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UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 

FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2014
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-21377

 
ROFIN-SINAR TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
38-3306461
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
40984 Concept Drive, Plymouth, MI
 
48170
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (734) 455-5400
 
(Former name, former address and former fiscal year,
if changed since last report)
 
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 [ ]

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

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.
Large accelerated filer [X]    Accelerated filer  [  ]
Non-accelerated filer   [   ]   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 [ ] / No [X]

28,092,616 shares of the registrant's common stock, par value $0.01 per share, were outstanding as of February 6, 2015.




ROFIN-SINAR TECHNOLOGIES INC.
INDEX
PART I
FINANCIAL INFORMATION
Page No.
 
 
 
 
Item 1 - Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2 -
 
 
 
 
 
 
 
 
Item 3 -
 
 
 
 
 
Item 4 -
 
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
 
 
Item 1 -
 
 
 
 
 
Item 1A -
 
 
 
 
 
Item 2 -
 
 
 
 
 
Item 3 -
 
 
 
 
 
Item 4 -
 
 
 
 
 
Item 5 -
 
 
 
 
 
Item 6 -
 
 
 
 
 


2



PART I.  ITEM 1.  FINANCIAL INFORMATION

Rofin-Sinar Technologies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(dollars in thousands, except per share amounts)
 
 
December 31, 2014
 
September 30, 2014
ASSETS
 
 

 
 

Current assets:
 
 
 
 
Cash and cash equivalents (Note 4)
 
$
140,374

 
$
128,537

Short-term investments (Note 4)
 
8,036

 
13,121

Accounts receivable, net of allowance for doubtful accounts
               $2,926 and $3,338, respectively
 
94,599

 
108,026

Inventories, net (Note 5)
 
187,071

 
190,321

Other current assets and prepaid expenses
 
35,678

 
33,870

Total current assets
 
465,758

 
473,875

Property and equipment, net
 
90,998

 
79,703

Goodwill (Note 6)
 
98,034

 
100,355

Other intangibles, net (Note 6)
 
14,861

 
15,712

Other assets
 
19,570

 
18,940

Total assets
 
$
689,221

 
$
688,585

LIABILITIES AND EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Lines of credit and short-term borrowings
 
$
5,604

 
$
3,255

Accounts payable, trade
 
18,248

 
22,702

Accounts payable to related party
 
440

 
443

Income tax payable
 
5,702

 
5,872

Accrued liabilities (Note 7)
 
65,477

 
67,581

Total current liabilities
 
95,471

 
99,853

Long-term debt
 
23,003

 
11,511

Pension obligations
 
25,360

 
25,692

Other long-term liabilities
 
12,499

 
12,820

Total liabilities
 
156,333

 
149,876

Commitments and contingencies
 


 


Stockholders’ equity:
 
 

 
 

Preferred stock, 5,000,000 shares authorized, none issued or outstanding
 

 

Common stock, $0.01 par value, 50,000,000 shares authorized, 32,959,800 shares issued at December 31, 2014, and 32,884,000 shares issued at September 30, 2014
 
330

 
329

Additional paid-in capital
 
235,303

 
232,832

Retained earnings
 
494,142

 
487,976

Accumulated other comprehensive income (Note 10)
 
(28,156
)
 
(14,072
)
Treasury stock, at cost, 4,871,884 shares at December 31, 2014,
              and 4,871,884 shares at September 30, 2014
 
(169,262
)
 
(169,262
)
Total Rofin-Sinar Technologies Inc. stockholders’ equity
 
532,357

 
537,803

Noncontrolling interest in subsidiaries
 
531

 
906

Total equity
 
532,888

 
538,709

Total liabilities and equity
 
$
689,221

 
$
688,585


See accompanying notes to condensed consolidated financial statements


3



Rofin-Sinar Technologies Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended December 31, 2014 and 2013
(dollars in thousands, except per share amounts)
 
 
 
Three months ended December 31,
 
 
2014

 
2013

Net sales
 
$
122,387

 
$
121,189

Cost of goods sold
 
79,760

 
79,881

Gross profit
 
42,627

 
41,308

 
 
 
 
 
Selling, general, and administrative expenses
 
24,100

 
25,393

Research and development expenses
 
10,616

 
11,540

Amortization expense
 
784

 
691

Income from operations
 
7,127

 
3,684

 
 
 
 
 
Other (income) expense
 
 

 
 
Interest income
 
(90
)
 
(124
)
Interest expense
 
82

 
412

Foreign currency (income) expense
 
(1,304
)
 
161

Other income
 
32

 
(250
)
Income before income tax
 
8,407

 
3,485

Income tax expense
 
2,237

 
1,233

Net income
 
6,170

 
2,252

Less:  Net income (loss) attributable to the noncontrolling interest
 
4

 
42

Net income attributable to RSTI
 
$
6,166

 
$
2,210

 
 
 
 
 
Net income attributable to RSTI per share:
 
 

 
 
Per share of common stock basic
 
$
0.22

 
$
0.08

Per share of common stock diluted
 
$
0.22

 
$
0.08

 
 
 
 
 
Weighted-average shares used in computing earnings per share (Note 12)
 
 

 
 
Basic
 
28,048,021

 
28,147,538

Diluted
 
28,210,986

 
28,334,910

 
See accompanying notes to condensed consolidated financial statements


4



Rofin-Sinar Technologies Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended December 31, 2014 and 2013
(dollars in thousands)

 
 
Three Months Ended December 31,
 
 
2014

 
2013

Net income
 
$
6,170

 
$
2,252

Other comprehensive income (loss):
 
 
 
 
Fair value of interest rate swap agreements, net of tax expense of $1 and $0
 
4

 
(2
)
Foreign currency translation adjustments
 
(14,123
)
 
5,791

Defined benefit pension plans, net of tax of $20 and $17
 
35

 
29

          Other comprehensive income (loss), net of tax
 
$
(14,084
)
 
$
5,818

               Total comprehensive income
 
$
(7,914
)
 
$
8,070

Less:  Total comprehensive income (loss) attributable to the
              noncontrolling interest
 
4

 
42

Total comprehensive income attributable to RSTI
 
$
(7,918
)
 
$
8,028

 
 
 
 
 


See accompanying notes to condensed consolidated financial statements






























5



Rofin-Sinar Technologies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Three Months Ended December 31, 2014 and 2013
(dollars in thousands)
 
