<PAGE>
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 27, 1998
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: 0-5255
COHERENT, INC.
(Exact name of registrant as specified in its charter)
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)
(408) 764-4000
(Registrant's telephone number, including area code)
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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
---- -----
APPLICABLE ONLY TO CORPORATE ISSUES:
The number of shares outstanding of registrant's common stock, par value $.01
per share, at July 27, 1998 was 23,705,299 shares
<PAGE>
COHERENT, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Consolidated Condensed Statements of Operations --
Three months and nine months ended June 27, 1998
and June 28, 1997 3
Consolidated Condensed Balance Sheets --
June 27, 1998 and September 27, 1997 4
Consolidated Condensed Statements of Cash Flows --
Nine months ended June 27, 1998 and June 28, 1997 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 14
SIGNATURES 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
----------------------- -----------------------
JUNE 27, June 28, JUNE 27, June 28,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 98,552 $102,335 $305,802 $287,213
COST OF SALES 53,861 47,754 155,965 134,602
- ----------------------------------------------------------------------------------------------------
GROSS PROFIT 44,691 54,581 149,837 152,611
- ----------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 11,598 9,949 33,634 27,397
Purchased in-process technology 9,315
Selling, general and administrative 36,104 30,363 96,806 83,747
- ----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 47,702 40,312 130,440 120,459
- ----------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (3,011) 14,269 19,397 32,152
- ----------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest and dividend income 199 282 810 1,040
Interest expense (298) (292) (867) (768)
Foreign exchange gain (loss) (280) 47 (708) (440)
Other - net (108) 3,710 (73) 4,238
- ----------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE), NET (487) 3,747 (838) 4,070
- ----------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (3,498) 18,016 18,559 36,222
PROVISION FOR INCOME TAXES (1,771) 6,666 5,938 16,534
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (1,727) 11,350 $ 12,621 $ 19,688
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE:
BASIC $ (.07) $ .50 $ .54 $ .87
DILUTED $ (.07) $ .48 $ .53 $ .84
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SHARES USED IN COMPUTATION:
BASIC 23,487 22,669 23,259 22,597
DILUTED 23,487 23,486 23,800 23,387
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT PAR VALUE PER SHARE)
<TABLE>
<CAPTION>
JUNE 27, September 27,
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
<C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 12,981 $ 21,455
Short-term investments 5,912 10,182
Accounts receivable - net of allowances of
$4,222 in 1998 and $3,499 in 1997 91,605 95,844
Inventories 104,562 86,446
Prepaid expenses and other assets 27,121 18,971
Deferred tax assets 23,122 22,267
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 265,303 255,165
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 142,335 128,532
ACCUMULATED DEPRECIATION AND AMORTIZATION (64,260) (56,708)
- -------------------------------------------------------------------------------
Property and equipment - net 78,075 71,824
- -------------------------------------------------------------------------------
GOODWILL - net of accumulated amortization of
$6,438 in 1998 and $7,199 in 1997 12,096 13,372
OTHER ASSETS 24,722 21,289
- -------------------------------------------------------------------------------
$380,196 $361,650
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 11,858 $ 19,235
Current portion of long-term obligations 1,075 3,629
Accounts payable 16,574 18,039
Income taxes payable 11,289 9,286
Other current liabilities 55,592 52,288
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 96,388 102,477
- -------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 10,406 9,665
OTHER LONG-TERM LIABILITIES 14,155 13,927
MINORITY INTEREST IN SUBSIDIARIES 5,183 4,348
STOCKHOLDERS' EQUITY:
Common stock, par value $.01
Authorized - 100,000 shares
Outstanding 23,694 in 1998 and
22,926 in 1997 235 228
Additional paid-in capital 101,898 90,750
Unrealized loss on marketable investments (147)
Notes receivable from stock sales (156) (98)
Retained earnings 152,707 140,086
Accumulated translation adjustment (473) 267
- -------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 254,064 231,233
- -------------------------------------------------------------------------------
$380,196 $361,650
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
NINE
MONTHS ENDED
--------------------
JUNE 27, June 28,
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 12,621 $ 19,688
Adjustments to reconcile to net cash
provided by operating activities:
Write-off of purchased in-process technology 9,315
Purchases of short-term investments (107,901) (63,611)
Proceeds from sales of short-term investments 112,171 75,700
Changes in assets and liabilities (21,949) (40,816)
Depreciation and amortization 12,641 10,242
Other adjustments 1,089 1,147
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,672 11,665
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (15,367) (9,920)
Acquisition of Ealing (9,500)
Acquisition of Tutcore and Micracor,
net of cash acquired (5,200)
Acquisition of distribution rights (3,320)
Other - net (1,022) (973)
- -------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (19,709) (25,593)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Long-term debt borrowings 2,333 3,277
Long-term debt repayments (1,191) (3,245)
Notes payable borrowings 15,220 24,374
Notes payable repayments (21,111) (13,233)
Sales of shares under employee stock plans 6,682 4,455
