly interconnected customer base across the Asia-Pacific region, Europe, and North America. Our net sales to customers located outside of the United States represented approximately 70%, 77%, and 80% of our total net sales in 2019, 2018, and 2017, respectively, and we expect that net sales to customers outside the United States will continue to represent a significant percentage of our total net sales. As a result, our business will be adversely impacted by further deterioration in global economic conditions, particularly in markets in Asia and Europe.

To date, we have not yet experienced any significant interruptions to our supply chain as a result of the COVID-19 pandemic. We continue to monitor our global supply chain and may experience disruptions in future periods, primarily as a result of financial challenges confronting companies in our supply chain and restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, any of which could cause a disruption in our ability to obtain raw materials or components required to manufacture our products.

Like many in our industry, we are managing through the effects of the COVID-19 pandemic. Although the full extent of the COVID-19 pandemic’s impact on our business, results of operations, supply chains and growth can not be predicted or quantified, we proactively identified potential challenges to our business and have been executing business continuity activities to manage disruptions in our business and continue to provide critical infrastructure to our customers. In response to the pandemic, we have taken, or intend to take, the following steps, among others, to keep our employees safe and minimize the spread of the virus, while continuing to serve our customers:

●

implemented rigorous health and safety protocols at our manufacturing facilities, including extensively and frequently disinfecting our facilities, limiting access to our facilities, checking temperatures of individuals entering our facilities, staggering shifts to minimize employee overlap in gowning areas, and providing protective equipment;

●

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

●

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

●

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

●

proactively identified gaps in our supply chain and re-sourced a number of components in order to maintain our customer shipment commitments and mitigate single points of failure;

●

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

●

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

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

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revise our approach to these initiatives or take additional actions to meet the needs of our employees and customers, and mitigate the impact of the pandemic on our business.

Business Update

We categorize our revenue by the key market segments into which we sell. Our four key markets are: Front-End Semiconductor; LED Lighting, Display & Compound Semiconductor; Scientific & Industrial; and Advanced Packaging, MEMS & RF Filters.

Sales in the Front-End Semiconductor market were driven by shipment of our Ion Beam Deposition system for EUV Mask Blank manufacturing. In the EUV market, customers appear to be moving ahead with their leading node EUV lithography plans for logic and memory applications, continuing to drive requirements for our mask blank systems. Looking ahead, we continue to work with our customers with our laser annealing technology, and seek additional customers, as they develop their “next nodes”. We believe demand for these two product lines, driven by the development and release of advanced node semiconductors, will continue to provide future growth opportunities for us.

Sales in the LED Lighting, Display & Compound Semiconductor market grew sequentially in the third quarter. We shipped MOCVD and PSP systems in the quarter for compound semiconductor applications in Photonics, Power Electronics, and RF devices. Additionally, we received acceptance of our Lumina MOCVD beta system which was under evaluation at one of our top customers. During the evaluation period, this Arsenide Phosphide MOCVD system passed rigorous testing and was qualified for production of several advanced photonics devices. We have a broad portfolio of MOCVD and PSP technologies which have been developed to support emerging applications such as 5G driven RF device manufacturing, photonics devices including 3D sensing laser diodes and mini/microLEDs, and GaN-based power electronics. We continue to work with customers to penetrate these markets.

Sales in the Scientific & Industrial market were primarily driven by shipments of Ion Beam systems for data storage applications. Demand for our Ion Beam products for Data Storage is being driven by big data and cloud-based storage growth. In order to be successful, hard disk drive manufacturers are required to improve areal density of magnetic heads for hard disk drives and are manufacturing drives with an increasing number of thin film magnetic heads. These two factors taken together, along with new innovations by HDD manufacturers such as heat assisted magnetic recording and microwave assisted magnetic recording, are driving additional capacity requirements and equipment upgrades. Additionally, recent trends in the work from home environment and the importance of cloud computing are also providing tailwinds to this market. We have good visibility in this market, which gives us confidence it will remain healthy through 2021.

