2013.6.29_10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________
FORM 10-Q
___________________________________________________
(Mark One)
|
| | |
x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 29, 2013
or
|
| | |
¨ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33962
COHERENT, INC.
|
| | |
Delaware | | 94-1622541 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
5100 Patrick Henry Drive, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 764-4000
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | |
Large accelerated filer x | | Accelerated filer ¨ |
| | |
Non-accelerated filer ¨ | | Smaller reporting company ¨ |
(do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of registrant’s common stock, par value $.01 per share, on July 31, 2013 was 24,450,177.
COHERENT, INC.
INDEX
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in or incorporated by reference in this quarterly report, other than statements of historical fact, are forward-looking statements. These statements are generally accompanied by words such as “trend,” “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “rely,” “believe,” “estimate,” “predict,” “intend,” “potential,” “continue,” "outlook," “forecast” or the negative of such terms, or other comparable terminology, including without limitation statements made under “Future Trends,” “Our Strategy,” discussions regarding our bookings and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Actual results of Coherent, Inc. (referred to herein as the Company, we, our or Coherent) may differ significantly from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections captioned “Future Trends,” “Risk Factors,” “Key Performance Indicators,” as well as any other cautionary language in this quarterly report. All forward-looking statements included in the document are based on information available to us on the date hereof. We undertake no obligation to update these forward-looking statements as a result of events or circumstances or to reflect the occurrence of unanticipated events or non-occurrence of anticipated events.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share data)
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 | |
Net sales | $ | 213,725 |
| | $ | 196,383 |
| | $ | 596,985 |
| | $ | 580,434 |
| |
Cost of sales | 130,461 |
| | 116,138 |
| | 359,755 |
| | 342,182 |
| |
Gross profit | 83,264 |
| | 80,245 |
| | 237,230 |
| | 238,252 |
| |
Operating expenses: | |
| | |
| | | | | |
Research and development | 21,782 |
| | 19,306 |
| | 61,229 |
| | 58,408 |
| |
Selling, general and administrative | 38,748 |
| | 32,894 |
| | 113,076 |
| | 102,902 |
| |
Amortization of intangible assets | 1,290 |
| | 1,723 |
| | 4,086 |
| | 4,970 |
| |
Total operating expenses | 61,820 |
| | 53,923 |
| | 178,391 |
| | 166,280 |
| |
Income from operations | 21,444 |
| | 26,322 |
| | 58,839 |
| | 71,972 |
| |
Other income (expense): | |
| | | | | | | |
Interest and dividend income | 48 |
| | 52 |
| | 161 |
| | 283 |
| |
Interest expense | (37 | ) | | (71 | ) | | (60 | ) | | (78 | ) | |
Other—net | (964 | ) | | (1,918 | ) | | (1,196 | ) | | 288 |
| |
Total other income (expense), net | (953 | ) | | (1,937 | ) | | (1,095 | ) | | 493 |
| |
Income before income taxes | 20,491 |
| | 24,385 |
| | 57,744 |
| | 72,465 |
| |
Provision for income taxes | 3,806 |
| | 7,177 |
| | 11,904 |
| | 22,051 |
| |
Net income | $ | 16,685 |
| | $ | 17,208 |
| | $ | 45,840 |
| | $ | 50,414 |
| |
| | | | | | | | |
Net income per share: | |
| | |
| | | | | |
Basic | $ | 0.69 |
| | $ | 0.73 |
| | $ | 1.91 |
| | $ | 2.14 |
| |
Diluted | $ | 0.68 |
| | $ | 0.72 |
| | $ | 1.87 |
| | $ | 2.10 |
| |
| | | | | | | | |
Shares used in computation: | |
| | |
| | | | | |
Basic | 24,310 |
| | 23,633 |
| | 24,055 |
| | 23,538 |
| |
Diluted | 24,690 |
| | 24,054 |
| | 24,462 |
| | 24,004 |
| |
See Accompanying Notes to Condensed Consolidated Financial Statements.
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in thousands)
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 | |
| | | | | | | | |
Net income | $ | 16,685 |
| | $ | 17,208 |
| | $ | 45,840 |
| | $ | 50,414 |
| |
Other comprehensive income (loss): | | | | | | | | |
Translation adjustment (1) | 7,558 |
| | (11,796 | ) | | 450 |
| | (18,587 | ) | |
Changes in unrealized gains (losses) on available-for-sale securities, net of taxes | (14 | ) | | 12 |
| | (21 | ) | | (2 | ) | |
Other comprehensive income (loss), net of tax | 7,544 |
| | (11,784 | ) | | 429 |
| | (18,589 | ) | |
Comprehensive income | $ | 24,229 |
| | $ | 5,424 |
| | $ | 46,269 |
| | $ | 31,825 |
| |
| |
(1) | Tax expense (benefit) of $(226) and $(1,365) was provided on translation adjustments during the three and nine months ended June 29, 2013, respectively. Tax expense (benefit) of $(483) and $(305) was provided on translation adjustments during the three and nine months ended June 30, 2012, respectively. Tax expense (benefit) on changes in unrealized gains (losses) on available-for-sale securities was insignificant. |
See Accompanying Notes to Condensed Consolidated Financial Statements.
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except par value data)
|
| | | | | | | |
| June 29, 2013 | | September 29, 2012 |
ASSETS | |
| | |
|
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 81,311 |
| | $ | 67,761 |
|
Short-term investments | 120,371 |
| | 157,168 |
|
Accounts receivable—net of allowances of $1,275 and $1,443, respectively | 146,184 |
| | 144,345 |
|
Inventories | 169,003 |
| | 160,113 |
|
Prepaid expenses and other assets | 68,653 |
| | 61,730 |
|
Deferred tax assets | 22,566 |
| | 23,368 |
|
Total current assets | 608,088 |
| | 614,485 |
|
Property and equipment, net | 113,952 |
| | 115,096 |
|
Goodwill | 110,465 |
| | 77,689 |
|
Intangible assets, net | 44,108 |
| | 9,473 |
|
Other assets | 68,141 |
| | 64,029 |
|
Total assets | $ | 944,754 |
| | $ | 880,772 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
|
Current liabilities: | |
| | |
|
Current portion of long-term obligations | $ | 6 |
| | $ | 17 |
|
Accounts payable | 40,869 |
| | 29,088 |
|
Income taxes payable | 18,431 |
| | 33,944 |
|
Other current liabilities | 103,682 |
| | 90,739 |
|
Total current liabilities | 162,988 |
| | 153,788 |
|
Long-term obligations | — |
| | 2 |
|
Other long-term liabilities | 62,759 |
| | 55,326 |
|
Commitments and contingencies (Note 11) |
|
| |
|
|
Stockholders’ equity: | |
| | |
|
Common stock, par value $.01 per share: | |
| | |
|
Authorized—500,000 shares | |
| | |
|
Outstanding—24,432 shares and 23,746 shares, respectively | 243 |
| | 237 |
|
Additional paid-in capital | 156,824 |
| | 131,708 |
|
Accumulated other comprehensive income | 40,884 |
| | 40,455 |
|
Retained earnings | 521,056 |
| | 499,256 |
|
Total stockholders’ equity | 719,007 |
| | 671,656 |
|
Total liabilities and stockholders’ equity | $ | 944,754 |
| | $ | 880,772 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements.
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands) |
| | | | | | | |
| Nine Months Ended |
| June 29, 2013 | | June 30, 2012 |
Cash flows from operating activities: | |
| | |
|
Net income | $ | 45,840 |
| | $ | 50,414 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
|
Depreciation and amortization | 19,386 |
| | 17,179 |
|
Amortization of intangible assets | 7,313 |
| | 4,970 |
|
Deferred income taxes | (225 | ) | | (2,095 | ) |
Loss on disposal of property and equipment | — |
| | 572 |
|
Stock-based compensation | 14,276 |
| | 12,310 |
|
Excess tax benefit from stock-based compensation arrangements | — |
| | (2,715 | ) |
Other non-cash (income) expense | 483 |
| | 140 |
|
Changes in assets and liabilities, net of effect of acquisitions: | |
| | |
|
Accounts receivable | (6,981 | ) | | (3,810 | ) |
Inventories | (76 | ) | | (11,721 | ) |
Prepaid expenses and other assets | (9,936 | ) | | (21,181 | ) |
Other assets | (535 | ) | | 1,510 |
|
Accounts payable | 10,487 |
| | (1,100 | ) |
Income taxes payable/receivable | (23,800 | ) | | (12,180 | ) |
Other current liabilities | 8,902 |
| | 12,237 |
|
Other long-term liabilities | 1,625 |
| | (819 | ) |
Net cash provided by operating activities | 66,759 |
| | 43,711 |
|
| | | |
Cash flows from investing activities: | |
| | |
|
Purchases of property and equipment | (15,366 | ) | | (30,613 | ) |
Proceeds from dispositions of property and equipment | 131 |
| | — |
|
Purchases of available-for-sale securities | (170,306 | ) | | (188,542 | ) |
Proceeds from sales and maturities of available-for-sale securities | 206,652 |
| | 114,776 |
|
Acquisition of businesses, net of cash acquired | (67,289 | ) | | — |
|
Net cash used in investing activities | (46,178 | ) | | (104,379 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
Short-term borrowings | 9,540 |
| | 9,262 |
|
Repayments of short-term borrowings | (9,540 | ) | | (9,262 | ) |
Capital lease repayments | (13 | ) | | (11 | ) |
Issuance of common stock under employee stock option and purchase plans | 15,708 |
| | 11,537 |
|
Cash dividend paid on common stock | (24,040 | ) | | — |
|
Repurchase of common stock | — |
| | (24,999 | ) |
Net settlement of restricted common stock | (4,163 | ) | | (4,514 | ) |
Excess tax benefits from stock-based compensation arrangements | — |
| | 2,715 |
|
Net cash used in financing activities | (12,508 | ) | | (15,272 | ) |
Effect of exchange rate changes on cash and cash equivalents | 5,477 |
| | (8,541 | ) |
Net increase (decrease) in cash and cash equivalents | 13,550 |
| | (84,481 | ) |
Cash and cash equivalents, beginning of period | 67,761 |
| | 167,061 |
|
Cash and cash equivalents, end of period | $ | 81,311 |
| | $ | 82,580 |
|
Supplemental disclosure of cash flow information: | |
| | |
|
Cash paid during the period for: | |
| | |
|
Interest | $ | 60 |
| | $ | 71 |
|
Income taxes | $ | 43,470 |
| | $ | 45,422 |
|
Cash received during the period for: | |
| | |
|
Income taxes | $ | 7,760 |
| | $ | 11,055 |
|
| | | |
Non-cash investing and financing activities: | |
| | |
|
Unpaid property and equipment | $ | 1,850 |
| | $ | 1,611 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements.
