Coherent, Inc 10-q q1 2016

10Q1a201672_10q.
htm10Q
TableofContents
UNITEDSTATES
SECURITIESANDEXCHANGECOMMISSION
WASHINGTON,D.C.20549
___________________________________________________
FORM10Q
___________________________________________________
(MarkOne)
QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIES
EXCHANGEACTOF1934
FortheQuarterlyPeriodEndedJuly2,2016
or
TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIES
EXCHANGEACTOF1934
Forthetransitionperiodfromto
CommissionFileNumber:00133962
COHERENT,INC.
Delaware
(Stateorotherjurisdictionof
incorporationororganization)
941622541
(I.R.S.Employer
IdentificationNo.)
5100PatrickHenryDrive,SantaClara,California95054
(Addressofprincipalexecutiveoffices)(ZipCode)
Registrantstelephonenumber,includingareacode:(408)7644000
___________________________________________________
Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecurities
ExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports)
and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesxNo
IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,every
InteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationST(232.405ofthischapter)duringthe
preceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles).YesxNo
Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anonacceleratedfiler,orasmaller
reportingcompany.Seedefinitionsoflargeacceleratedfiler,acceleratedfilerandsmallerreportingcompanyinRule12b2of
theExchangeAct.(Checkone):
Largeacceleratedfilerx
Nonacceleratedfiler
(donotcheckifasmallerreportingcompany)
Acceleratedfiler
Smallerreportingcompany
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b2oftheExchangeAct).YesNox
Thenumberofsharesoutstandingofregistrantscommonstock,parvalue$.01pershare,onAugust8,2016was24,322,965.
TableofContents
COHERENT,INC.
INDEX
PartI.
Item1.
Page
FinancialInformation
FinancialStatements(unaudited)
CondensedConsolidatedStatementsofOperations
ThreeandninemonthsendedJuly2,2016andJuly4,2015
CondensedConsolidatedStatementsofComprehensiveIncome
ThreeandninemonthsendedJuly2,2016andJuly4,2015
CondensedConsolidatedBalanceSheets
Item2.
Item3.
Item4.
PartII.
Item1.
Item1A.
Item6.
CondensedConsolidatedStatementsofCashFlows
July2,2016andOctober3,2015
NinemonthsendedJuly2,2016andJuly4,2015
NotestoCondensedConsolidatedFinancialStatements
Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations
24
QuantitativeandQualitativeDisclosuresAboutMarketRisk
47
ControlsandProcedures
49
OtherInformation
LegalProceedings
50
RiskFactors
50
Exhibits
68
Signatures
70
TableofContents
SPECIALNOTEREGARDINGFORWARDLOOKINGSTATEMENTS
ThisquarterlyreportcontainscertainforwardlookingstatementswithinthemeaningofSection27AoftheSecuritiesActof1933and
Section21EoftheSecuritiesExchangeActof1934.Allstatementsincludedinorincorporatedbyreferenceinthisquarterlyreport,
otherthanstatementsofhistoricalfact,areforwardlookingstatements.Thesestatementsaregenerallyaccompaniedbywordssuchas
trend,may,will,could,would,should,expect,plan,anticipate,rely,believe,estimate,predict,intend,
potential,continue,"outlook,"forecastorthenegativeofsuchterms,orothercomparableterminology,includingwithout
limitationstatementsmadeunderOurStrategy,discussionsregardingourbookingsandinManagementsDiscussionandAnalysis
ofFinancialConditionandResultsofOperations.Forwardlookingstatementsalsoincludetheassumptionsunderlyingorrelatingto
anyoftheforegoingstatements.ActualresultsofCoherent,Inc.(referredtohereinastheCompany,we,ourorCoherent)maydiffer
significantlyfromthoseanticipatedintheseforwardlookingstatementsasaresultofvariousfactors,includingthosediscussedinthe
sectionscaptionedOurStrategy,RiskFactors,KeyPerformanceIndicators,aswellasanyothercautionarylanguageinthis
quarterlyreport.Allforwardlookingstatementsincludedinthedocumentarebasedoninformationavailabletousonthedatehereof.
Weundertakenoobligationtoupdatetheseforwardlookingstatementsasaresultofeventsorcircumstancesortoreflectthe
occurrenceofunanticipatedeventsornonoccurrenceofanticipatedevents.
3
TableofContents
PARTI.FINANCIALINFORMATION
ITEM1.FINANCIALSTATEMENTS
COHERENT,INC.ANDSUBSIDIARIES
CONDENSEDCONSOLIDATEDSTATEMENTSOFOPERATIONS
(Unauditedinthousands,exceptpersharedata)
ThreeMonthsEnded
July2,
2016
Netsales
July4,
2015
NineMonthsEnded
July2,
2016
July4,
2015
218,767 $
188,502 $
608,924 $
592,838
Costofsales
124,208
109,720
341,868
348,433
Grossprofit
94,559
78,782
267,056
244,405
Operatingexpenses:
Researchanddevelopment
21,441
21,270
61,536
61,467
Selling,generalandadministrative
46,256
36,154
123,970
113,777
2,017
2,017
Impairmentofinvestment
Amortizationofintangibleassets
Totaloperatingexpenses
Incomefromoperations
Otherincome(expense):
574
647
1,975
2,009
68,271
60,088
187,481
179,270
26,288
18,694
79,575
65,135
Interestanddividendincome
351
183
854
440
Interestexpense
(63)
(4)
(108)
(29)
Othernet
564
(787)
(1,896)
286
852
(608)
(1,150)
697
27,140
18,086
78,425
65,832
8,490
4,822
21,708
16,725
18,650 $
13,264 $
56,717 $
49,107
Totalotherincome(expense),net
Incomebeforeincometaxes
Provisionforincometaxes
$
Netincome
Netincomepershare:
Basic
0.77 $
0.54 $
2.35 $
1.98
Diluted
0.76 $
0.53 $
Sharesusedincomputation:
2.33 $
1.96
Basic
24,192
24,737
24,108
24,794
Diluted
24,467
24,972
24,355
25,018
SeeAccompanyingNotestoCondensedConsolidatedFinancialStatements.
4
TableofContents
CONDENSEDCONSOLIDATEDSTATEMENTSOFCOMPREHENSIVEINCOME
(Unauditedinthousands)
ThreeMonthsEnded
July2,
2016
July4,
2015
NineMonthsEnded
July2,
2016
July4,
2015
Netincome
18,650 $
13,264 $
56,717 $
49,107
Othercomprehensiveincome(loss):(1)
Translationadjustment,netoftaxes(2)
(6,396)
1,108
(1,334)
(46,691)
77
(28)
627
(37)
1,059
2,426
1,260
(6,433)
2,244
1,064
(44,804)
15,508 $
57,781 $
Netgain(loss)onderivativeinstruments,netoftaxes(3)
Changesinunrealizedgains(losses)onavailableforsale
securities,netoftaxes(4)
Othercomprehensiveincome(loss),netoftax
Comprehensiveincome
12,217 $
4,303
(1)
ReclassificationadjustmentswerenotsignificantduringthethreeandninemonthsendedJuly2,2016andJuly4,2015.
(2)
Taxexpensesof$185and$304wereprovidedontranslationadjustmentsduringthethreeandninemonthsendedJuly2,2016,
respectively.Taxbenefitsof$98and$1,960wereprovidedontranslationadjustmentsduringthethreeandninemonthsended
July4,2015,respectively.
(3)
Taxexpenses(benefits)of$0and$(17)wereprovidedonnetgain(loss)onderivativeinstrumentsduringthethreeandnine
monthsendedJuly2,2016.Taxexpensesof$45and$364wereprovidedonnetgain(loss)onderivativeinstrumentsduringthe
threeandninemonthsendedJuly4,2015.
(4)
Taxexpenses(benefits)of$(22)and$1,415wereprovidedonunrealizedgains(losses)onavailableforsalesecuritiesduringthe
threeandninemonthsendedJuly2,2016.Taxexpensesof$619and$738wereprovidedonunrealizedgains(losses)on
availableforsalesecuritiesforthethreeandninemonthsendedJuly4,2015.
TableofContents
CONDENSEDCONSOLIDATEDBALANCESHEETS
(Unauditedinthousands,exceptparvalue)
July2,
2016
ASSETS
October3,
2015
Currentassets:
Cashandcashequivalents
139,407
130,607
Shortterminvestments
234,205
194,908
Accountsreceivablenetofallowancesof$2,632and$3,015,respectively
150,184
142,260
Inventories
200,171
156,614
36,349
28,294
Totalcurrentassets
760,316
652,683
Propertyandequipment,net
111,738
102,445
Goodwill
101,308
101,817
Intangibleassets,net
16,092
22,776
Otherassets
92,856
89,226
Prepaidexpensesandotherassets
Totalassets
1,082,310
LIABILITIESANDSTOCKHOLDERSEQUITY
Currentliabilities:
Shorttermborrowings
20,000
968,947
Accountspayable
44,182
33,379
Incometaxespayable
10,136
4,279
Othercurrentliabilities
92,061
84,932
166,379
122,590
44,985
49,939
Totalcurrentliabilities
Otherlongtermliabilities
Commitmentsandcontingencies(Note11)
Stockholdersequity:
Commonstock,Authorized500,000shares,parvalue$.01pershare:
Outstanding24,295sharesand23,970shares,respectively
Additionalpaidincapital
Accumulatedothercomprehensiveloss
242
238
145,350
128,607
(8,449)
Retainedearnings
Totalstockholdersequity
$
Totalliabilitiesandstockholdersequity
677,086
870,946
796,418
1,082,310
(9,513)
733,803
$
968,947
TableofContents
CONDENSEDCONSOLIDATEDSTATEMENTSOFCASHFLOWS
(Unauditedinthousands)
NineMonthsEnded
July2,
2016
Cashflowsfromoperatingactivities:
Netincome
Adjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivities:
Depreciationandamortization
Deferredincometaxes
Stockbasedcompensation
Othernoncashexpense
Changesinassetsandliabilities,netofeffectofacquisitions:
Accountsreceivable
Inventories
Otherassets
Accountspayable
July4,
2015
56,717
49,107
19,410
18,453
6,201
6,176
2,017
(3,356)
5,312
14,821
13,737
387
(4,195)
(43,627)
2,011
(4,809)
(21,193)
(577)
(670)
9,824
641
(11,800)
(15,637)
(2,759)
Othercurrentliabilities
4,519
19,177
2,065
1,496
54,621
68,835
Incometaxespayable/receivable
Netcashprovidedbyoperatingactivities
Cashflowsfrominvestingactivities:
Purchasesofpropertyandequipment
(28,310)
Proceedsfromdispositionsofpropertyandequipment
422
Purchasesofavailableforsalesecurities
Proceedsfromsalesandmaturitiesofavailableforsalesecurities
Netcashusedininvestingactivities
Repaymentsofshorttermborrowings
Debtissuancecosts
Issuanceofcommonstockunderemployeestockoptionandpurchaseplans
Increaseincashoverdraft
Repurchaseofcommonstock
(16,187)
1,848
(274,832)
144,966
270,044
(63,764)
(19,127)
Shorttermborrowings
Netcashprovidedby(usedin)financingactivities
Effectofexchangeratechangesoncashandcashequivalents
Netincreaseincashandcashequivalents
Cashandcashequivalents,beginningofperiod
Cashandcashequivalents,endofperiod
Noncashinvestingandfinancingactivities:
Unpaidpropertyandequipmentpurchases
54,792
24,354
(34,792)
(24,354)
(2,530)
7,249
7,256
880
Netsettlementofrestrictedcommonstock
(180,842)
Cashflowsfromfinancingactivities:
(25,009)
(5,414)
(5,295)
20,185
(23,048)
(2,242)
(14,739)
8,800
11,921
130,607
91,217
139,407
103,138
2,538
941
7
TableofContents
NOTESTOCONDENSEDCONSOLIDATEDFINANCIALSTATEMENTS
(Unaudited)
1.BASISOFPRESENTATION
Theaccompanyingunauditedcondensedconsolidatedfinancialstatementshavebeenpreparedpursuanttotherulesandregulations
oftheSecuritiesandExchangeCommission(SEC).Certaininformationandfootnotedisclosuresnormallyincludedinfinancial
statementspreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(GAAP)have
beencondensedoromittedpursuanttosuchrulesandregulations.Theseinterimcondensedconsolidatedfinancialstatementsand
notestheretoshouldbereadinconjunctionwiththeCoherent,Inc.(referredtohereinastheCompany,we,our,usor
Coherent)condensedconsolidatedfinancialstatementsandnotestheretofiledonForm10KforthefiscalyearendedOctober3,
2015.Intheopinionofmanagement,alladjustmentsnecessaryforafairpresentationoffinancialconditionandresultsofoperation
asofandfortheperiodspresentedhavebeenmadeandincludeonlynormalrecurringadjustments.Interimresultsofoperations
arenotnecessarilyindicativeofresultstobeexpectedfortheyearoranyotherinterimperiods.Ourfiscalyearendsonthe
SaturdayclosesttoSeptember30andourthirdfiscalquartersinclude13weeksofoperationsineachfiscalyearpresented.Fiscal
year2016includes52weeksandfiscalyear2015includes53weeks.Certainreclassificationshavebeenmadetothepriorperiod
amountstoconformtothecurrentperiod'spresentationrelatedtothereclassificationof$28.1millionofcurrentdeferredincome
taxassetstononcurrentdeferredincometaxassetsandnoncurrentdeferredincometaxliabilities.
2.RECENTACCOUNTINGSTANDARDS
AdoptionofNewAccountingPronouncements
InNovember2015,theFASBissuedamendedguidancethatclarifiesthatinaclassifiedstatementoffinancialposition,anentity
shallclassifydeferredtaxliabilitiesandassetsasnoncurrentamounts.ThenewguidancesupersedesASC74010455which
requiredthevaluationallowanceforaparticulartaxjurisdictionbeallocatedbetweencurrentandnoncurrentdeferredtaxassetsfor
thattaxjurisdictiononaproratabasis.Weelectedtoearlyadoptthestandardretrospectivelyinthefirstquarteroffiscal2016,
whichresultedinthereclassificationof$28.1millionfromcurrentdeferredincometaxassetstononcurrentdeferredincometax
assetsandnoncurrentdeferredincometaxliabilitiesasofOctober3,2015.
InApril2015,theFASBissuedamendedguidancethatsimplifiesthepresentationofdebtissuancecostsbyrequiringthatdebt
issuancecostsrelatedtoarecognizeddebtliabilitybepresentedinthebalancesheetasadirectdeductionfromthecarrying
amountofthatdebtliability,consistentwithdebtdiscounts.Therecognitionandmeasurementguidancefordebtissuancecostsare
notaffectedbytheamendedguidance.ThenewstandardwillbecomeeffectiveforourfiscalyearbeginningOctober2,2016.We
electedtoearlyadoptthestandardinthesecondquarteroffiscal2016andhaverecordedthedebtissuancecostsof$2.5millionas
ofJuly2,2016inotherassetsforthedebtcommitmentweenteredintointhesecondquarteroffiscal2016.
RecentlyIssuedAccountingPronouncements
InMarch2016,theFASBissuedamendedguidancethatsimplifiesseveralaspectsoftheaccountingforemployeesharebased
paymenttransactions,includingtheaccountingforincometaxes,forfeitures,andstatutorytaxwithholdingrequirements,aswellas
classificationinthestatementofcashflows.Underthenewguidance,anentityrecognizesallexcesstaxbenefitsandtax
deficienciesasincometaxexpenseorbenefitintheincomestatement.ThischangeeliminatesthenotionoftheAPICpooland
significantlyreducesthecomplexityandcostofaccountingforexcesstaxbenefitsandtaxdeficiencies.Thenewstandardwill
becomeeffectiveforourfiscalyearbeginningOctober2,2017.Wearecurrentlyassessingtheimpactofthisamendedguidance
andthetimingofadoption.
InFebruary2016,theFASBissuedamendedguidancetoincreasetransparencyandcomparabilityamongorganizationsby
recognizingleaseassetsandleaseliabilitiesonthebalancesheetanddisclosingkeyinformationaboutleasingarrangements.The
newguidanceclarifiesthecriteriafordistinguishingbetweenafinanceleaseandoperatinglease,aswellasclassificationbetween
thetwotypesofleases,whichissubstantiallyunchangedfromthepreviousleaseguidance.
Further,thenewguidancerequiresalesseetorecognizeinthestatementoffinancialpositionaliabilitytomakeleasepayments
(theleaseliability)andarightofuseasset,initiallymeasuredatthepresentvalueoftheleasepayments.Forfinanceleases,a
lesseeshouldrecognizeinterestontheleaseliabilityseparatelyfromamortizationoftherightofuse
8
TableofContents
asset.Foroperatingleases,alesseeshouldrecognizeasingleleasecost,calculatedsothatthecostoftheleaseisallocatedoverthe
leasetermonagenerallystraightlinebasis.Forleaseswithatermof12monthsorless,alesseeispermittedtomakean
accountingpolicyelectionnottorecognizeleaseassetsandleaseliabilities.Thenewstandardwillbecomeeffectiveforourfiscal
yearbeginningSeptember29,2019.Wearecurrentlyassessingtheimpactofthisamendedguidanceandthetimingofadoption.
InJanuary2016,theFASBissuedamendedguidancethatrevisestherecognitionandmeasurementoffinancialinstruments.The
newguidancerequiresequityinvestments(exceptthoseaccountedforundertheequitymethodofaccounting,orthosethatresult
inconsolidationoftheinvestee)tobemeasuredatfairvaluewithchangesinfairvaluerecognizedinnetincome,requirespublic
businessentitiestousetheexitpricenotionwhenmeasuringthefairvalueoffinancialinstrumentsfordisclosurepurposes,
requiresseparatepresentationoffinancialassetsandfinancialliabilitiesbymeasurementcategoryandformoffinancialasset,and
eliminatestherequirementforpublicbusinessentitiestodisclosethemethod(s)andsignificantassumptionsusedtoestimatethe
fairvaluethatisrequiredtobedisclosedforfinancialinstrumentsmeasuredatamortizedcost.Thenewstandardwillbecome
effectiveforourfiscalyearbeginningSeptember30,2018.Wearecurrentlyassessingtheimpactofthisamendedguidanceandthe
timingofadoption.
3.BUSINESSCOMBINATIONS
RofinSinarTechnologies,Inc.
OnMarch16,2016,weenteredintoadefinitiveagreementtoacquireRofinSinarTechnologies,Inc.("Rofin"),oneoftheworld's
leadingdevelopersandmanufacturersofhighperformanceindustriallasersourcesandlaserbasedsolutionsandcomponents.The
acquisitionwillbeanallcashtransactionatapriceof$32.50pershareofRofincommonstockforatotalapproximateoffervalue
of$942.0millionbeforefeesandtransactioncosts.Thecompletionoftheacquisitionissubjecttocustomaryclosingconditions,
includingregulatoryapprovals.
Fiscal2015Acquisitions
Raydiance,Inc.
OnJuly24,2015,weacquiredcertainassetsofRaydiance,Inc.("Raydiance")forapproximately$5.0million,excluding
transactioncosts.Raydiancemanufacturedcompletetoolsandlasersforultrafastprocessingsystemsandsubsystemsinthe
precisionmicromachiningprocessingmarket.TheRaydianceassetshavebeenincludedinourSpecialtyLasersandSystems
segment.
Ourallocationofthepurchasepriceisasfollows(inthousands):
Tangibleassets
Goodwill
Intangibleassets:
1,552
Existingtechnology
800
Customerlists
Total
1,048
1,600
$
5,000
Thepurchasepriceallocatedtogoodwillwasfinalizedinthefirstquarteroffiscal2016,withanincreaseof$0.4millionanda
correspondingdecreaseof$0.4milliontotangibleassets,andhasbeenupdatedfromthepreliminaryallocationinthefourth
quarteroffiscal2015.
Resultsofoperationsforthebusinesshavebeenincludedinourconsolidatedfinancialstatementssubsequenttothedateof
acquisitionandproformaresultsofoperationsinaccordancewithauthoritativeguidanceforpriorperiodshavenotbeenpresented
becausetheeffectoftheacquisitionwasnotmaterialtoourpriorperiodconsolidatedfinancialresults.
Theidentifiableintangibleassetsarebeingamortizedovertheirrespectiveusefullivesofthreetofiveyears.
Noneofthegoodwillfromthispurchaseisdeductiblefortaxpurposes.
Weexpensed$0.1millionofacquisitionrelatedcostsasselling,generalandadministrativeexpensesinourconsolidated
statementsofoperationsforourfiscalyear2015.
TinsleyOptics
9
TableofContents
OnJuly27,2015,weacquiredtheassetsandcertainliabilitiesoftheTinsleyOptics("Tinsley")businessfromL3
CommunicationsCorporationforapproximately$4.3million,excludingtransactioncosts.Tinsleyisaspecializedmanufacturerof
highprecisionopticalcomponentsandsubsystemssoldprimarilyintheaerospaceanddefenseindustry.Tinsleymanufacturesthe
largeformfactoropticsforourexcimerlaserannealingsystems.TinsleyhasbeenincludedinourSpecialtyLasersandSystems
segment.
Ourallocationofthepurchasepriceisasfollows(inthousands):
Tangibleassets:
Inventories
2,240
Accountsreceivable
2,263
1,132
Propertyandequipment
2,451
Liabilitiesassumed
(1,702)
Deferredtaxliabilities
(768)
Gainonbusinesscombination
(1,316)
$
Total
4,300
Thepurchasepricewaslowerthanthefairvalueofnetassetspurchased,resultinginagainof$1.3millionrecordedasaseparate
lineiteminourconsolidatedstatementsofoperationsforourfiscalyear2015.Wereassessedtherecognitionandmeasurementof
identifiableassetsacquiredandliabilitiesassumedandconcludedthatallacquiredassetsandassumedliabilitieswererecognized
andthatthevaluationproceduresandresultingmeasureswereappropriate.
Resultsofoperationsforthebusinesshavebeenincludedinourconsolidatedfinancialstatementssubsequenttothedateof
acquisitionandproformaresultsofoperationsinaccordancewithauthoritativeguidanceforpriorperiodshavenotbeenpresented
becausetheeffectoftheacquisitionwasnotmaterialtoourpriorperiodconsolidatedfinancialresults.
Thegainfromthebargainpurchaseisnotsubjecttoincometaxation.
Weexpensed$0.4millionofacquisitionrelatedcostsasselling,generalandadministrativeexpensesinourconsolidated
statementsofoperationsforourfiscalyear2015.
4.FAIRVALUES
Wehavenotchangedourvaluationtechniquesinmeasuringthefairvalueofanyfinancialassetsandliabilitiesduringtheperiod.
Werecognizetransfersbetweenlevelswithinthefairvaluehierarchy,ifany,attheendofeachquarter.Therewerenotransfers
betweenlevelsduringtheperiodspresented.AsofJuly2,2016andOctober3,2015,wedidnothaveanyassetsorliabilities
valuedbasedonLevel3valuations.
FinancialassetsandliabilitiesmeasuredatfairvalueasofJuly2,2016andOctober3,2015aresummarizedbelow(inthousands):
10
TableofContents
Aggregate
FairValue
QuotedPrices
in
ActiveMarkets
forIdentical
Assets
Significant
Other
Observable
Inputs
Aggregate
FairValue
QuotedPrices
in
ActiveMarkets
forIdentical
Assets
July2,2016
(Level2)
October3,2015
Moneymarketfunddeposits $ 29,112 $
29,112 $
8,297 $
8,297 $
Assets:
Cashequivalents:
Commercialpaper(2)
Shortterminvestments:
(Level1)
Significant
Other
Observable
Inputs
4,727
(Level2)
(Level1)
4,727
U.S.Treasuryandagency
obligations(2)
$ 145,752 $
$ 145,752 $ 150,748 $
$ 150,748
Corporatenotesand
obligations(2)
19,780
19,780
17,942
17,942
Commercialpaper(2)
48,318
48,318
9,740
9,740
Equitysecurities(1)
20,355
20,355
16,478
16,478
290
290
258
258
13,838
13,838
13,891
13,891
Prepaidandotherassets:
Foreigncurrencycontracts(3)
MutualfundsDeferred
compandsupplementalplan
(4)
Total
$ 282,172 $
Liabilities:
(3,750) $
(3,750) $
(239) $
Othercurrentliabilities:
Foreigncurrencycontracts(3)
Total
$ 278,422 $
63,305 $ 218,867 $ 217,354 $
63,305 $ 215,117 $ 217,115 $
38,666 $ 178,688
(239)
38,666 $ 178,449
___________________________________________________
(1) Valuationsarebaseduponquotedmarketprices.
(2)
Valuationsarebaseduponquotedmarketpricesinactivemarketsinvolvingsimilarassets.Themarketinputsusedtovaluethese
instrumentsgenerallyconsistofmarketyields,reportedtrades,broker/dealerquotesoralternativepricingsourceswithreasonable
levelsofpricetransparency.Pricingsourcesincludeindustrystandarddataproviders,securitymasterfilesfromlargefinancial
institutions,andotherthirdpartysourceswhichareinputintoadistributioncurvebasedalgorithmtodetermineadailymarket
value.Thiscreatesaconsensuspriceoraweightedaveragepriceforeachsecurity.
(3)
Theprincipalmarketinwhichweexecuteourforeigncurrencycontractsistheinstitutionalmarketinanoverthecounter
environmentwitharelativelyhighlevelofpricetransparency.Themarketparticipantsusuallyarelargecommercialbanks.Our
foreigncurrencycontractsvaluationinputsarebasedonquotedpricesandquotedpricingintervalsfrompublicdatasourcesand
donotinvolvemanagementjudgment.AtJuly2,2016,prepaidexpensesandotherassetsinclude$290nondesignatedforward
contractsothercurrentliabilitiesinclude$3,750nondesignatedforwardcontracts.AtOctober3,2015,prepaidexpensesand
otherassetsinclude$217nondesignatedforwardcontractsand$41foreigncurrencycontractsdesignatedforcashflowhedges,
respectivelyothercurrentliabilitiesinclude$239nondesignatedforwardcontractsand$0foreigncurrencycontractsdesignated
forcashflowhedges,respectively.SeeNote6,"DerivativeInstrumentsandHedgingActivities".
(4)
Thefairvalueofmutualfundsisdeterminedbasedonquotedmarketprices.Securitiestradedonanationalexchangearestatedat
thelastreportedsalespriceonthedayofvaluationothersecuritiestradedinoverthecountermarketsandlistedsecuritiesfor
whichnosalewasreportedonthatdatearestatedasthelastquotedbidprice.
11
TableofContents
5. SHORTTERMINVESTMENTS
Weconsiderallhighlyliquidinvestmentswithmaturitiesofthreemonthsorlessatthetimeofpurchasetobecashequivalents.
Investmentsclassifiedasavailableforsalearereportedatfairvaluewithunrealizedgainsandlosses,netofrelatedincometaxes,
recordedasaseparatecomponentofothercomprehensiveincome(OCI)instockholdersequityuntilrealized.Interestand
amortizationofpremiumsanddiscountsfordebtsecuritiesareincludedininterestincome.Gainsandlossesonsecuritiessoldare
determinedbasedonthespecificidentificationmethodandareincludedinotherincome(expense).
Cash,cashequivalentsandshortterminvestmentsconsistofthefollowing(inthousands):
July2,2016
CostBasis
139,407 $
Availableforsalesecurities:
U.S.Treasuryandagencyobligations
Corporatenotesandobligations
Equitysecurities
Totalshortterminvestments
Unrealized
Losses
Commercialpaper
Unrealized
Gains
48,318 $
FairValue
139,407
48,318
145,222
533
(3)
145,752
19,676
105
(1)
19,780
15,269
5,086
5,724 $
(4) $
228,485 $
20,355
234,205
October3,2015
CostBasis
130,607 $
Availableforsalesecurities:
Commercialpaper
9,740 $
Unrealized
Gains
Unrealized
Losses
FairValue
130,607
9,740
U.S.Treasuryandagencyobligations
149,708
1,040
150,748
Corporatenotesandobligations
17,892
52
(2)
17,942
15,269
1,209
2,301 $
(2) $
Equitysecurities
Totalshortterminvestments
192,609 $
16,478
194,908
NoneoftheunrealizedlossesasofJuly2,2016orOctober3,2015wereconsideredtobeotherthantemporaryimpairments.