 
Common
Stock

 
Additional
Paid-in
Capital

 
Retained
Earnings

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Treasury
Stock

 
Rofin-Sinar
Technologies
Stockholders’
Equity

 
Non-Controlling
Interest in
Subsidiaries

 
Total
Equity

BALANCES at September 30, 2013
$
327

 
$
228,124

 
$
462,808

 
$
11,533

 
$
(163,026
)
 
$
539,766

 
$
3,652

 
$
543,418

Total comprehensive income
 

 
 

 
2,210

 
5,818

 

 
8,028

 
42

 
8,070

Purchase of non-controlling interest

 

 

 

 

 

 
(370
)
 
(370
)
Common stock issued in connection with Stock Incentive Plans
1

 
1,949

 

 

 

 
1,950

 

 
1,950

BALANCES at December 31, 2013
$
328

 
$
230,073

 
$
465,018

 
$
17,351

 
$
(163,026
)
 
$
549,744

 
$
3,324

 
$
553,068

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCES at September 30, 2014
$
329

 
$
232,832

 
$
487,976

 
$
(14,072
)
 
$
(169,262
)
 
$
537,803

 
$
906

 
$
538,709

Total comprehensive income (loss)
 
 
 
 
6,166

 
(14,084
)
 

 
(7,918
)
 
4

 
(7,914
)
Purchase of non-controlling interest

 

 

 

 

 

 
(379
)
 
(379
)
Common stock issued in connection with Stock Incentive Plans
1

 
2,471

 

 

 

 
2,472

 

 
2,472

BALANCES at December 31, 2014
$
330

 
$
235,303

 
$
494,142

 
$
(28,156
)
 
$
(169,262
)
 
$
532,357

 
$
531

 
$
532,888

 

See accompanying notes to consolidated financial statements


6



Rofin-Sinar Technologies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, 2014 and 2013
(dollars in thousands)
 
 
 
Three months ended December 31,
 
 
2014

 
2013

CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
6,170

 
$
2,252

Adjustments to reconcile net income to net
 
 

 
 

cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
4,385

 
4,109

Stock-based compensation expenses
 
1,092

 
1,078

Other adjustments
 
(314
)
 
(125
)
Change in operating assets and liabilities:
 
 

 
 

Accounts receivable, trade
 
10,716

 
15,594

Inventories
 
(2,469
)
 
1,055

Accounts payable
 
(3,824
)
 
(4,348
)
Changes in other operating assets and liabilities
 
(1,897
)
 
(14,496
)
Net cash provided by operating activities
 
13,859

 
5,119

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from the sale of property and equipment
 
30

 
148

Additions to property and equipment
 
(18,302
)
 
(2,027
)
Purchases of short-term investments
 
(8,049
)
 
(14,808
)
Sales of short-term and long-term investments
 
12,712

 
5,155

Net cash used in investing activities
 
(13,609
)
 
(11,532
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Borrowing from banks
 
20,826

 
6,848

Repayments to banks
 
(6,077
)
 
(6,128
)
Purchase of non-controlling interests
 
(413
)
 
(234
)
Issuance of common stock
 
1,105

 
580

Net cash provided by financing activities
 
15,441

 
1,066

Effect of foreign currency translation on cash
 
(3,854
)
 
1,147

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
11,837

 
(4,200
)
Cash and cash equivalents at beginning of period
 
128,537

 
133,733

Cash and cash equivalents at end of period
 
$
140,374

 
$
129,533

 
 
 
 
 
Cash paid for interest
 
$
39

 
$
58

Cash paid for taxes
 
$
3,426

 
$
7,299

 
See accompanying notes to condensed consolidated financial statements


7



Rofin-Sinar Technologies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollars in thousands)

1.
Basis of Presentation

The accompanying unaudited, condensed and consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting, and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, the financial statements for interim reporting do not include all of the information and notes or disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature.  Results for interim periods should not be considered indicative of results for a full year.  The September 30, 2014, condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.  For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2014, as filed with the Securities and Exchange Commission on December 1, 2014.


2.
New Accounting Standards

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.”. This ASU amended guidance related to a parent company’s accounting for the release of the cumulative translation adjustment into net income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance became effective for the Company in fiscal year 2015, and is to be applied prospectively to derecognition events occurring after the effective date. The adoption of this amendment did not have an impact on the Company's financial statements.

In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists." ASU 2013-11 provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under this guidance an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. These amendments were effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (fiscal year 2015 for the Company). The adoption did not have an impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 provides guidance on revenue from contracts with customers, which implements a five step process of how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company as of October 1, 2017, and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact that the adoption will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

In August 2014, the FASB issued No. ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or are available to be

8



issued). The standard will be effective for the first interim period within annual reporting periods beginnign after December 15, 2016. Early application is permitted. The Company does not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

 
3.
Acquisitions

On November 18, 2013, the Company purchased the remaining 10% of the share capital of m2k-laser GmbH through its wholly-owned subsidiary RSL under an option agreement between the Company and the minority shareholders of m2k-laser GmbH. As a result, the Company currently holds 100% of the share capital of m2k-laser GmbH.

Effective December 20, 2013, the Company acquired the remaining 12% of the common stock of ROFIN-BAASEL Japan Corp. through its wholly-owned subsidiary RSL. The Company currently holds 100% of the share capital of ROFIN-BAASEL Japan Corp.

On April 10, 2014, the Company completed the acquisition of certain assets of FiLaser USA LLC ("FiLaser") and subsidiaries. The transaction contained all intellectual property including know-how, patents and patent applications of FiLaser. FiLaser developed advanced laser process technology used for precision cutting and drilling of brittle material including glass, sapphire and semiconductor substrates. The Company has held back approximately 28% of the purchase price as security for various claims. In addition, the purchase agreement also provides for potential future earn-out payments from revenues generated from certain of these intangible assets.

Effective June 12, 2014, the Company acquired the remaining 5% of the common stock of DILAS Diodenlaser GmbH through its wholly-owned subsidiary ROFIN-SINAR Technologies Europe S.L. The Company currently holds 100% of the share capital of DILAS Diodenlaser GmbH.

Effective December 23, 2014, the Company acquired an additional 8.8% of the common stock of Nanjing Eastern Laser Co., Ltd. The Company currently holds 88.8% of the share capital of Nanjing Eastern Laser Co., Ltd.


4.
Fair Value Measurements

The Company’s cash and cash equivalents, short-term investments, accounts receivable, and accrued liabilities are carried at amounts, which reasonably approximate their fair values due to their short-term nature. The Company’s lines of credit, short-term borrowings and long-term debt bear interest at variable and fixed interest rates that approximate market. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied.
 
