14JAN201416185898
Notice of Annual Meeting
of Stockholders
February 26, 2014
8:30 a.m.
Silicon Valley Capital Club, 50 West San Fernando, San Jose, California 95113
MATTERS TO BE VOTED ON:
1.
2.
3.
4.
To elect the seven directors named in the proxy statement;
To ratify the appointment of Deloitte & Touche LLP as the Company’s independent registered public
accounting firm for the fiscal year ending September 27, 2014;
Advisory vote to approve executive officer compensation; and
To transact such other business as may properly be brought before the meeting and any adjournment(s)
thereof.
The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.
Stockholders of record at the close of business on January 9, 2013, are entitled to notice of and to vote at the meeting and at any adjournments
or postponements thereof.
All stockholders are cordially invited to attend the meeting. However, to assure your representation at the meeting, you are urged to mark, sign,
date and return the enclosed proxy card as promptly as possible in the postage-prepaid envelope enclosed for that purpose or follow the
instructions on the enclosed proxy card to vote by telephone or via the Internet. Any stockholder of record attending the meeting may vote in
person even if he or she has returned a proxy. Please note, however, that if your shares are held of record by a broker, bank or other nominee and
you wish to vote at the meeting, you must obtain a proxy issued in your name from that record holder.
Santa Clara, California
January 23, 2014
Sincerely,
13JAN201423125288
John R. Ambroseo
President and Chief Executive Officer
Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held
on February 26, 2014
The proxy statement and annual report to stockholders are available at www.proxyvote.com.
YOUR VOTE IS IMPORTANT
In order to assure your representation at the meeting, you are requested to complete, sign and date the enclosed proxy card as promptly as possible
and return it in the enclosed envelope or follow the instructions on the enclosed proxy card to vote by telephone or via the Internet. Any
stockholder attending the Annual Meeting may vote in person even if he or she returned a proxy card.
Table of Contents
GENERAL INFORMATION ABOUT THE MEETING
PROPOSAL ONE
Election of Directors
PROPOSAL TWO
Ratification of the Appointment of Deloitte & Touche LLP
as Independent Registered Public Accounting Firm
PROPOSAL THREE
Advisory Vote to Approve Executive Officer Compensation
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OUR EXECUTIVE OFFICERS
COMPENSATION DISCUSSION AND ANALYSIS
SUMMARY COMPENSATION AND EQUITY TABLES
EQUITY COMPENSATION PLAN INFORMATION
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
OTHER MATTERS
3
6
14
15
16
17
18
27
33
33
34
35
PROXY STATEMENT
General Information About the Meeting
General
The enclosed Proxy is solicited on behalf of the Board of Directors
(the ‘‘Board’’) of Coherent, Inc. for use at the Annual Meeting of
Stockholders (the ‘‘Annual Meeting’’ or ‘‘meeting’’) to be held at
8:30 a.m., local time, on February 26, 2014 at the Silicon Valley
Capital Club, 50 West San Fernando, San Jose, California 95113, and
at any adjournment(s) thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting of Stockholders. Our
telephone number is (408) 764-4000. These proxy solicitation
materials were first mailed on or about January 23, 2014 to all
stockholders entitled to vote at the Annual Meeting.
Who May Vote at the Meeting?
You are entitled to vote at the Annual Meeting if our records show that you held your shares as of the close of business of our record date, January 9,
2014 (the ‘‘Record Date’’). On the Record Date, 24,839,166 shares of our common stock, $0.01 par value, were issued and outstanding.
What Does Each Share of Common Stock I Own Represent?
On all matters, each share has one vote, unless, with respect to Proposal 1 regarding the election of directors, cumulative voting is in effect. See
‘‘Election of Directors-Vote Required’’ for a description of cumulative voting rights with respect to the election of directors.
How Does a Stockholder Vote?
Whether or not you plan to attend the Annual Meeting, we urge you
to vote by proxy to ensure your vote is counted. If you are entitled to
vote, you may do so as follows:
(cid:129) Through your broker: If your shares are held through a broker,
bank or other nominee (commonly referred to as held in ‘‘street
name’’), you will receive instructions from them that you must
follow to have your shares voted. If you want to vote in person, you
will need to obtain a legal proxy from your broker, bank or other
nominee and bring it to the meeting.
(cid:129) In person: Attend the Annual Meeting and, if you request, we will
give you a ballot at the time of voting. If you have previously
submitted a proxy card, you must notify us at the Annual Meeting
that you intend to cancel your prior proxy and vote by ballot at the
meeting.
Matters to be Presented at the Meeting
We are not aware of any matters to be presented at the meeting other
than those described in this proxy statement. If any other matter is
properly presented at the Annual Meeting, your proxy holders (one of
the individuals named on your proxy card) will vote your shares in
their discretion. The cost of this solicitation will be borne by us. We
may reimburse brokerage firms and other persons representing
(cid:129) Returning a Proxy Card: Simply complete, sign and date the
enclosed proxy card and return it promptly in the envelope
provided. If your signed proxy card is received before the Annual
Meeting, the designated proxies will vote your shares as you direct.
(cid:129) Using the Telephone: Dial toll-free 1-800-690-6903 using a
touch-tone phone and follow the recorded instructions. You will be
asked to provide the control number from the enclosed proxy card.
(cid:129) Through the Internet: go to www.proxyvote.com to complete an
electronic proxy card. You will be asked to provide the control
number from the enclosed proxy card.
For telephone or Internet use, your vote must be received by
11:59 P.M. Eastern Time on February 25, 2014 to be counted.
If you return a signed and dated proxy card without marking any
voting directions, your shares will be voted ‘‘for’’ the election of all
seven nominees for director and ‘‘for’’ all other proposals.
beneficial owners of shares for their expenses in forwarding
solicitation material to such beneficial owners. In addition, proxies
may be solicited by certain of our directors, officers and regular
employees, without additional compensation, personally or by
telephone or facsimile.
COHERENT, INC. - 2013 Proxy Statement 3
GENERAL INFORMATION
Revoking Your Proxy
If you hold your shares in street name, you must follow the
instructions of your broker, bank or other nominee to revoke your
voting instructions. If you are a holder of record and wish to revoke
your proxy instructions, you must (i) advise the Corporate Secretary
in writing at 5100 Patrick Henry Dr., Santa Clara, California 95054
before the proxies vote your shares at the meeting, (ii) timely deliver
later-dated proxy instructions or (iii) attend the meeting and vote your
shares in person.
Attendance at the Annual Meeting
All stockholders of record as of the Record Date may attend the
Annual Meeting. Please note that cameras, recording devices and
similar electronic devices will not be permitted at the Annual
Meeting. No items will be allowed into the Annual Meeting that
might pose a concern for the safety of those attending. Additionally, to
attend the meeting you will need to bring identification and proof
sufficient to us that you were a stockholder of record as of the Record
Date or that you are a duly authorized representative of a stockholder
of record as of the Record Date. For directions to attend the Annual
Meeting or other questions, please contact Investor Relations by
telephone at (408) 764-4110 no later than 5:00 p.m. (California time)
on February 25, 2014.
Quorum; Abstentions; Broker Non-Votes
Our bylaws provide that stockholders holding a majority of the shares
of common stock issued and outstanding and entitled to vote on the
Record Date constitute a quorum at meetings of stockholders. Votes
will be counted by the inspector of election appointed for the Annual
Meeting, who will separately count ‘‘For’’ and ‘‘Against’’ votes,
abstentions and broker non-votes.
A ‘‘broker non-vote’’ occurs when a nominee holding shares for a
beneficial owner does not vote because the nominee does not have
discretionary voting power with respect to the proposal and has not
received instructions with respect to the proposal from the beneficial
owner. Abstentions will not be taken into account in determining the
outcome of the election of directors and will have no effect on the
outcome of Proposals Two and Three. We intend to separately report
abstentions and our Compensation and H.R. Committee will
generally view abstentions as neutral when considering the results of
Proposal Three. Broker non-votes represented by submitted proxies
will not be taken into account in determining the outcome of any
proposal.
Deadline for Receipt of Stockholder Proposals
In order to submit stockholder proposals for the fiscal 2014 annual
meeting for inclusion in the Company’s proxy statement pursuant to
Rule 14a-8 of the Securities Exchange Act of 1934, as amended (‘‘SEC
Rule 14a-8’’), written materials must be received by the Corporate
Secretary at the Company’s principal office in Santa Clara, California
no later than September 25, 2014.
Stockholder proposals must otherwise comply with the requirements
of SEC Rule 14a-8.
Proposals must be addressed to: Bret DiMarco, Corporate Secretary,
Coherent, Inc., 5100 Patrick Henry Dr., Santa Clara, California
95054. Simply submitting a proposal does not guarantee its inclusion.
Section 2.15 of the Company’s bylaws also establishes an advance
notice procedure with regards to director nominations and
stockholder proposals that are not submitted for inclusion in the
proxy statement, but that a stockholder instead wishes to present
directly from the floor at any Annual Meeting. To be properly brought
before the fiscal 2014 Annual Meeting, a notice of the nomination or
the matter the stockholder wishes to present at the meeting must be
delivered to the Corporate Secretary (see above), no later than the
close of business on the 45th day (December 9, 2014), nor earlier than
the close of business on the 75th day (November 9, 2014), prior to the
one year anniversary of the date these proxy materials were first mailed
by us unless the annual meeting of stockholders is held prior to
January 27, 2015 or after April 27, 2015, in which case, the proposal
must be received by us not earlier than the 120th day prior to the
4 COHERENT, INC. - 2013 Proxy Statement
annual meeting and not later than the later of the 90th day prior to the
annual meeting and the tenth day following public announcement of
the date the annual meeting will be held and must otherwise be in
compliance with applicable laws and regulations in order to be
considered for inclusion in the proxy statement and form of proxy
relating to that meeting. We have not received any notice regarding
any such matters to be brought at our fiscal 2013 meeting.
If a stockholder who has notified us of his or her intention to present a
proposal at an Annual Meeting does not appear to present his or her
proposal at such meeting, we need not present the proposal for vote at
such meeting. The Chair of the Annual Meeting has the final
discretion whether or not to allow any matter to be considered at the
meeting which did not timely comply with all applicable notice
requirements.
If a stockholder wishes only to recommend a candidate for
consideration by the Governance and Nominating Committee as a
potential nominee for the Company’s Board, see the procedures
discussed in ‘‘Proposal One—Election of Directors—Board Meetings
and Committees—Process
to Recommend
Candidates for Election to the Board of Directors.’’
for Stockholders
The attached proxy card grants to the proxyholders discretionary
authority to vote on any matter raised at the Annual Meeting,
including proposals which are timely raised at the meeting, but did
not meet the deadline for inclusion in this proxy statement.
Eliminating Duplicative Proxy Materials
To reduce the expense of delivering duplicate voting materials to our
stockholders who may hold shares of Coherent common stock in
more than one stock account, we are delivering only one set of the
proxy solicitation materials to certain stockholders who share an
address, unless otherwise requested. A separate proxy card is included
in the voting materials for each of these stockholders.
We will promptly deliver, upon written or oral request, a separate copy
of the annual report or this proxy statement to a stockholder at a
shared address to which a single copy of the documents was delivered.
To obtain an additional copy, you may write us at 5100 Patrick Henry
Drive, Santa Clara, California 95054, Attn: Investor Relations, or
contact our Investor Relations department by telephone at
(408) 764-4110.
Electronic Delivery of Proxy Materials
GENERAL INFORMATION
Similarly, if you share an address with another stockholder and have
received multiple copies of our proxy materials, you may contact us at
the address or telephone number specified above to request that only a
single copy of these materials be delivered to your address in the
future. Stockholders sharing a single address may revoke their consent
to receive a single copy of our proxy materials in the future at any time
by contacting our distribution agent, Broadridge, either by calling
toll-free at 1-800-542-1061, or by writing
to Broadridge,
Householding Department, 51 Mercedes Way, Edgewood,
NY 11717. Broadridge will remove such stockholder from the
Householding program within 30 days of receipt of such written
notice, after which each such stockholder will receive an individual
copy of our proxy materials.
In an effort to reduce paper mailed to your home and help lower printing and postage costs, we are offering stockholders the convenience of
viewing online proxy statements, annual reports and related materials. With your consent, we can stop sending future paper copies of these
documents. To participate during the voting season, registered stockholders may follow the instructions when voting online.
Incorporation by Reference
To the extent that this proxy statement has been or will be specifically
incorporated by reference into any other filing of Coherent with the
Securities and Exchange Commission (‘‘SEC’’), the sections of this
proxy statement entitled ‘‘Report of the Audit Committee of the
Board of Directors’’ (to the extent permitted by the rules of the SEC)
and ‘‘Compensation Discussion and Analysis’’ shall not be deemed to
be so incorporated (other than in our annual report on Form 10-K),
unless specifically provided otherwise in such filing.