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the Coherent, Inc. (referred to herein as the “Company,” “we,” “our,” “us” or “Coherent”) consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended September 29, 2012. In the opinion of management, all adjustments necessary for a fair presentation of financial condition and results of operation as of and for the periods presented have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year or any other interim periods presented therein. Our fiscal year ends on the Saturday closest to September 30 and our third fiscal quarters include 13 weeks of operations in each fiscal year presented. Fiscal years 2013 and 2012 each include 52 weeks.
2. RECENT ACCOUNTING STANDARDS
Adoption of New Accounting Pronouncement
In July 2012, the Financial Accounting Standards Board (“FASB”) amended existing guidance related to goodwill and other intangible assets by giving an entity testing an indefinite-lived intangible asset for impairment the option to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of an intangible asset is less than its carrying amount. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not impaired, the entity would not need to calculate the fair value of the asset. The guidance does not revise the requirement to test indefinite-lived intangible assets annually for impairment or to test these assets for impairment between annual tests if there is a change in events or circumstances. This amended guidance was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We adopted this authoritative guidance in the first quarter of fiscal 2013. As we did not have any indefinite-lived intangible assets recorded in our consolidated balance sheet, the implementation of this authoritative guidance did not have a material impact on our consolidated financial position, results of operations and cash flows in connection with our impairment testing.
Recently Issued Accounting Pronouncements
In February 2013, the FASB issued guidance which requires an entity to disclose additional information for items reclassified out of accumulated other comprehensive income ("AOCI"). For items reclassified out of AOCI and into net income in their entirety, entities are required to disclose the effect of the reclassification on each affected net income line item. For AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other disclosures is required. This information may be provided either in the notes or parenthetically on the face of the statement that reports net income as long as all the information is disclosed in a single location. The guidance is effective for us beginning in the first quarter of fiscal 2014. We are currently evaluating the potential impact, if any, of the adoption of this guidance on our consolidated financial position, results of operations and cash flows.
In March 2013, the FASB issued guidance regarding the treatment of cumulative translation adjustment ("CTA") by a parent company upon de-recognition of a subsidiary or group of assets within a foreign entity. The objective is to resolve the diversity in practice regarding the release into net income of such CTA. The guidance is effective for us beginning in the second quarter of fiscal 2014. We are currently evaluating the potential impact, if any, of the adoption of this guidance on our consolidated financial position, results of operations and cash flows.
3. BUSINESS COMBINATIONS
Lumera Laser GmbH
On December 20, 2012, we acquired privately held Lumera Laser GmbH (Kaiserslautern, Germany) ("Lumera") for approximately $51.5 million, excluding transaction costs. Lumera manufactures ultrafast solid state lasers for microelectronics, OEM medical and materials processing applications. Lumera has been included in our Specialty Lasers and Systems segment.
Our preliminary allocation of the purchase price is as follows (in thousands):
|
| | | |
Tangible assets | $ | 14,514 |
|
Goodwill | 24,640 |
Intangible assets: | |
Existing technology | 21,000 |
In-process R&D | 1,800 |
Trade name | 200 |
Customer lists | 6,500 |
Backlog | 900 |
Deferred tax liabilities | (9,300) |
Liabilities assumed | (8,793) |
Total | $ | 51,461 |
|
Results of operations for the business have been included in our consolidated financial statements subsequent to the date of acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisition was not material to our prior period consolidated financial results.
None of the goodwill from this purchase is deductible for tax purposes.
The identifiable intangible assets are being amortized over their respective useful lives of less than one to six years.
In-process research and development (“IPR&D”) consists of two projects that have not yet reached technological feasibility. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. The value assigned to IPR&D was determined by considering the value of the products under development to the overall development plan, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. During the development period, these assets will not be amortized as charges to earnings; instead these assets will be subject to periodic impairment testing. Upon successful completion of the development process for the acquired IPR&D projects, the assets would then be considered finite-lived intangible assets and amortization of the assets will commence. None of the projects have been completed as of June 29, 2013.
We expensed $0.1 million and $0.6 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in the three and nine months ended June 29, 2013, respectively, and expensed $0.3 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in fiscal 2012.
Innolight Innovative Laser and Systemtechnik GmbH
On October 30, 2012, we acquired all of the outstanding shares of Innolight Innovative Laser and Systemtechnik GmbH ("Innolight") for approximately $18.3 million, excluding transaction costs. Innolight provides a core technology building block for an emerging class of commercial, sub-nanosecond lasers for microelectronics manufacturing. Its semiconductor-based architecture delivers pulsed output that can be amplified by conventional or fiber amplifiers to ultimately deliver infrared, green or ultraviolet light capable of processing a range of materials. Innolight has been included in our Specialty Lasers and Systems segment.
Our preliminary allocation of the purchase price is as follows (in thousands):
|
| | | |
Tangible assets | $ | 2,510 |
|
Goodwill | 8,312 |
|
Intangible assets: | |
Existing technology | 8,500 |
|
In-process R&D | 430 |
|
Trade name | 100 |
|
Customer lists | 2,800 |
|
Deferred tax liabilities | (3,836 | ) |
Liabilities assumed | (480 | ) |
Total | $ | 18,336 |
|
Results of operations for the business have been included in our consolidated financial statements subsequent to the date of acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisition was not material to our prior period consolidated financial results.
None of the goodwill from this purchase is deductible for tax purposes.
The identifiable intangible assets are being amortized over their respective useful lives of six to seven years.
IPR&D consists of two projects that have not yet reached technological feasibility. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. The value assigned to IPR&D was determined by considering the value of the products under development to the overall development plan, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. During the development period, these assets will not be amortized as charges to earnings; instead these assets will be subject to periodic impairment testing. Upon successful completion of the development process for the acquired IPR&D projects, the assets would then be considered finite-lived intangible assets and amortization of the assets will commence. The projects have not been completed as of June 29, 2013.
We expensed $0.2 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in the nine months ended June 29, 2013 and expensed $0.1 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in fiscal 2012.
Fiscal 2012 and Fiscal 2011 acquisitions
As more fully described in our Annual Report on Form 10-K for our fiscal year ended September 29, 2012, we acquired two companies in fiscal 2012 and fiscal 2011:
| |
• | We acquired MiDAZ Lasers Ltd. ("Midaz") in the fourth quarter of fiscal 2012 for approximately $3.8 million in cash and recorded goodwill and intangible assets of approximately $4.6 million. |
| |
• | We acquired Hypertronics Pte Ltd (“Hypertronics”) in the second quarter of fiscal 2011 for approximately $14.5 million in cash and recorded goodwill and intangible assets of approximately $11.8 million. |
Both businesses have been included in our Specialty Lasers and Systems segment. Results of operations for these businesses have been included in our consolidated financial statements subsequent to the date of their acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of these acquisitions was not material to our prior period consolidated financial results.
During the second quarter of fiscal 2012, we determined that one of the hardware projects classified as IPR&D acquired from Hypertronics would not be completed. As a result, $0.2 million was expensed in the second fiscal quarter of fiscal 2012 for that project. During the fourth quarter of fiscal 2012, we decided to no longer pursue orders of Hypertronics' legacy products and thus determined that an impairment review of the intangible assets was required. As a result of our analysis, we determined that the intangible assets were fully impaired and that the remaining hardware projects classified as IPR&D acquired from Hypertronics would not be completed. As a result, we recorded a $4.0 million charge in amortization expense in the fourth quarter of fiscal 2012. We also wrote off $0.3 million of inventory unique to these products that were not expected to be resold.
4. FAIR VALUES
We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from quoted market prices in active markets involving similar assets; these instruments, which mature within one year and are issued by counterparties with high credit ratings, include U.S. Treasury and international government obligations, investment-grade corporate bonds, certificates of deposit and commercial paper. Level 3 valuations would be based on unobservable inputs to a valuation model and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances. As of June 29, 2013 and September 29, 2012, we did not have any assets or liabilities valued based on Level 3 valuations.