Assets and liabilities recorded at fair value in our balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values.  Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities are as follows:
 
Level 1 - Unadjusted observable quoted prices for identical instruments in active markets.
Level 2 - Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3 - Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.








9



Financial assets and liabilities measured at fair value on a recurring basis are classified on the valuation technique level in the table below:
December 31, 2014
 
Total

 
Level 1

 
Level 2

 
Level 3

     Cash and cash equivalents
 
$
140,374

 
$
140,374

 
$

 
$

     Short-term investments
 
8,036

 
8,036

 

 

     Derivatives
 
19

 

 
19

 

     Other long-term assets
 
550

 

 
550

 

          Total assets and liabilities at fair value
 
$
148,979

 
$
148,410

 
$
569

 
$


September 30, 2014
 
Total

 
Level 1

 
Level 2

 
Level 3

     Cash and cash equivalents
 
$
128,537

 
$
128,537

 
$

 
$

     Short-term investments
 
13,121

 
13,121

 

 

     Derivatives
 
(92
)
 

 
(92
)
 

     Other long-term assets
 
550

 

 
550

 

          Total assets and liabilities at fair value
 
$
142,116

 
$
141,658

 
$
458

 
$

 

5.
Inventories

Inventories are stated at the lower of cost or market, after provisions for excess and obsolete inventory salable at prices below cost.

Costs are determined using the first in, first out and weighted-average cost methods and are summarized as follows:
 
 
December 31, 2014

 
September 30, 2014

Finished goods
 
$
30,062

 
$
31,625

Work in progress
 
39,772

 
41,057

Raw materials and supplies
 
69,554

 
68,298

Demo inventory
 
16,988

 
18,268

Service parts
 
30,695

 
31,073

     Total inventories
 
$
187,071

 
$
190,321


Net inventory is net of provisions for excess and obsolete inventory of $29,075 and $29,974 at December 31, 2014, and September 30, 2014, respectively.


6.
Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the three months ended December 31, 2014, are as follows:
 
 
Germany

 
United States

 
Rest of World

 
Total

Balance as of September 30, 2014
 
$
40,938

 
$
13,091

 
$
46,326

 
$
100,355

Currency translation differences
 
(1,407
)
 
(106
)
 
(808
)
 
(2,321
)
Balance as of December 31, 2014
 
$
39,531

 
$
12,985

 
$
45,518

 
$
98,034











10



The carrying values of other intangible assets are as follows:
 
 
December 31, 2014
 
September 30, 2014
 
 
Gross Carrying
Amount

 
Accumulated
Amortization

 
Gross Carrying
Amount

 
Accumulated
Amortization

Amortized intangible assets:
 
 
 
 
 
 
 
 
Patents
 
$
17,720

 
$
8,848

 
$
17,947

 
$
8,721

Customer base
 
18,008

 
16,704

 
18,404

 
16,883

Other
 
21,794

 
17,109

 
22,101

 
17,136

Total
 
$
57,522

 
$
42,661

 
$
58,452

 
$
42,740


Amortization expense for each of the three-month periods ended December 31, 2014 and 2013, was $784 and $691, respectively. At December 31, 2014, estimated amortization expense of existing intangible assets for the remainder of fiscal year 2014 and the next five fiscal years based on the average exchange rates as of December 31, 2014, is as follows:
2015 (remainder)
2,200

2016
2,000

2017
1,800

2018
1,600

2019
1,300

2020
1,200

 

7.
Accrued Liabilities

Accrued liabilities are comprised of the following:
 
 
December 31, 2014

 
September 30, 2014

Employee compensation
 
$
15,919

 
$
21,822

Warranty reserves
 
10,269

 
10,778

Other taxes payable
 
137

 
665

Customer deposits
 
19,149

 
12,379

Other
 
20,003

 
21,937

     Total accrued liabilities
 
$
65,477

 
$
67,581

 

8.
Income Taxes

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as interest expense and selling, general and administrative expense, respectively. The Company has classified unrecognized tax benefits as non-current because payment is not anticipated within one year of the balance sheet date.

As of December 31, 2014, the Company's gross unrecognized tax benefits totaled $0.7 million which includes $0.2 million of interest and penalties.  The Company estimates that the unrecognized tax benefits will not change significantly within the next year.

The Company files federal and state income tax returns in several domestic and foreign jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. With limited exceptions, the Company is no longer subject to examination by the United States Internal Revenue Service for tax years through 2008. With respect to state and local tax jurisdictions and countries outside the United States, with limited exceptions, the Company is no longer subject to income tax audits for tax years before 2008.



11



9.
Product Warranties

The Company provides for the estimated costs of product warranties when revenue is recognized. The estimate of costs to fulfill warranty obligations is based on historical experience and an expectation of future conditions.
  
The changes in warranty reserve for the three-month periods ended December 31, 2014 and 2013, are as follows:
 
 
2014

 
2013

Balance at September 30,
 
$
10,778

 
$
12,301

Additional accruals for warranties during the period
 
849

 
1,045

Usage during the period
 
(1,047
)
 
(2,175
)
Currency translation
 
(311
)
 
137

Balance at December 31,
 
$
10,269

 
$
11,308



10.
Accumulated Other Comprehensive Income (Loss)

The changes in Accumulated Other Comprehensive Income by component, net of tax, during the three months ended December 31, 2014 and 2013, are as follows:

 
Defined Benefit Plans

 
Foreign Currency Translation Adjustments

 
Fair Value of Interest Swap Agreements

 
Total

Balance at September 30, 2014
 
$
(6,251
)
 
$
(7,759
)
 
$
(62
)
 
$
(14,072
)
Other comprehensive income before reclassifications
 

 
(14,123
)
 
4

 
(14,119
)
Amounts reclassified from accumulated other comprehensive income
 
35

 

 

 
35

Balance at December 31, 2014
 
$
(6,216
)
 
$
(21,882
)
 
$
(58
)
 
$
(28,156
)
 
 
Defined Benefit Plans

 
Foreign Currency Translation Adjustments

 
Fair Value of Interest Swap Agreements

 
Total

Balance at September 30, 2013
 
$
(5,449
)
 
$
17,091

 
$
(109
)
 
$
11,533

Other comprehensive income before reclassifications
 

 
5,791

 
(2
)
 
5,789

Amounts reclassified from accumulated other comprehensive income
 
29

 

 

 
29

Balance at December 31, 2013
 
$
(5,420
)
 
$
22,882

 
$
(111
)
 
$
17,351


The reclassifications out of Accumulated Other Comprehensive Income for the three-month periods ended December 31, 2014 and 2013, are as follows:
 
