Note 11 — Commitments and Contingencies

Warranty

Warranties are typically valid for one year from the date of system final acceptance, and the Company 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 is 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 the Company’s product warranty reserves were as follows:

	December 31,
	2017			2016			2015
	(in thousands)
Balance, beginning of the year	$	4,217		$	8,159		$	5,411
Warranties issued	5,817			3,916			7,873
Addition from Ultratech acquisition	1,889			—			—
Consumption of reserves	(6,330		)	(6,433		)	(3,551		)
Changes in estimate	939			(1,425		)	(1,574		)

Balance, end of the year	$	6,532		$	4,217		$	8,159

Minimum Lease Commitments

Minimum lease commitments at December 31, 2017 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows:

	Operating
	Leases
	(in thousands)
Payments due by period:
2018	$	5,655
2019	5,533
2020	5,529
2021	2,307
2022	2,308
Thereafter	2,919


Total	$	24,251

Lease expense was $5.3 million, $2.5 million, and $2.3 million for the years ended December 31, 2017, 2016, and 2015, respectively. In addition, the Company is obligated under such leases for certain other expenses, including real estate taxes and insurance.

Legal Proceedings

On September 21, 2017, Blueblade Capital Opportunities LLC et al., on behalf of purported beneficial owners of 440,100 shares of Ultratech common stock, filed an action against Ultratech in Delaware Court of Chancery requesting an appraisal of the value of their Ultratech stock pursuant to 8 Del. C. §262. The Company believes that the merger price, which was the product of arms-length negotiations, was fair and reasonable, and intends to contest the appraisal claim. Discovery in the matter has commenced and a trial on the action is scheduled to begin in December 2018.

On April 12, 2017, the Company filed a patent infringement complaint in the U.S. District Court for the Eastern District of New York against SGL Carbon, LLC and SGL Carbon SE (collectively, “SGL”), alleging infringement of patents relating to wafer carrier technology used in MOCVD equipment. The complaint alleges that SGL infringes Veeco’s patents by making and selling certain wafer carriers to Veeco’s competitor, Advanced Micro-Fabrication Equipment, Inc. (“AMEC”). On November 2, 2017, the U.S. District Court granted the Company’s motion for a preliminary injunction prohibiting SGL from shipping wafer carriers using the Company’s patented technology without the Company’s express authorization.

On July 13, 2017, AMEC filed a patent infringement complaint against Veeco Instruments Shanghai Co., Ltd. (“Veeco Shanghai”) with the Fujian High Court in China, alleging that the Company’s MOCVD products infringed a Chinese utility model patent relating to the synchronous movement engagement mechanism in a chemical vapor deposition reactor and seeking injunctive relief and monetary damages against Veeco Shanghai. On December 7, 2017, without providing notice to Veeco and without hearing Veeco’s position on alleged infringement, the Fujian High Court issued a preliminary injunction, applicable in China, that requires Veeco Shanghai to stop importing, making, selling, and offering to sell Veeco EPIK 700 model MOCVD systems and to stop importing, selling, and offering to sell wafer carriers used as supplies for the EPIK 700 MOCVD system.

On February 8, 2018, Veeco, AMEC, and SGL announced that they had mutually agreed to settle the pending litigation among the parties and to amicably resolve all pending disputes, including AMEC’s lawsuit against Veeco before the Fujian High Court in China and Veeco’s lawsuit against SGL before the U.S. District Court for the Eastern District of New York. As part of the settlement, all legal actions worldwide (in court, patent offices, and otherwise), between Veeco, AMEC, and SGL, and their affiliates, will be dismissed and/or otherwise withdrawn. As a result, all business processes, including sales, service, and importation, will be continued.

The Company is involved in various other legal proceedings arising in the normal course of business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

Concentrations of Credit Risk

The Company depends on purchases from its ten largest customers, which accounted for 67% and 73% of net accounts receivable at December 31, 2017 and 2016, respectively.

Customers who accounted for more than 10% of net accounts receivable or net sales are as follows:

	Accounts Receivable				Net Sales
	Year ended December 31,				For the Year Ended December 31,
Customer	2017		2016		2017		2016		2015
Customer A	24	%	23	%	21	%	13	%	*
Customer B	*		17	%	*		*		*
Customer C	*		*		*		*		20	%
Customer D	*		*		*		*		12	%

* Less than 10% of aggregate accounts receivable or net sales

The Company manufactures and sells its products to companies in different geographic locations. Refer to Note 18, “Segment Reporting and Geographic Information,” for additional information. In certain instances, the Company requires deposits from its customers for a portion of the sales price in advance of shipment and performs periodic credit evaluations on its customers. Where appropriate, the Company requires letters of credit on certain non-U.S. sales arrangements. Receivables generally are due within 30 to 90 days from the date of invoice.

Receivable Purchase Agreement

In December 2017, the Company entered into a Receivable Purchase Agreement with a financial institution to sell certain of its trade receivables from customers without recourse, up to $23.0 million at any point in time for a term of one year. Under the terms of the agreement, the Company may offer to sell certain eligible accounts receivable (the “Receivables”) to the financial institution (the “Purchaser”), which may accept such offer, and purchase the offered Receivables. The Purchaser will assume credit risk of the Receivables purchased; provided, however, the Company will service the Receivables, and as such servicer, collect and otherwise enforce the Receivables on behalf of the Purchaser. Pursuant to this agreement, the Company sold $15.0 million of Receivables during the year ended December 31, 2017 and maintained $8.0 million available under the agreement for additional sales of Receivables as of December 31, 2017. The sale of accounts receivable under the agreement is reflected as a reduction of accounts receivable in the Company’s Consolidated Balance Sheet at the time of sale and any fees for the sale of trade receivables were not material for the periods presented.

Suppliers

The Company outsources certain functions to third parties, including the manufacture of some of its MOCVD and Ultratech systems. While the Company primarily relies on one supplier for the manufacturing of these systems, the Company maintains a minimum level of internal manufacturing capability for these systems. The failure of the Company’s present suppliers to meet their contractual obligations under their supply arrangements and the Company’s inability to make alternative arrangements or resume the manufacture of these systems could have a material adverse effect on the Company’s revenues, profitability, cash flows, and relationships with its customers.

In addition, certain of the components and sub-assemblies included in the Company’s products are obtained from a single source or a limited group of suppliers. The Company’s inability to develop alternative sources, if necessary, could result in a prolonged interruption in supply or a significant increase in the price of one or more components, which could adversely affect the Company’s operating results.

The Company had deposits with its suppliers of $7.6 million and $7.8 million at December 31, 2017 and 2016, respectively, that were included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets.

Purchase Commitments

The Company had purchase commitments of $181.0 million at December 31, 2017, substantially all of which will come due within one year. Purchase commitments are primarily for inventory used in manufacturing products, and are partially offset by existing deposits with suppliers.

Bank Guarantees

The Company has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At December 31, 2017, outstanding bank guarantees and letters of credit totaled $6.5 million, and unused bank guarantees and letters of credit of $66.5 million were available to be drawn upon.