<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 April 3, 1999
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 April 30, 1999 was 23,951,338 shares.
<PAGE>
COHERENT, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Consolidated Condensed Statements of Income --
Three months and six months ended April 3, 1999 and March 28, 1998 3
Consolidated Condensed Balance Sheets --
April 3, 1999 and September 26, 1998 4
Consolidated Condensed Statements of Cash Flows --
Three months and six months ended April 3, 1999 and March 28, 1998 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 SIX
MONTHS ENDED MONTHS ENDED
------------ ------------
APRIL 3, March 28, APRIL 3, March 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
NET SALES $ 116,537 $ 105,881 $ 222,168 $ 207,250
COST OF SALES 62,288 53,185 116,960 102,104
- -----------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 54,249 52,696 105,208 105,146
- -----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 10,779 11,608 21,694 22,036
Selling, general and administrative 34,570 29,563 67,048 58,417
Intangibles amortization 1,061 1,204 2,212 2,285
- -----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 46,410 42,375 90,954 82,738
- -----------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 7,839 10,321 14,254 22,408
- -----------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest and dividend income 762 289 1,406 611
Interest expense (431) (251) (868) (569)
Foreign exchange loss (19) (83) (3) (428)
Minority interest in subsidiaries (248) (227) (454) (521)
Other - net (217) 263 (374) 556
- -----------------------------------------------------------------------------------------------------------------------
TOTAL OTHER (EXPENSE), NET (153) (9) (293) (351)
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 7,686 10,312 13,961 22,057
- -----------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 2,306 3,474 4,315 7,709
NET INCOME $ 5,380 $ 6,838 $ 9,646 $ 14,348
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE:
BASIC $ .22 $ .29 $ .40 $ .62
DILUTED $ .22 $ .29 $ .40 $ .61
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SHARES USED IN COMPUTATION:
BASIC 23,914 23,211 23,861 23,145
DILUTED 24,546 23,830 24,398 23,714
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</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>
APRIL 3, September 26,
1999 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
ASSETS
- ------
CURRENT ASSETS:
Cash and equivalents $ 15,005 $ 15,944
Short-term investments 28,003 16,954
Accounts receivable - net of allowances of
$5,786 in 1999 and $4,817 in 1998 88,772 86,822
Inventories 100,998 103,541
Prepaid expenses and other assets 23,128 22,895
Deferred tax assets 32,491 26,618
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 288,397 272,774
- ---------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 154,800 147,775
ACCUMULATED DEPRECIATION AND AMORTIZATION (69,342) (64,918)
- ---------------------------------------------------------------------------------------------------------------
Property and equipment - net 85,458 82,857
- ---------------------------------------------------------------------------------------------------------------
GOODWILL - net of accumulated amortization of
$7,502 in 1999 and $6,912 in 1998 10,756 11,595
OTHER ASSETS 23,461 23,535
- ---------------------------------------------------------------------------------------------------------------
$408,072 $390,761
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 17,623 $ 11,645
Current portion of long-term obligations 1,066 788
Accounts payable 16,409 17,851
Income taxes payable 4,009 9,160
Other current liabilities 64,438 59,603
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 103,545 99,047
- ---------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 12,293 12,828
OTHER LONG-TERM LIABILITIES 16,050 12,599
MINORITY INTEREST IN SUBSIDIARIES 4,276 3,664
STOCKHOLDERS' EQUITY:
Common stock, par value $.01
Authorized - 100,000 shares
Outstanding 23,951 in 1999 and 23,736 in 1998 238 236
Additional paid-in capital 104,153 102,469
Notes receivable from stock sales (464) (310)
Accumulated other comprehensive income (562) 1,331
Retained earnings 168,543 158,897
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 271,908 262,623
- ---------------------------------------------------------------------------------------------------------------
$408,072 $390,761
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</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>
SIX
MONTHS ENDED
------------
APRIL 3, March 28,
1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 9,646 $ 14,348
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Purchases of short-term investments (60,249) (74,714)
Proceeds from sales of short-term investments 49,200 78,671
Changes in assets and liabilities (6,752) (23,312)
Depreciation and amortization 6,991 6,382
Intangibles amortization 2,212 2,285
Other adjustments 621 677
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,669 4,337
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (10,868) (9,660)
Acquisition of distribution rights (3,320)
Other - net 887 (1,188)
- ----------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (9,981) (14,168)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Long-term debt borrowings 1,155 1,603
Long-term debt repayments (820) (1,491)
Short-term borrowings 13,277 13,502
Short-term repayments (7,697) (19,396)
Sales of shares under employee stock plans 1,331 3,203
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 7,246 (2,579)
- ----------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND EQUIVALENTS 127 61
- ----------------------------------------------------------------------------------------------------------------
Net decrease in cash and equivalents (939) (12,349)
Cash and equivalents, beginning of period 15,944 21,455
- ----------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 15,005 $ 9,106
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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.