2014

 
2013

Unamortized loss on defined benefit pension plans
 
 
 
    Amortization
$
55

 
$
46

     Tax effects
(20
)
 
(17
)
Total reclassification for the period
$
35

 
$
29





12



11.
Stock Incentive Plans

The Company maintains an Incentive Stock Plan, whereby incentive and non-qualified stock options, restricted stock and performance shares may be granted to officers and other key employees to purchase a specified number of shares of common stock at a price not less than the fair market value on the date of grant. The term of the Incentive Stock Plan continues through 2017. There were no incentive stock options, restricted stock or performance shares granted in fiscal year 2014 or through the first three months of fiscal year 2015. Non-qualified stock options were granted to officers and other key employees in the first quarter of fiscal year 2015 and 2014. During the three-month periods ended December 31, 2014 and 2013, outside directors each received 3,000 shares of common stock, from the 2007 Incentive Stock Plan, that were fully vested upon grant. Options granted to officers and other key employees generally vest over five years and will expire not later than ten years after the date on which they are granted.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model.  The following assumptions were used in these calculations:
 
 
November 2014 Grants

 
November 2013 Grants

Weighted average grant date fair value
 
$
8.37

 
$
11.72

Expected life
 
5.40 years

 
5.40 years

Volatility
 
37.47
%
 
50.55
%
Risk-free interest rate
 
1.73
%
 
1.48
%
Dividend yield
 
%
 
%
 
The Company uses historical data to estimate the expected life, volatility, and annual forfeiture rates of outstanding options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The balance of outstanding stock options and all options activity at and for the three months ended December 31, 2014, are as follows:
 
 
Number of
Shares

 
Weighted
Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(Years)
 
Aggregate
Intrinsic
Value
(Millions)

Outstanding at September 30, 2014
 
3,357,050

 
$
27

 
1/10 
 
4.86 years
 
 
Granted
 
341,750

 
$
22

 
3/4 
 
 
 
 
Exercised
 
(63,800
)
 
$
17

 
3/8 
 
 
 
 
Forfeited
 
(12,600
)
 
$
24

 
7/8 
 
 
 
 
Outstanding at December 31, 2014
 
3,622,400

 
$
26

 
9/10 
 
5.12 years
 
$
8.00

Exercisable at December 31, 2014
 
2,344,300

 
$
27

 
3/10 
 
3.40 years
 
$
12.27

 
As of December 31, 2014, there were $11.5 million of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted-average period of 3.38 years.

During the three-month periods ended December 31, 2014 and 2013, the following activity occurred under the Incentive Stock Plan:
 
 
Three months ended December 31,
 
 
2014

 
2013

Total intrinsic value of stock options exercised
 
$
633

 
$
313

Cash received from stock option exercises
 
$
1,105

 
$
580






13



12.
Earnings Per Common Share
 
The basic earnings per common share (EPS) calculation is computed by dividing net income attributable to holders of RSTI common stock by the weighted average number of shares outstanding during the period. Diluted earnings per common share reflect the potential dilution from common stock equivalents (stock options).

The calculation of the weighted average number of shares outstanding for each period is as follows:
 
 
Three months ended December 31,
 
 
2014

 
2013

Weighted number of shares for basic earnings per common share
 
28,048,021

 
28,147,538

Potential additional shares due to outstanding dilutive stock options
 
162,965

 
187,372

Weighted number of shares for diluted earnings per common share
 
28,210,986

 
28,334,910

 
The weighted average diluted shares outstanding for the three months ended December 31, 2014 and 2013, excludes the dilutive effect of approximately 2.8 million and 2.9 million stock options, respectively, since the impact of including these options in diluted earnings per share for these periods was antidilutive.

 
13.
Defined Benefit Plans

Components of net periodic cost were as follows for the three-month periods ended December 31, 2014 and 2013:
 
 
Three months ended December 31,
 
 
2014

 
2013

Service cost
 
$
246

 
$
245

Interest cost
 
278

 
334

Expected return on plan assets
 
(175
)
 
(167
)
Amortization of prior net (gain) loss
 
(6
)
 
19

Amortization of prior service cost
 
61

 
28

     Net periodic pension cost
 
$
404

 
$
459

 

14.
Segment and Geographic Information

Assets, property and equipment, sales, and income before income taxes, by geographic region attributable based on the geographic location of the RSTI entities are summarized below:
 
 
December 31, 2014

 
September 30, 2014

ASSETS
 
 
North America
 
$
241,335

 
$
246,370

Germany
 
428,954

 
430,123

Other
 
344,621

 
347,992

Intercompany eliminations
 
(325,689
)
 
(335,900
)
 
 
$
689,221

 
$
688,585



14



 
 
December 31, 2014

 
September 30, 2014

PROPERTY AND EQUIPMENT, NET
 
 

 
 

North America
 
$
15,967

 
$
16,319

Germany
 
52,479

 
41,828

Other
 
22,858

 
21,822

Intercompany eliminations
 
(306
)
 
(266
)
 
 
$
90,998

 
$
79,703

 
 
 
Three months ended December 31,
 
 
2014

 
2013

NET SALES
 
 
 
 
North America
 
$
36,132

 
$
32,755

Germany
 
77,713

 
76,172

Other
 
61,453

 
63,522

Intercompany eliminations
 
(52,911
)
 
(51,260
)
 
 
$
122,387

 
$
121,189

INTERCOMPANY SALES
 
 
 
 
North America
 
$
3,361

 
$
2,257

Germany
 
37,049

 
34,057

Other
 
12,501

 
14,946

Intercompany eliminations
 
(52,911
)
 
(51,260
)
 
 
$

 
$

EXTERNAL SALES
 
 
 
 
North America
 
$
32,771

 
$
30,498

Germany
 
40,664

 
42,115

Other
 
48,952

 
48,576

 
 
$
122,387

 
$
121,189

 
INCOME BEFORE INCOME TAX
 
 
 
 
North America
 
$
143

 
$
18

Germany
 
4,565

 
(1,605
)
Other
 
4,327

 
6,109

Intercompany eliminations
 
(628
)
 
(1,037
)
 
 
$
8,407

 
$
3,485




15.
Enterprise-Wide Information

The Company generates revenues from the sale and servicing of laser products used for macro applications, from the sale and servicing of laser products for marking and micro applications, and from the sale of components products as follows:
 
 
Three months ended December 31,
 
 
2014

 
2013

Macro applications
 
$
47,708

 
$
49,086

Marking and micro applications
 
57,606

 
55,976

Components
 
17,073

 
16,127

 
 
$
122,387

 
$
121,189


15



 

16.
Treasury Stock

As previously reported, on February 5, 2014, the Board of Directors authorized the Company to initiate a share buyback of up to $25.0 million of the Company’s Common Stock over the next twelve months ending February 10, 2015, subject to market conditions. The program permitted share repurchases from time to time in open market transactions or privately negotiated transactions at the Company’s discretion. During the three-months ended December 31, 2014, the Company did not repurchase any shares of common stock.



