Company Quick10K Filing
Quick10K
Coherent
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$128.69 24 $3,130
10-Q 2018-12-29 Quarter: 2018-12-29
10-K 2018-09-29 Annual: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-30 Quarter: 2017-12-30
10-K 2017-09-28 Annual: 2017-09-28
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-10-01 Annual: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-Q 2016-01-02 Quarter: 2016-01-02
8-K 2019-01-29 Earnings, Exhibits
8-K 2018-12-06 Officers, Exhibits
8-K 2018-11-13 Officers
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-10-22 Earnings, Exhibits
8-K 2018-09-25 Officers, Exhibits
8-K 2018-07-31 Earnings, Exhibits
8-K 2018-05-01 Earnings, Exhibits
8-K 2018-03-01 Shareholder Vote
8-K 2018-01-28 Amend Bylaw, Exhibits
ILMN Illumina
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AXDX Accelerate Diagnostics
FLDM Fluidigm
HBIO Harvard Bioscience
HTGM HTG Molecular Diagnostics
BNGO Bionano Genomics
AEMD Aethlon Medical
PRPO Precipio
COHR 2018-12-29
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
EX-10.2 exhibit102.htm
EX-31.1 cohr-ex311_2019q1.htm
EX-31.2 cohr-ex312_2019q1.htm
EX-32.1 cohr-ex321_2019q1.htm
EX-32.2 cohr-ex322_2019q1.htm

Coherent Earnings 2018-12-29

COHR 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a20191229_10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ___________________________________________________
FORM 10-Q
 ___________________________________________________
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 29, 2018
or
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to          
Commission File Number: 001-33962 
COHERENT, INC.
Delaware
 
94-1622541
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
5100 Patrick Henry Drive, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 764-4000 
___________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
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 x 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.
Large accelerated filer x
Accelerated filer o

Non-accelerated filer o

Smaller reporting company o
Emerging growth company o
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 x

 The number of shares outstanding of registrant’s common stock, par value $.01 per share, on February 4, 2019 was 24,326,589.

1


COHERENT, INC.

INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in or incorporated by reference in this quarterly report, other than statements of historical fact, are forward-looking statements. These statements are generally accompanied by words such as "trend," "may," "will," could," "would," "should," "expect," "plan," "anticipate," "rely," "believe," "estimate," "predict," "intend," "potential," "continue," "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.


3


PART I.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share data) 
 
Three Months Ended
 
 
December 29,
2018

December 30,
2017
 
Net sales
$
383,146


$
477,565

 
Cost of sales
233,796


260,542

 
Gross profit
149,350


217,023

 
Operating expenses:
 


 

 
Research and development
28,942


31,392

 
Selling, general and administrative
64,557


73,437

 
Impairment and other charges

 
265

 
Amortization of intangible assets
3,040


2,606

 
Total operating expenses
96,539


107,700

 
Income from operations
52,811


109,323

 
Other income (expense):
 




 
Interest income
228


471

 
Interest expense
(4,901
)

(8,747
)
 
Other—net
(4,478
)

(224
)
 
Total other income (expense), net
(9,151
)

(8,500
)
 
Income from continuing operations before income taxes
43,660


100,823

 
Provision for income taxes
8,110


58,920

 
Net income from continuing operations
35,550


41,903

 
Loss from discontinued operations, net of income taxes


(2
)
 
Net income
$
35,550


$
41,901

 
 

 
 
 
Net income per share:





 
Basic
$
1.46


$
1.70

 
Diluted
$
1.45


$
1.67

 






 
Shares used in computation:
 


 

 
Basic
24,268


24,635

 
Diluted
24,472


25,025

 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.


4



COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in thousands) 

 
Three Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
 
 
 
 
 
Net income
$
35,550

 
$
41,901

 
Other comprehensive income (loss): (1)
 
 
 
 
  Translation adjustment, net of taxes (2)
(5,690
)
 
92

 
Changes in unrealized losses on available-for-sale securities, net of taxes (3)

 
(7
)
 
Defined benefit pension plans, net of taxes (4)

8

 
147

 
  Other comprehensive income (loss), net of tax
(5,682
)
 
232

 
Comprehensive income
$
29,868

 
$
42,133

 

(1)
Reclassification adjustments were not significant during the three months ended December 29, 2018 and December 30, 2017.

(2)
Tax benefits of $2,755 and $0 were provided on translation adjustments during the three months ended December 29, 2018 and December 30, 2017, respectively. 

(3)
Tax benefits of $0 and $4 were provided on changes in unrealized gains (losses) on available-for-sale securities for the three months ended December 29, 2018 and December 30, 2017, respectively.

(4)
Tax benefits of $6 and $46 were provided on changes in defined benefit pension plans for the three months ended December 29, 2018 and December 30, 2017, respectively.





See Accompanying Notes to Condensed Consolidated Financial Statements.

5


COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; in thousands)


 
Common
Stock
Shares
 
Common
Stock
Par
Value
 
Add.
Paid-in
Capital
 
Accum.
Other
Comp.
Income (Loss)
 
Retained
Earnings
 
Total
Balances, September 30, 2017
24,631

 
$
245

 
$
171,403

 
$
19,906

 
$
971,710

 
$
1,163,264

Common stock issued under stock plans, net of shares withheld for employee taxes
191

 
2

 
(30,749
)
 

 

 
(30,747
)
Cumulative effect of change in accounting principle

 

 

 

 
13,621

 
13,621

Stock-based compensation

 

 
7,110

 

 

 
7,110

Net income

 

 

 

 
41,901

 
41,901

Other comprehensive income, net of tax

 

 

 
232

 

 
232

Balances, December 30, 2017
24,822

 
$
247

 
$
147,764

 
$
20,138

 
$
1,027,232

 
$
1,195,381


 
Common
Stock
Shares
 
Common
Stock
Par
Value
 
Add.
Paid-in
Capital
 
Accum.
Other
Comp.
Income (Loss)
 
Retained
Earnings
 
Total
Balances, September 29, 2018
24,299

 
$
242

 
$
78,700

 
$
2,833

 
$
1,232,689

 
$
1,314,464

Common stock issued under stock plans, net of shares withheld for employee taxes
223

 
2

 
(9,141
)
 

 

 
(9,139
)
Repurchase of common stock
(195
)
 
(2
)
 
(25,499
)
 

 

 
(25,501
)
Stock-based compensation

 

 
7,791

 

 

 
7,791

Net income

 

 

 

 
35,550

 
35,550

Other comprehensive loss, net of tax

 

 

 
(5,682
)
 

 
(5,682
)
Balances, December 29, 2018
24,327

 
$
242

 
$
51,851

 
$
(2,849
)
 
$
1,268,239

 
$
1,317,483






See Accompanying Notes to Condensed Consolidated Financial Statements.