TheamortizedcostandestimatedfairvalueofavailableforsaleinvestmentsindebtsecuritiesasofJuly2,2016andOctober3,
2015classifiedasshortterminvestmentsonourcondensedconsolidatedbalancesheetwereasfollows(inthousands):
12
TableofContents
AmortizedCost
Investmentsinavailableforsale
debtsecuritiesdueinlessthanone
$
year
Investmentsinavailableforsale
debtsecuritiesdueinonetofive
years(1)
July2,2016
EstimatedFairValue
October3,2015
AmortizedCost
EstimatedFairValue
211,327 $
211,951 $
148,088 $
149,100
1,889 $
1,899 $
29,252 $
29,330
(1)Classifiedasshortterminvestmentsbecausethesesecuritiesarehighlyliquidandcanbesoldatanytime.
DuringthethreeandninemonthsendedJuly2,2016,wereceivedproceedstotaling$15.5millionand$44.1million,respectively,
fromthesaleofavailableforsalesecuritiesandrealizedgrossgainsoflessthan$0.1millionand$0.1million,respectively.
DuringthethreeandninemonthsendedJuly4,2015,wereceivedproceedstotaling$44.6millionand$122.5million,respectively,
fromthesaleofavailableforsalesecuritiesandrealizedgrossgainsoflessthan$0.1millionand$0.1million,respectively.
6.DERIVATIVEINSTRUMENTSANDHEDGINGACTIVITIES
WemaintainoperationsinvariouscountriesoutsideoftheUnitedStatesandhaveforeignsubsidiariesthatmanufactureandsell
ourproductsinvariousglobalmarkets.ThemajorityofoursalesaretransactedinU.S.dollars.However,wedogeneraterevenues
inothercurrencies,primarilytheEuro,JapaneseYen,SouthKoreanWonandChineseRenminbi(RMB).Asaresult,ourearnings,
cashflowsandcashbalancesareexposedtofluctuationsinforeigncurrencyexchangerates.Weattempttolimittheseexposures
throughfinancialmarketinstruments.Weutilizederivativeinstruments,primarilyforwardcontractswithmaturitiesoftwomonths
orless,tomanageourexposureassociatedwithanticipatedcashflowsandnetassetandliabilitypositionsdenominatedinforeign
currencies.Gainsandlossesontheforwardcontractsaremitigatedbygainsandlossesontheunderlyinginstruments.Wedonot
usederivativefinancialinstrumentsforspeculativeortradingpurposes.ThecreditriskamountsrepresenttheCompanysgross
exposuretopotentialaccountinglossonderivativeinstrumentsthatareoutstandingorunsettledifallcounterpartiesfailedto
performaccordingtothetermsofthecontract,basedonthencurrentcurrencyorinterestratesateachrespectivedate.
Forderivativeinstrumentsthatarenotdesignatedashedginginstruments,gainsandlossesarerecognizedinotherincome
(expense).
NonDesignatedDerivatives
Theoutstandingnotionalcontractandfairvalueasset(liability)amountsofnondesignatedhedgecontracts,withmaximum
maturityoftwomonths,areasfollows(inthousands):
13
TableofContents
U.S.NotionalContractValue
July2,2016
Eurocurrencyhedgecontracts
October3,2015
U.S.FairValue
July2,2016
October3,2015
Purchase
64,730 $
52,699 $
(143) $
33
Sell
(307) $
6 $
JapaneseYencurrencyhedgecontracts
Purchase
558 $
Sell
(40,182) $
(15,804) $
(2,604) $
SouthKoreanWoncurrencyhedgecontracts
253 $
Sell
(21,763) $
(17,747) $
(921) $
30
ChineseRMBcurrencyhedgecontracts
(14,864) $
(10,900) $
128 $
Purchase
Sell
Otherforeigncurrencyhedgecontracts
8
(84)
(106)
Purchase
6,225 $
3,283 $
156 $
(49)
Sell
(1,883) $
(5,835) $
(82) $
146
DesignatedDerivatives
Cashflowhedgesrelatedtoanticipatedtransactionsaredesignatedanddocumentedattheinceptionofthehedgewhenweenter
intocontractsforspecificfuturetransactions.Cashflowhedgesareevaluatedforeffectivenessquarterly.Theeffectiveportionof
thegainorlossonthesehedgesisreportedasacomponentofOCIinstockholder'sequityandisreclassifiedintoearningswhen
theunderlyingtransactionaffectsearnings.WehadnocashflowhedgesoutstandingatJuly2,2016.Changesinthefairvalueof
currencyforwardcontractsduetochangesintimevalueareexcludedfromtheassessmentofeffectivenessandrecognizedinother
income(expense)asincurred.Weclassifythecashflowsfromtheforeignexchangeforwardcontractsthatareaccountedforas
cashflowhedgesinthesamesectionastheunderlyingitem,primarilywithincashflowsfromoperatingactivitiessincewedonot
designateourcashflowhedgesasinvestingorfinancingactivities.
Theoutstandingnotionalcontractandfairvalueasset(liability)amountsofdesignatedcashflowhedgecontracts,withmaximum
maturityofthirteenmonths,areasfollows(inthousands):
U.S.NotionalContractValue
July2,2016
JapaneseYencurrencyhedgecontracts
Sell
October3,2015
U.S.FairValue
July2,2016
October3,2015
(2,093) $
41
WehaveenteredintocertainderivativeforwardcontractstosellJapaneseYenandbuyEurotohedgerevenueexposuresrelatedto
ourphotonicsbasedsolutionsinAsia.Inordertofacilitatethehedge,wetransactwithcounterpartiesintheU.S.directlyandthen
allocatethehedgecontractstoouraffiliatesthroughabacktobackrelationshipwithourGermansubsidiary.TheGerman
subsidiarydesignatesthesehedgecontractsascashflowhedgesunderASC815,noneofwhichwereoutstandingatJuly2,2016.
Thefairvalueofourderivativeinstrumentsisincludedinprepaidexpensesandotherassetsandinothercurrentliabilitiesinour
CondensedConsolidatedBalanceSheets(SeeNote4"FairValues").
Thelocationsandamountsofdesignatedandnondesignatedderivativeinstrumentsgainsandlossesinthecondensed
consolidatedfinancialstatementsfortheindicatedperiodswereasfollows(inthousands):
14
TableofContents
Locationin
financial
statements
Derivativesdesignatedashedging
instruments
Gains(losses)inOCIonderivatives
(effectiveportion),aftertax
LossesreclassifiedfromOCIintoincome
(effectiveportion)
Gains(losses)reclassifiedfromOCIinto
income(effectiveportion)
Gains(losses)recognizedinincomeon
derivatives(ineffectiveportionandamount
excludedfromeffectivenesstesting)
Derivativesnotdesignatedas
hedginginstruments
Lossesrecognizedinincome
ThreeMonthsEnded
July2,
2016
July4,
2015
NineMonthsEnded
July2,
2016
July4,
2015
OCI
77 $
(28) $
627
Costofsales
Revenue
(58) $
208
Other
income(expense)
1 $
(29) $
(112)
Other
income(expense)
(4,926) $
(29) $
(7,437) $
(1,720)
(6,154)
Duringthefirstquarteroffiscal2016werecognizedalossof$31,000inotherincome(expense)asineffectivenessrelatedtoa
portionofananticipatedhedgedtransactionthatfailedtooccurwithintheoriginalhedgeperiodplustwomonths.Duringthenine
monthsendedJuly4,2015werecognizedalossof$0.1millioninotherincome(expense)asineffectivenessrelatedtoaportionof
ananticipatedhedgedtransactionthatfailedtooccurwithintheoriginalhedgeperiodplustwomonths.Theremainderofthe
hedgedtransactionoccurredasexpectedandeffectiveamountswererecognizedinrevenueasdisclosedintheabovetable.
TheamountsthatarereclassifiedfromOCItoearningsaregenerallyoffsetbytherecognitionofthehedgedtransactions(e.g.,
anticipatedcostofsales)inearnings,therebyachievingtherealizationofpricescontemplatedbytheunderlyingriskmanagement
strategiesandwillvaryfromtheexpectedamountspresentedaboveasaresultofchangesinforeignexchangerates.
Tomitigatecreditriskinderivativetransactions,weenterintomasternettingarrangementsthatalloweachcounterpartyinthe
arrangementstonetsettleamountsofmultipleandseparatederivativetransactionsundercertainconditions.Wepresentthefair
valueofderivativeassetsandliabilitieswithinourcondensedconsolidatedbalancesheetonagrossbasisevenwhenderivative
transactionsaresubjecttomasternettingarrangementsandmayotherwisequalifyfornetpresentation.Ourderivativecontractsdo
notcontainanycreditriskrelatedcontingentfeaturesanddonotrequirecollateralorothersecuritytobefurnishedbyusorthe
counterparties.
OffsettingofFinancialAssets/LiabilitiesunderMasterNettingAgreementswithDerivativeCounterpartiesasofJuly2,2016and
October3,2015(inthousands):
15
TableofContents
GrossAmountsNotOffsetin
theCondensedConsolidated
BalanceSheets
NetAmountsof
Derivative
GrossAmounts
Assets
GrossAmounts
Offsetinthe
Presentedinthe
ofRecognized
Condensed
Condensed
Financial
Cash
Derivative
Consolidated
Consolidated
Instruments
Collateral
Assets
BalanceSheets BalanceSheets
(1)
Received
AsofJuly2,2016:
Foreignexchange
contracts
290 $
290 $
(290) $
AsofOctober3,2015:
Net
Amounts
Foreignexchange
contracts
$
258 $
$
258 $
(116) $
$
142
(1)ThebalancesatJuly2,2016andOctober3,2015wererelatedtoderivativeliabilitieswhichareallowedtobenetsettled
againstderivativeassetsinaccordancewiththemasternettingagreements.
GrossAmountsNotOffsetin
theCondensedConsolidated
BalanceSheets
Gross
Amounts
Offsetinthe
Condensed
Consolidated
BalanceSheets
AsofJuly2,2016:
Foreignexchangecontracts $
(3,750) $
(3,750) $
290 $
(3,460)
AsofOctober3,2015:
Gross
Amountsof
Recognized
Derivative
Liabilities
NetAmounts
ofDerivative
Liabilities
Presentedin
theCondensed
Financial
Cash
Consolidated
Instruments
Collateral
BalanceSheets
(1)
Paid
Net
Amounts
Foreignexchangecontracts $
(239) $
$
(239) $
116 $
$
(123)
(1)ThebalancesatJuly2,2016andOctober3,2015wererelatedtoderivativeassetswhichareallowedtobenetsettledagainst
derivativeliabilitiesinaccordancewiththemasternettingagreements.
7.GOODWILLANDINTANGIBLEASSETS
DuringtheninemonthsendedJuly2,2016,wenotednoindicationsofimpairmentortriggeringeventstocauseustoreview
goodwillforpotentialimpairment.Wewillconductourannualgoodwilltestingduringthefourthfiscalquarter.
ThechangesinthecarryingamountofgoodwillbysegmentfortheperiodfromOctober3,2015toJuly2,2016areasfollows(in
thousands):
Specialty
Lasersand
Systems
BalanceasofOctober3,2015
Translationadjustmentsandother
$
BalanceasofJuly2,2016
16
Commercial
Lasersand
Components
95,454 $
6,363 $
(509)
94,945 $
6,363 $
Total
101,817
(509)
101,308
TableofContents
Componentsofouramortizableintangibleassetsareasfollows(inthousands):
Gross
Carrying
Amount
Existingtechnology
July2,2016
Accumulated
Amortization
Net
70,601 $
(59,714) $
15,933
(11,135)
4,798
Tradename
385
(349)
Inprocessresearch&
development
371
Customerlists
Total
87,290 $
(71,198) $
10,887 $
October3,2015
Gross
Carrying
Amount
Accumulated
Amortization
71,365 $
Net
(55,452) $
15,913
16,099
(9,661)
6,438
36
399
(349)
50
371
375
375
16,092 $
88,238 $
(65,462) $
22,776
Foraccountingpurposes,whenanintangibleassetisfullyamortized,itisremovedfromthedisclosureschedule.
AmortizationexpenseforintangibleassetsforthethreemonthsendedJuly2,2016andJuly4,2015was$2.0millionand$2.0
million,respectively,whichincludes$1.4millionand$1.5million,respectively,foramortizationofexistingtechnology.The
changeintheaccumulatedamortizationalsoincludes$0.4millionand$0.2millionofforeignexchangeimpactforthethree
monthsendedJuly2,2016andJuly4,2015,respectively.
AmortizationexpenseforintangibleassetsfortheninemonthsendedJuly2,2016andJuly4,2015was$6.2millionand$6.2
million,respectively,whichincludes$4.6millionand$4.8million,respectively,foramortizationofexistingtechnology.The
changeintheaccumulatedamortizationalsoincludes$0.5millionand$3.3millionofforeignexchangeimpactfortheninemonths
endedJuly2,2016andJuly4,2015,respectively.
AtJuly2,2016,estimatedamortizationexpensefortheremainderoffiscal2016,thenextfivesucceedingfiscalyearsandallfiscal
yearsthereafterareasfollows(inthousands):
Estimated
Amortization
Expense
2016(remainder)
1,875
2017
6,952
2018
4,248
2019
2,168
2020
685
2021
55
Thereafter
109
$
Total
16,092
8.BALANCESHEETDETAILS
Inventoriesconsistofthefollowing(inthousands):
July2,
2016
Purchasedpartsandassemblies
October3,
2015
54,569 $
50,182
Workinprocess
81,865
56,225
Finishedgoods
63,737
50,207
200,171 $
156,614
Totalinventories
Prepaidexpensesandotherassetsconsistofthefollowing(inthousands):
17
TableofContents
July2,
2016
Prepaidandrefundableincometaxes
October3,
2015
10,715 $
8,846
Othertaxesreceivable
11,155
6,574
14,479
12,874
36,349 $
28,294
Totalprepaidexpensesandotherassets
Otherassetsconsistofthefollowing(inthousands):
July2,
2016
Assetsrelatedtodeferredcompensationarrangements
Deferredtaxassets
Otherassets
$
Totalotherassets
October3,
2015
25,357 $
25,131
60,921
60,254
6,578
3,841
92,856 $
89,226
Forour$750.0milliondebtfinancingcommitmentwithcertainlenders(SeeNote9"ShorttermBorrowings"),wepaid$2.5
millionofdebtissuancecostsinthesecondandthirdquartersoffiscal2016andrecordedittootherassets.
Othercurrentliabilitiesconsistofthefollowing(inthousands):
July2,
2016
Accruedpayrollandbenefits
October3,
2015
35,782 $
35,504
Deferredrevenue
18,909
16,474
Warrantyreserve
15,151
15,308
Accruedexpensesandother
14,484
10,965
Othertaxespayable
5,302
4,888
Customerdeposits
2,433
1,793
92,061 $
84,932
Totalothercurrentliabilities
Componentsofthereserveforwarrantycostsduringthefirstninemonthsoffiscal2016and2015wereasfollows(inthousands):
NineMonthsEnded
July2,
2016
Beginningbalance
Additionsrelatedtocurrentperiodsales
Warrantycostsincurredinthecurrentperiod
Adjustmentstoaccrualsrelatedtoforeignexchangeandother
$
Endingbalance
Otherlongtermliabilitiesconsistofthefollowing(inthousands):
18
July4,
2015
15,308 $
16,961
15,298
16,605
(15,059)
(15,065)
(396)
(2,822)
15,151 $
15,679
TableofContents
July2,
2016
Longtermtaxespayable
October3,
2015
1,109 $
7,651
Deferredcompensation
27,166
26,691
Deferredtaxliabilities
1,634
2,717
Deferredrevenue
4,147
3,149
Assetretirementobligationsliability
2,771
2,654
8,158
7,077
44,985 $
49,939
Totalotherlongtermliabilities
9.SHORTTERMBORROWINGS
Wehaveseverallinesofcreditwhichallowustoborrowintheapplicablelocalcurrency.Wehaveatotalof$14.1millionof
unsecuredforeignlinesofcreditasofJuly2,2016.AtJuly2,2016,wehadused$1.8millionoftheseavailableforeignlinesof
creditasguarantees.ThesecreditfacilitieswereusedinEuropeandJapanduringthefirstninemonthsof2016.Inaddition,our
domesticlineofcreditconsistsofa$50.0millionunsecuredrevolvingcreditaccount.TheagreementwillexpireonMay31,2017.
Thelineofcreditissubjecttocovenantsrelatedtofinancialratiosandtangiblenetworthwithwhichwearecurrentlyin
compliance.Wehaveanoutstandingbalanceof$20.0millionandhaveused$1.1millionforlettersofcreditagainstourdomestic
lineofcreditasofJuly2,2016.
OnMarch16,2016,weenteredintoadebtcommitmentletterwithBarclaysBankPLC("Barclays")andonApril5,2016,entered
intoanamendedandrestateddebtcommitmentletterwithBarclaysandbothBankofAmerica,N.A.andMerrillLynch,Pierce,
Fenner&SmithIncorporated(together,"BAML").Pursuanttothecommitmentletter,amongotherthings,BarclaysandBAML
havecommittedtoprovideuswithdebtfinancingincludingatermloan(denominatedinEuros)inanamountoftheEuro
equivalentof$750.0millionand,alongwithTheBankofTokyoMitsubishiUFJ,Ltd.(MUFG),whichwasaddedbyajoinder
agreementwithBarclaysandBAML(andconsentedtobyus),a$100.0millionrevolvingfacility(denominatedinU.S.dollars)to
financetheacquisitionofRofin.Theobligationsofthelendersunderthecommitmentletteraresubjecttocertainconditions,
includingtheconsummationoftheacquisitioninaccordancewiththetermsandconditionsofthedefinitiveagreementandother
customaryclosingobligations.Forourdebtfinancingcommitment,wepaid$2.5millionofdebtissuancecostsinthesecondand
thirdquartersoffiscal2016andrecordedittootherassetsonourcondensedconsolidatedbalancesheets.Thedebtissuancecost
willbereclassifiedwhenthereisanoutstandingdebt.
10.STOCKBASEDCOMPENSATION
FairValueofStockCompensation
Werecognizecompensationexpenseforallsharebasedpaymentawardsbasedonthefairvalueofsuchawards.Theexpenseis
recognizedonastraightlinebasisovertherespectiverequisiteserviceperiodoftheawards.
DeterminingFairValue
ThefairvaluesofsharespurchasedundertheEmployeeStockPurchasePlan(ESPP)forthethreeandninemonthsendedJuly2,
2016andJuly4,2015,respectively,wereestimatedusingthefollowingweightedaverageassumptions:
EmployeeStockPurchasePlan
ThreeMonthsEnded
July2,
2016
July4,
2015
Expectedlifeinyears
Expectedvolatility
38.5%
30.8%
31.6%
26.8%
Riskfreeinterestrate
0.37%
0.06%
0.28%
0.06%
Expecteddividendyield
Weightedaveragefairvaluepershare
21.35
0.5
14.58
July4,
2015
0.5
NineMonthsEnded
July2,
2016
0.5
16.08
TherewerenostockoptionsgrantedduringthethreeandninemonthsendedJuly2,2016andJuly4,2015.
0.5
14.27
19
TableofContents
Wegrantperformancerestrictedstockunitstoofficersandcertainemployees.Theperformancerestrictedstockunitagreements
providefortheawardofperformancerestrictedstockunitswitheachunitrepresentingtherighttoreceiveoneshareofour
commonstocktobeissuedaftertheapplicableawardvestingperiod.Thefinalnumberofunitsawarded,ifany,forthese
performancegrantswillbedeterminedasofthevestingdates,baseduponourtotalshareholderreturnovertheperformanceperiod
comparedtotheRussell2000Indexandcouldrangefromnounitstoamaximumoftwicetheinitialawardunits.Theweighted
averagefairvaluefortheseperformanceunitswasdeterminedusingaMonteCarlosimulationmodelincorporatingthefollowing
weightedaverageassumptions:
Riskfreeinterestrate
1.20%
Volatility
27.0%
28.7%
Weightedaveragefairvalue
$74.48
$70.57
NineMonthsEnded
July2,2016
July4,2015
0.96%
Werecognizetheestimatedcostoftheseawards,asdeterminedunderthesimulationmodel,overtherelatedserviceperiod,with
noadjustmentinfutureperiodsbasedupontheactualshareholderreturnovertheperformanceperiod.
StockBasedCompensationExpense
Thefollowingtableshowstotalstockbasedcompensationexpenseandrelatedtaxbenefitsincludedinthecondensedconsolidated
statementsofoperationsforthethreeandninemonthsendedJuly2,2016andJuly4,2015(inthousands):
Costofsales
July2,2016
Incometaxbenefit
ThreeMonthsEnded
677 $
July4,2015
664 $
NineMonthsEnded
July2,2016
1,876 $
July4,2015
1,937
610
529
1,646
1,415
4,402
3,372
11,299
10,385
(1,588)
(1,272)
(3,450)
(3,005)
11,371 $
10,732
4,101 $
3,293 $
DuringthethreeandninemonthsendedJuly2,2016,$0.7millionand$2.0millionwascapitalizedintoinventoryforallstock
plans,$0.7millionand$1.9millionwasamortizedtocostofsalesand$0.8millionremainedininventoryatJuly2,2016.During
thethreeandninemonthsendedJuly4,2015,$0.6millionand$1.9millionwascapitalizedintoinventoryforallstockplans,$0.7
millionand$1.9millionwasamortizedtocostofsalesand$0.7millionremainedininventoryatJuly4,2015.
AtJuly2,2016,thetotalcompensationcostrelatedtounvestedstockbasedawardsgrantedtoemployeesundertheCompanys
stockplansbutnotyetrecognizedwasapproximately$27.1million,netofestimatedforfeituresof$0.9million.Thiscostwillbe
amortizedonastraightlinebasisoveraweightedaverageperiodofapproximately1.4yearsandwillbeadjustedforsubsequent
changesinestimatedforfeitures.
AtJuly2,2016,totalcompensationcostrelatedtooptionstopurchasecommonsharesundertheESPPbutnotyetvestedwas
approximately$0.8million,whichwillberecognizedoverthesixmonthofferingperiod.
StockAwardsActivity
Thefollowingtablesummarizestheactivityofourtimebasedandperformancerestrictedstockunitsforthefirstninemonthsof
fiscal2016(inthousands,exceptpershareamounts):
20
TableofContents
TimeBasedRestrictedStock
Units
Weighted
Average
GrantDate
FairValue
Numberof
Shares
PerformanceRestrictedStock
Units
Numberof
Shares
Weighted
Average
GrantDate
FairValue
NonvestedstockatOctober3,2015
394 $
65.17
199 $
67.09
Granted
269
64.42
65
74.48
Vested(1)
(191)
61.12
(57)
48.48
Forfeited
(12)
63.82
(38)
48.48
NonvestedstockatJuly2,2016
460 $
66.45
169 $
74.10
__________________________________________
(1)
Servicebasedrestrictedstockvestedduringeachfiscalyear.Performancebasedawardsandunitsincludedat100%oftargetgoalunderthetermsofthe
awards,therecipientmayearnbetween0%and200%oftheaward.
11. COMMITMENTSANDCONTINGENCIES
Wearesubjecttolegalclaimsandlitigationarisingintheordinarycourseofbusiness,suchasproductliability,employmentor
intellectualpropertyclaims,including,butnotlimitedto,themattersdescribedbelow.OnMay14,2013,IMRAAmerica(Imra)
filedacomplaintforpatentinfringementagainsttwoofoursubsidiariesintheRegionalCourtofDsseldorf,Germany,captioned
InreIMRAAmericaInc.versusCoherentKaiserslauternGmbHet.al.4bO38/13.Thecomplaintallegesthattheuseofcertainof
theCompanyslasersinfringesuponEPPatentNo.754,103,entitledMethod
21
TableofContents
ForControllingConfigurationofLaserInducedBreakdownandAblation,issuedNovember5,1997.Thepatent,nowexpiredin
alljurisdictions,isownedbytheUniversityofMichiganandlicensedtoImra.Thecomplaintseeksunspecifiedcompensatory
damages,thecostofcourtproceedingsandseekstopermanentlyenjointheCompanyfrominfringingthepatentinthefuture.
Followingthefilingoftheinfringementsuit,oursubsidiariesfiledaseparatenullityactionwiththeFederalPatentCourtin
Munich,GermanyrequestingthatthecourtholdthatthePatentwasinvalidbasedonpriorart.OnOctober1,2015,theFederal
PatentCourtruledthattheGermanportionofthePatentwasinvalid.ImrahasfiledanoticetoappealthisdecisiontotheFederal
CourtofJustice,thehighestciviljurisdictioncourtinGermany.Theinfringementactioniscurrentlystayedpendingtheoutcome
ofsuchappeal.Managementhasmadeanaccrualwithrespecttothismatterandhasdetermined,basedonitscurrentknowledge,
thattheamountorrangeofreasonablypossiblelossesinexcessoftheamountsalreadyaccruedisnotreasonablyestimable.
Althoughwedonotexpectthatsuchlegalclaimsandlitigationwillultimatelyhaveamaterialadverseeffectonourcondensed
consolidatedfinancialposition,resultsofoperationsorcashflows,anadverseresultinoneormorematterscouldnegativelyaffect
ourresultsintheperiodinwhichtheyoccur.
TheUnitedStatesandmanyforeigngovernmentsimposetariffsanddutiesontheimportandexportofcertainproductswesell.
Fromtimetotimeourdutycalculationsandpaymentsareauditedbygovernmentagencies.Duringthesecondquarteroffiscal
2016,weconcludedanauditinSouthKoreaforcustomsdutiesandvalueaddedtaxfortheperiodMarch2009toMarch2014.We
paid$1.6millionrelatedtothismatterinthesecondquarteroffiscal2016andhavenoremainingaccrualatJuly2,2016.
OnMarch16,2016,weenteredintoadebtcommitmentletterwithBarclaysBankPLC("Barclays")andonApril5,2016,entered
intoanamendedandrestateddebtcommitmentletterwithBarclaysandbothBankofAmerica,N.A.andMerrillLynch,Pierce,
Fenner&SmithIncorporated(together,"BAML").SeeNote9"ShorttermBorrowings".
Wehaveanagreementwithafinancialadvisor,Barclays,inrelationtothependingacquisitionofRofin.Wehaveagreedtopay
Barclaysafeeofapproximately$10.5million,$1.0millionofwhichwaspaidupondeliveryofthefairnessopinioninthesecond
quarteroffiscal2016,andwasrecordedintheselling,generalandadministrativelineofthecondensedconsolidatedstatementsof
operations,andtheremainingportionofwhichwillbepaidupon,andsubjectto,consummationoftheacquisition.Wehavealso
agreedtopaytoBarclaysapproximately$17.0millionand$7.5millionforunderwritingandupfrontfees,respectively,uponthe
closeofthefinancing.Inaddition,theacquisitionagreementcontainscertainterminationrightsforCoherentandfurtherprovides
thatwemayberequiredtopayaterminationfeeof$65.0milliontoRofinand$2.4milliontoBarclays.
12.STOCKREPURCHASE
OnJuly25,2014,theBoardofDirectorsauthorizedabuybackprogramwherebywewereauthorizedtorepurchaseupto$25.0
millionofourcommonstockfromtimetotimethroughJuly31,2015.Duringthefirstquarteroffiscal2015,werepurchasedand
retired300,441sharesofoutstandingcommonstockatanaveragepriceof$57.55pershareforatotalof$17.3million,excluding
expenses.Duringthesecondquarteroffiscal2015,werepurchasedandretired133,673sharesofoutstandingcommonstockunder
thisplanatanaveragepriceof$57.66pershareforatotalof$7.7million,completingtherepurchaseprogram.
OnJanuary21,2015,ourBoardofDirectorsauthorizedanadditionalstockrepurchaseprogramtorepurchaseupto$25.0million
ofouroutstandingcommonstockfromtimetotimethroughJanuary31,2016.Duringthefourthquarteroffiscal2015,we
repurchasedandretired430,675sharesofoutstandingcommonstockunderthisplanatanaveragepriceof$58.05persharefora
totalof$25.0million.
22
TableofContents
OnAugust25,2015,ourBoardofDirectorsauthorizedanadditionalstockrepurchaseprogramtorepurchaseupto$25.0million
ofouroutstandingcommonstockfromtimetotimethroughAugust31,2016.Duringthefourthquarteroffiscal2015,we
repurchasedandretired437,534sharesofoutstandingcommonstockunderthisplanatanaveragepriceof$57.14persharefora
totalof$25.0million.
13.EARNINGSPERSHARE
Basicearningspershareiscomputedbasedontheweightedaveragenumberofsharesoutstandingduringtheperiod,excluding
unvestedrestrictedstock.Dilutedearningspershareiscomputedbasedontheweightedaveragenumberofsharesoutstanding
duringtheperiodincreasedbytheeffectofdilutiveemployeestockawards,includingstockoptions,restrictedstockawardsand
stockpurchaseplancontracts,usingthetreasurystockmethod.
