Note 5 — Business Combinations

Ultratech

On May 26, 2017, the Company completed its acquisition of Ultratech, Inc. (“Ultratech”). Ultratech develops, manufactures, sells, and supports lithography, laser annealing, and inspection equipment for manufacturers of semiconductor devices, including front-end semiconductor manufacturing and advanced packaging. Ultratech also develops, manufactures, sells, and supports ALD equipment for scientific and industrial applications. Ultratech’s customers are primarily located throughout the United States, Europe, China, Japan, Taiwan, Singapore, and Korea. 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. The 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 of $229.4 million	$	404,490
Equity consideration (7.2 million shares issued)		228,643
Replacement equity awards attributable to pre-acquisition service		228
Acquisition date fair value	$	633,361

Approximately $2.7 million of the cash merger consideration is included in “Accrued expenses and other current liabilities” on the Consolidated Balance Sheets as of December 31, 2017 related to shareholder appraisal proceedings that were subsequently settled and paid during 2018.

The following table summarizes the 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
Inventories		59,100
Deferred cost of sales		242
Prepaid expense and other current assets		7,217
Property, plant, and equipment		18,152
Intangible assets		346,940
Other assets		6,442
Total identifiable assets acquired		530,719

Accounts payable		24,291
Accrued expenses and other current liabilities		16,356
Customer deposits and deferred revenue		4,834
Deferred income taxes		32,478
Other liabilities		11,622
Total liabilities assumed		89,581

Net identifiable assets acquired		441,138
Goodwill		192,223
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 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	9	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 met the criteria for recognition as IPR&D as of the date of the acquisition. 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 reflected the present value of the projected cash flows that were 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 was related to Ultratech’s lithography technologies and one-third of which was related to Ultratech’s laser annealing technologies.

During the second quarter of 2018, the Company lowered its projected results for the Ultratech asset group and determined that the revised projections were significantly lower than projected results at the time of the acquisition and that these revised projections required the Company to assess the Ultratech asset group for impairment. See Note 6, “Goodwill and Intangible Assets,” for additional information.

For the year ended December 31, 2018 and 2017, acquisition related costs were approximately $3.0 million and $17.8 million, respectively, including non-cash charges of $4.2 million related to accelerated share-based compensation for employee terminations for the year ended December 31, 2017.

The amounts of net sales and income (loss) from operations before income taxes of Ultratech included in the Company’s Consolidated Statement of Operations for the year ended December 31, 2017 are as follows:


	Year ended
	December 31, 2017
	(in thousands)
Net sales	$	65,280
Loss before income taxes	$	(62,284)

Loss before income taxes of Ultratech for the year ended December 31, 2017 of $62.3 million includes acquisition costs of $17.8 million, release of inventory fair value step-up related to purchase accounting of $9.6 million, amortization expense on intangible assets of $23.9 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:


		For the year ended December 31,
		2017		2016
	(in thousands, except per share amounts)
Net sales		$	546,428	$	525,752
Loss before income taxes			(90,000)		(217,783)
Diluted earnings per share		$	(1.38)	$	(4.67)

The pro-forma results were calculated by combining the audited 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 intangible assets 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 the year ended December 31, 2017 and included in the year ended December 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 the year ended December 31, 2017 and recorded in the year ended December 31, 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 12, “Debt”) 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.

(vii)

All shares issued in connection with the acquisition were considered outstanding as of January 1, 2016 for purposes of calculating diluted earnings per share.