Financial assets and liabilities measured at fair value as of June 29, 2013 are summarized below (in thousands):
|
| | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Total Fair Value |
| (Level 1) | | (Level 2) | | |
Money market fund deposits (1) | $ | 19,447 |
| | $ | — |
| | $ | 19,447 |
|
Certificates of deposit (1)(5) | — |
| | 19,590 |
| | 19,590 |
|
U.S. government obligations (2)(5) | — |
| | 95,040 |
| | 95,040 |
|
Corporate notes and obligations (2)(5) | — |
| | 15,338 |
| | 15,338 |
|
Commercial paper (2)(5) | — |
| | 9,994 |
| | 9,994 |
|
Foreign currency contracts (3)(6) | — |
| | (640 | ) | | (640 | ) |
Mutual funds — Deferred comp and supplemental plan (4)(7) | 13,480 |
| | — |
| | 13,480 |
|
___________________________________________________
(1) Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet. The carrying amounts approximate fair value due to the short-term maturities of the cash equivalents.
| |
(2) | Included in short-term investments on the Condensed Consolidated Balance Sheet. |
| |
(3) | Includes $170 recorded in prepaid expenses and other assets and $810 recorded in other current liabilities on the Condensed Consolidated Balance Sheet (see Note 5). |
(4) Includes $1,876 recorded in prepaid expenses and other assets and $11,604 recorded in other assets on the Condensed Consolidated Balance Sheet.
| |
(5) | Valuations are based upon quoted market prices in active markets involving similar assets. The market inputs used to value these instruments generally consist of market yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources include industry standard data providers, security master files from large financial institutions, and other third party sources which are input into a distribution-curve-based algorithm to determine a daily market value. This creates a “consensus price” or a weighted average price for each security. |
| |
(6) | The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large commercial banks. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. |
| |
(7) | The fair value of mutual funds is determined based on quoted market prices. Securities traded on a national exchange are stated at the last reported sales price on the day of valuation; other securities traded in over-the-counter market and listed securities for which no sale was reported on that date are stated as the last quoted bid price. |
Financial assets and liabilities measured at fair value as of September 29, 2012 are summarized below (in thousands):
|
| | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Total Fair Value |
| (Level 1) | | (Level 2) | | |
Money market fund deposits(1) | $ | 10,340 |
| | $ | — |
| | $ | 10,340 |
|
Certificates of deposit(2)(7) | — |
| | 31,253 |
| | 31,253 |
|
U.S. and international government obligations(3)(7) | — |
| | 110,967 |
| | 110,967 |
|
Corporate notes and obligations(4)(7) | — |
| | 43,406 |
| | 43,406 |
|
Commercial paper (3)(7) | — |
| | 2,000 |
| | 2,000 |
|
Foreign currency contracts(5)(8) | — |
| | (21 | ) | | (21 | ) |
Mutual funds—Deferred comp and supplemental plan(6)(9) | 6,400 |
| | — |
| | 6,400 |
|
___________________________________________________
| |
(1) | Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet. The carrying amounts approximate fair value due to the short-term maturities of the cash equivalents. |
| |
(2) | Includes $29,234 recorded in cash and cash equivalents and $2,019 recorded in short-term investments on the Condensed Consolidated Balance Sheet. |
| |
(3) | Included in short-term investments on the Condensed Consolidated Balance Sheet. |
| |
(4) | Includes $1,223 recorded in cash and cash equivalents and $42,183 recorded in short-term investments on the Condensed Consolidated Balance Sheet. |
| |
(5) | Includes $626 recorded in prepaid expenses and other assets and $645 recorded in other current liabilities on the Condensed Consolidated Balance Sheet. |
| |
(6) | Includes $2,891 recorded in prepaid expenses and other assets and $3,509 recorded in other assets on the Condensed Consolidated Balance Sheet. |
| |
(7) | Valuations are based upon quoted market prices in active markets involving similar assets. The market inputs used to value these instruments generally consist of market yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources include industry standard data providers, security master files from large financial institutions, and other third party sources which are input into a distribution-curve-based algorithm to determine a daily market value. This creates a “consensus price” or a weighted average price for each security. |
| |
(8) | The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large commercial banks. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. |
| |
(9) | The fair value of mutual funds is determined based on quoted market prices. Securities traded on a national exchange are stated at the last reported sales price on the day of valuation; other securities traded in over-the-counter market and listed securities for which no sale was reported on that date are stated as the last quoted bid price. |
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
All derivatives, whether designated in hedging relationships or not, are recorded on the Condensed Consolidated Balance Sheet at fair value. We enter into foreign exchange forwards to minimize the risks of foreign currency fluctuation of specific assets and liabilities on the balance sheet; these are not designated as hedging instruments. Our derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by us or the counterparties.
We maintain operations in various countries outside of the United States and have foreign subsidiaries that manufacture and sell our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do
generate net sales in other currencies, primarily the Japanese Yen, the Euro and the Korean Won. As a result, our earnings, cash flows and cash balances are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of three months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for speculative or trading purposes. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material financial losses.
For derivative instruments that are not designated as hedging instruments, gains and losses are recognized in other income (expense).
The outstanding notional contract and fair value amounts of hedge contracts, with maximum maturity of three months, are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| U.S. Notional Contract Value | | U.S. Notional Fair Value |
| June 29, 2013 | | September 29, 2012 | | June 29, 2013 | | September 29, 2012 |
Euro currency hedge contracts | |
| | |
| | |
| | |
|
Purchase | $ | 43,696 |
| | $ | 61,779 |
| | $ | 43,115 |
| | $ | 62,404 |
|
| | | | | | | |
Korean Won currency hedge contracts | | | | | | | |
Sell | $ | (12,929 | ) | | $ | (39,039 | ) | | $ | (12,872 | ) | | $ | (39,559 | ) |
| | | | | | | |
Other foreign currency hedge contracts | |
| | |
| | |
| | |
|
Purchase | $ | 1,471 |
| | $ | — |
| | $ | 1,463 |
| | $ | — |
|
Sell | $ | (23,483 | ) | | $ | (20,452 | ) | | $ | (23,590 | ) | | $ | (20,578 | ) |
The fair value of our derivative instruments are included in prepaid expenses and other assets and in other current liabilities in our Condensed Consolidated Balance Sheets; such amounts were not material as of June 29, 2013 and September 29, 2012.
The amount of non-designated derivative instruments’ gain in the Condensed Consolidated Statements of Operations included in other income (expense) for the three and nine months ended June 29, 2013 and June 30, 2012 is as follows (in thousands):
|
| | | | | | | | |
| | Amount of Gain or (Loss) Recognized in Income on Derivatives |
| | Three Months Ended | | Nine Months Ended |
| | June 29, 2013 | | June 29, 2013 |
Derivatives not designated as hedging instruments | | | | |
Foreign exchange contracts | | $ | 338 |
| | $ | 1,476 |
|
|
| | | | | | | | |
| | Amount of Gain or (Loss) Recognized in Income on Derivatives |
| | Three Months Ended | | Nine Months Ended |
| | June 30, 2012 | | June 30, 2012 |
Derivatives not designated as hedging instruments | | | | |
Foreign exchange contracts | | $ | (3,246 | ) | | $ | (3,657 | ) |
6. SHORT-TERM INVESTMENTS
We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Investments classified as available-for-sale are reported at fair value with unrealized gains and losses, net of related income taxes, recorded as a separate component of other comprehensive income (“OCI”) in stockholders’ equity
until realized. Interest and amortization of premiums and discounts for debt securities are included in interest income. Gains and losses on securities sold are determined based on the specific identification method and are included in other income (expense).
Cash, cash equivalents and short-term investments consist of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| June 29, 2013 |
| Cost Basis | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Cash and cash equivalents | $ | 81,311 |
| | $ | — |
| | $ | — |
| | $ | 81,311 |
|
| | | |
| | |
| | |
Short-term investments: | |
| | |
| | |
| | |
|
Available-for-sale securities: | |
| | |
| | |
| | |
|
Commercial paper | $ | 9,994 |
| | $ | — |
| | $ | — |
| | $ | 9,994 |
|
U.S. Treasury and agency obligations | 94,577 |
| | 468 |
| | (5 | ) | | 95,040 |
|
Corporate notes and obligations | 15,314 |
| | 36 |
| | (13 | ) | | 15,337 |
|
Total short-term investments | $ | 119,885 |
| | $ | 504 |
| | $ | (18 | ) | | $ | 120,371 |
|
|
| | | | | | | | | | | | | | | |
| September 29, 2012 |
| Cost Basis | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Cash and cash equivalents | $ | 67,752 |
| | $ | 9 |
| | $ | — |
| | $ | 67,761 |
|
| | | |
| | |
| | |
Short-term investments: | |
| | |
| | |
| | |
|
Available-for-sale securities: | |
| | |
| | |
| | |
|
Certificates of deposit | $ | 2,017 |
| | $ | 2 |
| | $ | — |
| | $ | 2,019 |
|
U.S. Treasury and agency obligations | 108,284 |
| | 666 |
| | (2 | ) | | 108,948 |
|
International government obligations | 2,004 |
| | 14 |
| | — |
| | 2,018 |
|
Corporate notes and obligations | 41,912 |
| | 272 |
| | (1 | ) | | 42,183 |
|
Commercial paper | 2,000 |
| | — |
| | — |
| | 2,000 |
|
Total short-term investments | $ | 156,217 |
| | $ | 954 |
| | $ | (3 | ) | | $ | 157,168 |
|
At June 29, 2013, gross unrealized losses on our investments with unrealized losses that are not deemed to be other-than-temporarily impaired were $18,000 on corporate notes and obligations of $16.2 million and U.S. treasury and agency obligations of $47.7 million.
