<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 1, 2000
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 24, 2000 was 25,125,400 shares.
<PAGE>
COHERENT, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION:
Condensed Consolidated Statements of Income --
Three months and six months ended April 1, 2000 and April 3, 1999 3
Condensed Consolidated Balance Sheets --
April 1, 2000 and October 2, 1999 4
Condensed Consolidated Statements of Cash Flows --
Three months and six months ended April 1, 2000 and April 3, 1999 5
Notes to Condensed Consolidated 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
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
------------- ------------
APRIL 1, April 3, APRIL 1, April 3,
2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $136,681 $116,537 $263,875 $222,168
COST OF SALES 67,898 62,288 133,069 116,960
- -------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 68,783 54,249 130,806 105,208
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 14,388 10,779 26,762 21,694
Selling, general and administrative 39,724 34,570 75,482 67,048
Intangibles amortization 2,222 1,061 4,401 2,212
- -------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 56,334 46,410 106,645 90,954
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 12,449 7,839 24,161 14,254
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest and dividend income 1,110 762 2,598 1,406
Interest expense (1,551) (431) (3,194) (868)
Foreign exchange gain (loss) 165 (19) (355) (3)
Other - net 712 (465) (366) (828)
- -------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE), NET 436 (153) (1,317) (293)
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 12,885 7,686 22,844 13,961
PROVISION FOR INCOME TAXES 4,482 2,306 7,768 4,315
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 8,403 $ 5,380 $ 15,076 $ 9,646
===================================================================================================================
NET INCOME PER SHARE:
BASIC $ .34 $ .22 $ .61 $ .40
DILUTED $ .31 $ .22 $ .57 $ .40
===================================================================================================================
SHARES USED IN COMPUTATION:
BASIC 24,892 23,914 24,705 23,861
DILUTED 27,412 24,546 26,594 24,378
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT PAR VALUE PER SHARE)
<TABLE>
<CAPTION>
APRIL 1, October 2,
2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and equivalents $ 27,797 $ 38,279
Short-term investments 48,804 30,637
Accounts receivable - net of allowances of
$5,454 in 2000 and $4,592 in 1999 113,520 95,003
Inventories 112,480 97,902
Prepaid expenses and other assets 15,569 18,738
Deferred tax assets 38,791 37,014
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 356,961 317,573
- -------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 172,264 165,630
ACCUMULATED DEPRECIATION AND AMORTIZATION (80,853) (75,676)
- -------------------------------------------------------------------------------------------------------------------
Property and equipment - net 91,411 89,954
- -------------------------------------------------------------------------------------------------------------------
GOODWILL - net of accumulated amortization of
$11,735 in 2000 and $9,372 in 1999 38,909 39,490
OTHER ASSETS 54,745 48,451
- -------------------------------------------------------------------------------------------------------------------
$542,026 $495,468
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 23,599 $ 14,371
Current portion of long-term obligations 7,749 8,599
Accounts payable 22,806 18,343
Income taxes payable 4,125 8,221
Other current liabilities 80,046 73,120
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 138,325 122,654
- -------------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 76,497 74,745
OTHER LONG-TERM LIABILITIES 19,465 16,819
MINORITY INTEREST IN SUBSIDIARIES 5,367 3,945
STOCKHOLDERS' EQUITY:
Common stock, par value $.01
Authorized - 100,000 shares
Outstanding 25,118 in 2000 and 24,142 in 1999 250 240
Additional paid-in capital 119,078 106,748
Notes receivable from stock sales (949) (557)
Accumulated other comprehensive income (loss) (1,821) 136
Retained earnings 185,814 170,738
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 302,372 277,305
- -------------------------------------------------------------------------------------------------------------------
$542,026 $495,468
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
APRIL 1, April 3,
2000 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,076 $ 9,646
Adjustments to reconcile net income to net cash
provided by operating activities:
Purchases of short-term trading investments (115,032) (60,249)
Proceeds from sales of short-term trading investments 96,850 49,200
Changes in assets and liabilities (30,015) (8,334)
Depreciation and amortization 7,989 6,991
Intangibles amortization 4,401 2,212
Other adjustments 2,060 621
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (18,671) 87
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (10,856) (10,868)
Acquisition of Microlase, net of cash acquired (3,109)
Other - net (5,796) 887
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (19,761) (9,981)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings 2,926 1,155
Long-term debt repayments (1,579) (820)
Short-term borrowings 21,208 13,277
Short-term repayments (11,388) (7,697)
Cash overdrafts 2,653 1,582
Sales of shares under employee stock plans 11,319 1,331
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,139 8,828
- -------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND EQUIVALENTS 2,811 127
- -------------------------------------------------------------------------------------------------------------------
Net decrease in cash and equivalents (10,482) (939)
Cash and equivalents, beginning of period 38,279 15,944
- -------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 27,797 $15,005
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles,
consistent with those reflected in Coherent's annual report to
stockholders for the year ended October 2, 1999. 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.