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,933 15,628
- -------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND EQUIVALENTS 630 985
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (8,474) 2,685
Cash and equivalents beginning of period 21,455 9,214
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS END OF PERIOD $ 12,981 $ 11,899
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Repayment of long-term debt by issuance of shares $ 2,875
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.<PAGE>
5
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying consolidated condensed financial statements have been
prepared in conformity with generally accepted accounting principles,
consistent with those reflected in the Company's annual report to
stockholders for the year ended September 27, 1997. All adjustments
necessary for a fair presentation have been made which comprise only
normal recurring adjustments; however, interim results of operations are
not necessarily indicative of results to be expected for the year.
2. In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which defines derivatives,
requires that all derivatives be carried at fair value, and provides for
hedging accounting when certain conditions are met. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Although the Company has not fully assessed the implications of this
new statement, the Company does not believe adoption of this statement will
have a material impact on the Company's financial position or results of
operations.
In June 1997, the Financial Accounting Standards Board adopted Statements
of Financial Accounting Standards No. 130 (Reporting Comprehensive Income),
which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and No. 131 (Disclosures about Segments of an Enterprise and
Related Information), which establishes annual and interim reporting
standards for an enterprise's business segments and related disclosures
about its products, services, geographic areas, and major customers.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows. Both statements
are effective for fiscal years beginning after December 15, 1997, with
earlier application permitted.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which was adopted by the Company in the first
quarter of fiscal 1998. Upon adoption of SFAS No. 128, the Company is
presenting basic earnings per share and diluted earnings per share. Basic
earnings per share is computed based on the weighted average number of
shares outstanding during the period. Diluted earnings per share is
computed based on the weighted average number of shares outstanding during
the period increased by the effect of dilutive stock options and stock
purchase contracts, using the treasury stock method, and shares issuable
under the Productivity Incentive Plan.
The following table presents information necessary to calculate basic and
diluted earnings per common and common equivalent share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding - Basic 23,487,000 22,699,000 23,259,000 22,597,000
Dilutive share equivalents 787,000 541,000 790,000
----------- ----------- ----------- -----------
Weighted average shares and equivalents -
Diluted 23,487,000 23,486,000 23,800,000 23,387,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) for basic and diluted
earnings per share computation $(1,727,000) $11,350,000 $12,621,000 $19,688,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
6
<PAGE>
No dividends were paid in fiscal 1998 or 1997.
7
<PAGE>
3. Balance Sheet Detail:
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are as follows:
<TABLE>
<CAPTION>
June 27, September 27,
1998 1997
-----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Purchased parts and assemblies $ 31,127 $25,756
Work-in-process 36,047 28,917
Finished goods 37,388 31,773
-----------------------------------------------------------------------
Net inventories $104,562 $86,446
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
June 27, September 27,
1998 1997
-----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Prepaid expenses and other $14,180 $ 8,240
Prepaid income taxes 12,941 10,731
-----------------------------------------------------------------------
Prepaid expenses and other assets $27,121 $18,971
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
Other assets consist of the following:
<TABLE>
<CAPTION>
June 27, September 27,
1998 1997
-----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Intangibles and other assets $23,196 $19,878
Assets held for investment 1,526 1,411
-----------------------------------------------------------------------
Other assets $24,722 $21,289
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 27, September 27,
1998 1997
-----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and benefits $17,801 $18,814
Accrued expenses and other 14,000 14,648
Deferred income 10,298 9,193
Reserve for warranty 10,112 7,498
Customer deposits 3,381 2,135
-----------------------------------------------------------------------
Other current liabilities $55,592 $52,288
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
8
<PAGE>
Other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
June 27, September 27,
1998 1997
-----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred income and other $11,698 $ 9,017
Environmental remediation costs 1,269 1,336
Deferred tax liabilities 1,188 3,574
-----------------------------------------------------------------------
Other long-term liabilities $14,155 $13,927
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
4. Certain claims and lawsuits have been filed or are pending against the
Company. In the opinion of management, all such matters have been
adequately provided for, are without merit, or are of such kind that if
disposed of unfavorably, would not have a material adverse effect on the
Company's consolidated financial position or results of operations.
