Attached files
| file | filename |
|---|---|
| EX-31.2 - CFO CERTIFICATION - ROFIN SINAR TECHNOLOGIES INC | a20151231ex312.htm |
| EX-31.1 - CEO CERTIFICATION - ROFIN SINAR TECHNOLOGIES INC | a20151231ex311.htm |
| EX-32.2 - CERTIFICATION OF CFO - ROFIN SINAR TECHNOLOGIES INC | a20151231ex322.htm |
| EX-3.1 - AMENDED AND RESTATED BY-LAWS - ROFIN SINAR TECHNOLOGIES INC | amendedandrestatedby-lawse.htm |
| EX-32.1 - CERTIFICATION OF CEO - ROFIN SINAR TECHNOLOGIES INC | a20151231ex321.htm |
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, 2015
¨ | 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]
28,507,403 shares of the registrant's common stock, par value $0.01 per share, were outstanding as of February 8, 2016.
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, 2015 | September 30, 2015 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents (Note 4) | $ | 175,382 | $ | 169,729 | ||||
Short-term investments (Note 4) | 1,592 | 5,833 | ||||||
Accounts receivable, net of allowance for doubtful accounts $2,903 and $3,279, respectively | 83,686 | 96,093 | ||||||
Inventories, net (Note 5) | 181,211 | 181,025 | ||||||
Other current assets and prepaid expenses | 39,787 | 35,896 | ||||||
Total current assets | 481,658 | 488,576 | ||||||
Property and equipment, net | 89,471 | 92,573 | ||||||
Goodwill (Note 6) | 92,181 | 93,541 | ||||||
Other intangibles, net (Note 6) | 14,185 | 14,767 | ||||||
Other assets | 16,930 | 17,034 | ||||||
Total assets | $ | 694,425 | $ | 706,491 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Lines of credit and short-term borrowings | $ | 6,244 | $ | 5,226 | ||||
Accounts payable, trade | 17,946 | 23,443 | ||||||
Accounts payable to related party | 293 | 299 | ||||||
Income tax payable | 5,035 | 7,998 | ||||||
Accrued liabilities (Note 7) | 61,870 | 72,652 | ||||||
Total current liabilities | 91,388 | 109,618 | ||||||
Long-term debt | 17,035 | 18,085 | ||||||
Pension obligations | 25,027 | 25,439 | ||||||
Other long-term liabilities | 10,789 | 10,740 | ||||||
Total liabilities | 144,239 | 163,882 | ||||||
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, 33,379,287 shares issued at December 31, 2015, and 33,053,687 shares issued at September 30, 2015 | 334 | 331 | ||||||
Additional paid-in capital | 248,783 | 239,333 | ||||||
Retained earnings | 535,781 | 529,234 | ||||||
Accumulated other comprehensive income (Note 10) | (65,904 | ) | (57,517 | ) | ||||
Treasury stock, at cost, 4,871,884 shares at December 31, 2015 and September 30, 2015 | (169,262 | ) | (169,262 | ) | ||||
Total Rofin-Sinar Technologies Inc. stockholders’ equity | 549,732 | 542,119 | ||||||
Non-controlling interest in subsidiaries | 454 | 490 | ||||||
Total equity | 550,186 | 542,609 | ||||||
Total liabilities and equity | $ | 694,425 | $ | 706,491 | ||||
See accompanying notes to condensed consolidated financial statements
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Rofin-Sinar Technologies Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended December 31, 2015 and 2014
(dollars in thousands, except per share amounts)
Three months ended December 31, | ||||||||
2015 | 2014 | |||||||
Net sales | $ | 112,464 | $ | 122,387 | ||||
Cost of goods sold | 72,053 | 79,760 | ||||||
Gross profit | 40,411 | 42,627 | ||||||
Selling, general and administrative expenses | 22,955 | 24,100 | ||||||
Research and development expenses | 8,697 | 10,616 | ||||||
Amortization expense | 679 | 784 | ||||||
Income from operations | 8,080 | 7,127 | ||||||
Other (income) expense | ||||||||
Interest income | (105 | ) | (90 | ) | ||||
Interest expense | 98 | 82 | ||||||
Foreign currency (income) expense | (455 | ) | (1,304 | ) | ||||
Other (income) expense | 24 | 32 | ||||||
Income before income tax | 8,518 | 8,407 | ||||||
Income tax expense | 2,007 | 2,237 | ||||||
Net income | 6,511 | 6,170 | ||||||
Less: Net income (loss) attributable to the non-controlling interest | (36 | ) | 4 | |||||
Net income attributable to RSTI | $ | 6,547 | $ | 6,166 | ||||
Net income attributable to RSTI per share: | ||||||||
Per share of common stock basic | $ | 0.23 | $ | 0.22 | ||||
Per share of common stock diluted | $ | 0.23 | $ | 0.22 | ||||
Weighted-average shares used in computing earnings per share (Note 12) | ||||||||
Basic | 28,328,714 | 28,048,021 | ||||||
Diluted | 28,494,352 | 28,210,986 | ||||||
See accompanying notes to condensed consolidated financial statements
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Rofin-Sinar Technologies Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended December 31, 2015 and 2014
(dollars in thousands)
Three months ended December 31, | ||||||||
2015 | 2014 | |||||||
Net income | $ | 6,511 | $ | 6,170 | ||||
Other comprehensive income (loss): | ||||||||
Fair value of interest rate swap agreements, net of tax expense of $0 and $1 | 1 | 4 | ||||||
Foreign currency translation adjustments | (8,488 | ) | (14,123 | ) | ||||
