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Table of Contents

 

 

 

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 2, 2011

 

or

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to          

 

Commission File Number: 001-33962

 

COHERENT, INC.

 

Delaware

 

94-1622541

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

5100 Patrick Henry Drive, Santa Clara, California 95054

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (408) 764-4000

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

The number of shares outstanding of registrant’s common stock, par value $.01 per share, on April 29, 2011 was 25,064,304.

 

 

 



Table of Contents

 

COHERENT, INC.

 

INDEX

 

 

 

 

 

Page

Part I.

 

Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations Three and six months ended April 2, 2011 and April 3, 2010

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets April 2, 2011 and October 2, 2010

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows Six months ended April 2, 2011 and April 3, 2010

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

43

 

 

 

 

 

Part II.

 

Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

44

 

 

 

 

 

Item 1A.

 

Risk Factors

 

45

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

 

 

 

 

 

Item 6.

 

Exhibits

 

58

 

 

 

 

 

Signatures

 

59

 

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Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in or incorporated by reference in this quarterly report, other than statements of historical fact, are forward-looking statements. These statements are generally accompanied by words such as “trend,” “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “rely,” “believe,” “estimate,” “predict,” “intend,” “potential,” “continue,” “forecast” or the negative of such terms, or other comparable terminology, including without limitation statements made under “Future Trends,” “Our Strategy,” discussions regarding our bookings and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Actual results of Coherent, Inc. (referred to herein as the Company, we, our or Coherent) may differ significantly from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections captioned “Future Trends,” “Risk Factors,” “Key Performance Indicators,” as well as any other cautionary language in this quarterly report. All forward-looking statements included in the document are based on information available to us on the date hereof. We undertake no obligation to update these forward-looking statements as a result of events or circumstances or to reflect the occurrence of unanticipated events or non-occurrence of anticipated event.

 

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Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 2,
2011

 

April 3,
2010

 

April 2,
2011

 

April 3,
2010

 

Net sales

 

$

200,880

 

$

149,157

 

$

383,991

 

$

271,972

 

Cost of sales

 

112,111

 

83,544

 

212,828

 

155,327

 

Gross profit

 

88,769

 

65,613

 

171,163

 

116,645

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

21,246

 

19,488

 

39,776

 

34,898

 

Selling, general and administrative

 

38,979

 

31,164

 

75,057

 

59,143

 

Amortization of intangible assets

 

2,257

 

1,956

 

4,352

 

3,917

 

Total operating expenses

 

62,482

 

52,608

 

119,185

 

97,958

 

Income from operations

 

26,287

 

13,005

 

51,978

 

18,687

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

161

 

1,290

 

344

 

1,438

 

Interest expense

 

(17

)

(23

)

(32

)

(70

)

Other—net

 

9,181

 

225

 

10,767

 

916

 

Total other income (expense), net

 

9,325

 

1,492

 

11,079

 

2,284

 

Income before income taxes

 

35,612

 

14,497

 

63,057

 

20,971

 

Provision for income taxes

 

11,889

 

6,017

 

20,221

 

8,312

 

Net income

 

$

23,723

 

$

8,480

 

$

42,836

 

$

12,659

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.94

 

$

0.34

 

$

1.72

 

$

0.51

 

Diluted

 

$

0.92

 

$

0.34

 

$

1.68

 

$

0.51

 

 

 

 

 

 

 

 

 

 

 

Shares used in computation:

 

 

 

 

 

 

 

 

 

Basic

 

25,246

 

24,704

 

24,967

 

24,587

 

Diluted

 

25,832

 

24,996

 

25,550

 

24,837

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except par data)

 

 

 

April 2,
2011

 

October 2,
2010

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

200,117

 

$

245,380

 

Restricted cash

 

625

 

625

 

Short-term investments

 

70,506

 

17,391

 

Accounts receivable—net of allowances of $1,672 and $1,655, respectively

 

134,121

 

110,211

 

Inventories

 

139,219

 

113,858

 

Prepaid expenses and other assets

 

54,039

 

35,002

 

Deferred tax assets

 

20,755

 

20,050

 

Total current assets

 

619,382

 

542,517

 

Property and equipment, net

 

98,069

 

90,339

 

Goodwill

 

78,567

 

70,796

 

Intangible assets, net

 

21,820

 

19,931

 

Other assets

 

69,984

 

79,521

 

Total assets

 

$

887,822

 

$

803,104

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term obligations

 

$

15

 

$

18

 

Accounts payable

 

47,119

 

39,737

 

Income taxes payable

 

14,380

 

4,267

 

Other current liabilities

 

110,986

 

87,898

 

Total current liabilities

 

172,500

 

131,920

 

Long-term obligations

 

26

 

33

 

Other long-term liabilities

 

78,564

 

79,688

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $.01 per share:

 

 

 

 

 

Authorized—500,000 shares

 

 

 

 

 

Outstanding—25,062 shares and 24,554 shares, respectively

 

250

 

245

 

Additional paid-in capital

 

187,930

 

186,078

 

Accumulated other comprehensive income

 

62,660

 

62,084

 

Retained earnings

 

385,892

 

343,056

 

Total stockholders’ equity

 

636,732

 

591,463

 

Total liabilities and stockholders’ equity

 

$

887,822

 

$

803,104

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

 

 

Six Months Ended

 

 

 

April 2, 
2011

 

April 3, 
2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

42,836

 

$

12,659

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

9,717

 

11,675

 

Amortization of intangible assets

 

4,352

 

3,917

 

Deferred income taxes

 

8,179

 

11,377

 

Tax benefit from employee stock options

 

248

 

 

Loss on disposal of property and equipment

 

567

 

333

 

Stock-based compensation

 

6,084

 

3,892

 

Excess tax benefit from stock-based compensation arrangements

 

(3,247

)

(482

)

Non-cash translation adjustment related to Finland dissolution

 

(6,511

)

 

Other non-cash expense

 

 

1,123

 

Changes in assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

Accounts receivable

 

(20,894

)

(9,699

)

Inventories

 

(21,874

)

2,321

 

Prepaid expenses and other assets

 

(14,515

)

(13,294

)

Other assets

 

(3,453

)

(176

)

Accounts payable

 

5,072

 

5,083

 

Income taxes payable/receivable

 

6,016

 

(1,482

)

Other current liabilities

 

20,858

 

19,853

 

Other long-term liabilities

 

2,409

 

(921

)

Net cash provided by operating activities

 

35,844

 

46,179

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(16,242

)

(5,708

)

Proceeds from dispositions of property and equipment

 

33

 

244

 

Purchases of available-for-sale securities

 

(101,378

)

(82,913

)

Proceeds from sales and maturities of available-for-sale securities

 

48,309

 

53,286

 

Acquisition of businesses, net of cash acquired

 

(14,589

)

(15,000

)

Net cash used in investing activities

 

(83,867

)

(50,091

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Short-term borrowings

 

864

 

 

Repayments of short-term borrowing

 

(864

)

 

Net change in capital lease obligations

 

(10

)

(8

)

Issuance of common stock under employee stock option and purchase plans

 

25,969

 

13,610

 

Repurchase of common stock

 

(27,397

)

 

Net settlement of restricted common stock

 

(3,189

)

(1,180

)

Excess tax benefits from stock-based compensation arrangements

 

3,247

 

482

 

Net cash provided by (used in) financing activities

 

(1,380

)

12,904

 

Effect of exchange rate changes on cash and cash equivalents

 

4,140

 

(16,776

)

Net decrease in cash and cash equivalents

 

(45,263

)

(7,784

)

Cash and cash equivalents, beginning of period

 

245,380

 

199,950

 

Cash and cash equivalents, end of period

 

$

200,117

 

$

192,166

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

13

 

$

54

 

Income taxes

 

$

11,431

 

$

5,538

 

Cash received during the period for:

 

 

 

 

 

Income taxes

 

$

5,387

 

$

5,006

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

Unpaid property and equipment

 

$

2,828

 

$

960

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

COHERENT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.     BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the Coherent, Inc. (referred to herein as the “Company,” “we,” “our,” “us” or “Coherent”) consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended October 2, 2010. In the opinion of management, all adjustments necessary for a fair presentation of financial condition and results of operation as of and for the periods presented have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year or any other interim periods presented therein. Our fiscal year ends on the Saturday closest to September 30 and our first fiscal quarters include 13 weeks of operations in each fiscal year presented. Fiscal years 2011 and 2010 each include 52 weeks.