The Company, along with several other companies, was named as a party to a
remedial action order issued by the California Department of Toxic
Substance Control relating to soil and groundwater contamination at and in
the vicinity of the Stanford Industrial Park in Palo Alto, California,
where the Company's former headquarters facility is located. The
responding parties to the Regional Order (including the Company) have
completed the investigations and have installed all required remedial
systems. The responding parties have agreed upon final cost sharing.
The Company was also named, along with other parties, to a remedial action
order for the Porter Drive facility site itself in Stanford Industrial
Park. The Company has completed the investigations and has installed all
required remedial systems. The Company has been operating remedial systems
at the site to remove subsurface chemicals since April 1992. During fiscal
1997, the Company settled with the prior tenant and neighboring companies,
on allocation of the cost of investigating and remediating the site at 3210
Porter Drive and the bordering site at 3300 Hillview Avenue.
Management believes that the Company's probable, nondiscounted net
liability at June 27, 1998 for remaining costs associated with the above
environmental matters is $1.1 million which has been previously accrued.
This amount consists of total estimated probable costs of $1.5 million
($0.2 million included in other current liabilities and $1.3 million
included in other long-term liabilities) reduced by estimated minimum
probable recoveries of $0.4 million included in other assets from other
parties named to the order.
5. The Board of Directors declared a 2-for-1 stock split of its common stock
effected in the form of a 100% stock dividend distributed on March 2, 1998
to holders of record as of February 17, 1998. All per share amounts and
numbers of shares have been restated to reflect the stock split.
9
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The statements in this document that relate to future plans, events or
performance are forward-looking statements that involve risks and
uncertainties, including risks associated with uncertainties related to
currency translations, contract cancellations, manufacturing risks,
competitive factors, uncertainties pertaining to customer orders, demand for
products and services, development of markets for the Company's products and
services and other risks identified in the Company's SEC filings. Actual
results, events and performance may differ materially. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to release
publicly the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. For a discussion of these
risks and uncertainties, refer to the Company's annual report on Form 10-K
for the fiscal year ended September 27, 1997 under the heading "Risk Factors"
in Part I, Item 1. Business.
The Company operates in a technologically advanced, dynamic and highly
competitive environment. The Company's future operating results are and will
continue to be subject to quarterly variations based on a variety of factors,
many of which are beyond the Company's control, including fluctuations in
customer orders and foreign currency exchange rates, among others. While the
Company attempts to identify and respond to these conditions in a timely
manner, such conditions represent significant risks to the Company's
performance. Accordingly, if the level of orders diminishes during the next
or any future quarter, or if for any reason the Company's shipments are
disrupted (particularly near a quarter end when the Company typically ships a
significant portion of its sales), it could have a material adverse effect on
sales and earnings, and a corresponding adverse effect on the market price of
the Company's stock.
Similarly, the Company conducts a significant portion of its business
internationally. International sales accounted for 55% of the Company's
sales for fiscal 1997 and were 56% of total sales for the current quarter and
55% for the nine months ended June 27, 1998, respectively. The Company
expects that international sales will continue to account for a significant
portion of its net sales in the future. The Company's international sales
occur through its international subsidiaries, (some of which also perform
research, development, manufacturing and service functions), and from exports
from its U.S. operations. As a result, the Company's international sales and
operations are subject to the risks of conducting business internationally,
including fluctuations in foreign exchange rates, which could affect the
sales price in local currencies of the Company's products in foreign markets
as well as the Company's local costs and expenses of its foreign operations.