16



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

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act").  Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may", "believe", "will", "expect", "project", "anticipate", "estimate", "plan", "continue", "position" or other words or terms of similar meaning.  These forward-looking statements are based on the current plans, expectations, and assumptions of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations, including by way of example those risk factors discussed under the sections entitled "Risk Factors" in Item 1A of the Company's Annual Report for the year ended September 30, 2014, as well as future results of operations and financial condition. In making these forward-looking statements, we claim the protection of the safe-harbor for forward-looking statements contained in the Reform Act.  We do not assume any obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements.


Overview

Rofin-Sinar Technologies Inc. (herein also referred to as "RSTI", "Rofin-Sinar", "Rofin", or the "Company" or "we", "us" or "our") is a leader in the design, development, engineering, manufacturing and marketing of laser sources and laser-based system solutions for industrial material processing applications, which include primarily cutting, welding and marking a wide range of materials. The Company's product portfolio ranges from single laser-beam sources to highly complex systems, covering all of the key laser technologies such as CO2 lasers, fiber, solid-state and diode lasers, and the entire power spectrum, from single-digit watts up to multi-kilowatts, as well as a comprehensive spectrum of wavelengths or pulse durations. An extensive range of laser components completes the product portfolio. Lasers are a non-contact technology for material processing, which have several advantages compared to conventional manufacturing tools that are desirable in industrial applications. The Company's lasers all deliver a high-quality beam at guaranteed power outputs and feature compact design, high processing speed, flexibility, low operating and maintenance costs, and easy integration into the customer's production process, thus meeting a broad range of its customers' material processing requirements.

Through its global manufacturing, distribution and service network, the Company provides a comprehensive range of laser sources and laser-based system solutions to the following principal target markets: the machine tool, automotive, semiconductor, electronics, and photovoltaic industries. The Company sells directly to end-users and to original equipment manufacturers (“OEMs”) (principally in the machine tool industry) that integrate Rofin's laser sources with other system components. Many of Rofin's customers are among the largest global participants in their respective industries.  
 
Rofin's sales approach in the laser-related business reflects the many different requirements of its customers throughout a multitude of industries, and is divided into three areas of core competence: Macro, Micro and Marking. The core of the Macro business section is high-powered laser sources, primarily used for cutting and welding as well as surface treatment applications. The Micro section concentrates on laser sources and laser-based system solutions that require less power output for micro-processing of materials. The Marking section specializes in innovative marking solutions on both organic and inorganic materials for many different industries. The activities in the components sector, which comprise diodes and diode laser components, power supplies, fibers and fiber beam deliveries as well as fiber laser components, round out the Company's business activities in the industrial laser market.

During the first quarter of fiscal years 2015 and 2014, we realized approximately 39% and 41% of revenues, respectively, from the sale and servicing of laser products used for macro applications, approximately 47% and 46%, respectively, from the sale and servicing of laser products for marking and micro applications, and approximately 14% and 13%, respectively, from the sale of components.

Our first quarter results demonstrate that our business is performing well. We achieved excellent sales levels in the automotive and solar industries, as well as solid sales in the machine tool, electronics and medical device industries, although sales to the semiconductor industry softened. These results were adversely affected by exchange rate volatility, since nearly 68% of our revenue is not dollar-denominated. Our quarterly earnings per share nearly tripled year-over-year, helped by a reduction in operating expenses, but were negatively impacted by volume-related, under-absorbed fixed costs, timing for revenue recognition on certain orders, and a less favorable product mix, which resulted in net sales and earnings per share below our

17



guidance for the quarter. Applying the average exchange rates underlying our last fiscal year, orders came in as expected on a very solid level.

The Company expects European and North American business conditions to be stable throughout the calendar year, assuming that European monetary policy does not have a significant influence on the economy. We also expect our Asian business to improve over the year, primarily due to the Chinese government’s initiatives in infrastructure, green and semiconductor technologies, as well as stable business in our other Asian markets.

The Company continues to see increased interest from worldwide OEM customers for its third generation of high-power fiber lasers and has started to produce these fiber lasers for first shipments in February. We plan to continue to introduce new products, such as ultrashort pulse lasers, and use our products in new applications such as brittle material cutting, which we believe will help us to achieve our gross margin goal of 40% by the fourth quarter of fiscal year 2015. Our substantial backlog, as well as other business prospects in our pipeline, position us to significantly improve our market position and support future growth in revenue and profitability.

 At December 31, 2014, the Company had 2,275 employees compared to 2,270 employees at December 31, 2013.


Results of Operations

For the periods indicated, the following table sets forth the percentage of net sales represented by the respective line items in the Company's consolidated statements of operations.
 
 
Three months ended December 31,
 
 
2014

 
2013

Net sales
 
100.0
%
 
100.0
%
Cost of goods sold
 
65.2
%
 
65.9
%
Gross profit
 
34.8
%
 
34.1
%
Selling, general and administrative expenses
 
19.7
%
 
21.0
%
Research and development expenses
 
8.7
%
 
9.5
%
Amortization expenses
 
0.6
%
 
0.6
%
Income from operations
 
5.8
%
 
3.0
%
Income before income taxes
 
6.9
%
 
2.9
%
Net income attributable to RSTI
 
5.0
%
 
1.8
%
 
Net Sales - Net sales of $122.4 million represents an increase of $1.2 million, or 1%, for the three-month period ended December 31, 2014, as compared to the corresponding period in fiscal year 2014. The increase for the three months ended December 31, 2014, resulted from net sales increases of $2.5 million, or 10%, in North America, and by $1.9 million, or 5%, in Asia, offset by a decrease of $3.2 million, or 5%, in Europe, compared to the corresponding period in fiscal year 2014. The U.S. dollar strengthened against foreign currencies, primarily against the Euro, which had an unfavorable effect on net sales of $7.1 million for the three-month period ended December 31, 2014.

Net sales of laser products for macro applications decreased by $1.4 million, or 3%, to $47.7 million for the three-month period ended December 31, 2014, as compared to the corresponding period of fiscal year 2014. The decrease was mainly attributable to the lower demand for our lasers for macro applications in the machine tool industry which was partially offset by an increase in the automotive industry.
  