 

2.     RECENT ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncement and Update to Significant Accounting Policies

 

In October 2009, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard for multiple deliverable revenue arrangements. The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. The FASB also issued a new accounting standard for certain revenue arrangements that include software elements. This new standard excludes software that is contained on a tangible product from the scope of software revenue guidance if the software is essential to the tangible product’s functionality. We prospectively adopted both these standards in the first quarter of fiscal 2011. The impact of adopting these standards was not material to net sales or our condensed consolidated financial statements for the three and six months ended April 2, 2011. The new accounting standards for revenue recognition if applied in the same manner to the year ended October 2, 2010 would not have had a material impact on net sales or to our consolidated financial statements for that fiscal year.

 

Under these new standards, when a sales arrangement contains multiple elements, such as products and/or services, we allocate revenue to each element based on a selling price hierarchy. Using the selling price hierarchy, we determine the selling price of each deliverable using vendor specific objective evidence (“VSOE”), if it exists, and otherwise third-party evidence (“TPE”). If neither VSOE nor TPE of selling price exists, we use estimated selling price (“ESP”). We generally expect that we will not be able to establish TPE due to the nature of the markets in which we compete, and, as such, we typically will determine selling price using VSOE or if not available, ESP.

 

Our basis for establishing VSOE of a deliverable’s selling price consists of standalone sales transactions when the same or similar product or service is sold separately. However, when services are never sold separately, such as product installation services, VSOE is based on the product’s estimated installation hours based on historical experience multiplied by the standard service billing rate. In determining VSOE, we require that a substantial majority of the selling price for a product or service fall within a reasonably narrow price range, as defined by us. We also consider the geographies in which the products or services are sold, major product and service groups, and other environmental variables in determining VSOE. Absent the existence of VSOE and TPE, our determination of a deliverable’s ESP involves evaluating several factors based on the specific facts and circumstances of these arrangements, which include pricing strategy and policies driven by geographies, market conditions, competitive landscape, correlation between proportionate selling price and list price established by management having the relevant authority, and other environmental variables in which the deliverable is sold.

 

For multiple element arrangements which include extended maintenance contracts, we allocate and defer the amount of consideration equal to the separately stated price and recognize revenue on a straight-line basis over the contract period.

 

Adoption of New Accounting Pronouncements

 

In June 2009, the FASB issued amendments to the accounting rules for variable interest entities (VIEs) and for transfers of financial assets. The new guidance eliminates the quantitative approach previously required for determining the primary

 

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beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. In addition, qualifying special purpose entities (“QSPE”) are no longer exempt from consolidation under the amended guidance. The amendments also limit the circumstances in which a financial asset, or a portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented, and/or when the transferor has continuing involvement with the transferred financial asset. We adopted these amendments in our first quarter of fiscal year 2011 and it did not have a material impact on our consolidated financial position, results of operations and cash flows.

 

In July 2010, the FASB issued an accounting standard update defining a milestone and determining what criteria must be met to apply the milestone method of revenue recognition for research or development transactions. The update provides guidance on the criteria which must be met to determine if the milestone method of revenue recognition is appropriate, whether a milestone is substantive and the disclosures that must be made if the method is elected. We adopted this standard on a prospective basis in our first quarter of fiscal year 2011 and it did not have a material impact on our consolidated financial position, results of operations and cash flows.

 

Recently Issued Accounting Pronouncements

 

In December 2010, the FASB amended its existing guidance for goodwill and other intangible assets. This authoritative guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists. The qualitative factors are consistent with the existing guidance which requires goodwill of a reporting unit to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This authoritative guidance becomes effective for us in fiscal 2012. The implementation of this authoritative guidance is not expected to have a material impact on our consolidated financial position, results of operations and cash flows.

 

3.     BUSINESS COMBINATIONS

 

Hypertronics Pte Ltd

 

On January 5, 2011, we acquired all of the assets and certain liabilities of Hypertronics Pte Ltd for approximately $15.0 million in cash. Hypertronics designs and manufactures laser-and vision-based tools for flat panel, storage, semiconductor and biomedical applications at facilities in Singapore and Malaysia. Hypertronics has been included in our Specialty Lasers and Systems segment.

 

Our preliminary allocation of the purchase price is as follows (in thousands):

 

Tangible assets

 

$

4,617

 

Goodwill

 

6,288

 

Intangible assets:

 

 

 

Existing technology

 

3,120

 

In-process R&D

 

570

 

Customer lists

 

1,880

 

Trade name

 

410

 

Non-compete agreements

 

60

 

Liabilities assumed

 

(1,965

)

Total

 

$

14,980

 

 

The goodwill recognized from this acquisition resulted primarily from anticipated revenue growth and synergies of integrating Hypertronics scan vision technology and system capabilities with our laser technology and global sales, marketing, distribution and service network.  The goodwill was included in our Specialty Lasers and Systems segment.

 

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None of the goodwill from this purchase is deductible for tax purposes.

 

The identifiable intangible assets are being amortized over their respective useful lives of two to six years.

 

In-process research and development (“IPR&D”) consists of seven interrelated projects that will be incorporated into one product and have not yet reached technological feasibility. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. The value assigned to IPR&D was determined by considering the value of the products under development to the overall development plan, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. During the development period, these assets will not be amortized as charges to earnings; instead these assets will be subject to periodic impairment testing. Upon successful completion of the development process for the acquired IPR&D projects, the assets would then be considered finite-lived intangible assets and amortization of the assets will commence. None of the projects had been completed as of April 2, 2011.

 

We expensed $0.6 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in the six months ended April 2, 2011.

 

Results of operations for the business have been included in our consolidated financial statements subsequent to the date of acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisition was not material to our prior period consolidated financial results.

 

Beam Dynamics, Inc.

 

On April 29, 2010, we acquired Beam Dynamics, Inc. for $5.9 million in cash as allocated below and $0.3 million in deferred compensation related to an employment contract, which is being recognized in expense as earned. Beam Dynamics manufactures flexible laser cutting tools for the materials processing market. Beam Dynamics has been included in our Commercial Lasers and Components segment.

 

Our allocation of the purchase price is as follows (in thousands):

 

Tangible assets

 

$

1,132

 

Goodwill

 

3,841

 

Intangible assets:

 

 

 

Existing technology

 

2,130

 

In-process R&D

 

650

 

Customer lists

 

360

 

Trade name

 

140

 

Order backlog

 

30

 

Non-compete agreements

 

10

 

Liabilities assumed

 

(2,371

)

Total

 

$

5,922

 

 

The goodwill recognized from this acquisition resulted primarily from access to anticipated growth in the laser tool market and was included in our Commercial Lasers and Components segment.  None of the goodwill from this purchase is deductible for tax purposes.

 

The identifiable intangible assets are being amortized over their respective useful lives of one to six years.

 

In-process research and development (“IPR&D”) consists of three development projects that have not yet reached technological feasibility. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. The value assigned to IPR&D was determined by considering the value of the products under development to the overall development plan, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their

 

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present value. During the development period, these assets will not be amortized as charges to earnings; instead these assets will be subject to periodic impairment testing. Upon successful completion of the development process for all of the acquired IPR&D projects, the assets would then be considered finite-lived intangible assets and amortization of the assets will commence. None of the projects had been completed as of April 2, 2011.

 

We expensed $0.2 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in fiscal 2010.

