What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-16 compared with 2023-02-22 · 91 added, 84 removed, 197 unchanged (47% 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 wet processing technologies play an integral role in the fabrication and packaging of advanced semiconductor devices.

Our proven ion beam, laser annealing, lithography, MOCVD, CVD, and single wafer wet processing technologies play an integral role in the fabrication and packaging of advanced semiconductor devices.

With equipment designed to optimize performance, yield and cost of ownership, Veeco holds leading technology positions in the markets we serve.

To learn more about Veeco’s systems and service offerings, visit www.veeco.com.

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

● Solidly executing our multi-year growth strategy, with progress advancing our product roadmaps for the Semiconductor and Compound Semiconductor markets, execution of our robust evaluation program with high customer acceptance rates, and completing our San Jose expansion

● Achieved 11% year-on-year revenue growth for the Company, including record revenue in the Semiconductor market, which grew 50% year-on-year

● Developed silicon carbide market strategy, culminating in the acquisition of Epiluvac, accelerating our SiC epitaxy equipment market penetration

● Reinforced our commitment to culture and corporate responsibility, including appointing an additional female Board member, publishing our third sustainability report, and implementing a leadership training program

● Positioned the Company for a solid performance expected in 2023, with an ending 2022 backlog of $500 million, and robust cash flow from operations of $108 million, strengthening our balance sheet

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

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

● Solidly executing our multi-year growth strategy, with progress made towards advancing our product roadmaps for the Semiconductor and Compound Semiconductor markets, including shipment of two next generation nanosecond annealing evaluation systems to Tier 1 logic customers, shipment of two IBD300 evaluation systems to Tier 1 memory customers, and the continued development of our CVD SiC technology;

● Achieved year-on-year revenue growth for the Company, including record revenue in the Semiconductor market, which grew 12% year-on-year despite a decline in Wafer Fabrication Equipment (“WFE”) spending;

● Shipped multiple Laser Annealing systems to a new Tier 1 logic customer and a new Tier 1 memory customer, and expanded adoption of Laser Annealing systems with mature node customers;

● Gross margin improvement enabled 16% growth in operating income year-over-year;

● Successfully refinanced a portion of our convertible notes in order to strengthen our balance sheet and financial profile by extending the average maturity of our notes, reducing future annual cash interest payments, and lowering share dilution;

● Capital allocation toward organic growth initiatives in the Semiconductor and Compound Semiconductor markets remained a top priority, including strategic R&D investment and investment in our evaluation program.

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

Business Update

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

Longer lead times and parts shortages and allocations have required that we plan further ahead than usual, and we have undertaken efforts to increase our purchase commitments to secure critical components in a timely manner.

Material lead times continue to be a challenge with respect to our supply chain, limiting our ability to fulfill some of our customers’ demands in a timely manner, as many of our peers have also been experiencing.

We are also experiencing increasing labor, logistics, and material costs, creating additional gross margin pressures.

We expect supply shortages and related challenges to persist into 2023, and we continue to monitor our supply chain and work with our suppliers to identify and mitigate potential gaps in an effort to ensure continuity of supply.

Additionally, we have seen a slow-down in certain shorter lead time products such as wet processing, advanced packaging lithography, and spare parts and upgrades, as well as instances where customers have requested order cancellations, delayed shipments, or delayed payments.

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

Furthermore, on October 17, 2023, the US Department of Commerce, Bureau of Industry and Security (“BIS”), issued an update to export regulations previously issued on October 7, 2022, to modify and reinforce the prior restrictions while placing additional entities on the BIS Entity List.

While these new regulations have not had a material impact to our business, the export regulation landscape is fluid and evolving, and it is possible that the issuance of additional export controls could further restrict our ability to sell to customers in China and lead to future revenue loss.

If we are not able to replace these sales with sales to other customers, it could have a material adverse impact on our business and financial position.

Finally, we continue to see reduced demand for certain products such as advanced packaging lithography, spare parts, and upgrades due to low customer utilization rates, as well as instances where customers have requested order cancellations, delayed shipments, or delayed payments.

Consequently, we are monitoring the situation very closely and have been taking early actions to limit the pace at which we increase spending while maintaining our growth trajectory.

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

In addition, certain China-based companies were added to the BIS Unverified

List, and changes have been made to the BIS Entity List, further restricting sales to the named entities.

