Item 1. Business
Item 1. Business
Business Description and Overview
Headquartered in Plainview, New York, we were organized as a Delaware corporation in 1989. We are a manufacturer of advanced semiconductor process equipment that solves an array of challenging materials engineering problems for our customers. Our comprehensive collection of ion beam, laser annealing, metal organic chemical vapor deposition (“MOCVD”), advanced packaging lithography, single wafer wet processing, molecular beam epitaxy (“MBE”), and atomic layer deposition (“ALD”) technologies play an integral role in the fabrication of key devices that are enabling the 4 th industrial revolution of all things connected. Such devices include leading node application processors for mobile devices, thin film magnetic heads for hard disk drives in data storage, photonics devices for 3D sensing, advanced displays and high-speed data communications, radio frequency (“RF”) filters and power amplifiers for fifth generation (“5G”) networks and mobile electronics. In close partnership with our customers, we combine decades of applications and materials know-how with leading-edge systems engineering to deliver high-volume manufacturing solutions with competitive cost of ownership. Serving a global and highly interconnected customer base, we have comprehensive sales and service operations across the Asia-Pacific, Europe, and North America regions to ensure real-time close collaboration and responsiveness.
Our priorities are:
● Maintain the resilience of our business – Veeco’s management team took decisive action in early 2020 to keep our employees safe and healthy. We implemented innovative work-arounds, such as virtual customer demos and factory acceptances, where customers can review data and the performance of their system, in our factory, via live video. This and other steps have helped Veeco operate safely and successfully throughout the COVID-19 pandemic, resulting in the overall resiliency of our business. We have been able to serve our customers without pause and expect to continue to do so while executing on our strategic transformation, which includes a return to profitability and a focus on growth initiatives. We enter 2021 on strong footing. Operationally, we have secured a healthy backlog and scaled costs in relation to revenue in order to generate increased earnings. From a financial perspective, we have strengthened our balance sheet and solidified our capital structure. We believe that the proactive steps we have taken to manage the business through the pandemic have helped us maintain our financial strength and flexibility while enabling us to remain on track with our transformation;
● Focus on profitability and products – We seek to maintain the strength of our foundational businesses, including data storage, service offerings and sales to universities and research institutions to enable further investment in our growth initiatives; we are focused on delivering strong operating results; and in order to provide the greatest value, we continue to rationalize our product portfolio for opportunities to optimize and strengthen our competitive edge;
● Execute near-term to grow in 2021 - We are excited about our near-term growth opportunities, driven by our laser annealing, 5G RF, and data storage products. We believe that the foundry and logic markets will remain strong, which bodes well for our laser annealing product line. The adoption of 5G is off to a great start resulting in traction with our wet processing product line for the production of RF filters used in the most advanced smartphones. Furthermore, we continue to see strength in demand for hard disk drive (“HDD”) magnetic head capacity in the Data Storage market giving us good visibility through 2021; and
● Prepare for longer term growth in 2022 and beyond - We view the Semiconductor and Compound Semiconductor markets as long-term growth opportunities. By selectively investing in new research and development (“R&D”) and developing additional applications for our technology, we believe that Veeco will be well positioned to capitalize on emerging global megatrends in these areas. We’re investing now in targeted R&D, inventory for evaluation tools, and improving our service support capability for longer term growth in Semiconductor and Compound Semiconductor markets. We have begun placing evaluation tools with customers and plan to continue with additional placements in the coming quarters in exciting applications such
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as laser annealing in the memory market, laser annealing at advanced logic nodes, and early stage micro-LED. We are also exploring the application of other core Veeco technologies in semiconductor manufacturing. With these actions, we expect to generate growth opportunities in both the Semiconductor and Compound Semiconductor markets.
Markets
Our products are purchased by customers in the following four end-markets: 1) Semiconductor; 2) Compound Semiconductor; 3) Data Storage; and 4) Scientific & Other.