Defined benefit pension plans, net of tax of $15 and $20 | 100 | 35 | ||||||
Other comprehensive income (loss), net of tax | $ | (8,387 | ) | $ | (14,084 | ) | ||
Total comprehensive income (loss) | $ | (1,876 | ) | $ | (7,914 | ) | ||
Less: Total comprehensive income (loss) attributable to the non-controlling interest | (36 | ) | 4 | |||||
Total comprehensive income (loss) attributable to RSTI | $ | (1,840 | ) | $ | (7,918 | ) | ||
See accompanying notes to condensed consolidated financial statements
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Rofin-Sinar Technologies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Three Months Ended December 31, 2015 and 2014
(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, 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 | |||||||||||||
BALANCES at September 30, 2015 | $ | 331 | $ | 239,333 | $ | 529,234 | $ | (57,517 | ) | $ | (169,262 | ) | $ | 542,119 | $ | 490 | $ | 542,609 | |||||||||||||
Total comprehensive income (loss) | 6,547 | (8,387 | ) | — | (1,840 | ) | (36 | ) | (1,876 | ) | |||||||||||||||||||||
Common stock issued in connection with Stock Incentive Plans | 3 | 9,450 | — | — | — | 9,453 | — | 9,453 | |||||||||||||||||||||||
BALANCES at December 31, 2015 | $ | 334 | $ | 248,783 | $ | 535,781 | $ | (65,904 | ) | $ | (169,262 | ) | $ | 549,732 | $ | 454 | $ | 550,186 | |||||||||||||
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, 2015 and 2014
(dollars in thousands)
Three months ended December 31, | ||||||||
2015 | 2014 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 6,511 | $ | 6,170 | ||||
Adjustments to reconcile net income to net | ||||||||
cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,811 | 4,385 | ||||||
Stock-based compensation expenses | 1,069 | 1,092 | ||||||
Other adjustments | 272 | (314 | ) | |||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable, trade | 11,066 | 10,716 | ||||||
Inventories | (3,811 | ) | (2,469 | ) | ||||
Accounts payable | (5,101 | ) | (3,824 | ) | ||||
Changes in other operating assets and liabilities | (14,648 | ) | (1,897 | ) | ||||
Net cash provided by (used in) operating activities | (831 | ) | 13,859 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from the sale of property and equipment | 60 | 30 | ||||||
Additions to property and equipment | (3,537 | ) | (18,302 | ) | ||||
Purchases of short-term investments | (1,510 | ) | (8,049 | ) | ||||
Sales of short-term and long-term investments | 5,714 | 12,712 | ||||||
Net cash provided by (used in) investing activities | 727 | (13,609 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Borrowing from banks | 5,988 | 20,826 | ||||||
Repayments to banks | (5,561 | ) | (6,077 | ) | ||||
Purchase of non-controlling interests | — | (413 | ) | |||||
Issuance of common stock | 7,997 | 1,105 | ||||||
Net cash provided by financing activities | 8,424 | 15,441 | ||||||
Effect of foreign currency translation on cash | (2,667 | ) | (3,854 | ) | ||||
Net increase in cash and cash equivalents | 5,653 | 11,837 | ||||||
Cash and cash equivalents at beginning of period | 169,729 | 128,537 | ||||||
Cash and cash equivalents at end of period | $ | 175,382 | $ | 140,374 | ||||
Cash paid for interest | $ | 69 | $ | 39 | ||||
Cash paid for taxes | $ | 6,924 | $ | 3,426 | ||||
See accompanying notes to condensed consolidated financial statements
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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, 2015, 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, as amended, for the fiscal year ended September 30, 2015, as filed with the Securities and Exchange Commission on November 30, 2015.
2. | New Accounting Standards |
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 standard was initially released as effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. The new guidelines can be implemented using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and has not yet determined the method by which it will adopt the standard.
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 issued). The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early application is permitted. This guidance will not have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement". ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, the customer should account for the software license element in a manner consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015 (fiscal year 2017 for the Company). The Company does not believe the pronouncement will have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. This standard amends existing guidance to require the presentation of debt issuance cost in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company does not believe the pronouncement will have a material impact on the Company’s financial statements and will implement the pronouncement beginning in the period after December 15, 2015.
