Note 5 - Liabilities

Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities at March 31, 2018 and December 31, 2017 consist of:

	March 31,		December 31,
	2018		2017
	(in thousands)
Payroll and related benefits	$	30,890	$	32,996
Warranty	6,455		6,532
Interest	2,148		4,430
Professional fees	3,654		3,942
Merger consideration payable	2,662		2,662
Sales, use, and other taxes	1,493		2,144
Restructuring liability	1,390		1,520
Other	5,605		3,842

Total	$	54,297	$	58,068

Other liabilities include accruals for costs related to customer training, royalties, and travel.

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 three months ended March 31, 2018 include:

	(in thousands)
Balance - December 31, 2017	$	6,532
Warranties issued	1,647
Consumption of reserves	(1,908		)
Changes in estimate	184

Balance - March 31, 2018	$	6,455

Restructuring Accruals

During the three months ended March 31, 2018, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. During 2017, the Company substantially completed restructuring activities as part of its initiative to streamline operations, enhance efficiencies, and reduce costs, as well as reducing future investments in certain technology development. In addition, during 2017, the Company began the Ultratech acquisition integration process to enhance efficiencies, resulting in employee terminations and other facility costs.

	Personnel
	Severance and			Facility
	Related Costs			Related Costs			Total
	(in thousands)
Balance - December 31, 2017	$	1,520		$	—		$	1,520
Provision	655			1,868			2,523
Payments	(785		)	(1,868		)	(2,653		)

Balance - March 31, 2018	$	1,390		$	—		$	1,390

Included within restructuring expense in the Consolidated Statements of Operations for the three months ended March 31, 2018 is approximately $0.2 million of non-cash charges related to accelerated share-based compensation for employee terminations.

Customer Deposits and Deferred Revenue

Customer deposits totaled $45.7 million and $41.5 million at March 31, 2018 and December 31, 2017, respectively. Deferred revenue represents amounts billed, other than deposits, in excess of the revenue that can be recognized on a particular contract at the balance sheet date. Changes in deferred revenue were as follows:

	(in thousands)
Balance - December 31, 2017	$	70,536
Deferral of revenue	5,360
Recognition of unearned revenue	(27,100		)

Balance - March 31, 2018	$	48,796

As of March 31, 2018, the Company has approximately $133.2 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 76% is expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

Convertible Senior Notes

On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes (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 (the “Maturity Date”), unless earlier purchased by the Company, redeemed, or converted.

The carrying value of the Convertible Senior Notes is as follows:

	March 31,			December 31,
	2018			2017
	(in thousands)
Principal amount	$	345,000		$	345,000
Unamortized debt discount	(60,424		)	(63,022		)
Unamortized transaction costs	(6,087		)	(6,348		)

Net carrying value	$	278,489		$	275,630

Total interest expense related to the Convertible Senior Notes is as follows:

	Three months		Three months
	ended March 31,		ended March 31,
	2018		2017
	(in thousands)
Cash Interest Expense
Coupon interest expense	$	2,329	$	1,915
Non-Cash Interest Expense
Amortization of debt discount	2,598		1,985
Amortization of transaction costs	261		200

Total Interest Expense	$	5,188	$	4,100

The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $314.1 million at March 31, 2018.

Other Liabilities

The Company maintains an executive non-qualified deferred compensation plan that was assumed from Ultratech that allows qualifying executives to defer cash compensation. At both March 31, 2018 and December 31, 2017, plan assets approximated $3.4 million representing the cash surrender value of life insurance policies and is included within “Other assets” in the Consolidated Balance Sheets, while plan liabilities approximated $4.5 million and $4.7 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities also included asset retirement obligations at March 31, 2018 and December 31, 2017 of $3.3 million, medical and dental benefits of $2.1 million and $2.2 million, respectively, and acquisition related accruals of $0.2 million, and $0.4 million, respectively.