Note 3 — Business Combinations

Ultratech

On May 26, 2017, the Company completed its acquisition of Ultratech, Inc. (“Ultratech”). Ultratech designs, manufactures, and markets lithography, laser annealing, and inspection equipment for manufacturers of semiconductor devices, including front-end semiconductor manufacturing and advanced packaging. Ultratech also designs, manufactures, and markets atomic layer deposition (“ALD”) equipment for scientific and industrial applications. Ultratech’s customers are primarily located throughout the United States, EMEA, China, Japan, Taiwan, Singapore, and Korea. With the addition of Ultratech, the Company establishes itself as a leading equipment supplier in the advanced packaging market, forming a strong technology portfolio to address critical advanced packaging applications. The results of Ultratech’s operations have been included in the consolidated financial statements since the date of acquisition.

Ultratech shareholders received (i) $21.75 per share in cash and (ii) 0.2675 of a share of Veeco common stock for each Ultratech common share outstanding on the acquisition date. In connection with the Company’s continued finalization of purchase accounting, during the three months ended September 30, 2017, the Company decreased the fair value of acquired inventory and property, plant and equipment by $4.1 million and $1.2 million, respectively, resulting in a corresponding increase in goodwill. The Company plans to finalize the purchase accounting within the measurement period, which may include additional adjustments to the fair values of assets acquired and liabilities assumed. The preliminary acquisition date fair value of the consideration totaled $633.4 million, net of cash acquired, which consisted of the following:

	Acquisition Date
	(May 26, 2017)
	(in thousands)
Cash consideration, net of cash acquired	$	404,489
Equity consideration (7.2 million shares issued)	228,644
Replacement equity awards attributable to pre-acquisition service	228

Acquisition date fair value	$	633,361

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

	Acquisition Date
	(May 26, 2017)
	(in thousands)
Short-term investments	$	47,161
Accounts receivable	45,465
Inventory and deferred cost of sales	57,570
Prepaid expense and other current assets	7,217
Property, plant, and equipment	18,332
Intangible assets	346,940
Other assets	6,442

Total identifiable assets acquired	529,127

Accounts payable and accrued expenses	40,123
Customer deposits and deferred revenue	4,834
Deferred income taxes	32,478
Other liabilities	11,952

Total liabilities assumed	89,387

Net identifiable assets acquired	439,740
Goodwill	193,621

Net assets acquired	$	633,361

The gross contractual value of the acquired accounts receivable was approximately $46.0 million. The fair value of the accounts receivables is the amount expected to be collected by the Company. Goodwill generated from the acquisition is primarily attributable to expected synergies from future growth and strategic advantages provided through the expansion of product offerings as well as assembled workforce and is not expected to be deductible for income tax purposes.

The preliminary classes of intangible assets acquired and the estimated useful life of each class is presented in the table below:

	Acquisition Date
	(May 26, 2017)
	Amount		Useful life
	(in thousands)
Technology	$	158,390	8 years
Customer relationships	116,710		12 years
Backlog	3,080		6 months
In-process research and development	43,340		*
Trademark and tradenames	25,420		7 years

Intangible assets acquired	$	346,940

*In-process research and development will be amortized (or impaired) upon completion (or abandonment) of the development project.

The Company determined the estimated fair value of the identifiable intangible assets based on various factors including: cost, discounted cash flow, income method, loss-of-revenue/income method, and relief-from-royalty method in determining the purchase price allocation.

In-process research and development (“IPR&D”) represents the estimated fair values of incomplete Ultratech research and development projects that had not reached the commercialization stage and meet the criteria for recognition as IPR&D as of the date of the acquisition. In the future, the fair value of each project at the acquisition date will be either amortized or impaired depending on whether the projects are completed or abandoned. The fair value of IPR&D was determined using an income approach and costs to complete the project and expected commercialization timelines are considered key assumptions. This valuation approach reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. The value of the IPR&D was determined to be $43.3 million, approximately half of which is related to Ultratech’s lithography technologies and one-third of which is related to Ultratech’s laser annealing technologies.

For the three and nine months ended September 30, 2017, acquisition related costs were approximately $0.8 million and $16.3 million, respectively, including non-cash charges of $4.2 million for the nine months ended September 30, 2017 related to accelerated share-based compensation for employee terminations.

The amounts of revenue and income (loss) from operations before income taxes of Ultratech included in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2017 are as follows:

	Three months ended September 30, 2017			Nine months ended September 30, 2017
	(in thousands)
Revenue	$	21,236		$	45,286
Loss from operations before income taxes	$	(21,556	)	$	(44,374	)

Loss from operations before income taxes of Ultratech for the three month period ended September 30, 2017 of $21.6 million includes acquisition costs of $0.8 million, release of inventory fair value step-up related to purchase accounting of $1.9 million, amortization expense on intangible assets of $9.6 million, and restructuring charges of $2.1 million. Loss from operations before income taxes of Ultratech for the nine month period ended September 30, 2017 of $44.4 million includes acquisition costs of $16.3 million, release of inventory fair value step-up related to purchase accounting of $9.2 million, amortization expense on intangible assets of $13.1 million, and restructuring charges of $3.3 million.

The following table presents unaudited pro forma financial information as if the acquisition of Ultratech had occurred on January 1, 2016:

	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
	(in thousands, except per share amounts)
Revenue	$	131,872		$	134,093		$	412,066		$	381,586
Loss from operations	(14,957		)	(74,197		)	(45,309		)	(187,499		)
Diluted earnings per share	$	(0.40	)	$	(1.67	)	$	(1.01	)	$	(4.34	)

The pro-forma results were calculated by combining the unaudited results of the Company with the stand-alone unaudited results of Ultratech for the pre-acquisition period, and adjusting for the following:

(i)

Additional amortization expense related to identified intangibles valued as part of the purchase price allocation that would have been incurred starting on January 1, 2016.

(ii)

Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred starting on January 1, 2016.

(iii)

All acquisition related costs incurred by the Company as well as by Ultratech pre-acquisition have been removed from their respective periods and included in the three months ended March 31, 2016, as such expenses would have been incurred in the first quarter following the acquisition.

(iv)

All amortization of inventory step-up has been removed from their respective periods and recorded in the first two quarters of 2016, as such costs would have been incurred as the corresponding inventory was sold.

(v)

Additional interest expense related to the Convertible Senior Notes (see Note 5, “Liabilities”) as if they had been issued on January 1, 2016.

(vi)

Income tax expense (benefit) was adjusted for the impact of the above adjustments for each period.