8
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory". The new guidance does not apply to inventory that is measured using last-in, first-out or the retail inventory method. The guidance applies to all other inventory, which includes inventory that is measured using first-in, first-out or average cost and requires that inventory should be measured at the lower of cost and net realizable value. These amendments are effective for fiscal years beginning after December 15, 2016 (fiscal year 2018 for the Company). The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
On November 20, 2015, the FAB issued ASU 2015-17, "Balance Sheet Classification of Deferred Assets". The new guidance will require entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. This amendment is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is allowed and entities are permitted to apply the amendments either prospectively or retrospectively. The Company is currently evaluating the impact of the new guidance on its 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 and Formations of New Entities |
The Company uses the acquisition method of accounting for its acquisitions with the respective results of operations included in the consolidated results from the date of acquisition
• | 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. |
The Company also completed the following acquisition of certain assets.
• | 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 has 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 18% 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. |
4. | Fair Value Measurements |
The Company’s cash, 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 notes payable are at variable 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. |
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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, 2015 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash and cash equivalents | $ | 175,382 | $ | 175,382 | $ | — | $ | — | ||||||||
Short-term investments | 1,592 | 1,592 | — | — | ||||||||||||
Derivatives | (66 | ) | — | (66 | ) | — | ||||||||||
Other long-term assets | 550 | — | 550 | — | ||||||||||||
Total assets and liabilities at fair value | $ | 177,458 | $ | 176,974 | $ | 484 | $ | — | ||||||||
September 30, 2015 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash and cash equivalents | $ | 169,729 | $ | 169,729 | $ | — | $ | — | ||||||||
Short-term investments | 5,833 | 5,833 | — | — | ||||||||||||
Derivatives | (51 | ) | — | (51 | ) | — | ||||||||||
Other long-term assets | 550 | — | 550 | — | ||||||||||||
Total assets and liabilities at fair value | $ | 176,061 | $ | 175,562 | $ | 499 | $ | — | ||||||||
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, 2015 | September 30, 2015 | |||||||
Finished goods | $ | 29,630 | $ | 29,720 | ||||
Work in progress | 39,212 | 38,602 | ||||||
Raw materials and supplies | 68,151 | 67,434 | ||||||
Demo inventory | 13,079 | 13,655 | ||||||
Service parts | 31,139 | 31,614 | ||||||
Total inventories | $ | 181,211 | $ | 181,025 | ||||
Net inventory is net of provisions for excess and obsolete inventory of $29,089 and $29,109 at December 31, 2015 and September 30, 2015, respectively.
6. | Goodwill and Other Intangible Assets |
The changes in the carrying amount of goodwill for the three months ended December 31, 2015, are as follows:
Germany | United States | Rest of World | Total | |||||||||||||
Balance as of September 30, 2015 | $ | 36,612 | $ | 12,766 | $ | 44,163 | $ | 93,541 | ||||||||
Currency translation differences | (833 | ) | (63 | ) | (464 | ) | (1,360 | ) | ||||||||
Balance as of December 31, 2015 | $ | 35,779 | $ | 12,703 | $ | 43,699 | $ | 92,181 | ||||||||
10
The carrying values of other intangible assets are as follows:
December 31, 2015 | September 30, 2015 | |||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
Amortized intangible assets: | ||||||||||||||||
Patents | $ | 16,875 | $ | 9,234 | $ | 16,985 | $ | 9,151 | ||||||||
Customer base | 17,298 | 16,569 | 17,220 | 16,451 | ||||||||||||
Other | 23,320 | 17,505 | 23,527 | 17,363 | ||||||||||||
Total | $ | 57,493 | $ | 43,308 | $ | 57,732 | $ | 42,965 | ||||||||
Amortization expense for each of the three-month periods ended December 31, 2015 and 2014, was $679 and $784, respectively. At December 31, 2015, estimated amortization expense of existing intangible assets for the remainder of fiscal year 2016 and the next five fiscal years based on the average exchange rates as of December 31, 2015, is as follows:
2016 (remainder) | 2,000 | |
2017 | 2,300 | |
2018 | 1,900 | |
2019 | 1,200 | |
2020 | 1,000 | |
2021 | 1,000 | |
7. | Accrued Liabilities |
Accrued liabilities are comprised of the following:
December 31, 2015 | September 30, 2015 | |||||||
Employee compensation | $ | 15,138 | $ | 24,314 | ||||
Warranty reserves | 10,483 | 10,913 | ||||||
Invoices to be received | 4,395 | 4,343 | ||||||
Customer deposits | 15,789 | 16,188 | ||||||
Other | 16,065 | 16,894 | ||||||
Total accrued liabilities | $ | 61,870 | $ | 72,652 | ||||
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, 2015, the Company's gross unrecognized tax benefits totaled $0.2 million which includes less than $0.1 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 2009. 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 2009.