FURTHER INFORMATION
We will provide without charge to each stockholder solicited by these proxy solicitation materials a copy of our annual report on Form 10-K for
the fiscal year ended September 28, 2013 without exhibits and any amendments thereto on Form 10-K/A upon request of such stockholder made
in writing to Coherent, Inc., 5100 Patrick Henry Drive, Santa Clara, California 95054, Attn: Investor Relations. We will also furnish any exhibit
to the annual report on Form 10-K if specifically requested in writing. You can also access our SEC filings, including our annual reports on
Form 10-K, and all amendments thereto filed on Form 10 K/A, on the SEC website at www.sec.gov.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER
MEETING TO BE HELD ON FEBRUARY 26 2014:
The proxy statement and annual report to stockholders are available at www.proxyvote.com.
Stockholder List
A list of stockholders entitled to vote at the Annual Meeting will be available for examination by stockholders of record at the Annual Meeting.
COHERENT, INC. - 2013 Proxy Statement 5
PROPOSAL ONE
ELECTION OF DIRECTORS
Nominees
Seven (7) members of our Board of Directors are to be elected at the
Annual Meeting. Unless otherwise instructed, the proxy holders will
vote the proxies received by them for the nominees named below.
Each nominee has consented to be named a nominee in the proxy
statement and to continue to serve as a director if elected. If any
nominee becomes unable or declines to serve as a director, if
additional persons are nominated at the meeting or if stockholders are
entitled to cumulate votes, the proxy holders intend to vote all proxies
received by them in such a manner (in accordance with cumulative
voting) as will ensure the election of as many of the nominees listed
below as possible, and the specific nominees to be voted for will be
determined by the proxy holders.
We are not aware of any reason that any nominee will be unable or will
decline to serve as a director. The term of office of each person elected
as a director will continue until the next Annual Meeting of
Stockholders or until a successor has been elected and qualified or
until his or her earlier resignation or removal. There are no
arrangements or understandings between any director or executive
officer and any other person pursuant to which he or she is or was to
be selected as a director or officer.
The names of the nominees, all of whom are currently directors
standing for re-election, and certain information about them as of
December 31, 2013 are set forth below. All of the nominees have been
unanimously recommended for nomination by the Board acting on
the unanimous recommendation of the Governance and Nominating
Committee of the Board. The committee consists solely of
independent members of the Board. There are no family relationships
among directors or executive officers of Coherent.
Name
John R. Ambroseo
Jay T. Flatley(3)
Susan M. James(1)(2)
L. William Krause(2)(3)
Garry W. Rogerson(1)(2)
Steve Skaggs(1)
Sandeep Vij(3)
Age Director Since
2002
2011
2008
2009
2004
2013
2004
52
61
67
71
61
51
48
Principal Occupation
President and Chief Executive Officer
President and Chief Executive Officer of Illumina, Inc.
Retired Audit Partner, Ernst & Young
President of LWK Ventures
Chief Executive Officer of Advanced Energy Industries, Inc.
Senior Vice President and Chief Financial Officer of Atmel Corporation
Former President and Chief Executive Officer of MIPS Technologies, Inc.
(1) Member of the Audit Committee.
(2) Member of the Governance and Nominating Committee.
(3) Member of the Compensation and H.R. Committee.
Except as set forth below, each of our directors has been engaged in his
or her principal occupation set forth above during the past five years.
John R. Ambroseo. Mr. Ambroseo has served as our President and Chief
Executive Officer as well as a member of the Board of Directors since
October 2002. Mr. Ambroseo served as our Chief Operating Officer
from June 2001 through September 2002. Mr. Ambroseo served as
our Executive Vice President and as President and General Manager of
the Coherent Photonics Group from September 2000 to June 2001.
From September 1997 to September 2000, Mr. Ambroseo served as
our Executive Vice President and as President and General Manager of
the Coherent Laser Group. From March 1997 to September 1997,
Mr. Ambroseo served as our Scientific Business Unit Manager. From
August 1988, when Mr. Ambroseo joined us, until March 1997, he
served as a Sales Engineer, Product Marketing Manager, National
Sales Manager and Director of European Operations. Mr. Ambroseo
received a Bachelor degree from SUNY-College at Purchase and a
PhD in Chemistry from the University of Pennsylvania.
Mr. Ambroseo’s status as our Chief Executive Officer, his over 25 year
tenure with Coherent, his extensive knowledge of our products,
technologies and end markets and his over a decade of service as a director
of Coherent make him an invaluable member of our Board of Directors.
Jay T. Flatley. Since 1999 Mr. Flatley has served as President, Chief
Executive Officer and a member of the Board of Directors of
Illumina, Inc., a leading developer, manufacturer and marketer of life
science tools and integrated systems for the analysis of genetic
variation and function. Prior to joining Illumina, Mr. Flatley was
6 COHERENT, INC. - 2013 Proxy Statement
co-founder, President, Chief Executive Officer, and a member of the
Board of Directors of Molecular Dynamics, Inc., a NASDAQ-listed
life sciences company focused on genetic discovery and analysis, from
1994 until its sale to Amersham Pharmacia Biotech Inc. in 1998. He
served in various other positions with that company from 1987 to
1994. From 1985 to 1987, he was Vice President of Engineering and
Vice President of Strategic Planning at Plexus Computers, a UNIX
computer company. Mr. Flatley holds a B.A. in Economics from
Claremont McKenna College and a B.S. and M.S. in Industrial
Engineering from Stanford University.
Mr. Flatley’s years of executive and management experience in the high
technology industry, including serving as the chief executive officer of
several public companies, his service on the board of another publicly held
company, and his service as a director of Coherent make him an
invaluable member of our Board of Directors.
Susan M. James. Ms. James originally joined Ernst & Young, a global
leader in professional services, in 1975, serving as a partner from 1987
until her retirement in June 2006, and as a consultant from June 2006
to December 2009. During her tenure with Ernst & Young, she was
the lead partner or partner-in-charge for the audit work for a
significant number of technology companies,
including Intel
Corporation, Sun Microsystems, Amazon.com, Autodesk, Inc. and
the Hewlett-Packard Company, as well as for the Ernst & Young
North America Global Account Network. She also served on the
Ernst & Young Americas Executive Board of Directors from
January 2002 through June 2006. She is a certified public accountant
(inactive) and a member of the American Institute of Certified Public
Accountants. Ms. James also serves on the boards of directors of
Applied Materials, Inc., a manufacturing equipment, services and
software company, Yahoo! Inc., an Internet technology company, and
Tri-Valley Animal Rescue, a non-profit corporation dedicated to
providing homes for homeless pets. Ms. James holds Bachelor’s
degrees in Mathematics from Hunter College and Accounting from
San Jose State University.
Ms. James’ years in the public accounting industry, her service on the
boards and committees of a number of other publicly held companies and
her five years of service as a director of Coherent make her an invaluable
member of our Board of Directors.
L. William Krause. Mr. Krause has been President of LWK Ventures, a
private investment firm, since 1991. In addition, Mr. Krause served as
Chairman of the Board of Caspian Networks, Inc., an IP networking
systems provider, from April 2002 to September 2006 and as Chief
Executive Officer from April 2002 until June 2004. He also served as
President and Chief Executive Officer of 3Com Corporation, a global
data networking company, from 1981 to 1990 and as its Chairman
from 1987 to 1993 when he retired. Mr. Krause currently serves as a
director of Brocade Communications Systems, Inc., a networking
solutions and services company, CommScope Inc., a networking
infrastructure company and Core-Mark Holdings, Inc., a distributor
of packaged consumer goods. Mr. Krause previously served as a
director for the following public companies: Packeteer, Inc.,
Sybase, Inc. and TriZetto Group, Inc. Mr. Krause holds a B.S. degree
in electrical engineering and received an honorary Doctorate of
Science from The Citadel.
Mr. Krause’s years of executive and management experience in the high
technology industry, including serving as the chief executive officer of
several companies, his service on the boards and committees of a number of
other publicly held companies, and his four years of service as a director of
Coherent make him an invaluable member of our Board of Directors.
Garry W. Rogerson. Mr. Rogerson has served as Coherent’s Chairman
of the Board since June 2007. Since August 2011, Mr. Rogerson has
been Chief Executive Officer and a member of the Board of Directors
of Advanced Energy Industries, Inc., a provider of power and control
technologies for thinfilm manufacturing and solar-power generation.
He was Chairman and Chief Executive Officer of Varian, Inc., a major
supplier of scientific instruments and consumable laboratory supplies,
vacuum products and services, from February 2009 and 2004,
respectively until the purchase of Varian by Agilent Technologies, Inc.
in May 2010. Mr. Rogerson served as Varian’s Chief Operating
Officer from 2002 to 2004, as Senior Vice President, Scientific
Instruments from 2001 to 2002, and as Vice President, Analytical
Instruments from 1999 to 2001. Mr. Rogerson received an honours
degree and Ph.D. in biochemistry as well as an honorary doctoral
science degree from the University of Kent at Canterbury.
Mr. Rogerson’s years of executive and management experience in the high
technology industry, including serving as the chief executive officer of
several public companies, his service on the board of another publicly held
Director Independence
PROPOSAL ONE ELECTION OF DIRECTORS
company, and his nine years of service as a director of Coherent make him
an invaluable member of our Board of Directors.
Steve Skaggs. Mr. Skaggs currently serves as Senior Vice President and
Chief Financial Officer of Atmel Corporation, a leading designer,
developer and supplier of microcontrollers. Mr. Skaggs joined Atmel
in September 2010 and has more than 20 years of experience in the
semiconductor industry. From 2008 to September 2010, Mr. Skaggs
was employed as an independent management consultant, providing
strategic advisory and consulting services to clients. From 2005 to
2008, Mr. Skaggs served as Chief Executive Officer of Lattice
Semiconductor, a supplier of programmable logic devices and related
software, and also served as President of Lattice from 2003 to 2005
and as Chief Financial Officer of Lattice from 1996 to 2003. He was
also previously a member of the Board of Directors of Lattice. Prior to
Lattice, Mr. Skaggs was employed by Bain & Company, a global
management consulting firm, where he specialized in high technology
product
corporate
and
restructurings. Mr. Skaggs holds an MBA degree from the Harvard
Business School and a BS degree in Chemical Engineering from the
University of California, Berkeley.
strategy, mergers
acquisitions
and
Mr. Skaggs’ years of executive and management experience in the high
technology industry, including serving as the chief executive officer and
chief financial officer of other public companies, his prior service on the
board of another publicly held company and his service as a director of
Coherent make him an invaluable member of our Board of Directors.
Mr. Skaggs was identified as a potential director by the Governance and
Nominating Committee’s independent search firm.
Sandeep Vij. Mr. Vij is a private investor. Previously, he held the
position of President and Chief Executive Officer of MIPS
Technologies, Inc., a leading provider of processor architectures and
cores, from January 2010 until its sale in February 2013. In addition,
Mr. Vij had been the Vice President and General Manager of the
Broadband and Consumer Division of Cavium Networks, Inc., a
leading provider of highly integrated semiconductor products from
May 2008 to January 2010. Prior to that, he held the position of Vice
President of Worldwide Marketing, Services and Support for
Xilinx Inc., a digital programmable logic device provider, from 2007
to April 2008. From 2001 to 2006, he held the position of Vice
President of Worldwide Marketing at Xilinx. From 1997 to 2001, he
served as Vice President and General Manager of the General Products
Division at Xilinx. Mr. Vij joined Xilinx in 1996 as Director of FPGA
Marketing. He is a graduate of General Electric’s Edison Engineering
Program and Advanced Courses in Engineering. He holds an MSEE
from Stanford University and a BSEE from San Jose State University.
Mr. Vij’s years of executive and management experience in the high
technology industry, including serving as the chief executive officer of
another public company, his service on the board of another publicly held
company, and his nine years of service as a director of Coherent make him
an invaluable member of our Board of Directors.
The Board has determined that, with the exception of Mr. Ambroseo, all of its current members and all of the nominees for director are
‘‘independent directors’’ as that term is defined in the marketplace rules of the Nasdaq Stock Market.
COHERENT, INC. - 2013 Proxy Statement 7
PROPOSAL ONE ELECTION OF DIRECTORS
Board Meetings and Committees
The Board held a total of five (5) meetings during fiscal 2013. During
fiscal 2013, the Board had three standing committees: the Audit
Committee; the Compensation and H.R. Committee; and the
Governance and Nominating Committee. From time to time, the
Board may create limited ad hoc committees, service on which does
not provide additional compensation. In the past, the Board has also
established special committees, which did provide compensation for
services. No director serving during fiscal 2013 attended fewer than
75% of the aggregate of all meetings of the Board and the committees
of the Board upon which such director served. All of the members of
each standing committee are ‘‘independent’’ as defined under the
applicable rules established by the Nasdaq Stock Market.
