Note 4 — Assets

Investments

Short-term investments are generally classified as available-for-sale and reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income” in the Consolidated Balance Sheets. These securities may include U.S. treasuries, government agency securities, corporate debt, and commercial paper, all with maturities of greater than three months when purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other, net” in the Consolidated Statements of Operations.

Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. Veeco classifies certain assets based on the following fair value hierarchy:

Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Veeco has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions or estimation methodologies could have a significant effect on the estimated fair value amounts.

The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017:


	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2018
Short-term investments
U.S. treasuries	$	36,527	$	—	$	—	$	36,527
Corporate debt		—		8,561		—		8,561
Commercial paper		—		6,975		—		6,975
Total	$	36,527	$	15,536	$	—	$	52,063
December 31, 2017
Cash equivalents
U.S. treasuries	$	12,490	$	—	$	—	$	12,490
Total	$	12,490	$	—	$	—	$	12,490
Short-term investments
U.S. treasuries	$	33,895	$	—	$	—	$	33,895
Corporate debt		—		10,886		—		10,886
Commercial paper		—		2,999		—		2,999
Total	$	33,895	$	13,885	$	—	$	47,780

There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2018.

At September 30, 2018 and December 31, 2017, the amortized cost and fair value of available-for-sale securities consist of:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(in thousands)
September 30, 2018
U.S. treasuries	$	36,538	$	1	$	(12)	$	36,527
Corporate debt		8,573		—		(12)		8,561
Commercial paper		6,975		—		—		6,975
Total	$	52,086	$	1	$	(24)	$	52,063
December 31, 2017
U.S. treasuries	$	33,914	$	—	$	(19)	$	33,895
Corporate debt		10,894		—		(8)		10,886
Commercial paper		2,999		—		—		2,999
Total	$	47,807	$	—	$	(27)	$	47,780

Available-for-sale securities in a loss position at September 30, 2018 and December 31, 2017 consist of:


	September 30, 2018				December 31, 2017
			Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses
	(in thousands)
U.S. treasuries	$	29,621	$	(12)	$	33,895	$	(19)
Corporate debt		8,561		(12)		10,886		(8)
Total	$	38,182	$	(24)	$	44,781	$	(27)

At September 30, 2018 and December 31, 2017, there were no short-term investments that had been in a continuous loss position for more than 12 months.

The maturities of securities classified as available-for-sale at September 30, 2018 were all due in one year or less. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were no realized gains or losses for the three and nine months ended September 30, 2018 and minimal realized gains for the three and nine months ending September 30, 2017.

Accounts Receivable

Accounts receivable is presented net of an allowance for doubtful accounts of $0.3 million at both September 30, 2018 and December 31, 2017.

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventories at September 30, 2018 and December 31, 2017 consist of the following:


	September 30,		December 31,
	2018		2017
	(in thousands)
Materials	$	84,864	$	59,919
Work-in-process		41,423		37,222
Finished goods		23,545		23,125
Total	$	149,832	$	120,266

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, and prepaid licenses. Veeco had deposits with its suppliers of $8.9 million and $7.6 million at September 30, 2018 and December 31, 2017, respectively.

Property, Plant, and Equipment

Property, plant, and equipment at September 30, 2018 and December 31, 2017 consist of the following:


	September 30,		December 31,
	2018		2017
	(in thousands)
Land	$	5,669	$	5,669
Building and improvements		59,547		54,449
Machinery and equipment (1)		126,126		126,829
Leasehold improvements		8,802		10,073
Gross property, plant, and equipment		200,144		197,020
Less: accumulated depreciation and amortization		119,518		111,962
Net property, plant, and equipment	$	80,626	$	85,058

⁽¹⁾

Machinery and equipment also includes software, furniture and fixtures

For the three and nine months ended September 30, 2018, depreciation expense was $4.6 million and $13.0 million, respectively, and $4.2 million and $10.6 million for the comparable 2017 periods.

Goodwill

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The Company is required to assess goodwill annually for impairment, which it does at the beginning of the fourth quarter, or on an interim basis whenever certain events occur or circumstances change, such as an adverse change in business climate, a decline in the adjusted market capitalization of the Company below the book value of the Company’s equity for an extended period of time, or other events that would more likely than not indicate that the fair value of the Company’s single goodwill reporting unit is less than its carrying amount. There were no changes to goodwill during the nine months ended September 30, 2018.