 

Results of operations for the business have been included in our consolidated financial statements subsequent to the date of acquisition.

 

As of April 2, 2011, we had $0.6 million remaining in an escrow account that will be applied towards remaining closing costs for the acquisition and payments to the shareholders. The amount is included in current restricted cash on our consolidated balance sheet.

 

StockerYale, Inc.

 

On October 13, 2009, we acquired all the assets and certain liabilities of the StockerYale, Inc. (“StockerYale”) laser module product line in Montreal, Canada and its specialty fiber product line in Salem, New Hampshire for $15.0 million in cash. StockerYale designs, develops and manufactures low power laser modules, light emitting diode (LED) systems and specialty optical fiber products.  These assets and liabilities have been included in our Commercial Lasers and Components segment.

 

Our allocation of the purchase price is as follows (in thousands):

 

Tangible assets

 

$

9,770

 

Goodwill

 

2,580

 

Intangible assets:

 

 

 

Existing technology

 

610

 

Production know-how

 

910

 

Customer lists

 

3,170

 

Non-compete agreements

 

60

 

Order backlog

 

600

 

Liabilities assumed

 

(2,700

)

Total

 

$

15,000

 

 

The goodwill recognized from this acquisition resulted primarily from anticipated increases in market share and synergies of combining these entities and was included in our Commercial Lasers and Components segment. None of the goodwill from this purchase is deductible for tax purposes.

 

The identifiable intangible assets are being amortized over their respective useful lives of one to seven years.

 

We expensed $0.2 million of acquisition-related costs incurred as selling, general and administrative expenses in our consolidated statements of operations for our fiscal year 2010.

 

Results of operations for the acquired product lines have been included in our consolidated financial statements subsequent to the date of acquisition.

 

4.     FAIR VALUES

 

Cash Equivalents and Marketable Securities

 

We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving

 

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identical assets. Level 2 valuations are obtained from quoted market prices in active markets involving similar assets. Level 3 valuations would be based on unobservable inputs to a valuation model and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances. As of April 2, 2011 and October 2, 2010, we did not have any assets or liabilities valued based on Level 3 valuations.

 

Financial assets and liabilities measured at fair value as of April 2, 2011 are summarized below (in thousands):

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets

 

Significant
Other
Observable
Inputs

 

Total Fair
Value

 

 

 

(Level 1)

 

(Level 2)

 

 

 

 

 

 

 

 

 

 

 

Money market fund deposits (1)

 

$

32,000

 

$

 

$

32,000

 

Certificates of deposit (2)

 

 

84,137

 

84,137

 

U.S. and international government obligations (3)

 

 

61,465

 

61,465

 

State and municipal obligations (4)

 

 

12,001

 

12,001

 

Corporate notes and obligations (5)

 

 

46,752

 

46,752

 

Foreign currency contracts (6)

 

 

367

 

367

 

Mutual funds — Deferred comp and supplemental plan (7)

 

5,740

 

 

5,740

 

 


(1)   Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet.

(2)   Includes $82,836 recorded in cash and cash equivalents and $1,301 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(3)   Includes $49,472 recorded in cash and cash equivalents and $11,993 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(4)   Included in short-term investments on the Condensed Consolidated Balance Sheet.

(5)   Includes $1,541 recorded in cash and cash equivalents and $45,211 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(6)   Includes $545 recorded in prepaid expenses and other assets and $178 recorded in other current liabilities on the Condensed Consolidated Balance Sheet

(7)   Includes $2,713 recorded in prepaid expenses and other assets and $3,027 recorded in other assets on the Condensed Consolidated Balance Sheet.

 

Financial assets and liabilities measured at fair value as of October 2, 2010 are summarized below (in thousands):

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets

 

Significant
Other
Observable
Inputs

 

Total Fair
Value

 

 

 

(Level 1)

 

(Level 2)

 

 

 

 

 

 

 

 

 

 

 

Money market fund deposits(1)

 

$

39,677

 

$

 

$

39,677

 

Certificates of deposit(1)

 

 

90,986

 

90,986

 

U.S. and international government obligations(2)

 

 

92,298

 

92,298

 

Corporate notes and obligations(3)

 

 

15,445

 

15,445

 

Commercial paper(4)

 

 

7,000

 

7,000

 

Foreign currency contracts(5)

 

 

1,401

 

1,401

 

Mutual funds—Deferred comp and supplemental plan(6)

 

6,711

 

 

6,711

 

 


(1)   Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet.

(2)   Includes $90,299 recorded in cash and cash equivalents and $1,999 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

 

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(3)   Includes $1,303 recorded in cash and cash equivalents and $14,142 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(4)   Includes $5,750 recorded in cash and cash equivalents and $1,250 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(5)   Includes $1,636 recorded in prepaid expenses and other assets and $235 recorded in other current liabilities on the Condensed Consolidated Balance Sheet.

(6)   Includes $2,340 recorded in prepaid expenses and other assets and $4,371 recorded in other assets on the Condensed Consolidated Balance Sheet.

 

5.     DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

All derivatives, whether designated in hedging relationships or not, are recorded on the condensed consolidated balance sheet at fair value. We enter into foreign exchange forward contracts to minimize the risks of foreign currency fluctuation of specific assets and liabilities on the balance sheet; these are not designated as hedging instruments.

 

We maintain operations in various countries outside of the United States and have foreign subsidiaries that manufacture and sell our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the Euro and the Japanese Yen. As a result, our earnings and cash flows are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of two months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for speculative or trading purposes. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material financial losses.

 

For derivative instruments that are not designated as hedging instruments, gains and losses are recognized in other income (expense).

 

The outstanding notional contract and fair value amounts of hedge contracts, with maximum maturity of 2 months, are as follows (in thousands):

 

 

 

U.S. Notional Contract Value

 

U.S. Notional Fair Value

 

 

 

April 2, 2011

 

October 2, 2010

 

April 2, 2011

 

October 2, 2010

 

Euro currency hedge contracts

 

 

 

 

 

 

 

 

 

Purchase

 

$

27,946

 

$

25,686

 

$

28,336

 

$

27,320

 

Sell

 

 

 

 

 

Net

 

$

27,946

 

$

25,686

 

$

28,336

 

$

27,320

 

Other foreign currency hedge contracts

 

 

 

 

 

 

 

 

 

Purchase

 

$

6,537

 

$

4,843

 

$

6,393

 

$

4,845

 

Sell

 

(8,037

)

(9,444

)

(7,915

)

(9,679

)

Net

 

$

(1,500

)

$

(4,601

)

$

(1,522

)

$

(4,834

)

 

The fair value of our derivative instruments are included in prepaid expenses and other assets and in other current liabilities in our Condensed Consolidated Balance Sheets; such amounts were not material as of April 2, 2011 and October 2, 2010.

 

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Table of Contents

 

The location and amount of non-designated derivative instruments’ gain (loss) in the Condensed Consolidated Statements of Operations for the three and six months ended April 2, 2011 and April 3, 2010 is as follows (in thousands):

 

 

 

Amount of Gain or (Loss) Recognized in

 

 

 

Income on Derivatives

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 2, 2011

 

April 2, 2011

 

Derivatives not designated as hedging instruments

 

 

 

 

 

Foreign exchange contracts

 

$

2,188

 

$

1,084

 

 

 

 

Amount of Gain or (Loss) Recognized in

 

 

 

Income on Derivatives

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 3, 2010

 

April 3, 2010

 

Derivatives not designated as hedging instruments

 

 

 

 

 

Foreign exchange contracts

 

$

(980

)

$

(1,011

)

 

6.     SHORT-TERM INVESTMENTS

 

We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Investments classified as available-for-sale are reported at fair value with unrealized gains and losses, net of related income taxes, recorded as a separate component of other comprehensive income (“OCI”) in stockholders’ equity until realized. Interest and amortization of premiums and discounts for debt securities are included in interest income. Gains and losses on securities sold are determined based on the specific identification method and are included in other income (expense).