2. In December 1999, the staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101). SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles (GAAP)
to revenue recognition in financial statements. The Company is required
to adopt SAB 101 in the first quarter of 2001. Although the Company
believes its revenue recognition policies are in accordance with GAAP,
the Company is currently studying SAB 101 and has not determined its
impact, if any, on the Company's financial statements.
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. In May 1999, SFAS 133 was amended to defer its
effective date. SFAS 133 will be effective for Coherent's first
quarterly filing of fiscal 2001. Management believes that this
statement will not have a significant impact, if any, on Coherent's
financial position or results of operations.
3. In December 1999, Coherent acquired the remaining 75% interest of
Microlase Optical Systems, Ltd (Microlase), in Glasgow, Scotland, for
approximately $3.2 million cash. Coherent now owns the entire share
capital of Microlase. Microlase is the manufacturer of a range of
advanced solid-state lasers that are used in a number of developing
applications including scientific research and semiconductor test
equipment. The acquisition was accounted for as a purchase and,
accordingly, Coherent has recorded the approximately $2.2 million
excess of the purchase price over the fair value of net assets acquired
as goodwill and other intangible assets, which will be amortized over 5
years.
4. The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income ............... $ 8,403 $ 5,380 $ 15,076 $ 9,646
Translation adjustment ... (545) (1,994) (1,957) (1,893)
-------- -------- -------- --------
Total comprehensive income $ 7,858 $ 3,386 $ 13,119 $ 7,753
======== ======== ======== ========
</TABLE>
6
<PAGE>
Accumulated other comprehensive income at April 1, 2000 and October 2,
1999 is comprised of accumulated translation adjustments of
$(1,821,000) and $136,000, respectively.
5. Basic earnings per share is computed based on the weighted average
number of shares outstanding during the period. Diluted earnings per
share is computed based on the weighted average number of shares
outstanding during the period increased by the effect of dilutive stock
options and stock purchase contracts, using the treasury stock method,
and shares issuable under the Productivity Incentive Plan.
The following table presents information necessary to calculate basic
and diluted earnings per common and common equivalent share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average shares outstanding - Basic ..... 24,892 23,914 24,705 23,861
Common stock equivalents ................... 2,277 411 1,702 322
Employee stock purchase plan equivalents ... 243 221 187 195
------- ------- ------- -------
Weighted average shares and equivalents - Diluted 27,412 24,546 26,594 24,378
======= ======= ======= =======
Net income for basic and diluted
earnings per share computation ............. $ 8,403 $ 5,380 $15,076 $ 9,646
======= ======= ======= =======
</TABLE>
5,000 and 1,487,000 anti-dilutive weighted shares have been excluded
from the dilutive share equivalents calculation for the three months
ended April 1, 2000 and April 3, 1999, respectively. 316,000 and
1,801,000 anti-dilutive weighted shares have been excluded from the
dilutive share equivalents calculation for the six months ended April
1, 2000 and April 3, 1999, respectively.