Recent order activity has led to significant backlog in China, some of which may be subject to these regulations.

While the export regulation landscape is fluid and evolving, we believe at this time that the substantial majority of this backlog will not be negatively affected by the new regulations.

Finally, like many in our industry, we continue to manage through the effects of the COVID-19 pandemic.

While new variants of COVID-19 have emerged and additional variants may emerge in the future, we continue to proactively implement precautionary measures if and when necessary to keep our workplaces healthy and safe.

Our top priority steadfastly remains protecting the health and safety of our employees, customers, suppliers and community.

While our actions have been effective so far, there could be additional challenges ahead that may impact either our operations or those of our customers, which could have a negative effect on our financial performance, including productivity and capacity impacts as a result of the ongoing pandemic.

We expect these measures to continue until we determine that the COVID-19 pandemic is adequately contained for purposes of our operations, and we may take further actions as government authorities require or as we determine to be in the best interests of our employees, customers, suppliers and community.

We may incur additional expenses in future periods in response to the pandemic, which could adversely affect our operations and financial condition.

We also have seen improvements in our supply chain, as evidenced by a significant decline in lead times and a further improvement to suppliers on time deliveries.

Material lead times have improved significantly and have generally returned to pre-pandemic levels.

We will continue to work with our suppliers to identify and mitigate potential gaps in an effort to ensure continuity of supply, as well as continue to focus our efforts on cost containment initiatives.

While we work to overcome these macroeconomic challenges, we continue to serve our customers in the following four end markets:

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and Scientific & Other.

Sales in the Semiconductor market grew 50% in 2022 and were driven by our laser annealing systems for both advanced and trailing node logic devices, ion beam deposition systems for EUV mask blank production, and lithography systems for Advanced Packaging.

We continue to build momentum for our laser annealing solutions with advanced node logic customers by winning application steps with leading manufacturers.

We have also been receiving orders and shipping systems for trailing node applications in China and other regions.

In addition to logic, we introduced laser annealing to the memory market and received an acceptance for an evaluation system at a DRAM manufacturer.

Our lithography systems for Advanced Packaging are aligned with packaging approaches such as fan out wafer level packaging and other advanced packaging applications.

Additionally, the ongoing adoption of EUV Lithography for advanced node semiconductor manufacturing continues to drive demand for our Ion Beam mask blank systems.

Sales in the Semiconductor market grew 12% in 2023, driven by our laser annealing systems for both advanced and mature node devices.

While our growth strategy is predominately focused on advanced node logic and memory applications, 2023 revenue has been strong for mature node applications in China.

We continue to build momentum for our laser annealing solutions in advanced node logic by winning application steps and new customers.

In 2023, we penetrated our 3 rd Tier 1 logic customer and shipped multiple systems to this customer.

As it relates to the memory market, we announced that a Tier 1 memory customer placed several LSA orders for high volume production of High Bandwidth Memory (“HBM”) and advanced DRAM devices following a successful evaluation program, and we shipped several systems to this customer in 2023.

Our Laser Annealing roadmap reached a key milestone during the fourth quarter upon shipment of our first two Nanosecond Annealing evaluation systems to Tier 1 logic customers.

Nanosecond annealing provides Veeco with an opportunity to expand laser annealing adoption for new advanced node applications.

The ongoing adoption of EUV Lithography for advanced node semiconductor manufacturing continues to drive demand for our Ion Beam mask blank deposition systems.

We reached another significant milestone in the fourth quarter upon shipment of our first two IBD300 evaluation systems to Tier 1 memory customers for 300mm front end semiconductor applications.

Additionally, our lithography systems for Advanced Packaging are used for packaging approaches such as fan out wafer level packaging and other advanced packaging applications, while our wet processing systems are used for Photoresist Strip, Solvent Cleans, and flux removal.

Overall, our technology and market strategy are well aligned with trends such as artificial intelligence, mobile connectivity and high-performance computing that drive the Semiconductor market.

Given recent order activity and current backlog in the Semiconductor market, we expect revenue in 2023 to outpace (“WFE”) spending growth, which is forecasted to be down 20% or more.

Finally, we have completed our new San Jose leased facility buildout, and have fully transitioned to this new location.

