Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
COHR
The NASDAQ Stock Market LLC
Nasdaq Global Select Market
__________________
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☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer," “accelerated filer", “smaller reporting company" and “emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of registrant’s common stock, par value $.01 per share, on August 5, 2019 was 23,982,361.
This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in or incorporated by reference in this quarterly report, other than statements of historical fact, are forward-looking statements. These statements are generally accompanied by words such as "trend," "may," "will," could," "would," "should," "expect," "plan," "anticipate," "rely," "believe," "estimate," "predict," "intend," "potential," "continue," "outlook," "forecast" or the negative of such terms, or other comparable terminology, including without limitation statements made under "Our Strategy" and in "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Actual results of Coherent, Inc. (referred to herein as the Company, we, our or Coherent) may differ significantly from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections captioned "Our Strategy," "Risk Factors" and "Key Performance Indicators," as well as any other cautionary language in this quarterly report. All forward-looking statements included in the document are based on information available to us on the date hereof. We undertake no obligation to update these forward-looking statements as a result of events or circumstances or to reflect the occurrence of unanticipated events or non-occurrence of anticipated events, except to the extent required by law.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; in thousands)
Three Months Ended
Nine Months Ended
June 29, 2019
June 30, 2018
June 29, 2019
June 30, 2018
Net income (loss)
$
(3,099
)
$
66,970
$
53,201
$
174,173
Other comprehensive income (loss): (1)
Translation adjustment, net of taxes (2)
2,762
(39,283
)
(10,506
)
(17,847
)
Changes in unrealized losses on available-for-sale securities, net of taxes (3)
—
4
—
(4
)
Defined benefit pension plans, net of taxes (4)
(971
)
(504
)
(1,719
)
(701
)
Other comprehensive income (loss), net of tax
1,791
(39,783
)
(12,225
)
(18,552
)
Comprehensive income (loss)
$
(1,308
)
$
27,187
$
40,976
$
155,621
(1)
Reclassification adjustments were not significant during the three and nine months endedJune 29, 2019 and June 30, 2018.
(2)
Tax expenses (benefits) of $535 and $(2,911) were provided on translation adjustments during the three and nine months endedJune 29, 2019, respectively. Tax expenses (benefits) were not provided on translation adjustments during the three and nine months endedJune 30, 2018.
(3)
Tax expenses (benefits) were not provided on changes in unrealized losses on available-for-sale securities for the three and nine months endedJune 29, 2019, respectively. Tax expenses (benefits) of $1 and $(2) were provided on changes in unrealized losses on available-for-sale securities for the three and nine months endedJune 30, 2018, respectively.
(4)
Tax benefits of $322 and $605 were provided on changes in defined benefit pension plans for the three and nine months endedJune 29, 2019, respectively. Tax benefits of $224 and $279 were provided on changes in defined benefit pension plans for the three and nine months endedJune 30, 2018, respectively.
See Accompanying Notes to Condensed Consolidated Financial Statements.