Sales in the Advanced Packaging, MEMS and RF Filter market were driven by shipments of lithography systems for Advanced Packaging as well as wet etch & clean systems for Advanced Packaging and RF filter manufacturing. We expect the RF Filter market to remain strong in the near term driven by 5G requirements for higher filter content in mobile devices.

Global trade policies have recently become more restrictive, resulting in increased tensions, which have impacted and may continue to impact our business. The U.S. government has implemented controls over transactions involving Chinese entities, and possibly others, who may respond by developing their own solutions or utilize our foreign competitors to replace our products. We have previously seen evidence of this behavior in transactions across our product lines, including our MOCVD and Wet Etch & Clean products. Our revenue from customers in China, which may be impacted if customers continue this behavior, represents a small percentage of our overall revenue.

Overall, the Data Storage market, the RF Filter market, and the Front-End Semiconductor market are all performing well for us today, and we expect these markets to provide growth in the near term, through 2021. Long term growth for 2022 and beyond is expected to come from the Front-End Semiconductor and Compound Semiconductor markets. As such, we have been making strategic investments in R&D and inventory, including evaluation systems, in these markets, as well as improving our service capabilities to support these anticipated growth opportunities.

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Results of Operations

For the three months ended September 30, 2020 and 2019

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2020 and 2019 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.


	Three Months Ended September 30,						Change
	2020			2019			Period to Period

	(dollars in thousands)
Net sales	$	112,078	100%	$	108,954	100%	$	3,124	3%
Cost of sales		62,936	56%		66,731	61%		(3,795)	(6)%
Gross profit		49,142	44%		42,223	39%		6,919	16%
Operating expenses, net:
Research and development		19,129	17%		22,639	21%		(3,510)	(16)%
Selling, general, and administrative		19,415	17%		20,962	19%		(1,547)	(7)%
Amortization of intangible assets		3,831	3%		4,312	4%		(481)	(11)%
Restructuring		—	-		1,828	2%		(1,828)	*
Other operating expense (income), net		(218)	-		(153)	-		(65)	42%
Total operating expenses, net		42,157	38%		49,588	46%		(7,431)	(15)%
Operating income (loss)		6,985	6%		(7,365)	(7)%		14,350	195%
Interest income (expense), net		(6,194)	(6)%		(4,330)	(4)%		(1,864)	43%
Income (loss) before income taxes		791	1%		(11,695)	(11)%		12,486	107%
Income tax expense (benefit)		211	-		72	-		139	*
Net income (loss)	$	580	1%	$	(11,767)	(11)%	$	12,347	105%

*	Not meaningful

Net Sales

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


	Three Months Ended September 30,						Change
	2020			2019			Period to Period

	(dollars in thousands)
Sales by market
Front-End Semiconductor	$	20,789	18%	$	33,578	31%	$	(12,789)	(38)%
LED Lighting, Display & Compound Semiconductor		20,098	18%		24,020	22%		(3,922)	(16)%
Scientific & Industrial		52,479	47%		39,975	37%		12,504	31%
Advanced Packaging, MEMS & RF Filters		18,712	17%		11,381	10%		7,331	64%
Total	$	112,078	100%	$	108,954	100%	$	3,124	3%
Sales by geographic region
United States	$	39,602	36%	$	27,915	25%	$	11,687	42%
China		10,464	9%		17,034	16%		(6,570)	(39)%
EMEA		14,991	13%		19,128	18%		(4,137)	(22)%
Rest of World		47,021	42%		44,877	41%		2,144	5%
Total	$	112,078	100%	$	108,954	100%	$	3,124	3%

Sales increased slightly for the three months ended September 30, 2020 against the comparable prior year period in the Scientific & Industrial and Advanced Packaging, MEMS & RF Filters markets, partially offset by decreases in the Front-End Semiconductor and LED Lighting, Display & Compound Semiconductor markets. Sales in the Scientific & Industrial market were primarily driven by shipments of Ion Beam systems to data storage customers. Pricing was not a significant driver of the change in total sales. By geography, sales increased in the United States and Rest of World

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regions, partially offset by decreases in the China and EMEA regions. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies. In light of the global nature of our business, we are impacted by conditions in the various countries in which we and our customers operate. Several markets continue to remain challenged in light of ongoing restrictions on business and travel, and decreased business and consumer spending generally, resulting from the COVID-19 pandemic.