Audit Committee
The Audit Committee, which has been established in accordance with
Section 3(a)(58)(A) of the Exchange Act, consists of directors James,
Rogerson, Skaggs and Tomlinson. The Audit Committee held
thirteen (13) meetings during fiscal 2013. The Board has determined
that directors James, Rogerson, Skaggs and Tomlinson are ‘‘audit
committee financial experts’’ as that term is defined in the rules of the
SEC. Among other things, the Audit Committee has the sole
authority for appointing and supervising our independent registered
public accounting firm and is primarily responsible for approving the
services performed by our independent registered public accounting
firm and for reviewing and evaluating our accounting principles and
our system of internal accounting controls.
Compensation and H.R. Committee
During fiscal 2013, the Compensation and H.R. Committee of the
Board consists of directors Krause, Flatley and Vij. Mr. Tomlinson
served on the committee until January 1, 2013. All of the members of
the Compensation and H.R. Committee are ‘‘independent’’ as
defined under the marketplace rules of the Nasdaq Stock Market. The
Compensation and H.R. Committee held eight (8) meetings during
fiscal 2013. The Compensation and H.R. Committee, among other
things, reviews and approves our executive compensation policies and
programs, and makes equity grants to our employees, including
officers, pursuant to our equity plans. This committee has the sole
authority delegated to it by the Board to make employee equity grants,
which must be done at a meeting rather than by written consent. For
additional
the committee’s processes and
procedures for the consideration and determination of executive
compensation, see ‘‘Compensation Discussion and Analysis’’.
information about
Governance and Nominating Committee
The Governance and Nominating Committee consists of directors
James, Krause and Rogerson. The Governance and Nominating
Committee held five (5) meetings during fiscal 2013. The
Governance and Nominating Committee, among other things, assists
the Board by making recommendations to the Board on matters
concerning director nominations and elections, board committees
and corporate governance and compensation for directors. For fiscal
2013, the committee retained an
independent compensation
consultant to advise it on Board compensation.
Copies of the charters for each of our committees may be found on
our website at www.coherent.com under ‘‘Investor Relations.’’
Attendance at Annual Meeting of Stockholders by the members of the Board of Directors
All directors are encouraged, but not required, to attend our annual meeting of stockholders. At our annual meeting held on February 27, 2013,
all members of the Board attended in person.
Process for Stockholders to Recommend Candidates for Election to the Board of Directors
The Governance and Nominating Committee will consider nominees
properly recommended by stockholders. A stockholder that desires to
recommend a candidate for election to the Board must direct the
recommendation in writing to us at our principal offices (Attention:
Bret DiMarco, Corporate Secretary) and must include the candidate’s
name, age, home and business contact information, principal
occupation or employment, the number of shares beneficially owned
by the nominee, whether any hedging transactions have been entered
into by the nominee or on his or her behalf, information regarding
any arrangements or understandings between the nominee and the
stockholder nominating the nominee or any other persons relating to
the nomination, a written statement by the nominee acknowledging
that the nominee will owe a fiduciary duty to Coherent if elected, a
written statement of the nominee that such nominee, if elected,
intends to tender, promptly following such nominee’s election or
re-election, an irrevocable resignation effective upon such nominee’s
failure to receive the required vote for re-election at the next meeting
at which such nominee would face re-election and upon acceptance of
such resignation by the board of directors, in accordance with the
corporation’s guidelines or policies, and any other information
required to be disclosed about the nominee if proxies were to be
solicited to elect the nominee as a director.
For a stockholder recommendation to be considered by the
Governance and Nominating Committee as a potential candidate at
an annual meeting, nominations must be received on or before the
deadline for receipt of stockholder proposals for such meeting. In the
event a stockholder decides to nominate a candidate for director and
solicits proxies for such candidate, the stockholder will need to follow
the rules set forth by the SEC and in our bylaws. See ‘‘General
Information About The Meeting-Deadline for Receipt of Stockholder
Proposals.’’
8 COHERENT, INC. - 2013 Proxy Statement
The Governance and Nominating Committee’s criteria and process
for evaluating and identifying the candidates that it approves as
director nominees are as follows:
(cid:129) the Governance and Nominating Committee regularly reviews the
current composition and size of the Board;
(cid:129) the Governance and Nominating Committee reviews
the
qualifications of any candidates who have been properly
recommended by a stockholder, as well as those candidates who
have been identified by management, individual members of the
Board or,
if the Governance and Nominating Committee
determines, a search firm. Such review may, in the Governance and
Nominating Committee’s discretion, include a review solely of
information provided to the Governance and Nominating
Committee or may also include discussions with persons familiar
with the candidate, an interview with the candidate or other actions
that the committee deems proper;
(cid:129) the Governance and Nominating Committee evaluates the
performance of the Board as a whole and evaluates the
qualifications of individual members of the Board eligible for
re-election at the annual meeting of stockholders;
(cid:129) the Governance and Nominating Committee considers the
suitability of each candidate, including the current members of the
Board, in light of the current size and composition of the Board.
Except as may be required by rules promulgated by the Nasdaq
Stock Market or the SEC, it is the current belief of the Governance
and Nominating Committee that there are no specific, minimum
qualifications that must be met by any candidate for the Board, nor
are there specific qualities or skills that are necessary for one or more
of the members of the Board to possess. In evaluating the
qualifications of the candidates, the Governance and Nominating
Committee considers many factors, including, issues of character,
judgment, independence, age, expertise, diversity of experience,
length of service, other commitments and the like. While Coherent
does not have a formal policy with regard to the consideration of
diversity in identifying director nominees, as noted above, diversity
of experience is one of many factors that the committee considers;
PROPOSAL ONE ELECTION OF DIRECTORS
(cid:129) the Governance and Nominating Committee evaluates such factors,
among others, and does not assign any particular weighting or
priority to any of these factors. The Governance and Nominating
Committee considers each individual candidate in the context of
the current perceived needs of the Board as a whole. While the
Governance and Nominating Committee has not established
specific minimum qualifications for director candidates, the
committee believes that candidates and nominees must reflect a
Board that is comprised of directors who (i) are predominantly
independent, (ii) are of high integrity, (iii) have qualifications that
will increase the overall effectiveness of the Board, and (iv) meet
other requirements as may be required by applicable rules, such as
financial literacy or financial expertise with respect to audit
committee members;
(cid:129) in evaluating and identifying candidates, the Governance and
Nominating Committee has the authority to retain and terminate
any third party search firm that is used to identify director
candidates and has the authority to approve the fees and retention
terms of any search firm; and
(cid:129) after such review and consideration, the Governance and
Nominating Committee recommends the slate of director
nominees to the full Board for its approval.
The Governance and Nominating Committee will endeavor to notify,
or cause to be notified, all director candidates, including those
recommended by a stockholder, of its decision as to whether to
nominate such individual for election to the Board.
Our corporate governance guidelines require that upon a member of
the Board turning 72 years old, he or she shall submit a conditional
resignation to the Governance and Nominating Committee effective
upon the next annual meeting of stockholders. The committee then
determines whether to recommend to the Board acceptance of such
resignation. Mr. Tomlinson is retiring from the Board at the
upcoming annual meeting after serving on the Board since 2003
pursuant to the Board’s retirement age policy.
Majority Voting and Conditional Resignations from the Board of Directors
Upon the recommendation of the Governance and Nominating
Committee the Board of Directors amended our bylaws, effective
December 1, 2013, to change the voting standard for the election of
directors that are not Contested Elections (as defined below) from a
plurality to a majority of the votes cast. A majority of the votes cast
means the number of votes cast ‘‘for’’ a director’s election exceeds the
number of votes cast against that director’s election (with
‘‘abstentions’’ and ‘‘broker non-votes’’ not counted as a vote cast either
‘‘for’’ or ‘‘against’’ that director’s election). However, if the number of
nominees exceeds the number of directors to be elected (a ‘‘Contested
Election’’), the directors shall be elected by a plurality of the votes cast.
In connection with the amendment to the Bylaws establishing a
majority vote standard for the election of directors in elections that are
not Contested Elections, the Board also adopted a director election
policy to (i) establish procedures under which any incumbent director
who fails to receive a majority of the votes cast in an election that is
not a Contested Election shall tender his or her resignation to the
Governance and Nominating Committee for consideration; and
(ii) provide that the Governance and Nominating Committee will
make recommendations to the Board regarding the actions to be taken
with respect to all such offers to resign. The Board shall act on the
resignation within 90 days following certification of the election
results. In the event that the Board does not accept such resignation,
then such director shall continue to serve until such time as his or her
successor is elected.
COHERENT, INC. - 2013 Proxy Statement 9
PROPOSAL ONE ELECTION OF DIRECTORS
Stockholder Communication with the Board of Directors
While the Board believes that management speaks for Coherent, any
stockholder may contact any of our directors by writing to them by
mail at our principal executive offices (c/o Corporate Secretary), the
address of which appears on the inside back cover of this proxy
statement.
Any stockholder may report to us any complaints regarding
accounting, internal accounting controls, or auditing matters. Any
stockholder who wishes to so contact us should send such complaints
to the Audit Committee c/o Corporate Secretary, at our principal
executive offices, the address of which appears on the inside back cover
of this proxy statement.
Any stockholder communications that the Board is to receive will first
go to our Corporate Secretary, who will log the date of receipt of the
Independent Chair and Board Leadership
communication as well as the identity and contact information of the
correspondent in our stockholder communications log.
Our Corporate Secretary will review, summarize and, if appropriate,
investigate the complaint under the direction of the appropriate
committee of the Board in a timely manner. In the case of accounting
or auditing related matters, a member of the Audit Committee, or the
Audit Committee as a whole, will then review the summary of the
communication, the results of the investigation, if any, and, if
appropriate, the draft response. The summary and response will be in
the form of a memo, which will become part of the stockholder
communications log that the Corporate Secretary maintains with
respect to all stockholder communications.
Our Board leadership structure consists of an independent Chairman,
who is elected by the independent directors, and independent
committee chairs. We separate the positions of Chief Executive
Officer and Chairman in recognition of the differences between the
two roles. The Board believes this structure provides independent
Board leadership and engagement.
Given that our Chairman is an independent director, the Board does
not feel the need for a separate ‘‘lead independent director,’’ as our
independent Chairman performs that function. The Board takes its
independence seriously and reinforces this standard with seven of its
eight members (with six of seven following the Annual Meeting) being
independent.
The Role of the Board and its Committees in Risk Oversight
The Board oversees Coherent’s risk profile and management’s
processes for assessing and managing risk, both as a whole Board and
through its committees, with our Governance and Nominating
Committee delegated the responsibility for assigning oversight
responsibilities to each committee and the Board as a whole. Our
senior executive team provides regular updates to the Board and each
committee regarding our strategies and objectives and the risks
inherent with them.
Each regular meeting of the Board includes a discussion of risks
related to the Company’s financial results and operations and each
committee schedules risk-related presentations regularly throughout
the year. In addition our directors have access to our management to
discuss any matters of interest, including those related to risk. Those
members of management most knowledgeable of the issues attend
Board and committee meetings to provide additional insight on the
matters being discussed, including risk exposures. Our Chief
Financial Officer and General Counsel both report directly to our
Chief Executive Officer, providing him with further visibility to our
risk profile. A Vice President, Finance is the designated officer
overseeing our enterprise risk management program and works closely
with both our Chief Financial Officer and General Counsel on these
matters.
These regular meetings also provide our Board members the
opportunity to discuss issues of concern directly with management. In
general the Board and its committees oversee the following risk
categories:
(cid:129) The Board oversees generally the Company’s overall enterprise risk
management process and specifically with regards to the areas of
strategy, mergers and acquisitions, communications and operations;
(cid:129) The Audit Committee generally oversees risks primarily related to
financial controls, IT, accounting, tax, treasury, capital, legal,
regulatory and compliance;
(cid:129) The Compensation and H.R. Committee generally oversees our
compensation programs so that they do not incentivize excessive
risk taking as well as overseeing human resources related risks; and
(cid:129) The Governance and Nominating Committee oversees the
assignment of risk oversight categories by each particular committee
and/or the Board as a whole as well as those risks related to
compensation of members of the Board, succession planning for the
Board and Chief Executive Officer.
the Company’s
In the fall of 2013, management presented an assessment of the risks
associated with
compensation plans. The
Compensation and H.R. Committee agreed with the conclusion that
the risks were within our ability to effectively monitor and manage
and that these risks are not reasonably likely to have a material adverse
effect on the Company.