6



COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except par value)
 
December 29,
2018
 
September 29,
2018
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
314,997

 
$
310,495

Restricted cash
827


858

Short-term investments
5,019

 
120

Accounts receivable—net of allowances of $5,018 and $4,568, respectively
330,892

 
355,208

Inventories
493,156

 
486,741

Prepaid expenses and other assets
84,141

 
85,080

Total current assets
1,229,032

 
1,238,502

Property and equipment, net
320,933

 
311,793

Goodwill
442,236

 
442,940

Intangible assets, net
135,941

 
142,293

Non-current restricted cash
12,514


12,692

Other assets
112,956

 
111,749

Total assets
$
2,253,612

 
$
2,259,969

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Short-term borrowings and current-portion of long-term obligations
$
46,670


$
5,072

Accounts payable
74,738

 
70,292

Income taxes payable
94,302

 
114,145

Other current liabilities
161,401

 
183,329

Total current liabilities
377,111

 
372,838

Long-term obligations
413,505

 
420,711

Other long-term liabilities
145,513

 
151,956

Commitments and contingencies (Note 12)


 


Stockholders' equity:
 

 
 

Common stock, Authorized—500,000 shares, par value $.01 per share:
 

 
 

Outstanding—24,327 shares and 24,299 shares, respectively
242

 
242

Additional paid-in capital
51,851

 
78,700

Accumulated other comprehensive income (loss)
(2,849
)
 
2,833

Retained earnings
1,268,239

 
1,232,689

Total stockholders’ equity
1,317,483

 
1,314,464

Total liabilities and stockholders’ equity
$
2,253,612

 
$
2,259,969


See Accompanying Notes to Condensed Consolidated Financial Statements.

7


COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Three Months Ended
 
December 29,
2018

December 30,
2017
Cash flows from operating activities:
 

 
 

Net income
$
35,550

 
$
41,901

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

Depreciation and amortization
13,916

 
12,555

Amortization of intangible assets
15,067

 
15,100

Deferred income taxes
(1,505
)
 
13,121

Amortization of debt issuance cost
1,288

 
3,815

Stock-based compensation
7,876

 
7,076

Non-cash restructuring charges
76

 
430

Other non-cash expense
1

 
377

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

 
 

Accounts receivable
23,635

 
(1,219
)
Inventories
(9,501
)
 
(16,128
)
Prepaid expenses and other assets
1,199

 
(6,364
)
Other long-term assets
2,332

 
(3,365
)
Accounts payable
4,736

 
4,676

Income taxes payable/receivable
(21,842
)
 
29,751

Other current liabilities
(20,685
)
 
(39,336
)
Other long-term liabilities
(832
)
 
2,588

Cash flows from discontinued operations

 
2

Net cash provided by operating activities
51,311

 
64,980

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(23,137
)
 
(23,683
)
Proceeds from dispositions of property and equipment

 
26

Purchases of available-for-sale securities
(5,000
)
 
(14,894
)
Proceeds from sales and maturities of available-for-sale securities
121

 
9,711

Acquisition of businesses, net of cash acquired
(18,881
)
 

Investment at cost
(3,423
)
 

Proceeds from sale of discontinued operation

 
25,000

Net cash used in investing activities
(50,320
)
 
(3,840
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Short-term borrowings
68,124

 
2,354

Repayments of short-term borrowings
(26,476
)
 
(622
)
Repayments of long-term borrowings
(1,907
)
 
(90,363
)
Issuance of common stock under employee stock option and purchase plans
5,704

 
4,899

Net settlement of restricted common stock
(14,843
)
 
(35,646
)
Repurchase of common stock
(25,501
)
 

Net cash provided by (used in) financing activities
5,101

 
(119,378
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(1,799
)
 
943

Net increase (decrease) in cash, cash equivalents and restricted cash
4,293


(57,295
)
Cash, cash equivalents and restricted cash, beginning of period
324,045

 
457,087

Cash, cash equivalents and restricted cash, end of period
$
328,338

 
$
399,792

 
 
 
 
Non-cash investing and financing activities:
 
 
 
  Unpaid property and equipment purchases
$
6,082

 
$
3,853


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.
 
December 29,
2018
 
December 30,
2017
Cash and cash equivalents
$
314,997

 
$
385,735

Restricted cash, current
827

 
1,100

Restricted cash, non-current
12,514

 
12,957

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
$
328,338

 
$
399,792

See Accompanying Notes to Condensed Consolidated Financial Statements.

8


COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the 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 first fiscal quarters include 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 Generally Accepted Accounting Principles ("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 three months ended December 29, 2018, 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 quarter ended December 29, 2018 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

9


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 of 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.

Warranty

10



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

In May 2014, the Financial Accounting Standards Board ("the FASB") issued ASC 606, which outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, accordingly, we expect more judgment and estimates may be required within the revenue recognition process than were required under the previous revenue recognition standard, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASC 606 permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method).

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

11


information. 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 quarter ended December 29, 2018 due to the adoption of ASC 606.

In August 2018, the Securities and Exchange Commission ("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 have included the first presentation of changes in stockholders’ equity in this quarterly report on Form 10-Q for our first quarter of fiscal 2019.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued accounting guidance 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 expect the standard will have a material impact on our consolidated balance sheets, but will not have a material impact on our consolidated income statements. The most significant impact will be the recognition of Right-Of-Use assets and lease liabilities for operating leases, while our accounting for capital leases will remain substantially unchanged. We will continue to assess and disclose the impact that this new guidance will have on our consolidated financial statements, disclosures and related controls, when known.


3.     REVENUE RECOGNITION
Disaggregation of Revenue

Based on the information that our chief operating decision maker 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
 
December 29, 2018
 
December 30, 2017
 
OEM Laser Sources
 
Industrial Lasers & Systems
 
OEM Laser Sources
 
Industrial Lasers & Systems
Net sales:
 
 
 
 
 
 
 
Products(1)
$
152,742

 
$
111,975

 
$
230,768

 
$
118,260

Other product and service revenues(2)
89,606

 
28,823

 
94,889

 
33,648

Total net sales
$
242,348

 
$
140,798

 
$
325,657

 
$
151,908

(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 $12.6 million for the three months ended December 29, 2018 was recognized over time.

