VEECO INSTRUMENTS INC (VECO)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

​

Introduction

​

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to facilitate an understanding of our business and results of operations. This MD&A should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. The following discussion contains forward-looking statements and should also be read in conjunction with the cautionary statement set forth at the beginning of this Form 10-K.

​

The following section generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2023 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed on February 16, 2024.

​

Executive Summary

​

We are an innovative manufacturer of semiconductor process equipment. Our proven ion beam, laser annealing, lithography, MOCVD, and single wafer wet processing 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.

​

Veeco executed well during 2024, accomplishing a number of milestones, including:

​

​

​

​

​

​

We believe these accomplishments position us well to capture our largest SAM growth opportunities in the coming years.

32

Table of Contents

Business Update

​

The Semiconductor industry has historically demonstrated cyclicality based on fluctuations in global chip demand and production capacity. Sales in the Semiconductor industry are estimated to have increased year-over-year in 2024 to around $650 billion dollars. Looking ahead, industry analysts are forecasting long-term growth of the industry, driven by secular growth trends such as artificial intelligence, high-performance computing, mobile connectivity, and the electrification of the automotive industry. Additionally, government investments in the Semiconductor industry are projected to accelerate global spending in next-generation technologies.

​

Growth in the Semiconductor industry, coupled with increasing technological complexity of Semiconductor chips, are expected to drive long-term growth in WFE spending. In an effort to improve chip performance, optimize power consumption, and reduce costs, today’s most advanced Semiconductor manufacturers are shrinking device geometries, investing in more complex transistor designs such as Gate-All-Around and exploring 3D architectures. As a result, growth of the WFE market is forecasted to keep pace with long-term growth of the Semiconductor industry, which we believe should benefit semiconductor capital equipment providers, including Veeco.

​

Our strategy of investing in advanced logic and memory has enabled our Semiconductor business to outperform WFE growth for four consecutive years. Veeco’s technologies are at the forefront of enabling new technical innovations in the manufacture of high-performance AI chips and High-Bandwidth Memory (“HBM”). We continue to invest in new technologies to expand our SAM to a broad range of new applications.

​

Semiconductor revenue increased by 13% in 2024 from the prior year, comprising 65% of total revenue. This increase was driven by our Laser Annealing business with both leading and mature node customers. Our laser annealing solutions continue to gain acceptance at advanced logic nodes, highlighted by recent order activity involving both new and existing customers. In 2024, we received laser annealing orders from, and shipped systems to several leading-edge logic customers, including for customers’ Gate-All-Around processes. We also shipped and recognized revenue on our first NSA system to a leading logic customer in the fourth quarter. In the memory market, we continue to ship systems to a Tier 1 customer for high volume production of HBM and advanced DRAM devices. While our growth strategy is predominately focused on advanced node logic and memory, LSA shipments to mature node customers have continued to increase in 2023 and 2024, predominantly driven by new greenfield fabs and capacity additions in China.

​

We have two next generation laser annealing systems under evaluation at Tier 1 foundry and logic customers. This next generation system, the NSA500, covers the nano-second annealing regime and complements our LSA product. This new system is part of our continued effort to enable our customers’ product roadmap by providing innovative annealing solutions. Nanosecond annealing provides Veeco with an opportunity to expand our laser annealing SAM for new advanced node logic and memory applications, including low thermal budget anneals for Gate-All-Around transistors and advanced 3D devices.

​

The ongoing adoption of EUV Lithography for advanced node semiconductor manufacturing continues to drive demand for our Ion Beam Deposition LDD system for mask blanks. Leading logic and memory customers expect EUV and High-Numerical Aperture (“High-NA”) lithography to be integral to their future roadmaps, which our Ion Beam Deposition technology is a key enabler of. Our product roadmap is well positioned as the industry adopts next-generation High-NA EUV lithography, and we are expanding our EUV related business to new mask blank applications.

​

We also have two Ion Beam Deposition “IBD300” systems under evaluation at leading memory customers. Our IBD300 system provides Veeco with another opportunity to expand our SAM to advanced node applications where low resistance films are critical. These initial systems are being evaluated for advanced memory applications, such as DRAM bitline.

​

33

Table of Contents

In Advanced Packaging, our Wet Processing systems are used for several applications, and we continue to see strong demand driven by Heterogenous Integration and 3D Packaging for AI. In the fourth quarter, we announced over $50 million in orders for our Wet Processing systems from a leading foundry, a HBM manufacturer, and OSATs. Our Advanced Packaging lithography systems are used for packaging applications such as fan out wafer level packaging and other advanced packaging solutions. After two years of slow order activity driven by consumer markets, we are beginning to see an increase in quoting and order activity from IDM’s, foundries, and OSAT’s driven by capacity expansions for AI and mobile markets.

​

Looking ahead, we anticipate seeing growth in leading-edge investment driven by new nodes and AI-related demand, including investment in Gate-All-Around nodes, High-Bandwidth Memory, and 3D packaging for AI. At the same time, recent engagement with customers in China has moderated, and we expect a decline in China revenue heading into 2025.

​

Veeco also serves customers in the Compound Semiconductor, Data Storage, and Scientific & Other markets. We address the Compound Semiconductor market with a broad portfolio of technologies, including Wet Processing, MOCVD, MBE and Ion Beam, for Power Electronics, Photonics, and 5G RF applications. Sales in the Compound Semiconductor market declined in 2024 from the prior year. Looking ahead, in the Silicon Carbide market, the slowdown in EV adoption has weakened demand as some customers continue their transition to 200mm production. Additionally, market penetration of our previously acquired Silicon Carbide technology has not met our expectations. In GaN Power, emerging use cases have driven some traditional silicon power electronics manufacturers to consider adoption of GaN at 300mm, and we have an evaluation system outstanding at a Tier 1 Power device customer. We are also seeing photonics opportunities in areas such as solar and MicroLEDs.

​

We address the Data Storage market with sales of our Ion Beam technology. Demand for our Ion Beam products is driven by demand for cloud-based storage. Revenue from our Data Storage products increased in 2024 as compared to the prior year. Looking ahead, while customer utilizations are improving, they remain well below peak levels from a few years ago and customers are not investing to expand new system capacity in 2025 as they bring idle capacity back on line. As a result, we expect an approximate $60 to $70 million reduction in revenue in our Data Storage business in 2025.

​

Sales in the Scientific & Other market are largely driven by sales to governments, universities, and research institutions. We address the Scientific & Other market with several technologies, including MBE, ALD, MOCVD, Wet Processing, and IBD/IBE, which support scientific, optical coating and other applications, and sales in this market declined slightly in 2024 from the prior year.

​

34

Table of Contents

Results of Operations

​

Years Ended December 31, 2024 and 2023

​

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2024 and 2023 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.

​

​

Net Sales

​

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

​

​

35

Table of Contents

Total sales increased for the year ended December 31, 2024 against the comparable prior year period in the Semiconductor and Data Storage markets, partially offset by a decrease in the Compound Semiconductor, and Scientific & Other markets. By geography, sales increased in the China, and Rest of APAC regions, partially offset by a decrease in the EMEA region. Included within the Rest of APAC region for the year ended December 31, 2024 were sales in Taiwan and Japan of $115.3 million and $67.4 million, respectively, while sales within Rest of APAC region for the year ended December 31, 2023 included sales in Japan, Taiwan, and Singapore of $74.7 million, $62.7 million, and $32.2 million, respectively. 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.

​

Gross Profit

​

In 2024, gross profit increased compared to 2023 primarily due to an increase in sales volume, partially offset by decreased gross margins. Gross margins decreased principally due to unfavorable product mix of sales and higher service costs. 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 increased in 2024 compared to 2023 primarily due to personnel-related expenses as we invest in new research and development and additional applications for our technology in order to be well-positioned to capitalize on emerging global megatrends and support longer term growth in Semiconductor and Compound Semiconductor markets. However, expenses as a percentage of revenue have remained flat when compared to the prior period.

​

Selling, General, and Administrative

​

Selling, general, and administrative expenses increased in 2024 compared to 2023. However, expenses as a percentage of revenue have remained flat when compared to the prior period. Given the uncertainty regarding the impacts on our business resulting from the general macroeconomic environment, we are focused on the proactive management of expenses.

​

Amortization Expense

​

Amortization expense decreased in 2024 compared to 2023 primarily due to changes in amortization expense to reflect expected cash flows of certain intangible assets, as well as certain other intangible assets becoming fully amortized in 2023.

​

Asset Impairment

​

During 2024, we recorded a non-cash impairment charge of $28.1 million related to intangible assets of our SiC technology acquired from Epiluvac in 2023, due to our market penetration not meeting expectations.