Certain prior period amounts have been reclassified to conform with the
current period presentation. Such reclassification had no impact on net
income or retained earnings for any period presented.
The Company's fiscal year 1999 includes 53 weeks, and the quarter ended
April 3, 1999 included 14 weeks of activity compared to 13 weeks of
activity in the corresponding prior year period.
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 SFAS.
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 Six Months Ended
April 3, March 28, April 3, March 28,
1999 1998 1999 1998
------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 5,380 $ 6,838 $ 9,646 $ 14,348
Translation adjustment (1,994) (490) (1,893) (1,011)
Change in unrealized gain on investment - - - (185)
-------- -------- -------- --------
Total comprehensive income $ 3,386 $ 6,348 $ 7,753 $ 13,152
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Accumulated other comprehensive income at April 3, 1999 and September
26, 1998 is comprised of accumulated translation adjustments of
$562,000 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 Six Months Ended
April 3, March 28, April 3, March 28,
1999 1998 1999 1998
------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average shares outstanding - Basic 23,914 23,211 23,861 23,145
Common stock equivalents 411 577 342 541
Employee stock purchase plan equivalents 221 42 195 28
------- ------ ------ ------
Weighted average shares and equivalents -
Diluted 24,546 23,830 24,398 23,714
------- ------ ------ ------
------- ------ ------ ------
Net income for basic and diluted
earnings per share computation $ 5,380 $ 6,838 $ 9,646 $14,348
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
The dilutive share equivalents calculation excludes 1,487,000 and
310,000 anti-dilutive weighted shares for the three months ended April
3, 1999 and March 28, 1998, respectively, and 1,801,000 and 334,000
anti-dilutive weighted shares have been excluded from the dilutive
share equivalents calculation for the six months ended April 3, 1999
and March 28, 1998, 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>
April 3, September 26,
1999 1998
------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Purchased parts and assemblies $ 26,841 $ 30,421
Work-in-process 30,226 33,684
Finished goods 43,931 39,436
------------------------------------------------------------------------------------------------
Net inventories $100,998 $103,541
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
April 3, September 26,
1999 1998
------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Prepaid income taxes $ 7,538 $10,275
Prepaid expenses and other 15,590 12,620
Prepaid expenses and other assets $23,128 $22,895
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
Other assets consist of the following:
<TABLE>
<CAPTION>
April 3, September 26,
1999 1998
------------------------------------------------------------------------------------------------
(IN THOUSANDS)
------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets held for investment $ 1,288 $ 1,507
Intangibles and other assets 22,173 22,028
------------------------------------------------------------------------------------------------
Other assets $23,461 $23,535
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
April 3, September 26,
1999 1998
------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and benefits $20,942 $20,803
Accrued expenses and other 19,312 14,495
Reserve for warranty 11,642 10,938
Deferred income 9,101 10,517
Customer deposits 3,441 2,850
------------------------------------------------------------------------------------------------
Other current liabilities $64,438 $59,603
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Other long-term liabilities consist of the following:
</TABLE>
<TABLE>
April 3, September 26,
1999 1998
------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred compensation $ 9,439 $ 8,200
Deferred income and other 4,205 3,082
Environmental remediation costs 1,169 1,269
Deferred tax liabilities 1,237 48
------------------------------------------------------------------------------------------------
Other long-term liabilities $16,050 $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 April 3, 1999 for remaining costs associated with the
above environmental matters is $1 million which has been previously
accrued. This amount consists of total estimated probable costs of $1.3
million ($0.1 million included in other current liabilities and $1.2
million included in other long-term liabilities) reduced by estimated
minimum probable recoveries of $0.3 million included in other assets
from other parties named to the order.