Sales by market application and segment

12


 
Three months ended
 
December 29, 2018
 
December 30, 2017
 
OEM Laser Sources
 
Industrial Lasers & Systems
 
OEM Laser Sources
 
Industrial Lasers & Systems
Net sales:
 
 
 
 
 
 
 
Microelectronics

$
162,203

 
$
16,206

 
$
250,237

 
$
17,939

Materials processing
8,802

 
95,841

 
10,453

 
117,008

OEM components and instrumentation
39,219

 
27,134

 
32,997

 
15,859

Scientific and government programs
32,124

 
1,617

 
31,970

 
1,102

Total net sales
$
242,348

 
$
140,798

 
$
325,657

 
$
151,908


See Note 18, "Segment and Geographic Information" for revenue disaggregation by reportable segment and geographic region.

Contract Balances

We record accounts receivable when we have an unconditional right to the consideration. Contract liabilities are recorded when cash payments are received or due in advance of performance. Contract liabilities consist of customer deposits and deferred revenue, where we have unsatisfied or partly satisfied performance obligations. Contract liabilities classified as customer deposits are included in other current liabilities and contract liabilities classified as deferred revenue are included in other current liabilities or other long-term liabilities on our condensed consolidated balance sheets. Payment terms vary by customer.

A rollforward of our customer deposits and deferred revenue is as follows (in thousands):
Beginning balance, September 30, 2018 (1)
 
$
55,637

Amount of customer deposits and deferred revenue recognized in income
 
(50,916
)
Additions to customer deposits and deferred revenue
 
41,270

Translation adjustments
 
(339
)
Ending balance, December 29, 2018 (2)
 
$
45,652


(1) Beginning customer deposits and deferred revenue as of September 30, 2018 includes $50,546 of current portion and $5,091 of long-term portion.            
(2) Ending customer deposits and deferred revenue as of December 29, 2018 includes $40,143 of current portion and $5,509 of long-term portion.    
        
Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. The following table includes estimated revenue expected to be recognized in the future related to performance obligations for sales of maintenance agreements, extended warranties, installation, and contracts with customer acceptance provisions included in customer deposits and deferred revenue as of December 29, 2018 (in thousands):
 
Remainder of fiscal 2019
 
Fiscal 2020
 
Fiscal 2021 and after
 
Total
Performance Obligations
$
37,626

 
$
5,177

 
$
2,849

 
$
45,652



4.     BUSINESS COMBINATIONS
Fiscal 2019 Acquisitions
Ondax
On October 5, 2018, we acquired privately held Ondax, Inc. ("Ondax") for approximately $12.0 million, excluding transaction costs. Ondax develops and produces photonic components which are used on an OEM basis by the laser industry as well as incorporated into its own stabilized lasers and Raman Spectroscopy systems. Ondax’s operating results have been included in our Industrial Lasers & Systems segment. See Note 18, "Segment and Geographic Information."
Our preliminary allocation of the purchase price is as follows (in thousands):

13


Tangible assets:
 
  Cash
$
103

  Accounts receivable
534

  Inventories
1,793

  Prepaid expenses and other assets
17

  Deferred tax assets
458

  Property and equipment
122

  Liabilities assumed
(499
)
Intangible assets:
 
  Existing technology
5,600

  Customer relationships
300

Goodwill
3,556

Total
$
11,984

Results of operations for the business have been included in our condensed consolidated financial statements subsequent to the date of acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisition was not material to our prior period consolidated financial results.
The identifiable intangible assets are being amortized over their respective preliminary useful lives of 1 to 8 years. The fair values of the acquired intangibles were determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of tangible and intangible assets, which was allocated to goodwill.
We believe the amount of goodwill relative to identifiable intangible assets relates to several factors including: (1) potential buyer-specific synergies related to the development of new technologies; and (2) the potential to leverage our sales force to attract new customers.
None of the goodwill from this purchase is deductible for tax purposes.
Quantum
On October 5, 2018, we acquired certain assets of Quantum Coating, Inc. ("Quantum") for approximately $7.0 million, excluding transaction costs, and will account for the transaction as an asset purchase.
Our preliminary allocation of the purchase price is as follows (in thousands):
Tangible assets:
 
  Property and equipment
$
2,770

Intangible assets:
 
  Existing technology
1,600

  Customer relationships
230

  Production know-how
2,300

  Backlog
100

Total
$
7,000

The identifiable intangible assets are being amortized over their respective preliminary useful lives of 1 to 5 years. The fair values of the acquired intangibles were determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations.

14


Fiscal 2018 Acquisitions
OR Laser
On March 8, 2018, we acquired OR Laser for approximately $47.4 million, excluding transaction costs. OR Laser produced laser-based material processing equipment for a variety of uses, including additive manufacturing, welding, cladding, marking, engraving and drilling. OR Laser’s operating results have been included in our Industrial Lasers & Systems segment. See Note 18, "Segment and Geographic Information."
Our allocation of the purchase price is as follows (in thousands):
Tangible assets:
 
  Cash
$
1,936

  Accounts receivable
3,973

  Inventories
2,360

  Prepaid expenses and other assets
630

  Property and equipment
1,515

  Liabilities assumed
(5,119
)
  Deferred tax liabilities
(4,517
)
Intangible assets:
 
  Existing technology
14,100

  Non-competition
200

  Backlog
100

  Customer relationships
700

  Trademarks
50

Goodwill
31,456

Total
$
47,384

Results of operations for the business have been included in our condensed consolidated financial statements subsequent to the date of acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisition was not material to our prior period consolidated financial results.
The identifiable intangible assets are being amortized over their respective preliminary useful lives of 1 to 8 years. The fair values of the acquired intangibles were determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of tangible and intangible assets, which was allocated to goodwill.
We believe the amount of goodwill relative to identifiable intangible assets relates to several factors including: (1) potential buyer-specific synergies related to the development of new technologies related primarily to the additive manufacturing business; and (2) the potential to leverage our sales force to attract new customers and revenue and cross-sell to existing customers.