​

Other Operating Expense (Income), Net

​

Net other operating income in 2024 was primarily due to a $21.2 million reduction in the expected earn-out payments to be made to the previous shareholders of Epiluvac, as well as proceeds from the sale of productive assets.

​

Interest Income (Expense)

​

For the year ended December 31, 2024, we recorded net interest income of $1.9 million, compared to $1.2 million of net interest expense for the prior year. The increase in net interest income was primarily related to an increase of interest income of approximately $2.3 million due to a higher interest rate environment for 2024 compared to 2023.

36

Table of Contents

Additionally, the Company had a decrease of interest expense of approximately $0.7 million due to a reduction in convertible note and bank guarantee interest expenses.

​

Other Income (Expense)

​

For the year ended December 31, 2023, we recorded a loss on extinguishment of approximately $97.1 million related to the repurchase and retirement of approximately $206.0 million aggregate principal amount of our 2025 and 2027 Notes.

​

Income Taxes

​

Our income tax benefit for the year ended December 31, 2024, was $4.9 million, compared to income tax expense of $2.0 million for the prior year. The 2024 income tax benefit was primarily attributed to 1) $12.2 million of income tax benefits associated with asset impairments, 2) a $7.9 million income tax benefit related to research and development tax credits, and 3) a $5.1 million income tax benefit related to Foreign-Derived Intangible Income, partially offset by 4) a $20.3 million income tax expense related to pre-tax income from operations. The 2023 income tax expense of $2.0 million was primarily comprised of 1) a $16.2 million income tax expense related to pre-tax income from operations, and 2) a $2.0 million income tax expense related to share-based compensation, partially offset by 3) a $7.5 million income tax benefit related to Foreign-Derived Intangible Income, 4) a $7.7 million income tax benefit associated with research and development tax credits, and 5) a $1.0 million income tax benefit associated with the loss on extinguishment of convertible notes under Section 249 of the Internal Revenue Code of 1986, as amended (Section 249).

​

Liquidity and Capital Resources

​

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

​

​

A portion of our cash and cash equivalents is held by our subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. At December 31, 2024 and 2023, cash and cash equivalents of $45.1 million and $46.8 million, respectively, were held outside the United States. As of December 31, 2024, we had $21.2 million of accumulated undistributed earnings generated by our non-U.S. subsidiaries for which the U.S. repatriation tax has been provided. Approximately $9.6 million of undistributed earnings would be subject to foreign withholding taxes if distributed back to the United States and we accrued $1.2 million for foreign withholding taxes for the undistributed earnings.

​

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 required under our operating leases.

​

37

Table of Contents

A summary of the cash flow activity for the year ended December 31, 2024 and 2023 is as follows:

​

Cash Flows from Operating Activities

​

​

Net cash provided by operating activities was $63.8 million for the year ended December 31, 2024 and was due to net income of $73.7 million and adjustments for non-cash items of $60.8 million, partially offset by a decrease in cash flow from changes in operating assets and liabilities of $70.7 million. The changes in operating assets and liabilities were largely attributable to an increase in inventories largely related to higher work-in-process and evaluation systems at customer facilities, an increase in contract assets, and a decrease in contract liabilities.

​

Net cash provided by operating activities was $61.7 million for the year ended December 31, 2023 and was due to net loss of $30.4 million and adjustments for non-cash items of $150.5 million, partially offset by a decrease in cash flow from changes in operating assets and liabilities of $58.5 million. The changes in operating assets and liabilities were largely attributable to increases in inventories largely related to evaluation systems at customer facilities, contract assets, prepaid expenses and other current assets, and decreases in accounts payable, and contract liabilities.

​

Cash Flows from Investing Activities

​

​

The cash used in investing activities during the year ended December 31, 2024 was primarily attributable to net cash used for capital expenditures, and net investment activity, partially offset by proceeds from the sale of productive assets. The cash used in investing activities during the year ended December 31, 2023 was attributable to net cash used in the acquisition of Epiluvac, and capital expenditures, partially offset by changes in net investment activity.

​

38

Table of Contents

Cash Flows from Financing Activities

​

​

The cash used in financing activities for the year ended December 31, 2024 was related to cash used to settle taxes related to employee equity programs and a contingent consideration payment related to the Epiluvac acquisition, partially offset by cash received under the Employee Stock Purchase Plan. The net cash used in financing activities for the year ended December 31, 2023 was related to the partial repurchase of the 2025 Notes and 2027 Notes, repayment of the 2023 Notes, a contingent consideration payment related to the Epiluvac acquisition, as well as cash used to settle taxes related to employee equity programs, partially offset by proceeds from issuance of the 2029 Notes.

​

Convertible Senior Notes and Revolving Credit Facility

​

We have $26.5 million outstanding principal balance of 3.50% convertible senior notes that bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted. These 2025 Notes subsequently matured in January 2025 and were settled through the issuance of Company shares to the noteholders. In addition, we have $25.0 million outstanding principal balance of 3.75% convertible senior notes that bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted. These 2027 Notes are currently convertible by shareholders and callable by the Company until March 31, 2025. In addition, we have $230.0 million outstanding principal balance of 2.875% convertible senior notes that bear interest at a rate of 2.875% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2029, unless earlier purchased by the Company, redeemed, or converted.

​

Furthermore, we have access to a $225.0 million revolving credit facility to provide for our working capital needs and reimburse drawings under letters of credit and for other general corporate purposes. The Company has no immediate plans to draw down on the facility, which expires in December of 2026. Interest under the facility is variable based on the Company’s secured net leverage ratio and is expected to bear interest based on SOFR plus a range of 150 to 225 basis points, if drawn. There is a yearly commitment fee of 25 to 35 basis points, based on the Company’s secured net leverage ratio, charged on the unused portion of the Facility.

​

Contractual Obligations and Commitments

​

We have commitments under certain contractual arrangements to make future payments for goods and services, including purchase obligations of $177.4 million as of December 31, 2024 for inventory used in the manufacture of our products, as well as equipment and project materials used to support research and development activities. We generally do not enter into purchase commitments extending beyond one year. At December 31, 2024, we have $18.7 million of offsetting supplier deposits that will be applied against these purchase commitments. We expect to fund these contractual arrangements with cash generated from operations in the normal course of business, as well as existing cash and cash equivalents and short-term investments. In addition, we have bank guarantees and letters of credit issued by a financial institution on our behalf as needed. At December 31, 2024, outstanding bank guarantees and letters of credit totaled $18.1 million and unused bank guarantees and letters of credit of $21.6 million were available to be drawn upon.

​

39

Table of Contents

Lease Obligations

​

As of December 31, 2024, our operating lease obligation was $53.1 million relating to various operating lease arrangements for certain facilities. Refer to Note 10, “Commitments and Contingencies”, of the Notes to the Consolidated Financial Statements for further discussion related to our lease obligations.

​

We believe that we have sufficient capital resources and cash flows from operations to support the above mentioned short-term obligations.

​

Critical Accounting Estimates

​

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. We continuously evaluate our estimates and judgments based on historical experience, as well as other factors that we believe to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates.

​

We consider the following estimates within our significant accounting policies to be critical because of their complexity and the high degree of judgment involved in maintaining them. See Note 1 Significant Accounting Policies of our Consolidated Financial Statements for additional information regarding our accounting policies.

​

Revenue Recognition

​

We recognize revenue upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration we expect to receive in exchange for such product or service. We perform the following five steps to determine when to recognize revenue: (1) identification of the contract(s) with customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied. Management uses judgements in identifying performance obligations, determining stand-alone selling price (“SSP”) for each distinct performance obligation and allocating consideration from an arrangement to the individual performance obligations based on the SSP. The SSPs are determined based on the prices at which we separately sell systems, upgrades, components, spare parts, installation, maintenance, and service plans. For items that are not sold separately, we estimate SSPs generally using an expected cost plus margin approach. Any material changes in the identification of performance obligations, determination and allocation of the transaction price to performance obligations, and determination of when transfer of control occurs to the customer, could impact the timing and amount of revenue recognition, which could have a material effect on our financial condition and results of operations.

​

Inventory Valuation

​

Inventories are stated at the lower of cost and net realizable value, with cost determined on a first-in, first-out basis. Each quarter we assess the valuation and recoverability of all inventories: materials (raw materials, spare parts, and service inventory); work-in-process; finished goods; and evaluation inventory at customer facilities. Obsolete inventory or inventory in excess of our estimated usage requirements is written down to its estimated net realizable value if less than cost. We evaluate usage requirements by analyzing historical usage, anticipated demand, alternative uses of materials, and other qualitative factors. Unanticipated changes in demand for our products may require a write down of inventory that could materially affect our operating results.