7. Subsequent to quarter-end, the Company completed its acquisition of all
outstanding shares of stock of Star Medical Technologies, Inc., for $65
million in cash and $2 million of unamortized distribution rights from
Palomar Medical Technologies, Inc. and from certain Star employees.
8
<PAGE>
Star, based in Pleasanton, California, manufactures LightSheer-TM-Diode
Laser Systems. The acquisition will be treated as a purchase. It is
estimated that the third quarter results will include a one-time
In-Process R&D pre-tax and after-tax charge of $16 million and $10.5
million ($.44 per diluted share), respectively. The remaining goodwill
and other intangibles of $51 million will be amortized over useful
lives primarily ranging from 7 to 15 years. The Company is in the
process of securing a private bond placement to finance the acquisition
which management expects to complete within 30 days. In the interim,
the Company's bank has provided a 30 day (from the date of acquisition)
bridge loan of $65 million until the other financing is obtained.
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 61% and 59% of total sales for the current quarter and
six months ended April 3, 1999, respectively. 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
10
<PAGE>
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 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 current quarter, which included 14
weeks, and six months ended April 3, 1999 was $5.4 million ($.22 per diluted
share) and $9.6 million ($.40 per diluted share) compared to net income of $6.8
million ($.29 per diluted share) and $14.3 million, ($.61 per diluted share) in
the corresponding prior year periods. The decrease in net income is primarily
due to lower gross profit as a percentage of sales and higher SG&A expenses.
With more than half of the Company's revenues outside the United States,
international sales were favorably impacted by $2.3 million and $4.6 million in
the current quarter and six months ended April 3, 1999, respectively, compared
to the same periods last year, due to the weakening of the U.S. dollar against
major foreign currencies.
NET SALES AND GROSS PROFITS
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
------------ -------------
APRIL 3, March 28 APRIL 3, March 28,
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET SALES
CONSOLIDATED:
Domestic $ 45,022 $ 47,402 $ 91,372 $ 93,777
International 71,515 58,479 130,796 113,473
-------- -------- -------- --------
Total $116,537 $105,881 $222,168 $207,250
-------- -------- -------- --------
-------- -------- -------- --------
ELECTRO-OPTICAL:
Domestic $ 26,780 $ 25,768 $ 54,221 $ 50,181
International 52,465 36,441 91,995 70,934
-------- -------- -------- --------
Total $ 79,245 $ 62,209 $146,216 $121,115
-------- -------- -------- --------
-------- -------- -------- --------
MEDICAL:
Domestic $ 18,242 $ 21,634 $ 37,151 $ 43,596
International 19,050 22,038 38,801 42,539
-------- -------- -------- --------
Total $ 37,292 $ 43,672 $ 75,952 $ 86,135
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
11
<PAGE>
CONSOLIDATED
The Company's sales for the current fiscal quarter and six months
ended April 3, 1999 increased $10.7 million (10%) and $14.9 million (7%),
respectively, from the same periods a year ago. During the current quarter,
international sales increased $13.0 million (22%) to 61% of total outside
sales, while domestic sales decreased $2.3 million (5%). Year to date,
international sales increased $17.3 million (15%) to 59% of total outside
sales, while domestic sales decreased $2.4 million (3%).
The gross profit rate decreased to 47% for the current quarter from 50% for
the same period last year and decreased to 47% for the six months ended April
3, 1999 compared to 51% for the same period one year ago. The deterioration
in the overall margin resulted primarily from lower margins within our optics
and photonics business located in Auburn, California, resulting from an
increase in inventory reserves reflecting changes in the business and an
increase in costs associated with implementing the catalog distribution
system; pricing pressures within the Coherent Medical Group; and lower unit
sales of traditionally higher margin medical aesthetic products.
ELECTRO-OPTICAL
Electro-Optical net sales increased $17 million (27%) and $25.1
million (21%) for the second quarter and six months ended April 3, 1999,
respectively, compared to the corresponding prior year periods. International
sales increased $16 million (44%) while domestic sales increased $1 million
(4%) during the current quarter. Year to date, international sales increased
$21.1 million (30%) while domestic sales increased $4 million (8%). Sales
increased primarily due to higher sales volumes in commercial solid state
products (including diode lasers) and in industrial systems as well as the
impact of the weakening of the U.S. dollar against major foreign currencies
in the current quarter and six months, which favorably impacted international
sales by $1.7 million and $3.3 million, respectively.