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, 2015 and 2014, are as follows:
2015 | 2014 | |||||||
Balance at September 30, | $ | 10,913 | $ | 10,778 | ||||
Additional accruals for warranties during the period | 1,202 | 849 | ||||||
Usage during the period | (1,430 | ) | (1,047 | ) | ||||
Currency translation | (202 | ) | (311 | ) | ||||
Balance at December 31, | $ | 10,483 | $ | 10,269 | ||||
10. | Accumulated Other Comprehensive Income (Loss) |
The changes in Accumulated Other Comprehensive Income by component, net of tax, during the three-month periods ended December 31, 2015 and 2014, are as follows:
Defined Benefit Plans | Foreign Currency Translation Adjustments | Fair Value of Interest Swap Agreements | Total | |||||||||||||
Balance at September 30, 2015 | $ | (6,597 | ) | $ | (50,896 | ) | $ | (24 | ) | $ | (57,517 | ) | ||||
Other comprehensive income (loss) before reclassifications | — | (8,488 | ) | 1 | (8,487 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive income | 100 | — | — | 100 | ||||||||||||
Balance at December 31, 2015 | $ | (6,497 | ) | $ | (59,384 | ) | $ | (23 | ) | $ | (65,904 | ) | ||||
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 (loss) 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 | ) | ||||
The reclassifications out of Accumulated Other Comprehensive Income for the three-month periods ended December 31, 2015 and 2014, are as follows:
2015 | 2014 | |||||||
Unamortized loss on defined benefit pension plans | ||||||||
Amortization | $ | 115 | $ | 55 | ||||
Tax effects | (15 | ) | (20 | ) | ||||
Total reclassification for the period | $ | 100 | $ | 35 | ||||
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11. | Stock Incentive Plans |
The Company maintains a 2007 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 2007 Incentive Stock Plan continues through 2017. Effective March 12, 2015, the stockholders approved the Rofin-Sinar Technologies Inc. 2015 Incentive Stock Plan to reserve an additional 1,800,000 shares of common stock. There were no incentive stock options, restricted stock or performance shares granted in fiscal year 2015 or through the first three months of fiscal year 2016 under either plan. Non-qualified stock options were granted to officers and other key employees in the first quarter of fiscal year 2016 and 2015 under the 2007 Incentive Stock Plan. During the three-month periods ended December 31, 2015 and 2014, 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 our stock options was estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used in these calculations:
2016 Grants | 2015 Grants | |||||||
Weighted average grant date fair value | $ | 11.75 | $ | 8.55 | ||||
Expected life | 6.40 years | 5.46 years | ||||||
Volatility | 36.41 | % | 37.57 | % | ||||
Risk-free interest rate | 1.97 | % | 1.74 | % | ||||
Dividend yield | — | % | — | % | ||||
For purposes of the Black-Scholes model, the Company uses historical data to estimate the expected life, volatility, and annual forfeiture rates of an option. 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 for the three months ended December 31, 2015, is as follows:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (Millions) | ||||||||||||
Outstanding at September 30, 2015 | 3,338,100 | $ | 27 | 2/5 | 4.63 years | ||||||||||
Granted | 321,500 | $ | 29 | 5/8 | |||||||||||
Exercised | (310,600 | ) | $ | 25 | 3/4 | ||||||||||
Forfeited | (6,200 | ) | $ | 29 | 3/8 | ||||||||||
Outstanding at December 31, 2015 | 3,342,800 | $ | 27 | 4/5 | 5.25 years | $ | 5.23 | ||||||||
Exercisable at December 31, 2015 | 2,168,350 | $ | 28 | 1/5 | 3.64 years | $ | 3.78 | ||||||||
As of December 31, 2015, there were $10.9 million of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted-average period of 3.46 years.
