What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-22 · 129 added, 121 removed, 181 unchanged (58% of the section changed)

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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:

● Significant progress on our San Jose capacity expansion project, including shipping the first systems out of this new facility;

● Greatly increased our emphasis on placing evaluation systems with customers.

We believe these evaluation systems are a final step in our customer’s selection process;

● Overall 28% revenue growth, led by the Semiconductor and Data Storage markets;

● Achieved $68 million in cash flow from operations;

● Grew backlog by $74 million to $440 million;

● Improved our capital structure by repurchasing $112 million of our 2023 Senior Convertible Notes;

● Improved financial flexibility by entering into revolving credit facility of $150 million;

● Improved our ESG efforts and disclosures, as reflected in our 2 nd Corporate Sustainability Report released in November 2021.

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.

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:

● 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;

● mandated remote working arrangements for employees who do not need to be physically present on the manufacturing floor or at customer facilities;

● 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;

● performing service and support activities remotely, when possible, to resolve customer issues and enable our customers to maintain their operations;

● 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;

● monitoring our IT systems and implementing contingency and disaster recovery plans to support our IT infrastructure to ensure that our systems remain continuously operative;

● 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.

Business Update

We categorize our revenue by the end-markets into which we sell.

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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.

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 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.

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 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 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.

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.

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.

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.

Results of Operations

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Rest of World

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 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.

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

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.

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.

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 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.

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 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.

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 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

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

In addition, we delayered the organization while preserving our ability to execute.

Collectively, these actions impacted approximately 60 employees.

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 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.

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.

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.

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

$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.

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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 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:

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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:

(i) a $1.0 million income tax expense attributed to the profitable non-U.S.

operations, as well as withholding tax as we now expect to repatriate certain foreign earnings as a result of changes in tax laws under the 2017 Tax Act, (ii) a $0.3 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, which were partially offset by (iii) a $0.5 million income tax benefit related to the amortization and subsequent impairment of certain non-U.S.

intangible assets during the year.

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.

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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subsidiaries for which the U.S.

repatriation tax has been provided and did not require the use of cash due to the use of net operating loss carryforwards.

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.

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Asset impairment

Impairment of equity investments

Impairment of equity investment

Provision for bad debts

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Net cash provided by (used in) 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.

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.

Cash Flows from Investing Activities

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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 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

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

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(in thousands)

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

Proceeds from issuance of 2027 Notes, net of issuance costs

Purchase of capped calls

Repurchase of 2023 Notes

Debt issuance costs

Settlement of equity awards, net of withholding taxes

Net cash provided by (used in) financing activities

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.

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.

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

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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, 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.

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.

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.

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At December 31, 2021, we have $3.9 million of offsetting supplier deposits that will be applied against these purchase commitments.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, expenses, results of operations, liquidity, capital expenditures, or capital resources other than bank guarantees and purchase commitments reflected in the preceding “Contractual Obligations and Commitments” table.

Application of Critical Accounting Policies

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.

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Revenue Recognition

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.

Our contracts with customers generally do not contain variable consideration.

In the rare instances where variable consideration is included, we estimate the amount of variable consideration and determine what portion of that, if any, has a high probability of significant subsequent revenue reversal, and if so, that amount is excluded from the transaction price.

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:

● Identification of performance obligations and allocation of contract price:

Our contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, installation, maintenance, and service plans.

Judgment is required to properly identify the performance obligations within a contract and to determine how the revenue should be allocated among the performance obligations.

We also evaluate whether multiple transactions with the same customer or related parties should be considered part of a single contract based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another.

When there are separate units of accounting, we allocate revenue to each performance obligation on a relative stand-alone selling price basis.

We allocate revenue to each performance obligation on a relative stand-alone selling price basis.

The stand-alone selling prices are determined based on the prices at which we separately sell the systems, upgrades, components, spare parts, installation, maintenance, and service plans.

For items that are not sold separately, we estimate stand-alone selling prices generally using an expected cost plus margin approach.

Most of our revenue is recognized at a point in time when the performance obligation is satisfied.

We consider many facts when evaluating each of our sales arrangements to determine the timing of revenue recognition, including our contractual obligations and the nature of the customer’s post-delivery acceptance provisions.

Judgment is required to properly identify the performance obligations within a contract and to determine how the revenue should be allocated among the performance obligations.

● Combination of contracts:

Judgment is required when evaluating whether multiple transactions with the same customer or related parties should be considered part of a single contract.

This evaluation includes an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another.

● Variable consideration:

Our contracts with customers generally do not contain variable consideration.

● Transfer of control:

Judgment may be required in the determination of when transfer of control occurs.

This judgment may include the interpretation of commercial terms and consideration of the customer’s post-delivery acceptance provisions.

Our system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures.

For many of these arrangements, a customer source inspection of the system is performed in our facility, test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery, or other quality assurance testing is performed internally to ensure system functionality prior to shipment.

Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system.

When we objectively demonstrate that the criteria specified in the contractual acceptance provisions are achieved prior to delivery either through customer testing or our historical experience of our tools meeting specifications, transfer of control of the product to the customer is considered to have occurred and revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date.

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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 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.

We recognize revenue related to maintenance and service contracts over time based upon the respective contract term.

Installation revenue is recognized over time as the installation services are performed.

We recognize revenue from the sales of components, spare parts, and specified service engagements at a point in time, which is typically consistent with the time of delivery in accordance with the terms of the applicable sales arrangement.

We may receive customer deposits on system transactions.

The timing of the transfer of goods or services related to the deposits is either at the discretion of the customer or expected to be within one year from the deposit receipt.

As such, we do not adjust transaction prices for the time value of money.

Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred since the expected performance period is one year or less.

We have elected to treat shipping and handling costs as a fulfillment activity, and we include such costs in cost of services when we recognize revenue for the related goods.

Taxes assessed by governmental authorities that are collected by us from a customer are excluded from revenue.

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

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Goodwill and Intangible Assets

Goodwill is tested for impairment at least annually in the beginning of the fourth quarter of our fiscal year.

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.

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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 control premium is estimated using historical transactions in similar industries.

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.

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.

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Recent Accounting Pronouncements

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.

We adopted ASU 2019-12 in the second quarter of 2020.

Additionally, we will adopt ASU 2020-06 effective January 1, 2022.

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