Gross Profit

For the three months ended September 30, 2020, gross profit increased against the comparable prior period primarily due to an increase in sales volume and increased gross margins. Gross margins increased principally due to higher production activity, as well as reductions in inventory reserves and warranty expenses. We expect our gross margins to fluctuate each period due to product mix and other factors.

Research and Development

The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses decreased for the three months ended September 30, 2020 against the comparable prior period primarily due to personnel-related expenses and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs. In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions.

Selling, General, and Administrative

Selling, general, and administrative expenses decreased for the three months ended September 30, 2020 against the comparable prior period primarily due to personnel-related expenses as a result of our initiative to streamline operations, enhance efficiency, and reduce costs. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions. Given the the uncertainty regarding the impacts on our business resulting from the COVID-19 pandemic, we are focused on the proactive management of expenses. In future periods, we may incur additional selling, general and administrative expenses to support our responses to the COVID-19 pandemic.

Amortization Expense

Amortization expense decreased compared to prior period primarily due to the sale of a non-core product line, including related intangible assets, as well as changes in amortization expense to reflect expected cash flows of certain intangible assets.

Restructuring Expense

We recorded restructuring charges during the year ended December 31, 2019 as a result of our efforts to further streamline operations, enhance efficiencies, and reduce costs. In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. In addition, we delayered the organization. Collectively, these actions impacted approximately 60 employees. During the three months ended September 30, 2020, payments were made related to these previous restructuring initiatives, while no additional charges were incurred.

Interest Income (Expense)

We recorded net interest expense of $6.2 million for the three months ended September 30, 2020, compared to $4.3 million for the comparable prior year period. The increase in interest expense was primarily related to the issuance of the 2027 Notes in May 2020, partially offset by the partial repurchase of the 2023 Notes. Included in interest expense for the three months ended September 30, 2020 were non-cash charges of $3.5 million related to the amortization of debt

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discount and transaction costs of the 2023 and 2027 Notes, while the three months ended September 30, 2019 included non-cash charges of $3.2 million related to the amortization of debt discount and transaction costs of the 2023 Notes. Additionally, interest income decreased approximately $1.0 million for the three months ended September 30, 2020 compared to the prior period, primarily as a result of lower interest rates, and we expect interest income to remain depressed as a result.

Income Taxes

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

We incurred a tax expense of $0.2 million for the three months ended September 30, 2020 compared to $0.1 million for the comparable prior period. The 2020 tax expense included an expense of $0.2 million related to our non-US operations and minimal expense related to our domestic operations, compared to 2019 when the expense was mainly attributable to domestic operations.