During the three-month periods ended December 31, 2015 and 2014, the following activity occurred under the Incentive Stock Plan:
Three months ended December 31, | ||||||||
2015 | 2014 | |||||||
Total intrinsic value of stock options exercised | $ | 911 | $ | 633 | ||||
Cash received from stock option exercises | $ | 7,997 | $ | 1,105 | ||||
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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, | ||||||
2015 | 2014 | |||||
Weighted number of shares for basic earnings per common share | 28,328,714 | 28,048,021 | ||||
Potential additional shares due to outstanding dilutive stock options | 165,638 | 162,965 | ||||
Weighted number of shares for diluted earnings per common share | 28,494,352 | 28,210,986 | ||||
The weighted average diluted shares outstanding for the three months ended December 31, 2015 and 2014, excludes the dilutive effect of approximately 2.1 million and 2.8 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, 2015 and 2014:
Three months ended December 31, | ||||||||
2015 | 2014 | |||||||
Service cost | $ | 217 | $ | 246 | ||||
Interest cost | 287 | 278 | ||||||
Expected return on plan assets | (165 | ) | (175 | ) | ||||
Amortization of prior net (gain) loss | 96 | (6 | ) | |||||
Amortization of prior service cost | 19 | 61 | ||||||
Net periodic pension cost | $ | 454 | $ | 404 | ||||
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, 2015 | September 30, 2015 | |||||||
ASSETS | ||||||||
North America | $ | 256,266 | $ | 258,424 | ||||
Germany | 430,285 | 433,435 | ||||||
Other | 341,270 | 343,072 | ||||||
Intercompany eliminations | (333,396 | ) | (328,440 | ) | ||||
$ | 694,425 | $ | 706,491 | |||||
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December 31, 2015 | September 30, 2015 | |||||||
PROPERTY AND EQUIPMENT, NET | ||||||||
North America | $ | 15,495 | $ | 16,128 | ||||
Germany | 49,114 | 51,124 | ||||||
Other | 25,083 | 25,560 | ||||||
Intercompany eliminations | (221 | ) | (239 | ) | ||||
$ | 89,471 | $ | 92,573 | |||||
Three months ended December 31, | ||||||||
2015 | 2014 | |||||||
NET SALES | ||||||||
North America | $ | 37,547 | $ | 36,132 | ||||
Germany | 69,421 | 77,713 | ||||||
Other | 53,817 | 61,453 | ||||||
Intercompany eliminations | (48,321 | ) | (52,911 | ) | ||||
$ | 112,464 | $ | 122,387 | |||||
INTERCOMPANY SALES | ||||||||
North America | $ | 2,399 | $ | 3,361 | ||||
Germany | 34,386 | 37,049 | ||||||
Other | 11,536 | 12,501 | ||||||
Intercompany eliminations | (48,321 | ) | (52,911 | ) | ||||
$ | — | $ | — | |||||
EXTERNAL SALES | ||||||||
North America | $ | 35,148 | $ | 32,771 | ||||
Germany | 35,034 | 40,664 | ||||||
Other | 42,282 | 48,952 | ||||||
$ | 112,464 | $ | 122,387 | |||||
INCOME BEFORE INCOME TAX | ||||||||
North America | $ | 928 | $ | 143 | ||||
Germany | 3,112 | 4,565 | ||||||
Other | 3,817 | 4,327 | ||||||
Intercompany eliminations | 661 | (628 | ) | |||||
$ | 8,518 | $ | 8,407 | |||||
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 component products as follows:
Three months ended December 31, | ||||||||
2015 | 2014 | |||||||
Macro applications | $ | 45,268 | $ | 47,708 | ||||
Marking and micro applications | 47,667 | 57,606 | ||||||
Components | 19,529 | 17,073 | ||||||
$ | 112,464 | $ | 122,387 | |||||
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16. | Treasury Stock |
On November 11, 2015, the Board of Directors authorized the Company to initiate a share buyback of up to $50.0 million of the Company’s Common Stock over the next eighteen months. The Company expects the purchases to be made from time to time in the open market or in privately negotiated transactions at the Company’s discretion. During the three months ended December 31, 2015, the Company did not repurchase any shares of common stock.
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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 on Form 10-K, as amended, for the year ended September 30, 2015, 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 solid-state, fiber, ultrashort pulse and CO2 lasers, as well as 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 2016 and 2015, we realized approximately 40% and 39% of revenues, respectively, from the sale and servicing of laser products used for macro applications, approximately 43% and 47%, respectively, from the sale and servicing of laser products for marking and micro applications, and approximately 17% and 14%, respectively, from the sale of components.
Our results in the first quarter demonstrate that our strategy to drive cost improvements is gaining traction. Net income increased 6% compared to the comparable quarter in fiscal year 2015 even considering the negative impact of non-recurring costs, mainly related to the proxy contest.
Sales in this seasonally slower quarter were broadly in line with last year excluding the impact of the strong U.S. dollar and were negatively impacted by the timing of revenue recognition for one order.
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We continue to reduce manufacturing costs for our fast-growing high-power fiber laser products. We also made significant progress towards realizing $5 million of operating cost reductions in fiscal year 2016, through our efficiency and consolidation program commenced in early 2015. Key highlights from the quarter include the merger of two German subsidiaries and better alignment of our workforce and other resources with growth opportunities and market demand. Further actions are being taken to streamline our processes globally and we continue to evaluate additional opportunities to reduce our operating costs.
Our R&D investments continue to yield important product developments that will support future value creation, including our proprietary filament cutting process with femtosecond lasers and our new 2.5 kilowatt fiber laser module. The successful test of this technology is an important milestone that will support continued growth of our high-power fiber laser business. We believe ROFIN will be first-to-market with 5 kilowatt lasers that operate with just two modules. Our R&D efforts are also driving cost improvements through improved design and we are targeting a 15% to 20% reduction in the manufacturing cost of high-power fiber lasers in fiscal year 2016.
