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Item 7. Management’s Discussion and Analysis

2021-02-22 compared with 2020-02-21 · 111 added, 87 removed, 191 unchanged (51% of the section changed)

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We are an innovative manufacturer of semiconductor process equipment.

Our proven ion beam, laser annealing, lithography, MOCVD and single wafer etch & clean 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 many of the markets we serve.

We categorize our revenue by the key market segments into which we sell.

Our four key markets are:

Front-End Semiconductor;

Advanced Packaging, MEMS & RF Filters;

LED Lighting, Display & Compound Semiconductor;

and Scientific & Industrial.

Sales in the Front-End Semiconductor market were driven by Laser Annealing systems and Low Defect Density Ion Beam Deposition (“LDD-IBD”) systems for Extreme Ultraviolet (“EUV”) Mask Blank Production.

We continue to build momentum in the Front-End Semiconductor market with shipments and additional orders for our EUV mask blank systems as well as advanced node penetration with our Laser Annealing systems.

The ongoing adoption of EUV Lithography for advanced node, front-end semiconductor manufacturing is a good trend for us, as is our Laser Annealing progress and opportunity with current advanced nodes and future nodes.

Sales in the Advanced Packaging, MEMS & RF Filter market were driven by Lithography and wet etch and clean systems.

Advanced Packaging opportunities remained soft in 2019 as mobile supply chains were dealing with excess capacity due to weak mobile device forecasts.

We remain well positioned for future growth in these markets, supported by trends such as artificial intelligence, mobile connectivity, automotive electronics, big data processing, and 5G infrastructure deployment, as well as the longer term growth of FOWLP and other Advanced Packaging applications.

Sales in the LED Lighting, Display & Compound Semiconductor market were very weak in 2019 with limited system shipments of MOCVD systems.

More recently, we have been focused on compound semiconductor applications such as 3D sensors, VCSELs, laser diodes, and RF devices.

Our broad portfolio of MOCVD and wet etch and clean technologies have been developed to support these industry applications.

During 2019, we shipped our first Lumina evaluation system.

This As/P-based system was developed to meet our customers’ requirements for the photonics market which includes specialty LEDs, edge emitting lasers and VCSELs.

Additionally, in 2019 we shipped and received acceptance on our fully automated, 300mm single wafer MOCVD cluster system to a major front-end fab.

This GaN based system is ideal for power and 5G RF applications.

Sales in the Scientific & Industrial market were supported by shipments of Ion Beam systems for data storage applications and optical coatings as well as shipments of MBE systems to universities and laboratories.

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.

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 were driven by our laser annealing systems, lithography systems for Advanced Packaging, as well as Low Defect Density IBD systems for EUV Mask Blank Production.

We continue to build momentum for our laser annealing solutions with advanced node logic customers.

We recently announced that Veeco won an additional application with a leading manufacturer.

We have evaluation systems at a DRAM manufacturer and are working with new and existing customers on their next manufacturing nodes.

Our lithography systems for Advanced Packaging are aligned with longer-term growth of FOWLP and other Advanced Packaging applications.

Additionally, the ongoing adoption of EUV Lithography for advanced node, semiconductor manufacturing continues to drive requirements 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 address the Compound Semiconductor market with a broad portfolio of technologies including Wet Processing, MOCVD, MBE, and Ion Beam, which have been developed to support emerging applications such as 5G driven RF device manufacturing, photonics applications including 3D sensing laser diodes and micro-LEDs, and GaN-based power electronics.

Sales in the Compound Semiconductor market improved in 2020, and were driven by equipment shipments for RF Filters, RF Devices, and power electronics, as well as sales to the Photonics market.

The Photonics market was driven by the monetization of slow moving MOCVD inventory, as well as shipments of MOCVD, Ion Beam, and MBE equipment for specialty LED and display applications.

Sales in the Data Storage market have been growing for several years, primarily driven by shipments of Ion Beam systems for data storage applications.

Demand for our Ion Beam products for data storage is being driven by big data and 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 thin film magnetic heads.

These two factors taken together along with new innovations by HDD manufacturers such as heat assisted magnetic recording (“HAMR”) and microwave assisted magnetic recording (“MAMR”) are driving additional capacity and equipment upgrades.