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


5.     FAIR VALUES
 
We have not changed our valuation techniques in measuring the fair value of any financial assets and liabilities during the period. We recognize transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers between levels during the periods presented. As of December 29, 2018, we had one investment carried on a cost basis. See Note 9, "Balance Sheet Details". If we were to fair value this investment, it would be based upon Level 3 inputs; this investment is not considered material to our condensed consolidated financial statements. As of September 29, 2018, we did not have any assets or liabilities valued based upon Level 3 inputs.

15



We measure the fair value of outstanding debt obligations for disclosure purposes on a recurring basis. As of December 29, 2018, the current and long-term portion of long-term obligations of $5.7 million and $413.5 million, respectively, are reported at amortized cost. As of September 29, 2018, the current and long-term portion of long-term obligations of $5.1 million and $420.7 million, respectively, are reported at amortized cost. These outstanding obligations are classified as Level 2 as they are not actively traded and are valued using a discounted cash flow model that uses observable market inputs. Based on the discounted cash flow model, the fair value of the outstanding debt approximates amortized cost.

Financial assets and liabilities measured at fair value as of December 29, 2018 and September 29, 2018 are summarized below (in thousands):
 
 
Aggregate Fair Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Aggregate Fair Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
 
December 29, 2018
 
September 29, 2018
 
 
 
 
(Level 1)
 
(Level 2)
 
 
 
(Level 1)
 
(Level 2)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
Money market fund deposits
 
$
42,679

 
$
42,679

 
$

 
$
56,285

 
$
56,285

 
$

U.S. Treasury and agency obligations (1)

 
121

 

 
121

 

 

 

Commercial paper (1)
 
1,197

 

 
1,197

 

 

 

Short-term investments:
 
 
 
 
 
 
 


 


 


U.S. Treasury and agency obligations (1)
 
5,019

 

 
5,019

 
120

 

 
120

Prepaid and other assets:
 
 
 
 
 
 
 


 


 


Foreign currency contracts (2)
 
789

 

 
789

 
1,007

 

 
1,007

Money market fund deposits — Deferred comp and supplemental plan (3)
 
808

 
808

 

 
522

 
522

 

Mutual funds — Deferred comp and supplemental plan (3)
 
20,467

 
20,467

 

 
21,862

 
21,862

 

Total
 
$
71,080

 
$
63,954

 
$
7,126

 
$
79,796

 
$
78,669

 
$
1,127

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts (2)
 
(1,361
)
 

 
(1,361
)
 
(1,879
)
 

 
(1,879
)
Total
 
$
69,719

 
$
63,954

 
$
5,765

 
$
77,917

 
$
78,669

 
$
(752
)

 ___________________________________________________
(1)
Valuations are based upon quoted market prices in active markets involving similar assets. The market inputs used to value these instruments generally consist of market yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources include industry standard data providers, security master files from large financial institutions, and other third party sources which are input into a distribution-curve-based algorithm to determine a daily market value. This creates a "consensus price" or a weighted average price for each security.

(2)
The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large commercial banks. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. See Note 7, "Derivative Instruments and Hedging Activities."

(3)
The fair value of mutual funds is determined based on quoted market prices. Securities traded on a national exchange are stated at the last reported sales price on the day of valuation; other securities traded in over-the-counter markets and listed securities for which no sale was reported on that date are stated as the last quoted bid price.  

16




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

Cash, cash equivalents and short-term investments consist of the following (in thousands):
 
 
December 29, 2018
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash and cash equivalents
$
314,996

 
$
1

 
$

 
$
314,997

 
 
 
 

 
 

 
 
Short-term investments:
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

U.S. Treasury and agency obligations
5,000

 
19

 

 
5,019

Total short-term investments
$
5,000

 
$
19

 
$

 
$
5,019

 
 
September 29, 2018
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash and cash equivalents
$
310,495

 
$

 
$

 
$
310,495

 
 
 
 

 
 

 
 
Short-term investments:
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

       U.S. Treasury and agency obligations
120

 

 

 
120

Total short-term investments
$
120

 
$

 
$

 
$
120


There were no unrealized losses at December 29, 2018. There were no unrealized gains or losses at September 29, 2018.

The amortized cost and estimated fair value of available-for-sale investments in debt securities as of December 29, 2018 and September 29, 2018 classified as short-term investments on our condensed consolidated balance sheet were as follows (in thousands):
 
December 29, 2018
 
September 29, 2018
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Investments in available-for-sale debt securities due in less than one year
$
5,000

 
$
5,019

 
$
120

 
$
120

 
During the three months ended December 29, 2018, we received no proceeds from the sale of available-for-sale securities and realized no gross gains or losses. During the three months ended December 30, 2017, we received proceeds totaling $2.4 million from the sale of available-for-sale securities and realized no gross gains or losses.

 
7.    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
We maintain operations in various countries outside of the United States and have foreign subsidiaries that manufacture and sell our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the Euro, Japanese Yen, South Korean Won and Chinese Renminbi (RMB).

17


As a result, our earnings, cash flows and cash balances are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of two months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for speculative or trading purposes. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency rates at each respective date.
 
Non-Designated Derivatives

The outstanding notional contract and fair value asset (liability) amounts of non-designated hedge contracts, with maximum maturity of two months, are as follows (in thousands):
 
 
U.S. Notional Contract Value
 
U.S. Fair Value
 
December 29, 2018
 
September 29, 2018
 
December 29, 2018
 
September 29, 2018
Euro currency hedge contracts
 

 
 

 
 

 
 

Purchase
$
135,736

 
$
126,589

 
$
611

 
$
(1,554
)
  Sell
$
(7,134
)
 
$
(8,701
)
 
$
(31
)
 
43

 
 
 
 
 
 
 
 
Japanese Yen currency hedge contracts
 
 
 
 
 
 
 
Purchase
$
2,288

 
$

 
$
36

 
$

Sell
$
(41,210
)
 
$
(27,473
)
 
$
(809
)
 
$
637

 
 
 
 
 
 
 
 
South Korean Won currency hedge contracts
 
 
 
 
 
 
 
Purchase
$
1,660

 
$
2,778

 
$
(16
)
 
$
27

  Sell
$
(39,665
)
 
$
(31,920
)
 
$
(147
)
 
$
(109
)
 
 
 
 
 
 
 
 
Chinese RMB currency hedge contracts
 
 
 
 
 
 
 
Purchase
$
2,191

 
$
5,852

 
$
(16
)
 
$
(33
)
Sell
$
(37,938
)
 
$
(51,137
)
 
$
(331
)
 
$
300

 
 
 
 
 
 
 
 
Singapore Dollar currency hedge contracts
 
 
 
 
 
 
 
Purchase
$
34,687

 
$
30,127

 
$
69

 
$
(131
)
 
 
 
 
 
 
 
 
Other foreign currency hedge contracts
 

 
 

 
 

 
 

Purchase
$
5,682

 
$
4,091

 
$
21

 
$
(13
)
Sell
$
(7,387
)
 
$
(5,934
)
 
$
41

 
$
(39
)

The fair value of our derivative instruments is included in prepaid expenses and other assets and in other current liabilities in our Condensed Consolidated Balance Sheets. See Note 5, "Fair Values."