The Company uses forward exchange and currency swap contracts, and other risk
management techniques, to hedge its exposure to currency fluctuations
relating to its intercompany transactions and certain firm foreign currency
commitments; however, its international subsidiaries remain exposed to the
economic risks of foreign currency fluctuations. There can be no assurance
that such factors will not adversely impact the Company's operations in the
future or require the Company to modify its current business practices.
Coherent, Inc., a Delaware corporation, (herein referred to as
"Coherent" or "Company") is a leading designer, manufacturer and supplier of
electro-optical systems and medical instruments utilizing laser, precision
optic and microelectronic technologies. The Company integrates these
technologies into a wide variety of products and systems designed to meet the
productivity and performance needs of its customers. Major markets include
the scientific research community, medical institutions, clinics and private
practices, and commercial and OEM (original equipment manufacturer)
applications ranging from semiconductor processing and disk mastering to
light shows and entertainment. Coherent also produces and sells optical and
laser components to other laser system manufacturers.
10
<PAGE>
The word "laser" is the acronym for "light amplification by stimulated
emission of radiation." The emitted radiation oscillates within an optical
resonator and is amplified by an active media, resulting in a monochromatic
beam of light which is narrow, highly coherent and thus can be focused to a
small spot with a high degree of precision.
Since inception in 1966, the Company has grown through a combination of
internal expansion, joint ventures and strategic acquisitions of companies
with related technologies and products. Coherent is a technical leader in
every market it serves. Driven by new product application innovations,
Coherent has approximately 189 U.S. patents in force, and over the past
several years has committed approximately 10% of annual revenues to research
and development efforts.
Committed to quality and customer satisfaction, Coherent designs and
produces many of its own components to retain quality control. Coherent
provides customers with around-the-clock technical expertise and quality that
is ISO 9000 certified at its principal manufacturing sites.
Coherent is focused on laser product innovations. Leveraging its
competitive strengths in laser technology development, new product
applications, engineering R&D and manufacturing expertise, Coherent is
dedicated to customer satisfaction, quality and service. Coherent's mission
is to continue its tradition of providing medical, scientific and commercial
customers with cost effective laser products that provide performance
breakthroughs and application innovations.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
The Company recorded a net loss for the current quarter of $1.7 million
($.07 per diluted share) and net income for the nine months ended June 27,
1998 of $12.6 million ($.53 per diluted share), compared to proforma net
income of $11.4 million ($.48 per diluted share) and $28.7 million $1.22 per
diluted share) (excluding the $9.0 million after-tax write-off of purchased
in process technology during the first quarter of fiscal 1997) in the
corresponding prior year periods. The decreases in current quarter and
year-to-date net income over the prior year quarter and year-to-date proforma
net income were primarily attributable to the performance of our medical
group not meeting expectations and the continued negative impact of the
strengthening dollar against the Japanese Yen and other major foreign
currencies. Actual net income for the prior year-to-date was $19.7 million
($.84 per diluted share).
NET SALES AND GROSS PROFITS
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
NET SALES 1998 1997 1998 1997
- --------- ------------------ --------------------
<S> <C> <C> <C> <C>
CONSOLIDATED:
Domestic $43,434 $ 50,385 $137,210 $130,160
International 55,118 51,950 168,592 157,053
-------------------------------------------
Total $98,552 $102,335 $305,802 $287,213
-------------------------------------------
-------------------------------------------
ELECTRO-OPTICAL:
Domestic $27,132 $27,613 $ 77,312 $ 70,814
International 38,358 29,406 106,293 90,534
-------------------------------------------
Total $65,490 $57,019 $186,605 $161,348
-------------------------------------------
-------------------------------------------
MEDICAL:
Domestic $16,302 $22,772 $ 59,898 $ 59,346
International 16,760 22,544 59,299 66,519
-------------------------------------------
Total $33,062 $45,316 $119,197 $125,865
-------------------------------------------
-------------------------------------------
</TABLE>
11
<PAGE>
CONSOLIDATED
The Company's sales for the current quarter decreased $3.8 million (4%)
while the Company's sales for the nine months ended June 27, 1998 increased
$18.6 million (6%) from the same periods a year ago. During the current
quarter, domestic sales decreased $7.0 million (14%) while international
sales increased $3.2 million (6%). Year to date, domestic sales increased
$7.1 million (5%) while international sales increased $11.5 million (7%). The
strengthening of the U.S. dollar against major foreign currencies during the
current quarter and nine months ended June 27, 1998, compared to the same
periods last year, adversely impacted international sales by $3.1 million and
$10.5 million, respectively. Reported international sales for the third
fiscal quarter and nine months ended June 27, 1998 represent 56% and 55% of
total outside sales, respectively.