​

40

Table of Contents

Long-lived Assets

​

The carrying values of long-lived assets, including identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, a recoverability test is performed utilizing undiscounted cash flows expected to be generated by that asset or asset group compared to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models or, when available, quoted market values and third-party appraisals. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude of any impairment. Intangible assets with finite useful lives, including purchased technology, customer-related intangible assets, patents, trademarks, backlog, and software licenses, are subject to amortization over the expected period of economic benefit to us. We evaluate whether events or circumstances have occurred that warrant a revision to the remaining useful lives of intangible assets. In cases where a revision is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the revised remaining useful life.

​

Income Taxes

​

We estimate our income taxes in each of the jurisdictions in which we operate. The calculation of our provision for income taxes and effective tax rate involves significant judgment in estimating the impact of uncertainties in the application of complex and evolving tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial condition. Deferred income taxes reflect the net tax effect of temporary differences between the asset and liability balances recognized for financial reporting purposes and the balances used for income tax purposes, as well as the tax effect of carry forwards. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. These estimates consider future operational results including realizability of our deferred tax assets. Deferred tax assets and liabilities are adjusted to reflect the effects of enacted changes in tax rates, laws and status, including changes in tax incentives.

​

Recent Accounting Pronouncements

​

We adopted ASU 2020-06 effective January 1, 2022 and ASU 2023-07 effective December 31, 2024. We are also evaluating other pronouncements recently issued but not yet adopted, including ASU 2023-09 and ASU 2024-03. The adoption of these pronouncements is not expected to have a material impact on our consolidated financial statements. Refer to Note 1, “Significant Accounting Policies,” for additional information.

​

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

​

Executive Summary

​

We are an innovative manufacturer of semiconductor process equipment. Our proven ion beam, laser annealing, lithography, MOCVD, CVD, and single wafer wet processing 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.

​

The Veeco United team executed well during 2023, accomplishing a number of milestones, including:

​

​

​

​

​

​

​

We believe these accomplishments enabled us to exit 2023 well positioned to execute on our growth plans for 2024.

​

Business Update

​

Macroeconomic challenges across the industry have been well publicized, including an inflationary and high-interest rate environment, heightened China export regulations, uncertainty in the banking industry, and an uncertain outlook in the semiconductor and related markets due to softness in consumer, smartphone and PC applications, all of which are contributing to increased uncertainty.

​

Furthermore, on October 17, 2023, the US Department of Commerce, Bureau of Industry and Security (“BIS”), issued an update to export regulations previously issued on October 7, 2022, to modify and reinforce the prior restrictions while placing additional entities on the BIS Entity List. While these new regulations have not had a material impact to our business, the export regulation landscape is fluid and evolving, and it is possible that the issuance of additional export controls could further restrict our ability to sell to customers in China and lead to future revenue loss. If we are not able to replace these sales with sales to other customers, it could have a material adverse impact on our business and financial position.

​

33

Table of Contents

Finally, we continue to see reduced demand for certain products such as advanced packaging lithography, spare parts, and upgrades due to low customer utilization rates, as well as instances where customers have requested order cancellations, delayed shipments, or delayed payments. Consequently, we are monitoring the situation very closely and have been taking early actions to limit the pace at which we increase spending while maintaining our growth trajectory. We also have seen improvements in our supply chain, as evidenced by a significant decline in lead times and a further improvement to suppliers on time deliveries. Material lead times have improved significantly and have generally returned to pre-pandemic levels. We will continue to work with our suppliers to identify and mitigate potential gaps in an effort to ensure continuity of supply, as well as continue to focus our efforts on cost containment initiatives.

​

While we work to overcome these macroeconomic challenges, we continue to serve our customers in the following four end markets: Semiconductor; Compound Semiconductor; Data Storage; and Scientific & Other.

​

Sales in the Semiconductor market grew 12% in 2023, driven by our laser annealing systems for both advanced and mature node devices. While our growth strategy is predominately focused on advanced node logic and memory applications, 2023 revenue has been strong for mature node applications in China. We continue to build momentum for our laser annealing solutions in advanced node logic by winning application steps and new customers. In 2023, we penetrated our 3rd Tier 1 logic customer and shipped multiple systems to this customer. As it relates to the memory market, we announced that a Tier 1 memory customer placed several LSA orders for high volume production of High Bandwidth Memory (“HBM”) and advanced DRAM devices following a successful evaluation program, and we shipped several systems to this customer in 2023. Our Laser Annealing roadmap reached a key milestone during the fourth quarter upon shipment of our first two Nanosecond Annealing evaluation systems to Tier 1 logic customers. Nanosecond annealing provides Veeco with an opportunity to expand laser annealing adoption for new advanced node applications. The ongoing adoption of EUV Lithography for advanced node semiconductor manufacturing continues to drive demand for our Ion Beam mask blank deposition systems. We reached another significant milestone in the fourth quarter upon shipment of our first two IBD300 evaluation systems to Tier 1 memory customers for 300mm front end semiconductor applications. Additionally, our lithography systems for Advanced Packaging are used for packaging approaches such as fan out wafer level packaging and other advanced packaging applications, while our wet processing systems are used for Photoresist Strip, Solvent Cleans, and flux removal. Overall, our technology and market strategy are well aligned with trends such as artificial intelligence, mobile connectivity and high-performance computing that drive the Semiconductor market. Given our current backlog and visibility, we expect Semiconductor revenue to be up in 2024.

​

We address the Compound Semiconductor market with a broad portfolio of technologies, including Wet Processing and MOCVD, along with MBE and Ion Beam, in emerging applications such as 5G driven RF device/filter manufacturing, GaN power electronics, and photonics applications including edge-emitting lasers, specialty LEDs and micro-LEDs. Sales in the Compound Semiconductor market declined by 28% in 2023, driven by a decline in systems for 5G driven RF device/filter manufacturing. We continue to invest for future growth in the Compound Semiconductor market in areas like Power Electronics and Micro-LED. Power Electronics markets are served by GaN equipment, and also by SiC epitaxy equipment. We are working to penetrate the GaN power market, which is driven by applications such as wireless charging in consumer electronics. In addition to our GaN system offerings, on January 31, 2023 Veeco acquired SiC technology to address the high-growth SiC power epitaxy equipment market, which is primarily driven by adoption of electric vehicles. With this acquisition, Veeco is accelerating its entry into this market. We expect revenue in the Compound Semi market to grow in 2024.

​

Sales in the Data Storage market increased slightly in 2023. Demand for our Ion Beam products is driven by cloud-based storage. As reported, the hard disk drive industry experienced contraction in exabyte shipments in 2022 and 2023 with uncertainty as to the timing of a recovery; however, recent analyst and industry forecasts predict nearline hard disk drive exabyte shipments to grow at an approximate 20% CAGR over the coming years from a lower base in 2023 due to long-term growth in the cloud. Despite current industry challenges, we expect revenue in the Data Storage market to be flat to up in 2024.

​

Sales in the Scientific & Other market are largely driven by sales to governments, universities, and research institutions. We address the Scientific & Other market with several technologies, including MBE, ALD, MOCVD, Wet Processing, & IBD/IBE, which support scientific, optical coating and other applications, such as Micro-Electromechanical Systems

34

Table of Contents

(MEMS) applications. Sales in this market increased as compared to the prior quarter and the prior year quarter. We expect sales in this market to grow in the long run, in line with GDP.

​

Results of Operations

​

Years Ended December 31, 2023 and 2022

​

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2023 and 2022 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.

​

​

Net Sales

​

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

​

​

35

Table of Contents

Total sales increased for the year ended December 31, 2023 against the comparable prior year period in the Semiconductor and Scientific & Other markets, partially offset by a decline in the Compound Semiconductor market. By geography, sales increased in the China region, partially offset by a decrease in the United States, EMEA, and Rest of APAC regions. Included within the Rest of APAC region for the year ended December 31, 2023 were sales in Japan, Taiwan, and Singapore of $74.7 million, $62.7 million, and $32.2 million, respectively, while sales within Rest of APAC region for the year ended December 31, 2022 included sales in sales in Taiwan, South Korea, Singapore, and Japan of $105.0 million, $40.3 million, $38.4 million, and $30.8 million, respectively. 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.

​

Gross Profit

​

In 2023, gross profit increased compared to 2022 primarily due to an increase in sales volume and higher gross margins. Gross margins increased due to product mix of sales in the period, as well as favorable service spending. 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 increased in 2023 compared to 2022 primarily due to personnel-related expenses as we invest in new research and development and additional applications for our technology in order to be well-positioned to capitalize on emerging global megatrends and support longer term growth in Semiconductor and Compound Semiconductor markets.