 

Cash, cash equivalents and short-term investments consist of the following (in thousands):

 

 

 

April 2, 2011

 

 

 

Cost Basis

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

 

Cash and cash equivalents

 

$

200,705

 

$

38

 

$

(1

)

$

200,742

 

Less: restricted cash

 

(625

)

 

 

 

 

(625

)

 

 

$

200,080

 

 

 

 

 

$

200,117

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

1,300

 

$

1

 

$

 

$

1,301

 

State and municipal obligations

 

12,000

 

1

 

 

12,001

 

U.S. Treasury and agency obligations

 

11,989

 

4

 

 

11,993

 

Corporate notes and obligations

 

45,111

 

100

 

 

45,211

 

Total short-term investments

 

$

70,400

 

$

106

 

$

 

$

70,506

 

 

 

 

October 2, 2010

 

 

 

Cost Basis

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

 

Cash and cash equivalents

 

$

246,004

 

$

1

 

$

 

$

246,005

 

Less: restricted cash

 

(625

)

 

 

 

 

(625

)

 

 

$

245,379

 

 

 

 

 

$

245,380

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

1,250

 

$

 

$

 

$

1,250

 

U.S. Treasury and agency obligations

 

1,999

 

 

 

1,999

 

Corporate notes and obligations

 

14,062

 

82

 

(2

)

14,142

 

Total short-term investments

 

$

17,311

 

$

82

 

$

(2

)

$

17,391

 

 

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Table of Contents

 

The amortized cost and estimated fair value of available-for-sale investments in debt securities as of April 2, 2011 and October 2, 2010 classified as short-term investments on our condensed consolidated balance sheet were as follows (in thousands):

 

 

 

April 2, 2011

 

October 2, 2010

 

 

 

Amortized Cost

 

Estimated Fair Value

 

Amortized Cost

 

Estimated Fair Value

 

Due in less than 1 year

 

$

57,100

 

$

57,204

 

$

17,307

 

$

17,387

 

Due in 1 to 5 years

 

1,000

 

1,000

 

 

 

Due in 5 to 10 years

 

1,000

 

1,000

 

 

 

Due beyond 10 years

 

10,000

 

10,001

 

4

 

4

 

Total investments in available-for-sale debt securities

 

$

69,100

 

$

69,205

 

$

17,311

 

$

17,391

 

 

During the three and six months ended April 2, 2011, we received proceeds totaling $19.1 million and $37.5 million, respectively, from the sale of available-for-sale securities and realized gross gains of less than $0.1 million and $0.1 million, respectively. During the three and six months ended April 3, 2010, we received proceeds totaling $12.6 million and $21.3 million, respectively,  from the sale of available-for-sale securities and realized gross gains of less than $0.1 million and $0.1 million, respectively.

 

At April 2, 2011, $0.6 million of cash was restricted for remaining closing costs for the Beam Dynamics acquisition and payments to former shareholders.

 

At April 2, 2011, gross unrealized losses on our investments with unrealized losses that are not deemed to be other-than-temporarily impaired were $1,000 on corporate notes and obligations of $1.5 million.

 

7.     GOODWILL AND INTANGIBLE ASSETS

 

Goodwill is tested for impairment on an annual basis and between annual tests if events or circumstances indicate that an impairment loss may have occurred, and written down when impaired. We perform our annual impairment tests during the fourth quarter of each fiscal year using the opening balance sheet as of the first day of the fourth quarter, with any resulting impairment recorded in the fourth quarter of the fiscal year.

 

We evaluate long-lived assets and amortizable intangible assets whenever events or changes in business circumstances or our planned use of assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. Reviews are performed to determine whether the carrying values of assets are impaired based on comparison to the undiscounted expected future cash flows identifiable to such long-lived and amortizable intangible assets. If the comparison indicates that impairment exists, the impaired asset is written down to its fair value.

 

During the six months ended April 2, 2011, we noted no indications of impairment or triggering events to cause us to review goodwill for potential impairment. We will conduct our annual goodwill testing during the fourth fiscal quarter.

 

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Table of Contents

 

The changes in the carrying amount of goodwill by segment for the period from October 2, 2010 to April 2, 2011 are as follows (in thousands):

 

 

 

Commercial
Lasers and
Components

 

Specialty
Lasers and
Systems

 

Total

 

Balance as of October 2, 2010

 

$

6,364

 

$

64,432

 

$

70,796

 

Additions

 

 

6,288

 

6,288

 

Translation adjustments and other

 

(1

)

1,484

 

1,483

 

Balance as of April 2, 2011

 

$

6,363

 

$

72,204

 

$

78,567

 

 

Components of our amortizable intangible assets are as follows (in thousands):

 

 

 

April 2, 2011

 

October 2, 2010

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Existing technology

 

$

59,915

 

$

(46,962

)

$

12,953

 

$

56,194

 

$

(43,666

)

$

12,528

 

Patents

 

9,040

 

(8,939

)

101

 

9,852

 

(9,326

)

526

 

Order backlog

 

5,505

 

(5,345

)

160

 

5,361

 

(5,054

)

307

 

Customer lists

 

10,813

 

(5,338

)

5,475

 

8,808

 

(4,635

)

4,173

 

Trade name

 

4,292

 

(2,934

)

1,358

 

3,766

 

(2,666

)

1,100

 

Non-compete agreement

 

1,699

 

(1,621

)

78

 

1,616

 

(1,583

)

33

 

Production know-how

 

910

 

(451

)

459

 

910

 

(296

)

614

 

In-process research & development

 

1,236

 

 

1,236

 

650

 

 

650

 

Total

 

$

93,410

 

$

(71,590

)

$

21,820

 

$

87,157

 

$

(67,226

)

$

19,931

 

 

Amortization expense for intangible assets for the six months ended April 2, 2011 and April 3, 2010 was $4.4 million and $3.9 million, respectively. At April 2, 2011, estimated amortization expense for the remainder of fiscal 2011, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):

 

 

 

Estimated
Amortization
Expense

 

2011 (remainder)

 

$

3,895

 

2012

 

6,697

 

2013

 

4,502

 

2014

 

3,426

 

2015

 

1,955

 

2016

 

1,252

 

Thereafter

 

93

 

Total

 

$

21,820

 

 

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Table of Contents

 

8.     BALANCE SHEET DETAILS

 

Inventories consist of the following (in thousands):

 

 

 

April 2,
2011

 

October 2,
2010

 

Purchased parts and assemblies

 

$

46,406

 

$

38,449

 

Work-in-process

 

49,263

 

40,010

 

Finished goods

 

43,550

 

35,399

 

Total inventories

 

$

139,219

 

$

113,858

 

 

Prepaid expenses and other assets consist of the following (in thousands):

 

 

 

April 2,
2011

 

October 2,
2010

 

Prepaid and refundable income taxes

 

$

12,103

 

$

8,407

 

Prepaid expenses and other

 

41,936

 

26,595

 

Total prepaid expenses and other assets

 

$

54,039

 

$

35,002

 

 

Other assets consist of the following (in thousands):

 

 

 

April 2,
2011

 

October 2,
2010

 

Assets related to deferred compensation arrangements

 

$

23,754

 

$

21,418

 

Deferred tax assets

 

40,586

 

53,219

 

Other assets

 

5,644

 

4,884

 

Total other assets

 

$

69,984

 

$

79,521

 

 

Other current liabilities consist of the following (in thousands):

 

 

 

April 2,
2011

 

October 2,
2010

 

Accrued payroll and benefits

 

$

38,576

 

$

35,716

 

Deferred income

 

15,168

 

13,471

 

Reserve for warranty

 

15,335

 

13,499

 

Accrued expenses and other

 

13,651

 

9,947

 

Other taxes payable

 

21,450

 

10,095

 

Accrued restructuring charges

 

2,063

 

2,232

 

Customer deposits

 

4,743

 

2,938

 

Total other current liabilities

 

$

110,986

 

$

87,898

 

 

During the second quarter of fiscal 2009, we announced our plans to close our facilities in Tampere, Finland and St. Louis, Missouri. The closure of our St. Louis site was completed in the fourth quarter of fiscal 2009.  The closure of our Finland site was scheduled for completion by the end of fiscal 2010, but we decided to delay the closure due to increased demand for products manufactured in Finland. In the second quarter of fiscal 2011, we ceased manufacturing operations in our Finland facility and recognized a $6.1 million gain, primarily in other income (expense), due to a non-recurring translation adjustment related to the dissolution of our Finland operations. We exited the facility in the third quarter of fiscal 2011. These closure plans have resulted in charges primarily for employee termination and other exit related costs associated with a plan approved by management.