6. Balance Sheet Detail:
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are as follows:
<TABLE>
<CAPTION>
April 1, October 2,
2000 1999
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Purchased parts and assemblies $ 34,586 $ 26,200
Work-in-process .............. 37,478 33,098
Finished goods ............... 40,416 38,604
------------------------------------------------------
Net inventories .............. $112,480 $ 97,902
======================================================
</TABLE>
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
April 1, October 2,
2000 1999
--------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Prepaid income taxes ............ $ 1,367 $ 4,943
Prepaid expenses and other ...... 14,202 13,795
--------------------------------------------------------
Prepaid expenses and other assets $15,569 $18,738
========================================================
</TABLE>
Other assets consist of the following:
<TABLE>
<CAPTION>
April 1, October 2,
2000 1999
-------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Other assets ............. $31,443 $22,470
7
<PAGE>
Intangible assets ........ 22,087 24,729
Assets Held for Investment 1,215 1,252
-------------------------------------------------
Other assets ............. $54,745 $48,451
=================================================
</TABLE>
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
April 1, October 2,
2000 1999
----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and benefits ......... $25,161 $25,132
Accrued expenses and other ........... 24,472 22,567
Reserve for warranty ................. 14,149 13,269
Deferred income ...................... 10,701 9,695
Customer deposits .................... 5,563 2,457
----------------------------------------------------------------
Other current liabilities ............ $80,046 $73,120
================================================================
</TABLE>
Other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
April 1, October 2,
2000 1999
----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred compensation ................ $14,402 $11,233
Deferred income and other ............ 2,912 3,435
Environmental remediation costs ...... 1,169 1,169
Deferred tax liabilities ............. 982 982
----------------------------------------------------------------
Other long-term liabilities .......... $19,465 $16,819
================================================================
</TABLE>
7. Certain claims and lawsuits have been filed or are pending against
Coherent. 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
Coherent's consolidated financial position or results of operations.
Coherent, 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 Coherent's former headquarters facility is located.
The responding parties to the Regional Order (including Coherent) 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.
Coherent 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 Coherent for this site. Coherent
has been operating remedial systems at the site to remove subsurface
chemicals since April 1992. During fiscal 1997, Coherent 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 Coherent's probable, nondiscounted net
liability at April 1, 2000 for remaining costs associated with the
above environmental matters is $1.0 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.
8
<PAGE>
8. Operating Segments:
In fiscal 1999, Coherent adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for reporting information about operating
segments and related disclosures about products, geographic information
and major customers. Coherent's corporate expenses, except for
depreciation of corporate assets and general legal expenses, are
allocated to the operating segments and are included in corporate and
other in the reconciliation of operating results. Furthermore, interest
expense, interest income and the provision for income taxes are
included in corporate and other in the reconciliation of operating
results. Information on reportable segments is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
------------- ------------
APRIL 1, April 3, APRIL 1, April 3,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales:
Electro-Optics ......... $ 65,301 $ 60,761 $ 124,843 $ 112,864
Medical ................ 50,604 37,292 97,379 75,952
Lambda ................. 20,776 18,484 41,653 33,352
--------- --------- --------- ---------
Total Net Sales ........ $ 136,681 $ 116,537 $ 263,875 $ 222,168
========= ========= ========= =========
Intersegment Net Sales:
Electro-Optics ......... $ 7,269 $ 5,706 $ 13,113 $ 9,898
Medical ................ 369 246 831 396
Lambda ................. 283 343 590 511
--------- --------- --------- ---------
Total Intersegment Sales $ 7,921 $ 6,295 $ 14,534 $ 10,805
========= ========= ========= =========
Pretax Income (Loss):
Electro-Optics ......... $ 9,017 $ 7,378 $ 15,238 $ 12,366
Medical ................ 2,245 (776) 3,795 (64)
Lambda ................. 1,297 913 4,586 1,577
Corporate and other .... 326 171 (775) 82
--------- --------- --------- ---------
Total Pretax Income .... $ 12,885 $ 7,686 $ 22,844 $ 13,961
========= ========= ========= =========
</TABLE>
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 Coherent's products and services and other risks identified in
Coherent'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. Coherent
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 Coherent's annual report on Form 10-K for the fiscal year ended October 2,
1999 under the heading "Risk Factors" in Part I, Item 1. Business.