10 COHERENT, INC. - 2013 Proxy Statement
Additional Governance Matters
On December 12, 2013, the Board of Directors (acting on the
recommendation of the Governance and Nominating Committee)
approved the updated Corporate Governance Guidelines, which
include, among other items (in addition to those items described
elsewhere in this proxy):
(cid:129) At each meeting of the Board of Directors the independent
directors will also meet in executive session without the presence of
management;
(cid:129) To avoid ‘‘over-boarding’’ the Company maintains the following
limits on service on other boards:
(cid:129) CEO-No more than one (1) other public company board of
directors in addition to the Company;
Fiscal 2013 Director Compensation
PROPOSAL ONE ELECTION OF DIRECTORS
(cid:129) Independent Directors-No more than four (4) other public
company board of directors in addition to the Company;
(cid:129) Audit Committee members-No more than three (3) other public
company audit committees in addition to the Company;
(cid:129) Each independent member of the Board of Directors must within
five years acquire and thereafter maintain a minimum value of
Company stock equal to three times such director’s annual Board
cash retainer (exclusive of any cash retainer for service as Chair or
committee service);
(cid:129) The Board is responsible for reviewing the Company’s succession
planning and senior management development on an annual basis.
During fiscal 2013, we paid our non-employee directors an annual retainer (depending upon position) and for service on the Board as follows:
Position
Board Member
Board Chair
Audit Committee Chair
Compensation and H.R. Comm. Chair
Governance & Nominating Comm. Chair
Audit Committee member (non-Chair)
Compensation and H.R. Committee member (non-Chair)
Governance and Nominating Committee member (non-Chair)
Annual Retainer
40,000
40,000
34,000
16,000
10,750
12,500
8,500
6,500
$
$
$
$
$
$
$
$
Beginning in the second quarter of fiscal year 2013, the annual
retainer for the Board Chair was increased to $40,000. The increase
was approved by the Governance and Nominating Committee after a
review of the compensation of the Board of Directors by the
committee’s independent compensation consultant, Compensia. In
particular, Compensia noted that the Chair annual retainer was
significantly below the median compensation measured against the
Company’s peer group (which was the same group used for comparing
compensation for the named executive officers).
The chart below summarizes the gross cash amounts earned by non-employee directors for service during fiscal 2013 on the Board and its
committees (all amounts in dollars):
Name
Jay T. Flatley
Susan M. James
L. William Krause
Garry W. Rogerson
Lawrence Tomlinson
Sandeep Vij
Annual Board
Service
40,000
40,000
40,000
74,000(1) $
40,000
$
40,000
$
$
$
$
$
$
$
Audit
Committee
— $
34,000
— $
12,500
12,500
$
— $
Compensation
and H.R.
Committee
8,500
Nominating
and Governance
Committee
8,500
— $
$
— $
2,125(2)
16,000
6,500
6,500
10,750
— $
$
$
$
— $
— $
Total
48,500
80,500
55,000
97,250
54,625
56,000
(1)
Includes Mr. Rogerson’s service as Chairman of the Board. Effective January 1, 2013, Mr. Rogerson’s service fee as Chairman of the Board was increased to $40,000.
(2) Effective January 1, 2013, Mr. Tomlinson was no longer a member of the Compensation Committee.
*
Note that Mr. Skaggs was appointed to the Board at the end of the first quarter of fiscal 2014 and, accordingly, is not reflected in any of the fiscal 2013-related Board
tables.
COHERENT, INC. - 2013 Proxy Statement 11
PROPOSAL ONE ELECTION OF DIRECTORS
The chart below presents information concerning the total compensation of our directors for services (including both Board and, where
applicable, committee service) provided during the fiscal year ended September 28, 2013:
Name
Jay T. Flatley
Susan M. James
L. William Krause
Garry W. Rogerson
Lawrence Tomlinson
Sandeep Vij
Fees Paid in
Cash ($)(1)
48,500
80,500
55,000
97,250
54,625
56,000
($)(2)(3)
201,460
201,460
201,460
201,460
201,460
201,460
Stock Awards Option Awards
($)(4)
Total ($)
— 249,960
— 281,960
— 256,460
— 298,710
— 256,085
— 257,460
(1) These amounts are the amounts earned by non-employee directors for service (including both Board and, where applicable, committee service) during fiscal 2013
(2) These amounts do not reflect compensation actually received. Rather, these amounts represent the aggregate grant date fair value computed in accordance with ASC 718,
for restricted stock units (‘‘RSUs’’) and stock options which were granted in fiscal 2013. The assumptions used to calculate the value of these stock units and stock options
are set forth in Note 12. ‘‘Employee Stock Option and Benefit Plans’’ of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the
year ended September 28, 2013.
(3) The directors’ aggregate RSU grants as of September 28, 2013 were as follows:
Name
Jay T. Flatley
Susan M. James
L. William Krause
Garry W. Rogerson
Lawrence Tomlinson
Sandeep Vij
Shares(a)
5,500(b)
3,500(c)
3,500(c)
3,500(c)
3,500(c)
3,500(c)
(a) The shares underlying the RSUs will vest to the extent an individual is a member of the Board of Directors on the applicable vesting date.
(b) 3,500 shares vest on February 15, 2014 and 2,000 shares vest on September 20, 2014.
(c) 3,500 shares vest on February 15, 2014.
(4) No stock option awards were granted to members of the Board during fiscal 2013. The directors’ aggregate holdings of stock option awards (both vested and unvested) as
of September 28, 2013 were as follows:
Name
Jay T. Flatley
Susan M. James
L. William Krause
Garry W. Rogerson
Lawrence Tomlinson
Sandeep Vij
The following table shows equity grants received by non-employee directors in fiscal 2013:
Name
Jay T. Flatley
Susan M. James
L. William Krause
Garry W. Rogerson
Lawrence Tomlinson
Sandeep Vij
Shares
24,000
—
30,000
—
—
—
Restricted Stock Units
Granted in Fiscal 2013
(# shares)
3,500
3,500
3,500
3,500
3,500
3,500
Our stockholders approved the adoption of our 2011 Equity
Incentive Plan at our annual meeting held in March 2011 (the ‘‘2011
Plan’’).
The Board has adopted resolutions automatically granting under the
2011 Plan each non-employee member of the Board of Directors
3,500 RSUs upon such member’s reelection to the Board, with vesting
on February 15 of the following year. Effective in December 2011, the
Board determined that upon the
initial appointment of a
non-employee member to the Board, such new director will receive a
grant of 3,500 RSUs, which vest over two years (fifty percent on each
anniversary of grant).
For option grants held by a director who retires after at least eight
years of service on the Board which are outstanding under the 1998
Director Plan, such grants will fully vest and the director will have the
right to exercise his or her option as to both vested and unvested shares
as of such date. The option will remain exercisable for the lesser of
(i) two (2) years following the date of such director’s retirement or
(ii) the expiration of the option’s original term. This provision was not
adopted for option grants under the 2011 Plan.
12 COHERENT, INC. - 2013 Proxy Statement
PROPOSAL ONE ELECTION OF DIRECTORS
With the adoption of our 2011 Plan, the 1998 Director Plan has been
terminated other than for outstanding historical grants made
thereunder. As of September 28, 2013, 548,000 shares have been
issued upon the exercise of options and the vesting of RSUs under the
1998 Director Plan.
Option Exercises and Stock Vested at 2013 Fiscal Year-End
The table below sets forth certain information for each non-employee director regarding the exercise of options and the vesting of stock awards
during the year ended September 28, 2013, including the aggregate value realized upon such exercise or vesting.
Name
Jay T. Flatley
Susan M. James
L. William Krause
Garry W. Rogerson
Lawrence Tomlinson
Sandeep Vij
Option Awards
Stock Awards
Number of Shares
Acquired on
Exercise
(#)
—
18,000
—
6,000
18,000
—
Value Realized
on Exercise
($)(1)
—
466,840
—
84,360
334,032
—
Number of Shares
Acquired on
Vesting
(#)
3,500
5,500
5,500
5,500
5,500
5,500
Value Realized
on Vesting
($)(2)
209,965
322,665
322,665
322,665
322,665
322,665
(1) Reflects the difference between the exercise price of the option and market price of our Common Stock on the exercise date.
(2) Reflects the market price of our Common Stock on the vesting date.
Vote Required
Every stockholder voting for the election of directors may cumulate
such stockholder’s votes and give one candidate a number of votes
equal to the number of directors to be elected multiplied by the
number of votes to which the stockholder’s shares are entitled.
Alternatively, a stockholder may distribute his or her votes on the
same principle among as many candidates as the stockholder thinks
fit, provided that votes cannot be cast for more than seven
(7) candidates. However, no stockholder will be entitled to cumulate
votes for a candidate unless (i) such candidate’s name has been
properly placed in nomination for election at the Annual Meeting
prior to the voting and (ii) the stockholder, or any other stockholder,
has given notice at the meeting prior to the voting of the intention to
cumulate the stockholder’s votes. If cumulative voting occurs at the
meeting and you do not specify how to distribute your votes, your
proxy holders (the individuals named on your proxy card) will
cumulate votes in such a manner as will ensure the election of as many
of the nominees listed above as possible, and the specific nominees to
be voted for will be determined by the proxy holders.
If a quorum is present, the seven (7) nominees receiving the highest
number of votes will be elected to the Board. See ‘‘Information
Concerning Solicitation and Voting-Quorum; Abstentions; Broker
Non-Votes.’’
The Board recommends that Stockholders vote
‘‘FOR’’ the seven nominees presented herein.
COHERENT, INC. - 2013 Proxy Statement 13
PROPOSAL TWO
RATIFICATION OF
THE APPOINTMENT OF
DELOITTE & TOUCHE LLP
AS INDEPENDENT
REGISTERED PUBLIC
ACCOUNTING FIRM
The Audit Committee of the Board has selected Deloitte &
Touche LLP, an independent registered public accounting firm, to
audit our financial statements for the fiscal year ending September 27,
2014, and recommends that stockholders vote for ratification of such
appointment. Deloitte & Touche LLP has audited our financial
statements since the fiscal year ended September 25, 1976. Although
ratification by stockholders is not required by law, the Audit
Committee has determined that it is desirable to request ratification of
this selection by the stockholders as a matter of good corporate
practice. Notwithstanding its selection, the Audit Committee, in its
discretion, may appoint a new independent registered public
accounting firm at any time during the year if the Audit Committee
Principal Accounting Fees and Services
believes that such a change would be in the best interest of Coherent
and its stockholders. If the stockholders do not ratify the appointment
of Deloitte & Touche LLP, the Audit Committee may reconsider its
selection. The Audit Committee selected Deloitte & Touche LLP to
audit our financial statements for the fiscal year ended September 28,
2013, which was ratified by our stockholders.
Representatives of Deloitte & Touche LLP are expected to be present
at the meeting and will be afforded the opportunity to make a
statement if they desire to do so. The representatives of Deloitte &
Touche LLP are also expected to be available to respond to appropriate
questions.
The following table sets forth fees for services provided by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their
respective affiliates (collectively, ‘‘Deloitte’’) during fiscal years 2013 and 2012:
2012
Audit fees(1)
1,725,000
Audit-related fees(2)
172,632
Tax fees(3)
—
All other fees(4)
2,200
Total
1,899,832
(1) Represents fees for professional services provided in connection with the integrated audit of our annual financial statements and internal control over financial reporting
and review of our quarterly financial statements, advice on accounting matters that arose during the audit and audit services provided in connection with other statutory or
regulatory filings.
2013
1,818,000
79,126
135,337
2,200
2,034,663
$
$
$
$
(2) For fiscal 2013, represents $79,126 in fees for due diligence associated with our acquisition activities in fiscal 2013. For fiscal 2012, represents $146,874 in fees for due
diligence associated with our acquisition activities in fiscal 2012 and $25,578 for services related to the review of our XBRL filings.
(3) Represents tax compliance and related services.
(4) Represents the annual subscription for access to the Deloitte Accounting Research Tool, which is a searchable on-line accounting database.
Pre-Approval of Audit and Non-Audit Services
The Audit Committee has determined that the provision of non-audit
services by Deloitte is compatible with maintaining Deloitte’s
independence. In accordance with its charter, the Audit Committee
approves in advance all audit and non-audit services to be provided by
Deloitte. In other cases, the Chairman of the Audit Committee has
the delegated authority from the Committee to pre-approve certain
additional services, and such pre-approvals are communicated to the
full Committee at its next meeting. During fiscal years 2013 and
2012, 100% of the services were pre-approved by the Audit
Committee in accordance with this policy.
Vote Required
The affirmative vote of a majority of the votes cast will be required to
ratify the selection of Deloitte & Touche LLP as our independent
registered public accounting firm for the fiscal year ending
September 27, 2014.
The Audit Committee and the Board recommends that
‘‘FOR’’ the ratification of the
Stockholders vote
appointment of Deloitte & Touche LLP as our
independent registered public accounting firm for the
fiscal year ending September 27, 2014.