​

Selling, General, and Administrative

​

Selling, general, and administrative expenses increased slightly in 2023 compared to 2022. However, expenses as a percentage of revenue have remained flat when compared to the prior period. Given the uncertainty regarding the impacts on our business resulting from the general macroeconomic environment, we are focused on the proactive management of expenses.

​

Amortization Expense

​

Amortization expense decreased in 2023 compared to 2022 primarily due to changes in amortization expense to reflect expected cash flows of certain intangible assets, as well as certain other intangible assets becoming fully amortized in 2022.

​

Interest Income (Expense)

​

For the year ended December 31, 2023, we recorded net interest expense of $1.2 million, compared to $9.3 million for the comparable prior period. The decrease in net interest expense was primarily related to an increase of interest income of approximately $8.4 million due to higher interest rates for 2023 compared to 2022.

​

Other Income (Expense)

​

On May 19, 2023, in connection with the completion of a private offering of $230.0 million aggregate principal amount of 2.875% convertible senior notes, we repurchased and retired approximately $106.0 million in aggregate principal amount of our outstanding 2025 Notes, with a carrying amount of $105.4 million, for approximately $106.0 million of cash and 0.7 million shares of our common stock for the 2025 Notes. Also, we repurchased and retired approximately $100.0 million in aggregate principal amount of our outstanding 2027 Notes with a carrying amount of $98.5 million, for approximately $92.8 million of cash and 3.8 million shares of our common stock for the 2027 Notes. We accounted for the partial settlement of the 2025 Notes and 2027 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $16.5 million and $80.6 million, respectively, for the year ended December 31, 2023.

36

Table of Contents

​

Income Taxes

​

At each reporting date, we consider new evidence, both positive and negative, that could affect our view of the future realization of our deferred tax assets. As of December 31, 2023, we achieved three years of cumulative pretax income for our United States (“domestic”) operations. In addition, we evaluated additional positive evidence and concluded that it is more likely than not our deferred tax assets are realizable on a more likely than not basis with the exception of certain state tax attributes.

​

The 2023 income tax expense of $2.0 million was primarily comprised of 1) a $16.2 million income tax expense on pre-tax income from operations; and 2) a $2.0 million income tax expense related to share-based compensation, partially offset by 3) a $7.5 million tax benefit related to Foreign-Derived Intangible Income; 4) a $7.7 million tax benefit associated with research and development tax credits; and 5) a $1.0 million tax benefit associated with the loss on extinguishment of convertible notes under Section 249 of the Internal Revenue Code of 1986, as amended (Section 249).

​

The 2022 income tax benefit of $116.0 million was primarily comprised of a $117.0 million domestic tax benefit primarily in connection with release of $105.5 million valuation allowance, partially offset by a $1.0 million income tax expense related to our foreign operations.

​

Years Ended December 31, 2022 and 2021

​

See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 22, 2023, for Management’s Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2021.

​

Liquidity and Capital Resources

​

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

​

​

A portion of our cash and cash equivalents is held by our subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. At December 31, 2023 and 2022, cash and cash equivalents of $46.8 million and $28.4 million, respectively, were held outside the United States. As of December 31, 2023, we had $22.0 million of accumulated undistributed earnings generated by our non-U.S. subsidiaries for which the U.S. repatriation tax has been provided. Approximately $7.7 million of undistributed earnings would 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.

​

37

Table of Contents

A summary of the cash flow activity for the year ended December 31, 2023 and 2022 is as follows:

​

Cash Flows from Operating Activities

​

​

Net cash provided by operating activities was $61.7 million for the year ended December 31, 2023 and was due to net loss of $30.4 million and adjustments for non-cash items of $150.5 million, partially offset by a decrease in cash flow from changes in operating assets and liabilities of $58.5 million. The changes in operating assets and liabilities were largely attributable to increases in inventories largely related to evaluation systems at customer facilities, contract assets, prepaid expenses and other current assets, and decreases in accounts payable, and contract liabilities.

​

Net cash provided by operating activities was $108.5 million for the year ended December 31, 2022 and was due to net income of $166.9 million and an increase in cash flow from operating activities due to changes in operating assets and liabilities of $10.0 million, partially offset by adjustments for non-cash items of $68.5 million. The changes in operating assets and liabilities was largely attributable to an increase in contract liabilities, partially offset by an increase in inventories and accounts receivables.

​

Cash Flows from Investing Activities

​

​

The cash used in investing activities during the year ended December 31, 2023 was primarily attributable to net cash used in the acquisition of Epiluvac, and capital expenditures, partially offset by changes in net investment activity. The cash used in investing activities during the year ended December 31, 2022 was attributable to the net change in investments, as well as capital expenditures.

​

38

Table of Contents

Cash Flows from Financing Activities

​

​

The cash used in financing activities for the year ended December 31, 2023 was related to the partial repurchase of the 2025 Notes and 2027 Notes, repayment of the 2023 Notes, contingent consideration payment related to the Epiluvac acquisition, as well as cash used to settle taxes related to employee equity programs, partially offset by proceeds from issuance of the 2029 Notes. The net cash used in financing activities for the year ended December 31, 2022 was primarily related to the settlement of equity awards.

​

Convertible Senior Notes and Revolving Credit Facility

​

We have $26.5 million outstanding principal balance of 3.50% convertible senior notes that bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted. In addition, we have $25.0 million outstanding principal balance of 3.75% convertible senior notes that bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted. The 2027 Notes are currently convertible by shareholders until March 31, 2024. In addition, we have $230.0 million outstanding principal balance of 2.875% convertible senior notes that bear interest at a rate of 2.875% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2029, unless earlier purchased by the Company, redeemed, or converted.

​

We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on these debts. In addition, we have access to a $150.0 million revolving credit facility (including an ability to request an additional $75.0 million, for a total commitment of no more than $225.0 million) to provide for our working capital needs and reimburse drawings under letters of credit and for other general corporate purposes. The Company has no immediate plans to draw down on the facility, which expires in December of 2026. Interest under the Facility is variable based on the Company’s secured net leverage ratio and is expected to bear interest based on SOFR plus a range of 150 to 225 basis points, if drawn. There is a yearly commitment fee of 25 to 35 basis points, based on the Company’s secured net leverage ratio, charged on the unused portion of the Facility.

​

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, as well as existing cash and cash equivalents and short-term investments. In addition, we have bank guarantees and letters of credit issued by a financial institution on our behalf as needed. At December 31, 2023, outstanding bank guarantees and letters of credit totaled $19.6 million and unused bank guarantees and letters of credit of $13.0 million were available to be drawn upon.

​

39

Table of Contents

The following table summarizes our contractual arrangements at December 31, 2023 and the timing and effect that those commitments are expected to have on our liquidity and cash flow in future periods.

​

​

Critical Accounting Policies and Estimates

​

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. We continuously evaluate our estimates and judgments based on historical experience, as well as other factors that we believe to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates.

​

We consider the following significant accounting policies to be critical because of their complexity and the high degree of judgment involved in maintaining them.

​

Revenue Recognition

​

We recognize revenue upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration we expect to receive in exchange for such product or service. We perform the following five steps to determine when to recognize revenue: (1) identification of the contract(s) with customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied. Judgment is used in the following areas in the determination of when to recognize revenue:

​

​

40

Table of Contents

​

​

​

Any material changes in the identification of performance obligations, determination and allocation of the transaction price to performance obligations, and determination of when transfer of control occurs to the customer, could impact the timing and amount of revenue recognition, which could have a material effect on our financial condition and results of operations.

​

Inventory Valuation

​

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Each quarter we assess the valuation and recoverability of all inventories: materials (raw materials, spare parts, and service inventory); work-in-process; finished goods; and evaluation inventory at customer facilities. Obsolete inventory or inventory in excess of our estimated usage requirements is written down to its estimated net realizable value if less than cost. We evaluate usage requirements by analyzing historical usage, anticipated demand, alternative uses of materials, and other qualitative factors. Unanticipated changes in demand for our products may require a write down of inventory that could materially affect our operating results.

​

Goodwill and Intangible Assets

​

Goodwill is tested for impairment at least annually in the beginning of the fourth quarter of our fiscal year, which may require significant judgment. We may first perform a qualitative assessment of whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount, and, if so, we then quantitatively compare the fair value of our reporting unit to its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired. If the carrying amount of the reporting unit exceeds its fair value, we then record an impairment loss equal to the difference, up to the carrying value of goodwill.

​

We determine the fair value of our reporting unit based on a reconciliation of the aggregate fair value of our reporting unit to our adjusted market capitalization. The adjusted market capitalization is calculated by multiplying the average share price of our common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium. The determination of a reasonable control premium may require significant judgment and is estimated using historical transactions in similar industries.

