Liabilities

6 Months Ended

Jun. 30, 2020

Liabilities

Liabilities

Note 4 — Liabilities

Accrued Expenses and Other Current Liabilities

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

	June 30,		December 31,
	2020		2019
	(in thousands)
Payroll and related benefits	$	21,267	$	15,174
Warranty		5,518		7,067
Operating lease liabilities		4,104		4,196
Interest		3,750		4,321
Professional fees		1,171		2,443
Sales, use, and other taxes		2,533		811
Restructuring liability		1,233		2,841
Other		2,730		4,390
Total	$	42,306	$	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 six months ended June 30, 2020 include:

		(in thousands)
Balance - December 31, 2019	$	7,067
Warranties issued		1,614
Consumption of reserves		(3,280)
Changes in estimate		117
Balance - June 30, 2020	$	5,518

Restructuring Accruals

The Company continued to record 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 six months ended June 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 six months ended June 30, 2020, and the remaining accrued balance of restructuring costs at June 30, 2020, which is included 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		(2,705)
Balance - June 30, 2020	$	1,233

Customer Deposits and Deferred Revenue

Customer deposits totaled $39.9 million and $26.6 million at June 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		6,180
Recognition of previously deferred revenue		(16,054)
Balance - June 30, 2020	$	18,375

As of June 30, 2020, the Company has approximately $25.0 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 81% 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 three and six months ended June 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

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.

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:

		June 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		(25,816)		(33,773)		(59,589)		(40,820)		—		(40,820)
Unamortized transaction costs		(2,601)		(2,191)		(4,792)		(4,112)		—		(4,112)
Net carrying value	$	228,278	$	89,036	$	317,314	$	300,068	$	—	$	300,068

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

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in thousands)
Cash Interest Expense
Coupon interest expense - 2023 Notes	$	2,070	$	2,329	$	4,399	$	4,658
Coupon interest expense - 2027 Notes		573		—		573		—
Non-cash Interest Expense
Amortization of debt discount - 2023 Notes		2,729		2,851		5,746		5,650
Amortization of debt discount - 2027 Notes		425		—		425		—
Amortization of transaction costs - 2023 Notes		275		287		579		569
Amortization of transaction costs - 2027 Notes		28		—		28		—
Total Interest Expense	$	6,100	$	5,467	$	11,750	$	10,877

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 June 30, 2020 of $235.4 million and $141.5 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 June 30, 2020 and December 31, 2019, plan assets approximated $2.1 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 $2.2 million and $3.1 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities at both June 30, 2020 and December 31, 2019 also included medical and dental benefits for former executives of $2.0 million, asset retirement obligations of $3.2 million, and 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 $1.4 million at June 30, 2020, which is included within “Other liabilities” in the Consolidated Balance Sheets.