Thefollowingtablepresentsinformationnecessarytocalculatebasicanddilutedearningspershare(inthousands,exceptpershare
data):
ThreeMonthsEnded
July2,
2016
Weightedaveragesharesoutstandingbasic
Dilutiveeffectofemployeestockawards
Weightedaveragesharesoutstanding
diluted
July4,
2015
NineMonthsEnded
July2,
2016
July4,
2015
24,192
24,737
24,108
24,794
275
235
247
224
24,467
24,972
24,355
25,018
Netincome
18,650 $
13,264 $
56,717 $
49,107
Netincomeperbasicshare
0.77 $
0.54 $
2.35 $
1.98
Netincomeperdilutedshare
0.76 $
0.53 $
2.33 $
1.96
Atotalof214and71potentiallydilutivesecuritieshavebeenexcludedfromthedilutedsharecalculationforthethreeandnine
monthsendedJuly2,2016astheireffectwasantidilutive.Atotalof333and44,688potentiallydilutivesecuritieshavebeen
excludedfromthedilutedsharecalculationforthethreeandninemonthsendedJuly4,2015astheireffectwasantidilutive.
14.OTHERINCOME(EXPENSE)
Otherincome(expense)isasfollows(inthousands):
July2,
2016
Foreignexchangeloss
Gainondeferredcompensationinvestments,
net
Other
Othernet
ThreeMonthsEnded
July4,
2015
NineMonthsEnded
July2,
2016
July4,
2015
(1,261) $
(869) $
(2,781) $
(950)
1,796
121
795
1,176
29
(39)
90
60
564 $
(787) $
(1,896) $
286
15.INCOMETAXES
Incometaxexpenseincludesaprovisionforfederal,stateandforeigntaxesbasedontheannualestimatedeffectivetaxrate
applicabletousandoursubsidiaries,adjustedforitemswhichareconsidereddiscretetotheperiod.Oureffectivetaxratesforthe
threeandninemonthsendedJuly2,2016were31.3%and27.7%,respectively.Oureffectivetaxratesforthethreeandnine
monthsendedJuly2,2016werelowerthanthestatutoryrateof35.0%primarilyduetodifferencesrelatedtothebenefitofincome
subjecttoforeigntaxratesthatarelowerthanU.S.taxratesincludingtheSingaporetaxexemption,thebenefitofforeigntax
creditsandthebenefitoffederalresearchanddevelopmenttaxcreditsincludingrenewalofthefederalresearchanddevelopment
taxcreditsforfiscal2015.TheseamountsarepartiallyoffsetbydeemeddividendinclusionsundertheSubpartFtaxrules
includinganintercompanyloanfromCoherentKoreathatwilllikelyberepaidinfiscal2017,stockbasedcompensationnot
deductiblefortaxpurposesandlimitationsonthedeductibilityofcompensationunderIRCSection162(m).
OureffectivetaxratesforthethreeandninemonthsendedJuly4,2015were26.7%and25.4%,respectively.Oureffectivetax
ratesforthethreeandninemonthsendedJuly4,2015werelowerthanthestatutoryrateof35.0%primarilyduetodifferences
relatedtothebenefitofincomesubjecttoforeigntaxratesthatarelowerthanU.S.taxratesincludingSouthKoreaandSingapore
taxexemptions,thebenefitofforeigntaxcreditsandthebenefitofthefederalresearchanddevelopmenttaxcreditsincluding
renewalofthefederalresearchanddevelopmenttaxcreditsforfiscal2014.Theseamountsarepartiallyoffsetbydeemeddividend
inclusionsundertheSubpartFtaxrules,stockbasedcompensationnotdeductiblefortaxpurposesandlimitationsonthe
deductibilityofcompensationunderIRCSection162(m).
Determiningtheconsolidatedprovisionforincometaxes,incometaxliabilitiesanddeferredtaxassetsandliabilitiesinvolves
judgment.Wecalculateandprovideforincometaxesineachofthetaxjurisdictionsinwhichweoperate,whichinvolves
estimatingcurrenttaxexposuresaswellasmakingjudgmentsregardingtherecoverabilityofdeferredtaxassetsineach
jurisdiction.Theestimatesusedcoulddifferfromactualresults,whichmayhaveasignificantimpactonoperatingresultsinfuture
periods.
WearesubjecttotaxationandfileincometaxreturnsintheU.S.federaljurisdictionandinmanystateandforeignjurisdictions.
ForU.S.federalincometaxpurposes,allyearspriortofiscal2011areclosed.Inourmajorforeignjurisdictionsandourmajor
statejurisdictions,theyearspriortofiscal2011areclosedtoexamination.Earlieryearsinourvariousjurisdictionsmayremain
openforadjustmenttotheextentthatwehavetaxattributecarryforwardsfromthoseyears.InMarch2016,theInternalRevenue
Service(IRS)issuedanauditnoticeandInformationDocumentationRequests(IDRs)forfiscalyear2013.Theauditiscurrentlyin
progress.
InDecember2011andJanuary2012,threeofourGermansubsidiariesreceivednoticesoftaxauditsforthefiscalyears2006
through2010.Theauditswerecompletedinthethirdquarteroffiscal2016.Asaresultofthesettlement,ourgrossuncertaintax
positionsdecreasedbyapproximately$4.9million.Thenetimpactoftheadjustmentswasimmaterialtothecondensed
consolidatedstatementofoperations.
InJuly2015andMarch2016,CoherentKaiserslauternGmbH(formerlyLumeraLaserGmbH)receivedtaxauditnoticesforthe
years2010to2014.TheauditbeganinAugust2015.WeacquiredthesharesofLumeraLaserGmbHinDecember2012and,
pursuanttothetermsoftheacquisitionagreement,weshouldnothaveresponsibilityforanyassessmentsrelatedtothepre
acquisitionperiod.InMarch2016,CoherentJapanKKreceivedataxauditnoticefortheyears2013to2015.Theauditwillbegin
inthefourthquarteroffiscal2016.InJune,2016,CoherentHoldingandCoherentDeutschlandGmbHreceivedataxauditnotice
fortheyears2011to2014.Theauditwillbegininthefourthquarteroffiscal2016.
Weregularlyengageindiscussionsandnegotiationswithtaxauthoritiesregardingtaxmattersinvariousjurisdictionsand
managementbelievesthatithasadequatelyprovidedreservesforanyadjustmentsthatmayresultfromtaxexaminations.
23
TableofContents
TheConsolidatedAppropriationsActof2016(theAct),wasenactedonDecember18,2015.UndertheAct,thefederalresearch
anddevelopmenttaxcreditwasretroactivelyextendedforamountspaidorincurredafterDecember31,2014
throughDecember31,2015andthecreditwasmadepermanent.Theeffectsofthechangeinthetaxlawarerecognizedinourfirst
quarteroffiscal2016,whichisthequarterthatthelawwasenacted.Accordingly,prioryearresearchanddevelopmenttaxcredits
ofapproximately$1.2million,afternettingwithappropriatereserves,wererecognizedinthefirstquarteroffiscal2016.
CoherentKoreareceivedapprovalforanadditionalHighTechtaxexemptioninApril2016fromtheKoreanauthoritiesandmust
makeacapitalcontributionfortheexemptiontobeeffective.
16.SEGMENTINFORMATION
Thefollowingtableprovidesnetsalesandincomefromoperationsforouroperatingsegmentsandareconciliationofourtotal
incomefromoperationstonetincome(inthousands):
ThreeMonthsEnded
July2,
2016
July4,
2015
NineMonthsEnded
July2,
2016
July4,
2015
Netsales:
SpecialtyLaserSystems
161,140
123,341 $
440,444 $
408,448
168,480
184,390
CommercialLasersandComponents
57,627
65,161
218,767
188,502 $
608,924 $
592,838
Income(expense)fromoperations:
SpecialtyLaserSystems
44,306
24,760 $
117,736 $
91,392
4,227
2,623
(17,242)
(10,293)
(40,784)
(33,466)
26,288
18,694
79,575
65,135
852
(608)
(1,150)
697
27,140
18,086
78,425
65,832
8,490
4,822
21,708
16,725
56,717 $
49,107
Totalnetsales
(776) 1,825
Corporateandother
Totalincomefromoperations
Totalotherincome(expense),
net
NetIncome
18,650
13,264 $
7,209 7,209
MajorCustomers
WehadonemajorcustomerduringthethreeandninemonthsendedJuly2,2016whoaccountedfor15.8%and16.8%,
respectively,ofconsolidatedrevenue.Thissamecustomeraccountedfor12.3%ofconsolidatedrevenueforthethreemonthsended
July4,2015.WehadanothermajorcustomerduringthethreeandninemonthsendedJuly2,2016whoaccountedfor11.3%and
10.6%,respectively,ofconsolidatedrevenue.Thiscustomeraccountedfor15.4%ofconsolidatedrevenuefortheninemonths
endedJuly4,2015.BothcustomerspurchasedprimarilyfromourSLSsegment.
Wehadonemajorcustomerwhoaccountedfor13.9%ofaccountsreceivableatJuly2,2016.Wehadanothermajorcustomerwho
accountedfor12.0%and21.4%ofaccountsreceivableatJuly2,2016andOctober3,2015,respectively.Bothcustomers
purchasedprimarilyfromourSLSsegment.
17.SUBSEQUENTEVENT
OnAugust1,2016,wepurchasedforwardcontractstotaling670.0millionEuro,withavaluedateofNovember30,2016,tolimit
ourforeignexchangeriskrelatedtothecommitmentofourtermloan(denominatedinEuros)inanamountoftheEuroequivalent
of$750.0milliontofinancetheU.S.dollarpaymentfortheacquisitionofRofin.Thederivativesusedtohedgeourcurrency
exposuredonotqualifyforhedgeaccountingtreatment.Thesederivativeswillbemarkedtomarketattheendofeachreporting
periodwithgainsandlossesrecognizedinotherincome(expense).
ITEM2.MANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOF
OPERATIONS
COMPANYOVERVIEW
BUSINESSBACKGROUND
Weareoneoftheworldsleadingprovidersoflasersandlaserbasedtechnologyinabroadrangeofscientific,commercialand
industrialapplications.Wedesign,manufacture,serviceandmarketlasersandrelatedaccessoriesforadiversegroupofcustomers.
Sinceinceptionin1966,wehavegrownthroughinternalexpansionandthroughstrategicacquisitionsofcomplementarybusinesses,
technologies,intellectualproperty,manufacturingprocessesandproductofferings.
Weareorganizedintotwooperatingsegments:SpecialtyLasersandSystems(SLS)andCommercialLasersandComponents
(CLC).Thissegmentationreflectsthegotomarketstrategiesforvariousproductsandmarkets.Whilebothsegmentsdelivercost
effectivephotonicssolutions,SLSdevelopsandmanufacturesconfigurable,advancedperformanceproductslargelyservingthe
microelectronics,scientificresearchandgovernmentprogramsandoriginalequipmentmanufacturer("OEM")
24
TableofContents
componentsandinstrumentationmarkets.ThesizeandcomplexityofmanyoftheSLSproductsrequireservicetobeperformedatthe
customersitebyfactorytrainedfieldserviceengineers.CLCfocusesonhighervolumeproductsthatareofferedinsetconfigurations.
Theproductarchitecturesaredesignedforeasyexchangeatthepointofusesuchthatsubstantiallyallproductserviceandrepairsare
baseduponadvancedreplacementanddepot(i.e.,factory)repair.CLCsprimarymarketsincludematerialsprocessing,OEM
componentsandinstrumentationandmicroelectronics.
Incomefromoperationsisthemeasureofprofitandlossthatourchiefoperatingdecisionmaker(CODM)usestoassessperformance
andmakedecisions.Incomefromoperationsrepresentsthesaleslessthecostofsalesanddirectoperatingexpensesincurredwithinthe
operatingsegmentsaswellasallocatedexpensessuchassharedsalesandmanufacturingcosts.Wedonotallocatetoouroperating
segmentscertainoperatingexpenses,whichwemanageseparatelyatthecorporatelevel.Theseunallocatedcostsincludestockbased
compensationandcorporatefunctions(certainadvancedresearchanddevelopment,management,finance,legalandhumanresources)
andareincludedinCorporateandother.ManagementdoesnotconsiderunallocatedCorporateandothercostsinitsmeasurementof
segmentperformance.
MARKETAPPLICATIONS
Ourproductsaddressabroadrangeofapplicationsthatwegroupintothefollowingmarkets:Microelectronics,ScientificResearchand
GovernmentPrograms,OEMComponentsandInstrumentationandMaterialsProcessing.
OURSTRATEGY
Westrivetodevelopinnovativeandproprietaryproductsandsolutionsthatmeettheneedsofourcustomersandthatarebasedonour
coreexpertiseinlasersandopticaltechnologies.Inpursuitofourstrategy,weintendto:
Leverageourtechnologyportfolioandapplicationengineeringtoleadtheproliferationofphotonicsintobroader
marketsWewillcontinuetoidentifyopportunitiesinwhichourtechnologyportfolioandapplicationengineeringcanbe
usedtoofferinnovativesolutionsandgainaccesstonewmarkets.Weplantoutilizeourexpertisetoincreaseourmarketshare
inthemidtohighpowermaterialprocessingapplications.
OptimizeourleadershippositioninexistingmarketsThereareanumberofmarketswherewehavehistoricallybeenat
theforefrontoftechnologicaldevelopmentandproductdeploymentandfromwhichwehavederivedasubstantialportionof
ourrevenues.Weplantooptimizeourfinancialreturnsfromthesemarkets.
MaintainanddevelopadditionalstrongcollaborativecustomerandindustryrelationshipsWebelievethatthe
Coherentbrandnameandreputationforproductquality,technicalperformanceandcustomersatisfactionwillhelpusto
furtherdevelopourloyalcustomerbase.Weplantomaintainourcurrentcustomerrelationshipsanddevelopnewoneswith
customerswhoareindustryleadersandworktogetherwiththesecustomerstodesignanddevelopinnovativeproductsystems
andsolutionsastheydevelopnewtechnologies.
DevelopandacquirenewtechnologiesandmarketshareWewillcontinuetoenhanceourmarketpositionthroughour
existingtechnologiesanddevelopnewtechnologiesthroughourinternalresearchanddevelopmentefforts,aswellasthrough
theacquisitionofadditionalcomplementarytechnologies,intellectualproperty,manufacturingprocessesandproduct
offerings.
StreamlineourmanufacturingstructureandimproveourcoststructureWewillfocusonoptimizingthemixof
productsthatwemanufactureinternallyandexternally.Wewillutilizeverticalintegrationwhereourinternalmanufacturing
processisconsideredproprietaryandseektoleverageexternalsourceswhenthecapabilitiesandcoststructurearewell
developedandonapathtowardscommoditization.
FocusonlongtermimprovementofadjustedEBITDA,indollarsandasapercentageofnetsalesWedefineadjusted
EBITDAasoperatingincomeadjustedfordepreciation,amortization,stockbasedcompensationexpense,majorrestructuring
costsandcertainothernonoperatingincomeandexpenseitems.KeyinitiativestoreachourgoalsforEBITDAimprovements
includeutilizationofourAsianmanufacturinglocations,rationalizingoursupplychainandcontinuedleveragingofour
infrastructure.
APPLICATIONOFCRITICALACCOUNTINGPOLICIES
Ourdiscussionandanalysisoffinancialconditionandresultsofoperationsarebaseduponourcondensedconsolidatedfinancial
statements,whichhavebeenpreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnited
25
TableofContents
StatesofAmericaandpursuanttotherulesandregulationsoftheSEC.Thepreparationofthesecondensedconsolidatedfinancial
statementsrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesand
disclosureofcontingentassetsandliabilitiesatthedateofthecondensedconsolidatedfinancialstatementsandthereportedamountsof
revenuesandexpensesduringthereportingperiod.Wehaveidentifiedthefollowingastheitemsthatrequirethemostsignificant
judgmentandofteninvolvecomplexestimation:revenuerecognition,accountingforlonglivedassets(includinggoodwilland
intangibleassets),inventoryvaluation,warrantyreserves,stockbasedcompensationandaccountingforincometaxes.SeeItem7.
"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"inourAnnualReportonForm10Kforour
fiscalyearendedOctober3,2015.
KEYPERFORMANCEINDICATORS
Belowisasummaryofsomeofthequantitativeperformanceindicators(asdefinedbelow)thatareevaluatedbymanagementtoassess
ourfinancialperformance.SomeoftheindicatorsarenonGAAPmeasuresandshouldnotbeconsideredasanalternativetoanyother
measurefordeterminingoperatingperformanceorliquiditythatiscalculatedinaccordancewithgenerallyacceptedaccounting
principles.
ThreeMonthsEnded
July2,2016
Change
%Change
(Dollarsinthousands)
Bookings
Booktobillratio
NetsalesSpecialtyLasersandSystems
July4,2015
390,814
1.79
176,665
0.94
214,149
121.2%
0.85
90.4%
161,140
123,341
37,799
30.6%
NetsalesCommercialLasersandComponents $
57,627
65,161
(7,534)
(11.6)%
Grossprofitasapercentageofnetsales
SpecialtyLasersandSystems
47.6%
45.4%
2.2%
4.8%
32.2%
35.8%
(3.6)%
(10.1)%
9.8%
11.3%
(1.5)%
(13.3)%
Researchanddevelopmentasapercentageofnet
sales
27,140
18,086
9,054
50.1%
Netcashprovidedby(usedin)operating
activities
9,067
(11,579) $
20,646
(178.3)%
61.8
69.1
(7.3)
(10.6)%
Annualizedthirdquarterinventoryturns
2.5
2.8
(0.3)
(10.7)%
Capitalspendingasapercentageofnetsales
5.5%
2.1%
3.4%
161.9%
8.5%
7.0%
1.5%
21.4%
20.8%
18.4%
2.4%
13.0%
Dayssalesoutstandinginreceivables
Netincomeasapercentageofnetsales
AdjustedEBITDAasapercentageofnetsales
26
TableofContents
July2,2016
July4,2015
Change
%Change
Bookings
Booktobillratio
NetsalesSpecialtyLasersandSystems
NineMonthsEnded
1,160,260
1.91
NetsalesCommercialLasersandComponents
559,741
0.94
600,519
107.3%
0.97
103.2%
440,444
408,448
31,996
7.8%
168,480
184,390
(15,910)
(8.6)%
47.7%
44.5%
3.2%
7.2%
35.1%
35.1%
Researchanddevelopmentasapercentageofnet
sales
10.1%
10.4%
(0.3)%
(2.9)%
78,425
65,832
12,593
19.1%
54,621
68,835
(14,214)
(20.6)%
Capitalspendingasapercentageofnetsales
4.6%
2.7%
1.9%
70.4%
9.3%
8.3%
1.0%
12.0%
21.0%
18.3%
2.7%
14.8%
AdjustedEBITDAasapercentageofnetsales
Definitionsandanalysisoftheseperformanceindicatorsareasfollows:
BookingsandBooktoBillRatio
Bookingsrepresentordersreceivedduringthecurrentperiodforproductsandservices.Whilewegenerallyhavenotexperienceda
significantrateofcancellation,bookingsaregenerallycancelablebyourcustomerswithoutsubstantialpenaltyand,therefore,we
cannotassureallbookingswillbeconvertedtonetsales.
Thebooktobillratioiscalculatedasquarterlybookingsdividedbyquarterlynetsales.Thisisanindicationofthestrengthofour
businessbutcansometimesbeimpactedbyasinglelargeorderorasinglelargeshipment.Aratioofgreaterthan1.0indicatesthat
demandforourproductsisgreaterthanwhatwesupplyinthequarterwhereasaratiooflessthan1.0indicatesthatdemandforour
productsislessthanwhatwesupplyinthequarter.
Bookingsincreased121.2%inthethirdquarteroffiscal2016comparedtothesamequarteroneyearago,withincreasesinthe
microelectronics,OEMcomponentsandinstrumentationandmaterialsprocessingmarkets.Comparedtothesecondquarteroffiscal
2016,bookingsdecreased21.3%withdecreasesinallfourmarkets,ledbyasignificantdecreaseinthemicroelectronicsmarket.The
booktobillratiowas1.79inthethirdquarteroffiscal2016.
Backlogrepresentsorderswhichweexpecttobeshippedwithin12monthsandthecurrentportionofservicecontracts.Fora
discussionofbacklog,see"RESULTSOFOPERATIONSBACKLOG".
Microelectronics
Microelectronicsbookingsincreased212.4%comparedtothesamequarteroneyearagoanddecreased22.9%frombookingsinthe
secondquarteroffiscal2016.Themicroelectronicsbooktobillratioforthethirdquarteroffiscal2016was2.43.
Flatpaneldisplayordersinthethirdquarteroffiscal2016increased359.0%fromordersinthethirdquarteroffiscal2015and
decreased24.9%fromrecordordersinthesecondquarteroffiscal2016,primarilyduetothetimingoforderplacementbycustomers,
withordersreceivedfrommultiplecustomersforlargeformatLinebeamsystemstobeusedinflexibleorganiclightemittingdiode
(OLED)production.Totalthirdquarterflatpaneldisplay(FPD)ordersexceeded$240million,includingservice,andincludedasingle
orderforsystemsinexcessof$100million.WebelievethatthepipelineforthenextroundofFPDannealingordersisdevelopingas
customersrefinetheirmarketshareassumptionsandlargerformatdisplaysgaintraction.Wearebeginningtoseeordersforother
processstepsinOLEDproductionincludingshortpulselasersforfilmcuttingandexcimerlasersforlaserliftoffapplications.
27
TableofContents
28
TableofContents
Ordersintheadvancedpackaging(API)marketdecreased16.9%fromordersinthethirdquarteroffiscal2015anddecreased0.9%
fromordersinthesecondquarteroffiscal2016.TheAPImarketcontinuestodemonstratevariabilitybasedonprojectspecificactivity.
Usersarelookingatreplacingorupgradingexistingtoolsasameansofloweringcostsaheadofachangeindrillingholesizeor
materials.
OrdersfromsemiconductorcapitalequipmentOEMsincreased4.9%fromthethirdquarteroffiscal2015butdecreased13.8%from
thesecondquarteroffiscal2016.Theoutlookforsemiconductorcapitalspendingisnowexpectedtobeflatfortheremainderof2016,
reflectingthemarket'sdependencyonmobiledevicesandtheexpectationoftheintroductionofmanynewsmartphonesin2017.
Accordingtoindustryexperts,thisshoulddrivemidtohighsingledigitgrowthinsemiconductorcapitalequipmentspendingfor2017.
MaterialsProcessing
Materialsprocessingordersincreased45.8%comparedtothesamequarteroneyearagoanddecreased12.4%fromthesecondquarter
offiscal2016.Thematerialsprocessingbooktobillratioforthethirdquarteroffiscal2016was1.04.
Thirdquarterbookingsremainedstrongfollowingarecordperformanceinthesecondquarter.Wecontinuedtoseestrengthinmetal
cuttingwithasignificantrepeatorderforaluminumcuttinginconsumerelectronics.Demandforcarbondioxidelasersremainedstrong
formidandhighpowerlasersinconvertingaswellasforlowpowerlasersinmarking.Inaddition,wehadtwonotableordersfor
ultrafastlaserprocessing,oneforfuelinjectornozzledrillingandtheotherformanufacturingdiamondtoolheads.Geographically,
Chinacontributedstrongordersinseveraladvancedapplications,butcoremarkingandcuttingmarketswereweakasthecountrydeals
withslowingdomesticconsumptionandexports.Europe,bycontrast,achievedalltimerecordmaterialsprocessingbookings,manyfor
Europeanendcustomers.
OEMComponentsandInstrumentation
OEMComponentsandInstrumentationordersincreased42.3%comparedtothesamequarteroneyearagoanddecreased25.5%from
therecordordersinthesecondquarteroffiscal2016.Thebooktobillratioforthethirdquarteroffiscal2016was1.16.
Instrumentationordersincreased41.5%comparedtothesamequarteroneyearagoanddecreased19.9%comparedtothesecond
quarteroffiscal2016.Weareexpandingourglobalcustomerbaseinbioinstrumentationwithordersfromkeycustomersforlasersand
subsystemsinflowcytometry.Thelegacybaseisalsoperformingwell,whichsuggestsanexpandingmarketratherthanmarketshare
shifts,consistentwithincreasedbiomedicalresearchfundingaswellashigherpenetrationinclinicalapplications.
OrdersformedicalOEMproductswere26.1%higherinthethirdquarteroffiscal2016comparedtothesamequarteroneyearagoand
48.6%lowerthanordersinthesecondquarteroffiscal2016,withthesequentialdecreaseduetothetimingoflargeordersfrom
medicalOEM's.Followingastrongperformanceinthesecondquarteroffiscal2016,themedicalOEMmarketperformedwellwith
strengthinophthalmicproductsforcataractandphotocoagulationtherapies.Webelievethatthemarketforeyetreatmentscontinuesto
bestrongduetoanagingandexpandingmiddleclassglobally,leadingtoanincreaseinagerelatedissuesandgreateraccesstocare.
ScientificandGovernmentPrograms
Scientificandgovernmentprogramsordersdecreased12.3%comparedtothesamequarteroneyearagoanddecreased4.1%fromthe
secondquarteroffiscal2016.Thebooktobillforthethirdquarteroffiscal2016was0.92.
Thedecreasefromthethirdquarteroffiscal2015waspartiallyduetothetimingofordersinEuropeandAsiawherecustomersare
awaitingthedeliveryofcommittedfunding.Applicationtrendsremainfocusedonbiologicalimagingandultrafastapplications.
InterestinournewerimagingproductsincludingMonacoandFidelityisrisingduetotheuniquecapabilitiesthattheselasersoffer.
OurAstrellaplatformisdoingwellwithintheultrafastresearchcommunityduetoitseaseofuse,performanceandreliability.
NetSales
Netsalesincludesalesoflasers,lasertools,relatedaccessoriesandservice.Netsalesforthethirdfiscalquarterincreased30.6%inour
SLSsegmentanddecreased11.6%inourCLCsegmentfromthesamequarteroneyearago.Netsalesforthefirstninemonths
increased7.8%inourSLSsegmentfromthesameperiodoneyearagoanddecreased8.6%inourCLCsegment
29
TableofContents
30
TableofContents
ninemonthsincreased7.8%inourSLSsegmentfromthesameperiodoneyearagoanddecreased8.6%inourCLCsegmentfromthe
sameperiodoneyearago.ForadescriptionofthereasonsforchangesinnetsalesrefertotheResultsofOperationssectionofthis
quarterlyreport.
GrossProfitasaPercentageofNetSales
Grossprofitasapercentageofnetsales(grossprofitpercentage)iscalculatedasgrossprofitfortheperioddividedbynetsalesfor
theperiod.Grossprofitpercentageinthethirdquarterincreasedfrom45.4%to47.6%inourSLSsegmentanddecreasedfrom35.8%
to32.2%inourCLCsegmentfromthesamequarteroneyearago.Grossprofitpercentageinthefirstninemonthsincreasedfrom
44.5%to47.7%inourSLSsegmentandremainedat35.1%inourCLCsegmentfromthesameperiodoneyearago.Foradescription
ofthereasonsforchangesingrossprofitrefertotheResultsofOperationssectionofthisquarterlyreport.
ResearchandDevelopmentasaPercentageofNetSales
Researchanddevelopmentasapercentageofnetsales(R&Dpercentage)iscalculatedasresearchanddevelopmentexpenseforthe
perioddividedbynetsalesfortheperiod.ManagementconsidersR&Dpercentagetobeanimportantindicatorinmanagingour
businessasinvestinginnewtechnologiesisakeytofuturegrowth.R&Dpercentagedecreasedto9.8%from11.3%inourthirdfiscal
quarteranddecreasedto10.1%from10.4%forthefirstninemonthsoffiscal2016comparedtothesameperiodsoneyearago.Fora
descriptionofthereasonsforchangesinR&DspendingrefertotheResultsofOperationssectionofthisquarterlyreport.
NetCashProvidedbyOperatingActivities
NetcashprovidedbyoperatingactivitiesasreflectedonourCondensedConsolidatedStatementsofCashFlowsprimarilyrepresents
theexcessofcashcollectedfrombillingstoourcustomersandotherreceiptsovercashpaidtoourvendorsforexpensesandinventory
purchasestorunourbusiness.Webelievethatcashflowsfromoperationsisanimportantperformanceindicatorbecausecash
generationoverthelongtermisessentialtomaintainingahealthybusinessandprovidingfundstohelpfuelgrowth.Foradescription
ofthereasonsforchangesinNetCashProvidedbyOperatingActivitiesrefertotheLiquidityandCapitalResourcessectionofthis
quarterlyreport.