While equipment demand from each individual market may fluctuate quarter to quarter, the diverse customer base has historically provided a relatively stable revenue stream for the Company.

These two factors taken together, along with new innovations by HDD manufacturers such as heat assisted magnetic recording and microwave assisted magnetic recording, are driving additional capacity requirements and equipment upgrades.

Additionally, recent trends in the work from home environment and the importance of cloud computing are also providing tailwinds to this market.

We have good visibility in this market, which we believe will remain healthy through 2021.

Sales in the Scientific & Other market are largely driven by sales to governments, universities, and research institutions.

While sales were lower in 2020 compared to 2019, which we attribute to COVID-19 impacts to purchasing decisions, revenues did increase in the second half of 2020 which may be indicative of a recovery.

Overall, our laser annealing, 5G RF, and data storage products are all performing well for us today, and we expect them to provide growth in the near term, through 2021.

Long term growth for 2022 and beyond is expected to come from the Semiconductor and Compound Semiconductor markets.

As such, we have been making strategic investments in R&D and inventory, including evaluation systems, in these markets, as well as improving our service capabilities to support these anticipated growth opportunities.

Results of Operations

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Our results of operations are reported as one business segment, represented by our single operating segment.

See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 25, 2019, as amended by Amendment No.

1 to such Annual Report on Form 10-K, filed with the SEC on May 1, 2019, for Management’s Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2017.

For the year ended December 31,

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Restructuring

Acquisition costs

Asset impairment

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* Not meaningful

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

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

Year ended December 31,

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(dollars in thousands)

Sales by market

Front-End Semiconductor

Advanced Packaging, MEMS & RF Filters

LED Lighting, Display & Compound Semiconductor

Scientific & Industrial

Sales by end-market

Semiconductor

Compound Semiconductor

Scientific & Other

Sales by geographic region

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Rest of World

Total sales decreased for the year ended December 31, 2019 against the comparable prior year period in the LED Lighting, Display & Compound Semiconductor and Advanced Packaging, MEMS & RF Filters markets, partially offset by increases in the Front-End Semiconductor and Scientific & Industrial markets.

Total sales increased for the year ended December 31, 2020 against the comparable prior year period in the Data Storage and Compound Semiconductor markets, partially offset by decreases in the Semiconductor and Scientific & Other

Pricing did not have a significant impact on the change in total sales.

By geography, sales decreased in the China and EMEA regions, partially offset by an increase in the Rest of World region.

The most significant decrease occurred in the China region, which was largely attributable to the decreased sales in the LED Lighting, Display & Compound Semiconductor market.

We do not expect significant new orders in China for the LED Lighting, Display & Compound Semiconductor market in the near future.

Sales increased in Rest of World due to an increase of sales in the Front-End Semiconductor market in Japan for our EUV mask blank systems.

Sales in Japan and Taiwan were $48.1 million and $48.8 million, respectively, for the year ended December 31, 2019.

By geography, sales increased in the United States, EMEA, and Rest of APAC regions, partially offset by a decrease in the China region.

Sales in the United States and EMEA regions were largely driven by increased sales in the Data Storage market, while sales in the Rest of APAC region were largely driven by increased sales in the Compound Semiconductor market.

Included within the Rest of APAC region for the year ended December 31, 2020 were sales in Singapore and Taiwan of $49.4 million and $40.0 million, respectively, while sales in Japan and Taiwan were $48.1 million and $48.8 million for the year ended December 31, 2019.

We expect there will continue to be year-to-year variations in our future sales distribution across markets and geographies.

In 2019, gross profit decreased compared to 2018 primarily due to a decrease in sales volume, partially offset by increased gross margins.

Gross margins increased principally due to product and region mix of sales in the periods, which included an exit out of the low margin commoditized LED market in China, partially offset by an increase in inventory reserves.

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.

Several markets continue to remain challenged in light of ongoing restrictions on business and travel, and decreased business and consumer spending generally, resulting from the COVID-19 pandemic.

In 2020, gross profit increased compared to 2019 primarily due to an increase in sales volume, as well as increased gross margins.