The amortized cost and estimated fair value of available-for-sale investments in debt securities as of June 29, 2013 and September 29, 2012 classified as short-term investments on our condensed consolidated balance sheet were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| June 29, 2013 | | September 29, 2012 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
Investments in available-for-sale debt securities due in less than one year | $ | 119,885 |
| | $ | 120,371 |
| | $ | 154,200 |
| | $ | 155,149 |
|
During the three and nine months ended June 29, 2013, we received proceeds totaling $3.0 million and $68.7 million, respectively, from the sale of available-for-sale securities and realized gross gains of less than $0.1 million and $0.1 million, respectively. During the three and nine months ended June 30, 2012, we received proceeds totaling $16.8 million and $76.9 million, respectively, from the sale of available-for-sale securities and realized gross gains of less than $0.1 million and $0.1 million, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill is tested for impairment on an annual basis and between annual tests if events or circumstances indicate that an impairment loss may have occurred, and we write down these assets when impaired. We perform our annual impairment tests during the fourth quarter of each fiscal year using the opening balance sheet as of the first day of the fourth quarter, with any resulting impairment recorded in the fourth quarter of the fiscal year.
We evaluate long-lived assets and amortizable intangible assets whenever events or changes in business circumstances or our planned use of assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. Reviews are performed to determine whether the carrying values of assets are impaired based on comparison to the undiscounted expected future cash flows identifiable to such long-lived and amortizable intangible assets. If the comparison indicates that impairment exists, the impaired asset is written down to its fair value.
During the nine months ended June 29, 2013, we noted no indications of impairment or triggering events to cause us to review goodwill for potential impairment. We will conduct our annual goodwill testing during the fourth fiscal quarter.
The changes in the carrying amount of goodwill by segment for the period from September 29, 2012 to June 29, 2013 are as follows (in thousands):
|
| | | | | | | | | | | |
| Specialty Lasers and Systems | | Commercial Lasers and Components | | Total |
Balance as of September 29, 2012 | $ | 71,326 |
| | $ | 6,363 |
| | $ | 77,689 |
|
Additions (See Note 3) | 32,952 |
| | — |
| | 32,952 |
|
Translation adjustments and other | (176 | ) | | — |
| | (176 | ) |
Balance as of June 29, 2013 | $ | 104,102 |
| | $ | 6,363 |
| | $ | 110,465 |
|
Components of our amortizable intangible assets are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2013 | | September 29, 2012 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Existing technology | $ | 80,702 |
| | $ | (49,155 | ) | | $ | 31,547 |
| | $ | 51,346 |
| | $ | (44,457 | ) | | $ | 6,889 |
|
Customer lists | 17,135 |
| | (6,947 | ) | | 10,188 |
| | 7,849 |
| | (5,666 | ) | | 2,183 |
|
Trade name | 3,375 |
| | (3,234 | ) | | 141 |
| | 3,050 |
| | (2,749 | ) | | 301 |
|
Non-compete agreement | 690 |
| | (674 | ) | | 16 |
| | 689 |
| | (661 | ) | | 28 |
|
Production know-how (1) | — |
| | — |
| | — |
| | 910 |
| | (838 | ) | | 72 |
|
In-process research & development | 2,216 |
| | — |
| | 2,216 |
| | — |
| | — |
| | — |
|
Total | $ | 104,118 |
| | $ | (60,010 | ) | | $ | 44,108 |
| | $ | 63,844 |
| | $ | (54,371 | ) | | $ | 9,473 |
|
(1) For accounting purposes, when an intangible asset is fully amortized, it is removed from the disclosure schedule.
Amortization expense for intangible assets for the nine months ended June 29, 2013 and June 30, 2012 was $7.3 million and $5.0 million, respectively, which includes $4.7 million and $3.7 million, respectively, for amortization of existing technology and production know-how.
At June 29, 2013, estimated amortization expense for the remainder of fiscal 2013, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):
|
| | | |
| Estimated Amortization Expense |
2013 (remainder) | $ | 2,439 |
|
2014 | 9,536 |
|
2015 | 9,029 |
|
2016 | 8,629 |
|
2017 | 7,664 |
|
2018 | 4,427 |
|
Thereafter | 2,384 |
|
Total | $ | 44,108 |
|
8. BALANCE SHEET DETAILS
Inventories consist of the following (in thousands):
|
| | | | | | | |
| June 29, 2013 | | September 29, 2012 |
Purchased parts and assemblies | $ | 53,105 |
| | $ | 46,526 |
|
Work-in-process | 62,927 |
| | 60,171 |
|
Finished goods | 52,971 |
| | 53,416 |
|
Total inventories | $ | 169,003 |
| | $ | 160,113 |
|
Prepaid expenses and other assets consist of the following (in thousands):
|
| | | | | | | |
| June 29, 2013 | | September 29, 2012 |
Prepaid and refundable income taxes | $ | 20,221 |
| | $ | 20,634 |
|
Other taxes receivable | 35,297 |
| | 25,607 |
|
Prepaid expenses and other | 13,135 |
| | 15,489 |
|
Total prepaid expenses and other assets | $ | 68,653 |
| | $ | 61,730 |
|
Other assets consist of the following (in thousands):
|
| | | | | | | |
| June 29, 2013 | | September 29, 2012 |
Assets related to deferred compensation arrangements | $ | 23,059 |
| | $ | 21,990 |
|
Deferred tax assets | 39,255 |
| | 37,160 |
|
Other assets | 5,827 |
| | 4,879 |
|
Total other assets | $ | 68,141 |
| | $ | 64,029 |
|
Other current liabilities consist of the following (in thousands):
|
| | | | | | | |
| June 29, 2013 | | September 29, 2012 |
Accrued payroll and benefits | $ | 29,726 |
| | $ | 28,100 |
|
Deferred income | 17,478 |
| | 17,465 |
|
Reserve for warranty | 18,074 |
| | 17,442 |
|
Accrued expenses and other | 11,431 |
| | 10,445 |
|
Other taxes payable | 24,312 |
| | 15,457 |
|
Customer deposits | 2,661 |
| | 1,830 |
|
Total other current liabilities | $ | 103,682 |
| | $ | 90,739 |
|
There were no restructuring plans or activities in the three and nine months ended June 29, 2013. There were no new restructuring charges during fiscal 2012. The closure of our Finland site was completed in the third quarter of fiscal 2011, with the last payments and other reductions completed during fiscal 2012.
We provide warranties on certain of our product sales and reserves for estimated warranty costs are recorded during the period of sale. The determination of such reserves requires us to make estimates of product return rates and expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line. The weighted average warranty period covered is approximately 15 months. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in future periods.
Components of the reserve for warranty costs during the first nine months of fiscal 2013 and 2012 were as follows (in thousands):
|
| | | | | | | |
| Nine Months Ended |
| June 29, 2013 | | June 30, 2012 |
Beginning balance | $ | 17,442 |
| | $ | 16,704 |
|
Additions related to current period sales | 18,739 |
| | 22,291 |
|
Warranty costs incurred in the current period | (19,681 | ) | | (21,454 | ) |
Accruals resulting from acquisitions | 1,728 |
| | — |
|
Adjustments to accruals related to foreign exchange and other | (154 | ) | | (177 | ) |
Ending balance | $ | 18,074 |
| | $ | 17,364 |
|
Other long-term liabilities consist of the following (in thousands):
|
| | | | | | | |
| June 29, 2013 | | September 29, 2012 |
Long-term taxes payable | $ | 15,526 |
| | $ | 21,281 |
|
Deferred compensation | 24,189 |
| | 22,816 |
|
Deferred tax liabilities | 12,263 |
| | 726 |
|
Deferred income | 2,684 |
| | 2,191 |
|
Asset retirement obligations liability | 2,156 |
| | 2,029 |
|
Other long-term liabilities | 5,941 |
| | 6,283 |
|
Total other long-term liabilities | $ | 62,759 |
| | $ | 55,326 |
|
9. SHORT-TERM BORROWINGS
We have several lines of credit which allow us to borrow in the applicable local currency. We have a total of $14.4 million of unsecured foreign lines of credit as of June 29, 2013. At June 29, 2013, we had used $2.4 million of these available foreign lines of credit as guarantees. These credit facilities were used in Europe and Japan during the third fiscal quarter of 2013. In addition, our domestic line of credit consists of a $50.0 million unsecured revolving credit account with Union Bank of California. The agreement will expire on May 31, 2014. The line of credit is subject to covenants related to financial ratios and tangible net worth with which we are currently in compliance. No amounts have been drawn upon our domestic line of credit as of June 29, 2013.
10. STOCK-BASED COMPENSATION
Fair Value of Stock Compensation
We recognize compensation expense for all share based payment awards based on the fair value of such awards. The expense is recognized on a straight-line basis over the respective requisite service period of the awards.