DaysSalesOutstandinginReceivables
Wecalculatedayssalesoutstanding(DSO)inreceivablesasnetreceivablesattheendoftheperioddividedbynetsalesduringthe
periodandthenmultipliedbythenumberofdaysintheperiod,using90daysforquarters.DSOinreceivablesindicateshowwellwe
aremanagingourcollectionofreceivables,withlowerDSOinreceivablesresultinginhigherworkingcapitalavailability.Themore
moneywehavetiedupinreceivables,thelessmoneywehaveavailableforresearchanddevelopment,acquisitions,expansion,
marketingandotheractivitiestogrowourbusiness.OurDSOinreceivablesforthethirdquarteroffiscal2016decreasedfrom69.1
daysto61.8dayscomparedtothesamequarteroneyearagoprimarilyduetoimprovedcollectionsinAsia,alowerconcentrationof
saleslateinthequarterinJapanandalowerconcentrationofreceivablesinJapanwhereDSOsaretypicallyhigher,partiallyoffsetby
slowercollectionsintheU.S.andEuropeandtheunfavorableimpactofforeignexchangerates.
AnnualizedThirdQuarterInventoryTurns
Wecalculateannualizedthirdquarterinventoryturnsasthecostofsalesduringthethirdquarterannualizedanddividedbynet
inventoriesattheendofthethirdquarter.Thisindicateshowwellwearemanagingourinventorylevels,withhigherinventoryturns
resultinginmoreworkingcapitalavailabilityandahigherreturnonourinvestmentsininventory.Themoremoneywehavetiedupin
inventory,thelessmoneywehaveavailableforresearchanddevelopment,acquisitions,expansion,marketingandotheractivitiesto
growourbusiness.Ourannualizedinventoryturnsforthethirdquarteroffiscal2016decreasedfrom2.8to2.5turnscomparedtothe
samequarteroneyearagoprimarilyduetotheplannedbuildupofinventorylevelsincertainbusinessunits,primarilyin
microelectronics,tosupportincreaseddemand.
CapitalSpendingasaPercentageofNetSales
Capitalspendingasapercentageofnetsales(capitalspendingpercentage)iscalculatedascapitalexpendituresfortheperioddivided
bynetsalesfortheperiod.Capitalspendingpercentageindicatestheextenttowhichweareexpandingorimprovingouroperations,
includinginvestmentsintechnologyandequipment.Managementmonitorscapitalspendinglevelsasthisassistsusinmeasuringour
cashflows,netofcapitalexpenditures.Ourcapitalspendingpercentageincreasedto5.5%from2.1%forthethirdquarterand
increasedto4.6%from2.7%forthefirstninemonthsoffiscal2016comparedtothesame
31
TableofContents
32
TableofContents
2.1%forthethirdquarterandincreasedto4.6%from2.7%forthefirstninemonthsoffiscal2016comparedtothesameperiodsone
yearagoprimarilyduetohigherinvestmentstoexpandourmanufacturingcapacityinGttingen,Germany,upgradecertainofour
productionfacilitiesinCaliforniaandNewJerseyandpurchasesofproductionrelatedassets,partiallyoffsetbytheimpactofhigher
revenuesinthethirdquarterandfirstninemonthsoffiscal2016.Weexpecthighercapitalspendingintheremainderoffiscal2016to
expandourmanufacturingcapacityinGttingen,GermanyandaddopticsfabricationcapacityatoursiteinRichmond,California.
AdjustedEBITDAasaPercentageofNetSales
WedefineadjustedEBITDAasoperatingincomeadjustedfordepreciation,amortization,stockbasedcompensation,major
restructuringcostsandcertainothernonoperatingincomeandexpenseitems,suchascostsrelatedtotheacquisitionofRofinSinar
Technologies,Inc.("Rofin").KeyinitiativestoreachourgoalsforEBITDAimprovementsincludeutilizationofourAsian
manufacturinglocations,rationalizingoursupplychainandcontinuedleveragingofourinfrastructure.
Weutilizeanumberofdifferentfinancialmeasures,bothGAAPandnonGAAP,suchasadjustedEBITDAasapercentageofnetsales,
inanalyzingandassessingouroverallbusinessperformance,formakingoperatingdecisionsandforforecastingandplanningfuture
periods.WeconsidertheuseofnonGAAPfinancialmeasureshelpfulinassessingourcurrentfinancialperformanceandongoing
operations.WhileweusenonGAAPfinancialmeasuresasatooltoenhanceourunderstandingofcertainaspectsofourfinancial
performance,wedonotconsiderthesemeasurestobeasubstitutefor,orsuperiorto,theinformationprovidedbyGAAPfinancial
measures.WeprovideadjustedEBITDAinordertoenhanceinvestors'understandingofourongoingoperations.Thismeasureisused
bysomeinvestorswhenassessingourperformance.
BelowisthereconciliationofournetincomeasapercentageofnetsalestoouradjustedEBITDAasapercentageofnetsales:
ThreeMonthsEnded
July2,
2016
July4,
2015
NineMonthsEnded
July2,
2016
July4,
2015
8.5%
7.0%
9.3%
8.3%
Incometaxexpense
3.9%
2.6%
3.6%
2.8%
Interestandotherincome(expense),net
0.5%
0.4%
0.4%
0.1%
Depreciationandamortization
3.9%
4.2%
4.2%
4.2%
Customsaudit
0.7%
0.2%
CostsrelatedtoacquisitionofRofin
1.4%
1.1%
1.1%
0.4%
2.6%
2.4%
2.4%
2.3%
20.8%
18.4%
21.0%
18.3%
Stockbasedcompensation
AdjustedEBITDAasapercentageofnet
sales
RESULTSOFOPERATIONS
SIGNIFICANTEVENTS
OnMarch16,2016,weenteredintoadefinitiveagreementtoacquireRofin,oneoftheworld'sleadingdevelopersandmanufacturers
ofhighperformanceindustriallasersourcesandlaserbasedsolutionsandcomponents.Theacquisitionwillbeanallcashtransaction
atapriceof$32.50pershareofRofincommonstockforatotalapproximateoffervalueof$942millionbeforefeesandtransaction
costs.Thecompletionoftheacquisitionissubjecttocustomaryclosingconditions,includingregulatoryapprovals,andweexpectitto
closeduringthefourthcalendarquarterof2016.
OnMarch16,2016,weenteredintoadebtcommitmentletterwithBarclaysBankPLC("Barclays")andonApril5,2016,enteredinto
anamendedandrestateddebtcommitmentletterwithBarclaysandbothBankofAmerica,N.A.andMerrillLynch,Pierce,Fenner&
SmithIncorporated(together,"BAML").Pursuanttothecommitmentletter,amongotherthings,BarclaysandBAMLhavecommitted
toprovideuswithdebtfinancingincludingatermloan(denominatedinEuros)inanamountoftheEuroequivalentof$750.0million
and,alongwithTheBankofTokyoMitsubishiUFJ,Ltd.(MUFG),whichwasaddedbyajoinderagreementwithBarclaysand
BAML(andconsentedtobyus),a$100.0millionrevolvingfacility(denominatedinU.S.dollars)tofinancetheacquisitionofRofin.
Theobligationsofthelendersunderthecommitmentletteraresubjecttocertainconditions,includingtheconsummationofthe
acquisitioninaccordancewiththetermsandconditionsof
33
TableofContents
thedefinitiveagreementandothercustomaryclosingobligations.SeeNote17,"SubsequentEvent"foradescriptionofourhedgeof
thiscommitment.
operations,andtheremainingportionofwhichwillbepaidupon,andsubjectto,consummationoftheacquisition.Wehavealsoagreed
topaytoBarclaysapproximately$17.0millionand$7.5millionforunderwritingandupfrontfees,respectively,uponthecloseofthe
financing.Inaddition,theacquisitionagreementcontainscertainterminationrightsforCoherentandfurtherprovidesthatwemaybe
requiredtopayaterminationfeeof$65.0milliontoRofinand$2.4milliontoBarclays.
CONSOLIDATEDSUMMARY
Thefollowingtablesetsforth,fortheperiodsindicated,thepercentageoftotalnetsalesrepresentedbythelineitemsreflectedinour
condensedconsolidatedstatementsofoperations:
ThreeMonthsEnded
July2,
2016
Netsales
July4,
2015
NineMonthsEnded
July2,
2016
July4,
2015
100.0%
100.0%
100.0%
100.0%
Costofsales
56.8%
58.2%
56.1%
58.8%
Grossprofit
43.2%
41.8%
43.9%
41.2%
Operatingexpenses:
9.8%
11.3%
10.1%
10.4%
21.1%
19.2%
20.4%
19.2%
1.1%
0.3%
0.3%
0.3%
0.3%
0.3%
31.2%
31.9%
30.8%
30.2%
12.0%
9.9%
13.1%
11.0%
Otherincome(expense),net
0.4%
(0.3)%
(0.2)%
0.1%
12.4%
9.6%
12.9%
11.1%
3.9%
2.6%
3.6%
2.8%
Netincome
8.5%
7.0%
9.3%
8.3%
Incomefromoperations
Netincomeforthethirdquarteroffiscal2016was$18.7million($0.76perdilutedshare),including$4.1millionofaftertaxstock
relatedcompensationexpense,$1.4millionamortizationofintangibleassetsand$2.0millionofaftertaxcostsrelatedtothe
acquisitionofRofin.Netincomeforthethirdquarteroffiscal2015was$13.3million($0.53perdilutedshare),including$3.3million
ofaftertaxstockrelatedcompensationexpense,$1.4millionamortizationofintangibleassets,a$1.3millionaftertaxchargeforthe
impairmentofourinvestmentinSiOnyxanda$1.3millionaftertaxchargeforanaccrualrelatedtoanongoingcustomsaudit.Net
incomeforthefirstninemonthsoffiscal2016was$56.7million($2.33perdilutedshare),including$11.4millionofaftertaxstock
relatedcompensationexpense,$4.3millionamortizationofintangibleassets,$4.3millionofaftertaxcostsrelatedtotheacquisitionof
Rofinandabenefitof$1.2millionrelatedtotherenewalofthefederalresearchanddevelopmenttaxcreditsforfiscal2015.Net
incomeforthefirstninemonthsoffiscal2015was$49.1million($1.96perdilutedshare),including$10.7millionofaftertaxstock
relatedcompensationexpense,$4.6millionamortizationofintangibleassets,a$1.3millionaftertaxchargefortheimpairmentofour
investmentinSiOnyx,a$1.3millionaftertaxchargeforanaccrualrelatedtoanongoingcustomsauditandabenefitof$1.1million
relatedtotherenewalofthefederalresearchanddevelopmenttaxcreditsforfiscal2014.
BACKLOG
Backlogrepresentsorderswhichweexpecttobeshippedwithin12monthsandthecurrentportionofservicecontracts.Ordersusedto
computebacklogaregenerallycancelableandsubjecttoreschedulingbyourcustomerswithoutsubstantialpenalties.Historically,we
havenotexperiencedasignificantrateofcancellationorrescheduling,thoughwecannotguaranteethattherateofcancellationsor
reschedulingwillnotincreaseinthefuture.Wehadabacklogofordersshippablewithin12monthsof
34
TableofContents
$564.5millionatJuly2,2016,includingasignificantconcentrationintheflatpaneldisplaymarket(63%)forcustomerswhichare
primarilylocatedinAsia.
NETSALES
MarketApplication
Thefollowingtablessetforth,fortheperiodsindicated,theamountofnetsalesandtheirrelativepercentagesoftotalnetsalesby
marketapplication(dollarsinthousands):
ThreeMonthsEnded
July2,2016
Amount
Consolidated:
Microelectronics
Percentage
oftotal
netsales
116,473
July4,2015
Amount
Percentage
oftotal
netsales
53.2% $
93,014
49.4%
OEMcomponentsandinstrumentation
37,892
17.3%
40,189
21.3%
Materialsprocessing
36,506
16.7%
27,403
14.5%
Scientificandgovernmentprograms
27,896
12.8%
27,896
14.8%
218,767
100.0% $
188,502
100.0%
Total
NineMonthsEnded
July2,2016
Amount
Consolidated:
Microelectronics
OEMcomponentsandinstrumentation
Percentage
oftotal
netsales
July4,2015
Amount
Percentage
oftotal
netsales
310,703
51.0% $
294,094
49.6%
119,025
19.6%
125,470
21.2%
Materialsprocessing
87,564
14.4%
85,513
14.4%
Scientificandgovernmentprograms
91,632
15.0%
87,761
14.8%
608,924
100.0% $
592,838
100.0%
Total
Quarterly
Netsalesforthethirdquarteroffiscal2016increasedby$30.3million,or16.1%,comparedtothethirdquarteroffiscal2015.Sales
increasesinthemicroelectronicsandmaterialsprocessingmarketswerepartiallyoffsetbydecreasesintheOEMcomponentsand
instrumentationmarket.
Theincreaseinthemicroelectronicsmarketof$23.5million,or25.2%,wasprimarilyduetohighershipmentsforflatpaneldisplay
annealingsystemsandsemiconductorapplicationspartiallyoffsetbylowershipmentsforadvancedpackagingapplications.Salesinthe
materialsprocessingmarketincreased$9.1million,or33.2%,primarilyduetohighershipmentsforcutting,markingandother
materialsprocessingapplications.ThedecreaseintheOEMcomponentsandinstrumentationmarketof$2.3million,or5.7%,wasdue
primarilytolowershipmentsformedicalapplicationspartiallyoffsetbyhighershipmentsformilitaryapplications.Salesinthe
scientificandgovernmentprogramsmarketwereflat.
Yeartodate
Netsalesforthefirstninemonthsoffiscal2016increasedby$16.1million,or2.7%comparedtothefirstninemonthsoffiscal2015
includingdecreasesduetotheunfavorableimpactofforeignexchangerates.Salesincreasesinthemicroelectronics,scientificand
governmentprogramsandmaterialsprocessingmarketswerepartiallyoffsetbysalesdecreasesintheOEMcomponentsand
instrumentationmarket.
Theincreaseinthemicroelectronicsmarketof$16.6million,or5.6%,wasprimarilyduetohighershipmentsforflatpaneldisplay
annealingsystemsandsemiconductorapplicationspartiallyoffsetbylowershipmentsforadvancedpackagingand
35
TableofContents
solarapplications.Salesinthescientificandgovernmentprogramsmarketincreased$3.9million,or4.4%,primarilyduetohigher
demandforadvancedresearchapplicationsusedbyuniversityandgovernmentresearchgroupsintheU.S.andEurope.Salesinthe
materialprocessingmarketincreased$2.1million,or2.4%,primarilyduetohighershipmentsforcuttingandothermaterials
processingapplications.ThedecreaseintheOEMcomponentsandinstrumentationmarketof$6.4million,or5.1%,wasdueprimarily
tolowershipmentsformedicalapplicationspartiallyoffsetbyhighershipmentsformilitaryandbioinstrumentationapplications.
Thetimingforshipmentsofourhigheraveragesellingpriceexcimerproductsintheflatpaneldisplaymarkethavehistorically
fluctuatedandareinthefutureexpectedtofluctuatefromquartertoquarterduetocustomerscheduling,ourabilitytomanufacture
theseproductsand/oravailabilityofcriticalcomponentpartsandsupplies.Asaresult,thetimingtoconvertordersfortheseproducts
tosaleswilllikelyfluctuatefromquartertoquarter.
Segments
Weareorganizedintotworeportableoperatingsegments:SLSandCLC.SLSdevelopsandmanufacturesconfigurable,advanced
performanceproductslargelyservingthemicroelectronics,scientificresearchandgovernmentprogramsandOEMcomponentsand
instrumentationmarkets.CLCfocusesonhighervolumeproductsthatareofferedinsetconfigurations.CLCsprimarymarketsinclude
materialsprocessing,OEMcomponentsandinstrumentationandmicroelectronics.
Thefollowingtablessetforth,fortheperiodsindicated,theamountofnetsalesandtheirrelativepercentagesoftotalnetsalesby
segment(dollarsinthousands):
ThreeMonthsEnded
Amount
Consolidated:
SpecialtyLasersandSystems(SLS)
CommercialLasersandComponents(CLC)
Total
Percentage
oftotal
netsales
161,140
July4,2015
Amount
Percentage
oftotal
netsales
73.7% $
123,341
65.4%
57,627
26.3%
65,161
34.6%
218,767
100.0% $
188,502
100.0%
NineMonthsEnded
July2,2016
Amount
Consolidated:
SpecialtyLasersandSystems(SLS)
CommercialLasersandComponents(CLC)
Total
July2,2016
Percentage
oftotal
netsales
July4,2015
Amount
Percentage
oftotal
netsales
440,444
72.3% $
408,448
68.9%
168,480
27.7%
184,390
31.1%
608,924
100.0% $
592,838
100.0%
Quarterly
Netsalesforthethirdquarteroffiscal2016increasedby$30.3million,or16.1%,comparedtothethirdquarteroffiscal2015,with
increasesof$37.8million,or30.6%,inourSLSsegmentpartiallyoffsetbydecreasesof$7.5million,or11.6%,inourCLCsegment.
TheincreaseinourSLSsegmentsaleswasprimarilyduetohighershipmentsofflatpaneldisplayannealingsystemsandhigher
shipmentsformaterialsprocessingapplications.ThedecreaseinourCLCsegmentsaleswasprimarilyduetoloweradvanced
packagingandmedicalapplicationsales.
Yeartodate
Netsalesforthefirstninemonthsoffiscal2016increasedby$16.1million,or2.7%,comparedtothefirstninemonthsoffiscal2015,
withincreasesof$32.0million,or7.8%,inourSLSsegmentoffsetbydecreasesof$15.9million,or8.6%,inour
36
TableofContents
CLCsegment.BoththeincreaseanddecreaseinSLSandCLCsegmentsales,respectively,includeddecreasesduetotheunfavorable
impactofforeignexchangerates.
TheincreaseinourSLSsegmentsaleswasprimarilyduetohighershipmentsofflatpaneldisplayannealingsystemsaswellashigher
shipmentsforsemiconductor,scientificandgovernmentresearchprograms,militaryandmaterialsprocessingapplicationspartially
offsetbylowershipmentsformedicalandadvancedpackagingapplications.ThedecreaseinourCLCsegmentsaleswasprimarilydue
tolowersalesformedical,advancedpackaging,materialsprocessing,flatpaneldisplayandscientificandgovernmentresearch
programsapplicationspartiallyoffsetbyhigherbioinstrumentationsales.
GROSSPROFIT
Consolidated
Ourgrossprofitrateincreasedto43.2%inthethirdquarteroffiscal2016from41.8%andincreasedto43.9%from41.2%inthefirst
ninemonthsoffiscal2016comparedtothesameperiodsoneyearago.
The1.4%thirdquarterincreaseinthegrossprofitratewasprimarilyduetolowerothercosts(1.0%)dueprimarilytoanaccrualinthe
thirdquarteroffiscal2015foracustomsauditinSouthKoreaandlowerwarrantycosts(0.5%)duetofewerwarrantyeventspartially
offsetbyunfavorableproductmargins(0.1%).Theunfavorableproductmarginswerearesultofunfavorablemixinthe
microelectronicsandinstrumentationmarketsforcertainbusinessunits,unfavorablemixwithinservicerevenuesandtheunfavorable
impactfromEuroforeigncurrencyfluctuationspartiallyoffsetbyfavorablemixofflatpaneldisplayannealingsystemsinthe
microelectronicsmarket,thefavorableimpactfromYenforeigncurrencyfluctuationsandtheimpactofhighersalesvolumesincertain
businessunits.
The2.7%increaseinthegrossprofitrateduringthefirstninemonthsoffiscal2016wasprimarilyduetofavorableproductmargins
(2.0%)asaresultoffavorablemixforsystemsinthemicroelectronicsmarket,particularlyforflatpaneldisplayapplications,the
favorableimpactfromforeigncurrencyfluctuations(primarilytheEuroandYen)andtheimpactofhighersalesvolumesincertain
businessunits.Alsocontributingtotheincreaseingrossprofitratewerelowerwarrantycosts(0.4%)duetofewerwarrantyeventsand
lowerothercosts(0.3%)dueprimarilytoanaccrualinthethirdquarteroffiscal2015foracustomsauditinSouthKorea.
Ourgrossprofitratehasbeenandwillcontinuetobeaffectedbyavarietyoffactorsincludingmarketandproductmix,pricingon
volumeorders,shipmentvolumes,ourabilitytomanufactureadvancedandmorecomplexproducts,manufacturingefficiencies,excess
andobsoleteinventorywritedowns,warrantycosts,amortizationofintangibles,pricingbycompetitorsorsuppliers,newproduct
introductions,productionvolume,customizationandreconfigurationofsystems,commoditypricesandforeigncurrencyfluctuations,
particularlytherecentvolatilityintheEuroandtoalesserextent,theJapaneseYenandtheKoreanWon.
ThegrossprofitrateinourSLSsegmentincreasedto47.6%inthethirdquarteroffiscal2016from45.4%andincreasedto47.7%from
44.5%inthefirstninemonthsoffiscal2016comparedtothesameperiodsoneyearago.
The2.2%thirdquarterincreaseinthegrossprofitratewasprimarilyduetolowerwarrantycosts(0.9%)duetofewerwarrantyevents,
lowerothercosts(0.7%)dueprimarilytoanaccrualinthethirdquarteroffiscal2015foracustomsauditinSouthKoreapartially
offsetbyhigherinventoryprovisionsincertainbusinessunitsandhigherfreightcosts,favorableproductmargins(0.5%)andlower
intangiblesamortization(0.1%)duetotheimpactofhighersales.Thefavorableproductmarginswerearesultoftheimpactofhigher
volumesincertainbusinessunits,favorablemixofflatpaneldisplayannealingsystemsinthemicroelectronicsmarketandthe
favorableimpactfromYenforeigncurrencyfluctuationspartiallyoffsetbyunfavorablemixinthemicroelectronicsandinstrumentation
marketsforcertainbusinessunits,unfavorablemixofservicerevenuesandtheunfavorableimpactfromEuroforeigncurrency
fluctuations.
The3.2%increaseinthegrossprofitrateduringthefirstninemonthsoffiscal2016wasprimarilyduetofavorableproductmargins
(2.4%),lowerwarrantycosts(0.5%)duetofewerwarrantyevents,lowerothercosts(0.2%)primarilyduetoanaccrualinthethird
quarteroffiscal2015foracustomsauditinSouthKoreaandlowerintangiblesamortizationexpense(0.1%).The2.4%productmargin
improvementresultedfromtheimpactofhighervolumesincertainbusinessunits,favorablemixforsystemsinthemicroelectronics
market,particularlyforflatpaneldisplayapplications,aswellasfavorableservicemixandthefavorableimpactfromforeigncurrency
fluctuations(primarilytheEuroandYen).
37
TableofContents
ThegrossprofitrateinourCLCsegmentdecreasedto32.2%inthethirdquarteroffiscal2016from35.8%andremainedflatat35.1%
inthefirstninemonthsoffiscal2016comparedtothesameperiodsoneyearago.
The3.6%thirdquarterdecreaseinthegrossprofitratewasprimarilyduetounfavorableproductmargins(4.5%)andhigherwarranty
costs(0.2%)partiallyoffsetbylowerothercosts(1.1%)asapercentageofsalesduetolowerfreightcostsandlowerinventory
provisionsincertainbusinessunits.The4.5%decreaseintheproductmarginresultsfromtheimpactoflowervolumesandunfavorable
productmixinthematerialsprocessingandOEMcomponentsandinstrumentationmarkets.
Thegrossprofitrateduringthefirstninemonthsoffiscal2016wasflatcomparedtotheprioryearwithlowerothercosts(0.3%)asa
percentageofsalesduetolowerfreightcostsnetofhigherinventoryprovisionsincertainbusinessunitsoffsetbyunfavorableproduct
margin(0.3%)resultingfromtheimpactoflowervolumesnetoffavorableproductmixintheOEMcomponentsandinstrumentation
andmaterialsprocessingmarkets.
OPERATINGEXPENSES:
ThreeMonthsEnded
July2,2016
Percentageof
totalnetsales
Amount
July4,2015
Percentageof
totalnetsales
Amount
21,441
21,270
11.3%
46,256
21.1%
36,154
19.2%
2,017
1.1%
574
0.3%
647
0.3%
60,088
31.9%
9.8% $
68,271
31.2% $
NineMonthsEnded
Amount
Percentageof
totalnetsales
July4,2015
Amount
Percentageof
totalnetsales
July2,2016
61,536
10.1% $
61,467
10.4%
123,970
20.4%
113,777
19.2%
2,017
0.3%
1,975
0.3%
2,009
0.3%
179,270
30.2%
187,481
30.8% $
Quarterly
Researchanddevelopment(R&D)expensesincreased$0.2million,or0.8%,duringthethirdfiscalquarterendedJuly2,2016
comparedtothesamequarteroneyearago.Theincreasewasprimarilydueto$0.7millionincrementalspendingfromtheasset
acquisitionsfromTinsleyandRaydiance,bothofwhichwereacquiredinthefourthquarteroffiscal2015,$0.3millionhighercharges
forincreasesindeferredcompensationplanliabilitiesand$0.1millionhigherstockbasedcompensationexpense.Theincreaseswere
partiallyoffsetby$0.9millionlowerprojectspendingprimarilyasaresultofhighercustomerreimbursementsfordevelopment
projects.Onasegmentbasisascomparedtotheprioryearperiod,SLSresearchanddevelopmentspendingincreased$0.2million
primarilyduetotheassetacquisitionsfromTinsleyandRaydiancepartiallyoffsetbylowerprojectspendingduetohighercustomer
reimbursements.CLCspendingdecreased$0.5millionduetolowerprojectspending.Corporateandotherspendingincreased$0.5
millionprimarilyduetohigherchargesforincreasesindeferredcompensationplanliabilitiesandhigherstockbasedcompensation
expense.
38
TableofContents
Yeartodate
R&Dexpensesincreased$0.1million,or0.1%,duringtheninemonthsendedJuly2,2016comparedtothesameperiodoneyearago.
Theincreaseforthefirstninemonthswasprimarilydueto$2.2millionincrementalspendingfromtheassetacquisitionsfromTinsley
andRaydiance,bothofwhichwereacquiredinthefourthquarteroffiscal2015,and$0.2millionhigherstockbasedcompensation
expense.Theincreaseswerepartiallyoffsetby$2.2millionlowerprojectspendingincludingthefavorableimpactofforeignexchange
ratesandlowerspendingonlabornetoflowercustomerreimbursementsand$0.1millionlowerchargesforincreasesindeferred
compensationplanliabilities.Onasegmentbasisascomparedtotheprioryearperiod,SLSresearchanddevelopmentspending
increased$1.0millionprimarilyduetotheassetacquisitionsfromTinsleyandRaydiancepartiallyoffsetbylowerprojectspending
includingthefavorableimpactofforeignexchangeratesnetoflowercustomerreimbursements.CLCspendingdecreased$1.1million
primarilyduetolowerprojectspendingincludinghighercustomerreimbursements.Corporateandotherspendingincreased$0.2
millionduetohigherstockbasedcompensationexpensenetoflowerchargesforincreasesindeferredcompensationplanliabilities.
Quarterly
Selling,generalandadministrative(SG&A)expensesincreased$10.1millionor27.9%,duringthethirdfiscalquarterendedJuly2,
2016comparedtothesamequarteroneyearago.Theincreasewasprimarilydueto$3.3millionhigherpayrollspendingduetohigher
variablecompensationandhighersalescommissions,anet$2.8millionhigherconsultingandlegalcostsrelatedtoacquisitions(of
which$3.0millionwasrelatedtotheacquisitionofRofin)and$1.4millionhigherchargesforincreasesindeferredcompensationplan
liabilities.Inaddition,theincreaseincluded$1.0millionhigherstockbasedcompensationexpenseduetoaformerexecutive's
transitionservicesagreementandhigherrestrictedstockexpenseand$1.6millionhigherothernetvariablespendingincluding
incrementalspendingfromtheassetacquisitionsfromTinsleyandRaydiance.Onasegmentbasisascomparedtotheprioryearperiod,
SLSsegmentexpensesincreased$2.9millionduetohigherpayrollspending,theimpactduetotheassetacquisitionsfromTinsleyand
Raydianceandhigherothervariablespending.CLCspendingincreased$0.9millionwithhigherpayrollspendingandhigherother
variablespending.SpendingforCorporateandotherincreased$6.3millionprimarilyduetohigherconsultingandlegalcostsrelatedto
acquisitions,higherchargesforincreasesindeferredcompensationplanliabilities,higherstockbasedcompensationexpenseand
higherpayrollspending.