Order entry in the first quarter was negatively impacted by currency movements ($18 million impact) and de-bookings in anticipation of cancellations by two Chinese customers (approximately $12 million impact). We expect to face a headwind from uncertainty with the Chinese economy. Our new technology initiatives and more efficient cost structure position us strongly to grow market share, further increase our profit margins and create additional shareholder value in the quarters ahead. We believe we are well positioned as we move into seasonally more active quarters and are encouraged by solid bookings activity in the first weeks of the second quarter.
At December 31, 2015, the Company had 2,178 employees compared to 2,275 employees at December 31, 2014.
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, | ||||||
2015 | 2014 | |||||
Net sales | 100.0 | % | 100.0 | % | ||
Cost of goods sold | 64.1 | % | 65.2 | % | ||
Gross profit | 35.9 | % | 34.8 | % | ||
Selling, general and administrative expenses | 20.4 | % | 19.7 | % | ||
Research and development expenses | 7.7 | % | 8.7 | % | ||
Amortization expenses | 0.6 | % | 0.6 | % | ||
Income from operations | 7.2 | % | 5.8 | % | ||
Income before income taxes | 7.6 | % | 6.9 | % | ||
Net income attributable to RSTI | 5.8 | % | 5.0 | % | ||
Net Sales - Net sales of $112.5 million represents a decrease of $9.9 million, or 8% for the three-month period ended December 31, 2015, as compared to the corresponding period in fiscal year 2015. The decrease for the three-month period ended December 31, 2015, resulted from a decrease of $6.6 million, or 12%, in Europe, and $4.9 million, or 13%, in Asia, partially offset by net sales increases of $1.6 million, or 6%, in North America, compared to the corresponding period in fiscal year 2015. The U.S. dollar strengthened against foreign currencies, primarily against the Euro, which had an unfavorable effect on net sales of $8.5 million for the three-month period ended December 31, 2015.
Net sales of laser products for macro applications decreased by $2.4 million, or 5%, to $45.3 million for the three-month period ended December 31, 2015, which was mainly due to a lower service and spare parts business as compared to the corresponding period of fiscal year 2015.
Net sales of lasers for marking and micro applications decreased by $9.9 million, or 17%, to $47.7 million for the three-month period ended December 31, 2015, and was mainly due to a decrease in the machine tool, electronics, photovoltaic and automotive industries.
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Revenues for the component business increased by $2.4 million, or 14%, to $19.5 million at December 31, 2015, compared to the corresponding period in fiscal year 2015. The increase is mainly attributable to higher demand for fibers, laser diodes and optical components.
Gross Profit - Our gross profit of $40.4 million for the three-month period ended December 31, 2015, represents a decrease of $2.2 million, or 5%, when compared to the corresponding period of fiscal year 2015. As a percentage of sales, gross profit for the three-month period ended December 31, 2015, increased from 35% to 36%. During the quarter, we benefited from improvements achieved in the manufacturing costs, mainly in our high-power fiber lasers, which helped to offset an unfavorable product mix. Gross profit was unfavorably affected by $1.5 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, 2015.
Selling, General and Administrative Expenses - Selling, general and administrative ("SG&A") expenses of $23.0 million for the three-month period ended December 31, 2015, represents a decrease of $1.1 million, or 5% compared to the corresponding period of fiscal year 2015. The decrease in SG&A expenses for the three-month period is mainly due to the impact of exchange rate fluctuations amounting to $1.7 million, lower labor costs and depreciation which was partially offset by non-recurring expenses mainly related to the proxy contest of approximately $0.7 million. As a percentage of net sales, SG&A expenses were stable at 20% for the three-month period ended December 31, 2015, as compared to the corresponding prior year period.
Research and Development - The Company spent net $8.7 million on research and development ("R&D") during the three-month period ended December 31, 2015, which represents a decrease of $1.9 million, or 18%, for the three-month period ended December 31, 2015, as compared to the corresponding period in fiscal year 2015. The decrease is mainly a result of lower labor costs, leasing and rental expenses, depreciation, and a favorable impact from foreign currencies of $0.9 million. Gross R&D expenses for the three-month periods ended December 31, 2015 and 2014, were $8.9 million and $10.7 million, respectively, and were reduced by $0.2 million and $0.1 million of government grants during each respective period.
Amortization Expense - Amortization expense for the three-month period ended December 31, 2015, amounted to $0.7 million. This represents a decrease of $0.1 million for the three-month period when compared to the same period of fiscal year 2015.
Other (Income) Expense - Net other income of $0.4 million for the three-month period ended December 31, 2015, represents a decrease of $0.9 million compared to $1.3 million for the corresponding period of the prior year. The decrease in net foreign currency income in the three-month period ended December 31, 2015, is due to higher net exchange losses in the current period compared to the corresponding period in fiscal year 2015.
Income Tax Expense - Income tax expense of $2.0 million for the three-month period ended December 31, 2015, represents an effective tax rate of 24%, compared to 27% for the corresponding period of fiscal year 2015. The decrease in the effective tax rate is mainly a result the reenactment of the legislation regarding R&D tax credits in the US. 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, 2015.