Gross margins increased principally due to higher production activity, as well as reductions in inventory reserves and warranty expenses.

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 decreased in 2019 compared to 2018 primarily related to personnel-related expenses and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs.

Research and development expenses decreased in 2020 compared to 2019 primarily from reductions to personnel-related expenses, project materials, and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs.

In the second half of 2019, we executed an initiative to reorganize various functions along product lines and created a central research and development organization to better allocate our resources to our highest priority projects.

Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions.

Selling, General, and Administrative

Selling, general, and administrative expenses decreased in 2020 compared to 2019 primarily related to personnel-related expenses and professional fees as a result of our initiative to streamline operations, enhance efficiency, and reduce costs.

Additionally, we had a decrease in travel-related expenses as a result of COVID-19 related restrictions.

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.

Amortization Expense

Amortization expense decreased in 2019 compared to 2018 primarily as a result of the impairment of intangible assets during the second quarter of 2018.

Amortization expense decreased in 2020 compared to 2019 primarily due to the sale of a non-core product line, including related intangible assets, as well as changes in amortization expense to reflect expected cash flows of certain intangible assets.

Restructuring Expense

During the second quarter of 2018, we initiated plans to reduce excess capacity associated with the manufacture and support of our advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into our San Jose, California facility.

As a result of this and other cost saving initiatives, we announced headcount reductions of approximately 40 employees.

We continued to record restructuring charges in 2019 as a result of our efforts to further streamline operations, enhance efficiencies, and reduce costs.

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Collectively, these actions impacted approximately 60 employees.

Acquisition Costs

Acquisition costs incurred during 2018 are non-recurring charges incurred in connection with the acquisition of the Ultratech business, as well as legal and professional fees incurred in connection with certain integration activities.

During the year ended December 31, 2020, additional accruals were recognized and payments were made related to these restructuring initiatives, which are largely completed at December 31, 2020.

Asset Impairment

During the fourth quarter of 2019, we determined that one of our product lines met the criteria for held for sale accounting treatment and recorded a non-cash impairment charge of $4.0 million to reduce these assets to their expected fair value upon sale.

During the second quarter of 2018, we lowered our projected results for the Ultratech asset group, which were significantly below the projected results at the time of the acquisition.

The reduced projections were based on lower than expected unit volume of certain smartphones, which incorporate advanced packaging methods such as FOWLP, and a delay in the adoption of FOWLP advanced packaging by other electronics manufacturers, both of which slowed orders and reduced revenue projections for our advanced packaging lithography systems.

In addition, there was a delay in the build out of 28nm facilities by companies in China who were expected to purchase our LSA systems.

Taken together, the reduced projections identified during the second quarter of 2018 required us to assess the Ultratech asset group for impairment.

As a result of the analysis, during the second quarter of 2018 we recorded a $252.3 million non-cash intangible asset impairment charge.

Additionally, as a result of a significant decline in our stock price during the fourth quarter of 2018, we concluded it was appropriate to perform an interim goodwill impairment test as of the end of fiscal 2018.

The fair value of our reporting unit was determined using an adjusted market capitalization approach, which is calculated by multiplying our stock price by the number of outstanding shares and adding a control premium.

The fair value of our reporting unit was determined to be below the carrying value, and we recorded an impairment charge equal to the excess of carrying value over fair value, or $122.8 million, for the year ended December 31, 2018.

The valuation of goodwill will continue to be subject to changes in our market capitalization and observable market control premiums.

During the fourth quarter of 2019, we determined that one of our non-core product lines met the criteria for held for sale accounting treatment and recorded a non-cash impairment charge of $4.0 million to reduce these assets to their expected fair value upon sale.

During the second quarter of 2020, we recorded additional impairment charges of $0.3 million related to the finalization of the sale of this product line.

Interest Income (Expense)

For the year ended December 31, 2020, we recorded net interest expense of $23.2 million, compared to $17.4 million for the comparable prior period.

Included in interest expense for the year ended December 31, 2019 and 2018 were non-cash charges of $12.7 million and $11.8 million, respectively, related to the amortization of debt discount and transaction costs of the Convertible Senior Notes.