Yeartodate
SG&Aexpensesincreased$10.2million,or9.0%,duringtheninemonthsendedJuly2,2016comparedtothesameperiodoneyear
ago.Theincreaseforthefirstninemonthswasprimarilyduetoanet$5.6millionhigherconsultingandlegalcostsrelatedto
acquisitions(ofwhich$6.6millionwasrelatedtotheacquisitionofRofin)and$2.4millionhigherpayrollspendingprimarilydueto
highervariablecompensationandhighersalescommissionsnetofthefavorableimpactofforeignexchangerates.Inaddition,the
increaseincludes$1.3millionhigherothernetvariablespendingincludingincrementalspendingfromtheassetacquisitionsofTinsley
andRaydianceand$0.9millionhigherstockbasedcompensationexpenseduetohigherrestrictedstockexpense.Onasegmentbasisas
comparedtotheprioryearperiod,SLSsegmentexpensesincreased$2.8millionprimarilyduetohigherpayrollspendingandthe
impactduetotheassetacquisitionsfromTinsleyandRaydiancenetofthefavorableimpactofforeignexchangerates.CLCspending
increased$0.3millionprimarilyduetohigherpayrollspendingnetofthefavorableimpactofforeignexchangerates.Spendingfor
Corporateandotherincreased$7.1millionprimarilyduetohigherconsultingandlegalcostsrelatedtoacquisitions,higherstockbased
compensationexpenseandhigherpayrollspending.
OnJune8,2010,weinvested$2.0millioninSiOnyx,Inc.,aprivatelyheldcompany.Theinvestmentwasincludedinotherassetsand
wasbeingcarriedonacostbasis.Duringthethirdquarteroffiscal2015wedeterminedthatourinvestmentbecameotherthan
temporarilyimpaired.Asaresult,werecordedanoncashimpairmentchargeof$2.0milliontooperatingexpenseinourresultsof
operationsinthethirdquarteroffiscal2015.
Amortizationofintangibleassetsdecreased$0.1millioninthethreemonthsendedJuly2,2016anddecreasedslightlyduringthenine
monthsendedJuly2,2016comparedtothesameperiodslastyear.Thedecreaseswereprimarilyduetothecompletionofamortization
ofcertainintangiblesfromprioracquisitionsandthefavorableimpactofforeignexchangeratesnetofincreasesduetotheasset
acquisitionfromRaydianceinthefourthquarteroffiscal2015.
39
TableofContents
OTHERINCOME(EXPENSE)NET
Otherincome,netofotherexpense,changedby$1.5millionfromanexpenseof$0.6millionforthethreemonthsendedJuly4,2015
toincomeof$0.9millionforthethreemonthsendedJuly2,2016andchangedby$1.8millionfromincomeof$0.7millionforthe
ninemonthsendedJuly4,2015to$1.2millionexpensefortheninemonthsendedJuly2,2016.Thethirdquarterchangefromnet
otherexpensetonetotherincomewasprimarilyduetohighergains,netofexpenses,onourdeferredcompensationplanassets($1.7
million).Theninemonthchangefromnetotherincomein2015tonetotherexpensein2016wasprimarilyduetohighernetforeign
exchangelosses($1.8million)duetohigherunhedgedexposureinthefirstninemonthsoffiscal2016,thesignificantmovementof
ratesinJune2016duetotheBrexitvoteaswellasfavorablechangesinforeignexchangeratesinthesecondquarteroffiscal2015
comparedtotimingofhedgecontracts.
INCOMETAXES
Theeffectivetaxrateonincomebeforeincometaxesforthethirdquarteroffiscal2016of31.3%andtheeffectivetaxrateonincome
beforeincometaxesof27.7%fortheninemonthsendedJuly2,2016werelowerthanthestatutoryrateof35.0%
primarilyduetodifferencesrelatedtothebenefitofincomesubjecttoforeigntaxratesthatarelowerthanU.S.taxratesincludingthe
Singaporetaxexemption,thebenefitofforeigntaxcreditsandthebenefitoffederalresearchanddevelopmenttaxcreditsincluding
renewalofthefederalresearchanddevelopmentcreditsforfiscal2015.Theseamountsarepartiallyoffsetbydeemeddividend
inclusionsundertheSubpartFtaxrulesincludinganintercompanyloanfromCoherentKoreathatwilllikelyberepaidinfiscal2017,
stockbasedcompensationnotdeductiblefortaxpurposesandlimitationsonthedeductibilityofcompensationunderIRCSection
162(m).
Theeffectivetaxrateonincomebeforeincometaxesforthethirdquarteroffiscal2015of26.7%andtheeffectivetaxrateonincome
beforeincometaxesof25.4%fortheninemonthsendedJuly4,2015werelowerthanthestatutoryrateof35.0%primarilydueto
differencesrelatedtothebenefitofincomesubjecttoforeigntaxratesthatarelowerthanU.S.taxratesincludingSouthKoreaand
Singaporetaxexemptions,thebenefitofforeigntaxcreditsandthebenefitoffederalresearchanddevelopmenttaxcreditsincluding
renewalofthefederalresearchanddevelopmentcreditsforfiscal2014.Theseamountsarepartiallyoffsetbydeemeddividend
inclusionsundertheSubpartFtaxrules,stockbasedcompensationnotdeductiblefortaxpurposesandlimitationsonthedeductibility
ofcompensationunderIRCSection162(m).
LIQUIDITYANDCAPITALRESOURCES
AtJuly2,2016,wehadassetsclassifiedascashandcashequivalentsandshortterminvestments,inanaggregateamountof$373.6
million,comparedto$325.5millionatOctober3,2015.AtJuly2,2016,approximately$323.8millionofthiscashandsecuritieswas
heldincertainofourforeignsubsidiaries,$91.0millionofwhichwasdenominatedincurrenciesotherthantheU.S.dollar.We
currentlyhaveapproximately$301.9millionofcashheldbyforeignsubsidiarieswhereweintendtopermanentlyreinvestour
accumulatedearningsintheseentitiesandourcurrentplansdonotdemonstrateaneedforthesefundstosupportourdomestic
operations.If,however,aportionofthesefundswereneededforanddistributedtoouroperationsintheUnitedStates,wewouldbe
subjecttoadditionalU.S.incometaxesandforeignwithholdingtaxes.Theamountofthetaxesduewoulddependontheamountand
mannerofrepatriation,aswellasthelocationfromwherethefundsarerepatriated.Weactivelymonitorthethirdpartydepository
institutionsthatholdtheseassets,primarilyfocusingonthesafetyofprincipalandsecondarilymaximizingyieldontheseassets.We
diversifyourcashandcashequivalentsandinvestmentsamongvariousfinancialinstitutions,moneymarketfunds,sovereigndebtand
othersecuritiesinordertoreduceourexposureshouldanyoneofthesefinancialinstitutionsorfinancialinstrumentsfailorencounter
difficulties.Todate,wehavenotexperiencedanymateriallossorlackofaccesstoourinvestedcash,cashequivalentsorshortterm
investments.However,wecanprovidenoassurancesthataccesstoourinvestedcash,cashequivalentsorshortterminvestmentswill
notbeimpactedbyadverseconditionsinthefinancialmarkets.
Inthesecondquarteroffiscal2016,thefirstquarteroffiscal2016,thesecondquarteroffiscal2015andthefourthquarteroffiscal
2014,weconverted$22.6million,$33.0million,$42.3millionand$62.7million,respectively,ofcashandsecuritiesheldincertainof
ourforeignsubsidiariestoU.S.dollarsandinvestedthosefundswithinaEuropeansubsidiarywhosefunctionalcurrencyistheU.S.
dollar.AtJuly2,2016,thissubsidiaryhad$226.6millionofU.S.dollardenominatedinvestmentsprimarilyinU.S.TreasurySecurities,
corporatenotesandcommercialpaper.Accordingly,thereisnotranslationexpensearisingfromthisentityholdingU.S.dollar
denominatedinvestments.TheconvertedfundsarenotintendedtoberepatriatedtotheU.S.andnoU.S.taxwastriggeredonthe
transferofthesefundstotheEuropeansubsidiary.SeeITEM3.QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUT
MARKETRISKbelowformoreinformationaboutrisksandtrendsrelatedtoforeigncurrencies.
SourcesandUsesofCash
40
TableofContents
Historically,ourprimarysourceofcashhasbeenprovidedbyoperations.Othersourcesofcashinthepastthreefiscalyearsinclude
proceedsreceivedfromthesaleofourstockthroughouremployeestockpurchaseplanaswellasborrowingsunderourdomesticline
ofcredit.Ourhistoricalusesofcashhaveprimarilybeenfortherepurchaseofourcommonstock,capitalexpendituresandacquisitions
ofbusinessesandtechnologies.Supplementalinformationpertainingtoourhistoricalsourcesandusesofcashispresentedasfollows
andshouldbereadinconjunctionwithourcondensedconsolidatedstatementsofcashflowsandthenotestocondensedconsolidated
financialstatements:
41
TableofContents
NineMonthsEnded
July2,
2016
July4,
2015
(inthousands)
Salesofsharesunderemployeestockplans
54,621 $
7,249
Repurchasesofcommonstock
Capitalexpenditures
Shorttermborrowings,netofrepayments
68,835
7,256
(25,009)
(28,310)
(16,187)
20,000
Debtissuancecosts
(2,530)
Netcashprovidedbyoperatingactivitiesdecreasedby$14.2millionforthefirstninemonthsoffiscal2016comparedtothesame
periodoneyearago.Thedecreaseincashprovidedbyoperatingactivitieswasprimarilyduetolowercashflowsfromthetimingof
shipmentsoflargesystemsfrominventorypartiallyoffsetbyhighercashflowsfromaccountsreceivable,higheraccountspayable
balancesandhighernetincome.Webelievethatourexistingcash,cashequivalentsandshortterminvestmentscombinedwithcashto
beprovidedbyoperatingactivities,amountsavailableunderourlinesofcreditandtheaccesstofinancingcontemplatedbythedebt
commitmentletterfromBarclaysandBAML(seebelow)willbeadequatetocoverourworkingcapitalneedsandplannedcapital
expendituresforatleastthenext12monthstotheextentsuchitemsareknownorarereasonablydeterminablebasedoncurrent
businessandmarketconditions.However,wemayelecttofinancecertainofourcapitalexpenditurerequirementsthroughborrowings
underourbankcreditfacilitiesorothersourcesofcapital.Wecontinuetofollowourstrategytofurtherstrengthenourfinancial
positionbyusingavailablecashflowtofundoperations.
Weintendtocontinuepursuingacquisitionopportunitiesatvaluationswebelievearereasonablebaseduponmarketconditions.
However,wecannotaccuratelypredictthetiming,sizeandsuccessofouracquisitioneffortsorourassociatedpotentialcapital
commitments.Furthermore,wecannotassureyouthatwewillbeabletoacquirebusinessesontermsacceptabletous.Weexpectto
fundfutureacquisitionsthroughadditionalborrowings(asinourpendingacquisitionofRofin),existingcashbalancesandcashflows
fromoperations.Ifrequired,wewillconsidertheissuanceofsecurities.Theextenttowhichwewillbewillingorabletouseour
commonstocktomakeacquisitionswilldependonitsmarketvalueatthetimeandthewillingnessofpotentialsellerstoacceptitas
fullorpartialpayment.
OnMarch16,2016,weenteredintoadebtcommitmentletterwithBarclaysBankPLC("Barclays")andonApril5,2016,enteredinto
anamendedandrestateddebtcommitmentletterwithBarclaysandbothBankofAmerica,N.A.andMerrillLynch,Pierce,Fenner&
SmithIncorporated(together,"BAML").Pursuanttothecommitmentletter,amongotherthings,BarclaysandBAMLhavecommitted
toprovideuswithdebtfinancingincludingatermloan(denominatedinEuros)inanamountoftheEuroequivalentof$750.0million
and,alongwithTheBankofTokyoMitsubishiUFJ,Ltd.(MUFG),whichwasaddedbyajoinderagreementwithBarclaysand
BAML(andconsentedtobyus),a$100.0millionrevolvingfacility(denominatedinU.S.dollars)tofinancetheacquisitionofRofin.
Theobligationsofthelendersunderthecommitmentletteraresubjecttocertainconditions,includingtheconsummationofthe
acquisitioninaccordancewiththetermsandconditionsofthedefinitiveagreementandothercustomaryclosingobligations.
Additionalsourcesofcashavailabletousweredomesticandinternationalcurrencylinesofcreditandbankcreditfacilitiestotaling
$64.1millionasofJuly2,2016,ofwhich$41.2millionwasunusedandavailable.Theseunsecuredinternationalcreditfacilitieswere
usedinEuropeandJapanduringthefirstninemonthsoffiscal2016.AsofJuly2,2016,wehaveutilized$1.8millionofinternational
creditfacilitiesasguarantees.Ourdomesticlineofcreditconsistsofa$50.0millionunsecuredrevolvingcreditaccount,whichexpires
onMay31,2017andissubjecttocovenantsrelatedtofinancialratiosandtangiblenetworth.Wewereincompliancewiththese
covenantsasofJuly2,2016.AsofJuly2,2016,wehavedrawn$20.0millionandhaveused$1.1millionforlettersofcreditagainst
ourdomesticlineofcredit.
42
TableofContents
Infiscal2015,underplansauthorizedbytheBoardofDirectors,werepurchasedandretired1,302,323sharesofoutstandingcommon
stockunderthisplanatanaveragepriceof$57.59pershareforatotalof$75.0million.
Ourratioofcurrentassetstocurrentliabilitieswas4.6:1atJuly2,2016comparedto5.3:1atOctober3,2015.Thedecreaseinourratio
isprimarilyduetoincreasesinshorttermborrowings,accountspayableandothercurrentliabilitiespartiallyoffsetbyincreasesincash
andshortterminvestments,inventories,prepaidsandotherassetsandaccountsreceivable.Ourcashandcashequivalents,shortterm
investmentsandworkingcapitalareasfollows:
43
TableofContents
July2,2016
October3,2015
(inthousands)
139,407 $
130,607
Shortterminvestments
234,205
194,908
Workingcapital
593,937
530,093
ContractualObligationsandOffBalanceSheetArrangements
WehavenooffbalancesheetarrangementsasdefinedunderRegulationSKoftheSecuritiesActof1933.Informationregardingour
longtermdebtpayments,operatingleasepayments,assetretirementobligations,purchasecommitmentswithsuppliersandpurchase
obligationsisprovidedinItem7ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperationsofour
AnnualReportonForm10KforthefiscalyearendedOctober3,2015.Therehavebeennomaterialchangesincontractualobligations
outsideoftheordinarycourseofbusiness,otherthannotedin"MergerrelatedCommitmentandFees"below,sinceOctober3,2015.
InformationregardingourotherfinancialcommitmentsatJuly2,2016isprovidedinthenotestothecondensedconsolidatedfinancial
statementsinthisreport.
MergerrelatedCommitmentandFees
operations,andtheremainingportionofwhichwillbepaidupon,andsubjectto,consummationoftheacquisition.Forour$750.0
milliondebtfinancingcommitment,wepaid$2.5millionofdebtissuancecostsinthesecondquarteroffiscal2016andrecordeditto
otherassetsonourcondensedconsolidatedbalancesheets.WehavealsoagreedtopaytoBarclaysandBAMLtogetherapproximately
$17.0millionand$7.5millionforunderwritingandupfrontfees,respectively,uponthecloseofthefinancing.Inaddition,the
acquisitionagreementcontainscertainterminationrightsforCoherentandfurtherprovidesthatwe,asapplicable,mayberequiredto
payaterminationfeeof$65.0milliontoRofinand$2.4milliontoBarclays.
ChangesinFinancialCondition
Cashprovidedbyoperatingactivitiesduringthefirstninemonthsoffiscal2016was$54.6million,whichincludednetincomeof$56.7
million,depreciationandamortizationof$25.6million,stockbasedcompensationexpenseof$14.8millionand$0.4millionother
partiallyoffsetbycashusedbyoperatingassetsandliabilitiesof$39.6millionandnetincreasesindeferredtaxassetsof$3.4million.
Cashprovidedbyoperatingactivitiesduringthefirstninemonthsoffiscal2015was$68.8million,whichincludednetincomeof$49.1
million,depreciationandamortizationof$24.6million,stockbasedcompensationexpenseof$13.7million,netdecreasesindeferred
taxassetsof$5.3million,theimpairmentofourinvestmentinSiOnyxof$2.0millionand$0.1millionotherpartiallyoffsetbycash
usedbyoperatingassetsandliabilitiesof$26.0million.
Cashusedininvestingactivitiesduringthefirstninemonthsoffiscal2016was$63.8million,whichincluded$27.9millionusedto
acquirepropertyandequipmentandimprovebuildingsnetofproceedsfromdispositionsand$35.9millionnetpurchasesofavailable
forsalesecurities.Cashusedininvestingactivitiesduringthefirstninemonthsoffiscal2015was$19.1million,whichincluded$14.3
millionusedtoacquirepropertyandequipmentandimprovebuildingsnetofproceedsfromdispositionsand$4.8millionnetpurchases
ofavailableforsalesecurities.
Cashprovidedbyfinancingactivitiesduringthefirstninemonthsoffiscal2016was$20.2million,whichincluded$20.0millionnet
borrowings,$7.2milliongeneratedfromouremployeestockoptionandpurchaseplansand$0.9millionincreaseincashoverdraft
partiallyoffsetby$5.4millionnetsettlementofrestrictedstockand$2.5millionofdebtissuancecosts.Cashusedinfinancing
activitiesduringthefirstninemonthsoffiscal2015was$23.0million,whichincluded$25.0million
44
TableofContents
repurchasesofcommonstockand$5.3millionnetsettlementofrestrictedstockpartiallyoffsetby$7.3milliongeneratedfromour
employeestockoptionandpurchaseplans.
Changesinexchangeratesduringthefirstninemonthsoffiscal2016decreasedourcashbalancesby$2.2million.Changesin
exchangeratesduringthefirstninemonthsoffiscal2015decreasedourcashbalancesby$14.7million.
RECENTACCOUNTINGSTANDARDS
45
TableofContents
SeeNote2.RecentAccountingStandardsintheNotestoCondensedConsolidatedFinancialStatementsforafulldescriptionof
recentaccountingpronouncements,includingtherespectivedatesofadoptionorexpectedadoptionandeffectsonourcondensed
consolidatedfinancialposition,resultsofoperationsandcashflows.
46
TableofContents
ITEM3.QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUTMARKETRISK
Marketriskdisclosures
Weareexposedtomarketriskrelatedtochangesininterestratesandforeigncurrencyexchangerates.Wedonotusederivative
financialinstrumentsforspeculativeortradingpurposes.
Interestratesensitivity
Aportionofourinvestmentportfolioiscomposedoffixedincomesecurities.Thesesecuritiesaresubjecttointerestrateriskandwill
fallinvalueifmarketinterestratesincrease.Ifmarketinterestratesweretoincreaseimmediately(whetherduetochangesinoverall
marketratesorcreditworthinessoftheissuersofourindividualsecurities)anduniformlyby10%fromlevelsatJuly2,2016,thefair
valueoftheportfolio,basedonquotedmarketpricesinactivemarketsinvolvingsimilarassets,woulddeclinebyanimmaterialamount
duetotheirshorttermmaturities.Wehavetheabilitytogenerallyholdourfixedincomeinvestmentsuntilmaturityandthereforewe
wouldnotexpectouroperatingresultsorcashflowstobeaffectedtoanysignificantdegreebytheeffectofasuddenchangeinmarket
interestratesonoursecuritiesportfolio.Ifnecessary,wemaysellshortterminvestmentspriortomaturitytomeetourliquidityneeds.
AtJuly2,2016,thefairvalueofouravailableforsaledebtsecuritieswas$218.6million,$4.7millionofwhichwasclassifiedascash
equivalentsand$213.9millionofwhichwasclassifiedasshortterminvestments.Grossunrealizedgainsandlossesonavailablefor
saledebtsecuritieswere$0.6millionandlessthan$0.1million,respectively,atJuly2,2016.
Foreigncurrencyexchangerisk
WemaintainoperationsinvariouscountriesoutsideoftheUnitedStatesandhaveforeignsubsidiariesthatmanufactureandsellour
productsinvariousglobalmarkets.ThemajorityofoursalesaretransactedinU.S.dollars.However,wedogeneraterevenuesinother
currencies,primarilytheEuro,theJapaneseYen,theSouthKoreanWonandtheChineseRMB.Additionally,wehaveoperationsin
differentcountriesaroundtheworldwithcostsincurredinotherlocalcurrencies,suchasBritishPoundSterling,SingaporeDollarsand
MalaysianRinggit.Asaresult,ourearnings,cashflowsandcashbalancesareexposedtofluctuationsinforeigncurrencyexchange
rates.Forexample,wehavesignificantmanufacturingoperationsinEuropesothataweakeningEuroisadvantageoustothe
Companysfinancialresults.Weattempttolimittheseexposuresthroughfinancialmarketinstruments.Weutilizederivative
instruments,primarilyforwardcontractswithmaturitiesoftwomonthsorless,tomanageourexposureassociatedwithanticipatedcash
flowsandnetassetandliabilitypositionsdenominatedinforeigncurrencies.Gainsandlossesontheforwardcontractsaremitigatedby
gainsandlossesontheunderlyinginstruments.Wedonotusederivativefinancialinstrumentsfortradingpurposes.
Onoccasion,weenterintocurrencyforwardexchangecontractstohedgespecificanticipatedforeigncurrencydenominated
transactionsgenerallyexpectedtooccurwithinthenext12months.Thesecashflowhedgesaredesignatedforhedgeaccounting
treatmentandgainsandlossesonthesecontractsarerecordedinaccumulatedothercomprehensiveincomeinstockholder'sequityand
reclassifiedintoearningsatthetimethattherelatedtransactionsbeinghedgedarerecognizedinearnings.SeeNote6"Derivative
InstrumentsandHedgingActivities".
Wedonotanticipateanymaterialadverseeffectonourcondensedconsolidatedfinancialposition,resultsofoperationsorcashflows
resultingfromtheuseoftheseinstruments.Therecanbenoassurancethatthesestrategieswillbeeffectiveorthattransactionlosses
canbeminimizedorforecastedaccurately.Whilewemodelcurrencyvaluationsandfluctuations,thesemaynotultimatelybeaccurate.
Ifafinancialcounterpartytoanyofourhedgingarrangementsexperiencesfinancialdifficultiesorisotherwiseunabletohonorthe
termsoftheforeigncurrencyhedge,wemayexperiencematerialfinanciallosses.Inthecurrenteconomicenvironment,theriskof
failureofafinancialpartyremainshigh.
AtJuly2,2016,approximately$323.8millionofourcash,cashequivalentsandshortterminvestmentswereheldoutsidetheU.S.in
certainofourforeignoperations,$91.0millionofwhichwasdenominatedincurrenciesotherthantheU.S.dollar.
Ahypothetical10%changeinforeigncurrencyratesonourforwardcontractswouldnothaveamaterialimpactonourresultsof
operations,cashflowsorfinancialposition.
ThefollowingtableprovidesinformationaboutourforeignexchangeforwardcontractsatJuly2,2016.Thetablepresentstheweighted
averagecontractualforeigncurrencyexchangerates,thevalueofthecontractsinU.S.dollarsatthecontractexchangerateasofthe
contractmaturitydateandfairvalue.TheU.S.fairvaluerepresentsthefairvalueofthecontractsvaluedatJuly2,2016rates.
47
TableofContents
Forwardcontractstosell(buy)foreigncurrenciesforU.S.dollars(inthousands,exceptcontractrates):
AverageContract
Rate
NonDesignatedForUSDollars
Euro
JapaneseYen
U.S.Notional
ContractValue
U.S.
FairValue
1.1173 $
(64,423) $
(137)
109.2593 $
40,182 $
(2,604)
1,193.6849 $
21,763 $
(921)
ChineseRMB
6.5985 $
14,864 $
128
SingaporeanDollar
1.3772 $
(5,712) $
148
MalaysianRinggit
4.2184 $
1,370 $
(74)
SouthKoreanWon
OnAugust1,2016,wepurchasedforwardcontractstotaling670.0millionEuro,withavaluedateofNovember30,2016,tolimitour
foreignexchangeriskrelatedtothecommitmentofourtermloan(denominatedinEuros)inanamountoftheEuroequivalentof
$750.0milliontofinancetheU.S.dollarpaymentfortheacquisitionofRofin.SeeNote17toourcondensedconsolidatedfinancial
statementsinPartI,Item1ofthisreport.
48
TableofContents
ITEM4.CONTROLSANDPROCEDURES
ManagementsEvaluationofDisclosureControlsandProcedures
Wehaveevaluatedtheeffectivenessofthedesignandoperationofourdisclosurecontrolsandprocedures,assuchtermisdefinedin
Rule13a15(e)undertheSecuritiesExchangeActof1934,asofJuly2,2016(EvaluationDate).Thecontrolsevaluationwas
conductedunderthesupervisionandwiththeparticipationofmanagement,includingourChiefExecutiveOfficerandChiefFinancial
Officer.Basedonthisevaluation,ourChiefExecutiveOfficerandChiefFinancialOfficerconcludedasoftheEvaluationDatethatour
disclosurecontrolsandprocedureswereeffectiveinprovidingreasonableassurancethatinformationrequiredtobedisclosedbyusin
reportsthatwefileorsubmitundertheSecuritiesExchangeActof1934,asamended,is(i)recorded,processed,summarizedand
reportedwithinthetimeperiodsspecifiedintheSecuritiesandExchangeCommissionsrulesandformsand(ii)accumulatedand
communicatedtoourmanagement,includingourChiefExecutiveOfficerandChiefFinancialOfficer,asappropriate,toallowtimely
decisionsregardingrequireddisclosures.
ChangesinInternalControloverFinancialReporting
TherewerenochangesinourinternalcontroloverfinancialreportingthatoccurredduringthequarterendedJuly2,2016thathave
materiallyaffected,orarereasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.
InherentLimitationsoverInternalControl
Internalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancial
reportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples
("GAAP").Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,
projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseof
changesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.Ourinternalcontrolover
financialreportingisdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationof
financialstatementsforexternalpurposesinaccordancewithGAAP.Ourinternalcontroloverfinancialreportingincludesthose
policiesandproceduresthat:
(i)
pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositions
ofourassets
(ii) providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsin
accordancewithgenerallyacceptedaccountingprinciples,andthatourreceiptsandexpendituresarebeingmadeonlyin
accordancewithauthorizationsofourmanagementanddirectorsand
(iii) providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofour
assetsthatcouldhaveamaterialeffectonthefinancialstatements.
Management,includingourChiefExecutiveOfficerandChiefFinancialOfficer,doesnotexpectthatourinternalcontrolswillprevent
ordetectallerrorsandallfraud.Acontrolsystem,nomatterhowwelldesignedandoperated,canprovideonlyreasonable,not
absolute,assurancethattheobjectivesofthecontrolsystemaremet.Further,thedesignofacontrolsystemmustreflectthefactthat
thereareresourceconstraints,andthebenefitsofcontrolsmustbeconsideredrelativetotheircosts.Becauseoftheinherentlimitations
inallcontrolsystems,noevaluationofinternalcontrolscanprovideabsoluteassurancethatallcontrolissuesandinstancesoffraud,if
any,havebeendetected.Also,anyevaluationoftheeffectivenessofcontrolsinfutureperiodsaresubjecttotheriskthatthoseinternal
controlsmaybecomeinadequatebecauseofchangesinbusinessconditions,orthatthedegreeofcompliancewiththepoliciesor
proceduresmaydeteriorate.
49
TableofContents
PARTII.OTHERINFORMATION
ITEM1.LEGALPROCEEDINGS
InformationwithrespecttothisitemmaybefoundinNote11toourcondensedconsolidatedfinancialstatementsinPartI,Item1of
thisreportandisincorporatedhereinbyreference.
ITEM1A.RISKFACTORS
YoushouldcarefullyconsiderthefollowingsriskswhenconsideringaninvestmentinourCommonStock.Theseriskscouldmaterially
affectourbusiness,resultsofoperationsorfinancialcondition,causethetradingpriceofourCommonStocktodeclinemateriallyor
causeouractualresultstodiffermateriallyfromthoseexpectedorthoseexpressedinanyforwardlookingstatementsmadebyus.
Theserisksarenotexclusive,andadditionalriskstowhichwearesubjectinclude,butarenotlimitedto,thefactorsmentionedunder
ForwardLookingStatementsandtheriskofourbusinessesdescribedelsewhereinthisannualreport.Additionally,theserisksand
uncertaintiesdescribedhereinarenottheonlyonesfacingus.Othereventsthatwedonotcurrentlyanticipateorthatwecurrently
deemimmaterialalsomayaffectourbusiness,resultsofoperationsorfinancialcondition.
Aswediscussmorefullyunderthesectionentitled,RISKSRELATEDTOTHEPROPOSEDMERGERWITHROFIN,anyofour
identifiedriskshereinwilllikelybeimpactedbycompletingouracquisitionofRofinandintegratingitsoperations.