 

Restructuring charges for the first six months of fiscal 2011 and 2010 are recorded in cost of sales, research and development and selling, general and administrative expenses in our condensed consolidated statements of operations.

 

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Table of Contents

 

The following table presents our current liability as accrued on our balance sheet for restructuring charges.  The table sets forth an analysis of the components of the restructuring charges and payments and other deductions made against the accrual for the first six months of fiscal 2011 and 2010 (in thousands):

 

 

 

Severance
Related

 

Facilities-
related
Charges

 

Other
Restructuring
Costs

 

Total

 

Balance at October 3, 2009

 

$

488

 

$

357

 

$

807

 

$

1,652

 

Provisions

 

964

 

17

 

1,492

 

2,473

 

Payments and other

 

(191

)

(268

)

(980

)

(1,439

)

Balance at April 3, 2010

 

$

1,261

 

$

106

 

$

1,319

 

$

2,686

 

 

 

 

 

 

 

 

 

 

 

Balance at October 2, 2010

 

$

912

 

$

17

 

$

1,303

 

$

2,232

 

Provisions

 

218

 

 

680

 

898

 

Payments and other

 

(562

)

(17

)

(488

)

(1,067

)

Balance at April 2, 2011

 

$

568

 

$

 

$

1,495

 

$

2,063

 

 

The current year severance related costs are primarily comprised of severance pay, outplacement services, medical and other related benefits for employees being terminated due to the transition of activities out of Tampere, Finland. The remaining severance related restructuring accrual balance of approximately $0.6 million at April 2, 2011 is expected to result in cash expenditures through the third quarter of fiscal 2011.

 

We provide warranties on certain of our product sales and allowances for estimated warranty costs are recorded during the period of sale. The determination of such reserves requires us to make estimates of product return rates and expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line. The weighted average period covered is approximately 15 months. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in future periods.

 

Components of the reserve for warranty costs during the first six months of fiscal 2011 and 2010 were as follows (in thousands):

 

 

 

Six Months Ended

 

 

 

April 2,
2011

 

April 3,
2010

 

Beginning balance

 

$

13,499

 

$

10,211

 

Additions related to current period sales

 

12,742

 

6,765

 

Warranty costs incurred in the current period

 

(10,825

)

(6,547

)

Accruals resulting from acquisition

 

178

 

160

 

Adjustments to accruals related to prior period sales

 

(259

)

(273

)

Ending balance

 

$

15,335

 

$

10,316

 

 

Other long-term liabilities consist of the following (in thousands):

 

 

 

April 2,
2011

 

October 2,
2010

 

Long-term taxes payable

 

$

42,500

 

$

42,902

 

Deferred compensation

 

23,229

 

21,927

 

Deferred tax liabilities

 

3,416

 

6,231

 

Deferred income

 

2,403

 

1,786

 

Asset retirement obligations liability

 

1,501

 

1,409

 

Other long-term liabilities

 

5,515

 

5,433

 

Total other long-term liabilities

 

$

78,564

 

$

79,688

 

 

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Table of Contents

 

9.     SHORT-TERM BORROWINGS

 

We have several lines of credit which allow us to borrow in the applicable local currency. We have a total of $16.2 million of foreign lines of credit as of April 2, 2011.  At April 2, 2011, we had used $2.7 million of these available foreign lines of credit. These credit facilities were used in Europe during the second fiscal quarter of 2011 as guarantees.  In addition, our domestic line of credit consists of a $40.0 million unsecured revolving credit account with Union Bank of California. The agreement will expire on March 31, 2012 and is subject to covenants related to financial ratios and tangible net worth with which we are currently in compliance.  No amounts have been drawn upon our domestic line of credit as of April 2, 2011.

 

10.  STOCK-BASED COMPENSATION

 

Fair Value of Stock Compensation

 

We recognize compensation expense for all share based payment awards based on the fair value of such awards. The expense is recognized on a straight-line basis over the respective requisite service period of the awards.

 

Determining Fair Value

 

The fair values of our stock options granted to employees for the three and six months ended April 3, 2010 and shares purchased under the Employee Stock Purchase Plan (“ESPP”) for three and six months ended April 2, 2011 and April 3, 2010, respectively, were estimated using the following weighted-average assumptions:

 

 

 

Employee Stock Option Plans (1)

 

Employee Stock Purchase Plan

 

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

 

 

April 2,
2011

 

April 3,
2010

 

April 2,
2011

 

April 3,
2010

 

April 2,
2011

 

April 3,
2010

 

April 2,
2011

 

April 3,
2010

 

Expected life in years

 

 

5.8

 

 

4.6

 

0.5

 

0.5

 

0.5

 

0.5

 

Expected volatility

 

 

33.0

%

 

33.0

%

30.2

%

29.9

%

30.4

%

35.9

%

Risk-free interest rate

 

%

3.0

%

%

2.0

%

0.2

%

0.2

%

0.2

%

0.2

%

Expected dividends

 

 

 

 

 

 

 

 

 

Weighted average fair value per share

 

$

 

$

11.80

 

$

 

$

8.25

 

$

10.06

 

$

5.88

 

$

9.92

 

$

5.91

 

 


(1)    There were no options granted during the three and six months ended April 2, 2011.

 

During the first quarter of fiscal 2011, we granted market-based performance restricted stock units to officers and certain employees.  There were two grants of market-based performance restricted stock units during the second quarter of fiscal 2011. The performance stock unit agreements provide for the award of performance stock units with each unit representing the right to receive one share of Coherent, Inc. common stock to be issued after the applicable award period. The final number of units awarded for this grant will be determined as of vesting dates in November 2011, November 2012 and November 2013, based upon our total shareholder return over the performance period compared to the Russell 2000 Index and could range from a minimum of no units to a maximum of twice the initial award. The weighted average fair value for these performance units was $49.37 and was determined using a Monte Carlo simulation model incorporating the following weighted average assumptions:

 

Risk-free interest rate

 

0.65

%

Volatility

 

38.8

%

 

We recognize the estimated cost of these awards, as determined under the simulation model, over the related service period, with no adjustment in future periods based upon the actual shareholder return over the performance period.

 

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Stock Compensation Expense

 

The following table shows total stock-based compensation expense and related tax benefits included in the Condensed Consolidated Statements of Operations for the three and six months ended April 2, 2011 and April 3, 2010 (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 2, 2011

 

April 3, 2010

 

April 2, 2011

 

April 3, 2010

 

Cost of sales

 

$

344

 

$

256

 

$

588

 

$

475

 

Research and development

 

363

 

280

 

700

 

553

 

Selling, general and administrative

 

2,454

 

1,514

 

4,796

 

3,184

 

Income tax benefit

 

(849

)

(177

)

(1,524

)

(820

)

 

 

$

2,312

 

$

1,873

 

$

4,560

 

$

3,392

 

 

During the three and six months ended April 2, 2011, $0.4 million and $0.7 million was capitalized into inventory for all stock plans, $0.3 million and $0.6 million was amortized to cost of sales and $0.4 million remained in inventory at April 2, 2011. During the three and six months ended April 3, 2010, $0.2 million and $0.4 million was capitalized into inventory for all stock plans, $0.3 million and $0.5 million was amortized to cost of sales and $0.3 million remained in inventory at April 3, 2010.  Management has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

 

At April 2, 2011, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock plans but not yet recognized was approximately $17.4 million, net of estimated forfeitures of $1.5 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.4 years and will be adjusted for subsequent changes in estimated forfeitures.