Our array of process equipment systems are used in the production of a broad range of microelectronic components, including logic, dynamic random-access memory (“DRAM”), photonics devices (including laser diodes and micro-LEDs), power electronics, RF filters and amplifiers, thin film magnetic heads, and other semiconductor devices. Many of our systems are used to directly deposit advanced materials critical to the operation of the device and some of our systems are used in cleaning and surface preparation as well as the precise removal of critical materials. We are also a leader in systems used in the advanced packaging process flow of microelectronic components such as flip chip, fan-out wafer level packaging (“FOWLP”), and other wafer level packaging approaches used in the modern integration of diverse semiconductor products, especially in consumer electronics. In general, our customers purchase our systems to both produce current-generation devices in volume and to develop next-generation products which deliver more efficient, cost-effective, and advanced technological solutions. We operate in several highly cyclical business environments, and our customers’ buying patterns are dependent upon industry trends and buying patterns for consumer electronics. As our products are sold into multiple markets, the following table describes these markets and the applicable Veeco technologies.
Markets
Description
Applicable Veeco Technologies
Semiconductor
The Semiconductor market refers to early process steps in logic and memory applications where silicon wafers are processed. There are many different process steps in forming patterned wafers, such as deposition, etching, masking, and doping, where the microchips are created but remain on the silicon wafer. As device architectures continue to shrink with advanced nodes, more precise process control is paramount to achieving high yields and competitive cost. This market includes mask blank production for extreme ultraviolet (“EUV”) lithography.
This market also includes Advanced Packaging which refers to a portfolio of wafer-level assembly technologies that enable improved performance of electronic products, such as smartphones, high-end servers, and graphical processors. Demand for higher performance, smaller form factors, and lower power consumption in applications such as artificial intelligence, mobile devices, consumer electronics, and high-performance computing is driving the adoption of advanced packaging technologies.
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Laser Annealing
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Ion Beam Deposition (“IBD”)
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Ion Beam Etch (“IBE”)
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Wet Processing
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Advanced Packaging Lithography
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Compound Semiconductor
The Compound Semiconductor market includes Photonics, Power Electronics, RF Filters and Amplifiers, and Solar applications.
Photonics refers to light source technologies and laser-based solutions for 3D sensing, datacom and telecom applications. This includes micro-LED, laser diodes, edge emitting lasers and vertical cavity surface emitting lasers (“VCSELs”).
Micro-LEDs may be used for next generation advanced displays. A micro-LED display is a new approach which uses an array of red, blue, and green micro-LEDs to directly display an image without motion blur or image retention, and with improved brightness, darker blacks, and wider viewing angles.
Power Electronics refers to semiconductor devices such as rectifiers, inverters and converters for the control and conversion of electric power in growing applications such as fast or wireless charging of consumer electronics and automotive applications.
RF power amplifiers and filters (including surface acoustic wave (“SAW”) and bulk acoustic wave (“BAW”) filters) are used in 5G communications infrastructure, smartphones, tablets, and mobile devices. They make use of radio waves for wireless broadcasting and/or communications.
Solar refers to power obtained by harnessing the energy of the sun through the use of compound semiconductor devices such as photovoltaics.
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Gallium Nitride (“GaN”) MOCVD
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Arsenides/ Phosphides (“As/P”) MOCVD
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Wet Processing
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MBE
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ALD
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IBE
Data Storage
Data Storage refers to the HDD market which provides significant value for mass storage and is an important part of large capacity storage applications. Our systems enable customers to manufacture thin film magnetic heads for hard disk drives.
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IBD
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IBE
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Physical Vapor Deposition
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Mechanical (Lapping and Dicing)
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Diamond Like Carbon Deposition
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Wet processing
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Scientific & Other
Scientific & Other refers to advanced materials research and a range of manufacturing applications including optical coatings (laser mirrors, optical filters, and anti-reflective coatings).
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Ion Beam Sputtering for optical coatings
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MBE for specialized laser and sensor devices
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Wet Processing for sensors
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ALD for a variety of applications
System Products
Laser Annealing Systems
Our laser annealing systems meet the industry demand for ultra-short time-scale annealing, heating the wafer up to temperatures just below the silicon melting point over a range of timeframes (microseconds to nanoseconds), enabling thermal annealing solutions at the most advanced processing nodes. This unique annealing technology provides the solution to the difficult challenge of fabricating ultra-shallow junctions and highly activated source/drain contacts at these advanced logic nodes. In addition, our proprietary hardware design enables outstanding temperature uniformity across the wafer and die, by minimizing the pattern-density effect, thus reducing absorption variations.
We have also developed a next generation melt anneal technology targeted for memory devices and annealing advanced logic devices at advanced nodes. As devices scale, achieving performance targets has become a challenge. To continue the roadmap, the industry is looking at new materials and the use of thermal processes that require nanosecond time-scale thermal annealing with temperatures exceeding the melting point. It is believed that nanosecond annealing will be required to meet the device targets at future nodes.