​

41

Table of Contents

The carrying values of long-lived assets, including identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, a recoverability test is performed utilizing undiscounted cash flows expected to be generated by that asset or asset group compared to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models or, when available, quoted market values and third-party appraisals. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude of any impairment.

​

Intangible assets with finite useful lives, including purchased technology, customer-related intangible assets, patents, trademarks, backlog, and software licenses, are subject to amortization over the expected period of economic benefit to us. We evaluate whether events or circumstances have occurred that warrant a revision to the remaining useful lives of intangible assets. In cases where a revision is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the revised remaining useful life.

​

Intangible assets related to in-process research and development (“IPR&D”) projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, the associated assets would be deemed long-lived and would then be amortized based on their respective estimated useful lives at that point in time. Indefinite-lived intangible assets are tested for impairment at least annually in the beginning of the fourth quarter of our fiscal year. In testing indefinite-lived intangible assets for impairment, we may first perform a qualitative assessment of whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, and, if so, we then quantitatively compare the fair value of the indefinite-lived intangible asset to its carrying amount. We determine the fair value of our indefinite-lived intangible assets using a discounted cash flow method.

​

Accounting for Business Combinations

​

We allocate the fair value of the purchase price of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their fair value at acquisition date. The excess of the fair value of the purchase price over the fair value of these net tangible and intangible assets acquired is recorded as goodwill. Management’s estimates of fair value are based on assumptions believed to be reasonable, but such estimates and assumptions are inherently uncertain and subject to refinement. We believe assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from management of the acquired companies, and inherently uncertain. The Company uses a discounted cash flow model to estimate the fair value of acquired intangible assets. Additionally, the Company estimates the fair value of contingent consideration included as part of the purchase price by assigning probabilities and discount factors to each of the various defined performance milestones, while using a Monte-Carlo simulation model to determine the most likely outcome for payments to be based on value of orders received. These valuation models utilize critical estimates, including, but not limited to, estimates of future revenues, gross margins, operating expenses, and cash flows, as well as discount rates that reflect the risk factors associated with the projected cash flows. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actuals results.

​

Income Taxes

​

We estimate our income taxes in each of the jurisdictions in which we operate. Deferred income taxes reflect the net tax effect of temporary differences between the asset and liability balances recognized for financial reporting purposes and the balances used for income tax purposes, as well as the tax effect of carry forwards. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Realization of our net deferred tax assets is dependent on future taxable income.

​

42

Table of Contents

We recognize the effect of income tax positions for only those positions which are estimated to more likely than not be sustained if challenged. We reflect changes in recognition or measurement in the period in which our change in judgment occurs. We record interest and penalties related to uncertain tax positions in income tax expense. Income taxes related to the global intangible low-taxed income (“GILTI”) rules are expensed as incurred.

​

Recent Accounting Pronouncements

​

We adopted ASU 2020-06 effective January 1, 2022. We are also evaluating other pronouncements recently issued but not yet adopted, including ASU 2023-09. The adoption of these pronouncements is not expected to have a material impact on our consolidated financial statements. Refer to Note 1, “Significant Accounting Policies,” for additional information.

​

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

​

Executive Summary

​

We are an innovative manufacturer of semiconductor process equipment. Our proven ion beam, laser annealing, lithography, MOCVD and single wafer wet processing 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.

​

The Veeco United team executed well in a challenging environment during 2022, accomplishing a number of milestones, including:

​

​

​

​

​

​

These accomplishments enabled us to exit 2022 well positioned to execute on our growth plans for 2023.

​

Business Update

​

Macroeconomic challenges across the industry have been well publicized, including supply chain constraints, an inflationary environment with a potential recession ahead, new China-export regulations, and a forecasted decline in the semiconductor and related markets due to softness in consumer, smartphone and PC applications, all of which are contributing to a difficult environment with increased uncertainty.

​

Longer lead times and parts shortages and allocations have required that we plan further ahead than usual, and we have undertaken efforts to increase our purchase commitments to secure critical components in a timely manner. Material lead times continue to be a challenge with respect to our supply chain, limiting our ability to fulfill some of our customers’ demands in a timely manner, as many of our peers have also been experiencing. We are also experiencing increasing labor, logistics, and material costs, creating additional gross margin pressures. We expect supply shortages and related challenges to persist into 2023, and we continue to monitor our supply chain and work with our suppliers to identify and mitigate potential gaps in an effort to ensure continuity of supply.

​

Additionally, we have seen a slow-down in certain shorter lead time products such as wet processing, advanced packaging lithography, and spare parts and upgrades, as well as instances where customers have requested order cancellations, delayed shipments, or delayed payments. Consequently, we are monitoring the situation very closely and have been taking early actions to limit the pace at which we increase spending while maintaining our growth trajectory.

​

Furthermore, the US Department of Commerce, Bureau of Industry and Security (“BIS”), issued additional China-export regulations on October 7, 2022, which broadened the requirements under which export licenses will be required, with a presumption of denial as to their issuance. In addition, certain China-based companies were added to the BIS Unverified

31

Table of Contents

List, and changes have been made to the BIS Entity List, further restricting sales to the named entities. Recent order activity has led to significant backlog in China, some of which may be subject to these regulations. While the export regulation landscape is fluid and evolving, we believe at this time that the substantial majority of this backlog will not be negatively affected by the new regulations.

​

Finally, like many in our industry, we continue to manage through the effects of the COVID-19 pandemic. While new variants of COVID-19 have emerged and additional variants may emerge in the future, we continue to proactively implement precautionary measures if and when necessary to keep our workplaces healthy and safe. Our top priority steadfastly remains protecting the health and safety of our employees, customers, suppliers and community.

​

While our actions 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 these measures to continue until we determine that the COVID-19 pandemic is adequately contained for purposes of our operations, and we may take further actions as government authorities require or as we determine to be in the best interests of our employees, customers, suppliers and community. We may incur additional expenses in future periods in response to the pandemic, which could adversely affect our operations and financial condition.

​

While we work to overcome these macroeconomic challenges, we continue to serve our customers in the following four end-markets: Semiconductor; Compound Semiconductor; Data Storage; and Scientific & Other.

​

Sales in the Semiconductor market grew 50% in 2022 and were driven by our laser annealing systems for both advanced and trailing node logic devices, ion beam deposition systems for EUV mask blank production, and lithography systems for Advanced Packaging. We continue to build momentum for our laser annealing solutions with advanced node logic customers by winning application steps with leading manufacturers. We have also been receiving orders and shipping systems for trailing node applications in China and other regions. In addition to logic, we introduced laser annealing to the memory market and received an acceptance for an evaluation system at a DRAM manufacturer. Our lithography systems for Advanced Packaging are aligned with packaging approaches such as fan out wafer level packaging and other advanced packaging applications. Additionally, the ongoing adoption of EUV Lithography for advanced node semiconductor manufacturing continues to drive demand for our Ion Beam mask blank systems. Overall, our technology and market strategy are well aligned with trends such as artificial intelligence, mobile connectivity and high-performance computing that drive the Semiconductor market. Given recent order activity and current backlog in the Semiconductor market, we expect revenue in 2023 to outpace (“WFE”) spending growth, which is forecasted to be down 20% or more. Finally, we have completed our new San Jose leased facility buildout, and have fully transitioned to this new location.

​

We address the Compound Semiconductor market with a broad portfolio of technologies, including Wet Processing and MOCVD, along with MBE and Ion Beam, all of which have been developed to support emerging applications such as 5G driven RF device/filter manufacturing, GaN power electronics, and photonics applications including edge-emitting lasers, specialty LEDs and micro-LEDs. Sales in the Compound Semiconductor market grew 13% in 2022. We experienced growth in system shipments for photonics applications. We continue to invest for future growth in the Compound Semiconductor market in areas like power electronics and Micro-LEDs. Power electronics markets are served by GaN equipment, and also by SiC epitaxy equipment. We are working to penetrate the GaN power market, which is driven by applications such as wireless charging in consumer electronics. In addition to our GaN system offerings, on January 31st, 2023 Veeco acquired SiC technology to address the high-growth SiC power epitaxy equipment market, which is driven by electric vehicles. With this acquisition, Veeco is accelerating its entry into this market, and expects revenue in 2024. The purchase price for the transaction, all payable in cash, was $30 million paid at the time of closing with a potential additional $35 million in performance based earn-outs.

​

After several years of growth, sales in the Data Storage market were down 48% in 2022. Demand for our Ion Beam products is driven by cloud-based storage. Hard disk drive manufacturers are manufacturing drives with an increasing number of magnetic heads and they are introducing advanced technologies which require increased capital intensity. With data proliferation forecasted to continue to grow, and based on orders we received in 2022, we feel optimistic about the long-term prospects of our data storage business.

