Note 3 — Assets

Investments and Assets held for sale

Marketable securities 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.” 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, net” in the Consolidated Statements of Operations.

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

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

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

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

The level used 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. In determining fair value, information from pricing services is utilized to value securities based on quoted market prices in active markets and matrix pricing. Matrix pricing is a mathematical valuation technique that does not rely exclusively on quoted prices of specific investments, but on the investment’s relationship to other benchmarked quoted securities. The use of different market assumptions and/or estimation methodologies could have a significant effect on the fair value estimates. The following table presents assets (excluding cash and cash equivalent balances) that are measured at fair value on a recurring basis:

	Level 1		Level 2		Total
	(in thousands)
March 31, 2015
U.S. treasuries	$	59,732	$	—	$	59,732
Government agency securities	—		4,999		4,999
Corporate debt	—		24,266		24,266

December 31, 2014
U.S. treasuries	$	81,527	$	—	$	81,527
Corporate debt	—		39,045		39,045

There were no transfers between fair value measurement levels during the three months ended March 31, 2015. There were no financial assets or liabilities measured at fair value using Level 3 fair value measurements at March 31, 2015 or December 31, 2014.

The amortized cost and fair value of available-for-sale securities consist of:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(in thousands)
March 31, 2015
U.S. treasuries	$	59,692	$	42	$	(2	)	$	59,732
Government agency securities	4,998		1		—			4,999
Corporate debt	24,240		27		(1		)	24,266
Total available-for-sale securities	$	88,930	$	70	$	(3	)	$	88,997

December 31, 2014
U.S. treasuries	$	81,506	$	27	$	(6	)	$	81,527
Corporate debt	39,031		20		(6		)	39,045
Total available-for-sale securities	$	120,537	$	47	$	(12	)	$	120,572

Available-for-sale securities in a loss position consist of:

	March 31, 2015					December 31, 2014
			Gross					Gross
	Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Losses			Fair Value		Losses
	(in thousands)
U.S. treasuries	$	22,001	$	(2	)	$	35,001	$	(6	)
Corporate debt	6,082		(1		)	13,069		(6		)
Total available-for-sale securities in a loss position	$	28,083	$	(3	)	$	48,070	$	(12	)

At March 31, 2015 and December 31, 2014, there were no short-term investments that had been in a continuous loss position for more than 12 months.

The contractual maturities of securities classified as available-for-sale at March 31, 2015 are:

	March 31, 2015
	Amortized		Estimated
	cost		fair value
	(in thousands)
Due in one year or less	$	49,028	$	49,055
Due after one year through two years	39,902		39,942
Total available-for-sale securities	$	88,930	$	88,997

Actual maturities may differ from contractual maturities. Veeco may sell these securities prior to maturity based on the needs of the business. In addition, borrowers may have the right to call or prepay obligations prior to scheduled maturities.

Realized gains or losses are included in “Other, net” in the Consolidated Statements of Operations. There were minimal realized gains for the three months ended March 31, 2015 and no realized gains or losses for the three months ended March 31, 2014. The cost of securities liquidated is based on specific identification.

Accounts receivable

Accounts receivable is presented net of allowance for doubtful accounts of $0.5 million and $0.7 million at March 31, 2015 and December 31, 2014, respectively.

Inventory

Inventory is stated at the lower of cost or market using standard costs that approximate actual costs on a first-in, first-out basis. Inventory consists of:

	March 31, 2015		December 31, 2014
	(in thousands)
Materials	$	33,627	$	30,319
Work-in-process	19,381		25,096
Finished goods	4,189		6,056
Total inventory	$	57,197	$	61,471

Deferred cost of sales

For new products, new applications of existing products or for products with substantive customer acceptance provisions where Veeco can not objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue and the associated costs are deferred and fully recognized upon the receipt of final customer acceptance, assuming all other revenue recognition criteria have been met.

Prepaid expenses and other current assets

Prepaid expenses and other current assets primarily consist of supplier deposits, as well as lease deposits and prepaid licenses.