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
41,462
38,735
Amortization of intangible assets
47,725
45,638
Deferred income taxes
(8,209
)
18,380
Amortization of debt issuance cost
3,810
8,251
Stock-based compensation
26,535
24,069
Non-cash restructuring charges
12,121
964
Other non-cash expense (income)
(2,498
)
194
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable
85,090
(27,520
)
Inventories
1,719
(84,867
)
Prepaid expenses and other assets
8,327
(7,712
)
Other long-term assets
1,661
(5,369
)
Accounts payable
(5,218
)
3,484
Income taxes payable/receivable
(115,413
)
9,720
Other current liabilities
(16,737
)
(69,634
)
Other long-term liabilities
1,788
4,487
Net cash provided by operating activities
135,364
132,993
Cash flows from investing activities:
Purchases of property and equipment
(60,511
)
(65,990
)
Proceeds from dispositions of property and equipment
5,228
2,738
Purchases of available-for-sale securities
(11,552
)
(54,323
)
Proceeds from sales and maturities of available-for-sale securities
9,557
86,787
Acquisition of businesses, net of cash acquired
(18,881
)
(45,448
)
Investment at cost
(3,423
)
—
Proceeds from sale of discontinued operation
—
25,000
Proceeds from sale of other entities
—
6,250
Other
—
470
Net cash used in investing activities
(79,582
)
(44,516
)
Cash flows from financing activities:
Short-term borrowings
107,054
64,815
Repayments of short-term borrowings
(68,720
)
(65,718
)
Repayments of long-term borrowings
(5,686
)
(169,286
)
Issuance of common stock under employee stock option and purchase plans
11,811
10,574
Net settlement of restricted common stock
(15,167
)
(36,292
)
Repurchase of common stock
(77,410
)
(100,000
)
Net cash used in financing activities
(48,118
)
(295,907
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(1,940
)
(3,379
)
Net increase (decrease) in cash, cash equivalents and restricted cash
5,724
(210,809
)
Cash, cash equivalents and restricted cash, beginning of period
324,045
457,087
Cash, cash equivalents and restricted cash, end of period
$
329,769
$
246,278
Non-cash investing and financing activities:
Unpaid property and equipment purchases
$
4,985
$
5,353
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows.
June 29, 2019
June 30, 2018
Cash and cash equivalents
$
316,458
$
232,458
Restricted cash, current
825
1,082
Restricted cash, non-current
12,486
12,738
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
$
329,769
$
246,278
See Accompanying Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto filed by Coherent, Inc. on Form 10-K for the fiscal year ended September 29, 2018. In the opinion of management, all adjustments necessary for a fair presentation of financial condition and results of operation as of and for the periods presented have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year or any other interim periods. Our fiscal year ends on the Saturday closest to September 30 and our third fiscal quarter includes 13 weeks of operations in each fiscal year presented. Fiscal year 2019 and 2018 both include 52 weeks.
The consolidated financial statements include the accounts of Coherent, Inc. and its direct and indirect subsidiaries (collectively, the "Company", "we", "our", "us" or "Coherent"). Intercompany balances and transactions have been eliminated.
On October 5, 2018, we acquired privately held Ondax, Inc. ("Ondax"). On March 8, 2018, we acquired privately held O.R. Lasertechnologie GmbH and certain assets of its U.S.-based affiliate (collectively "OR Laser"). The significant accounting policies of Ondax and OR Laser have been aligned to conform to those of Coherent, and the consolidated financial statements include the results of Ondax and OR Laser as of their acquisition dates.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Change in Significant Accounting Policies - Revenue Recognition
Except for the adoption of Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASC 606") on September 30, 2018, there have been no significant changes to our significant accounting policies as of and for the nine months endedJune 29, 2019, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended September 29, 2018.
Effective September 30, 2018, we adopted ASC 606, using the modified retrospective transition method applied to contracts that were not completed as of September 30, 2018. Revenue for the reporting periods after September 30, 2018 are presented under ASC 606, while prior period amounts are reported in accordance with our historical accounting under ASC 605. There was no impact on the opening accumulated retained earnings, revenues, costs, deferred income, customer deposits or other balances as of September 30, 2018 or the three and nine months endedJune 29, 2019 due to the adoption of ASC 606.
Under ASC 606, we determine revenue recognition by applying the following five-step approach:
Step 1
Identification of the contract, or contracts, with a customer;
Step 2
Identification of the performance obligations in the contract;
Step 3
Determination of the transaction price;
Step 4
Allocation of the transaction price to the performance obligations in the contract; and
Step 5
Recognition of revenue when, or as, we satisfy each performance obligation.