BUSINESSENVIRONMENTANDINDUSTRYTRENDS
Ouroperatingresults,includingnetsales,netincome(loss)andadjustedEBITDAindollarsandasapercentageofnetsales,as
wellasourstockpricehavevariedinthepast,andourfutureoperatingresultswillcontinuetobesubjecttoquarterlyand
annualfluctuationsbaseduponnumerousfactors,includingthosediscussedinthisItem1Aandthroughoutthisreport.Our
stockpricewillcontinuetobesubjecttodailyvariationsaswell.Ourfutureoperatingresultsandstockpricemaynotfollow
anypasttrendsormeetourguidanceandexpectations.
Ournetsalesandoperatingresults,suchasadjustedEBITDApercentage,netincome(loss)andoperatingexpenses,andourstockprice
havevariedinthepastandmayvarysignificantlyfromquartertoquarterandfromyeartoyearinthefuture.Webelieveanumberof
factors,manyofwhichareoutsideofourcontrol,couldcausethesevariationsandmakethemdifficulttopredict,including:
generaleconomicuncertaintiesinthemacroeconomicandlocaleconomiesfacingus,ourcustomersandthemarketsweserve
fluctuationsindemandforourproductsordownturnsintheindustriesthatweserve
theabilityofoursuppliers,bothinternalandexternal,toproduceanddelivercomponentsandparts,includingsoleorlimited
sourcecomponents,inatimelymanner,inthequantity,qualityandpricesdesired
thetimingofreceiptandconversionofbookingstonetsales
theconcentrationofasignificantamountofourbacklog,andresultantnetsales,withafewcustomers
fluctuationsinourproductmix
reschedulingofshipmentsorcancellationofordersbyourcustomers
theabilityofourcustomers'othersupplierstoprovidesufficientmaterialtosupportourcustomers'products
currencyfluctuationsandstability,inparticulartheEuro,theJapaneseYen,theSouthKoreanWon,theChineseRMBandthe
USdollarascomparedtoothercurrencies
commoditypricing
50
TableofContents
introductionsofnewproductsandproductenhancementsbyourcompetitors,entryofnewcompetitorsintoourmarkets,
pricingpressuresandothercompetitivefactors
ourabilitytodevelop,introduce,manufactureandshipnewandenhancedproductsinatimelymannerwithoutdefects
ourabilitytosuccessfullyexpandourmanufacturingcapacityinGttingen,Germanyandaddopticsfabricationcapacityat
oursiteinRichmond,California
ourabilitytomanageourmanufacturingcapacityandthatofoursuppliers
accesstoapplicablecreditmarketsbyus,ourcustomersandtheirendcustomers
ourrelianceoncontractmanufacturing
therateofmarketacceptanceofournewproducts
theabilityofourcustomerstopayforourproducts
expensesassociatedwithacquisitionrelatedactivities
seasonalsalestrends
delaysorreductionsincustomerpurchasesofourproductsinanticipationoftheintroductionofnewandenhancedproducts
byusorourcompetitors
ourabilitytocontrolexpenses
thelevelofcapitalspendingofourcustomers
potentialexcessand/orobsolescenceofourinventory
costsandtimingofadheringtocurrentanddevelopinggovernmentalregulationsandreviewsrelatingtoourproductsand
business
costsrelatedtoacquisitionsoftechnologyorbusinesses
impairmentofgoodwill,intangibleassetsandotherlonglivedassets
ourabilitytomeetourexpectationsandforecastsandthoseofpublicmarketanalystsandinvestors
theavailabilityofresearchfundingbygovernmentswithregardtoourcustomersinthescientificbusiness,suchas
universities
continuedgovernmentspendingondefenserelatedprojectswhereweareasubcontractor
maintenanceofsupplyrelatingtoproductssoldtothegovernmentontermswhichwewouldprefernottoaccept
changesinpolicy,interpretations,orchallengestotheallowabilityofcostsincurredundergovernmentcostaccounting
standards
damagetoourreputationasaresultofcoverageinsocialmedia,Internetblogsorothermediaoutlets
managingourandotherparties'compliancewithcontractsinmultiplelanguagesandjurisdictions
managingourinternalandthirdpartysalesrepresentativesanddistributors,includingcompliancewithallapplicablelaws
impactofgovernmenteconomicpoliciesonmacroeconomicconditions
51
TableofContents
costsandexpensesfromlitigation
costsassociatedwithdesigningaroundorpaymentoflicensingfeesassociatedwithissuedpatentsinourfieldsofbusiness
governmentsupportofalternativeenergyindustries,suchassolar
negativeimpactsrelatedtotherecentBrexitvotebytheUnitedKingdom,particularlywithregardtosalesfromour
Glasgow,ScotlandfacilitytootherjurisdictionsandpurchasesofsuppliesfromoutsidetheUnitedKingdombysuchfacility
thefutureimpactoflegislation,rulemaking,andchangesinaccounting,tax,defenseprocurement,orexportpoliciesand
distractionofmanagementrelatedtoacquisitionordivestmentactivities.
Inaddition,weoftenrecognizeasubstantialportionofoursalesinthelastmonthofourfiscalquarters.Ourexpensesforanygiven
quarteraretypicallybasedonexpectedsalesandifsalesarebelowexpectationsinanygivenquarter,theadverseimpactoftheshortfall
onouroperatingresultsmaybemagnifiedbyourinabilitytoadjustspendingquicklyenoughtocompensatefortheshortfall.Wealso
baseourmanufacturingonourforecastedproductmixforthequarter.Iftheactualproductmixvariessignificantlyfromourforecast,
wemaynotbeabletofillsomeordersduringthatquarter,whichwouldresultindelaysintheshipmentofourproducts.Accordingly,
variationsintimingofsales,particularlyforourhigherpriced,highermarginproducts,cancausesignificantfluctuationsinquarterly
operatingresults.
Duetotheseandotherfactors,suchasvaryingproductmix,webelievethatquartertoquarterandyeartoyearcomparisonsofour
historicaloperatingresultsmaynotbemeaningful.Youshouldnotrelyonourresultsforanyquarteroryearasanindicationofour
futureperformance.Ouroperatingresultsinfuturequartersandyearsmaybebelowpublicmarketanalysts'orinvestors'expectations,
whichwouldlikelycausethepriceofourstocktofall.Inaddition,overthepastseveralyears,U.S.andglobalequitymarketshave
experiencedsignificantpriceandvolumefluctuationsthathaveaffectedthestockpricesofmanytechnologycompaniesbothinand
outsideourindustry.Therehasnotalwaysbeenadirectcorrelationbetweenthisvolatilityandtheperformanceofparticularcompanies
subjecttothesestockpricefluctuations.Thesefactors,aswellasgeneraleconomicandpoliticalconditionsorinvestors'concerns
regardingthecredibilityofcorporatefinancialstatements,mayhaveamaterialadverseeffectonthemarketpriceofourstockinthe
future.
Wedependonsolesourceorlimitedsourcesuppliers,bothinternalandexternal,forsomeofourkeycomponentsandmaterials,
includingexoticmaterials,certaincuttingedgeopticsandcrystals,inourproducts,whichmakeussusceptibletosupplyshortages
orpricefluctuationsthatcouldadverselyaffectourbusiness,particularlyourabilitytomeetourcustomers'deliveryrequirements.
Wecurrentlypurchaseseveralkeycomponentsandmaterialsusedinthemanufactureofourproductsfromsolesourceorlimited
sourcesuppliers,bothinternalandexternal.Inparticular,fromtimetotimeourcustomersrequireustorampupproductionand/or
acceleratedeliveryschedulesofourproducts.Ourkeysuppliersmaynothavetheabilitytoincreasetheirproductioninlinewithour
customersdemands.Thiscanbecomeacuteduringtimesofhighgrowthinourcustomersbusinesses.Ourfailuretotimelyreceive
thesekeycomponentsandmaterialswouldlikelycausedelaysintheshipmentofourproducts,whichwouldlikelynegativelyimpact
bothourcustomersandourbusiness.Someofthesesuppliersarerelativelysmallprivatecompaniesthatmaydiscontinuetheir
operationsatanytimeandwhichmaybeparticularlysusceptibletoprevailingeconomicconditions.Someofoursuppliersarelocated
inregionswhichmaybesusceptibletonaturaldisasters,suchasthefloodinginThailandandtheearthquake,tsunamiandresulting
nucleardisasterinJapanandseverefloodingandpowerlossintheEasternpartoftheUnitedStatesinrecentyears.Somemaybe
vulnerabletomanmadedisasters,suchastherecentworldwideshortageofneongasasaresultoftheconflictinUkraine.Wetypically
purchaseourcomponentsandmaterialsthroughpurchaseordersoragreedupontermsandconditionsandwedonothaveguaranteed
supplyarrangementswithmanyofthesesuppliers.Forcertainlongleadtimesuppliesorinordertolockinpricing,wemaybe
obligatedtoplacepurchaseorderswhicharenotcancelableorotherwiseassumeliabilityforalargeamountoftheorderedsupplies,
whichlimitourabilitytoadjustdownourinventoryliabilityintheeventofmarketdownturnsorothercustomercancellationsor
reschedulingoftheirpurchaseordersforourproducts.Someofourproducts,particularlyintheflatpaneldisplayindustry,require
designsandspecificationswhichareatthecuttingedgeofavailabletechnologies.Ourandourcustomers'designsandspecifications
frequentlychangetomeetrapidlyevolvingmarketdemands.Accordingly,certainofourproductsrequirecomponentsandsupplies
whichmaybetechnologicallydifficultandunpredictabletomanufacture.Bytheirverynature,these
52
TableofContents
typesofcomponentsmayonlybeavailablebyasinglesupplier.Thesecharacteristicsfurtherpressurethetimelydeliveryofsuch
components.Wemayfailtoobtainthesesuppliesinatimelymannerinthefuture.Wemayexperiencedifficultyidentifyingalternative
sourcesofsupplyforcertaincomponentsusedinourproductsandmayhavetoincurexpensesandmanagementdistractioninassisting
ourcurrentandfuturesupplierstomeetourandourcustomers'technicalrequirements.Wewouldexperiencefurtherdelayswhile
identifying,evaluatingandtestingtheproductsofthesepotentialalternativesuppliers.Furthermore,financialorotherdifficultiesfaced
bythesesuppliersorsignificantchangesindemandforthesecomponentsormaterialscouldlimittheiravailability.Wecontinueto
consolidateoursupplybaseandmovesupplierlocations.Whenwetransitionlocationswemayincreaseourinventoryofsuchproducts
asasafetystockduringthetransition,whichmaycausetheamountofinventoryreflectedonourbalancesheettoincrease.
Additionally,manyofourcustomersrelyonsolesourcesuppliers.Intheeventofadisruptionofourcustomers'supplychain,orders
fromourcustomerscoulddecreaseorbedelayed.
Anyinterruptionordelayinthesupplyofanyofthesecomponentsormaterials,ortheinabilitytoobtainthesecomponentsand
materialsfromalternatesourcesatacceptablepricesandwithinareasonableamountoftime,orourfailuretoproperlymanagethese
moves,wouldimpairourabilitytomeetscheduledproductdeliveriestoourcustomersandcouldcausecustomerstocancelorders.We
havehistoricallyreliedexclusivelyonourownproductioncapabilitytomanufacturecertainstrategiccomponents,crystals,
semiconductorlasers,lasersandlaserbasedsystemsandrecentlyacquiredthecapabilitytomanufacturecertainlargeformatoptics.
Becausewemanufacture,packageandtestthesecomponents,productsandsystemsatourownfacilities,andsuchcomponents,
productsandsystemsarenotreadilyavailablefromothersources,anyinterruptioninmanufacturingwouldadverselyaffectour
business.Sincemanyofourproductshavelengthyqualificationperiods,ourabilitytointroducemultiplesuppliersforpartsmaybe
limited.Inaddition,ourfailuretoachieveadequatemanufacturingyieldsoftheseitemsatourmanufacturingfacilitiesmaymaterially
andadverselyaffectouroperatingresultsandfinancialcondition.
Weparticipateinthemicroelectronicsmarket,whichrequiressignificantresearchanddevelopmentexpensestodevelopand
maintainproductsandafailuretoachievemarketacceptanceforourproductscouldhaveasignificantnegativeimpactonour
businessandresultsofoperations.
Themicroelectronicsmarketischaracterizedbyrapidtechnologicalchange,frequentproductintroductions,thevolatilityofproduct
supplyanddemand,changingcustomerrequirementsandevolvingindustrystandards.Thenatureofthismarketrequiressignificant
researchanddevelopmentexpensestoparticipate,withsubstantialresourcesinvestedinadvanceofmaterialsalesofourproductsto
ourcustomersinthismarket.Additionally,ourproductofferingsmaybecomeobsoletegiventhefrequentintroductionofalternative
technologies.Intheeventeitherourcustomers'orourproductsfailtogainmarketacceptance,orthemicroelectronicsmarketfailsto
grow,itwouldlikelyhaveasignificantnegativeeffectonourbusinessandresultsofoperations.
Weparticipateintheflatpaneldisplaymarket,whichhasarelativelylimitednumberofendcustomermanufacturers.Ourbacklog,
timingofnetsalesandresultsofoperationscouldbenegativelyimpactedintheeventourcustomersrescheduleorcancelorders.
Intheflatpaneldisplaymarket,therearearelativelylimitednumberofmanufacturerswhoaretheendcustomersforourannealing
products.Inthefirstninemonthsoffiscal2016,AdvancedProcessSystemsCorporation,anintegratorintheflatpaneldisplaymarket
basedinSouthKorea,andJapaneseSteelWorks,Ltd.,anintegratorintheflatpaneldisplaymarketbasedinJapan,havecontributed
morethan10%ofourrevenue.Givenmacroeconomicconditions,varyingconsumerdemandandtechnicalprocesslimitationsat
manufacturers,ourcustomersmayseektorescheduleorcancelorders.Thiswasrecentlyseenwitharequestedexpeditedshipmentofa
Linebeam1500productforourthirdfiscalquarterof2015,whichdeliverydatewasthenchangedatthecustomersrequestbacktoits
originallyscheduleddateinthefourthfiscalquarterof2015.Theselargerflatpanelrelatedsystemshavelargeaveragesellingprices.
Anyreschedulingorcancelingofsuchordersbyourcustomerswilllikelyhaveasignificantimpactonourquarterlyorannualnetsales
andresultsofoperationsandcouldnegativelyimpactinventoryvaluesandbacklog.Additionally,challengesinmeetingevolving
technologicalrequirementsforthesecomplexproductsbyusandoursupplierscouldalsoresultindelaysinshipments,rescheduledor
canceledordersbyourcustomers.Thiscouldnegativelyimpactourbacklog,timingofnetsalesandresultsofoperations.
AsofJuly2,2016,flatpaneldisplaysystemsrepresented63%ofourbacklog,comparedto32%atOctober3,2015.Sinceourbacklog
includeshigheraveragesellingpriceflatpaneldisplaysystems,anydelaysorcancellationofshipmentscouldhaveamaterialadverse
effectonourfinancialresults.
Someofourlasersystemsarecomplexindesignandmaycontaindefectsthatarenotdetecteduntildeployedbyourcustomers,
whichcouldincreaseourcostsandreduceournetsales.
53
TableofContents
Lasersandlasersystemsareinherentlycomplexindesignandrequireongoingregularmaintenance.Themanufactureofourlasers,
laserproductsandsystemsinvolvesahighlycomplexandpreciseprocess.Asaresultofthetechnologicalcomplexityofourproducts,
inparticulartheflatpanelannealingsystems,changesinouroroursuppliers'manufacturingprocessesortheinadvertentuseof
defectivematerialsbyusoroursupplierscouldresultinamaterialadverseeffectonourabilitytoachieveacceptablemanufacturing
yieldsandproductreliability.Totheextentthatwedonotachieveandmaintainourprojectedyieldsorproductreliability,ourbusiness,
operatingresults,financialconditionandcustomerrelationshipswouldbeadverselyaffected.Weprovidewarrantiesonamajorityof
ourproductsales,andreservesforestimatedwarrantycostsarerecordedduringtheperiodofsale.Thedeterminationofsuchreserves
requiresustomakeestimatesoffailureratesandexpectedcoststorepairorreplacetheproductsunderwarranty.Wetypicallyestablish
warrantyreservesbasedonhistoricalwarrantycostsforeachproductline.Ifactualreturnratesand/orrepairandreplacementcosts
differsignificantlyfromourestimates,adjustmentstocostofsalesmayberequiredinfutureperiodswhichcouldhaveanadverse
effectonourresultsofoperations.
Ourcustomersmaydiscoverdefectsinourproductsaftertheproductshavebeenfullydeployedandoperated,includingundertheend
user'speakstressconditions.Inaddition,someofourproductsarecombinedwithproductsfromothervendors,whichmaycontain
defects.Asaresult,shouldproblemsoccur,itmaybedifficulttoidentifythesourceoftheproblem.Ifweareunabletoidentifyandfix
defectsorotherproblems,wecouldexperience,amongotherthings:
lossofcustomersororders
increasedcostsofproductreturnsandwarrantyexpenses
damagetoourbrandreputation
failuretoattractnewcustomersorachievemarketacceptance
diversionofdevelopment,engineeringandmanufacturingresourcesand
legalactionsbyourcustomersand/ortheirendusers.
Theoccurrenceofanyoneormoreoftheforegoingfactorscouldseriouslyharmourbusiness,financialconditionandresultsof
operations.
Continuedvolatilityintheadvancedpackagingandsemiconductormanufacturingmarketscouldadverselyaffectourbusiness,
financialconditionandresultsofoperations.
Aportionofournetsalesinthemicroelectronicsmarketdependsonthedemandforourproductsbyadvancedpackagingapplications
andsemiconductorequipmentcompanies.Thesemarketshavehistoricallybeencharacterizedbysuddenandseverecyclicalvariations
inproductsupplyanddemand,whichhaveoftenseverelyaffectedthedemandforsemiconductormanufacturingequipment,including
laserbasedtoolsandsystems.Thetiming,severityanddurationofthesemarketcyclesaredifficulttopredict,andwemaynotbeable
torespondeffectivelytothesecycles.Thecontinuinguncertaintyinthesemarketsseverelylimitsourabilitytopredictourbusiness
prospectsorfinancialresultsinthesemarkets.
Duringindustrydownturns,ournetsalesfromthesemarketsmaydeclinesuddenlyandsignificantly.Ourabilitytorapidlyand
effectivelyreduceourcoststructureinresponsetosuchdownturnsislimitedbythefixednatureofmanyofourexpensesinthenear
termandbyourneedtocontinueourinvestmentinnextgenerationproducttechnologyandtosupportandserviceourproducts.In
addition,duetotherelativelylongmanufacturingleadtimesforsomeofthesystemsandsubsystemsweselltothesemarkets,wemay
incurexpendituresorpurchaserawmaterialsorcomponentsforproductswecannotsell.Accordingly,downturnsinthesemiconductor
capitalequipmentmarketmaymateriallyharmouroperatingresults.Conversely,whenupturnsinthesemarketsoccur,wemustbeable
torapidlyandeffectivelyincreaseourmanufacturingcapacitytomeetincreasesincustomerdemandthatmaybeextremelyrapid,and
ifwefailtodosowemaylosebusinesstoourcompetitorsandourrelationshipswithourcustomersmaybeharmed.
Weareexposedtorisksassociatedwithworldwideeconomicconditionsandrelateduncertaintieswhichcouldnegativelyimpact
demandforourproductsandresultsofoperations.
Volatilityanddisruptioninthecapitalandcreditmarkets,depressedconsumerconfidence,governmenteconomicpolicies,negative
economicconditions,volatilecorporateprofitsandreducedcapitalspendingcouldnegativelyimpactdemandforourproducts.In
particular,itisdifficulttodevelopandimplementstrategy,sustainablebusinessmodelsandefficientoperations,aswellaseffectively
managesupplychainrelationshipsinthefaceofsuchconditionsincludinguncertaintyregardingtheability
54
TableofContents
ofsomeofoursupplierstocontinueoperationsandprovideuswithuninterruptedsupplyflow.Ourabilitytomaintainourresearchand
developmentinvestmentsinourbroadproductofferingsmaybeadverselyimpactedintheeventthatoursalesdeclineanddonot
increaseinthefuture.Spendingandthetimingthereofbyconsumersandbusinesseshaveasignificantimpactonourresultsand,where
suchspendingisdelayedorcanceled,itcouldhaveamaterialnegativeimpactonouroperatingresults.Currentglobaleconomic
conditionsremainuncertainandchallenging.Weaknessinourendmarketscouldnegativelyimpactournetsales,grossmarginand
operatingexpenses,andconsequentlyhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
Uncertaintyinglobalfiscalpolicyhaslikelyhadanadverseimpactonglobalfinancialmarketsandoveralleconomicactivity.Should
thisuncertainfinancialpolicyrecur,itwouldlikelynegativelyimpactglobaleconomicactivity.Anyweaknessinglobaleconomies
wouldalsolikelyhavenegativerepercussionsonU.S.andglobalcreditandfinancialmarkets,andfurtherexacerbatesovereigndebt
concernsintheEuropeanUnion.Allofthesefactorswouldlikelyadverselyimpacttheglobaldemandforourproductsandthe
performanceofourinvestments,andwouldlikelyhaveamaterialadverseeffectonourbusiness,resultsofoperationsandfinancial
condition.
Thefinancialturmoilaffectingthebankingsystemandfinancialmarketscontinuestonegativelyimpactfinancialinstitutionsandhas
resultedintightercreditmarkets,andlowerlevelsofliquidityinsomefinancialmarkets.Therecouldbeanumberoffollowoneffects
fromthetightenedcreditenvironmentonourbusiness,includingtheinsolvencyofkeysuppliersortheirinabilitytoobtaincreditto
financedevelopmentand/ormanufactureproductsresultinginproductdelaysinabilityofcustomerstoobtaincredittofinance
purchasesofourproductsand/orcustomerinsolvenciesandfailureoffinancialinstitutionsnegativelyimpactingourtreasury
functions.Intheeventourcustomersareunabletoobtaincreditorotherwisepayforourshippedproductsitcouldsignificantlyimpact
ourabilitytocollectonouroutstandingaccountsreceivable.Otherincomeandexpensealsocouldvarymateriallyfromexpectations
dependingongainsorlossesrealizedonthesaleorexchangeoffinancialinstrumentsimpairmentchargesresultingfromrevaluations
ofdebtandequitysecuritiesandotherinvestmentsinterestratescashbalancesandchangesinfairvalueofderivativeinstruments.
Volatilityinthefinancialmarketsandanyoveralleconomicuncertaintyincreasetheriskthattheactualamountsrealizedinthefuture
onourfinancialinstrumentscoulddiffersignificantlyfromthefairvaluescurrentlyassignedtothem.Uncertaintyaboutcurrentglobal
economicconditionscouldalsocontinuetoincreasethevolatilityofourstockprice.
Inaddition,politicalandsocialturmoilrelatedtointernationalconflicts,terroristacts,civilunrestandmassmigrationmayputfurther
pressureoneconomicconditionsintheUnitedStatesandtherestoftheworld.Unstableeconomic,politicalandsocialconditionsmake
itdifficultforourcustomers,oursuppliersandustoaccuratelyforecastandplanfuturebusinessactivities.Ifsuchconditionspersist,
ourbusiness,financialconditionandresultsofoperationscouldsuffer.Additionally,unstableeconomicconditionscanprovide
significantpressuresandburdensonindividuals,whichcouldcausethemtoengageininappropriatebusinessconduct.See
PartI,Item4.CONTROLSANDPROCEDURES.
Ourcashandcashequivalentsandshortterminvestmentsaremanagedthroughvariousbanksaroundtheworldandvolatilityin
thecapitalandcreditmarketconditionscouldcausefinancialinstitutionstofailormateriallyharmservicelevelsprovidedbysuch
banks,bothofwhichcouldhaveanadverseimpactonourabilitytotimelyaccessfunds.
Worldcapitalandcreditmarketshavebeenandmaycontinuetoexperiencevolatilityanddisruption.Insomecases,themarketshave
exerteddownwardpressureonstockpricesandcreditcapacityforcertainissuers,aswellaspressuredthesolvencyofsomefinancial
institutions.Thesefinancialinstitutions,includingbanks,havehaddifficultytimelyperformingregularservicesandinsomecaseshave
failedorotherwisebeenlargelytakenoverbygovernments.Wemaintainourcash,cashequivalentsandshortterminvestmentswitha
numberoffinancialinstitutionsaroundtheworld.Shouldsomeorallofthesefinancialinstitutionsfailorotherwisebeunabletotimely
performrequestedservices,wewouldlikelyhavealimitedabilitytotimelyaccessourcashdepositedwithsuchinstitutions,or,in
extremecircumstancesthefailureofsuchinstitutionscouldcauseustobeunabletoaccesscashfortheforeseeablefuture.Ifweare
unabletoquicklyaccessourfundswhenweneedthem,wemayneedtoincreasetheuseofourexistingcreditlinesoraccessmore
expensivecredit,ifavailable.Ifweareunabletoaccessourcashorifweaccessexistingoradditionalcreditorareunabletoaccess
additionalcredit,itcouldhaveanegativeimpactonouroperations,includingourreportednetincome.Inaddition,thewillingnessof
financialinstitutionstocontinuetoacceptourcashdepositswillimpactourabilitytodiversifyourinvestmentriskamonginstitutions.
Weareexposedtocreditriskandfluctuationsinthemarketvaluesofourinvestmentportfolio.
Althoughwehavenotrecognizedanymateriallossesonourcash,cashequivalentsandshortterminvestments,futuredeclinesintheir
marketvaluescouldhaveamaterialadverseeffectonourfinancialconditionandoperatingresults.Giventheglobalnatureofour
business,wehaveinvestmentsbothdomesticallyandinternationally.Therehasrecentlybeengrowingpressureonthecreditworthiness
ofsovereignnations,particularlyinEuropewhereasignificantportionofourcash,cashequivalentsand
55
TableofContents
shortterminvestmentsareinvested,whichresultsincorrespondingpressureonthevaluationofthesecuritiesissuedbysuchnations.
Additionally,ouroverallinvestmentportfolioisoftenconcentratedingovernmentissuedsecuritiessuchasU.S.Treasurysecuritiesand
governmentagencies,corporatenotes,commercialpaperandmoneymarketfunds.Creditratingsandpricingoftheseinvestmentscan
benegativelyimpactedbyliquidity,creditdeteriorationorlosses,financialresults,orotherfactors.Additionally,liquidityissuesor
politicalactionsbysovereignnationscouldresultindecreasedvaluesforourinvestmentsincertaingovernmentsecurities.Asaresult,
thevalueorliquidityofourcash,cashequivalentsandshortterminvestmentscoulddeclineorbecomemateriallyimpaired,which
couldhaveamaterialadverseeffectonourfinancialconditionandoperatingresults.SeeItem3.QuantitativeandQualitative
DisclosuresaboutMarketRisk.
Ourfuturesuccessdependsonourabilitytoincreaseoursalesvolumesanddecreaseourcoststooffsetpotentialdeclinesinthe
averagesellingprices(ASPs)ofourproductsand,ifweareunabletorealizegreatersalesvolumesandlowercosts,ouroperating
resultsmaysuffer.
Ourabilitytoincreaseoursalesvolumeandourfuturesuccessdependsonthecontinuedgrowthofthemarketsforlasers,lasersystems
andrelatedaccessories,aswellasourabilitytoidentify,inadvance,emergingmarketsforlaserbasedsystems.Wecannotassureyou
thatwewillbeabletosuccessfullyidentify,onatimelybasis,newhighgrowthmarketsinthefuture.Moreover,wecannotassureyou
thatnewmarketswilldevelopforourproductsorourcustomers'products,orthatourtechnologyorpricingwillenablesuchmarketsto
develop.Futuredemandforourproductsisuncertainandwilldependtoagreatdegreeoncontinuedtechnologicaldevelopmentandthe
introductionofneworenhancedproducts.Ifthisdoesnotcontinue,salesofourproductsmaydeclineandourbusinesswillbeharmed.
WehaveinthepastexperienceddecreasesintheASPsofsomeofourproducts.Ascompetingproductsbecomemorewidelyavailable,
theASPsofourproductsmaydecrease.IfweareunabletooffsetanydecreaseinourASPsbyincreasingoursalesvolumes,ournet
saleswilldecline.Inaddition,tomaintainourgrossmargins,wemustcontinuetoreducethecostofmanufacturingourproductswhile
maintainingtheirhighquality.Fromtimetotime,ourproducts,likemanycomplextechnologicalproducts,mayfailingreater
frequencythananticipated.Thiscanleadtofurthercharges,whichcanresultinhighercosts,lowergrossmarginsandloweroperating
results.Furthermore,asASPsofourcurrentproductsdecline,wemustdevelopandintroducenewproductsandproductenhancements
withhighermargins.Ifwecannotmaintainourgrossmargins,ouroperatingresultscouldbeseriouslyharmed,particularlyiftheASPs
ofourproductsdecreasesignificantly.