Results of Operations

For the nine months ended September 30, 2020 and 2019


	Nine Months Ended September 30,						Change
	2020			2019			Period to Period

	(dollars in thousands)
Net sales	$	315,216	100%	$	306,147	100%	$	9,069	3%
Cost of sales		177,761	56%		192,924	63%		(15,163)	(8)%
Gross profit		137,455	44%		113,223	37%		24,232	21%
Operating expenses, net:
Research and development		57,577	18%		68,901	23%		(11,324)	(16)%
Selling, general, and administrative		55,541	18%		60,620	20%		(5,079)	(8)%
Amortization of intangible assets		11,502	4%		12,773	4%		(1,271)	(10)%
Restructuring		1,097	-		3,874	1%		(2,777)	(72)%
Asset impairment		281	-		—	-		281	*
Other operating expense (income), net		(502)	-		(232)	-		(270)	116%
Total operating expenses, net		125,496	40%		145,936	48%		(20,440)	(14)%
Operating income (loss)		11,959	4%		(32,713)	(11)%		44,672	137%
Interest income (expense), net		(16,673)	(5)%		(12,742)	(4)%		(3,931)	31%
Loss on extinguishment of debt		(3,046)	(1)%		—	-		(3,046)	*
Income (loss) before income taxes		(7,760)	(2)%		(45,455)	(15)%		37,695	83%
Income tax expense (benefit)		530	-		407	-		123	30%
Net income (loss)	$	(8,290)	(3)%	$	(45,862)	(15)%	$	37,572	82%

*	Not meaningful

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Net Sales

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


	Nine Months Ended September 30,						Change
	2020			2019			Period to Period

	(dollars in thousands)
Sales by market
Front-End Semiconductor	$	69,914	22%	$	80,703	26%	$	(10,789)	(13)%
LED Lighting, Display & Compound Semiconductor		51,516	16%		47,263	15%		4,253	9%
Scientific & Industrial		145,033	46%		127,230	42%		17,803	14%
Advanced Packaging, MEMS & RF Filters		48,753	16%		50,951	17%		(2,198)	(4)%
Total	$	315,216	100%	$	306,147	100%	$	9,069	3%
Sales by geographic region
United States	$	108,869	35%	$	100,014	33%	$	8,855	9%
China		38,328	12%		46,846	15%		(8,518)	(18)%
EMEA		57,271	18%		49,280	16%		7,991	16%
Rest of World		110,748	35%		110,007	36%		741	1%
Total	$	315,216	100%	$	306,147	100%	$	9,069	3%

Sales increased for the nine months ended September 30, 2020 against the comparable prior year period in the Scientific & Industrial and LED Lighting, Display & Compound Semiconductor markets, partially offset by decreases in the Front-End Semiconductor and Advanced Packaging, MEMS & RF Filters markets. Sales in the Scientific & Industrial market were primarily driven by shipments of Ion Beam systems to data storage customers. Pricing was not a significant driver of the change in total sales. By geography, sales increased in the United States, EMEA, and Rest of World regions, partially offset by decreases in China. We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies. In light of the global nature of our business, we are impacted by conditions in the various countries in which we and our customers operate. Several markets continue to remain challenged in light of ongoing restrictions on business and travel, and decreased business and consumer spending generally, resulting from the COVID-19 pandemic.

Gross Profit

For the nine months ended September 30, 2020, gross profit increased against the comparable prior period primarily due to an increase in sales volume and increased gross margins. Gross margins increased principally due to higher production activity, as well as reductions in inventory reserves and warranty expenses. We expect our gross margins to fluctuate each period due to product mix and other factors.

Research and Development

The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses decreased for the nine months ended September 30, 2020 against the comparable prior period primarily due to personnel-related expenses and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs. In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions.

Selling, General, and Administrative

Selling, general, and administrative expenses decreased for the nine months ended September 30, 2020 against the comparable prior period primarily due to personnel-related expenses as a result of our initiative to streamline operations, enhance efficiency, and reduce costs. Additionally, we had a decrease in travel-related expenses as a result of COVID-19

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related restrictions. Given the the uncertainty regarding the impacts on our business resulting from the COVID-19 pandemic, we are focused on the proactive management of expenses. In future periods, we may incur additional selling, general and administrative expenses to support our responses to the COVID-19 pandemic.

Amortization Expense

Restructuring Expense

We continued to record restructuring charges during the year ended December 31, 2019 as a result of our efforts to further streamline operations, enhance efficiencies, and reduce costs. In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects. In addition, we delayered the organization. Collectively, these actions impacted approximately 60 employees. During the nine months ended September 30, 2020, additional accruals were recognized and payments were made related to these restructuring initiatives.