The gross profit rate decreased to 46% from 49% in the current quarter
compared to the same quarter one year ago and decreased to 46% from 50% for
the six months ended April 3, 1999, compared to the same period one year ago.
The decreases in gross margin were primarily attributable to a higher mix of
lower margin solid state products, lower margins within our optics and
photonics business located in Auburn, California, resulting from an increase
in inventory reserves reflecting changes in the business and an increase in
costs associated with implementing the catalog distribution system, inventory
obsolescence costs associated with changes in product requirements and higher
warranty costs.
MEDICAL
Medical net sales decreased $6.4 million (15%) and $10.2 million
(12%) for the second quarter and six months ended April 3, 1999,
respectively, compared to the corresponding prior year periods. Domestic
sales decreased $3.4 million (16%) while international sales decreased $3
million (14%) during the current quarter. Year to date, domestic sales
decreased $6.5 million (15%) while international sales decreased $3.7 million
(9%). The decrease in sales resulted primarily from lower average selling
prices and fewer unit sales of Aesthetic products due to increased market
competition, and to the expiration of our agreement to distribute refractive
systems for a German manufacturer. The decreases were partially offset by
increased commission revenue from sales of the LightSheer-TM- hair removal
laser and the weakening of the U.S. dollar against major foreign currencies
in the current quarter and six months, which favorably impacted international
sales by $0.7 million and $1.2 million, respectively.
The gross profit rate decreased to 48% from 51% in the current quarter
compared to the same quarter one year ago and decreased to 49% from 52% for
the six months ended April 3, 1999, compared to the same period one year ago.
The decreases in gross margin were primarily attributable 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 commission revenue
from sales of the LightSheer-TM- hair removal laser.
12
<PAGE>
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 3, March 28, April 3, March 28,
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Research & development $10,779 $11,608 $21,694 $22,036
Selling, general & administrative 34,570 29,563 67,048 58,417
Intangibles amortization 1,061 1,204 2,212 2,285
- -----------------------------------------------------------------------------------------------
Total operating expenses $46,410 $42,375 $90,954 $82,738
===============================================================================================
</TABLE>
Total operating expenses increased $4 million (10%) during the
second quarter compared to the same period last year, but remained at 40% of
sales. Year to date, total operating expenses increased $8.2 million (10%)
from the same prior year period and as a percentage of sales increased to 41%
from 40%.
Research and development (R&D) expenses decreased $0.8 million (7%) during
the second quarter compared to the same period last year, and as a percentage
of sales, decreased to 9% from 11%. Year to date, R&D expenses decreased $0.3
million (2%) from the same prior year period and as a percentage of sales
decreased to 10% from 11%. The decreases are due to reduced spending on
projects in the medical segment.
Sales, marketing and service expense increased $1.1 million (5%) for the
current quarter, but decreased as a percentage of sales from 20% to 19%
compared to the same period last year. Year to date, such expenses increased
$0.9 million (2%), but decreased as a percentage of sales from 21% to 20%
compared to the same period last year. The dollar increases are due to
increases in headcount in the Electro-Optical segment to support increased
sales volumes.
Administration expenses increased $3.9 million (45%) during the second
quarter compared to the same period last year, and as a percentage of sales,
increased to 11% from 8%. Year to date, administration expenses increased
$7.7 million (50%) from the same prior year period and as a percentage of
sales increased to 11% from 8%. The increase resulted primarily from the
requirement for additional receivable reserves, increased investments in
information technology, outside consulting costs and increased payroll
related costs.
OTHER INCOME (EXPENSE)
Other expense, net, increased $0.1 million to net expense of $.2
million during the current quarter and decreased $0.1 million to net expense
of $0.3 million for the six months ended April 3, 1999, compared to the
corresponding prior year periods.