We address the Compound Semiconductor market with a broad portfolio of technologies, including Wet Processing and MOCVD, along with MBE and Ion Beam, all of which have been developed to support emerging applications such as 5G driven RF device/filter manufacturing, GaN power electronics, and photonics applications including edge-emitting lasers, specialty LEDs and micro-LEDs.

Sales in the Compound Semiconductor market grew 13% in 2022.

We experienced growth in system shipments for photonics applications.

We continue to invest for future growth in the Compound Semiconductor market in areas like power electronics and Micro-LEDs.

Given our current backlog and visibility, we expect Semiconductor revenue to be up in 2024.

We address the Compound Semiconductor market with a broad portfolio of technologies, including Wet Processing and MOCVD, along with MBE and Ion Beam, in emerging applications such as 5G driven RF device/filter manufacturing, GaN power electronics, and photonics applications including edge-emitting lasers, specialty LEDs and micro-LEDs.

Sales in the Compound Semiconductor market declined by 28% in 2023, driven by a decline in systems for 5G driven RF device/filter manufacturing.

We continue to invest for future growth in the Compound Semiconductor market in areas like Power Electronics and Micro-LED.

Power Electronics markets are served by GaN equipment, and also by SiC epitaxy equipment.

We are working to penetrate the GaN power market, which is driven by applications such as wireless charging in consumer electronics.

In addition to our GaN system offerings, on January 31 st , 2023 Veeco acquired SiC technology to address the high-growth SiC power epitaxy equipment market, which is driven by electric vehicles.

With this acquisition, Veeco is accelerating its entry into this market, and expects revenue in 2024.

The purchase price for the transaction, all payable in cash, was $30 million paid at the time of closing with a potential additional $35 million in performance based earn-outs.

After several years of growth, sales in the Data Storage market were down 48% in 2022.

In addition to our GaN system offerings, on January 31, 2023 Veeco acquired SiC technology to address the high-growth SiC power epitaxy equipment market, which is primarily driven by adoption of electric vehicles.

With this acquisition, Veeco is accelerating its entry into this market.

We expect revenue in the Compound Semi market to grow in 2024.

Sales in the Data Storage market increased slightly in 2023.

Demand for our Ion Beam products is driven by cloud-based storage.

Hard disk drive manufacturers are manufacturing drives with an increasing number of magnetic heads and they are introducing advanced technologies which require increased capital intensity.

With data proliferation forecasted to continue to grow, and based on orders we received in 2022, we feel optimistic about the long-term prospects of our data storage business.

As reported, the hard disk drive industry experienced contraction in exabyte shipments in 2022 and 2023 with uncertainty as to the timing of a recovery;

however, recent analyst and industry forecasts predict nearline hard disk drive exabyte shipments to grow at an approximate 20% CAGR over the coming years from a lower base in 2023 due to long-term growth in the cloud.

Despite current industry challenges, we expect revenue in the Data Storage market to be flat to up in 2024.

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

Revenue was up 12% in 2022 compared to 2021, and we expect sales in this market to grow modestly in the long run, in line with GDP.

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

We address the Scientific & Other market with several technologies, including MBE, ALD, MOCVD, Wet Processing, & IBD/IBE, which support scientific, optical coating and other applications, such as Micro-Electromechanical Systems

(MEMS) applications.

Sales in this market increased as compared to the prior quarter and the prior year quarter.

We expect sales in this market to grow in the long run, in line with GDP.

Results of Operations

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Total operating expenses, net

Operating income

Operating income (loss)

Interest income (expense), net

Other income (expense), net

Income before income taxes

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

* Not meaningful

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Rest of World

Total sales increased for the year ended December 31, 2022 against the comparable prior year period in the Semiconductor, Compound Semiconductor, and Scientific & Other markets, partially offset by a decline in the Data Storage market.

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

Included within the Rest of APAC region for the year ended December 31, 2022 were sales in Taiwan, South Korea, Singapore, and Japan of $105.0 million, $40.3 million, $38.4 million, and $30.8 million, respectively, while sales within Rest of APAC region for the year ended December 31, 2021 included sales in Taiwan and South Korea of $65.2 million and $50.4 million, respectively.

Total sales increased for the year ended December 31, 2023 against the comparable prior year period in the Semiconductor and Scientific & Other markets, partially offset by a decline in the Compound Semiconductor market.

