Liabilities

9 Months Ended

Sep. 30, 2019

Liabilities

Liabilities

Note 4 — Liabilities

Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities at September 30, 2019 and December 31, 2018 consist of:

	September 30,		December 31,
	2019		2018
	(in thousands)
Payroll and related benefits	$	14,471	$	20,486
Warranty		7,552		7,852
Operating lease liabilities		4,730		—
Interest		1,992		4,321
Professional fees		2,794		2,897
Sales, use, and other taxes		1,497		2,670
Restructuring liability		1,617		2,213
Other		5,988		6,011
Total	$	40,641	$	46,450

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, 2019 include:

	(in thousands)
Balance - December 31, 2018	$	7,852
Warranties issued		4,551
Consumption of reserves		(4,517)
Changes in estimate		(334)
Balance - September 30, 2019	$	7,552

Restructuring Accruals

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 reductions of approximately 40 employees. During the nine months ended September 30, 2019, additional accruals were recognized and payments were made related to these restructuring initiatives.

The Company continued to record restructuring charges during the three and nine months ended September 30, 2019 as a result of the Company’s efforts to streamline operations, enhance efficiencies, and reduce costs. Changes in the restructuring accrual were as follows:

	Personnel		Facility
	Severance and		Related Costs
	Related Costs		and Other		Total
	(in thousands)
Balance - December 31, 2018	$	2,143	$	70	$	2,213
Provision		3,681		193		3,874
Payments		(4,207)		(263)		(4,470)
Balance - September 30, 2019	$	1,617	$	—	$	1,617

Customer Deposits and Deferred Revenue

Customer deposits totaled $31.6 million and $28.3 million at September 30, 2019 and December 31, 2018, 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, 2018	$	44,415
Deferral of revenue		4,717
Recognition of previously deferred revenue		(14,744)
Balance - September 30, 2019	$	34,388

As of September 30, 2019, the Company has approximately $49.5 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 86% 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:

	September 30,		December 31,
	2019		2018
	(in thousands)
Principal amount	$	345,000	$	345,000
Unamortized debt discount		(43,780)		(52,336)
Unamortized transaction costs		(4,410)		(5,272)
Net carrying value	$	296,810	$	287,392

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

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
Cash Interest Expense
Coupon interest expense	$	2,329	$	2,329	$	6,986	$	6,986
Non-Cash Interest Expense
Amortization of debt discount		2,906		2,697		8,556		7,940
Amortization of transaction costs		293		271		862		799
Total Interest Expense	$	5,528	$	5,297	$	16,404	$	15,725

The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $309.2 million at September 30, 2019.

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, 2019 and December 31, 2018, plan assets approximated $3.5 million and $3.2 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 $3.0 million and $3.5 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities also included medical and dental benefits of $2.0 million and $2.2 million at September 30, 2019 and December 31, 2018, respectively, and asset retirement obligations of $3.2 million and income tax payables of $1.0 million at both September 30, 2019 and December 31, 2018.