During the three months ended December 29, 2018 and December 30, 2017, we recognized losses of $3.7 million and $2.6 million, respectively, in other income (expense) for derivative instruments not designated as hedging instruments.

Master Netting Arrangements

To mitigate credit risk in derivative transactions, we enter into master netting arrangements that allow each counterparty in the arrangements to net settle amounts of multiple and separate derivative transactions under certain conditions. We present the fair value of derivative assets and liabilities within our condensed consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The impact of netting derivative assets and liabilities is not material to our financial position for any of the periods

18


presented. Our derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by us or the counterparties.


8.    GOODWILL AND INTANGIBLE ASSETS 

During the three months ended December 29, 2018, we noted no indications of impairment or triggering events to cause us to review goodwill for potential impairment. We will conduct our annual goodwill testing during the fourth fiscal quarter.
 
The changes in the carrying amount of goodwill by segment for the period from September 29, 2018 to December 29, 2018 are as follows (in thousands):
 
OEM Laser Sources
 
Industrial Lasers & Systems
 
Total
Balance as of September 29, 2018
$
100,732

 
$
342,208

 
$
442,940

Additions (see Note 4)

 
3,556

 
3,556

Translation adjustments and other
(1,106
)
 
(3,154
)
 
(4,260
)
Balance as of December 29, 2018
$
99,626

 
$
342,610

 
$
442,236

 
Components of our amortizable intangible assets are as follows (in thousands):
 
 
December 29, 2018
 
September 29, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Existing technology
$
206,454

 
$
(104,889
)
 
$
101,565

 
$
201,759

 
$
(94,376
)
 
$
107,383

Customer relationships
49,238

 
(23,384
)
 
25,854

 
50,359

 
(22,383
)
 
27,976

Trade name
5,788

 
(4,233
)
 
1,555

 
5,888

 
(3,818
)
 
2,070

Production know-how
2,300

 
(114
)
 
2,186

 

 

 

In-process research & development
4,781

 

 
4,781

 
4,864

 

 
4,864

Total
$
268,561

 
$
(132,620
)
 
$
135,941

 
$
262,870

 
$
(120,577
)
 
$
142,293


For accounting purposes, when an intangible asset is fully amortized, it is removed from the disclosure schedule.

Amortization expense for intangible assets for the three months ended December 29, 2018 and December 30, 2017 was $15.1 million and $15.1 million, respectively. The change in the accumulated amortization also includes $2.4 million (decrease) and $0.1 million (increase) of foreign exchange impact for the three months ended December 29, 2018 and December 30, 2017, respectively.

At December 29, 2018, estimated amortization expense for the remainder of fiscal 2019, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):
 
Estimated Amortization
Expense
2019 (remainder)
$
42,342

2020
49,637

2021
18,328

2022
7,188

2023
4,491

2024
3,108

Thereafter
6,066

Total (excluding IPR&D)
$
131,160



9.     BALANCE SHEET DETAILS

19


 
Inventories consist of the following (in thousands):
 
December 29,
2018
 
September 29,
2018
Purchased parts and assemblies
$
148,940

 
$
137,566

Work-in-process
178,947

 
186,240

Finished goods
165,269

 
162,935

Total inventories
$
493,156

 
$
486,741

 
Prepaid expenses and other assets consist of the following (in thousands):
 
December 29,
2018
 
September 29,
2018
Prepaid and refundable income taxes
$
39,165

 
$
37,884

Other taxes receivable
15,267

 
16,930

Prepaid expenses and other assets
29,709

 
30,266

Total prepaid expenses and other assets
$
84,141

 
$
85,080

 
Other assets consist of the following (in thousands):
 
December 29,
2018
 
September 29,
2018
Assets related to deferred compensation arrangements
$
35,465

 
$
37,370

Deferred tax assets
65,043

 
64,858

Other assets (1)
12,448

 
9,521

Total other assets
$
112,956

 
$
111,749


(1) In the first quarter of fiscal 2019, we invested 3.0 million Euro ($3.4 million) in 3D-Micromac AG, a company that specializes in laser micromachining. The investment is included in other assets and is being carried on a cost basis and will be adjusted, as necessary, for impairment.

Other current liabilities consist of the following (in thousands):
 
December 29,
2018
 
September 29,
2018
Accrued payroll and benefits
$
45,044

 
$
55,704

Deferred revenue
21,997

 
30,613

Warranty reserve
40,489

 
40,220

Accrued expenses and other
35,725

 
36,859

Customer deposits
18,146

 
19,933

Total other current liabilities
$
161,401

 
$
183,329

 
Components of the reserve for warranty costs during the first three months of fiscal 2019 and 2018 were as follows (in thousands):
 
Three Months Ended
 
December 29,
2018
 
December 30,
2017
Beginning balance
$
40,220

 
$
36,149

Additions related to current period sales
17,081

 
14,140

Warranty costs incurred in the current period
(16,376
)
 
(12,404
)
Accruals resulting from acquisitions
21

 

Adjustments to accruals related to foreign exchange and other
(457
)
 
(76
)
Ending balance
$
40,489

 
$
37,809


20



 
Other long-term liabilities consist of the following (in thousands):
 
December 29,
2018
 
September 29,
2018
Long-term taxes payable
$
35,709

 
$
36,336

Deferred compensation
39,021

 
40,895

Defined benefit plan liabilities
37,873

 
37,528

Deferred tax liabilities
21,615

 
26,339

Deferred revenue
5,509

 
5,091

Asset retirement obligations liability
4,551

 
4,529

Other long-term liabilities
1,235

 
1,238

Total other long-term liabilities
$
145,513

 
$
151,956

 