Coherent operates in a technologically advanced, dynamic and highly
competitive environment. Coherent'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 Coherent's control, including fluctuations in customer
orders and foreign currency exchange rates, among others. While Coherent
attempts to identify and respond to these conditions in a timely manner, such
conditions represent significant risks to Coherent's performance. Accordingly,
if the level of orders diminishes during the next or any future quarter, or if
for any reason Coherent's shipments are disrupted (particularly near a quarter
end when Coherent 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 Coherent's stock.
Similarly, Coherent conducts a significant portion of its business
internationally. International sales accounted for 58% of Coherent's sales for
fiscal 1999 and were 61% and 59% of total sales for the current quarter and six
months ended April 1, 2000, respectively. Coherent 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,
Coherent's international sales and operations are subject to the risks of
conducting business internationally. Risks include fluctuation in foreign
exchange rates, which could affect the sales price in local currencies of
products in foreign markets as well as the local costs and expenses of foreign
operations. Coherent 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 Coherent's operations in the future
or require it to modify its current business practices.
Coherent, Inc., a Delaware corporation, (herein referred to as
"Coherent" or "Company") is a global leader on the design, manufacture and sales
of lasers, laser systems, precision optics and related accessories. Coherent
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/OEM (original equipment manufacturer)
applications ranging from semiconductor processing and disk mastering to light
shows, entertainment, and telecommunications. 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." Energy is amplified to extremely high intensity by an
atomic process called stimulated emission. The use of the word in this context,
however, refers to an energy transfer. Energy moves from one location to another
by conduction, convection, and radiation. The color of laser light is normally
expressed in terms
10
<PAGE>
of the laser's wavelength. The most common unit in expressing a laser's
wavelength is a nanometer ("nm"). There are one billion nanometers in one meter.
A laser uses a source of energy such as electricity, light or a
chemical reaction to excite electrons in a "lasing medium." When these excited
electrons return to their grounded or normal state, energy is emitted in the
form of light at one or a few specific wavelengths. The lasing medium can be
gasses such as CO2 or argon, liquid dyes, or solid-state crystals such as the
commonly used yttrium aluminum garnet ("YAG"). The emitted light is collected
and refined using a series of mirrors and lenses, forming a high intensity,
tightly focused beam of "coherent" light. A laser beam can be made powerful
enough to cut steel or precise enough to perform eye surgery.
The semiconductor or diode laser uses these same physical principles,
but miniaturizes the entire assembly into a monolithic structure using
semiconductor wafer fabrication processes to build the device. In addition to
miniaturizing the laser, the use of solid-state materials greatly increases the
life of the device and provides power efficiencies over 100 times greater than a
typical gas or lamp based laser. A widely used analogy in the laser industry is
that the development of the semiconductor laser will have as significant an
impact on the use of lasers as the transition of the vacuum tube to the
transistor to the integrated circuit has on the electronics industry.
Since inception in 1966, Coherent 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 242 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
Coherent's net income for the current quarter and six months ended April 1, 2000
was $8.4 million ($0.31 per diluted share) and $15.1 million ($0.57 per diluted
share) compared to net income of $5.4 million ($0.22 per diluted share) and $9.6
million ($0.40 per diluted share) in the corresponding prior year periods. The
increase in net income was primarily attributable to increases in sales volumes
and higher gross profit as a percentage of sales.
11
<PAGE>
NET SALES AND GROSS PROFITS
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
------------ ------------
(IN THOUSANDS)
APRIL 1, April 3, APRIL 1, April 3,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES
- ---------
CONSOLIDATED
Domestic $ 53,585 $ 45,022 $107,220 $ 91,372
International 83,096 71,515 156,655 130,796
-------- -------- -------- --------
Total $136,681 $116,537 $263,875 $222,168
======== ======== ======== ========
ELECTRO-OPTICS:
Domestic $ 26,155 $ 22,918 $ 51,998 $ 44,772
International 39,146 37,843 72,845 68,092
-------- -------- -------- --------
Total $ 65,301 $ 60,761 $124,843 $112,864
======== ======== ======== ========
MEDICAL:
Domestic $ 23,441 $ 18,242 $ 44,809 $ 37,151
International 27,163 19,050 52,570 38,801
-------- -------- -------- --------
Total $ 50,604 $ 37,292 $ 97,379 $ 75,952
======== ======== ======== ========
LAMBDA:
Domestic $ 3,989 $ 3,862 $ 10,413 $ 9,449
International 16,787 14,622 31,240 23,903
-------- -------- -------- --------
Total $ 20,776 $ 18,484 $ 41,653 $ 33,352
======== ======== ======== ========
</TABLE>
CONSOLIDATED
Coherent's sales for the current fiscal quarter and six months ended
April 1, 2000 increased $20.1 million (17%) and $41.7 million (19%),
respectively, from the same periods a year ago. Sales increases were strong in
all three operating segments. During the current quarter, international sales
increased $11.6 million (16%) to 61% of total outside sales, and domestic sales
increased $8.5 million (19%). Year to date, international sales increased $25.9
million (20%) to 59% of total outside sales, and domestic sales increased $15.8
million (17%).
