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 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.
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 May 6, 2019 was 24,190,771.
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
(Unaudited; in thousands)
Three Months Ended
Six Months Ended
March 30, 2019
March 31, 2018
March 30, 2019
March 31, 2018
Net income
$
20,750
$
65,302
$
56,300
$
107,203
Other comprehensive income (loss): (1)
Translation adjustment, net of taxes (2)
(7,578
)
21,344
(13,268
)
21,436
Changes in unrealized losses on available-for-sale securities, net of taxes (3)
—
(1
)
—
(8
)
Defined benefit pension plans, net of taxes (4)
(756
)
(344
)
(748
)
(197
)
Other comprehensive income (loss), net of tax
(8,334
)
20,999
(14,016
)
21,231
Comprehensive income
$
12,416
$
86,301
$
42,284
$
128,434
(1)
Reclassification adjustments were not significant during the three and six months ended March 30, 2019 and March 31, 2018.
(2)
Tax benefits of $691 and $3,446 were provided on translation adjustments during the three and six months ended March 30, 2019, respectively. Tax expenses (benefits) were not provided on translation adjustments during the three and six months ended March 31, 2018.
(3)
Tax expenses (benefits) were not provided on changes in unrealized losses on available-for-sale securities for the three and six months ended March 30, 2019, respectively. Tax expenses (benefits) of $1 and $(3) were provided on changes in unrealized losses on available-for-sale securities for the three and six months ended March 31, 2018, respectively.
(4)
Tax benefits of $277 and $283 were provided on changes in defined benefit pension plans for the three and six months ended March 30, 2019, respectively. Tax benefits of $9 and $55 were provided on changes in defined benefit pension plans for the three and six months ended March 31, 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
27,690
25,399
Amortization of intangible assets
29,099
30,429
Deferred income taxes
(4,453
)
14,079
Amortization of debt issuance cost
2,562
7,221
Stock-based compensation
16,880
15,486
Non-cash restructuring charges
323
439
Other non-cash expense (income)
(1,224
)
92
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable
40,560
5,785
Inventories
(2,649
)
(59,678
)
Prepaid expenses and other assets
9,992
(5,193
)
Other long-term assets
2,300
(3,753
)
Accounts payable
(802
)
13,587
Income taxes payable/receivable
(29,192
)
20,815
Other current liabilities
(20,671
)
(41,575
)
Other long-term liabilities
(392
)
2,463
Net cash provided by operating activities
126,323
132,799
Cash flows from investing activities:
Purchases of property and equipment
(41,525
)
(44,951
)
Proceeds from dispositions of property and equipment
4,331
90
Purchases of available-for-sale securities
(11,433
)
(32,838
)
Proceeds from sales and maturities of available-for-sale securities
93
28,197
Acquisition of businesses, net of cash acquired
(18,881
)
(45,448
)
Investment at cost
(3,423
)
—
Proceeds from sale of discontinued operation
—
25,000
Other
—
470
Net cash used in investing activities
(70,838
)
(69,480
)
Cash flows from financing activities:
Short-term borrowings
88,424
36,672
Repayments of short-term borrowings
(48,235
)
(36,955
)
Repayments of long-term borrowings
(3,802
)
(166,913
)
Issuance of common stock under employee stock option and purchase plans
5,704
4,899
Net settlement of restricted common stock
(15,141
)
(36,250
)
Repurchase of common stock
(51,406
)
—
Net cash used in financing activities
(24,456
)
(198,547
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(4,601
)
1,704
Net increase (decrease) in cash, cash equivalents and restricted cash
26,428
(133,524
)
Cash, cash equivalents and restricted cash, beginning of period
324,045
457,087
Cash, cash equivalents and restricted cash, end of period
$
350,473
$
323,563
Non-cash investing and financing activities:
Unpaid property and equipment purchases
$
5,351
$
3,362
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.
March 30, 2019
March 31, 2018
Cash and cash equivalents
$
337,321
$
308,987
Restricted cash, current
814
1,144
Restricted cash, non-current
12,338
13,432
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
$
350,473
$
323,563
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 second 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 six months ended March 30, 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 six months ended March 30, 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 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 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 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 ("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
March 30, 2019
March 31, 2018
OEM Laser Sources
Industrial Lasers & Systems
OEM Laser Sources
Industrial Lasers & Systems
Net sales:
Products(1)
$
143,895
$
112,779
$
220,624
$
128,665
Other product and service revenues(2)
87,702
28,484
96,514
35,315
Total net sales
$
231,597
$
141,263
$
317,138
$
163,980
(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 $13.4 million for the three months ended March 30, 2019 was recognized over time.