Veeco outsources certain functions to third parties, including the manufacture of substantially all of its MOCVD systems, ion beam and other data storage systems, and ion sources. While primarily relying upon several suppliers for the manufacturing of these systems, Veeco maintains a minimum level of internal manufacturing capability for these systems. Supplier deposits consist of $21.4 million and $12.7 million at March 31, 2015 and December 31, 2014, respectively.

Assets held for sale

Research and demonstration laboratories in Asia, as well as a vacant building and land, were designated as held for sale during 2014. The balance sheet reflects Veeco’s estimate of fair value less costs to sell using the sales comparison market approach.

Property, plant, and equipment

Property, plant, and equipment consist of:

	March 31, 2015		December 31, 2014
	(in thousands)
Land	$	9,392	$	9,392
Building and improvements	51,984		51,979
Machinery and equipment	108,808		104,815
Leasehold improvements	4,440		4,356
Gross property, plant and equipment	174,624		170,542
Less: accumulated depreciation and amortization	94,323		91,790
Net property, plant, and equipment	$	80,301	$	78,752

There were $0.1 million in impairments during the three months ended March 31, 2015 related to restructuring activities. Depreciation expense was $2.8 million and $2.9 million for the three months ended March 31, 2015 and 2014, respectively.

Included in property, plant, and equipment are held-for-sale systems that are the same types of tools that Veeco sells to its customers in the ordinary course of business. During the three months ended March 31, 2015 and 2014, Veeco had aggregate sales of $1.3 million and $2.3 million with associated costs of $1.3 million and $1.4 million, respectively, which was included in “Net sales” and “Cost of sales” in the Consolidated Statements of Operations.

Goodwill

There were no new acquisitions or impairments during the three months ended March 31, 2015. The purchase accounting related to the $145.5 million December 4, 2014 acquisition of Solid State Equipment LLC (“SSEC”), which has been renamed Veeco Precision Surface Processing LLC (“PSP”), remains preliminary. The estimated fair value of the assets acquired and liabilities assumed may be adjusted as further information becomes available during the measurement period of up to 12 months from the acquisition date. Changes in goodwill consist of:

	Gross carrying		Accumulated
	amount		impairment		Net amount
	(in thousands)
Goodwill - December 31, 2014	$	238,158	$	123,199	$	114,959
Purchase price allocation adjustment	13		—		13
Goodwill - March 31, 2015	$	238,171	$	123,199	$	114,972

Intangible assets

There were no new acquisitions or impairments during the three months ended March 31, 2015. As the PSP purchase accounting remains preliminary, intangible assets acquired may be adjusted as further information becomes available. The components of purchased intangible assets consist of:

	March 31, 2015						December 31, 2014
			Accumulated						Accumulated
	Gross		Amortization				Gross		Amortization
	Carrying		and		Net		Carrying		and		Net
	Amount		Impairment		Amount		Amount		Impairment		Amount
	(in thousands)
Technology	$	222,358	$	109,881	$	112,477	$	222,358	$	106,342	$	116,016
Customer relationships	47,885		16,793		31,092		47,885		14,918		32,967
Trademarks and tradenames	3,050		1,406		1,644		3,050		1,096		1,954
Indefinite-lived trademark	2,900		—		2,900		2,900		—		2,900
Other	6,320		3,087		3,233		6,320		849		5,471
Total	$	282,513	$	131,167	$	151,346	$	282,513	$	123,205	$	159,308

Other intangible assets consist of patents, licenses, customer backlog, and non-compete agreements.

Other assets

Veeco has an ownership interest of less than 20% in a non-marketable cost method investment. Veeco does not exert significant influence over the investee, and therefore the investment is carried at cost. The carrying value of the investment is $19.4 million at both March 31, 2015 and December 31, 2014. The investment is subject to a periodic impairment review; as there are no open-market valuations, the impairment analysis requires significant judgment. The analysis includes assessments of the investee’s financial condition, the business outlook for its products and technology, its projected results and cash flow, the likelihood of obtaining subsequent rounds of financing, and the impact of any relevant contractual equity preferences held by Veeco or others. Fair value of the investment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of the investment. No such events or circumstances are present.