The gross margin rate increased to 50% from 47% for both the current
quarter and six months ended April 1, 2000 compared to the same periods a year
ago. Margins improved in all three operating segments. The current quarter
improvement was primarily due to higher sales volumes and increased sales of
higher margin hair removal and commercial electro-optical products. The year to
date improvement was primarily due to higher sales of higher margin hair removal
systems and lithography products as well as lower warranty costs in the
Electro-Optics and Medical segments.
ELECTRO-OPTICS
Electro-Optics net sales increased $4.5 million (7%) and $12.0
million (11%) for the second quarter and six months ended April 1, 2000,
respectively, compared to the corresponding prior year periods. Domestic
sales increased $3.2 million (14%) while international sales increased $1.3
million (3%) during the current quarter. Year to date, domestic sales
increased $7.2 million (16%) while international sales increased $4.8 million
(7%). Sales increased primarily due to higher sales volumes in commercial
solid state products, including diode lasers to the computer-to-plate, disk
mastering, non-metal PCB hole drilling and telecommunications markets.
Telecommunication market sales for the current quarter and six
12
<PAGE>
months increased 89% and 83% to $1.7 million and $3.3 million, respectively,
compared to the corresponding prior year periods.
The gross margin rate increased to 52% from 47% for the current quarter
compared to the same quarter one year ago and increased to 50% from 47% for the
six months ended April 1, 2000 compared to the same periods a year ago. The
improvement was primarily due to increased sales of higher margin commercial
solid-state products, lower warranty costs and higher sales volumes relative to
fixed overhead costs.
MEDICAL
Medical net sales increased $13.3 million (36%) and $21.4 million (28%)
for the second quarter and six months ended April 1, 2000, respectively,
compared to the corresponding prior year periods. International sales increased
$8.1 million (43%) while domestic sales increased $5.2 million (28%) during the
current quarter. Year to date, international sales increased $13.8 million (35%)
while domestic sales increased $7.6 million (21%). The increases were primarily
due to the acquisition of Star Medical in May 1999, where we now recognize the
full sales value of LightSheer(TM) hair removal systems instead of only the
commission revenue recognition in the prior year periods and to strong sales
growth in Ophthalmic products, including the OPAL Photoactivator(TM).
The gross margin rate increased to 51% from 48% in the current quarter
compared to the same quarter one year ago and increased to 50% from 49% for the
six months ended April 1, 2000, compared to the same period one year ago. The
improvement resulted from higher shipments of higher margin hair products, lower
warranty costs, and higher sales volumes relative to fixed overhead costs.
LAMBDA
Lambda net sales increased $2.3 million (12%) and $8.3 million (25%)
for the second quarter and six months ended April 1, 2000, respectively,
compared to the corresponding prior year periods. International sales increased
$2.2 million (15%) while domestic sales increased $0.1 million (3%) during the
current quarter. Year to date, international sales increased $7.3 million (31%)
while domestic sales increased $1.0 million (10%). The increases were primarily
due to increased shipments of commercial products, primarily lasers used in
photolithography systems.