10.     BORROWINGS
 
On November 7, 2016 (the "Closing Date"), we entered into a Credit Agreement by and among us, Coherent Holding BV & Co. K.G. (formerly Coherent Holding GmbH), as borrower (the "Borrower"), and certain of our direct and indirect subsidiaries from time to time party thereto, as guarantors, the lenders from time to time party thereto, Barclays Bank PLC, as administrative agent and an L/C Issuer, Bank of America, N.A., as an L/C Issuer, and MUFG Union Bank, N.A., as an L/C Issuer (the "Initial Credit Agreement" and, as amended by the Amendments (defined below), the "Credit Agreement"). The Initial Credit Agreement provided for a 670.0 million Euro senior secured term loan facility (the "Euro Term Loan") and a $100.0 million senior secured revolving credit facility (the "Revolving Credit Facility") with a $30.0 million letter of credit sublimit and a $10.0 million swing line sublimit, in each case, which may be increased from time to time pursuant to an incremental feature set forth in the Credit Agreement. On November 7, 2016, the Borrower borrowed the full 670.0 million Euros under the Euro Term Loan and its proceeds were used to finance the acquisition of Rofin and pay related fees and expenses. On November 7, 2016, we also used 10.0 million Euros of the capacity under the Revolving Credit Facility for the issuance of a letter of credit. On November 20, 2018, we borrowed an additional $40.0 million under the Revolving Credit Facility. The Initial Credit Agreement was amended on May 8, 2017 (the "First Amendment") to reduce the interest rate margins applicable to the Euro Term Loan and was amended again on July 5, 2017 (the "Second Amendment" and, together with the First Amendment, the "Amendments") to make certain technical changes in connection with the conversion of the Borrower from a German company with limited liability to a German limited partnership.

The Credit Agreement contains customary mandatory prepayment provisions. The Borrower has the right to prepay loans under the Credit Agreement in whole or in part at any time without premium or penalty, subject to customary breakage costs. Revolving loans may be borrowed, repaid and reborrowed until the fifth anniversary of the Closing Date, at which time all outstanding revolving loans must be repaid. The Euro Term Loan matures on the seventh anniversary of the Closing Date, at which time all outstanding principal and accrued and unpaid interest on the Euro Term Loan must be repaid.

As of December 29, 2018, the outstanding principal amount of the Euro Term Loan was 369.9 million Euros. As of December 29, 2018, the outstanding amount of the Revolving Credit Facility was $40.0 million plus a 10.0 million Euro letter of credit.

Loans under the Credit Agreement bear interest, at the Borrower’s option, at a rate equal to either (i)(x) in the case of calculations with respect to U.S. Dollars or certain other alternative currencies, the London interbank offered rate (the "LIBOR") or (y) in the case of calculations with respect to the Euro, the euro interbank offered rate ("EURIBOR" and, together with LIBOR), the "Eurocurrency Rate") or (ii) a base rate (the "Base Rate") equal to the highest of (x) the federal funds rate, plus 0.50%, (y) the prime rate then in effect and (z) the Eurocurrency Rate for loans denominated in U.S. dollars applicable to a one-month interest period, plus 1.0%, in each case, plus an applicable margin that is subject to adjustment pursuant to a pricing grid based on consolidated total gross leverage ratio. At December 29, 2018, the applicable margin for Euro Term Loans borrowed as Eurocurrency Rate loans was 2.00% per annum and as Base Rate loans was 1.00% and the applicable margin for revolving loans borrowed as Eurocurrency Rate loans was 3.75% per annum and as Base Rate loans was 2.75% per annum. Interest on Base Rate Loans is payable quarterly in arrears. Interest

21


on Eurocurrency Rate loans is payable at the end of the applicable interest period (or at three month intervals if the interest period exceeds three months).

The Credit Agreement requires the Borrower to make scheduled quarterly payments on the Euro Term Loan of 0.25% of the original principal amount of the Euro Term Loan, with any remaining principal payable at maturity. A commitment fee accrues on any unused portion of the revolving loan commitments under the Credit Agreement at a rate of 0.375% or 0.5% depending on the consolidated total gross leverage ratio at any time of determination. The Borrower is also obligated to pay other customary fees for a credit facility of this size and type.

On the Closing Date, we and certain of our direct and indirect subsidiaries, as guarantors, provided an unconditional guaranty of all obligations of the Borrower and the other loan parties arising under the Credit Agreement, the other loan documents and under swap contracts and treasury management agreements with the lenders or their affiliates (with certain limited exceptions). The Borrower and the guarantors have also granted security interests in substantially all of their assets to secure such obligations.

The Credit Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of us and our subsidiaries to, among other things, incur debt, grant liens, make investments, make certain restricted payments, transact with affiliates, and sell assets. The Credit Agreement also requires us and our subsidiaries to maintain a senior secured net leverage ratio as of the last day of each fiscal quarter of less of than or equal to 3.50 to 1.00. We were in compliance with all covenants at December 29, 2018.

We incurred $28.5 million of debt issuance costs related to the Euro Term Loan and $0.5 million of debt issuance costs to the original lenders related to the First Amendment, which are included in short-term borrowings and current portion of long-term obligations and long-term obligations in the condensed consolidated balance sheets and will be amortized to interest expense over the seven year life of the Euro Term Loan using the effective interest method, adjusted to accelerate amortization related to voluntary repayments. We incurred $2.3 million of debt issuance costs in connection with the Revolving Credit Facility which were capitalized and included in prepaid expenses and other assets and other assets in the condensed consolidated balance sheets and will be amortized to interest expense using the straight-line method over the contractual term of five years of the Revolving Credit Facility.

Additional sources of cash available to us were international currency lines of credit and bank credit facilities totaling $26.4 million as of December 29, 2018, of which $18.0 million was unused and available. These unsecured international credit facilities were used in Europe and Japan during the first three months of fiscal 2019. As of December 29, 2018, we had utilized $7.4 million of the international credit facilities as guarantees in Europe and $1.0 million of the international credit facilities as borrowings in Japan.

Short-term borrowings and current portion of long-term obligations consist of the following (in thousands):
 
December 29,
2018
 
September 29,
2018
Current portion of Euro Term Loan (1)
$
3,065

 
$
3,092

1.3% Term loan due 2024
1,783

 
1,448

1.0% State of Connecticut term loan due 2023
375

 
374

OR Laser loans
158

 
158

Capital lease obligations
270

 

Line of credit borrowings
41,019

 

Total short-term borrowings and current portion of long-term obligations
$
46,670

 
$
5,072

(1) Net of debt issuance costs of $4.6 million and $4.7 million at December 29, 2018 and September 29, 2018, respectively.