INCOME TAXES
The Company's effective tax rate for the current quarter was 30%
compared to 34% for the same quarter last year. The Company's effective tax
rate for the six months ended April 3, 1999 was 31% compared to 35% for the
same prior year period. 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)
13
<PAGE>
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 conducted a comprehensive inventory and evaluation of its
internal systems, equipment and facilities, which was completed March 15,
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
June 30, 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 determined that upgrades and replacements to
its primary systems will meet Y2K compliance. For the Year 2000
non-compliance issues identified to date, the cost of upgrade or replacement
has been less than $0.5 million through April 3, 1999. The Company currently
has budgeted an additional $0.4 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, by June 15, 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
June 30, 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 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 was affected by the conversion of eleven European
currencies into a common currency, the euro. Based
on its 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 has simplified 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.
14
<PAGE>
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 25 to 30% 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 $43 million. Additional sources of
liquidity are the Company's multi-currency line of credit and bank credit
facilities totaling $59.9 million. As of April 3, 1999, the Company had $42.3
million unused and available under these credit facilities.
Subsequent to quarter-end, the Company completed its acquisition of
all outstanding shares of stock of Star Medical Technologies, Inc., for $65
million in cash and $2 million of unamortized distribution rights from
Palomar Medical Technologies, Inc. and from certain Star employees. Star,
based in Pleasanton, California, manufactures LightSheer-TM- Diode Laser
Systems. The acquisition will be treated as a purchase. It is estimated that
the third quarter results will include a one-time In-Process R&D pre-tax and
after-tax charge of $16 million and $10.5 million ($.44 per diluted share),
respectively. The remaining goodwill and other intangibles of $51 million
will be amortized over useful lives primarily ranging from 7 to 15 years. The
Company is in the process of securing a private bond placement to finance the
acquisition which management expects to complete within 30 days. In the
interim, the Company's bank has provided a 30 day bridge loan of $65 million
until the other financing is obtained.
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 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 $24 million,
and $24 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 April 3, 1999.
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents decreased $0.9 million (6%) from September
26, 1998. Operations and changes in exchange rates provided $1.8 million,
including $11 million used to purchase short-term investments. Investing
activities used $10 million, including $10.9 million used to acquire property
and equipment, net and other, net provided $0.9 million. Financing activities
provided $7.3 million with net debt borrowings of $5.9 million and $1.3
million from the sale of shares under employee stock plans.
15
<PAGE>
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 April 3, 1999
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 $7.2
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 $25 million of short-term ($0.8 million long-term)
forward exchange contracts, denominated in major foreign currencies, which
approximated the fair value of such contracts and their underlying
transactions at April 3, 1999. Gains and losses related to these instruments
April 3, 1999 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 April 3, 1999. 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 April 3, 1999.
Forward contracts to sell (buy) foreign currencies for U.S. dollars:
<TABLE>
<CAPTION>
(in thousands, except contract rates)
Mature < 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 112.683 $9,791 $9,158
Euro 1.142 3,888 3,671
French Franc 5.674 3,719 3,469
German Deutschemark 1.711 3,676 3,468 1.733 $828 $791
British Pound Sterling 1.643 2,169 2,115
Hong Kong Dollar 7.793 1,668 1,677
Swedish Krone 8.041 808 789
Danish Krone 6.494 462 435
Austrian Schilling 11.573 294 266
Norwegian Kroner 7.836 281 284
Canadian Dollar 1.511 182 184
Belgian Franc 34.450 5 -
Finnish Mark 5.008 ( 519) (472)
</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 May 4, 1999 relating to
its purchase of 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: May 12, 1999 By: ROBERT J. QUILLINAN
-------------------------------------------
Robert J. Quillinan
Executive Vice President and Chief
Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> APR-03-1999
<CASH> 15,005
<SECURITIES> 28,003
<RECEIVABLES> 94,558
<ALLOWANCES> 5,786
<INVENTORY> 100,998
<CURRENT-ASSETS> 288,397
<PP&E> 154,800
<DEPRECIATION> 69,342
<TOTAL-ASSETS> 408,072
<CURRENT-LIABILITIES> 103,545
<BONDS> 12,293
0
0
<COMMON> 238
<OTHER-SE> 271,670
<TOTAL-LIABILITY-AND-EQUITY> 408,072
<SALES> 222,168
<TOTAL-REVENUES> 222,168
<CGS> 116,960
<TOTAL-COSTS> 116,960
<OTHER-EXPENSES> 90,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 868
<INCOME-PRETAX> 13,961
<INCOME-TAX> 4,315
<INCOME-CONTINUING> 9,646
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,646
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