The gross margin rate increased to 43% from 42% in the current quarter
compared to the same quarter one year ago and increased to 47% from 45% for the
six months ended April 1, 2000, compared to the same period one year ago. The
increases resulted from increased sales of photolithography systems at higher
margins and fewer sales of lower margin scientific systems.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
------------ ------------
APRIL 1, April 3, APRIL 1, April 3,
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Research & development $ 14,388 $ 10,779 $ 26,762 $ 21,694
Selling, general & administrative 39,724 34,570 75,482 67,048
Intangibles amortization 2,222 1,061 4,401 2,212
- -----------------------------------------------------------------------------------------
Total operating expenses $ 56,334 $ 46,410 $106,645 $ 90,954
=========================================================================================
</TABLE>
Total operating expenses increased $9.9 million (21%) during the second
quarter compared to the same period last year and as a percentage of sales
increased to 41% from 40%. Year to date, total
13
<PAGE>
operating expenses increased $15.7 million (17%), but as a percentage of sales
decreased to 40% from 41%.
Research and development (R&D) expenses increased $3.6 million (33%)
during the second quarter compared to the same period last year, and as a
percentage of sales increased to 11% from 9%. Year to date, R&D expenses
increased $5.1 million (23%), but as a percentage of sales remained at 10%. The
increases were primarily due to increased spending on lithography,
telecommunications and other projects, the acquisition of Star Medical in May
1999, and increased headcount to carry out such projects.
Selling, general and administrative (SG&A) expenses increased $5.2
million (15%) for the current quarter, but decreased as a percentage of sales
from 30% to 29% compared to the same period last year. Year to date, such
expenses increased $8.4 million (13%), but decreased as a percentage of sales
from 30% to 29% compared to the same period last year. The current quarter
dollar increase was due to increased sales and marketing costs to support
increased sales volumes, launching of new products and increased headcount. The
year to date dollar increase was due to increased sales and marketing costs to
support increased sales volumes, increased headcount and the write-off of a
permanently impaired intangible asset of $1.0 million related to the catalog
business unit of the Electro-Optics segment.
Intangibles amortization expenses increased $1.2 million (109%) and
$2.2 million (99%) for the current quarter and six months ended April 1, 2000,
respectively. The increases are primarily due to the acquisition of Star
Medical.
OTHER INCOME (EXPENSE)
Other income, net increased $0.6 million to net income of $0.4 million
from net expense of $0.2 million during the current quarter and decreased $1.0
million to net expense of $1.3 million from net expense of $0.3 million for the
six months ended April 1, 2000 compared to the corresponding prior year periods.
The current quarter increase was primarily due to increased interest income on
increased investments, the receipt of an insurance settlement at a manufacturing
facility and the non-recurrence of other miscellaneous expenses, partially
offset by increased interest expense on the Star acquisition debt. The year to
date decrease was primarily due to increased interest expense on the Star
acquisition debt, partially offset by increased interest income on increased
investments, the receipt of an insurance settlement at a manufacturing facility
and the non-recurrence of other miscellaneous expenses.
INCOME TAXES
Coherent's effective tax for the current quarter was 35% compared to
30% for the same quarter last year. Coherent's effective tax rate for the six
months ended April 1, 2000 was 34% compared to 31% for the same prior year
period. Coherent's effective tax rate increased as result of higher profit
before income taxes in fiscal 2000 with relatively flat tax credits compared to
fiscal 1999.
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, Coherent
does not believe the conversion has had a material impact on the competitiveness
of its products or increased the likelihood of contract cancellations in Europe,
where there already exists substantial price transparency. Coherent also
believes its current accounting systems 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 Coherent'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. Coherent 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>
FINANCIAL CONDITION
- -------------------
LIQUIDITY AND CAPITAL RESOURCES
Coherent's primary sources of liquidity are cash, cash equivalents and
short-term investments of $76.6 million. Additional sources of liquidity are
Coherent's multi-currency line of credit and bank credit facilities totaling
$69.6 million. As of April 1, 2000, Coherent had $56.0 million unused and
available under these credit facilities.
During the first quarter of fiscal 1997, Coherent 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. Coherent 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 Coherent retaining an obligation to the owner for the
difference between the sale price, if less than $20.8 million, and $20.8
million, subject to certain provisions of the lease. If Coherent does not
purchase the property or arrange for its sale as discussed above, Coherent would
be obligated for an additional lease payment of approximately $20.8 million.