 

At April 2, 2011, total compensation cost related to options to purchase common shares under the ESPP but not yet vested was approximately $0.1 million, which will be recognized over the offering period.

 

The cash flows resulting from excess tax benefits (tax benefits related to the excess of tax deduction resulting from an employee’s exercises of stock options over the stock-based compensation cost recognized for those options) are classified as financing cash flows. During the first six months of fiscal 2011 and fiscal 2010, we recorded $3.2 million and $0.5 million, respectively, of excess tax benefits as cash flows from financing activities.

 

Stock Options & Awards Activity

 

The following is a summary of option activity for our Stock Plans (in thousands, except per share amounts and weighted average remaining contractual term in years):

 

 

 

Number of
Shares

 

Weighted
Average
Exercise Price
Per Share

 

Weighted
Average
Remaining
Contractual
Term in Years

 

Aggregate
Intrinsic Value

 

Outstanding at October 2, 2010

 

1,893

 

$

28.96

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(782

)

30.28

 

 

 

 

 

Forfeitures

 

(3

)

25.33

 

 

 

 

 

Expirations

 

(1

)

35.03

 

 

 

 

 

Outstanding at April 2, 2011

 

1,107

 

$

28.04

 

4.3

 

$

32,678

 

Vested and expected to vest at April 2, 2011

 

1,098

 

$

28.05

 

4.3

 

$

32,396

 

Exercisable at April 2, 2011

 

651

 

$

30.00

 

3.6

 

$

17,955

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock at the end of the reporting period.  There were approximately 1.1 million outstanding

 

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options that were in-the-money as of April 2, 2011.  The aggregate intrinsic value of options exercised under the Company’s stock plans for the three and six months ended April 2, 2011 were $6.8 million and $13.4 million respectively, determined as of the date of option exercise. The aggregate intrinsic value of options exercised under the Company’s stock plans for the three and six months ended April 3, 2010 were $2.0 million and $2.1 million respectively, determined as of the date of option exercise.

 

The following table summarizes the activity of our time based and market- performance based restricted stock units for the first six months of fiscal 2011 (in thousands, except per share amounts):

 

 

 

Number of
Shares

 

Weighted
Average
Grant Date Fair
Value per Share

 

Nonvested stock at October 2, 2010

 

481

 

$

26.22

 

Granted

 

286

 

46.97

 

Vested

 

(178

)

26.03

 

Forfeited

 

(76

)

28.91

 

Nonvested stock at April 2, 2011

 

513

 

$

37.46

 

 

11.  COMMITMENTS AND CONTINGENCIES

 

We are subject to legal claims and litigation arising in the ordinary course of business, such as product liability, employment or intellectual property claims. The outcome of any such matters is currently not determinable. Although we do not expect that such legal claims and litigation will ultimately have a material adverse effect on our consolidated financial position or results of operations, an adverse result in one or more matters could negatively affect our results in the period in which they occur.

 

Set forth below is the description of our historical derivative litigation which was settled in the first quarter of fiscal 2010.

 

Derivative Lawsuit—Between February 15, 2007 and March 2, 2007, three purported shareholder derivative lawsuits were filed in the United States District Court for the Northern District of California against certain of the Company’s current and former officers and directors. The Company was named as a nominal defendant. The complaints generally alleged that the defendants breached their fiduciary duties and violated the securities laws in connection with the granting of stock options, the accounting treatment for such grants, the issuance of allegedly misleading public statements and stock sales by certain of the individual defendants. On May 30, 2007, these lawsuits were consolidated under the caption In re Coherent, Inc. Shareholder Derivative Litigation, Lead Case No. C-07-0955-JF (N.D. Cal.). On June 25, 2007, plaintiffs filed an amended consolidated complaint. The Company’s Board of Directors appointed a Special Litigation Committee (“SLC”) comprised of independent director Sandeep Vij to investigate and evaluate the claims asserted in the derivative litigation and to determine what action(s) should be taken with respect to the derivative litigation. On September 8, 2009, Coherent, Inc., by and through the SLC, plaintiffs, and certain of Coherent’s former and current officers and directors filed with the court a Stipulation of Settlement reflecting the terms of a settlement that would resolve all claims alleged in the consolidated complaint.

 

On September 14, 2009, the United States District Court for the Northern District of California issued an order granting preliminary approval of the settlement of the three purported shareholder derivative lawsuits. On November 20, 2009, the court held a hearing for final approval of the settlement, and on November 24, 2009, the court entered an Order and Final Judgment, which approved the settlement and dismissed the action with prejudice. Following receipt of insurance proceeds and the payment of the plaintiff attorneys’ fees and expenses, we received a net cash benefit of $2.2 million from the settlement on December 11, 2009, which has been recorded in selling general and administrative expenses in the Condensed Consolidated Statement of Operations for the first quarter of fiscal 2010.

 

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12.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The components of comprehensive income (loss), net of income taxes, are as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 2,
2011

 

April 3,
2010

 

April 2,
2011

 

April 3,
2010

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,723

 

$

8,480

 

$

42,836

 

$

12,659

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Translation adjustment (see Note 14)

 

11,986

 

(17,058

)

560

 

(20,283

)

Net gain on derivative instruments, net of taxes

 

 

3

 

 

4

 

Changes in unrealized gains on available-for-sale securities, net of taxes

 

17

 

(15

)

16

 

(7

)

Other comprehensive income (loss), net of tax

 

12,003

 

(17,070

)

576

 

(20,286

)

Comprehensive income (loss)

 

$

35,726

 

$

(8,590

)

$

43,412

 

$

(7,627

)

 

The following summarizes activity in accumulated other comprehensive loss related to derivatives, net of income taxes, held by us (in thousands):

 

Balance, October 3, 2009

 

$

(85

)

Changes in fair value of derivatives

 

 

Net losses reclassified from OCI

 

5

 

Balance, April 3, 2010

 

$

(80

)

 

There was no activity or balance in accumulated other comprehensive loss related to derivatives, net of income taxes in the first six months of fiscal 2011.

 

Accumulated other comprehensive income (net of tax) at April 2, 2011 is comprised of accumulated translation adjustments of $62.6 million. Accumulated other comprehensive income (net of tax) at October 2, 2010 is comprised of accumulated translation adjustments of $62.1 million.

 

13.  EARNINGS PER SHARE

 

Basic earnings per share is computed based on the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive employee stock awards, including stock options, restricted stock awards and stock purchase plan contracts, using the treasury stock method.

 

The following table presents information necessary to calculate basic and diluted earnings per share (in thousands, except per share data):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 2,
2011

 

April 3,
2010

 

April 2,
2011

 

April 3,
2010

 

Weighted average shares outstanding —basic (1)

 

25,246

 

24,704

 

24,967

 

24,587

 

Dilutive effect of employee stock awards

 

586

 

292

 

583

 

250

 

Weighted average shares outstanding—diluted

 

25,832

 

24,996

 

25,550

 

24,837

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,723

 

$

8,480

 

$

42,836

 

$

12,659

 

 

 

 

 

 

 

 

 

 

 

Net income per basic share

 

$

0.94

 

$

0.34

 

$

1.72

 

$

0.51

 

Net income per diluted share

 

$

0.92

 

$

0.34

 

$

1.68

 

$

0.51

 

 


(1)    Net of restricted stock

 

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A total of 832 and 74,775 potentially dilutive securities have been excluded from the dilutive share calculation for the three and six months ended April 2, 2011, respectively, as their effect was anti-dilutive. A total of 1,796,257 and 1,751,554 potentially dilutive securities have been excluded from the dilutive share calculation for the three and six months ended April 3, 2010, respectively, as their effect was anti-dilutive.