Determining Fair Value
The fair values of shares purchased under the Employee Stock Purchase Plan (“ESPP”) for the three and nine months ended June 29, 2013 and June 30, 2012, respectively, were estimated using the following weighted-average assumptions:
|
| | | | | | | | | | | | | | | | | |
| | Employee Stock Purchase Plan | |
| | Three Months Ended | | Nine Months Ended | |
| | June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 | |
Expected life in years | | 0.5 |
| | 0.5 |
| | 0.5 |
| | 0.5 |
| |
Expected volatility | | 30.8 | % | | 43.9 | % | | 33.3 | % | | 49.7 | % | |
Risk-free interest rate | | 0.1 | % | | 0.1 | % | | 0.1 | % | | 0.1 | % | |
Expected dividend yield | | — | % | | — | % | | 1.0 | % | | — | % | |
Weighted average fair value per share | | $ | 10.60 |
| | $ | 12.74 |
| | $ | 10.49 |
| | $ | 14.20 |
| |
There were no stock options granted during the three and nine months ended June 29, 2013 and June 30, 2012.
Restricted stock awards and restricted stock units are independent of option grants and are typically subject to vesting restrictions—either time-based or performance-based conditions for vesting. Until restricted stock vests, shares (including those issuable upon vesting of the applicable restricted stock unit) are subject to forfeiture if employment terminates prior to the release of restrictions and cannot be transferred.
•The service based restricted stock unit awards are generally subject to annual vesting over two to three years from the date of grant, as determined by the Compensation and H. R. Committees of our board of directors.
•The automatic annual grants of restricted stock units for non-employee members of our board of directors vest on February 15 of the calendar year following the grant, to the extent each individual is serving on the board on such date. The automatic grants are made on the date of our annual meeting of stockholders.
•The market-based performance restricted stock unit award grants are generally either subject to annual vesting over three years from the date of grant or subject to a single vest measurement three years from the date of grant, depending upon achievement of performance measurements based on the performance of the Company's total shareholder returns (as defined in the plan) compared with the performance of the Russell 2000 Index.
We grant market-based performance restricted stock units to officers and certain employees. The performance stock unit agreements provide for the award of performance stock units with each unit representing the right to receive one share of our common stock to be issued after the applicable award period. The final number of units awarded, if any, for this grant will be determined as of the vesting dates, based upon our total shareholder return over the performance period compared to the Russell 2000 Index and could range from no units to a maximum of twice the initial award. The weighted average fair value for these performance units was determined using a Monte Carlo simulation model incorporating the following weighted average assumptions:
|
| | | | | | |
| | Nine Months Ended |
| | June 29, 2013 | | June 30, 2012 |
Risk-free interest rate | | 0.33 | % | | 0.39 | % |
Volatility | | 37.9 | % | | 41.8 | % |
Weighted average fair value | | $48.48 | | $71.59 |
We recognize the estimated cost of these awards, as determined under the simulation model, over the related service period, with no adjustment in future periods based upon the actual shareholder return over the performance period.
Stock-Based Compensation Expense
The following table shows total stock-based compensation expense and related tax benefits included in the condensed consolidated statements of operations for the three and nine months ended June 29, 2013 and June 30, 2012 (in thousands):
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 | |
Cost of sales | $ | 576 |
| | $ | 453 |
| | $ | 1,605 |
| | $ | 1,263 |
| |
Research and development | 455 |
| | 407 |
| | 1,398 |
| | 1,231 |
| |
Selling, general and administrative | 3,610 |
| | 3,266 |
| | 11,274 |
| | 9,814 |
| |
Income tax benefit | (1,195 | ) | | (1,274 | ) | | (3,823 | ) | | (3,867 | ) | |
| $ | 3,446 |
| | $ | 2,852 |
| | $ | 10,454 |
| | $ | 8,441 |
| |
During the three and nine months ended June 29, 2013, $0.5 million and $1.7 million was capitalized into inventory for all stock plans, $0.6 million and $1.6 million was amortized to cost of sales and $0.7 million remained in inventory at June 29, 2013. During the three and nine months ended June 30, 2012, $0.4 million and $1.4 million was capitalized into inventory for all stock plans, $0.5 million and $1.3 million was amortized to cost of sales and $0.5 million remained in inventory at June 30, 2012. Management has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.
At June 29, 2013, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock plans but not yet recognized was approximately $19.5 million, net of estimated forfeitures of $1.0 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.1 years years and will be adjusted for subsequent changes in estimated forfeitures.
At June 29, 2013, total compensation cost related to options to purchase common shares under the ESPP but not yet vested was approximately $0.5 million, which will be recognized over the six month offering period.
The stock option exercise tax benefits reported in the statement of cash flows results from the excess tax benefits arising from tax deductions in excess of the stock-based compensation cost recognized, determined on a grant-by-grant basis. During the first nine months of fiscal 2013 and fiscal 2012, we recorded $0.0 and $2.7 million, respectively, of excess tax benefits as cash flows from financing activities.
Stock Options & Awards Activity
The following is a summary of option activity for our Stock Option Plans (in thousands, except per share amounts and weighted average remaining contractual term in years):
|
| | | | | | | | | | | | |
| Number of Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
Outstanding at September 29, 2012 | 641 |
| | $ | 27.86 |
| | | | |
|
Granted | — |
| | — |
| | | | |
|
Exercised | (339 | ) | | 28.83 |
| | | | |
|
Forfeitures | — |
| | — |
| | | | |
|
Expirations | — |
| | — |
| | | | |
|
Outstanding at June 29, 2013 | 302 |
| | $ | 26.77 |
| | 3.6 years | | $ | 8,561 |
|
Vested and expected to vest at June 29, 2013 | 302 |
| | $ | 26.77 |
| | 3.6 years | | $ | 8,561 |
|
Exercisable at June 29, 2013 | 287 |
| | $ | 25.77 |
| | 3.4 years | | $ | 8,396 |
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock at the end of the reporting period. There were approximately 0.3 million outstanding options that were in-the-money as of June 29, 2013. The aggregate intrinsic value of options exercised under the Company’s stock plans for the three and nine months ended June 29, 2013 were $0.5 million and $8.5 million, respectively, determined as of the date of option exercise. The aggregate intrinsic value of options exercised under the Company’s stock plans for the three and nine months ended June 30, 2012 were $0.7 million and $5.4 million, respectively, determined as of the date of option exercise.
The following table summarizes the activity of our time based and market- performance based restricted stock units for the first nine months of fiscal 2013 (in thousands, except per share amounts):
|
| | | | | | | | | | | | | |
| Time Based Restricted Stock Units | | Market-Based Performance Restricted Stock Units |
| Number of Shares(1) | | Weighted Average Grant Date Fair Value | | Number of Shares(2) | | Weighted Average Grant Date Fair Value |
Nonvested stock at September 29, 2012 | 440 |
| | $ | 47.81 |
| | 152 |
| | $ | 57.55 |
|
Granted | 272 |
| | 43.97 |
| | 97 |
| | 48.48 |
|
Vested | (253 | ) | | 43.06 |
| | (28 | ) | | 49.50 |
|
Forfeited | (6 | ) | | 45.59 |
| | (7 | ) | | 53.30 |
|
Nonvested stock at June 29, 2013 | 453 |
| | $ | 48.19 |
| | 214 |
| | $ | 54.63 |
|
__________________________________________
(1)Service-based restricted stock vested during each fiscal year.
(2)Performance-based awards and units included at 100% of target goal; under the terms of the awards, the recipient may earn between 0% and 200% of the award.
11. COMMITMENTS AND CONTINGENCIES
We are subject to legal claims and litigation arising in the ordinary course of business, such as product liability, employment or intellectual property claims. The outcome of any such matters is currently not determinable. Although we do not expect that such legal claims and litigation will ultimately have a material adverse effect on our consolidated financial position, results of operations or cash flows, an adverse result in one or more matters could negatively affect our results in the period in which they occur.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income (net of tax) at June 29, 2013 and September 29, 2012 is substantially comprised of accumulated translation adjustments of $40.9 million and $40.4 million, respectively.
13. EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive employee stock awards, including stock options, restricted stock awards and stock purchase plan contracts, using the treasury stock method.
The following table presents information necessary to calculate basic and diluted earnings per share (in thousands, except per share data):
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 | |
Weighted average shares outstanding —basic | 24,310 |
| | 23,633 |
| | 24,055 |
| | 23,538 |
| |
Dilutive effect of employee stock awards | 380 |
| | 421 |
| | 407 |
| | 466 |
| |
Weighted average shares outstanding—diluted | 24,690 |
| | 24,054 |
| | 24,462 |
| | 24,004 |
| |
| | | | | | | | |
Net income | $ | 16,685 |
| | $ | 17,208 |
| | $ | 45,840 |
| | $ | 50,414 |
| |
| | | | | | | | |
Net income per basic share | $ | 0.69 |
| | $ | 0.73 |
| | $ | 1.91 |
| | $ | 2.14 |
| |
Net income per diluted share | $ | 0.68 |
| | $ | 0.72 |
| | $ | 1.87 |
| | $ | 2.10 |
| |
A total of 2,999 and 82,053 potentially dilutive securities have been excluded from the diluted share calculation for the three and nine months ended June 29, 2013 as their effect was anti-dilutive. A total of 108,501 and 97,048 potentially dilutive securities have been excluded from the diluted share calculation for the three and nine months ended June 30, 2012 as their effect was anti-dilutive.
14. OTHER INCOME (EXPENSE)
Other income (expense) is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 | |
Foreign exchange gain (loss) | $ | (1,927 | ) | | $ | (835 | ) | | $ | (3,655 | ) | | $ | (533 | ) | |
Gain on deferred compensation investments, net | 1,010 |
| | (1,051 | ) | | 2,287 |
| | 436 |
| |
Other—net | (47 | ) | | (32 | ) | | 172 |
| | 385 |
| |
Other income (expense), net | $ | (964 | ) | | $ | (1,918 | ) | | $ | (1,196 | ) | | $ | 288 |
| |
15. STOCK REPURCHASES AND DIVIDENDS
On October 4, 2012, the Board of Directors authorized a buyback program whereby we are authorized to repurchase up to $25.0 million of our common stock. The program was authorized for 12 months from the date of authorization. No shares have been purchased under this program as of June 29, 2013.