Interest Income (Expense)

We recorded net interest expense of $16.7 million for the nine months ended September 30, 2020, compared to $12.7 million for the comparable prior year period. The increase in interest expense was primarily related to the issuance of the 2027 Notes in May 2020, partially offset by the partial repurchase of the 2023 Notes. Included in interest expense for the nine months ended September 30, 2020 were non-cash charges of $10.3 million related to the amortization of debt discount and transaction costs of the 2023 and 2027 Notes, while the nine months ended September 30, 2019 included non-cash charges of $9.4 million related to the amortization of debt discount and transaction costs of the 2023 Notes. Additionally, interest income decreased approximately $2.3 million for the nine months ended September 30, 2020 compared to the prior period, primarily as a result of lower interest rates, and we expect interest income to remain depressed as a result.

Loss on Extinguishment of Debt

On May 18, 2020, in connection with the completion of a private offering of $125 million aggregate principal amount of 3.75% convertible senior notes described below, we repurchased and retired approximately $88.3 million in aggregate principal amount of our outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash. We accounted for the repurchase of the $88.3 million of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $3.0 million in the second quarter of 2020.

Income Taxes

Our tax expense for the nine months ended September 30, 2020 was $0.5 million compared to a tax expense of $0.4 million for the comparable prior period. The 2020 tax expense included an expense of $0.2 million related to our domestic operations, and $0.3 million related to our non-U.S. operations, compared to 2019 when the expense included a $0.2 million expense related to our domestic operations and a $0.2 million expense related to our non-U.S. operations. Although there was a domestic pre-tax loss for the nine months ended September 30, 2020 and 2019, we did not provide a current tax benefit on domestic pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The domestic tax expense for the current period is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offset U.S. deferred tax assets. The current period non-U.S. tax expense is primarily

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attributable to tax expense on non-U.S. operation profits and foreign withholding taxes on unremitted earnings as of September 30, 2020, offset by a tax benefit related to the amortization of intangible assets.

Liquidity and Capital Resources

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


	September 30,		December 31,
	2020		2019

	(in thousands)
Cash and cash equivalents	$	147,588	$	129,294
Restricted cash		664		657
Short-term investments		161,585		115,252
Total	$	309,837	$	245,203

At September 30, 2020 and December 31, 2019, cash and cash equivalents of $41.7 million and $73.0 million, respectively, were held outside the United States. As of September 30, 2020, we had $12.8 million of accumulated undistributed earnings generated by our non-U.S. subsidiaries for which the U.S. repatriation tax has been provided and did not require the use of cash due to the use of net operating loss carryforwards. Approximately $5.8 million of undistributed earnings will be subject to foreign withholding taxes if distributed back to the United States.

We believe that our projected cash flow from operations, combined with our cash and short-term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months, including scheduled interest payments on our convertible senior notes, purchase commitments and payments in respect of operating leases. However, the COVID-19 pandemic, together with other dynamics in the marketplace, has resulted in wider credit spreads and significantly increased borrowing costs and, in certain cases, limited the ability of companies to access the capital markets and other sources of financing on attractive terms or at all.

Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our business model, our current cash and short-term investments and the recent steps we have taken to rationalize expenses, leave us well-positioned to manage our business through this crisis as it continues to unfold.

A summary of the cash flow activity for the nine months ended September 30, 2020 and 2019 is as follows:


	Nine Months Ended September 30,
	2020		2019

	(in thousands)
Net income (loss)	$	(8,290)	$	(45,862)
Non-cash items:
Depreciation and amortization		23,021		25,838
Non-cash interest expense		10,282		9,418
Deferred income taxes		330		20
Share-based compensation expense		9,562		11,528
Loss on extinguishment of debt		3,046		—
Asset impairment		281		—
Provision for bad debts		140		—
Changes in operating assets and liabilities		(10,781)		(23,947)
Net cash provided by (used in) operating activities	$	27,591	$	(23,005)

Net cash provided by operating activities was $27.6 million for the nine months ended September 30, 2020 and was due to the net loss of $8.3 million and a decrease in cash flow from changes in operating assets and liabilities of $10.8 million, offset by adjustments for non-cash items of $46.7 million. The changes in operating assets and liabilities were largely attributable to increases in accounts receivable and inventories, partially offset by increases in accounts payable and customer deposits.