32

Table of Contents

​

Sales in the Scientific & Other market are largely driven by sales to governments, universities, and research institutions. Revenue was up 12% in 2022 compared to 2021, and we expect sales in this market to grow modestly in the long run, in line with GDP.

​

Overall, given our strong backlog in the semiconductor, data storage and scientific markets, offset by near-term weakness in compound semiconductor, we expect total 2023 revenue to be in the range of $630 million to $670 million.

​

Results of Operations

​

Years Ended December 31, 2022 and 2021

​

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2022 and 2021 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.

​

​

33

Table of Contents

Net Sales

​

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

​

​

Total sales increased for the year ended December 31, 2022 against the comparable prior year period in the Semiconductor, Compound Semiconductor, and Scientific & Other markets, partially offset by a decline in the Data Storage market. By geography, sales increased in the EMEA, China, and Rest of APAC regions, partially offset by a decrease in the United States. Included within the Rest of APAC region for the year ended December 31, 2022 were sales in Taiwan, South Korea, Singapore, and Japan of $105.0 million, $40.3 million, $38.4 million, and $30.8 million, respectively, while sales within Rest of APAC region for the year ended December 31, 2021 included sales in Taiwan and South Korea of $65.2 million and $50.4 million, respectively. 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.

​

Gross Profit

​

In 2022, gross profit increased compared to 2021 primarily due to an increase in sales volume, partially offset by decreased gross margins. Gross margins decreased principally due to increased logistics costs, as well as an increase in spending as we invested in service infrastructure and capacity expansion to meet the growing demands for our semiconductor product lines. 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 increased in 2022 compared to 2021 primarily due to personnel-related expenses as we invest in new research and development and additional applications for our technology in order to be well positioned to capitalize on emerging global megatrends and support longer term growth in Semiconductor and Compound Semiconductor markets.

​

Selling, General, and Administrative

​

Selling, general, and administrative expenses increased in 2022 compared to 2021 primarily due to higher variable expenses associated with the increase in revenue, profitability, and order in-take. Given 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

34

Table of Contents

responses to the COVID-19 pandemic. In addition, we experienced some duplicate operating expenses for the transition from our existing facility in San Jose, California to our new leased facility, which is substantially complete at this time.

​

Amortization Expense

​

Amortization expense decreased in 2022 compared to 2021 primarily due to changes in amortization expense to reflect expected cash flows of certain intangible assets, as well as certain other intangible assets becoming fully amortized in 2022.

​

Interest Income (Expense)

​

For the year ended December 31, 2022, we recorded net interest expense of $9.3 million, compared to $26.0 million for the comparable prior period. The decrease in interest expense was primarily related to the adoption of ASU 2020-06, as non-cash charges related to the amortization of debt discount and transaction costs of the 2023 Notes, 2025 Notes, and 2027 Notes decreased approximately $12.9 million for 2022 compared to 2021. Additionally, cash interest expense on the Notes decreased approximately $2.6 million from the comparable prior year due to the partial repurchase of the 2023 Notes in November 2021.

​

Other Income (Expense)

​

On November 5, 2021, we entered into a privately negotiated note purchase agreement with a holder of our outstanding 2023 Notes, under which we agreed to repurchase and retire approximately $111.5 million in aggregate original principal amount of the 2023 Notes, with a carrying amount of $105.5 million, for cash consideration of approximately $115.6 million, and approximately $1.0 million of accrued and unpaid interest. We accounted for the partial settlement of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $4.0 million for the year ended December 31, 2021. In addition, we recorded a non-cash impairment charge of approximately $1.0 million related to an equity investment without a readily observable market price.

​

Income Taxes

​

At each reporting date, we consider new evidence, both positive and negative, that could affect our view of the future realization of our deferred tax assets. As of December 31, 2022, we achieved three years of cumulative pretax income for our United States (“domestic”) operations. In addition, we evaluated additional positive evidence and concluded that it is more likely than not our deferred tax assets are realizable on a more likely than not basis with the exception of certain state tax attributes.

​

The 2022 income tax benefit of $116.0 million was primarily comprised of a $117.0 million domestic tax benefit primarily in connection with release of $105.5 million valuation allowance, partially offset by a $1.0 million income tax expense related to our foreign operations.

​

The 2021 income tax benefit of $0.4 million is comprised of a $0.7 million income tax benefit related to the reduction of uncertain tax positions based upon settlements with tax authorities, partially offset by a $0.3 million income tax expense attributable to the foreign income taxes and foreign withholding taxes.

​

Years Ended December 31, 2021 and 2020

​

See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 18, 2022, for Management’s Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2020.

35

Table of Contents

​

Liquidity and Capital Resources

​

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

​

​

A portion of our cash and cash equivalents is held by our subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. At December 31, 2022 and 2021, cash and cash equivalents of $28.4 million and $38.3 million, respectively, were held outside the United States. As of December 31, 2022, we had $17.8 million of accumulated undistributed earnings generated by our non-U.S. subsidiaries for which the U.S. repatriation tax has been provided. Approximately $7.8 million of undistributed earnings would 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.

​

A summary of the cash flow activity for the year ended December 31, 2022 and 2021 is as follows:

​

Cash Flows from Operating Activities

​

​

Net cash provided by operating activities was $108.5 million for the year ended December 31, 2022 and was due to net income of $166.9 million and an increase in cash flow from operating activities due to changes in operating assets and liabilities of $10.0 million, partially offset by adjustments for non-cash items of $68.5 million. The changes in operating assets and liabilities was largely attributable to an increase in customer deposits, partially offset by an increase in inventories and accounts receivables.

​

Net cash provided by operating activities was $67.7 million for the year ended December 31, 2021 and was due to net income of $26.0 million and adjustments for non-cash items of $59.5 million, partially offset by a decline in cash flow from operating activities due to changes in operating assets and liabilities of $17.8 million. The changes in operating assets and liabilities was largely attributable to increases in accounts receivable and inventories and decreases in deferred revenue, partially offset by increases in accounts payable and cash received for landlord reimbursements for leasehold improvements.

​

36

Table of Contents

Cash Flows from Investing Activities

​

​

The net cash used in investing activities during the year ended December 31, 2022 was attributable to the net change in investments, as well as capital expenditures. The net cash provided by investing activities during the year ended December 31, 2021 was attributable to the net change in investments, partially offset by capital expenditures. We experienced a high level of capital expenditures during 2021 associated with the continued build-out of our newly leased facility in San Jose, California, which is substantially complete at this time.

​

Cash Flows from Financing Activities

​

​

The net cash used in financing activities for the year ended December 31, 2022 was primarily related to the settlement of equity awards. The net cash used in financing activities for the year ended December 31, 2021 was primarily related to the cash used to repurchase $111.5 million principal amount of our 2023 Notes as well as the settlement of equity awards.

​

Convertible Senior Notes and Revolving Credit Facility

​

We have $20.2 million outstanding principal balance of 2.70% convertible senior notes that bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted. These notes matured on January 15, 2023 and were paid in cash and settled by the Company at that time. In addition, we have $132.5 million outstanding principal balance of 3.50% convertible senior notes that bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted. Finally, we have $125.0 million outstanding principal balance of 3.75% convertible senior notes that bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted. The 2027 Notes are currently convertible by shareholders until March 31, 2023.

​

We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on these debts. In addition, we have access to a $150.0 million revolving credit facility (including an ability to request an additional $75.0 million, for a total commitment of no more than $225.0 million) to provide for our working capital needs and reimburse drawings under letters of credit and for other general corporate purposes. The Company has no immediate plans to draw down on the facility, which expires in December of 2026. Interest under the Facility is variable based on the Company’s secured net leverage ratio and is expected to bear interest based on SOFR plus a range of 150 to 225 basis points, if drawn. There is a yearly commitment fee of 25 to 35 basis points, based on the Company’s secured net leverage ratio, charged on the unused portion of the Facility.

​

37

Table of Contents

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, as well as existing cash and cash equivalents and short-term investments. In addition, we have bank guarantees and letters of credit issued by a financial institution on our behalf as needed. At December 31, 2022, outstanding bank guarantees and letters of credit totaled $8.2 million and unused bank guarantees and letters of credit of $14.1 million were available to be drawn upon.

​

The following table summarizes our contractual arrangements at December 31, 2022 and the timing and effect that those commitments are expected to have on our liquidity and cash flow in future periods.

​

​

Critical Accounting Policies and Estimates

​

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. We continuously evaluate our estimates and judgments based on historical experience, as well as other factors that we believe to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates.

​

We consider the following significant accounting policies to be critical because of their complexity and the high degree of judgment involved in maintaining them.