Net Income Attributable to RSTI - As a result of the foregoing factors, the Company realized consolidated net income attributable to RSTI of $6.5 million for the three-month period ended December 31, 2015, which represents an increase of $0.3 million, or 6%, from the corresponding period in fiscal year 2015. For the three-month period ended December 31, 2015, both the basic and diluted earnings per common share calculations equaled $0.23, based upon a weighted average of 28.3 million and 28.5 million shares of common stock outstanding, as compared to basic and diluted earnings per common share calculation of $0.22, based upon a weighted average of 28.0 million and 28.2 million shares of common stock outstanding for the corresponding period of fiscal year 2015.
Liquidity and Capital Resources
The Company's primary sources of liquidity at December 31, 2015, were cash and cash equivalents of $175.4 million, short-term investments of $1.6 million, short-term credit lines of $63.1 million and long-term credit lines of $18.6 million. As of December 31, 2015, $4.6 million was outstanding under the short-term lines of credit and $1.7 million was used for bank guarantees under these lines of credit, leaving $56.8 million available for borrowing under the short-term lines of credit. In addition, the Company maintained short-term credit lines specific to bank guarantees for $12.6 million, of which $5.0 million was used. Therefore, $64.4 million was unused and available under the Company's short-term and bank guarantee lines of credit, in the aggregate, at December 31, 2015. At such date, the entire amount of our long-term lines of credit was fully drawn and $1.6 million was classified under short-term lines of credit for the current portion of the long-term debt. The Company is
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subject to financial covenants, which could restrict the Company from drawing money under these lines of credit. At December 31, 2015, the Company was in compliance with these covenants.
Cash and cash equivalents increased by $5.7 million during the three-month period ended December 31, 2015. Approximately $0.8 million in cash and cash equivalents were used in operating activities, mainly as the result of a decrease in accrued liabilities, income taxes payable, trade accounts payable and an increase of net inventories offset by a decrease in trade accounts receivable and net income generated for the three-month period ended December 31, 2015.
Net cash provided by investing activities totaled $0.7 million for the three-month period ended December 31, 2015, and was primarily related to net sales of short-term investments partly offset by additions to property and equipment.
Net cash provided by financing activities totaled $8.4 million for the three-month period ended December 31, 2015, and was primarily related to the issuance of common stock from option exercises and borrowings from banks,which were partially offset by 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, 2015, $131.1 million of the total $177.0 million of our cash, cash equivalents and short-term investments, was held by our non-US subsidiaries, with the balance of $45.9 million held by our US subsidiaries. As of that date, $20.5 million was owed by our non-US subsidiaries and $2.8 million was owed by our US subsidiaries from the total indebtedness amounting to $23.3 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, 2015. 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.
Contractual Obligations and Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements, other than those listed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K, as amended, for the fiscal year ended September 30, 2015, or financing arrangements involving variable interest entities. There have been no material changes in contractual obligations outside of the ordinary course of business since September 30, 2015.
Currency Exchange Rate Fluctuations
Although we report our consolidated financial statements in U.S. dollars, during the three-month period ended December 31, 2015, approximately 62% 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 $59.4 million at December 31, 2015, as compared to $50.9 million at September 30, 2015.
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.
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
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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 of fiscal year 2016 figures when applying the average exchange rates of the first quarter of fiscal year 2015:
December 31, 2015 | December 31, 2014 | |||||||||||
GAAP Actual | Non-GAAP Constant Currency | GAAP Actual | ||||||||||
Net Sales | $ | 112,464 | $ | 120,927 | $ | 122,387 | ||||||
Order Entry | $ | 96,854 | $ | 114,883 | $ | 122,691 | ||||||
Between the first quarter of fiscal year 2015 and the first quarter of fiscal year 2016, the average exchange rate for the Euro weakened against the U.S. dollar by approximately 14%. The impact of exchange rate fluctuations, mainly the Euro, was to decrease quarterly net sales by $8.5 million and quarterly order entry by $18.0 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, as amended, for the fiscal year ended September 30, 2015. 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 evaluate the sufficiency of the reserve. Warranty expense has historically been within our expectations. To the extent we experience increased warranty claim activity or increased 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.
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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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For the three-month period ended December 31, 2015, 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, as amended, for the fiscal year ended September 30, 2015.
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
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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, 2015, the Company maintained cash, cash equivalents and short-term investments of $177.0 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, 2015, the Company had $2.5 million of variable rate debt on which the interest rate is reset every six months, and $20.8 million of fixed rate debt.
Maturities of this debt are as follows (amounts in dollars):
2016 | 5.6 | million |
2017 | 5.4 | million |
2018 | 2.4 | million |
2019 | 1.7 | million |
2020 | 1.8 | million |
2021 and thereafter | 6.4 | millions |
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 an interest rate swap agreement 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. The swap agreement is for a total notional amount of Swiss francs 2.5 million (equivalent to $2.5 million based on the exchange rates at December 31, 2015).