Ion Beam Deposition and Etch Systems
Our NEXUS ® Ion Beam systems are used to deposit and etch thin film layers for multiple end applications in the Semiconductor, Data Storage, RF and other various emerging markets. These systems utilize Veeco’s proven gridded ion source technology which delivers a charged ion beam directed at a substrate for the etch application and at a sputter target for the deposition application. Our NEXUS ® IBD system has a leading position in multiple markets including EUV mask blank manufacturing in which it enables our customers to deposit multilayers with high precision and ultra-low defects which is essential for EUV lithography. Our ion sources and grid technology are incorporated into etch systems used to pattern magnetic materials for the 300mm Semiconductor STT-MRAM market. The IBD systems are also critical in the manufacture of thin film magnetic heads where they are used to deposit various magnetic and oxide layers and deliver best-in-class film properties. Our NEXUS ® IBE systems are used to precisely etch complex features on materials which are challenging to pattern by traditional reactive ion etching techniques. These systems are widely used in the data storage industry for patterning of magnetic and oxide materials and are essential for forming the precise shape of the thin film magnetic head. The NEXUS ® systems may be included on our cluster system platform to allow either parallel or sequential deposition/etch processes.
Our Lancer IBE system is used for etching of SAW and BAW devices in the RF filter market and various waveguide patterning steps for AR/VR markets where their best-in-class film uniformity is a key advantage.
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Our SPECTOR ® Ion Beam Sputtering system was developed for high precision optical coatings and offers manufacturers state of the art optical thickness monitoring, improved productivity, and target material utilization, for cutting-edge optical interference coating applications. We also provide a broad array of ion beam sources.
Advanced Packaging Lithography
We have a leading position in the Advanced Packaging lithography equipment market for applications such as FOWLP, Flip Chip (including Copper Pillar), Fan In Wafer Lever Packaging, 3D stacking, interposers and embedded die. The Advanced Packaging market is driven by the need for improved performance, reduced power consumption, and the ability to image smaller geometries for mobile and automotive applications. These applications continue to demand increasingly complex packaging techniques and heterogeneous device integration from integrated device manufacturers (“IDMs,”), Foundries, and outsourced semiconductor assembly and test (“OSAT”) companies. Our Advanced Packaging tools are designed to optimize productivity for leading-edge 200mm and 300mm Advanced Packaging applications by delivering proven reliability and low cost of ownership in high-volume manufacturing environments. Our products are known for best-in-class yield coupled with outstanding resolution and depth of focus.
Single Wafer Wet Processing
We offer single wafer wet processing, and surface preparation systems which target growth opportunities in RF filters and amplifiers in the Compound Semiconductor market, as well as advanced packaging applications in the Semiconductor market. The WaferStorm ® platform is based on our unique ImmJET™ technology, which provides improved performance at a lower cost of ownership than conventional wet bench-only or spray-only approaches. This highly flexible platform targets solvent-based cleaning applications that require a significant level of process control and flexibility. The WaferEtch ® platform provides highly uniform, selective etching with onboard end-point detection for improved process control and yield in bumping applications. In addition, we have developed a state-of-the-art solution with the WaferEtch ® platform to address the requirements of wafer thinning.
Metal Organic Chemical Vapor Deposition Systems
MOCVD production systems are used to make GaN and As/P-based devices for applications including power electronics, RF devices, specialty LED, display, and many other applications. Our proven TurboDisc ® technology is at the heart of our MOCVD systems and is the key to enabling best-in-class deposition uniformity, yield performance and cost per wafer savings for our customers with a combined advantage of high operating uptime and low maintenance costs. Our Lumina™ platform is used for As/P deposition, and features long campaigns and low defectivity for exceptional yield and flexibility. Our Propel™ series (“Propel”) enables the development of highly-efficient GaN-based power electronic, RF devices and advanced GaN-on-silicon micro-LEDs. The Propel system offers 200mm and fully-automated 300mm technology and incorporates single-wafer reactor technology for outstanding film uniformity, yield, and device performance.
Molecular Beam Epitaxy Systems
MBE is the process of precisely depositing epitaxially-aligned atomically-thin crystalline layers, or epilayers, of elemental materials onto a substrate in an ultra-high vacuum environment. We are a leading supplier of MBE systems worldwide.