As the Company maintains a single goodwill reporting unit, it determines the fair value of its reporting unit based upon the Company’s adjusted market capitalization. The adjusted market capitalization is calculated by multiplying the average closing share price of the Company’s common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium.

Based on the most recent annual impairment test as of October 1, 2018, the Company determined that the fair value of its single goodwill reporting unit exceeded its carrying amount by approximately $60 million. However, this analysis is sensitive to changes in the Company’s stock price and absent other qualitative factors, the Company may be required to record a goodwill impairment charge in future periods if the stock price declines subsequent to its annual measurement date and remains depressed for an extended period of time.

Intangible Assets

Intangible assets consist of purchased technology, customer relationships, patents, trademarks and tradenames, and backlog, and are initially recorded at fair value. Long-lived intangible assets are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line basis if such pattern cannot be reliably determined.

During the second quarter of 2018, the Company lowered its projected results for the Ultratech asset group, which were significantly below the projected results at the time of the acquisition. The reduced projections were based on lower than expected unit volume of certain smartphones, which incorporate advanced packaging methods such as Fan-Out Wafer Level Packaging (“FOWLP”), and a delay in the adoption of FOWLP advanced packaging by other electronics manufacturers, both of which slowed orders and reduced revenue projections for the Company’s advanced packaging lithography systems. In addition, there has been a delay in the build out of 28nm facilities by companies in China who were expected to purchase the Company’s Laser Spike Anneal (“LSA”) systems. Taken together, the reduced projections identified during the second quarter of 2018 required the Company to assess the Ultratech asset group for impairment. As a result of the analysis, which included projected cash flows that required the use of unobservable inputs, the Company recorded non-cash impairment charges of $216.4 million and $35.9 million related to definite-lived intangible assets and in-process research and development assets, respectively, during the second quarter of 2018.

The components of purchased intangible assets were as follows:


	September 30, 2018						December 31, 2017
			Accumulated						Accumulated
	Gross		Amortization				Gross		Amortization
	Carrying		and		Net		Carrying		and		Net
	Amount		Impairment		Amount		Amount		Impairment		Amount
	(in thousands)
Technology	$	320,888	$	273,821	$	47,067	$	307,588	$	133,121	$	174,467
Customer relationships		164,595		134,760		29,835		164,595		39,336		125,259
In-process R&D		30,040		25,000		5,040		43,340		—		43,340
Trademarks and tradenames		30,910		23,560		7,350		30,910		4,321		26,589
Other		3,686		3,580		106		3,686		3,498		188
Total	$	550,119	$	460,721	$	89,398	$	550,119	$	180,276	$	369,843

Other intangible assets primarily consist of patents, licenses, and backlog.

Based on the revised intangible asset values resulting from the impairment recorded during the period ended June 30, 2018, the remaining estimated annual amortization expense, excluding in-process R&D, is expected to be as follows:


	Amortization
	(in thousands)
2018	$	4,184
2019		16,554
2020		15,628
2021		12,506
2022		10,172
Thereafter		25,314
Total	$	84,358

Other Assets

Veeco has an ownership interest of less than 20% in a non-marketable investment, Kateeva, Inc. (“Kateeva”), over which Veeco does not exert significant influence. The carrying value of the investment was $21.0 million at September 30, 2018 and December 31, 2017. Additionally, during the nine months ended September 30, 2018, the Company made a separate non-marketable investment of $3.5 million. The Company does not exert significant influence over this investment, and its ownership interest is less than 20%. Neither equity investment has a readily observable market price, and therefore the Company has elected to measure these investments at cost, adjusted for changes in observable market prices minus impairment. The investments are included in “Other assets” on the Consolidated Balance Sheets. There were no changes in observable market prices for either investment for the nine months ended September 30, 2018. These investments are subject to periodic impairment reviews; as there are no open-market valuations, the impairment analyses require judgment. The analyses include assessments of the companies’ financial condition, the business outlooks for their products and technologies, their projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by Veeco relative to other investors.