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, 2015, the Company held Japanese yen forward exchange options with notional amounts of Euro 2.5 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 $0.3 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, 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 been no 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes from the legal matters reported in our Annual Report on Form 10-K, as amended, for the year ended September 30, 2015, as filed with the SEC on November 30, 2015.
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, as amended, for the year ended September 30, 2015. 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
On November 11, 2015, the Board of Directors authorized the Company to initiate a share buyback of up to $50.0 million of the Company’s Common Stock over the next eighteen months. The Company expects the purchases to be made from time to time in the open market or in privately negotiated transactions at the Company’s discretion. During the three-months ended December 31, 2015, 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
On February 3, 2016, the Company’s Board of Directors (the “Board”) amended and restated the Company’s By-laws (the “Amended and Restated By-Laws”), effective immediately, to, among other changes, implement a majority voting standard in uncontested elections of directors, to add a forum selection provision providing for the Delaware courts to be a sole and exclusive forum for adjudication of certain disputes and to eliminate the limitation on a director’s eligibility to stand for re-election after reaching age 70.
Majority Voting
The Company’s By-laws previously required that directors be elected by a plurality of votes cast. Under the plurality voting standard, only “for” votes are counted, not any “against” votes or abstentions, so in an uncontested election (i.e., an election where the only nominees are those proposed by the Board) a director could be elected with as few as one “for” vote, regardless of the number of “against” votes.
The Amended and Restated By-Laws change the voting standard for uncontested director elections from a plurality voting standard to a majority voting standard. Accordingly, under the Amended and Restated By-Laws, in future uncontested director elections, in order to be elected, the votes cast “for” a director nominee’s election must exceed the number of votes cast “against” such nominee’s election. The Amended and Restated By-Laws retain a plurality voting standard in contested elections.
In connection with this By-law amendment, the Board adopted a director resignation policy providing that, with respect to director nominations, the Board will nominate for reelection as a director only those incumbent directors who have tendered, in advance
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of such nomination, an irrevocable resignation that will become effective in the event such nominee fails to receive the required majority vote at the stockholders’ meeting at which he or she faces reelection, and the Board accepts such resignation.
If an incumbent director fails to receive the required vote for reelection, the Nominating Committee (excluding the incumbent director in question, if applicable) shall make a recommendation to the Board as to whether to accept or reject such director’s resignation as previously tendered or whether other action should be taken. The Nominating Committee and the Board may consider any factors they deem relevant in deciding whether to accept or reject a director’s resignation or whether other action should be taken. Within 90 days from the date the election results are certified, the Company will publicly disclose the Board’s decision and the rationale behind such decision.
Forum Selection
A new Article XII was added to the Amended and Restated By-laws, which provides that unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for certain legal actions involving the Company (including any derivative action or proceeding brought on behalf of the Company and certain disputes between the Company, on the one hand, and a stockholder of the Corporation, on the other hand), will be a state or federal court located within the State of Delaware. The Board believes that the exclusive forum provision is in the best interests of the Company because, among other reasons, it will focus any future litigation covered by the provision in one jurisdiction, avoiding the unnecessary risk, uncertainty and expense from concurrent multi-jurisdictional litigation. The provision does not preclude any type of legal actions against the Company or its directors or officers or other employees or limit or adversely impact any property right vested in the Company’s stockholders; rather, it directs certain legal actions to a single jurisdiction, with the goal of securing a more efficient and effective resolution of those legal actions.
Director Age Limitation
The Amended and Restated By-laws remove a provision prohibiting directors from standing for re-election after reaching age 70 and exempted certain individuals from such limitation. In adopting the amendment, the Board determined that a specific age limitation for serving on the Board was not necessary as the Board’s peer review process provides the Board with the ability to assess a director’s contributions and suitability to stand for re-election and that age, while one of the factors that will be considered by the Board, should not of itself be a disqualifying factor.
The Amended and Restated By-Laws also make clarifications, updates and other changes to other provisions of the By-laws, which are all effective immediately.
The foregoing summary of the amendments to the By-laws is qualified in its entirety by reference to the full text of the Amended and Restated By-laws, a copy of which is filed with this Quarterly Report on Form 10-Q as Exhibit 3.1 and incorporated into this Item 5 by reference.
Item 6. Exhibits
3.1 | Amended and Restated By-laws of Rofin-Sinar Technologies Inc., as amended on February 3, 2016 |
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.
Date: February 9, 2016 | Rofin-Sinar Technologies Inc. |
(Registrant) | |
/s/ Thomas Merk | |
Thomas Merk | |
President, Chief Executive Officer, | |
(Principal Executive Officer) | |
/s/ Ingrid Mittelstaedt | |
Ingrid Mittelstaedt | |
Chief Financial Officer, | |
Executive Vice President, Finance | |
and Administration, and Treasurer | |
(Principal Financial and Accounting Officer) | |
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