​

Revenue Recognition

​

We recognize revenue upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration we expect to receive in exchange for such product or service. We perform the following five steps to determine when to recognize revenue: (1) identification of the contract(s) with customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied. Judgment is used in the following areas in the determination of when to recognize revenue:

​

38

Table of Contents

​

​

​

​

Any material changes in the identification of performance obligations, determination and allocation of the transaction price to performance obligations, and determination of when transfer of control occurs to the customer, could impact the timing and amount of revenue recognition, which could have a material effect on our financial condition and results of operations.

​

Inventory Valuation

​

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Each quarter we assess 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 our estimated usage requirements is written down to its estimated net realizable value if less than cost. We evaluate usage requirements by analyzing historical usage, anticipated demand, alternative uses of materials, and other qualitative factors. Unanticipated changes in demand for our products may require a write down of inventory that could materially affect our operating results.

​

Goodwill and Intangible Assets

​

Goodwill is tested for impairment at least annually in the beginning of the fourth quarter of our fiscal year, which may require significant judgment. We may first perform a qualitative assessment of whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount, and, if so, we then quantitatively compare the fair value of our reporting unit to its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired. If the carrying amount of the reporting unit exceeds its fair value, we then record an impairment loss equal to the difference, up to the carrying value of goodwill.

39

Table of Contents

​

We determine the fair value of our reporting unit based on a reconciliation of the aggregate fair value of our reporting unit to our adjusted market capitalization. The adjusted market capitalization is calculated by multiplying the average share price of our common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium. The determination of a reasonable control premium may require significant judgment and is estimated using historical transactions in similar industries.

​

The carrying values of long-lived assets, including identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, a recoverability test is performed utilizing undiscounted cash flows expected to be generated by that asset or asset group compared to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models or, when available, quoted market values and third-party appraisals. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude of any impairment.

​

Intangible assets with finite useful lives, including purchased technology, customer-related intangible assets, patents, trademarks, backlog, and software licenses, are subject to amortization over the expected period of economic benefit to us. We evaluate whether events or circumstances have occurred that warrant a revision to the remaining useful lives of intangible assets. In cases where a revision is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the revised remaining useful life.

​

Intangible assets related to in-process research and development (“IPR&D”) projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, the associated assets would be deemed long-lived and would then be amortized based on their respective estimated useful lives at that point in time. Indefinite-lived intangible assets are tested for impairment at least annually in the beginning of the fourth quarter of our fiscal year. In testing indefinite-lived intangible assets for impairment, we may first perform a qualitative assessment of whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, and, if so, we then quantitatively compare the fair value of the indefinite-lived intangible asset to its carrying amount. We determine the fair value of our indefinite-lived intangible assets using a discounted cash flow method.

​

Income Taxes

​

We estimate our income taxes in each of the jurisdictions in which we operate. Deferred income taxes reflect the net tax effect of temporary differences between the asset and liability balances recognized for financial reporting purposes and the balances used for income tax purposes, as well as the tax effect of carry forwards. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Realization of our net deferred tax assets is dependent on future taxable income.

​

We recognize the effect of income tax positions for only those positions which are estimated to more likely than not be sustained if challenged. We reflect changes in recognition or measurement in the period in which our change in judgment occurs. We record interest and penalties related to uncertain tax positions in income tax expense. Income taxes related to the global intangible low-taxed income (“GILTI”) rules are expensed as incurred.

​

Recent Accounting Pronouncements

​

We adopted ASU 2019-12 in the second quarter of 2020. We have also adopted ASU 2020-06 effective January 1, 2022. Refer to Note 1, “Significant Accounting Policies,” for additional information.

​

We are also evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on our consolidated financial statements.

​

40

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

​

Executive Summary

​

We are an innovative manufacturer of semiconductor process equipment. Our proven ion beam, laser annealing, lithography, MOCVD and single wafer wet processing 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.

​

The Veeco United team executed well in a challenging environment during 2021, accomplishing a number of milestones, including:

​

​

​

​

​

​

​

​

​

These accomplishments enabled us to exit 2021 well positioned to execute on our growth plans for 2022.

​

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, vaccine mandates, and business shutdowns. We have important internal and third-party manufacturing operations in the U.S. and Singapore, 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 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.

​

31

Table of Contents

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 62% of our total net sales for the year ended December 31, 2021, and 68% and 70% for the years ended December 31, 2020 and 2019, 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.

​

We are starting to see the effects of the macroeconomic inflationary cost environment and supply chain disruptions due to strained transportation capacity, labor shortages and absenteeism associated with COVID-19, and high global demand as markets reopen and economic stimulus drives growth. These effects include longer lead times and increased costs. We are taking proactive steps in an effort to manage the impact to our business, including buying in advance and re-sourcing components on a more frequent basis. We continue to monitor our global supply chain and may experience additional disruptions in future periods, 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 chain, and growth can not be predicted or quantified, we proactively endeavor to identify 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:

​

​

​

​

​

​

​

​

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 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.

32

Table of Contents

​

Business Update

​

We categorize our revenue by the end-markets into which we sell. Our four end-markets are: Semiconductor; Compound Semiconductor; Data Storage; and Scientific & Other.

​

Sales in the Semiconductor market grew 49% in 2021 and were driven by our laser annealing systems for logic devices and lithography systems for Advanced Packaging. We continue to build momentum for our laser annealing solutions with advanced node logic customers. We have been winning additional application steps with leading manufacturers. We have evaluation systems at a DRAM manufacturer and are working with new and existing logic customers on their next manufacturing nodes. We also continue to deliver our laser annealing systems to trailing node logic manufacturers. Our lithography systems for Advanced Packaging are aligned with longer-term growth of FOWLP and other Advanced Packaging applications such as heterogeneous integration. Additionally, the ongoing adoption of EUV Lithography for advanced node, semiconductor manufacturing continues to drive demand for our mask blank systems. Overall, our technology and market strategy is well aligned with trends such as artificial intelligence, mobile connectivity and high performance computing that drive the Semiconductor market. We expect continued growth in this market. Finally, we have begun shipping systems from our new San Jose facility, and expect to fully transition to this new location in 2022.

​

We address the Compound Semiconductor market with a broad portfolio of technologies including primarily Wet Processing and MOCVD, along with MBE and Ion Beam, all of which have been developed to support emerging applications such as 5G driven RF device/filter manufacturing, Gallium Nitride power electronics, and photonics applications including edge-emitting lasers and micro-LEDs. Sales in the Compound Semiconductor market were flat in 2021. However, we did experience strong growth in equipment shipments for RF Devices and we expect future growth to come from MOCVD and other system shipments in the Photonics market.

​

Sales in the Data Storage market have been growing for several years, primarily driven by shipments of Ion Beam systems. Demand for our Ion Beam products was driven by 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 heads. After multiple years of customers accelerating their capacity additions, contributing to growth in 2021 of 37%, we expect a period of slowing capacity adds by our data storage customers, resulting in an expected revenue decline in our data storage business in 2022 from recent levels. With data proliferation forecasted to continue to grow, however, we feel confident about the long-term prospects of our data storage business.

​

Sales in the Scientific & Other market are largely driven by sales to governments, universities, and research institutions. Revenue was slightly higher in 2021 compared to 2020, and we expect sales in this market to grow modestly in the long run, in line with GDP.

​

Overall, we enter 2022 with strong backlog in our semiconductor and compound semiconductor markets which, along with our customer engagements and order activity, lead us to expect revenue growth in the coming year as we make progress toward our long-term financial target model.

​

33

Table of Contents

Results of Operations

​

Years Ended December 31, 2021 and 2020

​

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for 2021 and 2020 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.

​

​

Net Sales

​

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

​

​

Total sales increased for the year ended December 31, 2021 against the comparable prior year period primarily in the Semiconductor and Data Storage markets. By geography, sales increased in the United States, China, and Rest of APAC

34

Table of Contents

regions, partially offset by decreases in the EMEA region. The increase in sales in the United States was primarily driven by shipments to Data Storage and Compound Semiconductor customers, while the increase in sales in the Rest of APAC region was primarily driven by shipments to Semiconductor and Data Storage customers. The increase in sales in the China region was primarily driven by shipments to Semiconductor customers. The decrease in sales in the EMEA region was primarily driven by a decrease in shipments to Data Storage customers. Included within the Rest of APAC region for the year ended December 31, 2021 were sales in Taiwan and South Korea of $65.2 million and $50.4 million, respectively, while sales within Rest of APAC region for the year ended December 31, 2020 included sales in Singapore and Taiwan of $49.4 million and $40.0 million, respectively. 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.

​

Gross Profit

​

In 2021, gross profit increased compared to 2020 primarily due to an increase in sales volume, partially offset by decreased gross margins. Gross margins decreased principally due to an increase in spending as we invested in service infrastructure and capacity expansion to meet the growing demands for our semiconductor product lines and supporting our evaluation systems at customers, as well as product and region mix of sales in the period. We expect our gross margins to fluctuate each period due to product mix and other factors, while we remain committed to increasing our overall gross margins.