Long-term obligations consist of the following (in thousands):

22


 
December 29,
2018
 
September 29,
2018
Euro Term Loan due 2024 (1)
$
404,562

 
$
411,661

1.3% Term loan due 2024
6,775

 
7,242

1.0% State of Connecticut term loan due 2023
1,312

 
1,406

OR Laser loans
364

 
402

Capital lease obligations
492

 

Total long-term obligations
$
413,505

 
$
420,711

(1) Net of debt issuance costs of $9.9 million and $11.2 million at December 29, 2018 and September 29, 2018, respectively.

Contractual maturities of our debt obligations as of December 29, 2018 are as follows (in thousands):
 
Amount
2019 (remainder)
$
7,766

2020
9,823

2021
9,808

2022
9,555

2023
9,461

2024
387,199

Total
$
433,612



11.  STOCK-BASED COMPENSATION
 
Fair Value of Stock Compensation
 
We recognize compensation expense for all share based payment awards based on the fair value of such awards. The expense is recognized on a straight-line basis per tranche over the respective requisite service period of the awards.
 
Determining Fair Value
 
The fair values of shares purchased under the Employee Stock Purchase Plan ("ESPP") for the three months ended December 29, 2018 and December 30, 2017, respectively, were estimated using the following weighted-average assumptions:
 
 
Employee Stock Purchase Plan
 
 
Three Months Ended
 
 
 
December 29,
2018
 
December 30,
2017
 
Expected life in years
 
0.5

 
0.5

 
Expected volatility
 
48.3
%
 
47.9
%
 
Risk-free interest rate
 
2.35
%
 
1.21
%
 
Expected dividend yield
 
%
 
%
 
Weighted average fair value per share
 
$
42.80

 
$
70.75

 

We grant performance restricted stock units to officers and certain employees. The performance restricted stock unit agreements provide for the award of performance stock units with each unit representing the right to receive one share of our common stock to be issued after the applicable award vesting period. The final number of units awarded, if any, for these performance grants will be determined as of the vesting dates, based upon our total shareholder return over the performance period compared to the applicable Russell Index and could range from no units to a maximum of twice the initial award units. The weighted average fair value for these performance units was determined using a Monte Carlo simulation model incorporating the following weighted average assumptions:

23


 
 
Three Months Ended
 
 
December 29, 2018
 
December 30, 2017
Risk-free interest rate
 
2.9
%
 
1.7
%
Volatility
 
43.7
%
 
37.0
%
Weighted average fair value per share
 
$
117.43

 
$
315.05


We recognize the estimated cost of these awards, as determined under the simulation model, over the related service period of approximately 3 years, with no adjustment in future periods based upon the actual shareholder return over the performance period.
 
Stock Compensation Expense
 
The following table shows total stock-based compensation expense and related tax benefits included in the condensed consolidated statements of operations for the three months ended December 29, 2018 and December 30, 2017 (in thousands):
 
 
Three Months Ended
 
 
 
December 29,
2018
 
December 30,
2017
 
Cost of sales
 
$
1,237

 
$
988

 
Research and development
 
650

 
668

 
Selling, general and administrative
 
5,989

 
5,420

 
Income tax benefit
 
(1,233
)
 
(1,609
)
 
 
 
$
6,643

 
$
5,467

 

During the three months ended December 29, 2018, $1.2 million of stock-based compensation cost was capitalized as part of inventory for all stock plans, $1.2 million was amortized into cost of sales and $1.4 million remained in inventory at December 29, 2018. During the three months ended December 30, 2017, $1.0 million of stock-based compensation was capitalized as part of inventory for all stock plans, $1.0 million was amortized into cost of sales and $1.3 million remained in inventory at December 30, 2017
 
At December 29, 2018, the total compensation cost related to unvested stock-based awards granted to employees under our stock plans but not yet recognized was approximately $51.6 million. We do not estimate forfeitures. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.6 years.

Stock Awards Activity

The following table summarizes the activity of our time-based and performance restricted stock units for the first three months of fiscal 2019 (in thousands, except per share amounts):
 
Time Based Restricted Stock Units
 
Performance Restricted Stock Units
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested stock at September 29, 2018
279

 
$
155.24

 
159

 
$
155.76

Granted
149

 
123.26

 
105

 
117.43

Vested (1)
(155
)
 
125.08

 
(131
)
 
74.48

Forfeited
(1
)
 
189.16

 

 

Nonvested stock at December 29, 2018
272

 
$
154.70

 
133

 
$
184.26


__________________________________________
(1)Service-based restricted stock units vested during the fiscal year. Performance-based restricted stock units included at 100% of target goal; under the terms of the awards, the recipient may earn between 0% and 200% of the award.

24




12.      COMMITMENTS AND CONTINGENCIES

Indemnifications

In the normal course of business, we enter into agreements that contain a variety of representations and warranties and provide for general indemnification. Exposure under these agreements is unknown because claims may be made against us in the future and we may record charges in the future as a result of these indemnification obligations. As of December 29, 2018, we did not have any material indemnification claims that were probable or reasonably possible.

Contingencies

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

The United States and many foreign governments impose tariffs and duties on the import and export of certain products we sell. From time to time our customs compliance, product classifications, duty calculations and payments are reviewed or audited by government agencies.


13.      STOCK REPURCHASES

On February 6, 2018, our board of directors authorized a stock repurchase program authorizing the Company to repurchase up to $100.0 million of our common stock from time to time through January 31, 2019. During fiscal 2018, we repurchased and retired 574,946 shares of outstanding common stock under this program at an average price of $173.91 per share for a total of $100.0 million.

On October 28, 2018, our board of directors authorized a stock repurchase program authorizing the Company to repurchase up to $250.0 million of our common stock through December 31, 2019, with a limit of no more than $75.0 million per quarter. During the first quarter of fiscal 2019, we repurchased and retired 194,801 shares of outstanding common stock under this program at an average price of $130.91 per share for a total of $25.5 million.


14.  EARNINGS PER SHARE
 
Basic earnings per share is computed based on the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive employee stock awards, including stock options, restricted stock awards and stock purchase plan contracts, using the treasury stock method.
 