 

14.  OTHER INCOME (EXPENSE)

 

Other income (expense) is as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 2,
2011

 

April 3,
2010

 

April 2,
2011

 

April 3,
2010

 

Interest and dividend income

 

$

161

 

$

1,290

 

$

344

 

$

1,438

 

Interest expense

 

(17

)

(23

)

(32

)

(70

)

Foreign exchange gain (loss)

 

(451

)

81

 

(445

)

(276

)

Gain on deferred compensation investments, net

 

3,117

 

97

 

4,670

 

1,160

 

Translation adjustment related to dissolution of Finland

 

6,511

 

 

6,511

 

 

Other—net

 

4

 

47

 

31

 

32

 

Other income (expense), net

 

$

9,325

 

$

1,492

 

$

11,079

 

$

2,284

 

 

The gain on deferred compensation investments, net for the three and six months ended April 2, 2011 included the death benefits from one of the insurance policies, net of its previously recorded cash surrender value, of approximately $1.5 million.

 

By the end of the three month period ended April 2, 2011, the Company had substantially completed the liquidation of its Finland operations and recognized in other income the accumulated translation gains for this subsidiary previously recorded in accumulated other comprehensive income (loss) on the condensed consolidated balance sheets.

 

15.  STOCK REPURCHASES

 

On January 26, 2011, we announced that the Board of Directors had authorized the repurchase of up to $75.0 million of our common stock.  The timing and size of any purchases will be subject to market conditions. The program is authorized for 12 months from the date of authorization.

 

On February 10, 2011, we announced that the Company would repurchase up to 1,271,100 shares of our common stock through a modified “Dutch Auction” tender offer, following the completion or termination of the tender offer, terminating no later than March 11, 2011. On March 14, 2011, we completed our tender offer, repurchased and retired 454,682 shares of outstanding common stock at a price of $59.00 per share for a total of $27.4 million including expenses. Such repurchases were accounted for as a reduction in additional paid in capital.

 

16.  INCOME TAXES

 

Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries, adjusted for items which are considered discrete to the period. Our estimated effective tax rates for the three and six months ended April 2, 2011 were 33.4% and 32.1%, respectively.  Our effective tax rates for the three and six months ended April 2, 2011 were both lower than the statutory rate of 35% primarily due to the benefit of currency translation adjustments related to closure of Coherent Finland’s operations, the benefit of foreign tax credits, the benefit of federal research and development tax credits, including additional credits reinstated from fiscal 2010 resulting from the enactment of the “Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010,” the benefits from life insurance proceeds and the unrealized gain on life insurance policy investments related to our deferred compensation plans and the benefit from income subject to foreign tax rates that are lower than U.S. tax rates. These amounts are partially offset by a valuation allowance against certain foreign deferred tax assets, limitations on the utilization of certain foreign losses, deemed dividend inclusions under the Subpart F tax rules, state income taxes and limitations on the deductibility of compensation under IRC Section 162(m).

 

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Determining the consolidated provision for income taxes, income tax liabilities and deferred tax assets and liabilities involves judgment. We calculate and provide for income taxes in each of the tax jurisdictions in which we operate, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.

 

As of April 2, 2011, the total amount of gross unrecognized tax benefits was $50.2 million of which $29.3 million, if recognized, would affect our effective tax rate. Our total gross unrecognized tax benefits were classified as other long-term liabilities in the condensed consolidated balance sheets.

 

Our policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of April 2, 2011, the total amount of gross interest and penalties accrued was $7.4 million, which is classified as other long-term liabilities in the condensed consolidated balance sheets.

 

We are subject to taxation and file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. For U.S. federal income tax purposes, all years prior to 1999 are closed. The IRS has audited the research and development credits generated in the years 1999 through 2001 and carried forward to future tax years. We received a notice of proposed adjustment (“NOPA”) from the IRS in October 2008 to decrease the amount of research and development credits generated in years 2000 and 2001. We have signed a Closing Agreement with the IRS which allows additional research and development credits for the years 2000 and 2001, respectively.  This agreement must be approved by the Joint Committee on Taxation.  We believe that we have provided adequate tax reserves for any adjustments to these research and development credits and we do not anticipate any material impacts to our consolidated financial statements.  The IRS has also indicated that it may consider an audit of our 2005 and 2006 tax returns. In our major state jurisdiction and our major foreign jurisdiction, the years subsequent to 2000 and 2004, respectively, remain open and could be subject to examination by the taxing authorities.

 

Management believes that it has adequately provided for any adjustments that may result from tax examinations. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign and state tax matters may be concluded in the next 12 months. Specific positions that may be resolved include issues involving research and development credits, transfer pricing and various other matters. The Company estimates that the unrecognized tax benefits at April 2, 2011 could be reduced by approximately $8.0 million to $13.0 million in the next 12 months.

 

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Act”), was enacted on December 17, 2010. Under the Act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2009 through December 31, 2011. The effects of the change in the tax law are recognized in our first quarter of fiscal 2011, which is the quarter that the law was enacted. In addition to the federal legislation, the state of California approved its 2010-2011 budget on October 8, 2010 that includes modifications to tax law provisions that were previously set to become effective with tax years beginning on or after January 1, 2011. We have assessed the effects of the change in the California tax law and there are no material impacts in fiscal year 2011.

 

Deferred Income Taxes

 

As of April 2, 2011, our condensed consolidated balance sheet included net deferred tax assets, before valuation allowance, of approximately $64.2 million, which consists of tax credit carryovers, accruals and reserves, competent authority offset to transfer pricing tax reserves, employee stock-based compensation expenses, and certain other liabilities. Management periodically evaluates the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is solely dependent on our ability to generate sufficient future taxable income in the applicable jurisdictions during periods prior to the expiration of tax statutes to fully utilize these assets.  After evaluating all available evidence, we have determined that it is “more likely than not” that a portion of the deferred tax assets would not be realized and we have a total valuation allowance of $8.2 million as of April 2, 2011.  This amount includes an increase in the valuation allowance of approximately $1.5 million for the three and six months periods then ended as a result of changes in the expected realization of these assets for one of our foreign subsidiaries. We intend to maintain the valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.

 

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Table of Contents

 

17.  SEGMENT INFORMATION

 

We are organized into two reportable operating segments: Commercial Lasers and Components (“CLC”) and Specialty Lasers and Systems (“SLS”). This segmentation reflects the go-to-market strategies for various products and markets.  While both segments work to deliver cost-effective solutions, CLC focuses on higher volume products that are offered in set configurations. The product architectures are designed for easy exchange at the point of use such that product service and repairs are generally based upon advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include OEM components and instrumentation and materials processing. SLS develops and manufactures configurable, advanced-performance products largely serving the microelectronics and scientific research markets. The size and complexity of many of the SLS products generally require service to be performed at the customer site by factory-trained field service engineers.

 

We have identified CLC and SLS as operating segments for which discrete financial information is available. Both units have engineering, marketing, product business management and product line management. A small portion of our outside revenue is attributable to projects and recently developed products for which a segment has not yet been determined. The associated direct and indirect costs are presented in the category of Corporate and other, along with other corporate costs as described below.

 

Our Chief Executive Officer has been identified as the chief operating decision maker (CODM) as he assesses the performance of the segments and decides how to allocate resources to the segments. Income (loss) from operations is the measure of profit and loss that our CODM uses to assess performance and make decisions. Assets by segment are not a measure used to assess the performance of the company by the CODM; therefore we do not report assets by segment internally or in our disclosures. Income (loss) from operations represents the net sales less the cost of sales and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain operating expenses which we manage separately at the corporate level. These unallocated costs include stock-based compensation and corporate functions (certain research and development, management, finance, legal and human resources) and are included in the results below under Corporate and other in the reconciliation of operating results. Management does not consider unallocated Corporate and other costs in its measurement of segment performance.