Interest income increased to $4.7 million for 2019, compared to $3.2 million for the comparable prior period, primarily related to higher average interest yields.

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 repurchase and exchange of the 2023 Notes.

Included in interest expense for the year ended December 31, 2020 were non-cash charges of $13.8 million related to the amortization of debt discount and transaction costs of the 2023 Notes, 2025 Notes, and 2027 Notes, while the year ended December 31, 2019 included non-cash charges of $12.7 million related to the amortization of debt discount and transaction costs of the 2023 Notes.

Additionally, interest income decreased approximately $3.1 million for the year ended December 31, 2020 as compared to the prior period, primarily as a result of lower interest rates, and we expect interest income to remain depressed as a result.

Other Income (Expense)

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.

During the fourth quarter of 2019, we determined that our equity investment in Kateeva had indicators of impairment, and as such, we reviewed this investment for impairment.

Based on this review, we recorded a non-cash impairment charge of $21.0 million.

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.

The 2019 income tax expense of $0.8 million is comprised of:

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intangible assets during the year.

The 2018 income tax benefit of $26.7 million is comprised of:

(i) a $25.2 million income tax benefit related to the impairment of certain intangible assets during the year, (ii) a $1.7 million income tax benefit recorded in connection with the 2017 Tax Act, (iii) a $0.4 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, and (iv) a $0.2 million income tax benefit from non-U.S.

operations and non-U.S.

withholding taxes recorded as we expected to repatriate certain foreign earnings as a result of changes in tax laws under the 2017 Tax Act.

Years Ended December 31, 2019 and 2018

See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 21, 2020, for Management’s Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2018.

In addition, in order to align with our evolving strategy, we have changed the end-markets by which we categorize sales.

Prior period sales have been reclassified to the new end-markets for comparative purposes.

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

Year ended December 31,

Period to Period

(dollars in thousands)

Sales by end-market

Semiconductor

Compound Semiconductor

Scientific & Other

Total sales decreased for the year ended December 31, 2019 against the comparable prior year period principally in the Compound Semiconductor market, partially offset by increases in the Semiconductor and Data Storage markets.

Pricing did not have a significant impact on the change in total sales.

The decrease in sales in the Compound Semiconductor market was largely driven by our exit out of the low margin commoditized LED market.

We expect there will continue to be year-to-year variations in our future sales distribution across markets.

Liquidity and Capital Resources

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Approximately $6.0 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 due 2023.

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, 2020 and 2019 is as follows:

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Share-based compensation expense

Loss on extinguishment of debt

Asset impairment

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Net cash provided by (used in) operating activities

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.

Net cash used in operating activities was $7.4 million for the year ended December 31, 2019 and was due to the net loss of $78.7 million plus a decline in cash flow from operating activities due to changes in operating assets and liabilities of $16.8 million, partially offset by adjustments for non-cash items of $88.1 million.

The changes in operating assets and liabilities was largely attributable to decreases in accounts payable and accrued expenses and customer deposits and deferred revenue, partially offset by decreases in inventories and deferred cost of sales, accounts receivable and contract assets, and prepaid expenses and other current assets.

Net cash used in operating activities was $37.7 million for the year ended December 31, 2018 and was due to the net loss of $407.1 million plus a decline in cash flow from operating activities due to changes in operating assets and liabilities of $56.0 million, partially offset by adjustments for non-cash items of $425.4 million.

The changes in operating assets and liabilities was largely attributable to decreases in accounts payable and accrued expenses, customer deposits and deferred

revenue, and an increase in inventories and deferred cost of sales, partially offset by decreases in accounts receivable and contract assets, and prepaid expenses and other current assets.

Cash Flows from Investing Activities

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(in thousands)

Acquisitions of businesses, net of cash acquired

Capital expenditures

Changes in investments, net

Proceeds from held for sale assets

Proceeds from held for sale assets, net of costs to sell

Net cash provided by (used in) investing activities

The net cash used in investing activities during the year ended December 31, 2020 was attributable to capital expenditures and net change in investments, partially offset by the proceeds from the sale of a non-core product line.

As discussed in Note 20 to the Consolidated Financial Statements, we have entered into a new lease agreement in San Jose, California, and as such, capital expenditures associated with the build-out of the new facility are expected to total between $30 million and $40 million over the next two years.