​

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 increased in 2021 compared to 2020 primarily from personnel-related expenses as we invest in new research and development and additional applications for our technology in order to be well positioned to capitalize on emerging global megatrends and support longer term growth in Semiconductor and Compound Semiconductor markets. However, expenses as a percentage of revenue have decreased when compared to the prior period.

​

Selling, General, and Administrative

​

Selling, general, and administrative expenses increased in 2021 compared to 2020 primarily due to higher variable expenses associated with the increase in revenue, profitability, and order in-take. However, expenses as a percentage of revenue have decreased when compared to the prior year period. Given 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. In addition, we are currently experiencing some duplicate operating expenses for the transition from our existing facility in San Jose, California to our new leased facility, and we expect to continue to do so until this transition is completed over the next several quarters.

​

Amortization Expense

​

Amortization expense decreased in 2021 compared to 2020 primarily due to changes in amortization expense to reflect expected cash flows of certain intangible assets, as well as certain other intangible assets becoming fully amortized in 2021.

​

Interest Income (Expense)

​

For the year ended December 31, 2021, we recorded net interest expense of $26.0 million, compared to $23.2 million for the comparable prior period. The increase in interest expense was primarily related to the issuance of the 2027 Notes in May 2020 and the 2025 Notes in November 2020, partially offset by the partial repurchases and exchange of the 2023 Notes in 2020 and 2021, as well as an increase in interest income of approximately $0.8 million as compared to the prior period. Included in interest expense for both of the years ended December 31, 2021 and 2020 were non-cash charges of

35

Table of Contents

$13.8 million related to the amortization of debt discount and transaction costs of the 2023 Notes, 2025 Notes, and 2027 Notes.

​

Other Income (Expense)

​

On November 5, 2021, we entered into a privately negotiated note purchase agreement with a holder of our outstanding 2023 Notes, under which we agreed to repurchase and retire approximately $111.5 million in aggregate original principal amount of the 2023 Notes, with a carrying amount of $105.5 million, for cash consideration of approximately $115.6 million, and approximately $1.0 million of accrued and unpaid interest. We accounted for the partial settlement of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $4.0 million for the year ended December 31, 2021. In addition, we recorded a non-cash impairment charge of approximately $1.0 million related to an equity investment without a readily observable market price.

​

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, 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. Additionally, on November 11, 2020, we entered into a privately negotiated exchange agreement with a holder of our outstanding 2023 Notes, under which we agreed to retire $125.0 million in aggregate original principal amount of the 2023 Notes, with a carrying amount of $113.1 million, in exchange for the issuance of $132.5 million in aggregate principal amount of new 3.50% convertible senior notes. We accounted for both transactions as an extinguishment of the 2023 Notes, and as such, recorded a loss on extinguishment of approximately $7.8 million for the year ended December 31, 2020.

Income Taxes

​

The 2021 income tax benefit of $0.4 million is comprised of a $0.7 million income tax benefit related to the reduction of uncertain tax positions based upon settlements with tax authorities, partially offset by a $0.3 million income tax expense attributable to the foreign income taxes and foreign withholding taxes.

​

The 2020 income tax benefit of $0.1 million is comprised of: (i) a $0.8 million income tax benefit related to the amortization and subsequent sale of certain intangible assets during the year, which was partially offset by (ii) a $0.5 million income tax expense attributed to the profitable non-U.S. operations, as well as withholding tax to repatriate certain foreign earnings as a result of changes in tax laws under the 2017 Tax Act, and (iii) a $0.2 million income tax expense related primarily to U.S. tax amortization of our indefinite-lived intangible assets that is not available to offset existing deferred tax assets, as well as state and local income taxes.

​

Years Ended December 31, 2020 and 2019

​

See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 22, 2021, for Management’s Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2019.

​

Liquidity and Capital Resources

​

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

​

​

36

Table of Contents

A portion of our cash and cash equivalents is held by our subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. At December 31, 2021 and 2020, cash and cash equivalents of $38.3 million and $40.2 million, respectively, were held outside the United States. As of December 31, 2021, 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. Approximately $5.3 million of undistributed earnings would 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.

​

A summary of the cash flow activity for the year ended December 31, 2021 and 2020 is as follows:

​

Cash Flows from Operating Activities

​

​

Net cash provided by operating activities was $67.7 million for the year ended December 31, 2021 and was due to net income of $26.0 million and adjustments for non-cash items of $59.5 million, partially offset by a decline in cash flow from operating activities due to changes in operating assets and liabilities of $17.8 million. The changes in operating assets and liabilities was largely attributable to increases in accounts receivable and inventories and decreases in deferred revenue, partially offset by increases in accounts payable and cash received for landlord reimbursements for leasehold improvements.

​

Net cash provided by operating activities was $43.0 million for the year ended December 31, 2020 and was due to the net loss of $8.4 million plus a decline in cash flow from operating activities due to changes in operating assets and liabilities of $13.7 million, being more than offset by adjustments for non-cash items of $65.2 million. The changes in operating assets and liabilities was largely attributable to increases in accounts receivable and inventories and decreases in deferred revenue, partially offset by increases in accounts payable and customer deposits.

​

Cash Flows from Investing Activities

​

​

The net cash provided by investing activities during the year ended December 31, 2021 was attributable to the net change in investments, partially offset by capital expenditures. We experienced increased capital expenditures associated

37

Table of Contents

with the build-out of our newly leased facility in San Jose, California during 2021, and expect to complete this build-out over the next several quarters. In addition, we expect a period of some duplicate operating expenses until the transition from our pre-existing facility to our new facility is completed. The net cash used in investing activities during the year ended December 31, 2020 was attributable to net change in investments as well as capital expenditures, partially offset by the proceeds from the sale of a non-core product line.

​

Cash Flows from Financing Activities

​

​

The net cash used in financing activities for the year ended December 31, 2021 was primarily related to the cash used to repurchase $111.5 million principal amount of our 2023 Notes as well as the settlement of equity awards. The net cash provided by financing activities for the year ended December 31, 2020 was primarily related to the net cash proceeds received from the issuance of the 2027 Notes, net of issuance costs, partially offset by the cash used to repurchase the 2023 Notes as well as the purchase of capped calls.

​

Convertible Senior Notes and Revolving Credit Facility

​

We have $20.2 million outstanding principal balance of 2.70% convertible senior notes that bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted. In addition, we have $132.5 million outstanding principal balance of 3.50% convertible senior notes that bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted. Finally, we have $125.0 million outstanding principal balance of 3.75% convertible senior notes that bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted. The 2027 Notes are currently convertible by shareholders until March 31, 2022.

​

We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on these debts. In addition, we have access to a $150.0 million revolving credit facility (including an ability to request an additional $75.0 million, for a total commitment of no more than $225.0 million) to provide for our working capital needs and reimburse drawings under letters of credit and for other general corporate purposes. The Company has no immediate plans to draw down on the facility, which expires in December of 2026. Interest under the Facility is variable based on the Company’s secured net leverage ratio and is expected to bear interest based on SOFR plus a range of 150 to 225 basis points, if drawn. There is a yearly commitment fee of 25 to 35 basis points, based on the Company’s secured net leverage ratio, charged on the unused portion of the Facility.

​

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, as well as existing cash and cash equivalents and short-term investments. In addition, we have bank guarantees and letters of credit issued by a financial institution on our behalf as needed. At December 31, 2021, outstanding bank guarantees and letters of credit totaled $2.7 million and unused bank guarantees and letters of credit of $15.2 million were available to be drawn upon.

​

38

Table of Contents

The following table summarizes our contractual arrangements at December 31, 2021 and the timing and effect that those commitments are expected to have on our liquidity and cash flow in future periods.

​

​

Critical Accounting Policies and Estimates

​

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. We continuously evaluate our estimates and judgments based on historical experience, as well as other factors that we believe to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates.

​

We consider the following significant accounting policies to be critical because of their complexity and the high degree of judgment involved in maintaining them.

​

Revenue Recognition

​

We recognize revenue upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration we expect to receive in exchange for such product or service. We perform the following five steps to determine when to recognize revenue: (1) identification of the contract(s) with customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied. Judgment is used in the following areas in the determination of when to recognize revenue:

​

​

​

39

Table of Contents

​

​

Any material changes in the identification of performance obligations, determination and allocation of the transaction price to performance obligations, and determination of when transfer of control occurs to the customer, could impact the timing and amount of revenue recognition, which could have a material effect on our financial condition and results of operations.

​

Inventory Valuation

​