Ourfuturesuccessdependsonourabilitytodevelopandsuccessfullyintroducenewandenhancedproductsthatmeettheneedsof
ourcustomers.
Ourcurrentproductsaddressabroadrangeofcommercialandscientificresearchapplicationsinthephotonicsmarkets.Wecannot
assureyouthatthemarketfortheseapplicationswillcontinuetogeneratesignificantorconsistentdemandforourproducts.Demand
forourproductscouldbesignificantlydiminishedbydisruptingtechnologiesorproductsthatreplacethemorrenderthemobsolete.
Furthermore,thenewandenhancedproductsincertainmarketsgenerallycontinuetobesmallerinsizeandhavelowerASPs,and
therefore,wehavetosellmoreunitstomaintainrevenuelevels.Accordingly,wemustcontinuetoinvestinresearchanddevelopment
inordertodevelopcompetitiveproducts.
Ourfuturesuccessdependsonourabilitytoanticipateourcustomers'needsanddevelopproductsthataddressthoseneeds.
Introductionofnewproductsandproductenhancementswillrequirethatweeffectivelytransferproductionprocessesfromresearch
anddevelopmenttomanufacturingandcoordinateoureffortswiththoseofoursupplierstoachievevolumeproductionrapidly.Ifwe
failtotransferproductionprocesseseffectively,developproductenhancementsorintroducenewproductsinsufficientquantitiesto
meettheneedsofourcustomersasscheduled,ournetsalesmaybereducedandourbusinessmaybeharmed.
Wefacerisksassociatedwithourforeignoperationsandsalesthatcouldharmourfinancialconditionandresultsofoperations.
ForthethreeandninemonthsendedJuly2,2016,77%and75%ofournetsaleswerederivedfromcustomersoutsideoftheUnited
States.Forfiscal2015,fiscal2014andfiscal2013,73%,74%,and77%,respectively,ofournetsaleswerederivedfromcustomers
outsideoftheUnitedStates.Weanticipatethatforeignsales,particularlyinAsia,willcontinuetoaccountforasignificantportionof
ournetsalesintheforeseeablefuture.
Aglobaleconomicslowdownoranaturaldisastercouldhaveanegativeeffectonvariousforeignmarketsinwhichweoperate,suchas
theearthquake,tsunamiandresultingnucleardisasterinJapanandthefloodinginThailandinrecentyears.Suchaslowdownmay
causeustoreduceourpresenceincertaincountries,whichmaynegativelyaffecttheoveralllevelofbusinessin
56
TableofContents
suchcountries.Ourforeignsalesareprimarilythroughourdirectsalesforce.Additionally,someforeignsalesaremadethroughforeign
distributorsandrepresentatives.Ourforeignoperationsandsalesaresubjecttoanumberofrisks,including:
longeraccountsreceivablecollectionperiods
theimpactofrecessionsandothereconomicconditionsineconomiesoutsidetheUnitedStates
unexpectedchangesinregulatoryrequirements
certificationrequirements
environmentalregulations
reducedprotectionforintellectualpropertyrightsinsomecountries
potentiallyadversetaxconsequences
politicalandeconomicinstability
import/exportregulations,tariffsandtradebarriers
compliancewithapplicableUnitedStatesandforeignanticorruptionlaws
culturalandmanagementdifferences
relianceinsomejurisdictionsonthirdpartysaleschannelpartners
preferenceforlocallyproducedproductsand
shippingandotherlogisticscomplications.
Ourbusinesscouldalsobeimpactedbyinternationalconflicts,terroristandmilitaryactivity,civilunrestandpandemicillnesswhich
couldcauseaslowdownincustomerorders,causecustomerordercancellationsornegativelyimpactavailabilityofsuppliesorlimit
ourabilitytotimelyserviceourinstalledbaseofproducts.
Wearealsosubjecttotherisksoffluctuatingforeigncurrencyexchangerates,whichcouldmateriallyadverselyaffectthesalespriceof
ourproductsinforeignmarkets,aswellasthecostsandexpensesofourforeignsubsidiaries.Whileweuseforwardexchangecontracts
andotherriskmanagementtechniquestohedgeourforeigncurrencyexposure,weremainexposedtotheeconomicrisksofforeign
currencyfluctuations.
Wemaynotbeabletoprotectourproprietarytechnologywhichcouldadverselyaffectourcompetitiveadvantage.
Maintenanceofintellectualpropertyrightsandtheprotectionthereofisimportanttoourbusiness.Werelyonacombinationofpatent,
copyright,trademarkandtradesecretlawsandrestrictionsondisclosuretoprotectourintellectualpropertyrights.Ourpatent
applicationsmaynotbeapproved,anypatentsthatmaybeissuedmaynotsufficientlyprotectourintellectualpropertyandanyissued
patentsmaybechallengedbythirdparties.Otherpartiesmayindependentlydevelopsimilarorcompetingtechnologyordesignaround
anypatentsthatmaybeissuedtous.Wecannotbecertainthatthestepswehavetakenwillpreventthemisappropriationofour
intellectualproperty,particularlyinforeigncountrieswherethelawsmaynotprotectourproprietaryrightsasfullyasintheUnited
States.Further,wemayberequiredtoenforceourintellectualpropertyorotherproprietaryrightsthroughlitigation,which,regardless
ofsuccess,couldresultinsubstantialcostsanddiversionofmanagement'sattention.Additionally,theremaybeexistingpatentsof
whichweareunawarethatcouldbepertinenttoourbusinessanditisnotpossibleforustoknowwhethertherearepatentapplications
pendingthatourproductsmightinfringeuponsincetheseapplicationsareoftennotpubliclyavailableuntilapatentisissuedor
published.
Wemay,inthefuture,besubjecttoclaimsorlitigationfromthirdparties,forclaimsofinfringementoftheirproprietaryrightsorto
determinethescopeandvalidityofourproprietaryrightsortheproprietaryrightsofcompetitorsorotherrightsholders.These
claimscouldresultincostlylitigationandthediversionofourtechnicalandmanagementpersonnel.Adverseresolutionof
litigationmayharmouroperatingresultsorfinancialcondition.
57
TableofContents
Inrecentyears,therehasbeensignificantlitigationintheUnitedStatesandaroundtheworldinvolvingpatentsandotherintellectual
propertyrights.Thishasbeenseeninourindustry,forexampleintherecentlyconcludedpatentrelatedlitigationbetweenIMRA
America,Inc.("Imra")andIPGPhotonicsCorporationandinImra'srecentlybroughtlitigationagainsttwoofourGermansubsidiaries.
Fromtimetotime,likemanyothertechnologycompanies,wehavereceivedcommunicationsfromotherpartiesassertingtheexistence
ofpatentrights,copyrights,trademarkrightsorotherintellectualpropertyrightswhichsuchthirdpartiesbelievemaycovercertainof
ourproducts,processes,technologiesorinformation.Inthefuture,wemaybeapartytolitigationtoprotectourintellectualpropertyor
asaresultofanallegedinfringementofothers'intellectualpropertywhetherthroughdirectclaimsorbywayofindemnificationclaims
ofourcustomers,as,insomecases,wecontractuallyagreetoindemnifyourcustomersagainstthirdpartyinfringementclaimsrelating
toourproducts.Theseclaimsandanyresultinglawsuit,ifsuccessful,couldsubjectustosignificantliabilityfordamagesor
invalidationofourproprietaryrights.Theselawsuits,regardlessoftheirsuccess,wouldlikelybetimeconsumingandexpensiveto
resolveandwoulddivertmanagementtimeandattention.Anypotentialintellectualpropertylitigationcouldalsoforceustodooneor
moreofthefollowing:
stopmanufacturing,sellingorusingourproductsthatusetheinfringedintellectualproperty
obtainfromtheowneroftheinfringedintellectualpropertyrightalicensetosellorusetherelevanttechnology,althoughsuch
licensemaynotbeavailableonreasonableterms,oratallor
redesigntheproductsthatusethetechnology.
Ifweareforcedtotakeanyoftheseactionsorareotherwiseapartytolawsuitsofthisnature,wemayincursignificantlossesandour
businessmaybeseriouslyharmed.Wedonothaveinsurancetocoverpotentialclaimsofthistype.
Ifourgoodwillorintangibleassetsbecomeimpaired,wemayberequiredtorecordasignificantchargetoearnings.
UnderaccountingprinciplesgenerallyacceptedintheUnitedStates,wereviewourintangibleassetsforimpairmentwheneventsor
changesincircumstancesindicatethecarryingvaluemaynotberecoverable.Goodwillisrequiredtobetestedforimpairmentatleast
annually.Factorsthatmaybeconsideredindeterminingwhetherachangeincircumstancesindicatingthatthecarryingvalueofour
goodwillorotherintangibleassetsmaynotberecoverableincludedeclinesinourstockpriceandmarketcapitalizationorfuturecash
flowsprojections.Adeclineinourstockprice,oranyotheradversechangeinmarketconditions,particularlyifsuchchangehasthe
effectofchangingoneofthecriticalassumptionsorestimatesweusedtocalculatetheestimatedfairvalueofourreportingunits,could
resultinachangetotheestimationoffairvaluethatcouldresultinanimpairmentcharge.Anysuchmaterialcharges,whetherrelated
togoodwillorpurchasedintangibleassets,mayhaveamaterialnegativeimpactonourfinancialandoperatingresults.
Wedependonskilledpersonneltooperateourbusinesseffectivelyinarapidlychangingmarket,andifweareunabletoretain
existingorhireadditionalpersonnelwhenneeded,ourabilitytodevelopandsellourproductscouldbeharmed.
Ourabilitytocontinuetoattractandretainhighlyskilledpersonnelwillbeacriticalfactorindeterminingwhetherwewillbe
successfulinthefuture.Recruitingandretaininghighlyskilledpersonnelincertainfunctionscontinuestobedifficult.Atcertain
locationswhereweoperate,thecostoflivingisextremelyhighanditmaybedifficulttoretainkeyemployeesandmanagementata
reasonablecost.Wemaynotbesuccessfulinattracting,assimilatingorretainingqualifiedpersonneltofulfillourcurrentorfuture
needs.Ourfailuretoattractadditionalemployeesandretainourexistingemployeescouldadverselyaffectourgrowthandourbusiness.
Ourfuturesuccessdependsuponthecontinuedservicesofourexecutiveofficersandotherkeyengineering,sales,marketing,
manufacturingandsupportpersonnel,anyofwhommayleaveandourabilitytoeffectivelytransitiontotheirsuccessors.Ourinability
toretainortoeffectivelytransitiontotheirsuccessorscouldharmourbusinessandourresultsofoperations.
Thelongsalescyclesforourproductsmaycauseustoincursignificantexpenseswithoutoffsettingnetsales.
Customersoftenviewthepurchaseofourproductsasasignificantandstrategicdecision.Asaresult,customerstypicallyexpend
significanteffortinevaluating,testingandqualifyingourproductsbeforemakingadecisiontopurchasethem,resultinginalengthy
initialsalescycle.Whileourcustomersareevaluatingourproductsandbeforetheyplaceanorderwithus,wemayincursubstantial
salesandmarketingandresearchanddevelopmentexpensestocustomizeourproductstothecustomers'needs.Wemayalsoexpend
significantmanagementefforts,increasemanufacturingcapacityandorderlongleadtimecomponentsormaterialspriortoreceivingan
order.Evenafterthisevaluationprocess,apotentialcustomermaynotpurchaseourproducts.Asaresult,theselongsalescyclesmay
causeustoincursignificantexpenseswithouteverreceivingnetsalestooffsetsuchexpenses.
58
TableofContents
Themarketsinwhichwesellourproductsareintenselycompetitiveandincreasedcompetitioncouldcausereducedsaleslevels,
reducedgrossmarginsorthelossofmarketshare.
Competitioninthevariousphotonicsmarketsinwhichweprovideproductsisveryintense.Wecompeteagainstanumberoflarge
publicandprivatecompanies,includingCVIMellesGriot,GSIGroup,Inc.,IPGPhotonicsCorporation,LumentumHoldingsInc.,
NewportCorporation,RofinSinarTechnologies,Inc.,andTrumpfGmbH,aswellasothersmallercompanies.Someofourcompetitors
arelargecompaniesthathavesignificantfinancial,technical,marketingandotherresources.Thesecompetitorsmaybeabletodevote
greaterresourcesthanwecantothedevelopment,promotion,saleandsupportoftheirproducts.Someofourcompetitorsaremuch
betterpositionedthanwearetoacquireothercompaniesinordertogainnewtechnologiesorproductsthatmaydisplaceourproduct
lines.Anyoftheseacquisitionscouldgiveourcompetitorsastrategicadvantage.Anybusinesscombinationsormergersamongour
competitors,forminglargercompanieswithgreaterresources,couldresultinincreasedcompetition,pricereductions,reducedmargins
orlossofmarketshare,anyofwhichcouldmateriallyandadverselyaffectourbusiness,resultsofoperationsandfinancialcondition.
Additionalcompetitorsmayenterthemarketsinwhichweserve,bothforeignanddomestic,andwearelikelytocompetewithnew
companiesinthefuture.Wemayencounterpotentialcustomersthat,duetoexistingrelationshipswithourcompetitors,arecommitted
totheproductsofferedbythesecompetitors.Further,ourcurrentorpotentialcustomersmaydeterminetodevelopandproduce
productsfortheirownusewhicharecompetitivetoourproducts.Asaresultoftheforegoingfactors,weexpectthatcompetitive
pressuresmayresultinpricereductions,reducedmargins,lossofsalesandlossofmarketshare.Inaddition,inmarketswherethereare
alimitednumberofcustomers,competitionisparticularlyintense.
Ifwefailtoaccuratelyforecastcomponentandmaterialrequirementsforourproducts,wecouldincuradditionalcostsandincur
significantdelaysinshipments,whichcouldresultinalossofcustomers.
Weuserollingforecastsbasedonanticipatedproductordersandmaterialrequirementsplanningsystemstodetermineourproduct
requirements.Itisveryimportantthatweaccuratelypredictboththedemandforourproductsandtheleadtimesrequiredtoobtainthe
necessarycomponentsandmaterials.Wedependonoursuppliersformostofourproductcomponentsandmaterials.Leadtimesfor
componentsandmaterialsthatweordervarysignificantlyanddependonfactorsincludingthespecificsupplierrequirements,thesize
oftheorder,contracttermsandcurrentmarketdemandforcomponents.Forsubstantialincreasesinoursaleslevelsofcertainproducts,
someofoursuppliersmayneedatleastninemonthsleadtime.Ifweoverestimateourcomponentandmaterialrequirements,wemay
haveexcessinventory,whichwouldincreaseourcosts.Ifweunderestimateourcomponentandmaterialrequirements,wemayhave
inadequateinventory,whichcouldinterruptanddelaydeliveryofourproductstoourcustomers.Anyoftheseoccurrenceswould
negativelyimpactournetsales,businessoroperatingresults.
Ourrelianceoncontractmanufacturingandoutsourcingmayadverselyimpactourfinancialresultsandoperationsduetoour
decreasedcontrolovertheperformanceandtimingofcertainaspectsofourmanufacturing.
Ourmanufacturingstrategyincludespartneringwithcontractmanufacturerstooutsourcenoncoresubassembliesandlesscomplex
turnkeyproducts,includingsomeperformedatinternationalsiteslocatedinAsiaandEasternEurope.Ourabilitytoresumeinternal
manufacturingoperationsforcertainproductsandcomponentsinatimelymannermaybeeliminated.Thecost,quality,performance
andavailabilityofcontractmanufacturingoperationsareandwillbeessentialtothesuccessfulproductionandsaleofmanyofour
products.Ourfinancialconditionorresultsofoperationcouldbeadverselyimpactedifanycontractmanufacturerorothersupplieris
unableforanyreason,includingasaresultoftheimpactofworldwideeconomicconditions,tomeetourcost,quality,performance,
andavailabilitystandards.Wemaynotbeabletoprovidecontractmanufacturerswithproductvolumesthatarehighenoughtoachieve
sufficientcostsavings.Ifshipmentsfallbelowforecastedlevels,wemayincurincreasedcostsorberequiredtotakeownershipofthe
inventory.Also,ourabilitytocontrolthequalityofproductsproducedbycontractmanufacturersmaybelimitedandqualityissuesmay
notberesolvedinatimelymanner,whichcouldadverselyimpactourfinancialconditionorresultsofoperations.
Ifwefailtoeffectivelymanageourgrowthor,alternatively,ourspendingduringdownturns,ourbusinesscouldbedisrupted,which
couldharmouroperatingresults.
Growthinsales,combinedwiththechallengesofmanaginggeographicallydispersedoperations,canplaceasignificantstrainonour
managementsystemsandresources,andouranticipatedgrowthinfutureoperationscouldcontinuetoplacesuchastrain.Thefailureto
effectivelymanageourgrowthcoulddisruptourbusinessandharmouroperatingresults.Ourabilitytosuccessfullyofferourproducts
andimplementourbusinessplaninevolvingmarketsrequiresaneffectiveplanningandmanagementprocess.Ineconomicdownturns,
wemusteffectivelymanageourspendingandoperationstoensureour
59
TableofContents
competitivepositionduringthedownturn,aswellasourfutureopportunitieswhentheeconomyimproves,remainintact.Thefailureto
effectivelymanageourspendingandoperationscoulddisruptourbusinessandharmouroperatingresults.
Historically,acquisitionshavebeenanimportantelementofourstrategy.However,wemaynotfindsuitableacquisitioncandidates
inthefutureandwemaynotbeabletosuccessfullyintegrateandmanageacquiredbusinesses.Anyacquisitionswemakecould
disruptourbusinessandharmourfinancialcondition.
Wehaveinthepastmadestrategicacquisitionsofothercorporationsandentities,aswellasassetpurchases,andwecontinueto
evaluatepotentialstrategicacquisitionsofcomplementarycompanies,productsandtechnologies.Intheeventofanyfuture
acquisitions,wecould:
issuestockthatwoulddiluteourcurrentstockholders'percentageownership
paycashthatwoulddecreaseourworkingcapital
incurdebt
assumeliabilitiesor
incurexpensesrelatedtoimpairmentofgoodwillandamortization.
Acquisitionsalsoinvolvenumerousrisks,including:
problemscombiningtheacquiredoperations,systems,technologiesorproducts
aninabilitytorealizeexpectedoperatingefficienciesorproductintegrationbenefits
difficultiesincoordinatingandintegratinggeographicallyseparatedpersonnel,organizations,systemsandfacilities
difficultiesintegratingbusinesscultures
unanticipatedcostsorliabilities,includingthecostsassociatedwithimprovingtheinternalcontrolsoftheacquiredcompany
diversionofmanagement'sattentionfromourcorebusinesses
adverseeffectsonexistingbusinessrelationshipswithsuppliersandcustomers
potentiallossofkeyemployees,particularlythoseofthepurchasedorganizations
incurringunforeseenobligationsorliabilitiesinconnectionwithacquisitionsand
thefailuretocompleteacquisitionsevenaftersigningdefinitiveagreementswhich,amongotherthings,wouldresultinthe
expensingofpotentiallysignificantprofessionalfeesandotherchargesintheperiodinwhichtheacquisitionornegotiations
areterminated.
Wecannotassureyouthatwewillbeabletosuccessfullyidentifyappropriateacquisitioncandidates,tointegrateanybusinesses,
products,technologiesorpersonnelthatwemightacquireinthefutureorachievetheanticipatedbenefitsofsuchtransactions,which
mayharmourbusiness.
Ourmarketisunpredictableandcharacterizedbyrapidtechnologicalchangesandevolvingstandardsdemandingasignificant
investmentinresearchanddevelopment,and,ifwefailtoaddresschangingmarketconditions,ourbusinessandoperatingresults
willbeharmed.
Thephotonicsindustryischaracterizedbyextensiveresearchanddevelopment,rapidtechnologicalchange,frequentnewproduct
introductions,changesincustomerrequirementsandevolvingindustrystandards.Becausethisindustryissubjecttorapidchange,itis
difficulttopredictitspotentialsizeorfuturegrowthrate.Oursuccessingeneratingnetsalesinthisindustrywilldependon,among
otherthings:
60
TableofContents
maintainingandenhancingourrelationshipswithourcustomers
theeducationofpotentialendusercustomersaboutthebenefitsoflasersandlasersystemsand
ourabilitytoaccuratelypredictanddevelopourproductstomeetindustrystandards.
ForthethreeandninemonthsendedJuly2,2016,ourresearchanddevelopmentcostswere$21.4million(9.8%ofnetsales)and$61.5
million(10.1%ofnetsales).Forourfiscalyears2015,2014and2013,ourresearchanddevelopmentcostswere$81.5million(10.2%
ofnetsales),$79.1million(10.0%ofnetsales)and$82.8million(10.2%ofnetsales),respectively.Wecannotassureyouthatour
expendituresforresearchanddevelopmentwillresultintheintroductionofnewproductsor,ifsuchproductsareintroduced,thatthose
productswillachievesufficientmarketacceptanceortogeneratesalestooffsetthecostsofdevelopment.Ourfailuretoaddressrapid
technologicalchangesinourmarketscouldadverselyaffectourbusinessandresultsofoperations.
Weareexposedtolawsuitsinthenormalcourseofbusinesswhichcouldhaveamaterialadverseeffectonourbusiness,operating
results,orfinancialcondition.
Weareexposedtolawsuitsinthenormalcourseofourbusiness,includingproductliabilityclaims,ifpersonalinjury,deathor
commerciallossesoccurfromtheuseofourproducts.Whilewetypicallymaintainbusinessinsurance,includingdirectors'andofficers'
policies,litigationcanbeexpensive,lengthy,anddisruptivetonormalbusinessoperations,includingthepotentialimpactof
indemnificationobligationsforindividualsnamedinanysuchlawsuits.Wemaynot,however,beabletosecureinsurancecoverageon
termsacceptabletousinthefuture.Moreover,theresultsofcomplexlegalproceedingsaredifficulttopredict.Anunfavorable
resolutionofaparticularlawsuit,includingarecallorredesignofproductsifultimatelydeterminedtobedefective,couldhavea
materialadverseeffectonourbusiness,operatingresults,orfinancialcondition.
Weusestandardlaboratoryandmanufacturingmaterialsthatcouldbeconsideredhazardousandwecouldbeliableforany
damageorliabilityresultingfromaccidentalenvironmentalcontaminationorinjury.
Althoughmostofourproductsdonotincorporatehazardousortoxicmaterialsandchemicals,someofthegasesusedinourexcimer
lasersandsomeoftheliquiddyesusedinsomeofourscientificlaserproductsarehighlytoxic.Inaddition,ouroperationsinvolvethe
useofstandardlaboratoryandmanufacturingmaterialsthatcouldbeconsideredhazardous.Also,ifafacilityfireweretooccuratour
Sunnyvale,Californiasiteandweretospreadtoareactorusedtogrowsemiconductorwafers,itcouldreleasehighlytoxicemissions.
Webelievethatoursafetyproceduresforhandlinganddisposingofsuchmaterialscomplywithallfederal,stateandoffshore
regulationsandstandards.However,theriskofaccidentalenvironmentalcontaminationorinjuryfromsuchmaterialscannotbe
entirelyeliminated.Intheeventofsuchanaccidentinvolvingsuchmaterials,wecouldbeliablefordamagesandsuchliabilitycould
exceedtheamountofourliabilityinsurancecoverageandtheresourcesofourbusinesswhichcouldhaveanadverseeffectonour
financialresultsorourbusinessasawhole.
Complianceorthefailuretocomplywithcurrentandfutureenvironmentalregulationscouldcauseussignificantexpense.
Wearesubjecttoavarietyoffederal,state,localandforeignenvironmentalregulationsrelatingtotheuse,storage,dischargeand
disposalofhazardouschemicalsusedduringourmanufacturingprocessorrequiringdesignchangesorrecyclingofproductswe
manufacture.Ifwefailtocomplywithanypresentandfutureregulations,wecouldbesubjecttofutureliabilities,thesuspensionof
productionoraprohibitiononthesaleofproductswemanufacture.Inaddition,suchregulationscouldrestrictourabilitytoexpandour
facilitiesorcouldrequireustoacquirecostlyequipment,ortoincurothersignificantexpensestocomplywithenvironmental
regulations,includingexpensesassociatedwiththerecallofanynoncompliantproductandthemanagementofhistoricalwaste.
Fromtimetotimenewregulationsareenacted,anditisdifficulttoanticipatehowsuchregulationswillbeimplementedandenforced.
Wecontinuetoevaluatethenecessarystepsforcompliancewithregulationsastheyareenacted.Theseregulationsinclude,for
example,theRegistration,Evaluation,AuthorizationandRestrictionofChemicalsubstances(REACH),theRestrictionontheUseof
CertainHazardousSubstancesinElectricalandElectronicEquipmentDirective(RoHS)andtheWasteElectricalandElectronic
EquipmentDirective(WEEE)enactedintheEuropeanUnionwhichregulatetheuseofcertainhazardoussubstancesin,andrequire
thecollection,reuseandrecyclingofwastefrom,certainproductswemanufacture.Thisandsimilarlegislationthathasbeenorisinthe
processofbeingenactedinJapan,China,SouthKoreaandvariousstatesoftheUnitedStatesmayrequireustoredesignourproducts
toensurecompliancewiththeapplicablestandards,forexamplebyrequiringtheuseofdifferenttypesofmaterials.Theseredesignsor
alternativematerialsmaydetrimentallyimpacttheperformanceofourproducts,addgreatertestingleadtimesforproductintroductions
orhaveothersimilareffects.Webelievewecomplywithallsuchlegislationwhereourproductsaresoldandwewillcontinueto
monitortheselawsandtheregulations
61
TableofContents
beingadoptedunderthemtodetermineourresponsibilities.Inaddition,wearemonitoringlegislationrelatingtothereductionof
carbonemissionsfromindustrialoperationstodeterminewhetherwemayberequiredtoincuranyadditionalmaterialcostsorexpenses
associatedwithouroperations.Wearenotcurrentlyawareofanysuchmaterialcostsorexpenses.TheSEChaspromulgatedrules
requiringdisclosureregardingtheuseofcertainconflictmineralsminedfromtheDemocraticRepublicofCongoandadjoining
countriesandproceduresregardingamanufacturer'seffortstopreventthesourcingofsuchminerals.Theimplementationofsuchrules
hasrequiredustoincuradditionalexpenseandinternalresourcesandmaycontinuetodosointhefuture,particularlyintheeventthat
onlyalimitedpoolofsuppliersareavailabletocertifythatproductsarefreefromconflictminerals.Ourfailuretocomplywithany
oftheforegoingregulatoryrequirementsorcontractualobligationscouldresultinourbeingdirectlyorindirectlyliableforcosts,fines
orpenaltiesandthirdpartyclaims,andcouldjeopardizeourabilitytoconductbusinessintheUnitedStatesandforeigncountries.
Ourandourcustomers'operationswouldbeseriouslyharmedifourlogisticsorfacilitiesorthoseofoursuppliers,ourcustomers'
suppliersorourcontractmanufacturersweretoexperiencecatastrophicloss.
Ouroperations,logisticsandfacilitiesandthoseofourcustomers,suppliersandcontractmanufacturerscouldbesubjecttoa
catastrophiclossfromfire,flood,earthquake,volcaniceruption,workstoppages,poweroutages,actsofwar,pandemicillnesses,
energyshortages,theftofassets,othernaturaldisastersorterroristactivity.Asubstantialportionofourresearchanddevelopment
activities,manufacturing,ourcorporateheadquartersandothercriticalbusinessoperationsarelocatednearmajorearthquakefaultsin
SantaClara,California,anareawithahistoryofseismicevents.Anysuchlossordetrimentalimpacttoanyofouroperations,logistics
orfacilitiescoulddisruptouroperations,delayproduction,shipmentsandnetsalesandresultinlargeexpensestorepairorreplacethe
facility.Whilewehaveobtainedinsurancetocovermostpotentiallosses,afterreviewingthecostsandlimitationsassociatedwith
earthquakeinsurance,wehavedecidednottoprocuresuchinsurance.Webelievethatthisdecisionisconsistentwithdecisionsreached
bynumerousothercompanieslocatednearby.Wecannotassureyouthatourexistinginsurancecoveragewillbeadequateagainstall
otherpossiblelosses.