On December 10, 2012, we announced that the Board of Directors approved a $1.00 per share special cash dividend on our outstanding common stock payable on December 27, 2012 to stockholders of record on December 19, 2012, resulting in a payment of $24.0 million in the first quarter of fiscal 2013.
16. INCOME TAXES
Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries, adjusted for items which are considered discrete to the period. Our estimated effective tax rates for the three and nine months ended June 29, 2013 were 18.6% and 20.6%. Our effective tax rates for the three and nine months ended June 29, 2013 were lower than the statutory rate of 35% primarily due to permanent differences related to the benefit of income subject to foreign tax rates that are lower than U.S. tax rates including Korea and Singapore tax exemptions, the benefit of foreign tax credits, the benefit of the federal research and development tax credits including renewal of the federal research and development tax credits for fiscal 2012 and the benefit of releasing foreign tax reserves accrued under ASC 740-10 and related interest. These amounts are partially offset by deemed dividend inclusions under the Subpart F tax rules, stock compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m).
Determining the consolidated provision for income taxes, income tax liabilities and deferred tax assets and liabilities involves judgment. We calculate and provide for income taxes in each of the tax jurisdictions in which we operate, which
involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.
As of June 29, 2013, the total amount of gross unrecognized tax benefits was $22.5 million including gross interest and penalties of $1.6 million, of which $17.6 million, if recognized, would affect our effective tax rate. Our total gross unrecognized tax benefits, net of certain deferred tax assets, were classified as other long-term liabilities in the condensed consolidated balance sheets. During the quarter, we released approximately $2.7 million of foreign translation reserves due to the revaluation of this exposure and this release only impacts our cumulative translation adjustment.
Our policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of June 29, 2013, the total amount of gross interest and penalties accrued was $1.6 million, which is classified as other long-term liabilities in the condensed consolidated balance sheets.
We are subject to taxation and file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. For U.S. federal income tax purposes, all years prior to 2010 are closed to examination. In our major state jurisdiction and our major foreign jurisdictions, the years prior to 2009 and 2006, respectively, are closed to examination. In December 2011 and January 2012, our three German subsidiaries received notices of tax audits for the fiscal years 2006 through 2010. We received a preliminary assessment for two of the German subsidiaries and the amount is immaterial; the audit for the other German subsidiary is currently in process.
Management believes that it has adequately provided for any adjustments that may result from tax examinations. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign and state tax matters may be concluded in the next 12 months. Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of net unrecognized tax benefits including interest and penalties at June 29, 2013 could be reduced by approximately $0.2 million to $2.4 million in the next 12 months.
The American Taxpayer Relief Act of 2012 (“the Act”), was enacted on January 2, 2013. Under the Act, the federal research and development tax credit was retroactively extended for amounts paid or incurred after December 31, 2011 through December 31, 2013. The effects of the change in the tax law were recognized in our second quarter of fiscal 2013, which is the quarter that the law was enacted. Accordingly, prior year research and development tax credits of approximately $1.4 million less appropriate reserves were recognized in the second quarter of fiscal 2013.
On March 26, 2013, Coherent Korea received final approval for a High-Tech tax exemption from the Korea authorities. The High-Tech tax exemption is effective retroactively to the beginning of fiscal 2013. Coherent Singapore had previously received a Pioneer Status tax exemption from the Singapore authorities effective in fiscal 2012.
Deferred Income Taxes
As of June 29, 2013, our condensed consolidated balance sheet included net deferred tax assets, before valuation allowance, of approximately $59.2 million, which consists of tax credits carryovers, accruals and reserves, competent authority offset to transfer pricing tax reserves, employee stock-based compensation expenses and certain other liabilities. Management periodically evaluates the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is solely dependent on our ability to generate sufficient future taxable income in the applicable jurisdictions during periods prior to the expiration of tax statutes to fully utilize these assets. After evaluating all available evidence, we have determined that it is “more likely than not” that a portion of the deferred tax assets would not be realized and we have a total valuation allowance of $10.3 million as of June 29, 2013. We intend to maintain the valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.
17. SEGMENT INFORMATION
We are organized into two reportable operating segments: Specialty Lasers and Systems (“SLS”) and Commercial Lasers and Components (“CLC”). This segmentation reflects the go-to-market strategies for various products and markets. SLS develops and manufactures configurable, advanced-performance products largely serving the microelectronics, scientific research and government programs and original equipment manufacturer (“OEM”) components and instrumentation markets. The size and complexity of many of the SLS products generally require service to be performed at the customer site by factory-trained field service engineers. While both segments work to deliver cost-effective solutions, CLC focuses
on higher volume products that are offered in set configurations. The product architectures are designed for easy exchange at the point of use such that product service and repairs are generally based upon advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include materials processing, OEM components and instrumentation and microelectronics.
We have identified SLS and CLC as operating segments for which discrete financial information is available. Both units have dedicated engineering, manufacturing, product business management and product line management functions. A small portion of our outside net sales is attributable to projects and recently developed products for which a segment has not yet been determined. The associated direct and indirect costs are presented in the category of Corporate and other, along with other corporate costs as described below.
Our Chief Executive Officer has been identified as the chief operating decision maker (CODM) as he assesses the performance of the segments and decides how to allocate resources to the segments. Income (loss) from operations is the measure of profit and loss that our CODM uses to assess performance and make decisions. As assets are not a measure used to assess the performance of the company by the CODM, asset information is not tracked or compiled by segment and is not available to be reported in our disclosures. Income (loss) from operations represents the net sales less the cost of sales and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain operating expenses which we manage separately at the corporate level. These unallocated costs include stock-based compensation and corporate functions (certain research and development, management, finance, legal and human resources) and are included in the results below under Corporate and other in the reconciliation of operating results. Management does not consider unallocated Corporate and other costs in its measurement of segment performance.
The following table provides net sales and income (loss) from operations for our operating segments (in thousands):
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 | |
Net sales: | | | | | | | | |
Specialty Laser Systems | $ | 149,466 |
| | $ | 140,407 |
| | $ | 423,608 |
| | $ | 414,338 |
| |
Commercial Lasers and Components | 64,259 |
| | 55,976 |
| | 173,377 |
| | 166,096 |
| |
Total net sales | $ | 213,725 |
| | $ | 196,383 |
| | $ | 596,985 |
| | $ | 580,434 |
| |
| | | | | | | | |
Income (loss) from operations: | | | | | | | | |
Specialty Laser Systems | $ | 28,071 |
| | $ | 31,484 |
| | $ | 84,990 |
| | $ | 92,582 |
| |
Commercial Lasers and Components | 4,395 |
| | 2,955 |
| | 7,667 |
| | 8,125 |
| |
Corporate and other | (11,022 | ) | | (8,117 | ) | | (33,818 | ) | | (28,735 | ) | |
Total income from operations | $ | 21,444 |
| | $ | 26,322 |
| | $ | 58,839 |
| | $ | 71,972 |
| |
Major Customers
We had two customers during the three months ended June 29, 2013 who accounted for 16.2% and 11.2% respectively, of consolidated net sales; and the same two customers accounted for 13.3% and 10.0%, respectively, of consolidated net sales during the nine months ended June 29, 2013. Both customers purchased primarily from our SLS segment. There was one customer who accounted for 11.4% of consolidated net sales for the three months ended June 30, 2012, and two customers who accounted for 10.4% and 10.3%, respectively, of consolidated net sales for the nine months ended June 30, 2012; both customers purchased primarily from our SLS segment.
We had one customer who accounted for 18.3% of accounts receivable at June 29, 2013. There were two customers who accounted for 14.9% and 14.8%, respectively, of accounts receivable at September 29, 2012.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
BUSINESS BACKGROUND
We are one of the world’s leading suppliers of photonics-based solutions in a broad range of commercial and scientific research applications. We design, manufacture, service and market lasers and related accessories for a diverse group of customers. Since
inception in 1966, we have grown through internal expansion and through strategic acquisitions of complementary businesses, technologies, intellectual property, manufacturing processes and product offerings.
We are organized into two operating segments: Specialty Lasers and Systems (“SLS”) and Commercial Lasers and Components (“CLC”). This segmentation reflects the go-to-market strategies for various products and markets. SLS develops and manufactures configurable, advanced performance products largely serving the microelectronics, scientific research and government programs and OEM components and instrumentation markets. The size and complexity of many of the SLS products require service to be performed at the customer site by factory trained field service engineers. While both segments deliver cost-effective photonics solutions, CLC focuses on higher volume products that are offered in set configurations. The product architectures are designed for easy exchange at the point of use such that substantially all product service and repairs are based upon advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include materials processing, original equipment manufacturer (“OEM”) components and instrumentation and microelectronics.
Income (loss) from operations is the measure of profit and loss that our chief operating decision maker (“CODM”) uses to assess performance and make decisions. Income (loss) from operations represents the sales less the cost of sales and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain operating expenses, which we manage separately at the corporate level. These unallocated costs include stock-based compensation and corporate functions (certain advanced research and development, management, finance, legal and human resources) and are included in Corporate and other. Management does not consider unallocated Corporate and other costs in its measurement of segment performance.