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Cash Flows from Investing Activities


	Nine Months Ended September 30,
	2020		2019

	(in thousands)
Capital expenditures	$	(3,331)	$	(8,189)
Changes in investments, net		(46,045)		(46,434)
Proceeds from held for sale assets, net of costs to sell		9,503		645
Net cash provided by (used in) investing activities	$	(39,873)	$	(53,978)

The cash used in investing activities during the nine months ended September 30, 2020 was primarily attributable to net purchases of investments, partially offset by the net proceeds from sale of a non-core product line.

Cash Flows from Financing Activities


	Nine Months Ended September 30,
	2020		2019

	(in thousands)
Proceeds from issuance of 2027 Notes, net of issuance costs	$	121,946	$	—
Purchase of capped calls		(10,313)		—
Repurchase of 2023 Notes		(81,240)		—
Settlement of equity awards, net of withholding taxes		211		(162)
Net cash provided by (used in) financing activities	$	30,604	$	(162)

The cash provided by financing activities for the nine months ended September 30, 2020 was primarily related to the net cash proceeds received from the issuance of the 2027 Notes, partially offset by the cash used to repurchase the 2023 Notes as well as the purchase of the capped call transactions.

Convertible Senior Notes

On January 10, 2017, we issued $345.0 million of 2.70% convertible senior unsecured notes (the “2023 Notes”). We received net proceeds, after deducting underwriting discounts and fees and expenses payable by us, of approximately $335.8 million. The 2023 Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The 2023 Notes mature on January 15, 2023, unless earlier purchased by us, redeemed, or converted. On May 18, 2020, in connection with the completion of a private offering of $125 million aggregate principal amount of 3.75% convertible senior notes described below, we repurchased and retired approximately $88.3 million in aggregate principal amount of our outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash.

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

We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on the 2023 and 2027 Notes.

Contractual Obligations and Commitments

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

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Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates primarily relates to our investment portfolio. We centrally manage our investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately $161.6 million at September 30, 2020. These securities are subject to interest rate risk and, based on our investment portfolio at September 30, 2020, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of $0.9 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.

Currency Exchange Risk

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

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

Our net sales to customers located outside of the United States represented approximately 64% and 65% of our total net sales for the three and nine months ended September 30, 2020, respectively, and 75% and 67% for the comparable 2019 periods. We expect that net sales to customers outside the United States will continue to represent a large percentage of our total net sales. Our sales denominated in currencies other than the U.S. dollar represented 7% and 5% of total net sales in the three and nine months ended September 30, 2020, respectively, and 3% and 4% for the comparable 2019 periods.

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

Item 4. Controls and Procedures

Management’s Report on Internal Control Over Financial Reporting

Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective as of September 30, 2020. The disclosure controls and procedures are designed to ensure that the information required to be disclosed in this report filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s

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rules and forms and is accumulated and communicated to our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2020, there were no changes in internal control that have materially affected or are reasonably likely to materially affect internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Information regarding risk factors appears in the Safe Harbor Statement at the beginning of this quarterly report on Form 10-Q, in Part I — Item 1A of our 2019 Form 10-K, and Part 2, Item 1A of our quarterly reports on Form 10-Q for the quarters ending March 31, 2020 and June 30, 2020. There have been no material changes from the risk factors previously disclosed.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

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Item 5. Other Information

None.

Item 6. Exhibits

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


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

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

* Filed herewith

** Filed herewith electronically

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on October 27, 2020.


	Veeco Instruments Inc.

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

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