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Debt

12 Months Ended

Dec. 31, 2020

Debt

Note 11 — Debt

Convertible Senior Notes

2023 Notes

On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes due 2023 (the “2023 Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The 2023 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 2023 Notes mature on January 15, 2023, unless earlier purchased by the Company, redeemed, or converted.

On May 18, 2020, in connection with the completion of a private offering of $125.0 million aggregate principal amount of 3.75% convertible senior notes due 2027 described below, the Company repurchased and retired approximately $88.3 million in aggregate principal amount of its outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash. The Company accounted for the partial settlement of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $3.0 million for the year ended December 31, 2020, which is included in “Other income (expense), net” in the Consolidated Statements of Operations, as well as a reduction of additional paid-in capital of $0.1 million for the repurchase of the conversion feature.

Additionally, on November 11, 2020, the Company entered into a privately negotiated exchange agreement with a holder of its outstanding 2023 Notes, under which the Company agreed to retire $125.0 million in aggregate original principal amount of the 2023 Notes, with a carrying amount of $113.1 million, in exchange for the issuance of $132.5 million in aggregate principal amount of new 3.50% convertible senior notes due 2025 described below, which had a fair value that approximated the principal amount of notes issued. The Company accounted for the partial settlement of the 2023 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $4.8 million for the year ended December 31, 2020, which is included in “Other income (expense), net” in the Consolidated Statements of Operations, as well as a reduction of additional paid-in capital of $14.6 million for the exchange of the conversion feature.

2025 Notes

On November 17, 2020, as part of the privately negotiated exchange agreement described above, the Company issued $132.5 million of 3.50% convertible senior notes due 2025 (the “2025 Notes”). The 2025 Notes bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2021. The 2025 Notes mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted.

2027 Notes

On May 18, 2020, the Company completed a private offering of $125.0 million of 3.75% convertible senior notes due 2027 (the “2027 Notes”). The Company received net proceeds of approximately $121.9 million, after deducting underwriting discounts and fees and expenses payable by the Company. Additionally, the Company used approximately $10.3 million of cash to purchase capped calls, discussed below. The 2027 Notes bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2020. The 2027 Notes mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted.

The 2023 Notes, 2025 Notes, and 2027 Notes (collectively, the “Notes”) are unsecured obligations of Veeco and rank senior in right of payment to any of Veeco’s subordinated indebtedness; equal in right of payment to all of Veeco’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Veeco’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Veeco’s subsidiaries.

The Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rates are 24.9800, 41.6667, and 71.5372 shares of the Company’s common stock per $1,000 principal amount of the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, representing initial effective conversion prices of $40.03, $24.00, and $13.98 per share of common stock, respectively. The conversion rates may be subject to adjustment upon the occurrence of certain specified events.

Holders may convert all or any portion of their notes, in multiples of one thousand dollar principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 15, 2022 with respect to the 2023 Notes, October 15, 2024 with respect to the 2025 Notes, and October 1, 2027 with respect to the 2027 Notes, only under the following circumstances:

(i)

During any calendar quarter (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

(ii)

During the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per one thousand dollar principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Veeco’s common stock and the conversion rate on each such trading day;

(iii)

If the Company calls any or all of applicable series of the Notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or

(iv)

Upon the occurrence of specified corporate events.

Holders may convert their notes at any time, regardless of the foregoing circumstances, on or after October 15, 2022 with respect to the 2023 Notes, October 15, 2024 with respect to the 2025 Notes, and October 1, 2026 with respect to the 2027 Notes, until the close of business on the business day immediately preceding the respective maturity date.

Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion options, the Company segregated the liability component of the instruments from the equity components. The liability components were measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Notes. The calculation of the fair value of the debt components required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and

high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the Notes at a discount rate equal to the estimated borrowing rate for similar non-convertible debt, or 7.0%, 8.0%, and 9.1% with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively. The excess of the aggregate face values of the Notes over the estimated fair values of the liability components of $72.5 million, $21.0 million, and $34.2 million with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, were recognized as debt discounts and recorded as an increase to additional paid-in capital and will be amortized over the expected lives of the Notes using the effective interest rate method. Amortization of the debt discounts are recognized as non-cash interest expense.

The transaction costs of $9.2 million, $1.9 million, and $3.1 million incurred in connection with the issuance of the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected terms of the Notes. Transaction costs allocated to the equity component of $1.9 million, $0.3 million, and $0.8 million with respect to the 2023 Notes, 2025 Notes, and 2027 Notes, respectively, reduced the value of the equity components recognized in stockholders' equity.

In connection with the offering of the 2027 Notes, on May 13, 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”), pursuant to capped call confirmations, covering the total principal amount of the 2027 Notes for an aggregate premium of $10.3 million. The Capped Call Transactions are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of the 2027 Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted 2027 Notes, as the case may be, with such reduction and/or offset subject to a cap based on the capped price of the Capped Call Transactions. The Capped Call Transactions exercise price is equal to the initial conversion price of the 2027 Notes, and the capped price of the Capped Call Transactions is approximately $18.46 per share and is subject to certain adjustments under the terms of the capped call confirmations.

The Capped Call Transactions are separate transactions entered into by the Company with the capped call counterparties, are not part of the terms of the 2027 Notes and do not change the holders’ rights under the 2027 Notes. Holders of the 2027 Notes do not have any rights with respect to the Capped Call Transactions. The cost of the Capped Call Transactions is not expected to be tax-deductible as the Company did not elect to integrate the Capped Call Transactions into the 2027 Notes for tax purposes. The Company used a portion of the net proceeds from the offering of the 2027 Notes to pay for the Capped Call Transactions, and the cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the accompanying consolidated financial statements.

The carrying values of the Notes are as follows:


			December 31, 2020												December 31, 2019
			2023 Notes			2025 Notes			2027 Notes			Total			2023 Notes

			(in thousands)
Principal amount		$	131,695		$	132,500		$	125,000		$	389,195		$	345,000
Unamortized debt discount/transaction costs			(11,925)			(22,097)			(34,058)			(68,080)			(44,932)
Net carrying value		$	119,770		$	110,403		$	90,942		$	321,115		$	300,068

Total interest expense related to the Notes is as follows:


		For the year ended December 31,
		2020			2019			2018

		(in thousands)
Cash Interest Expense
Coupon interest expense - 2023 Notes		$	7,390		$	9,315		$	9,315
Coupon interest expense - 2025 Notes			554			—			—
Coupon interest expense - 2027 Notes			2,904			—			—
Non-cash Interest Expense
Amortization of debt discount/transaction costs- 2023 Notes			10,887			12,676			11,762
Amortization of debt discount/transaction costs- 2025 Notes			546			—			—
Amortization of debt discount/transaction costs- 2027 Notes			2,359			—			—
Total Interest Expense		$	24,640		$	21,991		$	21,077

The Company determined the Notes are Level 2 liabilities in the fair value hierarchy and estimated their fair values as $125.4 million, $140.2 million, and $180.9 million at December 31, 2020 for the 2023 Notes, 2025 Notes, and 2027 Notes, respectively.