Six months ended
March 30, 2019
March 31, 2018
OEM Laser Sources
Industrial Lasers & Systems
OEM Laser Sources
Industrial Lasers & Systems
Net sales:
Products(1)
$
296,637
$
224,753
$
451,392
$
246,926
Other product and service revenues(2)
177,308
57,308
191,403
68,962
Total net sales
$
473,945
$
282,061
$
642,795
$
315,888
(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 $26.0 million for the six months ended March 30, 2019 was recognized over time.
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 (2)
(96,345
)
Additions to customer deposits and deferred revenue
84,113
Translation adjustments
(616
)
Ending balance, March 30, 2019 (3)
$
42,789
(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) Amount of customer deposits and deferred revenue recognized in the three and six months ended March 30, 2019 was $45,429 and $96,345, respectively.
(3) Ending customer deposits and deferred revenue as of March 30, 2019 includes $37,275 of current portion and $5,514 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 March 30, 2019 (in thousands):
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):
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 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 allocation of the purchase price is as follows (in thousands):
The identifiable intangible assets are being amortized over their respective 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.
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 March 30, 2019, 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.
We measure the fair value of outstanding debt obligations for disclosure purposes on a recurring basis. As of March 30, 2019, the current and long-term portion of long-term obligations of $5.7 million and $405.8 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 March 30, 2019 and September 29, 2018 are summarized below (in thousands):
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.
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):
March 30, 2019
Cost Basis
Unrealized
Gains
Unrealized
Losses
Fair Value
Cash and cash equivalents
$
337,321
$
—
$
—
$
337,321
Short-term investments:
Available-for-sale securities:
Commercial paper
$
6,460
$
—
$
—
$
6,460
U.S. Treasury and agency obligations
5,000
20
—
5,020
Total short-term investments
$
11,460
$
20
$
—
$
11,480
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 March 30, 2019. 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 March 30, 2019 and September 29, 2018 classified as short-term investments on our condensed consolidated balance sheet were as follows (in thousands):
March 30, 2019
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
$
11,460
$
11,480
$
120
$
120
During the three and six months ended March 30, 2019, we received no proceeds from the sale of available-for-sale securities and realized no gross gains or losses. During the three months ended March 31, 2018, we received no proceeds from the sale of available-for-sale securities and realized no gross gains or losses. During the six months ended March 31, 2018, 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). 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
March 30, 2019
September 29, 2018
March 30, 2019
September 29, 2018
Euro currency hedge contracts
Purchase
$
40,755
$
126,589
$
(579
)
$
(1,554
)
Sell
$
(3,479
)
$
(8,701
)
$
28
43
Japanese Yen currency hedge contracts
Purchase
$
—
$
—
$
—
$
—
Sell
$
(11,848
)
$
(27,473
)
$
21
$
637
South Korean Won currency hedge contracts
Purchase
$
781
$
2,778
$
(5
)
$
27
Sell
$
(29,829
)
$
(31,920
)
$
519
$
(109
)
Chinese RMB currency hedge contracts
Purchase
$
1,964
$
5,852
$
(1
)
$
(33
)
Sell
$
(26,419
)
$
(51,137
)
$
67
$
300
Singapore Dollar currency hedge contracts
Purchase
$
31,902
$
30,127
$
(126
)
$
(131
)
Other foreign currency hedge contracts
Purchase
$
6,260
$
4,091
$
5
$
(13
)
Sell
$
(5,982
)
$
(5,934
)
$
60
$
(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 and six months ended March 30, 2019, we recognized losses of $3.0 million and $6.7 million, respectively, in other income (expense) for derivative instruments not designated as hedging instruments. During the three and six months ended March 31, 2018, we recognized a gain of $1.0 million and a loss of $1.6 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 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.
During the six months ended March 30, 2019, 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 March 30, 2019 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
(1,886
)
(8,613
)
(10,499
)
Balance as of March 30, 2019
$
98,846
$
337,151
$
435,997
Components of our amortizable intangible assets are as follows (in thousands):
March 30, 2019
September 29, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Existing technology
$
202,766
$
(115,395
)
$
87,371
$
201,759
$
(94,376
)
$
107,383
Customer relationships
43,092
(19,056
)
24,036
50,359
(22,383
)
27,976
Trade name
5,723
(4,660
)
1,063
5,888
(3,818
)
2,070
Production know-how
2,300
(228
)
2,072
—
—
—
In-process research & development
4,716
—
4,716
4,864
—
4,864
Total
$
258,597
$
(139,339
)
$
119,258
$
262,870
$
(120,577
)
$
142,293
For accounting purposes, when an intangible asset is fully amortized, it is removed from the disclosure schedule.
The in-process research and development project is not expected to be completed in fiscal 2019.
Amortization expense for intangible assets for the six months ended March 30, 2019 and March 31, 2018 was $29.1 million and $30.4 million, respectively. The change in the accumulated amortization also includes $4.4 million (decrease) and $4.5 million (increase) of foreign exchange impact for the six months ended March 30, 2019 and March 31, 2018, respectively.
At March 30, 2019, 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)
$
27,758
2020
48,652
2021
17,828
2022
6,786
2023
4,417
2024
3,071
Thereafter
6,030
Total (excluding IPR&D)
$
114,542
9. BALANCE SHEET DETAILS
Inventories consist of the following (in thousands):
Prepaid expenses and other assets consist of the following (in thousands):
March 30, 2019
September 29, 2018
Prepaid and refundable income taxes
$
39,539
$
37,884
Other taxes receivable
10,632
16,930
Prepaid expenses and other assets
29,294
30,266
Total prepaid expenses and other assets
$
79,465
$
85,080
Other assets consist of the following (in thousands):
March 30, 2019
September 29, 2018
Assets related to deferred compensation arrangements
$
33,605
$
37,370
Deferred tax assets
64,065
64,858
Other assets (1)
11,844
9,521
Total other assets
$
109,514
$
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):
March 30, 2019
September 29, 2018
Accrued payroll and benefits
$
54,162
$
55,704
Deferred revenue
23,898
30,613
Warranty reserve
38,991
40,220
Accrued expenses and other
33,525
36,859
Customer deposits
13,377
19,933
Total other current liabilities
$
163,953
$
183,329
Components of the reserve for warranty costs during the first six months of fiscal 2019 and 2018 were as follows (in thousands):
Six Months Ended
March 30, 2019
March 31, 2018
Beginning balance
$
40,220
$
36,149
Additions related to current period sales
27,816
24,290
Warranty costs incurred in the current period
(28,406
)
(24,212
)
Accruals resulting from acquisitions
21
179
Adjustments to accruals related to foreign exchange and other
Other long-term liabilities consist of the following (in thousands):
March 30, 2019
September 29, 2018
Long-term taxes payable
$
36,341
$
36,336
Deferred compensation
37,313
40,895
Defined benefit plan liabilities
37,365
37,528
Deferred tax liabilities
16,605
26,339
Deferred revenue
5,514
5,091
Asset retirement obligations liability
4,656
4,529
Other long-term liabilities
957
1,238
Total other long-term liabilities
$
138,751
$
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 March 30, 2019, the outstanding principal amount of the Euro Term Loan was 368.3 million Euros. As of March 30, 2019, 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 March 30, 2019, 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 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 March 30, 2019.
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 $26.2 million as of March 30, 2019, of which $17.1 million was unused and available. These unsecured international credit facilities were used in Europe and Japan during the first six months of fiscal 2019. As of March 30, 2019, we had utilized $7.8 million of the international credit facilities as guarantees in Europe and $1.3 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):
March 30, 2019
September 29, 2018
Current portion of Euro Term Loan (1)
$
3,038
$
3,092
1.3% Term loan due 2024
1,404
1,448
1.0% State of Connecticut term loan due 2023
376
374
OR Laser loans
118
158
Capital lease obligations
741
—
Line of credit borrowings
41,302
—
Total short-term borrowings and current portion of long-term obligations
$
46,979
$
5,072
(1) Net of debt issuance costs of $4.5 million and $4.7 million at March 30, 2019 and September 29, 2018, respectively.
Long-term obligations consist of the following (in thousands):