MARKET APPLICATIONS
Our products address a broad range of applications that we group into the following markets: Microelectronics, Scientific Research and Government Programs, OEM Components and Instrumentation and Materials Processing.
OUR STRATEGY
We strive to develop innovative and proprietary products and solutions that meet the needs of our customers and that are based on our core expertise in lasers and optical technologies. In pursuit of our strategy, we intend to:
| |
• | Leverage our technology portfolio and application engineering to lead the proliferation of photonics into broader markets—We will continue to identify opportunities in which our technology portfolio and application engineering can be used to offer innovative solutions and gain access to new markets. We plan to utilize our expertise to increase our market share in the mid to high power material processing applications. |
| |
• | Optimize our leadership position in existing markets—There are a number of markets where we have historically been at the forefront of technological development and product deployment and from which we have derived a substantial portion of our net sales. We plan to optimize our financial returns from these markets. |
| |
• | Maintain and develop additional strong collaborative customer and industry relationships—We believe that the Coherent brand name and reputation for product quality, technical performance and customer satisfaction will help us to further develop our loyal customer base. We plan to maintain our current customer relationships and develop new ones with customers who are industry leaders and work together with these customers to design and develop innovative product systems and solutions as they develop new technologies. |
| |
• | Develop and acquire new technologies and market share—We will continue to enhance our market position through our existing technologies and develop new technologies through our internal research and development efforts, as well as through the acquisition of additional complementary technologies, intellectual property, manufacturing processes and product offerings. |
| |
• | Streamline our manufacturing structure and improve our cost structure—We will focus on optimizing the mix of products that we manufacture internally and externally. We will utilize vertical integration where our internal manufacturing process is considered proprietary and seek to leverage external sources when the capabilities and cost structure are well developed and on a path towards commoditization. |
| |
• | Focus on long-term improvement of adjusted EBITDA, in dollars and as a percentage of net sales—We define adjusted EBITDA as operating income adjusted for depreciation, amortization, stock compensation expenses, major restructuring costs and certain other non-operating income and expense items. Key initiatives to reach our goals for EBITDA improvements include utilization of our Asian manufacturing locations, rationalizing our supply chain and continued leveraging of our infrastructure. |
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. We have identified the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition, accounting for long-lived assets (including goodwill and intangible assets), inventory valuation, warranty reserves, stock-based compensation and accounting for income taxes. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for our fiscal year ended September 29, 2012.
KEY PERFORMANCE INDICATORS
Below is a summary of some of the quantitative performance indicators (as defined below) that are evaluated by management to assess our financial performance. Some of the indicators are non-GAAP measures and should not be considered as an alternative to any other measure for determining operating performance or liquidity that is calculated in accordance with generally accepted accounting principles.
|
| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| June 29, 2013 | | June 30, 2012 | | Change | | % Change |
| (Dollars in thousands) |
| | | | | | | |
Bookings | $ | 189,206 |
| | $ | 218,927 |
| | $ | (29,721 | ) | | (13.6 | )% |
Book-to-bill ratio | 0.89 |
| | 1.11 |
| | (0.22 | ) | | (19.8 | )% |
Net sales—Specialty Lasers and Systems | $ | 149,466 |
| | $ | 140,407 |
| | $ | 9,059 |
| | 6.5 | % |
Net sales—Commercial Lasers and Components | $ | 64,259 |
| | $ | 55,976 |
| | $ | 8,283 |
| | 14.8 | % |
Gross profit as a percentage of net sales— Specialty Lasers and Systems | 40.3 | % | | 42.7 | % | | (2.4 | )% | | (5.6 | )% |
Gross profit as a percentage of net sales—Commercial Lasers and Components | 36.7 | % | | 37.1 | % | | (0.4 | )% | | (1.1 | )% |
Research and development as a percentage of net sales | 10.2 | % | | 9.8 | % | | 0.4 | % | | 4.1 | % |
Income before income taxes | $ | 20,491 |
| | $ | 24,385 |
| | $ | (3,894 | ) | | (16.0 | )% |
Net cash provided by (used in) operating activities | $ | (3,665 | ) | | $ | 10,965 |
| | $ | (14,630 | ) | | (133.4 | )% |
Days sales outstanding in receivables | 61.6 |
| | 64.8 |
| | (3.2 | ) | | (4.9 | )% |
Annualized third quarter inventory turns | 3.1 |
| | 2.9 |
| | 0.2 |
| | 6.9 | % |
Capital spending as a percentage of net sales | 2.3 | % | | 5.5 | % | | (3.2 | )% | | (58.2 | )% |
Net income as a percentage of net sales | 7.8 | % | | 8.8 | % | | (1.0 | )% | | (11.4 | )% |
Adjusted EBITDA as a percentage of net sales | 17.3 | % | | 18.9 | % | | (1.6 | )% | | (8.5 | )% |
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| June 29, 2013 | | June 30, 2012 | | Change | | % Change |
| (Dollars in thousands) |
| | | | | | | |
Bookings | $ | 567,004 |
| | $ | 603,912 |
| | $ | (36,908 | ) | | (6.1 | )% |
Book-to-bill ratio | 0.95 |
| | 1.04 |
| | (0.09 | ) | | (8.7 | )% |
Net sales—Specialty Lasers and Systems | $ | 423,608 |
| | $ | 414,338 |
| | $ | 9,270 |
| | 2.2 | % |
Net sales—Commercial Lasers and Components | $ | 173,377 |
| | $ | 166,096 |
| | $ | 7,281 |
| | 4.4 | % |
Gross profit as a percentage of net sales— Specialty Lasers and Systems | 41.6 | % | | 42.9 | % | | (1.3 | )% | | (3.0 | )% |
Gross profit as a percentage of net sales—Commercial Lasers and Components | 36.3 | % | | 37.2 | % | | (0.9 | )% | | (2.4 | )% |
Research and development as a percentage of net sales | 10.3 | % | | 10.1 | % | | 0.2 | % | | 2.0 | % |
Income before income taxes | $ | 57,744 |
| | $ | 72,465 |
| | $ | (14,721 | ) | | (20.3 | )% |
Net cash provided by operating activities | $ | 66,759 |
| | $ | 43,711 |
| | $ | 23,048 |
| | 52.7 | % |
Capital spending as a percentage of net sales | 2.6 | % | | 5.3 | % | | (2.7 | )% | | (50.9 | )% |
Net income as a percentage of net sales | 7.7 | % | | 8.7 | % | | (1.0 | )% | | (11.5 | )% |
Adjusted EBITDA as a percentage of net sales | 17.4 | % | | 18.5 | % | | (1.1 | )% | | (5.9 | )% |
Definitions and analysis of these performance indicators are as follows:
Bookings and Book-to-Bill Ratio
Bookings represent orders received during the current period for products and services to be provided pursuant to service contracts. While we generally have not experienced a significant rate of cancellation, bookings are generally cancelable by our customers without substantial penalty and, therefore, we cannot assure all bookings will be converted to net sales.
The book-to-bill ratio is calculated as bookings for the period divided by net sales for the period. This is an indication of the strength of our business but can sometimes be impacted by a single large order. A ratio of greater than 1.0 indicates that demand for our products is greater than what we supply in the period whereas a ratio of less than 1.0 indicates that demand for our products is less than what we supply in the period.
Bookings decreased 13.6% in the third quarter of fiscal 2013 compared to the same quarter one year ago, with decreases in the microelectronics market partially offset by increases in the materials processing, OEM components and instrumentation and scientific and government programs markets. The acquisitions of Lumera at the end of the first quarter of fiscal 2013 and Innolight during the first quarter of fiscal 2013 contributed $5.1 million to bookings. Compared to the second quarter of fiscal 2013, bookings decreased 6.3% with decreases in the OEM components and instrumentation and microelectronics markets partially offset by increases in the materials processing market. Our overall book-to-bill ratio was 0.89 in the third quarter of fiscal 2013.
Microelectronics
Microelectronics bookings decreased 35% compared to the same quarter one year ago due to timing of large excimer laser annealing orders for the flat panel display market and decreased 3% from bookings in the second quarter of fiscal 2013. Given these timing factors, the microelectronics book-to-bill ratio for the third quarter of fiscal 2013 was 0.79.
Flat panel display (FPD) orders in the third quarter of fiscal 2013 decreased 57% from the same quarter one year ago and 14% from orders in the second quarter of fiscal 2013 primarily due to timing of large excimer laser annealing orders for the flat panel display market. The trends within the FPD market are consistent with what we have reported previously. The rollout of low temperature poly-crystalline silicon (LTPS) annealing systems continues and we are negotiating the terms for the next round of orders. New systems will need to support wide quad extended graphics array (WQXGA) displays, which may require higher laser powers to maintain throughput levels. These displays will be utilized in premium smartphones and phablets. We have seen an increase in demand for UV lasers used in patterning one glass solution (OGS) panels. The use of OGS is expected to increase since it is thinner, lighter and less expensive to manufacture than other designs. Application development for cutting
of strengthened glass is very active with emphasis on the cut quality, speed and the ability to make rounded cuts with little to no post processing; we expect that Asian panel manufacturers will be at the forefront of this business. With respect to the TV market, Samsung has begun shipping a 55-inch, active-matrix organic light emitting diode (AMOLED)-based unit with a curved screen and a LTPS backplane. While it is currently an expensive device; we expect the price will decrease as capacity comes on-line and yields increase. The market remains strong for liquid crystal display (LCD) and AMOLED production from integrators for flat panel display manufacturers in Japan, Korea and China and we expect follow-on orders and continued fluctuations in order volumes on a quarterly basis.
