Note 5 - Liabilities

Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities at June 30, 2018 and December 31, 2017 consist of:

	June 30,		December 31,
	2018		2017
	(in thousands)
Payroll and related benefits	$	25,910	$	32,996
Warranty	6,889		6,532
Interest	4,477		4,430
Professional fees	3,807		3,942
Merger consideration payable	2,662		2,662
Sales, use, and other taxes	891		2,144
Restructuring liability	2,178		1,520
Other	8,460		3,842

Total	$	55,274	$	58,068

Other liabilities include accruals for costs related to customer training, royalties, and travel.

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 six months ended June 30, 2018 include:

	(in thousands)
Balance - December 31, 2017	$	6,532
Warranties issued	3,514
Consumption of reserves	(3,444		)
Changes in estimate	287

Balance - June 30, 2018	$	6,889

Restructuring Accruals

During 2017, the Company substantially completed its restructuring activities related to its initiative to streamline operations, enhance efficiencies, and reduce costs, as well as reduced investments in certain technology development. In addition, during 2017, the Company began the Ultratech acquisition integration process to enhance efficiencies, resulting in reductions in headcount and other facility costs. During the six months ended June 30, 2018, additional accruals were recognized and payments were made related to prior year restructuring initiatives.

During the second quarter of 2018, the Company initiated plans to further reduce excess capacity associated with the manufacture and support of the Company’s advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into its San Jose, California facility. As a result of this and other cost saving initiatives, the Company announced headcount reduction of approximately 40 employees and recorded restructuring charges related to these actions of $1.7 million, consisting principally of personnel severance and related costs. The Company expects the consolidation to be completed in the first quarter of 2019. Over the next few quarters, the Company expects to incur additional restructuring costs of $2 million to $4 million as it completes these activities.

	Personnel
	Severance and			Facility
	Related Costs			Related Costs			Total
	(in thousands)
Balance - December 31, 2017	$	1,520		$	—		$	1,520
Provision	2,412			2,371			4,783
Payments	(1,754		)	(2,371		)	(4,125		)

Balance - June 30, 2018	$	2,178		$	—		$	2,178

Included within restructuring expense in the Consolidated Statements of Operations for the six months ended June 30, 2018 is approximately $0.8 million of non-cash charges related to accelerated share-based compensation for employee terminations.

Customer Deposits and Deferred Revenue

Customer deposits totaled $25.2 million and $41.5 million at June 30, 2018 and December 31, 2017, 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, 2017	$	70,536
Deferral of revenue	9,608
Recognition of previously deferred revenue	(31,867		)

Balance - June 30, 2018	$	48,277

As of June 30, 2018, the Company has approximately $91.4 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 74% 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

On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes (the “Convertible Senior Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The Convertible Senior 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 Convertible Senior Notes mature on January 15, 2023 (the “Maturity Date”), unless earlier purchased by the Company, redeemed, or converted.

The carrying value of the Convertible Senior Notes is as follows:

	June 30,			December 31,
	2018			2017
	(in thousands)
Principal amount	$	345,000		$	345,000
Unamortized debt discount	(57,779		)	(63,022		)
Unamortized transaction costs	(5,820		)	(6,348		)

Net carrying value	$	281,401		$	275,630

Total interest expense related to the Convertible Senior Notes is as follows:

	Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017
	(in thousands)
Cash Interest Expense
Coupon interest expense	$	2,329	$	2,329	$	4,658	$	4,244
Non-Cash Interest Expense
Amortization of debt discount	2,646		2,455		5,243		4,440
Amortization of transaction costs	266		247		528		447

Total Interest Expense	$	5,241	$	5,031	$	10,429	$	9,131

The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $304.3 million at June 30, 2018.

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 June 30, 2018 and December 31, 2017, plan assets approximated $3.5 million and $3.4 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 $4.0 million and $4.7 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities also include asset retirement obligations of $3.3 million at both June 30, 2018 and December 31, 2017, and medical and dental benefits of $2.1 million and $2.2 million, respectively.