Difficultieswithourenterpriseresourceplanning(ERP)systemandotherpartsofourglobalinformationtechnologysystem
couldharmourbusinessandresultsofoperation.Ifournetworksecuritymeasuresarebreachedandunauthorizedaccessis
obtainedtoacustomer'sdataorourdataorourinformationtechnologysystems,wemayincursignificantlegalandfinancial
exposureandliabilities.
Likemanymodernmultinationalcorporations,wemaintainaglobalinformationtechnologysystem,includingsoftwareproducts
licensedfromthirdparties.Anysystem,networkorInternetfailures,misusebysystemusers,thehackingintoordisruptioncausedby
theunauthorizedaccessbythirdpartiesorlossoflicenserightscoulddisruptourabilitytotimelyandaccuratelymanufactureandship
productsortoreportourfinancialinformationincompliancewiththetimelinesmandatedbytheSEC.Anysuchfailure,misuse,
hacking,disruptionsorlosswouldlikelycauseadiversionofmanagement'sattentionfromtheunderlyingbusinessandcouldharmour
operations.Inaddition,asignificantfailureofourglobalinformationtechnologysystemcouldadverselyaffectourabilitytocomplete
anevaluationofourinternalcontrolsandattestationactivitiespursuanttoSection404oftheSarbanesOxleyActof2002.
Ourinformationsystemsaresubjecttoattacks,interruptionsandfailures.
Aspartofourdaytodaybusiness,westoreourdataandcertaindataaboutourcustomersinourglobalinformationtechnologysystem.
Whileoursystemisdesignedwithaccesssecurity,ifathirdpartygainsunauthorizedaccesstoourdata,includinganyregardingour
customers,suchasecuritybreachcouldexposeustoariskoflossofthisinformation,lossofbusiness,litigationandpossibleliability.
Oursecuritymeasuresmaybebreachedasaresultofthirdpartyaction,includingintentionalmisconductbycomputerhackers,
employeeerror,malfeasanceorotherwise.Additionally,thirdpartiesmayattempttofraudulentlyinduceemployeesorcustomersinto
disclosingsensitiveinformationsuchasusernames,passwordsorotherinformationinordertogainaccesstoourcustomers'dataor
ourdata,includingourintellectualpropertyandotherconfidentialbusinessinformation,orourinformationtechnologysystems.
Becausethetechniquesusedtoobtainunauthorizedaccess,ortosabotagesystems,changefrequentlyandgenerallyarenotrecognized
untillaunchedagainstatarget,wemaybeunabletoanticipatethesetechniquesortoimplementadequatepreventativemeasures.Any
unauthorizedaccesscouldresultinalossofconfidencebyourcustomers,damageourreputation,disruptourbusiness,leadtolegal
liabilityandnegativelyimpactourfuturesales.Additionally,suchactionscouldresultinsignificantcostsassociatedwithlossofour
intellectualproperty,impairmentofourabilitytoconductouroperations,rebuildingournetworkandsystems,prosecutingand
defendinglitigation,respondingtoregulatoryinquiriesoractions,payingdamagesortakingotherremedialsteps.
Changesintaxrates,taxliabilitiesortaxaccountingrulescouldaffectfutureresults.
62
TableofContents
Asaglobalcompany,wearesubjecttotaxationintheUnitedStatesandvariousothercountriesandjurisdictions.Significantjudgment
isrequiredtodetermineourworldwidetaxliabilities.Anumberoffactorsmayaffectourfutureeffectivetaxratesincluding,butnot
limitedto:
changesinthecompositionofearningsincountriesorstateswithdifferingtaxrates
changesinthevaluationsofourdeferredtaxassetsandliabilities
theresolutionofissuesarisingfromtaxauditswithvarioustaxauthorities,andinparticular,theoutcomeoftheGermantax
auditsofourtaxreturnsforfiscalyears20112014,theU.S.taxauditofourtaxreturnforfiscalyear2013andtheJapantax
auditofourtaxreturnsforfiscalyears20132015
changesinourglobalstructurethatinvolveacquisitionsoranincreasedinvestmentintechnologyoutsideoftheUnitedStates
tobetteralignassetownershipandbusinessfunctionswithrevenuesandprofits
adjustmentstoestimatedtaxesuponfinalizationofvarioustaxreturns
increasesinexpensesnotdeductiblefortaxpurposes,includingimpairmentsofgoodwillinconnectionwithacquisitions
ourabilitytomeettheeligibilityrequirementsfortaxholidaysoflimitedtimetaxadvantagestatusinvariousjurisdictions
changesinavailabletaxcredits
changesinsharebasedcompensation
changesinthetaxlawsortheinterpretationofsuchtaxlaws,includingtheBaseErosionProfitShifting(BEPS)project
beingconductedbytheOrganizationforEconomicCooperationandDevelopment(OECD)
changesingenerallyacceptedaccountingprinciplesand
therepatriationofnonU.S.earningsforwhichwehavenotpreviouslyprovidedforU.S.taxes.
WearealsoengagedindiscussionswithvarioustaxauthoritiesregardingtheappropriatelevelofprofitabilityforCoherententitiesand
thismayresultinchangestoourworldwidetaxliabilities.Inaddition,wearesubjecttoregularexaminationofourincometaxreturns
bytheInternalRevenueService(IRS)andothertaxauthorities.FromtimetotimetheUnitedStates,foreignandstategovernments
makesubstantivechangestotaxrulesandtheapplicationofrulestocompanies,includingvariousannouncementsfromtheUnited
Statesgovernmentpotentiallyimpactingourabilitytodefertaxesoninternationalearnings.Weregularlyassessthelikelihoodof
favorableorunfavorableoutcomesresultingfromtheseexaminationstodeterminetheadequacyofourprovisionforincometaxes.
Althoughwebelieveourtaxestimatesarereasonable,therecanbenoassurancethatanyfinaldeterminationwillnotbematerially
differentthanthetreatmentreflectedinourhistoricalincometaxprovisionsandaccruals,whichcouldmateriallyandadverselyaffect
ouroperatingresultsandfinancialcondition.
Changinglaws,regulationsandstandardsrelatingtocorporategovernanceandpublicdisclosuremaycreateuncertaintyregarding
compliancematters.
Federalsecuritieslaws,rulesandregulations,aswellastherulesandregulationsofselfregulatoryorganizationssuchasNASDAQ
andtheNYSE,requirecompaniestomaintainextensivecorporategovernancemeasures,imposecomprehensivereportingand
disclosurerequirements,setstrictindependenceandfinancialexpertisestandardsforauditandothercommitteemembersandimpose
civilandcriminalpenaltiesforcompaniesandtheirchiefexecutiveofficers,chieffinancialofficersanddirectorsforsecuritieslaw
violations.Theselaws,rulesandregulationshaveincreasedandwillcontinuetoincreasethescope,complexityandcostofour
corporategovernance,reportinganddisclosurepractices,whichcouldharmourresultsofoperationsanddivertmanagement'sattention
frombusinessoperations.Changinglaws,regulationsandstandardsrelatingtocorporategovernanceandpublicdisclosuremaycreate
uncertaintyregardingcompliancematters.Neworchangedlaws,regulationsandstandardsaresubjecttovaryinginterpretationsin
manycases.Asaresult,theirapplicationinpracticemayevolveovertime.Wearecommittedtomaintaininghighstandardsofethics,
corporategovernanceandpublicdisclosure.Complyingwithevolvinginterpretationsofneworchangedlegalrequirementsmaycause
ustoincurhighercostsaswerevisecurrentpractices,policiesandprocedures,andmaydivertmanagementtimeandattentionfrom
revenuegeneratingtocomplianceactivities.If
63
TableofContents
oureffortstocomplywithneworchangedlaws,regulationsandstandardsdifferfromtheactivitiesintendedbyregulatoryor
governingbodiesduetoambiguitiesrelatedtopractice,ourreputationmayalsobeharmed.
Governmentalregulations,includingduties,affectingtheimportorexportofproductscouldnegativelyaffectournetsales.
TheUnitedStatesandmanyforeigngovernmentsimposetariffsanddutiesontheimportandexportofproducts,includingsomeof
thosewhichwesell.Inparticular,givenourworldwideoperations,wepaydutiesoncertainproductswhentheyareimportedintothe
UnitedStatesforrepairworkaswellasoncertainofourproductswhicharemanufacturedbyourforeignsubsidiaries.Theseproducts
canbesubjecttoadutyontheproductvalue.Additionally,theUnitedStatesandvariousforeigngovernmentshaveimposedtariffs,
controls,exportlicenserequirementsandrestrictionsontheimportorexportofsometechnologies,especiallyencryptiontechnology.
Fromtimetotime,governmentagencieshaveproposedadditionalregulationofencryptiontechnology,suchasrequiringtheescrow
andgovernmentalrecoveryofprivateencryptionkeys.Governmentalregulationofencryptiontechnologyandregulationofimportsor
exports,orourfailuretoobtainrequiredimportorexportapprovalforourproducts,couldharmourinternationalanddomesticsales
andadverselyaffectournetsales.Fromtimetotimeourdutycalculationsandpaymentsareauditedbygovernmentagencies.For
example,wewereauditedinSouthKoreaforcustomsdutiesandvalueaddedtaxfortheperiodMarch2009toMarch2014.Wewere
liableforadditionalpayments,duties,taxesandpenaltiesof$1.6million,whichwepaidinthesecondquarteroffiscal2016.Any
futureassessmentscouldhaveamaterialadverseeffectonourbusinessorfinancialposition,resultsofoperations,orcashflows
Inaddition,compliancewiththedirectivesoftheDirectorateofDefenseTradeControls(DDTC)mayresultinsubstantialexpenses
anddiversionofmanagement.AnyfailuretoadequatelyaddressthedirectivesofDDTCcouldresultincivilfinesorsuspensionorloss
ofourexportprivileges,anyofwhichcouldhaveamaterialadverseeffectonourbusinessorfinancialposition,resultsofoperations,
orcashflows.
Failuretomaintaineffectiveinternalcontrolsmaycausealossofinvestorconfidenceinthereliabilityofourfinancialstatements
ortocauseustodelayfilingourperiodicreportswiththeSECandadverselyaffectourstockprice.
TheSEC,asdirectedbySection404oftheSarbanesOxleyActof2002,adoptedrulesrequiringpubliccompaniestoincludeareport
ofmanagementoninternalcontroloverfinancialreportingintheirannualreportsonForm10Kthatcontainanassessmentby
managementoftheeffectivenessofourinternalcontroloverfinancialreporting.Inaddition,ourindependentregisteredpublic
accountingfirmmustattesttoandreportontheeffectivenessofourinternalcontroloverfinancialreporting.Althoughwetestour
internalcontroloverfinancialreportinginordertoensurecompliancewiththeSection404requirements,ourfailuretomaintain
adequateinternalcontrolsoverfinancialreportingcouldresultinanadversereactioninthefinancialmarketplaceduetoalossof
investorconfidenceinthereliabilityofourfinancialstatementsoradelayinourabilitytotimelyfileourperiodicreportswiththeSEC,
whichultimatelycouldnegativelyimpactourstockprice.
ProvisionsofourcharterdocumentsandDelawarelaw,andourChangeofControlSeverancePlanmayhaveantitakeovereffects
thatcouldpreventordelayachangeincontrol.
Provisionsofourcertificateofincorporationandbylawsmaydiscourage,delayorpreventamergeroracquisitionormakeremovalof
incumbentdirectorsorofficersmoredifficult.Theseprovisionsmaydiscouragetakeoverattemptsandbidsforourcommonstockata
premiumoverthemarketprice.Theseprovisionsinclude:
theabilityofourBoardofDirectorstoalterourbylawswithoutstockholderapproval
limitingtheabilityofstockholderstocallspecialmeetingsand
establishingadvancenoticerequirementsfornominationsforelectiontoourBoardofDirectorsorforproposingmattersthat
canbeactedonbystockholdersatstockholdermeetings.
WearesubjecttoSection203oftheDelawareGeneralCorporationLaw,whichprohibitsapubliclyheldDelawarecorporationfrom
engaginginamerger,assetorstocksaleorothertransactionwithaninterestedstockholderforaperiodofthreeyearsfollowingthe
datesuchpersonbecameaninterestedstockholder,unlesspriorapprovalofourboardofdirectorsisobtainedorasotherwiseprovided.
TheseprovisionsofDelawarelawalsomaydiscourage,delayorpreventsomeonefromacquiringormergingwithuswithoutobtaining
thepriorapprovalofourboardofdirectors,whichmaycausethemarketpriceofourcommonstocktodecline.Inaddition,wehave
adoptedachangeofcontrolseveranceplan,whichprovidesforthepaymentofacashseverancebenefittoeacheligibleemployee
basedontheemployee'sposition.Ifachangeofcontroloccurs,oursuccessororacquirerwillberequiredtoassumeandagreeto
performallofourobligationsunderthechangeofcontrolseveranceplanwhichmaydiscouragepotentialacquirersorresultinalower
stockprice.
64
TableofContents
RISKSRELATEDTOTHEPROPOSEDMERGERWITHROFIN
IfweareunabletocompleteourcontemplatedmergerwithRofin,ourexpectedfinancialresultsandthemarketvalueofour
commonstockcouldbeadverselyaffected.
ConsummationofthemergerwithRofinissubjecttocustomaryconditionstoclosing,includingthereceiptofrequiredregulatory
approvals.Ifanyconditiontothemergerisnotsatisfiedorwaived,themergermaynotbecompleted.WeandRofinmayalsoterminate
themergeragreementundercertaincircumstances.Totheextentthemergerisnotcompletedforanyreason,wewouldhavedevoted
substantialresourcesandmanagementattentiontothetransactionwithoutrealizingtheaccompanyingbenefitsexpectedbyour
management,andourfinancialconditionandresultsofoperationsandthemarketvalueofourstockmaybeadverselyaffected.
Additionalrisksanduncertaintiesassociatedwiththemergerinclude:
thefailuretoconsummatethemergermayresultinnegativepublicityandanegativeimpressionofusintheinvestment
community
weandRofinmaybecomesubjecttocostlylitigationrelatedtothemerger,andmaybesubjecttoadditionalproceedingsin
thefuture
requiredregulatoryapprovalsfromgovernmentalentitiesmaydelaythemergerorresultintheimpositionofconditionsthat
couldcausetheabandonmentofthemerger
themergeragreementmaybeterminatedincircumstancesthatwouldrequireustopayRofinaterminationfeeofupto$65.0
millionandaterminationfeetoBarclaysof$2.4million
ourabilitytoattract,recruit,retainandmotivatecurrentandprospectiveemployeeswhomaybeuncertainabouttheirfuture
rolesandrelationshipswithusfollowingthecompletionofthemergermaybeadverselyaffected
theincreaseinourleverageanddebtserviceobligationsasaresultoftheincurrenceofadditionalfinancinginconnectionwith
themergermayadverselyaffectthecombinedcompanysfinancialcondition,resultsofoperationsandearningspershareand
theattentionofouremployeesandmanagementmaybedivertedduetoactivitiesrelatedtothemergeranddisruptionsfrom
themerger,whethercompletedornot,mayharmourrelationshipswithouremployees,customers,distributors,suppliersor
otherbusinesspartners,andmayresultinalossoforasubstantialdecreaseinpurchasesbyourcustomers.
EveniftheRofinmergerisconsummated,wemaynotbeabletointegratethebusinessofRofinsuccessfullywithourownorrealize
theanticipatedbenefitsofthemerger.
Themergerinvolvesthecombinationoftwocompaniesthatcurrentlyoperateasindependentmultinationalpubliccompanies.The
combinedcompanywillberequiredtodevotesignificantmanagementattentionandresourcestointegratingourbusinesspracticeswith
thoseofRofin.Potentialdifficultiesthatthecombinedcompanymayencounteraspartoftheintegrationprocessincludethefollowing:
theinabilitytosuccessfullycombineourbusinesswithRofininamannerthatpermitsthecombinedcompanytoachievethe
fullsynergiesandotherbenefitsanticipatedtoresultfromthemerger
complexitiesassociatedwithmanagingthecombinedbusinesses,includingdifficultyaddressingpossibledifferencesin
corporateculturesandmanagementphilosophiesandthechallengeofintegratingcomplexsystems,technology,networksand
otherassetsofeachofthecompaniesinaseamlessmannerand
potentialunknownliabilitiesandunforeseenincreasedexpensesordelaysassociatedwiththemerger
Inaddition,wehaveoperatedand,untilthecompletionofthemergerwillcontinuetooperate,independently.Itispossiblethatthe
integrationprocesscouldresultin:
diversionoftheattentionofourmanagementand
65
TableofContents
thedisruptionof,orthelossofmomentumin,ourongoingbusinessorinconsistenciesinstandards,controls,proceduresor
policies,anyofwhichcouldadverselyaffectourabilitytomaintainrelationshipswithcustomers,suppliers,employeesand
otherconstituenciesorourabilitytoachievetheanticipatedbenefitsofthemerger,orcouldreduceourearningsorotherwise
adverselyaffectthebusinessandfinancialresultsofthecombinedcompany.
Thefutureresultsofthecombinedcompanywillsufferifthecombinedcompanydoesnoteffectivelymanageitsexpanded
operationsfollowingthemerger.
Followingthemerger,thesizeofthebusinessofthecombinedcompanywillincreasesignificantlybeyondthecurrentsizeofeitherour
orRofinsbusiness.Thecombinedcompanysfuturesuccessdepends,inpart,uponitsabilitytomanagethisexpandedbusiness,which
willposesubstantialchallengesformanagement,includingchallengesrelatedtothemanagementandmonitoringofnewoperations
andassociatedincreasedcostsandcomplexity.Therecanbenoassurancesthatthecombinedcompanywillbesuccessfulorthatitwill
realizetheexpectedsynergiesandbenefitscurrentlyanticipatedfromthemerger.
ThecombinedcompanyisexpectedtoincursubstantialexpensesrelatedtothemergerwithandtheintegrationofRofin.
WehaveandexpecttocontinuetoincursubstantialexpensesinconnectionwiththemergerandtheintegrationofRofin.Therearea
largenumberofprocesses,policies,procedures,operations,technologiesandsystemsthatmayneedtobeintegrated,including
purchasing,accountingandfinance,sales,payroll,pricing,marketingandemployeebenefits.Whilewehaveassumedthatacertain
levelofexpenseswillbeincurred,therearemanyfactorsbeyondourortheircontrolthatcouldaffectthetotalamountorthetimingof
theintegrationexpenses.Moreover,manyoftheexpensesthatwillbeincurredare,bytheirnature,difficulttoestimateaccurately.
Theseexpensescould,particularlyinthenearterm,exceedthesavingsthatthecombinedcompanyexpectstoachievefromthe
eliminationofduplicativeexpensesandtherealizationofeconomiesofscaleandcostsavings.Theseintegrationexpensescouldresult
inthecombinedcompanytakingsignificantchargesagainstearningsfollowingthecompletionofthemerger,andtheamountand
timingofsuchchargesareuncertainatpresent.
ChargestoearningsresultingfromtheapplicationofthepurchasemethodofaccountingtotheRofinacquisitionmayadversely
affectourresultsofoperations.
Inaccordancewithgenerallyacceptedaccountingprinciples,wewillaccountfortheRofinacquisitionusingthepurchasemethodof
accounting,whichwillresultinchargestoearningsthatcouldhaveamaterialadverseeffectonthemarketvalueofourcommonstock
followingcompletionoftheacquisition.Underthepurchasemethodofaccounting,wewillallocatethetotalpurchasepriceofRofins
nettangibleandidentifiableintangibleassetsbasedupontheirestimatedfairvaluesattheacquisitiondate.Theexcessofthepurchase
priceovernettangibleandidentifiableintangibleassetswillberecordedasgoodwill.Wewillincuradditionaldepreciationand
amortizationexpenseovertheusefullivesofcertainofthenettangibleandintangibleassetsacquiredinconnectionwiththe
acquisition.Inaddition,totheextentthevalueofgoodwillorintangibleassetswithindefinitelivesbecomesimpaired,wemaybe
requiredtoincurmaterialchargesrelatingtotheimpairmentofthoseassets.Thesedepreciation,amortizationandpotentialimpairment
chargescouldhaveamaterialimpactonourresultsofoperations.
Therecanbenoassurancethatwewillbeabletosecurethefinancingweintendtousetopaythecashportionoftheconsideration
fortheacquisitionofRofin.
WehaveenteredintoadebtcommitmentletterwithBarclaysandBAML,pursuanttowhich,amongotherthings,BarclaysandBAML
havecommittedtoprovideuswithdebtfinancingincludingatermloan(denominatedinEuros)inanamountoftheEuroequivalentof
$750.0millionand,alongwithMUFG,a$100.0millionrevolvingfacility(denominatedinU.S.dollars)tofinancetheacquisitionof
Rofin.Theobligationsofthelendersunderthecommitmentletteraresubjecttocertainconditions,includingtheconsummationofthe
acquisitioninaccordancewiththetermsandconditionsofthedefinitiveagreementandothercustomaryclosingobligations.
Weintendtofundtheacquisitionconsideration,therepaymentofcertainindebtednessofthecombinedcompaniesandrelatedfeesand
expenseswithacombinationofthecombinedcompaniesbalancesheetcashandproceedsofapproximately$850.0millionunderthe
termloanandtherevolvingcreditagreement.
Theavailabilityofthetermloanandrevolvingcreditagreementwillbesubjecttocertainconditions.Therefore,noassurancecanbe
giventhatthefinancingpursuanttothetermloanandrevolvingcreditagreementdescribedabovewillbeavailable.Ourobligationto
completethemergerissubjecttoafinancingcontingency.
66
TableofContents
Intheeventthatthetermloanandrevolvingcreditisnotavailable,otherfinancingmaynotbeavailableonacceptableterms,ina
timelymanner,oratall.Ifweareunabletosecurealternativefinancing,themergermaynotbecompleted.
Inaddition,inAugust2016,wepurchasedforwardcontractstotaling670.0millionEuro,withavaluedateofNovember30,2016,to
limitourforeignexchangeriskrelatedtoourtermloancommitmentlettertofinancetheacquisitionofRofin.Thederivativesusedto
hedgethiscurrencyexposuredonotqualifyforhedgeaccountingtreatment.Asaresult,thesederivativeswillbemarkedtomarketat
theendofeachreportingperiodwithgainsandlossesrecognizedinotherincome(expense).Anylossesassociatedwithmarkingthese
derivativestomarketcouldhaveamaterialadverseeffectonourresultsofoperations.
Ourindebtednessfollowingcompletionofthemergerwillbesubstantiallygreaterthanourindebtednessonastandalonebasisand
greaterthanourorRofin'scombinedindebtednessexistingpriortothemerger.Thisincreasedlevelofindebtednesscouldadversely
affectus,includingbydecreasingourbusinessflexibility,andwillincreaseourborrowingcosts.
Oursubstantiallyincreasedindebtednessandhigherdebttoequityratiofollowingcompletionofthemergerincomparisontothatprior
tothemergerwillhavetheeffect,amongotherthings,ofreducingourflexibilitytorespondtochangingbusinessandeconomic
conditionsandwillincreaseourborrowingcosts.Inaddition,theamountofcashrequiredtoserviceourincreasedindebtednesslevels
andthusthedemandsonourcashresourceswillbegreaterthantheamountofcashflowsrequiredtoserviceourindebtednessorthatof
Rofinindividuallypriortothemerger.Theincreasedlevelsofindebtednesscouldalsoreducefundsavailableforourinvestmentsin
productdevelopmentaswellascapitalexpenditures,dividends,sharerepurchasesandotheractivitiesandmaycreatecompetitive
disadvantagesforusrelativetoothercompanieswithlowerdebtlevels.
67
TableofContents
ITEM6.EXHIBITS
ExhibitNo.
Description
10.1+
AmendedandRestatedCommitmentLetterbyandamongtheCompany,BarclaysBankPLC,MerrillLynch,
Pierce,Fenner&SmithIncorporatedandBankofAmerica,N.A.,datedasofApril5,2016.(Previouslyfiledas
Exhibit10.2toForm10QfiledonMay11,2016)
JoinderAgreementtoAmendedandRestatedCommitmentLetterbyandamongtheCompany,BarclaysBankPLC,
MerrillLynch,Pierce,Fenner&SmithIncorporated,BankofAmerica,N.A.andTheBankofTokyoMitsubishi
UFJ,Ltd.,datedasofJune29,2016.
10.2
31.1
31.2
32.1
32.2
CertificationofChiefExecutiveOfficerpursuanttoExchangeActRule13a14(a)/15d14(a)asadoptedpursuantto
Section302oftheSarbanesOxleyActof2002.
CertificationofChiefFinancialOfficerpursuanttoExchangeActRule13a14(a)/15d14(a)asadoptedpursuantto
CertificationofChiefExecutiveOfficerpursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906of
theSarbanesOxleyActof2002.
CertificationofChiefFinancialOfficerpursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906of
101.INS*
XBRLInstanceDocument
101.SCH*
XBRLTaxonomyExtensionSchema
101.CAL*
XBRLTaxonomyExtensionCalculationLinkbase
101.DEF*
XBRLTaxonomyExtensionDefinitionLinkbase
101.LAB*
XBRLTaxonomyExtensionLabelLinkbase
101.PRE*
XBRLTaxonomyExtensionPresentationLinkbase
TheseexhibitswerepreviouslyfiledwiththeCommissionasindicatedandareincorporatedhereinbyreference.
InaccordancewithRule406TofRegulationST,theinformationintheseexhibitsisfurnishedanddeemednot
filedorpartofaregistrationstatementorprospectusforpurposesofsections11or12oftheSecuritiesActof1933,
isdeemednotfiledforpurposesofsection18oftheExchangeActof1934,andotherwiseisnotsubjecttoliability
underthesesections.
68
TableofContents
69
TableofContents
COHERENT,INC.
SIGNATURES
PursuanttotherequirementsoftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisReporttobesignedonits
behalfbytheundersigned,thereuntodulyauthorized.
Coherent,Inc.
(Registrant)
Date: August10,2016
/s/: JOHNR.AMBROSEO
PresidentandChiefExecutiveOfficer
(PrincipalExecutiveOfficer)
Date: August10,2016
/s/: KEVINPALATNIK
ExecutiveVicePresidentandChiefFinancial
Officer
(PrincipalFinancialandAccountingOfficer)
JohnR.Ambroseo
70
KevinPalatnik
TableofContents
EXHIBITINDEX
ExhibitNo.
Description
10.1+
AmendedandRestatedCommitmentLetterbyandamongtheCompany,BarclaysBankPLC,MerrillLynch,
Pierce,Fenner&SmithIncorporatedandBankofAmerica,N.A.,datedasofApril5,2016.(Previouslyfiledas
Exhibit10.2toForm10QfiledonMay11,2016)
JoinderAgreementtoAmendedandRestatedCommitmentLetterbyandamongtheCompany,BarclaysBankPLC,
MerrillLynch,Pierce,Fenner&SmithIncorporated,BankofAmerica,N.A.andTheBankofTokyoMitsubishi
UFJ,Ltd.,datedasofJune29,2016.
10.2
31.1
31.2
32.1
32.2
CertificationofChiefExecutiveOfficerpursuanttoExchangeActRule13a14(a)/15d14(a)asadoptedpursuantto
CertificationofChiefFinancialOfficerpursuanttoExchangeActRule13a14(a)/15d14(a)asadoptedpursuantto
CertificationofChiefExecutiveOfficerpursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906of
CertificationofChiefFinancialOfficerpursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906of
101.INS*
XBRLInstanceDocument
101.SCH*
XBRLTaxonomyExtensionSchema
101.CAL*
XBRLTaxonomyExtensionCalculationLinkbase
101.DEF*
XBRLTaxonomyExtensionDefinitionLinkbase
101.LAB*
XBRLTaxonomyExtensionLabelLinkbase
101.PRE*
XBRLTaxonomyExtensionPresentationLinkbase
TheseexhibitswerepreviouslyfiledwiththeCommissionasindicatedandareincorporatedhereinbyreference.
InaccordancewithRule406TofRegulationST,theinformationintheseexhibitsisfurnishedanddeemednot
filedorpartofaregistrationstatementorprospectusforpurposesofsections11or12oftheSecuritiesActof1933,
isdeemednotfiledforpurposesofsection18oftheExchangeActof1934,andotherwiseisnotsubjecttoliability
underthesesections.
71

Coherent, Inc 10-q q1 2016

Diunggah oleh

Informasi Dokumen

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Coherent, Inc 10-q q1 2016

Diunggah oleh

Hak Cipta:

Format Tersedia

10Q1a201672_10q.

63,305 $ 218,867 $ 217,354 $

63,305 $ 215,117 $ 217,115 $

Anda mungkin juga menyukai