The following table presents information necessary to calculate basic and diluted earnings per share (in thousands, except per share data): 
 
Three Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
Weighted average shares outstanding—basic
24,268

 
24,635

 
Dilutive effect of employee stock awards
204

 
390

 
Weighted average shares outstanding—diluted
24,472

 
25,025

 
 
 
 
 
 
Net income from continuing operations
$
35,550

 
$
41,903

 
Loss from discontinued operations, net of income taxes

 
(2
)
 
Net income
$
35,550

 
$
41,901

 

25


 
A total of 100,520 and 19,375 potentially dilutive securities have been excluded from the diluted share calculation for the three months ended December 29, 2018 and December 30, 2017, respectively, as their effect was anti-dilutive.


15.  OTHER INCOME (EXPENSE)
 
Other income (expense) is as follows (in thousands): 
 
Three Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
Foreign exchange loss
$
(2,177
)
 
$
(2,235
)
 
Gain (loss) on deferred compensation investments, net
(2,125
)
 
1,855

 
Other
(176
)
 
156

 
Other—net
$
(4,478
)
 
$
(224
)
 


16.  INCOME TAXES
 
Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries, adjusted for items which are considered discrete to the period.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act contains significant changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21.0% and implementing a territorial tax system. The Securities Exchange Commission issued guidance under Staff Accounting Bulletin No. 118 ("SAB 118") directing taxpayers to record the impact of the Tax Act as "provisional" when they do not have all the necessary information to complete the accounting under ASC 740. The guidance allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impact. In accordance with SAB 118, we recorded provisional estimates to our consolidated financial statements in fiscal 2018 based on the Tax Act. During the first quarter of fiscal 2019, we further analyzed the income tax effects of the Tax Act and there were no material changes to the provisional amounts disclosed in our fiscal 2018 financial statements. Although our accounting for the effects of the Tax Act is complete under SAB 118, there may be future adjustments based on changes in interpretations of the Tax Act, any legislative updates or final regulations under the Tax Act, any changes in accounting standards for income taxes or related interpretations or any updates or changes in estimates we have utilized to calculate the transitional impact.

The Tax Act also made other significant changes to U.S. federal income tax laws, including a global intangible low-taxed income tax (GILTI) and a base erosion anti-abuse tax (BEAT) which became effective for us beginning on September 30, 2018. There is no material impact of GILTI and BEAT expected.

Our effective tax rate on income from continuing operations before income taxes for the three months ended December 29, 2018 was 18.6%. Our effective tax rate for the three months ended December 29, 2018 was lower than the U.S. federal tax rate of 21.0% primarily due to the excess tax benefits from restricted stock unit vesting, the benefit of federal research and development tax credits and our Singapore tax exemption. This amount is partially offset by the impact of income subject to foreign tax rates that are higher than the U.S. tax rates, stock-based compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m).

Our effective tax rate on income from continuing operations before income taxes for the three months ended December 30, 2017 was 58.4%. Our effective tax rate for the three months ended December 30, 2017 was higher than the U.S. federal blended tax rate of 24.5% primarily due to the Tax Act's one-time mandatory deemed repatriation transition tax, the impact of income subject to foreign tax rates that are higher than U.S. tax rates, the remeasurement of deferred tax assets and liabilities based on the newly enacted U.S. Federal tax rate of 21.0%, stock-based compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m). These amounts are partially offset by the excess tax benefits from stock award exercises and restricted stock unit vesting, the benefit of foreign tax credits, the benefit of federal research and development tax credits, the benefit of a domestic manufacturing deduction under IRC Section 199 and our Singapore tax exemption.



26


17.  DEFINED BENEFIT PLANS
 
For the three months ended December 29, 2018 and December 30, 2017, net periodic cost under our defined benefit plans was $0.6 million and $0.5 million, respectively.


18.  SEGMENT AND GEOGRAPHIC INFORMATION

At December 29, 2018, we were organized into two reporting segments, OEM Laser Sources ("OLS") and Industrial Lasers & Systems ("ILS"), based upon our organizational structure and how the chief operating decision maker ("CODM") receives and utilizes information provided to allocate resources and make decisions. This segmentation reflects the go-to-market strategies and synergies for our broad portfolio of laser technologies and products. While both segments deliver cost-effective, highly reliable photonics solutions, the OLS business segment is focused on high performance laser sources and complex optical sub-systems, typically used in microelectronics manufacturing, medical diagnostics and therapeutic medical applications, as well as in scientific research. Our ILS business segment delivers high performance laser sources, sub-systems and tools primarily used for industrial laser materials processing, serving important end markets like automotive, machine tool, consumer goods and medical device manufacturing. Ondax’s and OR Laser's operating results have been included in our ILS segment.
 
We have identified OLS and ILS as operating segments for which discrete financial information is available. Both units have dedicated engineering, manufacturing, product business management and product line management functions. A small portion of our outside revenue is attributable to projects and recently developed products for which a segment has not yet been determined. The associated direct and indirect costs are presented in the category of Corporate and other, along with other corporate costs as described below.

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

The following table provides net sales and income from continuing operations for our operating segments and a reconciliation of our total income from continuing operations to income from continuing operations before income taxes (in thousands): 

27


 
Three Months Ended
 
December 29,
2018
 
December 30,
2017
Net sales:
 
 
 
OEM Laser Sources
$
242,348

 
$
325,657

Industrial Lasers & Systems
140,798

 
151,908

Total net sales
$
383,146

 
$
477,565

 
 
 
 
Income (loss) from continuing operations:
 
 
 
OEM Laser Sources
$
78,858

 
$
127,717

Industrial Lasers & Systems
(13,704
)
 
1,213

Corporate and other
(12,343
)
 
(19,607
)
Total income from continuing operations
52,811

 
109,323

 Total other income (expense), net
(9,151
)
 
(8,500
)
Income from continuing operations before income taxes
$
43,660

 
$
100,823

   
Geographic Information
Our foreign operations consist primarily of manufacturing facilities and sales offices in Europe and Asia-Pacific. Sales, marketing and customer service activities are conducted through sales subsidiaries throughout the world. Geographic sales information for first quarter of fiscal 2019 and 2018 is based on the location of the end customer.
Sales to unaffiliated customers are as follows (in thousands):
 
Three months ended
SALES
December 29,
2018
 
December 30,
2017
 
United States
$
84,030

 
$
71,944

 
Foreign countries:

 

 
South Korea
106,526

 
178,367