Coherent occupied the building in July 1998 and commenced lease payments at that
time. The lease requires Coherent to maintain specified financial covenants, all
of which Coherent was in compliance with as of April 1, 2000.
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents decreased $10.5 million (27%) from October 2,
1999. Operations and changes in exchange rates used $15.8 million, including
$18.2, net, million used to purchase short-term investments. Investing
activities used $19.8 million, including $10.9 million used to acquire property
and equipment, net, $3.1 million used to acquire Microlase and other, net used
$5.8 million. Financing activities provided $25.1 million with net debt
borrowings of $13.8 million and $11.3 million from the sale of shares under
employee stock plans.
Net accounts receivable increased $18.5 million (19%) primarily due to
increases in the Medical segment to support increased sales and increases in the
Lambda segment due to extended payment terms with a large Japanese commercial
customer.
Net inventories increased $14.6 million (15%) primarily due to
increases in the Lambda segment to support the lithography business and
increases in the Medical segment due to increased demo and new product inventory
of the OPAL Photoactivator, on which FDA clearance was received after the end of
the quarter.
Short-term borrowings increased $9.2 million (64%) primarily due to
borrowings incurred within our Lambda segment to fund its higher working capital
needs and capital spending necessitated by its rapid growth.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
INTEREST RATE SENSITIVITY
Coherent 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 1, 2000 the fair
value of the portfolio would decline by an immaterial amount. Coherent has the
ability to generally hold its fixed income investments until maturity and
therefore Coherent 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.
Coherent has fixed rate long-term debt of approximately $80.4 million,
and a hypothetical 10 percent decrease in interest rates would not have a
material impact on the fair market value of this debt. Coherent does not hedge
any interest rate exposures.
15
<PAGE>
FOREIGN CURRENCY EXCHANGE RISK
Coherent has foreign subsidiaries which sell and manufacture Coherent's
products in various global markets. As a result, Coherent's earnings and cash
flows are exposed to fluctuations in foreign currency exchange rates. Coherent
attempts to limit these exposures through operational strategies and financial
market instruments. Coherent 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. Coherent does not
use derivative financial instruments for trading purposes.
Coherent had $25.3 million of short-term forward exchange contracts,
denominated in major foreign currencies, which approximated the fair value of
such contracts and their underlying transactions at April 1, 2000. Gains and
losses related to these instruments at April 1, 2000 were not material. Looking
forward, Coherent 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 Coherent's foreign
exchange forward contracts at April 1, 2000. 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 1, 2000.
Forward contracts to sell (buy) foreign currencies for U.S. dollars:
<TABLE>
<CAPTION>
(in thousands, except contract rates)
-------------------------------------
Average U.S.
Contract Notional Fair
Rate Amount Value
-------- -------- -----
<S> <C> <C> <C>
Euro 1.035 $16,760 $15,496
British Pound Sterling 1.636 4,923 4,801
Swedish Krone 8.318 2,669 2,575
Danish Krone 7.222 949 881
Japanese Yen 98.421 813 777
Norwegian Kroner 8.147 626 603
Hong Kong Dollar 7.854 166 167
</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.
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 9, 2000 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> SEP-30-2000
<PERIOD-START> OCT-03-1999
<PERIOD-END> APR-01-2000
<CASH> 27,797
<SECURITIES> 48,804
<RECEIVABLES> 118,974
<ALLOWANCES> 5,454
<INVENTORY> 112,480
<CURRENT-ASSETS> 356,961
<PP&E> 172,264
<DEPRECIATION> 80,853
<TOTAL-ASSETS> 542,026
<CURRENT-LIABILITIES> 138,325
<BONDS> 76,497
0
0
<COMMON> 250
<OTHER-SE> 302,122
<TOTAL-LIABILITY-AND-EQUITY> 542,026
<SALES> 263,875
<TOTAL-REVENUES> 263,875
<CGS> 133,069
<TOTAL-COSTS> 133,069
<OTHER-EXPENSES> 106,645
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,194
<INCOME-PRETAX> 22,844
<INCOME-TAX> 7,768
<INCOME-CONTINUING> 15,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,076
<EPS-BASIC> .61
<EPS-DILUTED> .57
</TABLE>