 

The following table provides net sales and income (loss) from operations for our operating segments (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 2,
2011

 

April 3,
2010

 

April 2,
2011

 

April 3,
2010

 

Net sales:

 

 

 

 

 

 

 

 

 

Commercial Lasers and Components

 

$

72,236

 

$

51,514

 

$

133,594

 

$

88,595

 

Specialty Laser Systems

 

128,644

 

97,618

 

250,397

 

183,327

 

Corporate and other

 

 

25

 

 

50

 

Total net sales

 

$

200,880

 

$

149,157

 

$

383,991

 

$

271,972

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

Commercial Lasers and Components

 

$

8,993

 

$

2,161

 

$

17,318

 

$

(3,299

)

Specialty Laser Systems

 

29,397

 

18,881

 

58,258

 

36,667

 

Corporate and other

 

(12,103

)

(8,037

)

(23,598

)

(14,681

)

Total income (loss) from operations

 

$

26,287

 

$

13,005

 

$

51,978

 

$

18,687

 

 

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Table of Contents

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

COMPANY OVERVIEW

 

BUSINESS BACKGROUND

 

We are one of the world’s leading suppliers of photonics-based solutions in a broad range of commercial and scientific research applications. We design, manufacture, service and market lasers and related accessories for a diverse group of customers. Since inception in 1966, we have grown through internal expansion and through strategic acquisitions of complementary businesses, technologies, intellectual property, manufacturing processes and product offerings.

 

We are organized into two operating segments: Commercial Lasers and Components (“CLC”) and Specialty Lasers and Systems (“SLS”). This segmentation reflects the go-to-market strategies for various products and markets. While both segments deliver cost-effective photonics solutions, CLC focuses on higher volume products that are offered in set configurations. The product architectures are designed for easy exchange at the point of use, such that substantially all product service and repairs are based upon advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include materials processing and original equipment manufacturer (“OEM”) components and instrumentation. SLS develops and manufactures configurable, advanced performance products largely serving the microelectronics, OEM components and instrumentation and scientific research and government programs markets. The size and complexity of many of the SLS products require service to be performed at the customer site by factory trained field service engineers.

 

Income (loss) from operations is the measure of profit and loss that our chief operating decision maker (“CODM”) uses to assess performance and make decisions. Income (loss) from operations represents the sales less the cost of sales and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain operating expenses, which we manage separately at the corporate level. These unallocated costs include stock-based compensation and corporate functions (certain advanced research and development, management, finance, legal and human resources) and are included in Corporate and other. Management does not consider unallocated Corporate and other costs in its measurement of segment performance.

 

MARKET APPLICATIONS

 

Our products address a broad range of applications that we group into the following markets: Microelectronics, Scientific Research and Government Programs, OEM Components and Instrumentation and Materials Processing.

 

OUR STRATEGY

 

We strive to develop innovative and proprietary products and solutions that meet the needs of our customers and that are based on our core expertise in lasers and optical technologies. In pursuit of our strategy, we intend to:

 

·      Leverage our technology portfolio and application engineering to lead the proliferation of photonics into broader markets—We will continue to identify opportunities in which our technology portfolio and application engineering can be used to offer innovative solutions and gain access to new markets. We plan to utilize our expertise to expand into new markets, such as laser-based processing development tools for solar manufacturing and high power materials processing solutions.

 

·      Optimize our leadership position in existing markets—There are a number of markets where we have historically been at the forefront of technological development and product deployment and from which we have derived a substantial portion of our revenues. We plan to optimize our financial returns from these markets.

 

·      Maintain and develop additional strong collaborative customer and industry relationships—We believe that the Coherent brand name and reputation for product quality, technical performance and customer satisfaction will help us to further develop our loyal customer base. We plan to maintain our current customer relationships and develop new ones with customers who are industry leaders and work together with these customers to design and develop innovative product systems and solutions as they develop new technologies.

 

·      Develop and acquire new technologies and market share—We will continue to enhance our market position through our existing technologies and develop new technologies through our internal research and development efforts, as well as through the acquisition of additional complementary technologies, intellectual property, manufacturing processes and product offerings.

 

·      Streamline our manufacturing structure and improve our cost structure—We will focus on optimizing the mix of products that we manufacture internally and externally. We will utilize vertical integration where our internal manufacturing process is considered proprietary and seek to leverage external sources when the capabilities and cost structure are well developed and on a path towards commoditization.

 

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·                  Focus on long-term improvement of adjusted EBITDA in dollars and as a percentage of net sales—We define adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, stock compensation expenses, major restructuring costs and certain other non-operating income and expense items. Key initiatives to reach our goals for adjusted EBITDA improvements include our program of consolidating manufacturing locations, rationalizing our supply chain and selective outsourcing of certain manufacturing operations.

 

APPLICATION OF CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We have identified the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition, accounting for long-lived assets (including goodwill and intangible assets), inventory valuation, warranty reserves, stock-based compensation and accounting for income taxes.

 

Revenue Recognition

 

We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, the product has been delivered or the service has been rendered, the price is fixed or determinable and collection is probable. Revenue from product sales is recorded when all of the foregoing conditions are met and risk of loss and title passes to the customer. Our products typically include a warranty and the estimated cost of product warranty claims (based on historical experience) is recorded at the time the sale is recognized. Sales to customers are generally not subject to any price protection or return rights.

 

The vast majority of our sales are made to OEMs, distributors, resellers and end-users in the non-scientific market. Sales made to these customers do not require installation of the products by us and are not subject to other post-delivery obligations, except in occasional instances where we have agreed to perform installation or provide training. In those instances, we defer revenue related to installation services or training until these services have been rendered. We allocate revenue from multiple element arrangements to the various elements based upon fair values or a selling price hierarchy, for arrangements entered into subsequent to October 2, 2010, as discussed below.

 

Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Failure to obtain anticipated orders due to delays or cancellations of orders could have a material adverse effect on our revenue. In addition, pressures from customers to reduce our prices or to modify our existing sales terms may have a material adverse effect on our revenue in future periods.

 

Our sales to distributors, resellers and end-user customers typically do not have customer acceptance provisions and only certain of our sales to OEM customers have customer acceptance provisions. Customer acceptance is generally limited to performance under our published product specifications. For the few product sales that have customer acceptance provisions because of higher than published specifications, (1) the products are tested and accepted by the customer at our site or by the customer’s acceptance of the results of our testing program prior to shipment to the customer, or (2) the revenue is deferred until customer acceptance occurs.

 

Sales to end-users in the scientific market typically require installation and, thus, involve post-delivery obligations; however our post-delivery installation obligations are not essential to the functionality of our products. We defer revenue related to installation services until completion of these services.

 

For most products, training is not provided; therefore, no post-delivery training obligation exists. However, when training is provided to our customers, it is typically priced separately and recognized as revenue after these services have been provided.

 

In October 2009, the FASB issued a new accounting standard for multiple deliverable revenue arrangements. The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. The FASB also issued a new accounting standard for certain revenue arrangements that include software elements. This new standard excludes software that is contained on a tangible product from the scope of software revenue guidance if the software is essential to the tangible product’s functionality. We prospectively adopted both these standards in the first quarter of fiscal 2011. The impact of

 

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adopting these standards was not material to net sales or our condensed consolidated financial statements for the three months ended January 1, 2011. The new accounting standards for revenue recognition if applied in the same manner to the year ended October 2, 2010 would not have had a material impact on net sales or to our consolidated financial statements for that fiscal year.

 

Under these new standards, when a sales arrangement contains multiple elements, such as products and/or services, we allocate revenue to each element based on a selling price hierarchy. Using the selling price hierarchy, we determine the selling price of each deliverable using vendor specific objective evidence (“VSOE”), if it exists, and otherwise third