Orders in the advanced packaging (API) market increased 60% from the same quarter one year ago and 18% from orders in the second quarter of fiscal 2013, signaling an overall recovery in the segment. Orders were very strong during the third quarter of fiscal 2013for CO2 lasers used in via drilling and UV lasers used in laser direct imaging and flex circuit manufacturing. We believe the strong demand is, in part, due to Chinese and Taiwanese PCB manufacturers ramping up for the new iPhone®. Products and technologies from Innolight and Lumera will play important roles in advanced packaging applications.
Orders from semiconductor capital equipment OEMs decreased 14% from the second quarter of fiscal 2013 as the market is being influenced by a number of factors heading into the second half of calendar 2013 and 2014. Industry analysts are forecasting rising utilization rates, which boosts capacity expansion and service revenues, due to increasing demand for advanced components for smartphones, tablets, set-top boxes and automotive electronics. Growth in these devices offsets continued deterioration of the PC market. Demand should also be bolstered by shifts within the IDM universe. The combination of these factors has led industry reports to project strong growth in equipment spending in fiscal 2014.
Materials Processing
Materials processing orders increased 49% compared to the same quarter one year ago and increased 16% from the second quarter of fiscal 2013, a second consecutive quarter of record bookings. The materials processing book-to-bill ratio for the third quarter of fiscal 2013 was 1.17.
Bookings were strong across most submarkets and product lines. Cutting and packaging for consumer devices drove orders for UV-marking and CO2-cutting lasers and orders for kilowatt class CO2 lasers were primarily from consumer packaging applications.
Our fiber laser programs are progressing and we are shipping one kilowatt lasers as previously announced; field deployment is going as expected. In the third quarter of fiscal 2013, we also shipped a three kilowatt prototype to a leading system integrator for metal cutting. The system delivers the required cutting speed and quality in a package considerably smaller than fiber lasers of comparable output power, thereby saving space on the production floor. In an OEM configuration, we believe our laser may fit inside the customer's tool.
OEM Components and Instrumentation
OEM Components and Instrumentation orders increased 7% compared to the same quarter one year ago but decreased 33% from the second quarter of fiscal 2013 with the sequential decrease driven largely by timing of volume orders from medical OEM accounts. The corresponding book-to-bill ratio for the third quarter of fiscal 2013 was 0.85.
Orders from medical OEM accounts were lower following a record-setting second quarter of fiscal 2013 that included a number of volume orders. The outlook in this market remains strong, with customers signaling increased demand. We have also broadened our opportunity through our recent acquisition as Lumera gives us immediate entry into the fast evolving cataract market, where we have been working on design wins and received a pilot order for cataract treatment. We are also working on a next generation laser for flap cutting in LASIK, which has the potential to displace much more complex and costly competitive offerings.
Bookings for the instrumentation market decreased 11% sequentially, but increased 46% compared to the third quarter of fiscal 2012. Orders remain strong, particularly from OEMs, despite the downward drag created by sequestration, which affects the research side of the instrumentation business. Part of the strength comes from new products including OBIS™ and Galaxy™ that have broadened our market participation while our legacy products such as Sapphire™ remain a cornerstone in the cytometry market.
Scientific and Government Programs
Scientific and government programs orders increased 7% compared to the same quarter one year ago and were flat from the second quarter of fiscal 2013. The book-to-bill for the third quarter of fiscal 2013 was 0.96.
Geographically, in the third quarter of fiscal 2013 we experienced softness in the U.S. and European research markets offset by a strong performance in China and benefits from current economic policies in Japan. Third quarter orders for life science applications continued to outpace investments in the physical sciences, especially in the U.S. where physical sciences are more heavily impacted by sequestration.
In the third quarter of fiscal 2013, we introduced a new member of our Vitara™ family. The Vitara Ultra Broadband is the first laser to simultaneously deliver pulses shorter than eight femtoseconds and provide adjustable bandwidth.
Net Sales
Net sales include sales of lasers, laser tools, related accessories and service contracts. Net sales for the third fiscal quarter increased 6.5% in our SLS segment and increased 14.8% in our CLC segment from the same quarter one year ago. Net sales for the first nine months increased 2.2% in our SLS segment and increased 4.4% in our CLC segment from the same period one year ago. For a description of the reasons for changes in net sales refer to the “Results of Operations” section of this quarterly report.
Gross Profit as a Percentage of Net Sales
Gross profit as a percentage of net sales (“gross profit percentage”) is calculated as gross profit for the period divided by net sales for the period. Gross profit percentage in the third quarter decreased from 42.7% to 40.3% in our SLS segment and decreased from 37.1% to 36.7% in our CLC segment from the same quarter one year ago. Gross profit percentage in the first nine months decreased from 42.9% to 41.6% in our SLS segment and decreased from 37.2% to 36.3% in our CLC segment from the same period one year ago. For a description of the reasons for changes in gross profit refer to the “Results of Operations” section of this quarterly report.
Research and Development as a Percentage of Net Sales
Research and development as a percentage of net sales (“R&D percentage”) is calculated as research and development expense for the period divided by net sales for the period. Management considers R&D percentage to be an important indicator in managing our business as investing in new technologies is a key to future growth. R&D percentage increased to 10.2% from 9.8% in our third fiscal quarter and increased to 10.3% from 10.1% for the first nine months of fiscal 2013 compared to the same periods one year ago. For a description of the reasons for changes in R&D spending refer to the “Results of Operations” section of this quarterly report.
Net Cash Provided by Operating Activities
Net cash provided by operating activities as reflected on our Condensed Consolidated Statements of Cash Flows primarily represents the excess of cash collected from billings to our customers and other receipts over cash paid to our vendors for expenses and inventory purchases to run our business. We believe that cash flows from operations is an important performance indicator because cash generation over the long term is essential to maintaining a healthy business and providing funds to help fuel growth. For a description of the reasons for changes in Net Cash Provided by Operating Activities refer to the “Liquidity and Capital Resources” section of this quarterly report.
Days Sales Outstanding in Receivables
We calculate days sales outstanding (“DSO”) in receivables as net receivables at the end of the period divided by net sales during the period and then multiplied by the number of days in the period, using 90 days for quarters. DSO in receivables indicates how well we are managing our collection of receivables, with lower DSO in receivables resulting in higher working capital availability. The more money we have tied up in receivables, the less money we have available for research and development, acquisitions, expansion, marketing and other activities to grow our business. Our DSO in receivables for the third quarter of fiscal 2013 decreased 3.2 days from the same quarter one year ago primarily due to improved collections in Japan and Europe and a lower concentration of sales with longer payment terms in Japan, partially offset by a higher concentration of sales with longer payment terms in Korea and China.
Annualized Inventory Turns
We calculate annualized inventory turns as the cost of sales during the quarter annualized and divided by net inventories at the end of the period. This indicates how well we are managing our inventory levels, with higher inventory turns resulting in more working capital availability and a higher return on our investments in inventory. The more money we have tied up in inventory, the less money we have available for research and development, acquisitions, expansion, marketing and other activities to grow our business. Our annualized inventory turns for the third quarter of fiscal 2013 increased slightly by 0.2 turns from the same quarter one year ago primarily due to the impact of increased sales volumes in relation to inventory levels in certain businesses.
Capital Spending as a Percentage of Net Sales
Capital spending as a percentage of net sales (“capital spending percentage”) is calculated as capital expenditures for the period divided by net sales for the period. Capital spending percentage indicates the extent to which we are expanding or improving our operations, including investments in technology and equipment. Management monitors capital spending levels as this assists management in measuring our cash flows, net of capital expenditures. Our capital spending percentage decreased to 2.3% from 5.5% for the third quarter and to 2.6% from 5.3% for the first nine months of fiscal 2013 compared to the same periods one year ago. During fiscal 2012 we invested in manufacturing and refurbishment capacity in Germany and Korea.
Adjusted EBITDA as a Percentage of Net Sales
We define adjusted EBITDA as operating income adjusted for depreciation, amortization, stock compensation expenses, major restructuring costs and certain other non-operating income and expense items. Key initiatives to reach our goals for EBITDA improvements include utilization of our Asian manufacturing locations, rationalizing our supply chain and continued leveraging of our infrastructure.
We utilize a number of different financial measures, both GAAP and non-GAAP, such as adjusted EBITDA as a percentage of net sales, in analyzing and assessing our overall business performance, for making operating decisions and for forecasting and planning future periods. We consider the use of non-GAAP financial measures helpful in assessing our current financial performance and ongoing operations. While we use non-GAAP financial measures as a tool to enhance our understanding of certain aspects of our financial performance, we do not consider these measures to be a substitute for, or superior to, the information provided by GAAP financial measures. We provide adjusted EBITDA in order to enhance investors' understanding of our ongoing operations. This measure is used by some investors when assessing our performance.
Below is the reconciliation of our net income as a percentage of net sales to our adjusted EBITDA as a percentage of net sales:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 29, 2013 | | June 30, 2012 | | June 29, 2013 | | June 30, 2012 |
Net income as a percentage of net sales | 7.8 | % | | 8.8 | % | | 7.7 | % | | 8.7 | % |
Income tax expense | 1.8 | % | | 3.6 | % | | 2.0 | % | | 3.8 | % |
Interest and other income (expense), net | |