Our MBE systems, sources, and components are used to develop and manufacture compound semiconductor devices in a wide variety of applications such as high-power fiber lasers, infrared detectors, mobile phones, radar systems, high efficiency solar cells, and basic materials science research. The GENxplor ® MBE system creates high quality epitaxial layers and is ideal for cutting-edge research on a wide variety of materials including GaAs, antimonides, nitrides, and oxides on 3” diameter substrates.
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Atomic Layer Deposition and Other Deposition Systems
ALD is a thin-film deposition method in which a film is deposited on a substrate uniformly with precise control down to the atomic scale. Veeco offers a full suite of ALD systems for non-semiconductor front-end production applications across a wide range of markets and applications such as energy, optical, electronics, micro-electro mechanical systems (“MEMS”), nanostructures, and biomedical. We have recently developed a fully automated tool, Firebird™, capable of managing fragile wafers in a continuous operational sequence.
Other deposition systems include Physical Vapor Deposition, Diamond-Like Carbon Deposition, and Chemical Vapor Deposition Systems.
Sales and Service
We sell our products and services worldwide through various strategically located facilities in the United States, Europe, and the Asia-Pacific region. We believe that our customer service organization is a significant factor in our success. We provide service and support on a warranty, service contract, and an individual service-call basis. We believe that offering timely support creates stronger relationships with customers. Revenue from the sales of parts, upgrades, service, and support represented approximately 30%, 26%, and 28% of our net sales for the years ended December 31, 2020, 2019, and 2018, respectively. Parts and upgrade sales represented approximately 23%, 19%, and 23% of our net sales for those years, respectively, and service and support sales were 7%, 7%, and 5% respectively.
Customers
We sell our products to many of the world’s semiconductor IDMs and Foundries, OSAT, HDD, and photonics manufacturers, as well as research centers and universities. We rely on certain principal customers for a significant portion of our sales. Sales to Seagate Technology accounted for more than 10% of our total net sales in 2020 and 2019; and sales to Focus Lighting Tech Co. accounted for more than 10% of our total net sales in 2018. If any principal customer discontinues its relationship with us or suffers economic difficulties, our business prospects, financial condition, and operating results could be materially and adversely affected.
Research and Development
Our research and development functions are focused on the timely creation of new products and enhancements to existing products, both of which are necessary to maintain our competitive position. We collaborate with our customers to align our technology and product roadmaps to customer requirements. Our research and development activities take place at our facilities in San Jose, California; Plainview, New York; Horsham, Pennsylvania; Somerset, New Jersey; St. Paul, Minnesota; and Waltham, Massachusetts.
Suppliers
We outsource certain functions to third parties, including the manufacture of several of our systems. While we rely on our outsourcing partners to perform their contracted functions, we maintain some level of internal manufacturing capability for these systems. Refer to Item 1A, “Risk Factors,” for a description of risks associated with our reliance on suppliers and outsourcing partners.
Backlog
Our backlog consists of orders for which we received a firm purchase order, a customer-confirmed shipment date generally within twelve months, and a deposit, when required. Our backlog increased to $366.0 million at December 31, 2020 from $267.6 million at December 31, 2019.
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Competition
In each of the markets that we serve, we face competition from established competitors, some of which have greater financial, engineering, and marketing resources than we do, as well as from smaller competitors. In addition, many of our products face competition from alternative technologies, some of which are more established than those used in our products. Significant factors for customer selection of our tools include system performance, accuracy, repeatability, ease of use, reliability, cost of ownership, and technical service and support. None of our competitors compete with us across all of our product lines.
Our principal competitors include: Aixtron; Applied Materials; Canon; Grand Plastics Technology Corporation; Screen Semiconductor Solutions; and Shanghai Micro Electronics Equipment.
Intellectual Property
Our success depends, in part, on our proprietary technology, and we have over 500 patents in the United States and other countries.
We have patents and exclusive and non-exclusive licenses to patents owned by others covering certain of our products, which we believe provide us with a competitive advantage. We have a policy of seeking patents on inventions concerning new products and improvements as part of our ongoing research, development, and manufacturing activities. We believe that there is no single patent or exclusive or non-exclusive license to patents owned by others that is critical to our operations, as the success of our business depends primarily on the technical expertise, innovation, customer satisfaction, and experience of our employees. Refer to Item 1A, “Risk Factors,” for a description of risks associated with intellectual property.