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

Included within the Rest of APAC region for the year ended December 31, 2023 were sales in Japan, Taiwan, and Singapore of $74.7 million, $62.7 million, and $32.2 million, respectively, while sales within Rest of APAC region for the year ended December 31, 2022 included sales in sales in Taiwan, South Korea, Singapore, and Japan of $105.0 million, $40.3 million, $38.4 million, and $30.8 million, respectively.

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

In light of the global nature of our business, we are impacted by conditions in the various countries in which we and our customers operate.

In 2022, gross profit increased compared to 2021 primarily due to an increase in sales volume, partially offset by decreased gross margins.

Gross margins decreased principally due to increased logistics costs, as well as an increase in spending as we invested in service infrastructure and capacity expansion to meet the growing demands for our semiconductor product lines.

In 2023, gross profit increased compared to 2022 primarily due to an increase in sales volume and higher gross margins.

Gross margins increased due to product mix of sales in the period, as well as favorable service spending.

We expect our gross margins to fluctuate each period due to product mix and other factors.

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Selling, General, and Administrative

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

Given the uncertainty regarding the impacts on our business resulting from the COVID-19 pandemic, we are focused on the proactive management of expenses.

In future periods, we may incur additional selling, general and administrative expenses to support our

responses to the COVID-19 pandemic.

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

Selling, general, and administrative expenses increased slightly in 2023 compared to 2022.

However, expenses as a percentage of revenue have remained flat when compared to the prior period.

Given the uncertainty regarding the impacts on our business resulting from the general macroeconomic environment, we are focused on the proactive management of expenses.

Amortization Expense

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For the year ended December 31, 2023, we recorded net interest expense of $1.2 million, compared to $9.3 million for the comparable prior period.

The decrease in interest expense was primarily related to the adoption of ASU 2020-06, as non-cash charges related to the amortization of debt discount and transaction costs of the 2023 Notes, 2025 Notes, and 2027 Notes decreased approximately $12.9 million for 2022 compared to 2021.

Additionally, cash interest expense on the Notes decreased approximately $2.6 million from the comparable prior year due to the partial repurchase of the 2023 Notes in November 2021.

The decrease in net interest expense was primarily related to an increase of interest income of approximately $8.4 million due to higher interest rates for 2023 compared to 2022.

Other Income (Expense)

On 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 19, 2023, in connection with the completion of a private offering of $230.0 million aggregate principal amount of 2.875% convertible senior notes, we repurchased and retired approximately $106.0 million in aggregate principal amount of our outstanding 2025 Notes, with a carrying amount of $105.4 million, for approximately $106.0 million of cash and 0.7 million shares of our common stock for the 2025 Notes.

Also, we repurchased and retired approximately $100.0 million in aggregate principal amount of our outstanding 2027 Notes with a carrying amount of $98.5 million, for approximately $92.8 million of cash and 3.8 million shares of our common stock for the 2027 Notes.

We accounted for the partial settlement of the 2025 Notes and 2027 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $16.5 million and $80.6 million, respectively, for the year ended December 31, 2023.

At each reporting date, we consider new evidence, both positive and negative, that could affect our view of the future realization of our deferred tax assets.

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In addition, we evaluated additional positive evidence and concluded that it is more likely than not our deferred tax assets are realizable on a more likely than not basis with the exception of certain state tax attributes.

The 2023 income tax expense of $2.0 million was primarily comprised of 1) a $16.2 million income tax expense on pre-tax income from operations;

and 2) a $2.0 million income tax expense related to share-based compensation, partially offset by 3) a $7.5 million tax benefit related to Foreign-Derived Intangible Income;

4) a $7.7 million tax benefit associated with research and development tax credits;

and 5) a $1.0 million tax benefit associated with the loss on extinguishment of convertible notes under Section 249 of the Internal Revenue Code of 1986, as amended (Section 249).

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

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

Years Ended December 31, 2022 and 2021

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(in thousands)

Net income (loss)

Non-cash items:

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Loss on extinguishment of debt

Impairment of equity investment

Provision for bad debts

Change in contingent consideration

Changes in operating assets and liabilities

Net cash provided by (used in) operating activities

Net cash provided by operating activities was $61.7 million for the year ended December 31, 2023 and was due to net loss of $30.4 million and adjustments for non-cash items of $150.5 million, partially offset by a decrease in cash flow from changes in operating assets and liabilities of $58.5 million.

The changes in operating assets and liabilities were largely attributable to increases in inventories largely related to evaluation systems at customer facilities, contract assets, prepaid expenses and other current assets, and decreases in accounts payable, and contract liabilities.

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

The changes in operating assets and liabilities was largely attributable to an increase in customer deposits, partially offset by an increase in inventories and accounts receivables.

Net cash provided by operating activities was $67.7 million for the year ended December 31, 2021 and was due to net income of $26.0 million and adjustments for non-cash items of $59.5 million, partially offset by a decline in cash flow from operating activities due to changes in operating assets and liabilities of $17.8 million.

The changes in operating assets and liabilities was largely attributable to increases in accounts receivable and inventories and decreases in deferred revenue, partially offset by increases in accounts payable and cash received for landlord reimbursements for leasehold improvements.

The changes in operating assets and liabilities was largely attributable to an increase in contract liabilities, partially offset by an increase in inventories and accounts receivables.

Cash Flows from Investing Activities

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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, 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, 2022 was attributable to the net change in investments, as well as capital expenditures.

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

We experienced a high level of capital expenditures during 2021 associated with the continued build-out of our newly leased facility in San Jose, California, which is substantially complete at this time.

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

The cash used in investing activities during the year ended December 31, 2022 was attributable to the net change in investments, as well as capital expenditures.

Cash Flows from Financing Activities

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(in thousands)

Repurchase of 2023 Notes

Debt issuance costs

Proceeds from issuance of 2029 Notes, net of issuance costs

Extinguishment of Convertible Notes

Contingent consideration payment

Settlement of equity awards, net of withholding taxes

Net cash provided by (used in) financing activities

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

The net cash used in financing activities for the year ended December 31, 2022 was primarily related to the settlement of equity awards.

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

Convertible Senior Notes and Revolving Credit Facility

We have $26.5 million outstanding principal balance of 3.50% convertible senior notes that bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted.

These notes matured on January 15, 2023 and were paid in cash and settled by the Company at that time.

In addition, we have $132.5 million outstanding principal balance of 3.50% convertible senior notes that bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted.

Finally, we have $125.0 million outstanding principal balance of 3.75% convertible senior notes that bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted.

In addition, we have $25.0 million outstanding principal balance of 3.75% convertible senior notes that bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted.

The 2027 Notes are currently convertible by shareholders until March 31, 2024.

In addition, we have $230.0 million outstanding principal balance of 2.875% convertible senior notes that bear interest at a rate of 2.875% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2029, unless earlier purchased by the Company, redeemed, or converted.

We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on these debts.

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● 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.

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

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

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work-in-process;

and finished goods.

finished goods;

and evaluation inventory at customer facilities.

Obsolete inventory or inventory in excess of our estimated usage requirements is written down to its estimated net realizable value if less than cost.

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We determine the fair value of our indefinite-lived intangible assets using a discounted cash flow method.

Accounting for Business Combinations

We allocate the fair value of the purchase price of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their fair value at acquisition date.

The excess of the fair value of the purchase price over the fair value of these net tangible and intangible assets acquired is recorded as goodwill.

Management’s estimates of fair value are based on assumptions believed to be reasonable, but such estimates and assumptions are inherently uncertain and subject to refinement.

We believe assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from management of the acquired companies, and inherently uncertain.

The Company uses a discounted cash flow model to estimate the fair value of acquired intangible assets.

Additionally, the Company estimates the fair value of contingent consideration included as part of the purchase price by assigning probabilities and discount factors to each of the various defined performance milestones, while using a Monte-Carlo simulation model to determine the most likely outcome for payments to be based on value of orders received.

These valuation models utilize critical estimates, including, but not limited to, estimates of future revenues, gross margins, operating expenses, and cash flows, as well as discount rates that reflect the risk factors associated with the projected cash flows.

Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actuals results.

We estimate our income taxes in each of the jurisdictions in which we operate.

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Recent Accounting Pronouncements

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

We have also adopted ASU 2020-06 effective January 1, 2022.

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

We are also evaluating other pronouncements recently issued but not yet adopted.

We adopted ASU 2020-06 effective January 1, 2022.

We are also evaluating other pronouncements recently issued but not yet adopted, including ASU 2023-09.

The adoption of these pronouncements is not expected to have a material impact on our consolidated financial statements.

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

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