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Liabilities | 6 Months Ended
--- | ---
Jun. 30, 2017
Liabilities |
Liabilities | Note 5 - Liabilities Accrued expenses and other current liabilities The components of accrued expenses and other current liabilities at June 30, 2017 and December 31, 2016 consist of:
|  | June 30, |  | December 31, |
|  | 2017 |  | 2016 |
|  | (in thousands) |
Payroll and related benefits |  | $ | 23,016 |  | $ | 18,780 |
Warranty |  | 6,741 |  | 4,217 |
Professional fees |  | 2,943 |  | 1,827 |
Installation |  | 1,386 |  | 1,382 |
Sales, use, and other taxes |  | 1,806 |  | 1,282 |
Restructuring liability |  | 1,373 |  | 1,796 |
Interest |  | 4,244 |  | — |
Other |  | 2,796 |  | 3,917 |
Total |  | $ | 44,305 |  | $ | 33,201 |
Warranty Warranties are typically valid for one year from the date of system final acceptance, and Veeco estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and are affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. Changes in product warranty reserves for the six months ended June 30, 2017 include:
|  | (in thousands) |
Balance - December 31, 2016 |  | $ | 4,217 |
Warranties issued |  | 2,809 |
Addition from Ultratech acquisition |  | 1,889 |
Consumption of reserves |  | (2,673 | )
Changes in estimate |  | 499 |
Balance - June 30, 2017 |  | $ | 6,741 |
Restructuring accruals During the six months ended June 30, 2017, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. During the second and third quarters of 2016, the Company undertook restructuring activities as part of its initiative to streamline operations, enhance efficiency, and reduce costs. As a result of these actions, the Company notified approximately 50 employees of their termination from the Company. In addition, during the third quarter of 2016, the Company decided to significantly reduce future investments in its ALD technology development, which impacted approximately 25 additional employees. Over the next few quarters, the Company expects to incur additional restructuring costs of $1 million to $3 million as it finalizes all of these activities.
|  | Personnel |  |  |  |  |
|  | Severance and |  | Facility |  |  |
|  | Related Costs |  | Closing Costs |  | Total |
|  | (in thousands) |
Balance - December 31, 2016 |  | $ | 1,796 |  | $ | — |  | $ | 1,796 |
Provision |  | 1,405 |  | 2,349 |  | 3,754 |
Payments |  | (2,079 | ) | (2,098 | ) | (4,177 | )
Balance - June 30, 2017 |  | $ | 1,122 |  | $ | 251 |  | $ | 1,373 |
Included within restructuring expense in the Consolidated Statements of Operations for the six months ended June 30, 2017 is approximately $0.8 million of non-cash charges related to accelerated share-based compensation for employee terminations. Customer deposits Customer deposits totaled $25.0 million and $22.2 million at June 30, 2017 and December 31, 2016, respectively. Mortgage Payable The Company has a mortgage note payable associated with its property in St. Paul, Minnesota, which, during the second quarter of 2017 was designated an asset held for sale. The carrying value of the property exceeds the carrying value of the mortgage note, which was $1.0 million and $1.2 million at June 30, 2017 and December 31, 2016, respectively. The annual interest rate on the note is 7.91%, and the final payment is due on January 1, 2020. The Company determined the mortgage is a Level 3 liability in the fair-value hierarchy and, using a discounted cash flow model, estimated its fair value as $1.0 million and $1.2 million at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, the remaining principle balance on the mortgage note is included in “Current portion of long-term debt” on the Consolidated Balance Sheet as the associated asset is expected to be sold within the next twelve months. Convertible Senior Notes On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes due (the “Convertible Senior Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The Convertible Senior Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted. The Convertible Senior Notes are unsecured obligations of Veeco and rank senior in right of payment to any of Veeco’s subordinated indebtedness; equal in right of payment to all of Veeco’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Veeco’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Veeco’s subsidiaries. The Convertible Senior Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is 24.9800 shares of the Company’s common stock per $1,000 principal amount of Convertible Senior Notes, representing an initial effective conversion price of $40.03 per share of common stock. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the indenture governing the Convertible Senior Notes, dated January 18, 2017 between the Company and U.S. Bank National Association, as trustee (the “Indenture”), but will not be adjusted for accrued but unpaid interest. Holders may convert all or any portion of their notes, in multiples of one thousand dollar principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 15, 2022 only under the following circumstances:
| (i) |  | During any calendar quarter (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
| (ii) |  | During the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per one thousand dollar principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Veeco’s common stock and the conversion rate on each such trading day;
| (iii) |  | If the Company calls any or all of the Convertible Senior Notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
| (iv) |  | Upon the occurrence of specified corporate events.
On or after October 15, 2022, until the close of business on the business day immediately preceding the Maturity Date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion option, the Company segregated the liability component of the instrument from the equity component. The liability component was measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Convertible Senior Notes. The calculation of the fair value of the debt component required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the Convertible Senior Notes at a discount rate of 7.00%, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the aggregate face value of the Convertible Senior Notes over the estimated fair value of the liability component of $72.5 million was recognized as a debt discount and recorded as an increase to additional paid-in capital, and will be amortized over the expected life of the Convertible Senior Notes using the effective interest rate method. Amortization of the debt discount is recognized as non-cash interest expense. The transaction costs of $9.2 million incurred in connection with the issuance of the Convertible Senior Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected term of the Convertible Senior Notes. Transaction costs allocated to the equity component of $1.9 million reduced the value of the equity component recognized in stockholders’ equity. The carrying value of the Convertible Senior Notes is as follows:
|  | June 30, |
|  | 2017 |
|  | (in thousands) |
Principal amount |  | $ | 345,000 |
Unamortized debt discount |  | (68,072 | )
Unamortized transaction costs |  | (6,857 | )
Net carrying value |  | $ | 270,071 |
Total interest expense related to the Convertible Senior Notes is as follows:
|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2017 |  | 2017 |
|  | (in thousands) |
Cash Interest Expense |  |  |  |  |
Coupon interest expense |  | $ | 2,329 |  | $ | 4,244 |
Non-Cash Interest Expense |  |  |  |  |
Amortization of debt discount |  | 2,455 |  | 4,440 |
Amortization of transaction costs |  | 247 |  | 447 |
Total Interest Expense |  | $ | 5,031 |  | $ | 9,131 |
The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $354.0 million at June 30, 2017. Other Liabilities Other liabilities at June 30, 2017 included deferred compensation of $4.4 million, asset retirement obligations of $3.3 million, medical and dental benefits of $2.5 million, and acquisition related accruals of $1.0 million. At December 31, 2016, other liabilities primarily consisted of a non-current income tax payable of $4.9 million.

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