Net sales of lasers for marking and micro applications increased by $1.6 million, or 3%, to $57.6 million for the three-month period ended December 31, 2014, and reflects higher demand from the machine tool, automotive, consumer electronics and solar industries offset by a decrease from the semi-conductor industry.

Revenues for the component business increased by $0.9 million, or 6%, to $17.1 million at December 31, 2014, compared to the corresponding period in fiscal year 2014, mainly attributable to higher demand for laser diodes and optical components.

Gross Profit - Our gross profit of $42.6 million for the three-month period ended December 31, 2014, represents an increase of $1.3 million, or 3%, from the corresponding period of fiscal year 2014. As a percentage of sales, gross profit for the three-

18



month period ended December 31, 2014, increased from 34% to 35%. Gross profit was unfavorably affected by $1.4 million due to the strengthening of the U.S. dollar against foreign currencies, primarily against the Euro, in the three-month period ended December 31, 2014.

Selling, General and Administrative Expenses - Selling, general and administrative ("SG&A") expenses of $24.1 million for the three-month period ended December 31, 2014, represents a decrease of $1.3 million, or 5%, from the corresponding period of fiscal year 2014. The decrease in SG&A expenses for the three-month period is mainly due to the impact of exchange rate fluctuations partially offset by an increase in consulting fees. SG&A, a significant portion of which is incurred in foreign currencies, was favorably affected by $1.4 million due to the strengthening of the U.S. dollar against foreign currencies, primarily the Euro, for the three-month period ended December 31, 2014. As a percentage of net sales, SG&A expenses decreased from 21% to 20% for the three-month period ended December 31, 2014, as compared to the corresponding prior year period.

Research and Development - The Company spent net $10.6 million on research and development ("R&D") during the three-month period ended December 31, 2014, which represents a decrease of $0.9 million, or 8%, for the three-month period ended December 31, 2014, as compared to the corresponding period in fiscal year 2014. Gross R&D expenses for the three-month periods ended December 31, 2014 and 2013, were $10.7 million and $12.0 million, respectively, and were reduced by $0.1 million and $0.5 million, respectively, of government grants during each period. R&D, a significant portion of which is conducted in Europe, and therefore incurred in foreign currencies, was favorably affected by $0.8 million due to the strengthening of the U.S. dollar against foreign currencies, primarily the Euro, for the three-month period ended December 31, 2014.

Amortization Expense - Amortization expense for the three-month period ended December 31, 2014, amounted to $0.8 million. This represents an increase of $0.1 million for the three-month period when compared to the same period of fiscal year 2014. This increase is attributable to the newly acquired intangible assets from FiLaser.

Other (Income) Expense -  Net other income of $1.3 million for the three-month period ended December 31, 2014, represents an increase of $1.5 million compared to net other expenses of $0.2 million for the corresponding period of the prior year. Net interest expense for the three-month period ended December 31, 2014, within this category, includes $0.1 million of interest expense offset by $0.1 million of interest income. The increase in net foreign currency income in the three-month period ended December 31, 2014, is due to higher net exchange gains in the current period compared to the corresponding period in fiscal year 2014.

Income Tax Expense - Income tax expense of $2.2 million for the three-month period ended December 31, 2014, represents an effective tax rate of 27%, compared to 35% for the corresponding period of fiscal year 2014. The decrease in the effective tax rate is mainly due to the generation of taxable income in countries with lower tax rates and the renewal of enacted laws for research and development tax credits in the United States. Income tax expense, a significant portion of which is incurred in foreign currencies, was favorably affected by $0.2 million due to the strengthening of the U.S. dollar against foreign currencies, primarily against the Euro, during the three-month period ended December 31, 2014.

Net Income Attributable to RSTI - As a result of the foregoing factors, the Company realized consolidated net income attributable to RSTI of $6.2 million for the three-month period ended December 31, 2014, which represents an increase of $4.0 million, or 179%, from the corresponding period in fiscal year 2014. Net income attributable to RSTI was favorably affected by $0.9 million due to the strengthening of the U.S. dollar against foreign currencies, primarily against the Euro, in the three-month period ended December 31, 2014. For the three-month period ended December 31, 2014, both the basic and diluted earnings per common share calculation equaled $0.22, based upon a weighted average of 28.0 million and 28.2 million shares of common stock outstanding, as compared to basic and diluted earnings per common share calculation of $0.08, based upon a weighted average of 28.1 million and 28.3 million shares of common stock outstanding for the corresponding period of fiscal year 2014.


Liquidity and Capital Resources

The Company's primary sources of liquidity at December 31, 2014, were cash and cash equivalents of $140.4 million, short-term investments of $8.0 million, short-term credit lines of $64.1 million and long-term credit lines of $24.7 million.  As of December 31, 2014, $3.9 million was outstanding under the short-term lines of credit and $1.8 million was used for bank guarantees under these lines of credit, leaving $58.4 million available for borrowing under our short-term lines of credit. In addition, the Company maintained short-term credit lines specific to bank guarantees for $13.3 million, of which $3.5 million was used. Therefore, $68.2 million was unused and available under our short-term and bank guarantee lines of credit, in aggregate, at December 31, 2014.  At such date, the entire amount of our long-term lines of credit was fully drawn and $1.7

19



million was classified under short-term lines of credit for the current portion of the long-term debt. The Company is subject to financial covenants, which could restrict the Company from drawing money under these lines of credit.  At December 31, 2014, the Company was in compliance with these covenants.

Cash and cash equivalents increased by $11.8 million during the three-month period ended December 31, 2014.  Approximately $13.9 million in cash and cash equivalents were provided by operating activities, mainly as the result of net income generated for the three-month period ended December 31, 2014, a decrease in trade accounts receivable and changes in non-cash transactions (depreciation and stock-based compensation expense), partially offset by an increase of net inventories, accounts payable, and changes in other operating assets and liabilities.

Net cash used in investing activities totaled $13.6 million for the three-month period ended December 31, 2014, and was primarily related to additions to property and equipment offset by net sales of short-term investments.

Net cash provided by financing activities totaled $15.4 million for the three-month period ended December 31, 2014, and was primarily related to borrowings from banks and by the issuance of common stock from option exercises, which were partially offset by purchases of non-controlling interests and repayments to banks.
 
Management believes that the Company's cash flow from operations, along with existing cash and cash equivalents and availability under the credit facilities and lines of credit, will provide adequate resources to meet both our capital requirements and operational needs on both a short-term and long-term basis.