In addition, we expect a period of duplicate operating expenses until the transition from our existing facility to our new facility is completed over the next two years.

The net cash used in investing activities during the year ended December 31, 2019 was attributable to net change in investments as well as capital expenditures.

The net cash used in investing activities during the year ended December 31, 2018 was attributable to capital expenditures, net change in investments, and net cash used in the final payout related to the acquisition of Ultratech.

Cash Flows from Financing Activities

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(in thousands)

Proceeds from issuance of 2025 Notes and 2027 Notes, net of issuance costs

Purchase of capped calls

Repurchase of 2023 Notes

Settlement of equity awards, net of withholding taxes

Purchases of common stock

Net cash provided by (used in) financing activities

The net cash provided by financing activities for the year ended December 31, 2019 was immaterial.

The net cash used in financing activities for the year ended December 31, 2018 was primarily related to the share repurchase program that expired in December 2019.

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 2025 Notes and 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

On January 10, 2017, we issued $345.0 million of 2.70% convertible senior notes.

We received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million.

The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017.

The Convertible Senior Notes mature on January 15, 2023, 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 this debt.

On May 18, 2020, in connection with the completion of a private offering of $125 million aggregate principal amount of 3.75% convertible senior notes described below, we repurchased and retired approximately $88.3 million in aggregate principal amount of our outstanding 2023 Notes.

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, in exchange for the issuance of $132.5 million in aggregate principal amount of new 3.50% convertible senior notes described below.

The remaining 2023 Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year.

The 2023 Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted.

On November 17, 2020, as part of the privately negotiated exchange agreement described above, we issued $132.5 million of 3.50% convertible senior notes.

The 2025 Notes bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2021.

The 2025 Notes mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted.

On May 18, 2020, we completed a private offering of $125.0 million of 3.75% convertible senior notes.

We received net proceeds of approximately $121.9 million, after deducting underwriting discounts and fees and expenses payable by the Company.

Additionally, we used approximately $10.3 million of cash to purchase the capped calls.

The 2027 Notes bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2020.

The 2027 Notes mature on June 1, 2027, 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.

Contractual Obligations and Commitments

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In addition, we have bank guarantees and letters of credit issued by a financial institution on our behalf as needed.

At December 31, 2019, outstanding bank guarantees and letters of credit totaled $10.2 million and unused bank guarantees and letters of credit of $21.6 million were available to be drawn upon.

At December 31, 2020, outstanding bank

guarantees and letters of credit totaled $9.5 million and unused bank guarantees and letters of credit of $23.2 million were available to be drawn upon.

The following table summarizes our contractual arrangements at December 31, 2020 and the timing and effect that those commitments are expected to have on our liquidity and cash flow in future periods.

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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.

On an ongoing basis, we evaluate our estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances.

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 implementing them.

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 adopted ASC 606 as of January 1, 2018, using the full retrospective method.

Refer to Note 1, “Significant Accounting Policies,” for additional information.

Revenue is recognized 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.

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We recognize such revenue and costs upon obtaining objective evidence that the acceptance provisions can be achieved, assuming all other revenue recognition criteria have been met.

In certain cases, our contracts with customers contain a billing retention, typically 10% of the sales price, which is billed by us and payable by the customer when field acceptance provisions are completed.

In certain cases, our contracts with customers contain a billing retention which is billed by us and payable by the customer when field acceptance provisions are completed.

Revenue recognized in advance of the amount that has been billed is recorded as a contract asset on the Consolidated Balance Sheets.

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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 IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development (“R&D”) efforts.

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.

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Recent Accounting Pronouncements

We adopted ASC 606 and ASU 2016-01 as of January 1, 2018.

We also adopted ASC 842 as of January 1, 2019.

We adopted ASC 842 as of January 1, 2019 and ASU 2019-12 in the second quarter of 2020.

Additionally, we are currently evaluating the impact of ASU 2020-06 on our consolidated financial statements, which will be effective for us starting January 1, 2022, with early adoption permitted.

Refer to Note 1, “Significant Accounting Policies,” for additional information.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis