<PAGE>
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 December 26, 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 January 21, 1999 was 23,889,313 shares.
<PAGE>
COHERENT, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Consolidated Condensed Statements of Income --
Three months ended December 26, 1998 and December 27, 1997 3
Consolidated Condensed Balance Sheets --
December 26, 1998 and September 26, 1998 4
Consolidated Condensed Statements of Cash Flows --
Three months ended December 26, 1998 and December 27, 1997 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION 17
SIGNATURES 18
</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
MONTHS ENDED
DECEMBER 26, December 27,
1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $105,631 $101,369
COST OF SALES 54,672 48,919
- ----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 50,959 52,450
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 10,915 10,428
Selling, general and administrative 33,629 29,935
- ----------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 44,544 40,363
- ----------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 6,415 12,087
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest and dividend income 644 322
Interest expense (437) (318)
Foreign exchange gain (loss) 16 (345)
Minority interest in subsidiaries (206) (294)
Other - net (157) 293
- ----------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE), NET (140) (342)
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 6,275 11,745
PROVISION FOR INCOME TAXES 2,009 4,235
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,266 $ 7,510
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE:
BASIC $ .18 $ .33
DILUTED $ .18 $ .32
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
SHARES USED IN COMPUTATION:
BASIC 23,809 23,080
DILUTED 24,210 23,598
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
</TABLE>
3
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT PAR VALUE PER SHARE)
<TABLE>
<CAPTION>
DECEMBER 26, September 26,
1998 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 14,480 $ 15,944
Short-term investments 19,581 16,954
Accounts receivable - net of allowances of
$5,127 in 1999 and $4,817 in 1998 87,705 86,822
Inventories 104,887 103,541
Prepaid expenses and other assets 17,841 22,895
Deferred tax assets 32,025 26,618
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 276,519 272,774
- -------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 152,333 147,775
ACCUMULATED DEPRECIATION AND AMORTIZATION (67,673) (64,918)
- -------------------------------------------------------------------------------------------------------------------
Property and equipment - net 84,660 82,857
- -------------------------------------------------------------------------------------------------------------------
GOODWILL - net of accumulated amortization of
$7,079 in 1999 and $6,912 in 1998 11,180 11,595
OTHER ASSETS 24,001 23,535
- -------------------------------------------------------------------------------------------------------------------
$396,360 $390,761
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 16,141 $ 11,645
Current portion of long-term obligations 975 788
Accounts payable 13,738 17,851
Income taxes payable 6,628 9,160
Other current liabilities 60,744 59,603
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 98,226 99,047
- -------------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 12,013 12,828
OTHER LONG-TERM LIABILITIES 14,147 12,599
MINORITY INTEREST IN SUBSIDIARIES 3,875 3,664
STOCKHOLDERS' EQUITY:
Common stock, par value $.01
Authorized - 100,000 shares
Outstanding 23,882 in 1999 and 23,736 in 1998 237 236
Additional paid-in capital 103,577 102,469
Notes receivable from stock sales (310) (310)
Accumulated other comprehensive income 1,432 1,331
Retained earnings 163,163 158,897
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 268,099 262,623
- -------------------------------------------------------------------------------------------------------------------
$396,360 $390,761
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
</TABLE>
4
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
DECEMBER 26, December 27,
1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 4,266 $ 7,510
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Purchases of short-term investments (24,727) (41,188)
Proceeds from sales of short-term investments 22,100 34,601
Changes in assets and liabilities (5,739) (6,709)
Depreciation and amortization 4,480 3,932
Other adjustments 135 240
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 515 (1,614)
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (4,876) (4,098)
Acquisition of distribution rights (3,320)
Other - net 620 105
- -----------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (4,256) (7,313)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Long-term debt repayments (591) (1,002)
Short-term borrowings 6,864 9,088
Short-term repayments (3,518) (8,595)
Sales of shares under employee stock plans 1,022 2,613
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,777 2,104
- -----------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND EQUIVALENTS (1,500) (61)
- -----------------------------------------------------------------------------------------------------------
Net decrease in cash and equivalents (1,464) (6,884)
Cash and equivalents, beginning of period 15,944 21,455
- -----------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF PERIOD $14,480 $14,571
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
</TABLE>
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 26, 1998. 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 issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires
companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from
changes in the value of those derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting.
SFAS 133 will be effective for the Company's fiscal year 2000. Management
believes that this statement will not have a significant 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. 131 "Disclosures about Segments of
an Enterprise and Related Information". This statement requires that
financial information be reported on the basis used internally for
evaluating segment performance and deciding how to allocate resources to
segments. SFAS 131 will be effective for the Company's fiscal year 1999 and
requires restatement of all previously reported information for comparative
purposes. Management of the Company is evaluating the effects of this
change on its reporting segments.
3. The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 26, December 27,
1998 1997
---------------------------------
<S> <C> <C>
Net income $4,266,000 $7,510,000
Translation adjustment 101,000 (521,000)
Change in unrealized gain on investment (185,000)
------------ ------------
Total comprehensive income $4,367,000 $6,804,000
---------- ----------
---------- ----------
</TABLE>
Accumulated other comprehensive income at December 26, 1998 and September
26, 1998 is comprised of accumulated translation adjustments of $101,000
and $1,331,000, respectively.
4. 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.
6
<PAGE>
The following table presents information necessary to calculate basic and
diluted earnings per common and common equivalent share:
<TABLE>
<CAPTION>
Three Months Ended
December 26, December 27,
1998 1997
---------------------------------------
<S> <C> <C>
Weighted average shares outstanding - Basic 23,809,000 23,080,000
Common stock equivalents 233,000 503,000
Employee stock purchase plan equivalents 168,000 15,000
------------ ------------
Weighted average shares and equivalents - Diluted 24,210,000 23,598,000
---------- ----------
---------- ----------
Net income for basic and diluted
earnings per share computation $ 4,266,000 $7,510,000
----------- ----------
----------- ----------
</TABLE>
1,818,000 and 164,000 anti-dilutive weighted shares have been excluded from
the dilutive share equivalents calculation at December 26, 1998 and
December 27, 1997, respectively.
5. Balance Sheet Detail:
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are as follows:
<TABLE>
<CAPTION>
December 26, September 26,
1998 1998
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Purchased parts and assemblies $ 31,100 $ 30,421
Work-in-process 32,011 33,684
Finished goods 41,776 39,436
- ---------------------------------------------------------------------------------------------------------------
Net inventories $104,887 $103,541
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
December 26, September 26,
1998 1998
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Prepaid income taxes $ 3,955 $10,275
Prepaid expenses and other 13,886 12,620
- ---------------------------------------------------------------------------------------------------------------
Prepaid expenses and other assets $ 17,841 $22,895
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Other assets consist of the following:
<TABLE>
<CAPTION>
December 26, September 26,
1998 1998
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Assets held for investment $ 1,438 $ 1,507
Intangibles and other assets 22,563 22,028
- ---------------------------------------------------------------------------------------------------------------
Other assets $24,001 $23,535
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 26, September 26,
1998 1998
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and benefits $19,033 $20,803
Accrued expenses and other 16,121 14,495
Reserve for warranty 10,864 10,938
Deferred income 10,733 10,517
Customer deposits 3,993 2,850
- ---------------------------------------------------------------------------------------------------------------
Other current liabilities $60,744 $59,603
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
December 26, September 26,
1998 1998
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred compensation $ 9,185 $ 8,200
Deferred income and other 3,591 3,082
Environmental remediation costs 1,269 1,269
Deferred tax liabilities 102 48
- ---------------------------------------------------------------------------------------------------------------
Other long-term liabilities $14,147 $12,599
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
6. 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
Remedial Investigation and Feasibility Reports, which were approved by the
State of California. The responding parties have installed four remedial
systems and have reached agreement with responding parties on 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 State of California has approved the Remedial Investigation
Report, Feasibility Study Report, Remedial Action Plan Report and Final
Remedial Action Report, prepared by the Company for this site. 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 December 26, 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.
7. On December 7, 1998, the Company signed a definitive agreement with Palomar
Medical Technologies, Inc. (Palomar) to acquire Palomar's majority owned
subsidiary, Star Medical Technologies, Inc., for $65 million in cash. The
consummation of the sale, which is subject to the approval of Palomar's
stockholders, other standard closing conditions and certain regulatory
approvals, is expected to occur prior to May 1, 1999. The Company is in the
process of securing
8
<PAGE>
a private bond placement to finance the acquisition. In the interim,
the Company's bank has agreed to provide a bridge loan in the event
that other financing is not obtained by the closing of the deal.
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
26, 1998 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 1998 and were 56% of total sales for the current quarter. The Company
expects that international sales will continue to account for a significant
portion of its net sales in the future. A significant amount of these 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, currency swap contracts, currency options 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.
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.
10
<PAGE>
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 200 U.S. patents in force, and over the past several years has
committed approximately 10% to 11% 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 and OEM customers with
cost effective laser products that provide performance breakthroughs and
application innovations.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
The Company's net income for the first quarter ended December 26, 1998 was
$4.3 million ($.18 per diluted share) compared to net income of $7.5 million
($.32 per diluted share) for the same quarter one year ago. The decrease in net
income is primarily due to decreased Coherent Medical Group sales, a decrease in
the gross profit rate due to lower sales of higher margin medical and
electro-optical products and higher administration expenses. With more than half
of the Company's revenues outside the United States, international sales were
favorably impacted by $2.2 million in the current quarter, compared to the same
period last year, due to the weakening of the U.S. dollar against major foreign
currencies.
NET SALES AND GROSS PROFITS
<TABLE>
<CAPTION>
FIRST QUARTER
NET SALES 1999 1998
- --------- ---- ----
<S> <C> <C>
CONSOLIDATED:
Domestic $ 46,350 $ 46,375
International 59,281 54,994
-------- --------
Total $105,631 $101,369
-------- --------
-------- --------
ELECTRO-OPTICAL:
Domestic $ 27,441 $ 24,413
International 39,530 34,494
-------- --------
Total $ 66,971 $ 58,907
-------- --------
-------- --------
MEDICAL:
Domestic $ 18,909 $ 21,962
International 19,751 20,500
-------- --------
Total $ 38,660 $ 42,462
-------- --------
-------- --------
</TABLE>
CONSOLIDATED
The Company's sales for the first fiscal quarter of 1999 increased $4.3
million (4%) to $105.6 million from $101.3 million one year ago. Domestic sales
remained flat while international sales increased $4.3 million (8%) to 56% of
total outside sales.
11
<PAGE>
The gross profit rate decreased to 48% from 52% one year ago. The
deterioration in the overall margin resulted primarily from lower sales of
higher margin medical products and a shift to higher sales of the lower margin
solid state technology products in the Electro-Optical segment as well as higher
sales of the lower margin catalog products and higher warranty costs in both
business segments.
ELECTRO-OPTICAL
Electro-Optical net sales increased $8.1 million (14%) to $67.0 million
from $58.9 million one year ago. Domestic sales increased $3.0 million (12%) and
international sales increased $5.1 million (15%). Sales increased primarily due
to higher sales volumes in commercial solid state products (including diode
lasers) and in the lithography business as well as the impact of the weakening
of the U.S. dollar against major foreign currencies in the current quarter,
which favorably impacted international sales by $1.6 million.
The gross profit rate decreased to 47% from 50% one year ago. The decrease
was primarily attributable to a higher mix of lower margin solid state, diode
and catalog products and higher inventory related and warranty costs.
MEDICAL
Medical net sales decreased by $3.8 million (9%) to $38.7 million from
$42.5 million one year ago. Domestic and international sales decreased $3.1
million (14%) and $0.7 million (4%), respectively, during the current quarter.
The decrease in sales resulted primarily from lower average selling prices and
fewer unit sales of higher margin Aesthetic products due to increased market
competition, and to the expiration of our agreement to distribute refractive
systems for a German manufacturer. These decreases were partially offset by
increased sales of the LightSheer(TM) hair removal laser and the weakening of
the U.S. dollar against major foreign currencies, which resulted in a favorable
impact to international sales of $0.6 million in the current quarter, compared
to the same quarter last year.
The gross profit rate decreased to 51% from 54% one year ago. The decrease
in gross margin was primarily due to lower average selling prices and unit
shipments of Aesthetic products, lower manufacturing throughput resulting in
under absorbed fixed costs, as well as higher warranty costs. These factors were
partially offset by the sales of the LightSheer(TM) hair removal laser, for
which Coherent recognizes a commission for its selling efforts.
OPERATING EXPENSES
<TABLE>
<CAPTION>
First Quarter
1999 1998
----------------------------
(IN THOUSANDS)
<S> <C> <C>
Research & development $10,915 $10,428
Selling, general & administrative 33,629 29,935
- --------------------------------------------------------------------------------
Total operating expenses $44,544 $40,363
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Total operating expenses increased by $4.1 million (10%) to $44.5 million
from $40.4 million one year ago. As a percentage of sales, operating expenses
increased to 42% from 40% one year ago.
Research and development (R&D) expenses increased $0.5 million (5%) to
$10.9 million compared to $10.4 million one year ago and remained at 10% of
sales.
Sales, marketing and service expense decreased $0.2 million (1%) to $21.8
million from $22.0 million one year ago. As a percentage of sales, sales
marketing and service expenses decreased to 21% from 22% one year ago.
Administration expenses increased $3.9 million (49%) to $11.8 million from
$7.9 million one year ago and as a percentage of sales increased to 11% from 8%
one year ago. The increase resulted primarily from increased investments in
information technology, higher legal expenses, and increased payroll related
costs.
12
<PAGE>
OTHER INCOME (EXPENSE)
Other income (expense), net, decreased to net expense of $0.1 million
compared to net expense of $0.3 million in the same quarter last year. The
decrease is primarily due to lower foreign exchange losses, net, due to the
weakening of the U.S. dollar against major foreign currencies, higher interest
income on notes receivable and higher average investment balances, and higher
dividend income.
INCOME TAXES
The Company's effective tax rate for the current quarter was 32% compared
to 36% for the same quarter last year. The Company's effective tax rate
decreased as a result of increases in foreign tax credit utilization and
increased research and development credits, offset by changes in income by tax
jurisdiction as well as the proportionately greater impact of these items due to
lower income before taxes in the current period.
YEAR 2000 COMPLIANCE.
As is true for most companies, the Year 2000 computer issue creates a risk
for Coherent. If systems do not correctly recognize date information when the
year changes to 2000, there could be an adverse impact on the Company's
operations. The risk for Coherent exists in four areas: (i) information
technology used by the Company to run its business, (ii) systems used by the
Company's suppliers, (iii) potential warranty or other claims from Coherent's
customers, and (iv) the potential for reduced spending by customers for
Coherent's products as a result of significant spending on Year 2000 issues and
related adverse effects of such issues on the customer's business. The Company
is currently evaluating its exposure in all of these areas.
Coherent is in the process of conducting a comprehensive inventory and
evaluation of its internal systems, equipment and facilities, which will be
completed by March 31, 1999. The Company has a number of projects underway to
replace or upgrade systems, equipment and facilities that are already known to
be Year 2000 non-compliant and expects to be substantially complete with these
projects by April 1999. At this time, the Company has not determined a most
reasonably likely worst case scenario if its Year 2000 remediation efforts are
unsuccessful. The Company has not developed alternative plans if upgrade or
replacement is not feasible. The Company will consider the need for such plans
upon completion of its assessment of the Year 2000 risk by March 31, 1999. For
the Year 2000 non-compliance issues identified to date, the cost of upgrade or
replacement has been less than $0.3 million through December 26, 1998. The
Company currently has budgeted an additional $0.6 million through December 31,
1999 for system upgrades and replacements which it expects to capitalize. The
cost of the upgrades or replacements in the future is not expected to materially
affect the Company's operating results and will be funded by working capital
generated by operations. The Company expects to estimate such additional costs
for Year 2000 compliance, if any, when it completes its assessments in March
1999 and adjust its budget accordingly. If implementation of replacement systems
is delayed, or if significant new non-compliance issues are identified, the
Company's results of operation or financial condition could be adversely
affected. However, the Company believes that it will be able to complete its
Year 2000 compliance review and make any necessary system modifications prior to
any adverse consequences.
Coherent is also in the process of contacting its critical suppliers to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant and expects to complete this process by April
1999 for all critical suppliers. Where practical, Coherent will attempt to
mitigate its risks with respect to the failure of suppliers to be Year 2000
ready. In the event that suppliers are not Year 2000 compliant, the Company may
seek alternative sources of supplies. However, such failures remain a
possibility and could have an adverse impact on the Company's results of
operations or financial condition.
The Company believes the large majority of its current products are Year
2000 compliant; however, since all customer situations cannot be anticipated,
particularly those involving third party products, Coherent may see an increase
in warranty and other claims as a result of the Year 2000 transition. While
litigation regarding Year 2000 compliance issues is expected to escalate, the
Company
13
<PAGE>
does not believe that the impact of customer claims would materially
affect the Company's results of operations or financial condition.
Year 2000 compliance is an issue for virtually all businesses, whose
systems and applications may require significant hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a substantial portion of their information systems' spending to fund such
upgrades and modifications and divert spending away from the purchase of
Coherent products and services. Such changes in customers' spending patterns
could have an adverse impact on the Company's sales, but the impact on operating
results and financial condition is not known at this time.
EURO CONVERSION
As with many multinational companies operating in Europe, beginning in
January 1999, Coherent will be affected by the conversion of 11 European
currencies into a common currency, the euro. Based on its preliminary
assessment, the Company does not believe the conversion will have a material
impact on the competitiveness of its products or increase the likelihood of
contract cancellations in Europe, where there already exists substantial price
transparency. The Company also believes its current accounting systems will
accommodate the euro conversion with minimal intervention and does not expect to
experience material adverse tax consequences as a result of the conversion. The
convergence of currencies into the euro is expected to simplify the Company's
currency risk management process, including its use of derivatives to manage
that risk. The cost of addressing the euro conversion is not expected to be
material and will be charged to operations as incurred. The Company will
continue to assess the impact of the introduction of the euro currency over the
transition period as well as the period subsequent to the transition period, as
applicable.
ASIA-PACIFIC RISK
Recent economic trends, particularly in the Asia-Pacific marketplace, have
caused a heightened awareness of the impact this portion of the world's economy
can have on the overall economy. As the Asia-Pacific market currently represents
almost one-third of the worlds buying power and approximately 20 to 25% of
Coherent's sales are to this region, changes in this area's economic growth rate
may impact suppliers of product into that market. While the actual magnitude of
the business at risk is unknown, it is likely that in the near term capital
spending in this market will decrease and thus, Coherent's ability to maintain
or grow sales in this region may be negatively impacted.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash, cash equivalents and
short-term investments of $34.1 million. Additional sources of liquidity are the
Company's multi-currency line of credit and bank credit facilities totaling
$56.4 million. As of December 26, 1998, the Company had $40.6 million unused and
available under these credit facilities.
The Company has signed a definitive agreement with Palomar Medical
Technologies, Inc. (Palomar) to acquire Palomar's majority owned subsidiary,
Star Medical Technologies, Inc., for $65 million in cash. The consummation of
the sale, which is subject to the approval of Palomar's stockholders, other
standard closing conditions and certain regulatory approvals, is expected to
occur prior to May 1, 1999. The Company is in the process of securing a private
bond placement to finance the acquisition. In the interim, the Company's bank
has agreed to provide a bridge loan in the event that other financing is not
obtained by the closing of the deal.
During the first quarter of fiscal 1997, the Company signed a lease for
216,000 square feet of office, research and development and manufacturing space
for its Medical Group headquarters in Santa Clara, California. The lease expires
in December 2001. The Company has an option to purchase the property for $24.0
million, or at the end of the lease arrange for the sale of the property to a
third party with the Company retaining an obligation to the owner for the
difference between the sale price, if less than
14
<PAGE>
$24.0 million, and $24.0 million, subject to certain provisions of the lease.
If the Company does not purchase the property or arrange for its sale as
discussed above, the Company would be obligated for an additional lease
payment of approximately $21.5 million. The Company occupied the building in
July 1998 and commenced lease payments at that time. The lease requires the
Company to maintain specified financial covenants, all of which the Company
was in compliance with as of December 26, 1998.
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents decreased $1.5 million (9%) from September 26,
1998. Operations and changes in exchange rates used $1.0 million, including $2.6
million used to purchase short-term investments. Investing activities used $4.3
million, including $4.9 million used to acquire property and equipment, net and
other, net provided $0.6 million. Financing activities provided $3.8 million
with net debt borrowings of $2.8 million and $1.0 million from the sale of
shares under employee stock plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company maintains a short-term investment portfolio consisting mainly
of income securities with an average maturity of less than one year. These
trading securities are subject to interest rate risk and will fall in value if
market interest rates increase. If market interest rates were to increase
immediately and uniformly by 10 percent from levels at December 26, 1998, the
fair value of the portfolio would decline by an immaterial amount. The Company
has the ability to generally hold its fixed income investments until maturity
and therefore the Company would not expect its operating results or cash flows
to be affected to any significant degree by the effect of a sudden change in
market interest rates on its securities portfolio.
The Company has fixed rate long-term debt of approximately $8 million, and
a hypothetical 10 percent decrease in interest rates would not have a material
impact on the fair market value of this debt. The Company does not hedge any
interest rate exposures.
FOREIGN CURRENCY EXCHANGE RISK
The Company has foreign subsidiaries which sell and manufacture the
Company's products in various global markets. As a result, the Company's
earnings and cash flows are exposed to fluctuations in foreign currency exchange
rates. The Company attempts to limit these exposures through operational
strategies and financial market instruments. The Company utilizes hedge
instruments, primarily forward contracts with maturities of twelve months or
less, to manage its exposure associated with firm intercompany and third-party
transactions and net asset and liability positions denominated in non-functional
currencies. The Company does not use derivative financial instruments for
trading purposes.
The Company had $27.7 million of short-term ($.9 million long-term) forward
exchange contracts, denominated in major foreign currencies, which approximated
the fair value of such contracts and their underlying transactions at December
26, 1998. Gains and losses related to these instruments at December 26, 1998
were not material. Looking forward, the Company does not anticipate any material
adverse effect on its consolidated financial position, results of operations, or
cash flows resulting from the use of these instruments. There can be no
assurance that these strategies will be effective or that transaction losses can
be minimized or forecasted accurately.
The following table provides information about the Company's foreign
exchange forward contracts at December 26, 1998. The table presents the value of
the contracts in U.S. dollars at the contract exchange rate as of the contract
maturity date. Due to the short-term nature of these contracts, the fair value
approximates the weighted average contractual foreign currency exchange rate
value of the contracts at December 26, 1998.
15
<PAGE>
Forward contracts to sell (buy) foreign currencies for U.S. dollars:
<TABLE>
<CAPTION>
(in thousands, except contract rates)
Mature LESS THAN 1 Year Mature 1-3 years
----------------------------------------------------------------------------------
Average U.S. Average U.S.
Contract Notional Fair Contract Notional Fair
Rate Amount Value Rate Amount Value
-------- -------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Japanese Yen 121.920 $8,612 $9,060
German Deutschemark 1.777 6,466 6,862 1.733 $828 $857
French Franc 5.770 5,857 6,016
Austrian Schilling 12.243 1,013 1,053
British Pound Sterling 1.696 2,036 2,012
Hong Kong Dollar 7.877 851 865
Swedish Krone 7.876 1,498 1,470
Norwegian Kroner 7.576 449 446
Belgian Franc 34.190 322 319
Finnish Mark 5.008 (519) (511)
Dutch Guilder 1.860 29 -
Danish Krone 6.3047 159 157
</TABLE>
16
<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.
The Company filed a report on Form 8-K on December 18, 1998 relating
to its agreement to purchase Star Medical Technologies, Inc.
Exhibit 27 "Financial Data Schedules" included herewith.
17
<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: February 8, 1999 By: ROBERT J. QUILLINAN
-------------------
Robert J. Quillinan
Executive Vice President and Chief
Financial Officer
18
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> DEC-26-1998
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<SECURITIES> 19,581
<RECEIVABLES> 92,832
<ALLOWANCES> 5,127
<INVENTORY> 104,887
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<PP&E> 152,333
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0
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<COMMON> 237
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