As of December 31, 2014, $125.7 million of the total $148.4 million of our cash, cash equivalents and short-term investments, was held by our non-US subsidiaries, with the balance of $22.7 million held by our US subsidiaries. As of that date, $25.6 million was owed by our non-US subsidiaries and $3.0 million was owed by our US subsidiaries from the total indebtedness amounting to $28.6 million. We expect our existing domestic cash, cash equivalents and short-term investments, together with cash flows from operations to be sufficient to fund our domestic operating activities. In addition our US subsidiaries had $20.0 million in available and unused lines of credit at December 31, 2014. Therefore, we do not intend, nor do we foresee a need, to repatriate foreign earnings that are considered to be indefinitely reinvested, and we do not believe there are any material implications for or restrictions on the liquidity of our domestic subsidiaries as a result of having a majority of our cash, cash equivalents and short-term investments held by our foreign subsidiaries.

The Company has listed all its material contractual obligations in the Annual Report on Form 10-K, for the fiscal year ended September 30, 2014, and has not entered into any further material contractual obligations since that date.


Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements (other than operating leases) or financing arrangements involving variable interest entities.


Currency Exchange Rate Fluctuations

Although we report our consolidated financial statements in U.S. dollars, during the three-month period ended December 31, 2014, approximately 68% of our sales have been denominated in other currencies, primarily the Euro, British pound sterling, Swiss franc, Swedish krona, Singapore dollar, Taiwanese dollar, Korean won, Canadian dollar, Chinese RMB, Japanese yen and Indian rupee.  Net sales, costs and related assets and liabilities of our operations are generally denominated in the functional currencies of the relevant operating units, thereby serving to reduce our exposure to exchange gains and losses.

Exchange differences upon translation from each operating unit's functional currency to U.S. dollars are accumulated as a separate component of equity. The currency translation adjustment component of shareholders’ equity had the effect of decreasing total equity by $21.9 million at December 31, 2014, as compared to $7.8 million at September 30, 2014.

The fluctuation of the Euro and the other relevant functional currencies against the U.S. dollar has had the effect of increasing or decreasing (as applicable) reported net sales, as well as cost of goods sold, gross margin, selling, general and administrative expenses, and research and development expenses, denominated in such foreign currencies when translated into U.S. dollars as compared to prior periods.

20



The Company defines the term “constant currency”, a non-GAAP measure, to mean that financial data for a period are translated into U.S. dollars using the same foreign currency exchange rates that were used to translate financial data for the previously reported period. Changes in net sales and order entry include the effect of fluctuations in foreign currency exchange rates. The Company's management reviews and analyzes business results on a constant currency basis and believes these results represent the Company's underlying business trends without distortion due to currency fluctuations. The Company believes that this “constant currency” financial information is a useful measure for investors because it reflects actual changes in the development of net sales and order entry.
 
The following table illustrates the development of the order entry and sales figures, taking into account exchange rate fluctuations. The non-GAAP presentation shows the first quarter 2015 figures when applying the average exchange rates of the first quarter of fiscal year 2014:
 
 
December 31, 2014
 
December 31, 2013
 
 
GAAP Actual
 
Non-GAAP Constant Currency
 
GAAP Actual
Net Sales
 
$122,387
 
$129,479
 
$121,189
Order Entry
 
$122,691
 
$137,588
 
$140,591

Between the first quarter of fiscal year 2014 and the first quarter of fiscal year 2015, the average exchange rate for the Euro weakened against the U.S. dollar by approximately 9.6%. The impact of this weakening was to decrease net sales by $7.1 million because approximately 68% of fiscal year 2015 sales were denominated in other currencies, primarily the Euro. These exchange rate fluctuations also had the effect of decreasing order entry by $14.9 million.


Critical Accounting Policies

Our significant accounting policies are more fully described in Part 2, Item 8, Note 1 of our consolidated financial statements in our Annual Report on Form 10-K, for the fiscal year ended September 30, 2014.  Certain of the accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent degree of uncertainty.

Allowance for Doubtful Accounts

The Company records allowances for uncollectible customer accounts receivable based on historical experience. Additionally, an allowance is made based on an assessment of specific customers' financial condition and liquidity.
If the financial condition of the Company's customers were to deteriorate, additional allowances may be required. No individual customer represents more than 10% of total accounts receivable. Any increase in allowance will impact operating income during a given period.

Inventory Valuation

Inventories are stated at the lower of cost or market, after provisions for excess and obsolete inventory salable at prices below cost. Provisions for slow moving and obsolete inventories are provided based on current assessments about historical experience and future product demand and production requirements for the next twelve months. We also write-down up to 90% of our total demo inventory costs over thirty six months. These factors are impacted by market conditions, technology changes and changes in strategic direction, and require estimates and management judgment that may include elements that are uncertain. The Company evaluates the adequacy of these provisions quarterly. Although the Company strives to achieve a balance between market demands and risk of inventory excess or obsolescence, it is possible that, should conditions change, additional provisions may be needed.  Any changes in the provisions will impact operating income during a given period.

Warranty Reserves
 
The Company provides reserves for the estimated costs of product warranties when revenue is recognized. The Company relies upon historical experience, expectation of future conditions, and its service data to estimate its warranty reserve. The Company continuously monitors this data to ensure that the reserve is sufficient. Warranty expense has historically been within our expectations. To the extent we experience increased warranty claim activity or increased

21



costs associated with servicing those claims (such costs may include material, labor and travel costs), revisions to the estimated warranty liability would be required.  Increases in reserves will impact operating income during the period.

Pension

The determination of the Company's obligation and expense for pension is dependent on the selection of certain assumptions used by actuaries in calculating those amounts. Assumptions are made about interest rates, expected investment return on plan assets, total turnover rates and rates of future compensation increases. In addition, the Company's actuarial consultants use subjective factors such as withdrawal rates and mortality rates to develop their calculations of these amounts. The Company generally reviews these assumptions at the beginning of each fiscal year. The Company is required to consider current market conditions, including changes in interest rates, in making these assumptions. The actuarial assumptions that the Company may use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of pension benefits expense the Company has recorded or may record.

The discount rate enables the Company to state expected future cash flows at a present value on the measurement date. The Company has little latitude in selecting this rate, and it must represent the market rate of high-quality fixed income investments. A lower discount rate increases the present value of benefit obligations and increases pension expense.

To determine the expected long-term rate of return on plan assets, the Company considers the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets.