The gross profit rate decreased to 45% for the current quarter from 53%
for the same period last year and decreased to 49% for the nine months ended
June 27, 1998 compared to 53% for the same period one year ago. Factors
contributing to the decline were the strong U.S. dollar, and the following,
occurring primarily in the medical business: a less favorable product mix
with lower sales of high margin aesthetic products, lower average selling
prices, lower manufacturing throughput, as well as higher inventory related
costs, warranty costs and manufacturing variances. These factors were
partially offset by sales of the new LightSheer-TM- hair removal laser,
manufactured by Star Medical Technologies, Inc.(a subsidiary of Palomar
Medical Technologies, Inc.), for which Coherent recognizes a commission for
its selling efforts.
ELECTRO-OPTICAL
Electro-Optical net sales increased $8.5 million (15%) and $25.3 million
(16%) for the third quarter and nine months ended June 27, 1998,
respectively, compared to the corresponding prior year periods. Domestic
sales decreased $.5 million (2%) while international sales increased $9.0
million (30%) during the current quarter. Year-to-date, domestic sales
increased $6.5 million (9%) while international sales increased $18.8 million
(21%). Sales increased primarily due to higher sales volumes in commercial
solid state products and in the lithography business and due in part to the
Auburn Group's fiscal 1997 third quarter acquisition of Ealing Electro-Optics
in Watford, England. Partially offsetting these increases was the impact of
the strengthening of the U.S. dollar against major foreign currencies in the
current quarter and nine months ended June 27, 1998, compared to the same
periods last year, adversely impacting international sales by $2.1 million
and $7.3 million, respectively.
The gross profit rate decreased to 47% from 51% in the current quarter
compared to the same quarter one year ago and decreased to 49% from 52% for
the nine months ended June 27, 1998, compared to the same period one year
ago. The decreases in gross margin were primarily attributable to a change
in mix to lower margin products, the strengthening of the U.S. dollar against
the major foreign currencies and higher manufacturing variances for certain
new products.
MEDICAL
Medical net sales decreased by $12.2 million (27%) and $6.7 million (5%)
for the third quarter and nine months ended June 27, 1998, respectively,
compared to the corresponding prior year periods. Domestic and international
sales decreased $6.4 million (28%) and $5.8 million (26%), respectively,
during the current quarter. Year-to-date, domestic sales increased $.5
million (1%) while international sales decreased $7.2 million (11%). The
decreases in sales over the same prior year periods resulted primarily from
decreased sales volumes, higher sales returns and allowances and lower
average selling prices, as well as from the strengthening of the U.S. dollar
against the major foreign currencies. Such strengthening of the U.S. dollar
against the major foreign currencies in the current quarter and nine months,
compared to the same periods one year ago, contributed to the decrease in
international sales by $1.1 million and $3.2 million, respectively.
12
<PAGE>
The gross profit rate decreased to 41% from 56% in the current quarter
compared to the same quarter one year ago and decreased to 49% from 55% for
the nine months ended June 27, 1998 compared to the same period one year ago.
The decreases in gross margins were primarily due to lower sales and margins
on skin resurfacing products, lower manufacturing throughput, as well as
higher inventory related costs, warranty costs and manufacturing variances,
and due in part to a strengthening of the U.S. dollar against the major
foreign currencies. These factors were partially offset by the inaugural
sales of the new LightSheer-TM- hair removal laser, for which Coherent
recognizes a commission for its selling efforts.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Third Quarter Nine Months
1998 1997 1998 1997
----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Research & development $11,598 $ 9,949 $ 33,634 $ 27,397
Purchased in-process technology 9,315
Selling, general & administrative 36,104 30,363 96,806 83,747
----------------------------------------
Total operating expenses $47,702 $40,312 $130,440 $120,459
----------------------------------------
----------------------------------------
</TABLE>
Total operating expenses increased by $7.4 million (18%) during the
third quarter compared to the same period last year and as a percentage of
sales increased to 48% from 39%. Exclusive of the first quarter of fiscal
1997 write-off of purchased in-process technology, year-to-date, total
operating expenses increased $19.3 million (17%) from the same prior year
period and as a percentage of sales increased to 43% from 39%.
Research and development (R&D) expenses increased $1.7 million (17%)
during the current quarter compared to the same period last year and as a
percentage of sales, increased to 12% from 10%. Year-to-date, R&D expense
(exclusive of the aforementioned write-off of purchased in-process
technology) increased $6.2 million (23%) compared to the same period one year
ago and increased as a percentage of sales to 11% from 10%. The dollar
increases are due to increased spending for projects, including lithography
and, as a percentage of sales, the increases are due to decreased sales
volumes.
Sales, marketing and service expense decreased $1.4 million (6%) for the
current quarter and decreased as a percentage of sales from 22% to 21%
compared to the same period last year. Year-to-date, such expenses increased
$3.6 million (6%) and as a percentage of sales remained at 21% compared to
the same period last year. The current quarter decreases were primarily due
to reduced expenses in the medical segment as a result of decreased sales
volumes. The year-to-date dollar increase, in the electro-optical segment,
is primarily due to recent business acquisitions, increased costs associated
with higher headcount and higher costs associated with the Asia-Pacific
region.
Administration expenses increased $7.2 million (88%) and $9.4 million
(40%) for the current quarter and year-to-date, respectively, compared to the
same periods a year ago. As a percentage of sales, such expenses increased
to 16% from 8% for the current quarter and to 11% from 8% for the
year-to-date compared to the same periods one year ago. Restructuring costs
of $2.9 million related to personnel actions in the medical segment, closure
of the Tucson, Arizona facility and the relocation of the medical segment to
a new facility contributed to the increases. Remaining increases are
primarily due to increased amortization of intangibles and the Ealing
Electro-Optics acquisition.
OTHER INCOME (EXPENSE)
Year-to-date, other income, net, decreased to net expense of $.8 million
compared to net income of $4.1 million in the same period last year. Other
income decreased $4.9 million, year-to-date, due primarily to the May 1997
$3.5 million gain on the sale of the former headquarters facility.
INCOME TAXES
13
<PAGE>
The Company's proforma effective tax rate for the nine months ended June
27, 1998 was 32% compared to 37% (excluding the $9.3 million write-off of
purchased in-process technology) for the same prior year period. The
Company's effective tax rate decreased as a result of increases in foreign
tax and R&D credits utilization, foreign sales corporation benefits and
changes in income by taxing jurisdiction as well as the proportionately
greater impact of these items due to lower income before taxes in the current
period.
14
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash, cash equivalents
and short-term investments of $18.9 million. Additional sources of liquidity
are the Company's multi-currency line of credit and bank credit facilities
totaling $52.4 million. As of June 27, 1998, the Company had $39.1 million
unused and available under these credit facilities.
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents decreased $8.5 million (39%) from September
27, 1997. Operations and changes in exchange rates provided $9.3 million,
including $4.3 million in net proceeds from short-term investments.
Investing activities used $19.7 million, including $15.4 million used to
acquire property and equipment, net and $3.3 million used to acquire
distribution rights, and other, net used $1.0 million. Financing activities
provided $1.9 million with debt repayments, net of $4.8 million offset by
$6.7 million from the sale of shares under employee stock plans.
Net inventories increased $18.1 million (21%) from September 27, 1997
primarily due to new product development and decreased current quarter sales
in the medical segment and increased bookings in the Electro-Optical business
segment.
15
<PAGE>
COHERENT, INC.
PART II. OTHER INFORMATION
ITEM 1. Material developments in connection with legal proceedings.
N/A
ITEM 2. Material modification of rights of registrant's securities.
N/A
ITEM 3. Defaults on senior securities.
N/A
ITEM 4. Submission of Matters to a Vote of Security Holders
N/A
ITEM 5. Other.
N/A
ITEM 6. Exhibits and Reports on Form 8-K.
Exhibit 27 "Financial Data Schedules" included herewith.
16
<PAGE>
COHERENT, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COHERENT, INC.
(Registrant)
Date: August 4, 1998 By: ROBERT J. QUILLINAN
--------------------------------------------
Robert J. Quillinan
Executive Vice President and Chief Financial
Officer
17
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