Contracts and customer purchase orders, which in some cases are governed by master sales agreements, are generally used to determine the existence of an arrangement. In addition, shipping documents and customer acceptance, if applicable, are used to verify delivery and transfer of control. Performance obligations are identified based on the products or services that will be transferred to the customer that are considered distinct. Being distinct is defined as products or services that the
customer can benefit from either on its own or together with other resources that are readily available from third parties or from us, and by the product or service being separately identifiable from other promises in the contract. We assess our ability to collect from our customers based primarily on the creditworthiness and past payment history of each customer. Revenue from all sales are recognized at the transaction price. The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration, if any. The consideration associated with customer contracts is generally fixed. Variable consideration includes discounts, rebates, credits and incentives, or other similar items. The amount of consideration that can vary is not a substantial portion of the total consideration. Variable consideration estimates are re-assessed at each reporting period until a final outcome is determined. Changes to the original transaction price due to a change in estimated variable consideration are calculated on a retrospective basis, with the adjustment recorded in the period in which the change occurs.
Sales to customers are generally not subject to any price protection or return rights. Accordingly, upon application of steps one through five above, product revenue is recognized upon shipment and transfer of control. The majority of products and services offered by us have readily observable selling prices. As a part of our stand-alone selling price policy, we review product pricing on a periodic basis to identify any significant changes and revise our expected selling price assumptions as appropriate.
We record taxes collected on revenue-producing activities on a net basis.
Revenue recognition at a point in time
Revenues recognized at a point in time consist primarily of product, installation and training. The majority of our sales are made to original equipment manufacturers ("OEMs"), distributors, representatives and end-users. Sales made to customers generally do not require installation of the products by us and are not subject to other post-delivery obligations. Sales to end-users in the scientific market typically require installation by us and, thus, involve post-delivery obligations; however, our post-delivery installation obligations are not essential to the functionality of our products and represent a separate performance obligation. We recognize revenue for these sales following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. In those instances that we have agreed to perform installation or provide training, we defer revenue related to installation or training until these services have been rendered.
Our sales to distributors, representatives and end-user customers typically do not have customer acceptance provisions and only certain of our sales to OEM customers and integrators have customer acceptance provisions. Customer acceptance is generally limited to performance under our published product specifications. For the few product sales that have customer acceptance provisions because of more advanced performance than our published specifications, the revenue is recognized when the control transfers or the revenue is deferred until customer acceptance occurs.
Revenue recognition over time
We periodically enter into contracts in which a customer may purchase a combination of goods and/or services, such as products with maintenance contracts or extended warranty. These contracts are evaluated to determine if the multiple promises are separate performance obligations. Once we determine the performance obligations, we then determine the transaction price, which includes estimating the amount of variable consideration, if any. We then allocate the transaction price to each performance obligation in the contract based on a relative stand-alone selling price charged separately to customers. Extended warranties are sold separately from products and represent a distinct performance obligation. Revenue related to the performance obligation for extended warranties is recognized over time as the customer simultaneously receives and consumes the benefits provided by us.
Customized products, for which we have an enforceable right to payment for performance completed to date, are recorded over time. We use the output method to recognize revenue over time for such contracts as it best depicts the satisfaction of our performance obligations.
Shipping and handling costs
We record costs related to shipping and handling of net sales in cost of sales for all periods presented. Shipping and handling fees billed to customers are included in net sales. Customs duties billed to customers are recorded in cost of sales.
We provide warranties on the majority of our product sales and reserves for estimated warranty costs are recorded during the period of sale. These standard warranties are assurance type warranties and do not offer any services beyond the assurance that the product will continue working as specified. Therefore, these warranties are not considered separate performance obligations in the arrangement. Instead, the expected cost of the warranty is accrued as an expense. The determination of such reserves requires us to make estimates of product return rates and expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line. The weighted average warranty period covered is approximately 15 months. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in future periods.
Costs of obtaining a contract
We recognize the incremental direct costs of obtaining a contract from a customer as an expense, which primarily includes sales commissions. Sales commissions are recorded at a point of time when control of the product transfers or over a period of time when sales commission provided is expected to be recovered through future services. The costs are recorded within selling, general and administrative expense. Costs incurred prior to the transfer of control of the product to the customer and costs to be amortized over a future period are classified as a prepaid asset and are included in prepaid expenses and other assets. Upon adoption of ASC 606, we determined there was an immaterial impact on sales commissions, therefore, we did not record a transition adjustment on adoption.