Human Capital
Veeco’s global workforce spans 12 countries around the world. At the end of 2020, we had 993 employees with 221 located in the Asia-Pacific region, 37 in the EMEA region, and 735 in the United States. Approximately 23% of our employees are involved in research and development; 53% are involved in operations, manufacturing, service and quality assurance; and 24% are involved in sales, order administration, marketing, finance, information technology, general management and other administrative functions. Our success depends on our ability to attract, retain and motivate employees. We compete for talent with other companies and organizations. We consider our relations with our employees to be good. We are subject to various federal, state and local regulations, and regularly monitor all key employment activities, such as hiring, termination, pay and working practices to ensure compliance with such regulations. In addition, we supplement our employee base with contractors and other temporary workers.
Our recruitment programs are regionally focused, and hiring is done at a local level to ensure compliance with applicable regulations. To ensure diversity within our workforce we advertise job openings and source candidates broadly to attract a diverse candidate pool. As a leader in our industry, we are able to attract a strong candidate pool and have been successful in filling vacancies. In fiscal 2020, we hired 138 employees, 113 of whom were within the United States, 24 of whom were in the Asia-Pacific region and 1 of whom was within the EMEA region.
During fiscal 2019, we conducted a global employee survey designed to assess employee engagement, leadership, work environment and culture. We had a response rate of 91% of our total worldwide employee base, which is one indicator of a high-level of employee engagement. Participants provided over 2,000 responses to open-ended questions. The findings from this survey established an agenda for various initiatives designed to strengthen our Company. A follow-up survey is planned for fiscal 2021.
We track and report internally on key talent metrics including workforce demographics, talent pipeline and diversity. We believe in investing in professional development programs to ensure we provide opportunities for individuals to advance their careers either in a technical track or move to a leadership position. We offer many of our training and development programs on-line for the benefit of employees located around the world. Additional focus is placed on the development of our future leaders and we leverage a talent review process where high-potential and high-performing employees are
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assessed for future leadership roles as part of our succession management process for critical leadership positions. Since turnover is an important indicator of employee satisfaction, we closely monitor turnover globally and benchmark locally. Our 12-month rolling average for voluntary turnover at December 31, 2020 was approximately 6.8%, substantially less than benchmark data. Our employee average tenure is more than 9 years.
COVID-19 Update
As a result of the outbreak and continuing spread of COVID-19, 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, and business shutdowns. We have important manufacturing operations in the United States 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 currently 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.
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 68%, 70%, and 77% of our total net sales in 2020, 2019, and 2018, 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.
To date, we have not yet experienced any significant interruptions to our supply chain as a result of the COVID-19 pandemic. We continue to monitor our global supply chain and may experience disruptions in future periods, primarily as a result of financial challenges confronting companies in our supply chain and restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, any of 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 chains and growth can not be predicted or quantified, we proactively identified 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:
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implemented rigorous health and safety protocols at our manufacturing facilities, including extensively and frequently disinfecting our facilities, limiting access to our facilities, checking temperatures of individuals entering our facilities, staggering shifts to minimize employee overlap in gowning areas, and providing protective equipment;
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mandated remote working arrangements for employees that do not need to be physically present on the manufacturing floor or at customer facilities;
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implemented virtual meetings, customer demos, and factory acceptances to enable customers to review data and performance of their system in our factory remotely via live video;
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performing service and support activities remotely to resolve customer issues and enable our customers to maintain their operations;
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proactively identified gaps in our supply chain and re-sourced a number of components in order to maintain our customer shipment commitments and mitigate single points of failure;
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monitoring our IT systems and implementing contingency and disaster recovery plans to support our IT infrastructure to ensure that our systems remain continuously operative; and
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continuing to monitor and, if necessary, reduce our operating expenses and capital expenditures to maintain financial flexibility and profit margins.
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.
Available Information
Our corporate website address is www.veeco.com. All filings we make with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, our proxy statements and any amendments thereto filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available for free in the Investor Relations section of our website as soon as reasonably practicable after they are filed with or furnished to the SEC. The reference to our website address does not constitute inclusion or incorporation by reference of the information contained on our website in this Form 10-K or other filings with the SEC, and the information contained on our website is not part of this document.
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