14 COHERENT, INC. - 2013 Proxy Statement
PROPOSAL THREE
ADVISORY VOTE
TO APPROVE EXECUTIVE
OFFICER COMPENSATION
At our Annual Meeting in March 2011, our stockholders indicated
that they would like to have an annual advisory vote on executive
compensation. Accordingly, our Board of Directors proposes that
stockholders provide advisory (non-binding) approval of the
compensation of our named executive officers, as disclosed pursuant
to the compensation disclosure rules of the SEC, including the
Compensation Discussion and Analysis, the Fiscal 2013 Summary
Compensation Table and related tables and disclosure.
As described in our Compensation Discussion and Analysis, we have
adopted an executive compensation philosophy designed to provide
alignment between executive pay and performance and to focus
executives on making decisions that enhance our stockholder value in
both the short and long term. Executives are compensated in a
manner consistent with Coherent’s strategy, competitive practices,
stockholder
interest alignment, and evolving compensation
governance standards.
Vote Required
Under our bylaws the affirmative vote of the holders of a majority of
the votes cast is required to approve the compensation of our named
executive officers disclosed in this proxy statement. The vote is an
advisory vote, and therefore not binding. Our Board of Directors
values the opinions of our stockholders and to the extent there is any
significant vote against the named executive officer compensation as
disclosed in this proxy statement, we will consider our stockholders’
concerns and the Compensation and H.R. Committee will evaluate
whether any actions are necessary to address those concerns.
Recommendation
The Board of Directors unanimously recommends that Stockholders vote ‘‘FOR’’ the approval of our
Executive Officer Compensation disclosed in this proxy statement.
COHERENT, INC. - 2013 Proxy Statement 15
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 2013, certain
information with respect to the beneficial ownership of common
stock by (i) any person (including any ‘‘group’’ as that term is used in
Section 13(d)(3) of the Exchange Act known by us to be the beneficial
owner of more than 5% of our voting securities, (ii) each director and
each nominee for director, (iii) each of the executive officers named in
the Summary Compensation Table appearing herein, and (iv) all
executive officers and directors as a group, based on information
available to the Company as of filing this proxy statement. We do not
know of any arrangements, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a
change of control. Unless otherwise indicated, the address of each
stockholder in the table below is c/o Coherent, Inc., 5100 Patrick
Henry Drive, Santa Clara, California 95054.
Name and Address
Eagle Asset Management, Inc.(2)
880 Carillon Parkway
St. Petersburg, FL 33716
Blackrock Fund Advisors(2)
400 Howard St.
San Francisco, CA 94105
Vanguard Group Inc.(2)
P.O. Box 2600
Valley Forge, PA 19482
John R. Ambroseo
Helene Simonet
Paul Sechrist(3)
Bret DiMarco
Mark Sobey
Jay T. Flatley(4)
Susan M. James(5)
L. William Krause(6)
Garry W. Rogerson(7)
Steve Skaggs
Lawrence Tomlinson(8)
Sandeep Vij(9)
All directors and executive officers as a group (13 persons)(10)
*
Represents less than 1%.
Number
of Shares
Percent of
Total(1)
2,085,024
8.39%
1,950,642
7.85%
1,477,907
154,334
23,767
35,349
12,842
9,470
23,000
8,000
44,500
19,500
—
7,000
11,400
373,036
5.95%
*
*
*
*
*
*
*
*
*
*
*
*
1.5%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Based upon 24,839,166 shares of Coherent common stock outstanding as of December 31, 2013. Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to the securities. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, each share of Coherent common stock subject to options held by that person that are currently exercisable or will be exercisable
within 60 days of December 31, 2013 and all RSUs which will vest within 60 days of December 31, 2013, are deemed outstanding. In addition, such shares, are not
deemed outstanding for the purpose of computing the percentage ownership of any other person.
Based on the institutional holding report provided by NASDAQ, which reflects the most recent Schedule 13D, 13F or 13G (or amendments thereto) filed by such person
with the SEC, or a Schedule 13D, 13F or 13G filing made after our receipt of this report.
Includes 8,000 shares issuable upon exercise of options held by Mr. Sechrist which were exercisable or would become exercisable within 60 days of December 31, 2013.
Includes 16,000 shares issuable upon exercise of options held by Mr. Flatley which were exercisable and 3,500 shares issuable upon vesting of RSUs within 60 days of
December 31, 2013.
Includes 3,500 shares issuable upon vesting of RSUs within 60 days of December 31, 2013 held by Ms. James.
Includes 30,000 shares issuable upon exercise of options held by Mr. Krause which were exercisable and 3,500 shares issuable upon vesting of RSUs within 60 days of
December 31, 2013.
Includes 3,500 shares issuable upon vesting of RSUs within 60 days of December 31, 2013 held by Mr. Rogerson.
Includes 3,500 shares issuable upon vesting of RSUs within 60 days of December 31, 2013 held by Mr. Tomlinson.
Includes 3,500 shares issuable upon vesting of RSUs within 60 days of December 31, 2013 held by Mr. Vij.
(10)
Includes an aggregate of 68,000 options and 21,000 shares issuable upon vesting of RSU’s which were exercisable or would become exercisable or vested, as the case may
be, within 60 days of December 31, 2013.
16 COHERENT, INC. - 2013 Proxy Statement
OUR EXECUTIVE OFFICERS
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the ‘‘Exchange
Act’’) requires our officers and directors, and persons who own more
than ten percent of a registered class of our equity securities to file
reports of ownership and changes in ownership with the SEC. Such
officers, directors and ten-percent stockholders are also required by
SEC rules to furnish us with copies of all forms that they file pursuant
to Section 16(a). Based solely on our review of the copies of such
forms received by us, and on written representations from certain
reporting persons that no other reports were required for such
persons, we believe that, during fiscal 2013, our officers, directors
and, to our knowledge, greater than ten percent stockholders
complied with all applicable Section 16(a) filing requirements.
OUR EXECUTIVE OFFICERS
The name, age, position and a brief account of the business experience of our Chief Executive Officer and each of our other executive officers as of
December 31, 2013 are set forth below:
Name
John R. Ambroseo
Helene Simonet
Mark Sobey
Paul Sechrist
Luis Spinelli
Bret DiMarco
Age
52
61
53
54
65
45
Please see heading ‘‘Nominees’’ under Proposal One above for
Mr. Ambroseo’s biographical information.
Helene Simonet. Ms. Simonet has served as our Executive Vice
President and Chief Financial Officer since April 2002. Ms. Simonet
served as Vice President of Finance of our former Medical Group and
Vice President of Finance, Photonics Division from December 1999
to April 2002. Prior to joining Coherent, she spent over twenty years
in senior finance positions at Raychem Corporation’s Division and
Corporate organizations, including Vice President of Finance of
Raynet Corporation. Ms. Simonet has both Master’s and Bachelor
degrees from the University of Leuven, Belgium.
Mark Sobey. Mr. Sobey was appointed Executive Vice President of
Coherent and General Manager of Specialty Laser Systems (SLS) in
April 2010. He had previously served as Senior Vice President and
General Manager for the SLS Business Group, which primarily serves
the Microelectronics and Research markets, since joining Coherent in
July 2007 until April 2010. Prior to Coherent, Mr. Sobey has spent
over 20 years in the Laser and Fiber Optics Telecommunications
industries,
including roles as Senior Vice President Product
Management at Cymer from January 2006 through June 2007 and
prior to that as Senior Vice President Global Sales at JDS Uniphase
through October 2005. He received his PhD in Engineering and BSc
in Physics, both from the University of Strathclyde in Scotland.
Paul Sechrist. Mr. Paul Sechrist was appointed Executive Vice
President, Worldwide Sales and Service in March 2011. He has over
30 years of experience with Coherent, including roles as Senior Vice
President and General Manager of Commercial Lasers and
Components from October 2008 to March 2011, Vice President and
Office Held
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President and General Manager, Specialty Laser Systems
Executive Vice President, Worldwide Sales and Service
Executive Vice President and Chief Technology Officer
Executive Vice President, General Counsel and Corporate Secretary
General Manager of Specialty Laser Systems, Santa Clara from March
2008 to October 2008 and Vice President for Components from April
2005 to October 2008. Mr. Sechrist received an AA degree from San
Jose City College, with Physics studies at California State University,
Hayward.
Luis Spinelli. Mr. Spinelli has served as our Executive Vice President
and Chief Technology Officer since February 2004. Mr. Spinelli
joined the Company in May 1985 and has since held various
engineering and managerial positions, including Vice President,
Advanced Research from April 2000 to September 2002 and Vice
President, Corporate Research from September 2002 to February
2004. Mr. Spinelli has led the Advanced Research Unit from its
inception in 1998, whose charter is to identify and evaluate new and
emerging technologies of interest for us across a range of disciplines in
the laser field. Mr. Spinelli holds a degree in Electrical Engineering
from the University of Buenos Aires, Argentina with post-graduate
work at the Massachusetts Institute of Technology.
Bret M. DiMarco. Mr. DiMarco has served as our Executive Vice
President and General Counsel since June 2006 and our Corporate
Secretary since February 2007. From February 2003 until May 2006,
Mr. DiMarco was a member and from October 1995 until January
2003 was an associate at Wilson Sonsini Goodrich & Rosati, P.C., a
law firm. Mr. DiMarco received a Bachelor’s degree from the
University of California at Irvine and a Juris Doctorate degree from
the Law Center at the University of Southern California. He is also an
adjunct professor of law at the University of California Hastings
College of the Law, teaching corporate law and mergers &
acquisitions.
COHERENT, INC. - 2013 Proxy Statement 17
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
In this section, we describe the material components of our executive
compensation program for our ‘‘Named Executive Officers’’ or
‘‘NEOs’’:
Name
John R. Ambroseo
Helene Simonet
Mark Sobey
Paul Sechrist
Bret DiMarco
Title
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President and General Manager,
Specialty Laser Systems
Executive Vice President, Worldwide Sales
and Service
Executive Vice President, General Counsel
and Corporate Secretary
We also provide an overview of our executive compensation
philosophy, principal compensation policies and practices by which
the Compensation and H.R. Committee arrives at its decisions
regarding NEO compensation.
Stockholder Feedback
The committee carefully considers feedback from our stockholders
regarding our executive compensation program, including the results
of our annual advisory vote on executive compensation, which (as
seen below) has historically been strongly supported by our
stockholders. All stockholders are invited to express their views to the
committee as described in this proxy under the heading ‘‘Stockholder
Communication with the Board of Directors.’’ We strongly urge our
stockholders to read this Compensation Discussion and Analysis in
conjunction with the advisory vote under Proposal Three.
Executive Summary
Our Business
Founded in 1966, we are a world leader in providing photonics based
solutions to the commercial and scientific research markets. Our
common stock is listed on the NASDAQ Global Select Market and is
part of the Russell 2000 and Standard & Poor’s SmallCap 600 Index.
For more information about our business, please read ‘‘Business’’ and
‘‘Management’s Discussion and Analysis of Financial Condition and
Results of Operations’’ sections in our Annual Report on Form 10-K
filed with SEC on November 27, 2013.
Selected Business Highlights
Fiscal 2013 saw Coherent maintain its strong financial performance.
This financial performance allowed us to continue to invest in the
development of new technologies and to prudently return money to
our stockholders through a one-time $24 million special dividend.
These results, however, did not fully meet the performance
requirements under our executive compensation programs and you
18 COHERENT, INC. - 2013 Proxy Statement
will see in the coming pages that our executive variable cash
compensation program had a significantly lower payout than targeted.
Set forth below are tables reflecting several performance metrics from
the last three fiscal years.
Our revenue decreased 4% from fiscal 2011 to fiscal 2012 and grew
5% from fiscal 2012 to fiscal 2013 (dollars in millions):
Our pro forma EBITDA% decreased from 19.5% to 18.4% from
fiscal 2011 to fiscal 2012 and decreased to 17.8% in fiscal 2013:
14JAN201422040425
Our non-GAAP earnings per share declined 11% from fiscal 2011 to
fiscal 2012 and grew 9% from fiscal 2012 to fiscal 2013:
16JAN201414504405
16JAN201414504213
For a reconciliation table of earnings per share on a GAAP basis and
EBITDA % to net income as a percentage of revenue, please refer to the
‘‘Reconciliation Table’’ at the end of this section.
COMPENSATION DISCUSSION AND ANALYSIS
officer during fiscal 2013 at target, maximum and actual can be
illustrated as follows (*) (dollars in thousands):
Compensation Overview
Compensation Philosophy. Our approach to compensating our
executives is to tie total compensation to stockholder value by our
results of operations and the comparative performance of our stock
price. This approach provides strong alignment between executive pay
and performance and focuses executives on making decisions that
enhance our stockholder value in both the short and long-term. We
design our executive compensation program to achieve the following
goals:
(cid:129) Pay
for Performance, with both short and
long-term
measurements—A significant portion of the annual compensation
of our executives is designed to vary with annual business
performance and the relative performance of Coherent’s trading
price in comparison to the Russell 2000 Index.