Payment terms
Our standard payment terms are 30 days but vary by the industry and location of the customer and the products or services offered. The time between invoicing and when payment is due is not significant. As our standard payment terms are less than one year, we have elected the practical expedient under ASC 606-10-32-18 and therefore are not required to assess whether each contract has a significant financing component.
Customer deposits and deferred revenue
When we receive consideration from a customer prior to transferring goods or services under the terms of a sales contract, we record customer deposits or deferred revenue, depending on whether or not the product has shipped to the customer, which are included in other current liabilities or other long-term liabilities when the payment is made or due, whichever is earlier. We recognize deferred revenue as net sales after control of the goods or services has been transferred to the customer and all revenue recognition criteria are met.
2. RECENT ACCOUNTING STANDARDS
Adoption of New Accounting Pronouncement
We adopted ASC 606 and all related amendments as of September 30, 2018 using the modified retrospective transition method applied to contracts that were not completed as of September 29, 2018 and all new contracts entered into by us subsequent to September 29, 2018. All prior period financial statements and disclosures are presented in accordance with ASC 605. We concluded that the adoption of the new standard did not have a material impact on the timing or amount of revenue recognized as the majority of our sales are not bundled. Therefore, revenue will be recorded at the point-in-time when control transfers, which is consistent with the timing of revenue recognition under ASC 605. See Note 1, "Basis of Presentation" and Note 3, "Revenue Recognition" to the Notes to Condensed Consolidated Financial Statements for more information.
In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments became effective on November 5, 2018. The SEC staff subsequently indicated that it would not object if a filer’s first presentation of changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the final rule’s effective date. Among the amendments is the requirement to present the changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a consolidated statement of operations is required to be filed. We adopted this amendment and included the first presentation of changes in stockholders’ equity in our quarterly report on Form 10-Q for our first quarter of fiscal 2019.
In February 2016, the FASB issued accounting guidance (ASC 842) that modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The new standard will become effective for our fiscal year 2020, which begins on September 29, 2019. We will adopt the new guidance utilizing the modified retrospective transition method. We have reviewed the requirements of this standard and have formulated a plan for implementation. We continue to implement internal controls and key system functionality to enable the preparation of financial information. We currently estimate that the adoption of the standard will result in the recognition of $90 million to $100 million in lease related right-of-use assets and liabilities on our consolidated balance sheet, primarily related to real estate leases. The estimate could change as we finalize estimates and proceed towards implementation of the standard and will also fluctuate based on the lease portfolio, discount rates and foreign currency exchange rates as of the adoption date. We expect the standard will not have a material impact on our consolidated statements of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and a subsequent amendment, ASU 2018-19 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. The new standard will become effective for our fiscal year 2021, which begins on October 4, 2020. We are currently evaluating the impact of our pending adoption of Topic 326 on our consolidated financial statements.
3. REVENUE RECOGNITION
Disaggregation of Revenue
Based on the information that our chief operating decision maker ("CODM") uses to manage the business, we disaggregate revenue by type and market application within each segment. No other level of disaggregation is required considering the type of products, customers, markets, contracts, duration of contracts, timing of transfer of control and sales channels.
The following tables summarize revenue from contracts with customers (in thousands):
Sales by revenue type and segment
Three Months Ended
June 29, 2019
June 30, 2018
OEM Laser Sources
Industrial Lasers & Systems
OEM Laser Sources
Industrial Lasers & Systems
Net sales:
Products(1)
$
115,992
$
104,784
$
226,370
$
134,693
Other product and service revenues(2)
90,293
28,101
89,168
32,111
Total net sales
$
206,285
$
132,885
$
315,538
$
166,804
(1) Net sales primarily recognized at a point in time.
(2) Includes sales of spare parts, related accessories and other consumable parts as well as revenues from service agreements, of which $14.1 million for the three months ended June 29, 2019 was recognized over time.