Income Taxes

We estimate our income tax provision in each of the jurisdictions in which we operate, a process that includes estimating exposures related to examinations by taxing authorities. We must also make judgments regarding the ability to realize our deferred tax assets. The carrying value of our net deferred tax assets is based on our belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. A valuation allowance has been established for deferred tax assets that we do not believe meet the “more likely than not” criteria. We assess whether an uncertain tax position taken or expected to be taken in a tax return meets the threshold for recognition and measurement in the consolidated financial statements. Our judgments regarding future taxable income as well as tax positions taken or expected to be taken in a tax return may change due to changes in market conditions, changes in tax laws or other factors. If our assumptions and consequently our estimates change in the future, the valuation allowances and/or tax reserves established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.

Share-Based Payment

Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee's requisite vesting period. We make judgments about the fair value of the awards, including the expected term of the award, volatility of the underlying stock and estimated forfeitures, which impact the amount of compensation expense recognized in the financial statements. Such amounts may change as a result of additional grants, forfeitures, modifications in assumptions and other factors. The income tax effects of share-based payments are recognized in the financial statements for those awards which will normally result in tax deductions under existing tax law. Under current U.S. federal tax laws, we receive a compensation expense deduction related to stock options only when those options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation cost for stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in the income statement for all U.S.-based employees. Stock-based compensation expense related to non-US employees is treated as a permanent difference for income tax purposes.



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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

For the three-month period ended December 31, 2014, we did not experience any material change in market risk exposures affecting the quantitative and qualitative disclosures as presented in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

The following discussion about the Company's market risk disclosures involves forward-looking statements.  Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for trading purposes.


Interest Rate Sensitivity

At December 31, 2014, the Company maintained cash equivalents and short-term investments of $148.4 million, mainly consisting of interest bearing securities and demand deposits with maturities mainly of less than one year. If interest rates were to increase or decrease by 10%, interest income would increase or decrease by less than $0.1 million.
 
At December 31, 2014, the Company had $0.5 million of variable rate debt on which the interest rate is reset every three months, $3.0 million of variable rate debt on which the interest rate is reset every six months, $1.7 million of variable rate debt on which the interest rate is reset every twelve months, and $23.4 million of fixed rate debt.

Maturities of this debt are as follows (amounts in dollars):
2015
5.6
 million
2016
3.9
 million
2017
6.0
 million
2018
2.4
 million
2019
1.9
 million
2020 and thereafter
8.8
 million

A 10% change in the variable interest rates of the Company's debt would result in an increase or decrease in interest expense of less than $0.1 million.

The Company has entered into two interest rate swap agreements to minimize the interest expenses on a portion of its variable debt described in the previous paragraph by shifting from variable to fixed interest rates. One swap agreement is for a total notional amount of Euro 0.4 million (equivalent to $0.5 million based on the exchange rate at December 31, 2014) and the other is for a total notional amount of Swiss francs 3.0 million (equivalent to $3.0 million based on the exchange rates at December 31, 2014).


Foreign Currency Exchange Risk

The Company enters into foreign currency forward contracts and forward exchange options generally of less than one year duration to hedge a portion of its foreign currency risk on sales transactions. At December 31, 2014, the Company held Japanese yen forward exchange options with notional amounts of Euro 1.0 million and less than $ 0.1 million. Under these Japanese yen forward exchange options, the profit or loss resulting from a 10% change in currency exchange rates would vary approximately from $0.2 million profit to a $0.1 million loss.


Item 4.  Controls and Procedures

As of the end of the quarterly period covered by this report, the Chief Executive Officer and Chief Financial Officer of the Company (collectively, the "certifying officers") have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended). These disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in its periodic reports filed with the Securities and Exchange Commission (the "Commission") is recorded,

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processed, summarized and reported within the time periods specified by the Commission's rules and forms, and that the information is communicated to the certifying officers on a timely basis.

The certifying officers concluded, based on their evaluation, that the Company's disclosure controls and procedures were effective, as of the end of the quarterly period covered by this report, in ensuring that material information relating to the Company, including its consolidated subsidiaries, is made known to them in a timely fashion, taking into consideration the size and nature of the Company's business and operations.

There have not been changes in the Company's internal control over financial reporting that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

The Company has been and is likely to be involved from time to time in litigation involving its intellectual property and routine litigation arising in the ordinary course of business.
 
A licensor of patents that, before their expiration in 2010, covered the technology used in certain of the Company's CO2 lasers has asserted that the Company has calculated royalties due in respect of certain sales of such CO2 lasers in a manner that is not consistent with the applicable license agreement. In addition, the licensor claims that it has not been provided with copies of invoices and other documentation relating to such sales, to which it asserts it is entitled under the license agreement. The Company disputes these and related allegations and believes that it is in compliance with all of its obligations under the license agreement. The patents, and therefore the license rights, have already expired and there are no further license fees to be calculated and paid. Accordingly, management believes that the resolution of this matter will not have a material adverse impact on the Company's financial condition or results of operations or cash flows.


Item 1A. Risk Factors

For information regarding risk factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors discussion provided under "Risk Factors" in Item 1A of the Company's Annual Report on Form 10-K for the year ended September 30, 2014.  See also "Overview" and "Forward-Looking Statements" included in this Quarterly Report on Form 10-Q.


 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

As previously reported, on February 5, 2014, the Board of Directors authorized the Company to initiate a share buyback of up to $25.0 million of the Company’s Common Stock over the twelve months ending February 10, 2015, subject to market conditions. The program permitted share repurchases from time to time in open market transactions or privately negotiated transactions at the Company’s discretion. During the three-months ended December 31, 2014, the Company did not repurchase any shares of common stock.


Item 3.   Defaults Upon Senior Securities
 
None


Item 4.   Mine Safety Disclosures

Not applicable
 

Item 5.   Other Information

None


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 Item 6.   Exhibits
 
31.1   
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2     
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1   
Section 1350 Certification of Chief Executive Officer
32.2       
Section 1350 Certification of Chief Financial Officer
101.INS *
XBRL Instance Document
101.SCH *
XBRL Taxonomy Extension Schema
101.CAL *
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF *
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB *
XBRL Taxonomy Extension Label Linkbase Document
101.PRE *
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
* The Exhibits 101 are filed with the SEC only.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

 
Rofin-Sinar Technologies Inc.
 
(Registrant)
 
 
Date: February 9, 2015
/s/ Gunther Braun
 
Gunther Braun
 
President, Chief Executive Officer,
 
and Director
 
 
 
/s/ Ingrid Mittelstaedt
 
Ingrid Mittelstaedt
 
Chief Financial Officer,
 
Executive Vice President, Finance
 
and Administration, and Treasurer



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