(cid:129) Tie compensation to performance of the core business—Our
fiscal 2013 annual cash bonus plan was dependent upon Coherent’s
achievement against two thresholds: adjusted EBITDA dollars and
revenue. The committee felt these were the most effective metrics
for tying management’s compensation directly to Coherent’s core
operating results.
(cid:129) Retain and Hire Talented Executives—Executives should have
market competitive compensation and the committee positions the
midpoint of our target total compensation ranges near the
50th percentile of our peer group (as noted below), with actual
compensation falling above or below depending upon Coherent’s
financial performance.
(cid:129) Align
stockholder
compensation with
interests—Our
stockholders benefit from continued strong operating performance
by the Company and the committee believes that having a
significant portion of compensation tied to equity with both time
and performance-based vesting requirements directly aligns
management to stockholder returns. Grants of performance-based
RSUs in fiscal 2013 have a single vesting date three years from grant
solely dependent upon the performance of Coherent’s common
stock price measured against the Russell 2000 Index. For each 1%
Coherent’s common stock exceeds the performance of the Russell
2000 Index for the trailing 90 trading days from the vesting
measurement date against the comparable period from the date of
grant, the grant recipient will get a 2% increase in the number of
shares above target (up to a maximum cap), and for each 1% below
the Russell 2000 Index’s performance, a 2% decrease in the number
of shares (down to zero). The maximum achievable amounts under
the performance-based RSUs make up the largest potential portion
of the equity grants for our chief executive officer.
Elements of Executive Compensation. During fiscal 2013, the
compensation of our NEOs primarily consisted of (A) base salary,
(B) participation in our annual variable cash incentive plan (referred
to below as our ‘‘cash bonus plan’’ or ‘‘VCP’’), and (C) long-term
equity incentive awards divided between time-based RSUs and
performance-based RSUs. For fiscal 2013, on average, approximately
78% of our NEO’s target compensation and approximately 86% of
our CEO’s target compensation was delivered in the form of variable
annual cash bonus plan and long-term equity incentives.
As a demonstration of how closely executive cash compensation is tied
to company performance, the cash pay mix for our chief executive
14JAN201422035507
You will note that our CEO’s cash compensation was significantly
below target since the Company did not fully meet the performance
criteria under our annual variable cash compensation plan.
‘‘Pay for performance’’ has been and
Compensation Governance.
remains at the core of Coherent’s executive compensation coupled
with appropriately managing risk and aligning our compensation
programs with long-term stockholder interests. We accomplish this
primarily by having a majority of the NEOs’ potential compensation
being ‘‘at risk’’ through a combination of (i) a fiscal year variable cash
bonus program tied to achievement of operating metrics and
(ii) equity grant vesting tied to achievement of a performance metric.
The committee monitors and considers evolving governance
approaches and standards in executive compensation.
As more fully discussed below, recent examples of how this philosophy
is applied and changes made pursuant to compensation practices as
well as governance practices in effect during fiscal 2013, include:
(cid:129) In fiscal 2013, the payouts of our annual cash bonus plan to our
NEOs were approximately 38% as compared to target;
(cid:129) As a result of the performance criteria of our annual cash bonus
plan, in fiscal 2012 the payouts to our NEOs were approximately
19.9% as compared to target, including no payout in the second
half of the year due to a failure to meet the threshold conditions;
(cid:129) We have a claw-back policy for our Chief Executive Officer and
Chief Financial Officer in certain circumstances;
(cid:129) We have minimum share ownership requirements for our Chief
Executive Officer and members of the Board of Directors;
(cid:129) Our performance-based RSU program is measured by the
Company’s stock price achievement against the Russell 2000, which
the committee believes is a direct connection to total stockholder
return;
(cid:129) Our performance-based RSU grants to our NEOs when measured
in fiscal 2013 for performance achievement vested below target;
(cid:129) The committee is composed entirely of directors who satisfy the
standards of independence in Coherent’s Corporate Governance
Guidelines and NASDAQ listing standards;
(cid:129) Executive incentive compensation programs include limits on
maximum payouts to contain the risk of excessive payouts;
COHERENT, INC. - 2013 Proxy Statement 19
COMPENSATION DISCUSSION AND ANALYSIS
(cid:129) Our change-of-control plan provides for payment only in ‘‘double-
trigger’’ circumstances-namely a change-of-control coupled with a
termination of employment; and
(cid:129) None of our executive officers have employment contracts.
but leave the meetings when matters potentially affecting them are
discussed.
The committee makes decisions
compensation without him present.
regarding Mr. Ambroseo’s
Our stockholders recognized our corporate governance and executive
compensation structure by overwhelmingly approving our ‘‘say on
pay’’ advisory votes in each of the last three years (with abstentions
significantly out-numbering ‘‘no’’ votes in two of the past three years):
In 2011, voting 19,684,002 shares (92%) in favor compared to only
591,602 shares (3%) against, with 1,204,275 shares (5%) abstaining;
In 2012, voting 20,764,535 shares (99%) in favor compared to only
187,670 shares (1%) against, with 24,577 shares (0%) abstaining;
In 2013, voting 18,999,148 shares (88%) in favor compared to only
1,137,010 shares (5%) against, with 1,439,307 (7%) abstaining.
Role of Management
The committee regularly meets with Mr. Ambroseo, our Chief
Executive Officer, to obtain recommendations with respect to the
compensation programs, practices and packages for our Named
Executive Officers other
than Mr. Ambroseo. Additionally,
Ms. Simonet, our Executive Vice President and Chief Financial
Officer, Mr. DiMarco, our Executive Vice President and General
Counsel and members of our human resources department are
regularly invited to meetings of the committee or otherwise asked to
assist the committee.
The assistance of these individuals include providing financial
information and analysis for the committee and its compensation
consultant, taking minutes of the meeting or providing legal advice,
developing compensation proposals for consideration, and providing
insights regarding our employees (executive and otherwise) and the
business context for the committee’s decisions. Named Executive
Officers will attend portions of committee meetings when requested,
Role of the Committee’s Compensation
Consultant
The committee is committed to utilizing the services of an
independent compensation consultant and in fiscal 2013, engaged
Compensia as its independent compensation consultant. Compensia
assisted the committee by:
(cid:129) Reviewing and analyzing our executive compensation program; and
(cid:129) Providing market data and ranges for fiscal 2013 compensation.
Additionally, in fiscal 2013, Compensia was retained by the
Governance and Nominating Committee to review, analyze and make
recommendations regarding compensation for service on the Board of
Directors and its committees.
The independent compensation consultant serves at the discretion of
the committee and is not permitted to do other work for Coherent
unless expressly authorized by the committee. Since retention,
Compensia has not performed any work for Coherent other than its
work with the committee, the Board of Directors or other committees
of the Board of Directors. The committee is focused on maintaining
the independence of its compensation consultant and, accordingly,
does not anticipate having its consultant perform any other work for
the Company in addition to its direct work for the committee or the
Board. The committee has assessed the independence of Compensia
and concluded that no conflict of interest exists.
We also participate in and maintain a subscription to the Radford
Global Technology Survey. This survey provides benchmark data and
compensation practices reports to assist us with regards to employee
compensation generally.
Pay Positioning Strategy and Benchmarking of Compensation
Philosophically the committee initially orients the midpoint of our
target total compensation ranges for our NEOs generally near the
50th percentile of our peers, resulting in targeted total compensation
that is competitive for performance that meets the objectives
established by the committee. A Named Executive Officer’s actual
incentive compensation opportunity and equity
salary, cash
compensation grant value may fall below or above the target position
based on the individual’s experience, seniority, skills, knowledge,
performance and contributions. These
factors are weighed
individually by the committee in its judgment, and no single factor
takes precedence over others nor is any formula used in making these
decisions. For fiscal 2013 compensation of the Chief Executive
Officer, based on the Company’s performance and the structure of his
equity grant being two-thirds solely performance-based (i.e. no shares
will vest unless the threshold performance criteria is met), the
committee asked Compensia to provide information at the 50th and
75th percentile and oriented his compensation target closer to the
75th percentile.
The Chief Executive Officer’s review of the performance of the other
Named Executive Officers is considered by the committee in making
individual pay decisions. With respect to the Chief Executive Officer,
the committee additionally considered the performance of Coherent
as a whole and the views of the Board of Directors regarding the Chief
Executive Officer’s performance. Actual realized pay is higher or lower
than the targeted amounts for each individual based primarily on the
Company’s performance.
In analyzing our executive compensation program relative to this
target market positioning, the committee reviews information
provided by its independent compensation consultant, which includes
an analysis of data from peer companies’ proxy filings with respect to
similarly situated individuals at the peer companies and the Radford
Global Technology Survey, which is a broad cross-section of
technology companies of similar size to Coherent. It is important to
note that these are the peers selected by the committee. The
committee uses criteria as described below in determining the
appropriate group. There are proxy advisory services which use their
own criteria to select peers for the Company and, accordingly,
stockholders should be aware that these advisory services do not, in
fact, follow the same methodology of the committee and there may be
wide variances between the different peer groups used by these
20 COHERENT, INC. - 2013 Proxy Statement
COMPENSATION DISCUSSION AND ANALYSIS
services. Any comparison of company performance or market data for
executive compensation using a completely different peer group will,
therefore, naturally result in a different analysis. We encourage our
stockholders to consider the peer group used in any comparisons and
direct any questions to the committee regarding such comparisons or
any other matters when considering how to vote on Proposal Three.
For pay decisions made in fiscal 2013, after consulting with our independent compensation consultant, the committee determined that the
following companies comprise the peer group for fiscal 2013:
Cabet Microelectronics (CCMP)
Cymer Inc. (CYMI)
Emulex (ELX)
Entegris (ENTG)
FEI Company (FEIC)
Finisar Corp. (FNSR)
FLIR Systems, Inc. (FLIR)
Harmonic (HLIT)
Infinera (INFN)
JDS Uniphase (JDSU)
MKS Instruments (MKSI)
National Instruments (NATI)
Newport Corporation (NEWP)
Plantronics (PLT)
PMC-Sierra, Inc. (PMCS)
Polycom (PLCM)
The committee made the following changes to the group of peer
companies from fiscal 2012 primarily as a result of filtering such
companies through the selection criteria noted below:
Removed:
Opnext, Inc. and Trimble Navigation.
Integrated Device Technology, Novellus Systems,
(cid:129) Revenue level (primarily companies with annual revenues between
0.5x-2.0x that of Coherent);
Secondary Criteria
(cid:129) Annual revenue growth of greater than 5%;
Added: For fiscal 2013, no new peer group companies were added.
(cid:129) Market capitalization between 0.5 and 2.0x of Coherent; and
Several factors are considered in selecting the peer group, the most
important of which are:
Primary Criteria
(cid:129) Industry (primarily companies in the Electronic Equipment and
Semiconductor sub-industry classifications defined by the Global
Industry Classification Standard (GICS) system);
(cid:129) Market capitalization as a multiple of revenues of greater than 1.5x.
The committee reviews the composition of the peer group annually to
ensure it is the most relevant set of companies to use for comparison
purposes.
Components of Our Executive Compensation Program
The principal components of our executive officer compensation and
employment arrangements during fiscal 2013 included:
(cid:129) Base salary;
(cid:129) Variable cash bonus program;
(cid:129) Equity awards; and
(cid:129) Other benefits.
These components were selected because the committee believes that
a combination of salary, incentive pay and benefits is necessary to help
us attract and retain the executive talent on which Coherent’s success
depends. The following table shows at target the components of total
direct compensation for our named executive officers as a group for
fiscal 2013.
Base Salary
14JAN201422035731
Base salary is the foundation to providing an appropriate total direct
compensation package. We use base salary to fairly and competitively
compensate our executives for the jobs we ask them to perform. This
is the most stable component of our executive compensation program,
as this amount is not at risk. The committee reviewed market data
information provided by Compensia with respect to similarly situated
individuals to assist it in determining the base salary for each Named
Executive Officer, depending upon the particular executive’s
experience and historical performance. There were no increases to
salary in fiscal 2012 for any of our Named Executive Officers. In fiscal
2013, only one of our Named Executive officers, Mr. Sechrist,
received a salary increase based on the market data reviewed by the
committee.
COHERENT, INC. - 2013 Proxy Statement 21
COMPENSATION DISCUSSION AND ANALYSIS
Variable Cash Incentive Compensation
A substantial portion of each individual’s potential short-term
compensation is in the form of variable incentive pay tied to
committee-established goals. In fiscal 2013, Coherent maintained one
incentive cash program under which executive officers were eligible to
receive bonuses, the 2013 Variable Compensation Plan (‘‘2013
VCP’’).
2013 VCP
The 2013 VCP was designed as an ‘‘at risk’’ bonus compensation
program to promote a focus on Coherent’s growth and profitability. It
provided incentive compensation opportunity in line with targeted
market rates to our Named Executive Officers. Under the 2013 VCP,
participants were eligible to receive bi-annual bonuses (with
measurement periods for the first half and the second half of the 2013
fiscal year). In setting the performance goals at the beginning of the
fiscal year, the committee assessed the anticipated difficulty and
importance to the success of Coherent of achieving the performance
goals.
The actual awards (if any) payable for each semi-annual period varied
depending on the extent to which actual performance met, exceeded
or fell short of the goals approved by the committee. The 2013 VCP
goals were tied to Coherent achieving varying levels of adjusted
EBITDA dollars (‘‘adjusted EBITDA $’’), with a requirement of
achieving two thresholds for each payment period: (1) at least 80%
of the Board-approved budgeted revenue and (2) a minimum of a
certain adjusted EBITDA $, without giving effect to any 2013 VCP
payments. Adjusted EBITDA was defined as earnings before interest,
taxes, depreciation, amortization and certain other non-operating
income and expense items and other items, such as the fiscal impact of
stock option expensing under Financial Accounting Standards Board,
or FASB, Accounting Standards Codification, or ASC 718, amounts
earned under the 2013 VCP, impairment or restructuring charges, and
the impact of acquisitions made during the fiscal year.
Each measurement period had the same range of between zero and
200%, with target at 100% of the executive’s participation rate.
Fiscal 2013 Variable Compensation Plan Scale for Named Executive Officers
Revenue exceeded the 80% threshold and Adjusted EBITDA$
Achievement for the First Half FY 2013 was $67.3M, with a
corresponding payout of approximately 43.62% of Target
First Half FY 2013 VCP Scale
Adjusted EBITDA $(in millions)
$62.8 (threshold)
$67.3 (actual)
$70.6
$78.4
$84.9
$91.4 (and above)
Revenue Threshold $314.2 million
Payout
—%
43.62% (actual)
50%
100%
150%
200%
Revenue exceeded the 80% threshold and Adjusted EBITDA$
Achievement for the Second Half FY 2013 was $76.9M, with a
corresponding payout of approximately 25.08% of Target
Second Half FY 2013 VCP Scale
Adjusted EBITDA $(in millions)
$73.7 (threshold)
$76.9 (actual)
$83.0
$92.2
$98.7
$105.2
Revenue Threshold $336.4 million
Payout
—%
25.08% (actual)
50%
100%
150%
200%
The tables below describe for each Named Executive Officer under
the 2013 Variable Compensation Plan (i) the target percentage of base
salary, (ii) the potential award range as a percentage of base salary, and
(iii) the actual award earned for the measurement period in fiscal
2013.
First Half of Fiscal Year 2013
Named
Executive
Officer
John Ambroseo
Helene Simonet
Mark Sobey
Paul Sechrist
Bret DiMarco
Payout
Target Percentage
Range of
Salary
Percentage
of Salary
Actual
Award as a
Actual Percentage of
Target
Award
Award(2)
($)(1)
100%
70%
65%
50%
50%
0-200% 136,317
0-140% 61,834
0-130% 51,036
0-100% 38,168
0-100% 36,532
43.62%
43.62%
43.62%
43.62%
43.62%
Second Half of Fiscal Year 2013
Named
Executive
Officer
Payout
Target Percentage
Range of
Salary
Percentage
of Salary
Actual
Award as a
Actual Percentage of
Target
Award
Award(2)
($)(1)
100%
John Ambroseo
70%
Helene Simonet
65%
Mark Sobey
50%
Paul Sechrist
50%
Bret DiMarco
(1) Reflects amounts earned during the applicable half of fiscal 2013.
0-200% 78,377
0-140% 35,552
0-130% 29,344
0-100% 21,945
0-100% 21,005
25.08%
25.08%
25.08%
25.08%
25.08%
(2) This reflects the aggregate bonuses earned by the Named Executive Officers for
the applicable half of fiscal 2013 under the 2013 VCP.
22 COHERENT, INC. - 2013 Proxy Statement
COMPENSATION DISCUSSION AND ANALYSIS
Equity Awards
We believe that equity awards provide a strong alignment between the
interests of our executives and our stockholders. We seek to provide
equity award opportunities that are consistent with our compensation
philosophy, with the potential for increase for exceptional financial
performance, consistent with the reasonable management of overall
equity compensation expense and stockholder dilution. Finally, we
believe that long-term equity awards are an essential tool in promoting
executive retention. For fiscal 2013, our long-term incentive program
included the grant of time-based RSUs and performance-based RSUs.
These components provide a reward for past corporate and individual
performance and as an incentive for future performance. Our
performance-based RSUs grants are tied to the Company’s
performance and, as a result, may fluctuate from no vesting to vesting
which is above target. When making its compensation decisions, the
committee reviews a compensation overview prepared by
its
independent compensation consultant which reflects potential
realizable value under current short and long-term compensation
arrangements for each Named Executive Officer.
Fiscal 2013 Equity Grants
For fiscal 2013, the committee determined to base the equity program
on a combination of time-based and performance-based RSUs. In
particular, the committee determined to measure achievement for the
performance grants by the relative performance of Coherent’s stock
price in comparison to the Russell 2000 Index. The committee
believed that using the Russell 2000 Index (in which Coherent is a
member) as a proxy of total stockholder return directly aligns
executive compensation with stockholder interest. The committee
determined that both the performance-based and time-based RSU
grants provide a further retention tool in that the time-based grants
vest over two years with pro rata annual vesting and, for the
performance-based grants, a single measurement period three years
from the date of grant with three-year cliff vesting shortly thereafter if
such grants vest at all since such grants vest purely based on
performance.
Performance-based RSU grants in fiscal 2013 vest solely dependent
upon the performance of Coherent’s common stock price measured
against the Russell 2000 Index. For each 1% Coherent’s common
stock exceeds the performance of the Russell 2000 Index for the
trailing 90 trading days from the vesting measurement date against the
comparable period from the date of grant, the grant recipient will get a
2% increase in the number of shares above target (up to a maximum
cap), and for each 1% below the Russell 2000 Index’s performance, a
2% decrease in the number of shares (down to zero). The maximum
achievable amounts under the performance-based RSUs make up the
largest potential portion of the equity grants for our Chief Executive
Officer. The following table summarizes some of the key attributions
of our 2013 equity grants:
Fiscal 2013 Equity Grants
Type
Vesting for RSUs
Vesting for PSUs
PSU Metrics
RSUs and PSUs
50% each grant anniversary
Single vesting date three years from grant
100% tied to Russell 2000 Index
Minimum vest: zero
Target vest: even with Russell 2000 Index
Maximum vest: 200% of target
15JAN201417045803
The following chart shows the aggregate composition of equity
grants for fiscal 2013 to our Chief Executive Officer assuming the
maximum achievement under the performance-based grants:
For our Chief Executive Officer, our goal is that at the end of three
years, he will receive greater than half of his total equity awards in
performance-based equity awards at target achievement. Accordingly,
for our Chief Executive Officer, at target, approximately 66% of his
equity awards are performance-based and at maximum achievement
that percentage increases to approximately 80%.
In the event of a change of control of the Company, the performance-
based grants will be measured, with respect to performance periods
not yet completed, by the relative stock performance of Coherent in
comparison to the Russell 2000 Index through the date of the change
of control and such performance-based shares would, subject to the
terms of the Change of Control Severance Plan, then convert to
time-based vesting with a single vesting date at the three year
anniversary of the grant.
14JAN201422035286
COHERENT, INC. - 2013 Proxy Statement 23
COMPENSATION DISCUSSION AND ANALYSIS
The following tables reflect the equity grants to the Named Executive
Officers during the first quarter of fiscal 2013:
Named
Executive
Officer
Time-Based
RSU Grants
Performance-Based Performance-Based
RSU Grants
Range
RSU Grants
at Target
John Ambroseo
Helene Simonet
Mark Sobey
Paul Sechrist
Bret DiMarco
24,000
11,100
10,400
8,900
7,400
47,000
5,500
5,200
4,400
3,700
0 – 94,000
0 – 11,000
0 – 10,400
0 – 8,800
0 – 7,400
Equity Award Practices
Equity grants to our employees are driven by our annual review
process. Grant guidelines are based on competitive market practices.
Typically, an eligible employee is granted equity at the first committee
meeting after beginning employment and may be eligible for periodic
grants thereafter. Eligibility for and the size of grants are influenced by
the then-current guidelines for non-executive officer grants and the
individual’s performance or particular requirements at the time of
hire.
In fiscal 2013 the committee granted an aggregate of 446,604 shares
subject to time-based and performance-based restricted stock units (at
maximum), representing approximately 1.83% of Coherent’s
outstanding common stock as of September 28, 2013 (excluding
automatic and initial grants to directors). The committee did not
grant any stock options during fiscal 2013 to employees. With the
assistance of Compensia, the committee has reviewed this burn rate
relative to peer practices and guidance from Institutional Shareholder
Services (ISS) and found that the total dilution was consistent with
the median of peer practices and complied with ISS guidelines.
During fiscal 2013 equity grants were only made at meetings of the
committee.
Chief Executive Officer Minimum Stock
Ownership Guidelines
During fiscal 2012, the committee adopted mandatory stock
ownership guidelines for our Chief Executive Officer. Our guidelines
require that the Chief Executive Officer hold shares with a value of at
least three times base salary, without counting vested or unvested
option grants or unvested grants of RSUs. Compliance is measured as
of the date of each year’s annual meeting based on the stock price of
the shares as of the date of their acquisition. In the event that our
Chief Executive Officer does not satisfy the minimum requirements,
then 25% of the net after-tax shares (e.g. exercised options/shares
received on the vesting of RSUs) must be held until the guidelines are
met. As of December 31, 2013, Mr. Ambroseo held stock worth
approximately 18 times his base salary and, accordingly, significantly
exceeded the minimum stock ownership guideline.
Other Benefits
Retirement Plans
Executive officers are eligible to participate in our 401(k) Retirement
Plan on the same terms as all other U.S. employees, including a 4%
Company matching contribution. Our 401(k) Retirement Plan is a
tax-qualified plan and therefore is subject to certain Internal Revenue
Code limitations on the dollar amounts of deferrals and Company
contributions that can be made to plan accounts. These limitations
apply to our more highly-compensated employees (including the
Named Executive Officers).
We maintain a Deferred Compensation Plan for certain employees
and members of the Board. The Deferred Compensation Plan permits
eligible participants to defer receipt of compensation pursuant to the
terms of the plan. The Deferred Compensation Plan permits
participants to contribute, on a pre-tax basis, up to 75% of their base
salary earnings, up to 100% of their bonus pay and commissions and
up to 100% of directors’ annual retainer earned in the upcoming plan
year. We provide no matching or other additional contributions to
such Deferred Compensation Plan. Plan participants may invest
deferrals in a variety of different deemed investment options. To
preserve the tax-deferred status of deferred compensation plans, the
IRS requires that the available investment alternatives be ‘‘deemed
investments.’’ Participants do not have an ownership interest in the
funds they select; the funds are only used to measure the gains or losses
that are attributed to the participant’s deferral account over time.
The committee considers the Deferred Compensation Plan to be a
reasonable and appropriate program because it promotes executive
officer retention by offering a deferred compensation plan that is
24 COHERENT, INC. - 2013 Proxy Statement
comparable to and competitive with what is offered by our peer group
of companies.
Employee Stock Purchase Plan
Our stockholders have approved an employee stock purchase plan
whereby employees can purchase shares for a discount, subject to
various participation limitations. As employees, our Named Executive
Officers are eligible to participate in this plan.
Severance and Change of Control
Arrangements
Our Change of Control Severance Plan (the ‘‘Change of Control
Plan’’) provides certain benefits in the event of a change of control of
Coherent for certain executives, including each of our Named
Executive Officers. Benefits are provided if there is a change in
ownership of Coherent, a change in effective control of Coherent, or a
change in ownership of a substantial portion of Coherent’s assets (in
each case as construed under Section 409A of the Internal Revenue
Code and the regulations thereunder)(a ‘‘change of control’’) and
within two years thereafter (or within two months prior thereto) the
participant’s employment is terminated without cause or is voluntarily
termination event. The
terminated
committee believes the Change of Control Plan serves as an important
retention tool in the event of a pending change of control transaction.
following a constructive
The Change of Control Plan was amended and restated in the first
quarter of fiscal 2013. Among the amendments made to the plan in
fiscal 2013 were: eliminating outplacement assistance and adding a
COMPENSATION DISCUSSION AND ANALYSIS
time-limited protection against terminations made in anticipation of a
change of control as well as changes to the definition of ‘‘Good
Reason.’’
with the opportunity to revise the plan consistent with corporate
governance best practices, evolving peer group practices and
regulatory changes.
The committee reviews the provisions of the Change of Control Plan
at a minimum every two years at or immediately prior to the
termination of the plan. The committee believes that reviewing the
Change of Control Plan every two years allows for the right balance in
providing certainty for the participants while providing the committee
The committee does not consider the potential payments and benefits
under these arrangements when making compensation decisions for
our NEOs. These arrangements serve specific purposes unrelated to
the determination of the NEOs’ total direct compensation for a
specific year.
Tax and Accounting Considerations
(cid:129) Accounting for Stock-Based Compensation—We account for stock-
based compensation in accordance with the requirements of ASC
718. We also take into consideration ASC 718 and other generally
accepted accounting principles in determining changes to policies
and practices for our stock-based compensation programs.
(cid:129) Section 162(m) of the Internal Revenue Code—This section limits the
deductibility of compensation for our Chief Executive Officer and
our four other most highly compensated Named Executive Officers
unless the compensation is less than $1 million during any fiscal
year or is ‘‘performance-based’’ under Section 162(m). Our 2001
Stock Plan and 2011 Plan are designed to permit option grants and
certain performance-based full value awards thereunder to be fully
tax-deductible. Cash compensation (including both base salary and
payments under our 2013 VCP) and time-based full-value awards are
‘‘performance-based’’ compensation under
not qualified as
Section 162(m). We may from time to time pay compensation to
our executive officers (including under our VCP) that may not be
deductible when, for example, we believe that such compensation is
appropriate and in the best interests of the stockholders after taking
various factors into consideration, including business conditions
and the performance of such executive officer.
(cid:129) Section 409A of the Internal Revenue Code—Section 409A imposes
additional significant taxes in the event that an executive officer,
director or service provider received ‘‘deferred compensation’’ that
does not satisfy the requirements of Section 409A. We consider
Section 409A in the design and operation of any plans.
Other Compensation Policies
To further align our executive compensation program with the
interests of our stockholders, at the end of fiscal 2009, a committee of
the Board approved a recoupment policy. The recoupment policy
provides that, in the event that there is an accounting restatement and
there is a finding by the Board that such restatement was due to the
gross recklessness or intentional misconduct of the Chief Executive
it caused material
Officer or Chief Financial Officer and
noncompliance with any financial reporting requirement, then
Coherent shall seek disgorgement of any portion of the bonus or other
incentive or equity based compensation related to such accounting
restatement received by such individual during the 12-month period
following the originally filed financial document. Under our Insider
Trading Policy, no employees or directors are allowed to hedge or
pledge Coherent securities.
Compensation Committee Interlocks and Insider Participation
During fiscal 2013, the Compensation and H.R. Committee of the
Board consisted of Messrs. Vij (Chair), Krause, Flatley, and until
January 1, 2013, Tomlinson. None of the members of the committee
has been or is an officer or employee of Coherent. None of our
executive officers serve on the board of directors or compensation
committee of a company that has an executive officer that serves on
our Board or Compensation and H.R. Committee. No member of
our Board is an executive officer of a company in which one of our
executive officers serves as a member of the board of directors or
compensation committee of that company.
Committee Independence
Each of the members of the committee qualifies as (i) an ‘‘independent director’’ under the requirements of The NASDAQ Stock Market, (ii) a
‘‘non-employee director’’ under Rule 16b-3 of the Securities Exchange Act of 1934 (the ‘‘1934 Act’’), (iii) an ‘‘outside director’’ under
Section 162(m) of the Code and (iv) an ‘‘independent outside director’’ as that term is defined by ISS.
COHERENT, INC. - 2013 Proxy Statement 25
COMPENSATION DISCUSSION AND ANALYSIS
Compensation and H.R. Committee Report
The Compensation and H.R. Committee of the Board has reviewed
and discussed the Compensation Discussion and Analysis required by
Item 402(b) of Regulation S-K with management and, based on such
review and discussions, the Compensation and H.R. Committee
recommended to the Board that the Compensation Discussion and
Analysis be included in this Proxy Statement.
Respectfully submitted by the Compensation and H.R. Committee
Sandeep Vij, Chair
Jay Flatley
L. William Krause
RECONCILIATION TABLE—NON-GAAP EARNINGS PER SHARE
GAAP NET INCOME PER DILUTED SHARE
Stock based compensation
Intangible amortization
R&D tax (benefit)/expense
Gain on Finland dissolution
Scotland valuation adjustment
Goodwill impairment
Inventory step-up
NON-GAAP NET INCOME PER DILUTED SHARE
RECONCILIATION TABLE—PRO FORMA EBITDA%
NET INCOME % OF REVENUE
Income tax expense (benefit)
Interest and other income (expense), net
Depreciation and amortization
Purchase accounting step up
Restructuring and one time benefits/charges
Stock based compensation
PRO FORMA EBITDA % OF REVENUE
September 28, 2013
Year Ended
September 29, 2012
October 1, 2011
$2.70
0.55
0.32
—
—
(0.06)
—
0.05
$3.56
$2.62
0.48
0.19
—
—
(0.18)
0.18
—
$3.28
$3.66
0.36
0.24
(0.38)
(0.26)
0.06
0.02
—
$3.70
Fiscal Year
2013
2012
2011
8.2%
2.1%
0.5%
4.5%
0.2%
—%
2.3%
8.2%
3.6%
0.1%
3.9%
—%
0.5%
2.1%
17.8%
18.4%
11.6%
3.8%
(1.2)%
3.6%
—%
0.1%
1.6%
19.5%
26 COHERENT, INC. - 2013 Proxy Statement
SUMMARY COMPENSATION AND EQUITY TABLES
Fiscal 2013 Summary Compensation Table
The table below presents information concerning the total compensation of our Named Executive Officers for the fiscal years ended
September 28, 2013, September 29, 2012 and October 1, 2011.
Name and Principal Position
John Ambroseo,
Chief Executive Officer
and President
Helene Simonet,
Executive Vice President
and Chief Financial Officer
Mark Sobey,
Executive Vice President
General Manager, SLS
Paul Sechrist,
Executive Vice President
Worldwide Sales, Service and Marketing
Bret DiMarco,
Executive Vice President
and General Counsel
Fiscal
Year
2013(1)
2012
2011
2013(1)
2012
2011
2013(1)
2012
2011
2013(1)
2012
2011
2013(1)
2012
2011
Salary ($)
625,019
625,019
612,901
405,018
405,018
395,587
360,006
360,006
343,856
345,194
325,000
306,573
335,005
333,985
325,580
Stock Awards
($)(2)
3,293,280
3,860,280
2,452,700
735,948
891,644
660,675
691,808
832,201
616,630
589,604
713,314
570,055
492,248
594,429
440,450
(1) Reflects the dollar amount of salary earned in fiscal year 2013.
Non-Equity
Incentive Plan
Compensation
($)(3)
214,694
124,629
1,628,675
97,386
56,532
738,776
80,380
43,071
562,863
60,113
32,403
423,443
57,537
33,400
436,478
All Other
Compensation
($)(4)
33,623
34,591
46,841
20,774
33,532
41,183
12,147
11,852
27,277
10,822
12,233
16,357
12,934
27,543
33,405
Total ($)
4,166,616
4,644,519
4,741,117
1,259,126
1,386,725
1,836,221
1,144,341
1,247,130
1,550,626
1,005,733
1,082,950
1,316,428
897,724
989,357
1,235,913
(2) Amounts shown reflect the grant date fair value of awards granted in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic 718. Reflects unvested time-based and performance-based restricted stock units; there is no guaranty that the recipients will ultimately receive this amount, or
any amount. No stock options were granted to the named executive officers in fiscal years 2011, 2012 and 2013.
(3) Reflects the dollar amounts earned under the Variable Compensation Plan (VCP) during fiscal 2013, fiscal 2012 and fiscal 2011.
(4) As previously noted, effective January 1, 2011, the Compensation and H.R. Committee announced the elimination and phasing out of executive perquisites. Prior to its
elimination, the automobile benefit was administered by the Company on a December-to-November calendar year basis, which was different than the Company’s fiscal
year. Because of this difference, even though Mr. Ambroseo did not receive an automobile benefit during fiscal 2013, consistent with the past reporting practice of
determining the benefit amount as of each November, we included $8,083 for Mr. Ambroseo under ‘‘All Other Compensation’’ for fiscal 2013 with respect to the phased
out automobile benefit. No other ‘‘perquisites’’ are included for any named executive officers in the summary compensation table for fiscal 2013. Executives continue to
receive certain ‘‘other compensation’’ other than perquisites, such as the regular Company-provided employee 401(k) Plan contribution match (subject to applicable IRS
rule limitations). During fiscal 2013, the named executive officers received the following contribution matches: Ambroseo ($10,192), Simonet ($11,246), Sobey
($10,200), Sechrist ($9,408) and DiMarco ($11,723). During fiscal 2013, we discovered that we had historically over-imputed income on the value of Company-provided
life insurance to certain employees, including each of the named executive officers. Accordingly, in fiscal 2013 we made a one-time payment to these employees
representing our estimate of the resulting impact on each individual (the ‘‘One-Time Payment’’). The One-Time Payments are included under ‘‘All Other Compensation’’
for fiscal 2013 for each of our Named Executive Officers as follows: Ambroseo ($10,038), Simonet ($7,820), Sobey ($1,136), Sechrist ($452) and DiMarco ($584).
COHERENT, INC. - 2013 Proxy Statement 27
SUMMARY COMPENSATION AND EQUITY TABLES
Grants of Plan-Based Awards in Fiscal 2013
Except as set forth in the footnotes, the following table shows all plan-based equity and non-equity incentive awards granted to our Named
Executive Officers during fiscal 2013. Our Named Executive Officers have not received any option awards during fiscal 2013.
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
Thresh-
Grant Date hold($)(2)
11/14/2012
11/14/2012
Target
($)
Actual
Payouts
Under
Non-Equity
Incentive
Maxi- Plan Awards Thresh-
hold
mum
0
($)(3)
Estimated Future Payouts
Under Equity Incentive
Plan Awards
Target
(#)
47,000
Maxi-
mum
94,000
All Other
Stock
Awards:
# of
Securities
Underlying
Options
(#)
Grant
Date Fair
Value
($)(1)
$ 2,278,560
24,000 $ 1,014,720
11/14/2012
11/14/2012
11/14/2012
11/14/2012
11/14/2012
11/14/2012
11/14/2012
11/14/2012
0
312,510
625,019
136,317
312,510
0
625,019
0 625,020 1,250,038
78,377
214,694
0
141,756
283,512
61,834
0
141,756
0 283,512
283,512
567,024
35,552
97,386
0
117,002
234,004
51,036
0
117,002
0 234,004
234,004
468,008
29,344
80,380
0
87,500
175,000
38,168
0
87,500
0 175,000
175,000
350,000
21,945
60,113
0
83,751
167,502
36,532
0
5,500
11,000
$
11,100 $
266,640
469,308
0
5,200
10,400
$
10,400 $
252,096
439,712
0
4,400
8,800
$
8,900 $
213,312
376,292
0
3,700
7,400
$
7,400 $
179,376
312,872
Name
John Ambroseo
Helene Simonet
Mark Sobey
Paul Sechrist
Bret DiMarco
Type
PRSU
RSU
1st semi-annual
bonus
2nd semi-annual
bonus
Total
PRSU
RSU
1st semi-annual
bonus
2nd semi-annual
bonus
Total
PRSU
RSU
1st semi-annual
bonus
2nd semi-annual
bonus
Total
PRSU
RSU
1st semi-annual
bonus
2nd semi-annual
bonus
Total
PRSU
RSU
1st semi-annual
bonus
2nd semi-annual
bonus
Total
0
83,751
0 167,502
167,502
335,004
(1) Reflects the dollar amount recognized for financial statement reporting purposes (disregarding an estimate of forfeitures related to service-based vesting conditions) for
fiscal 2013 in accordance with ASC 718, and includes grants made in fiscal 2013. The assumptions used in the valuation of these awards are set forth in Note 14
‘‘Employee Stock Option and Benefits Plans’’ of the Financial Statements in the Annual Report on Form 10-K. For informational purposes, if the maximum level of
performance for the PRSU awards was achieved, the value, calculated by multiplying the closing price of the Company’s common stock on the date of grant by the number
of shares issuable upon achievement of the maximum level of performance under the PRSU, is $4,557,120, $533,280, $504,192, $426,624 and $358,752, for
Mr. Ambroseo, Ms. Simonet, Mr. Sobey. Mr. Sechrist and Mr. DiMarco, respectively. These amounts do not correspond to the actual value, if any, that will be recognized
by the Named Executive Officers. See ‘‘Compensation Discussion and Analysis-Equity Awards’’ for a description of the PRSUs.
21,005
57,537
(2) Failure to meet a minimum level of performance would have resulted in no bonus paid out under the 2013 Variable Compensation Plan.
(3) Reflects the amount earned under the 2013 Variable Compensation Plan during the 2013 fiscal year.
28 COHERENT, INC. - 2013 Proxy Statement
SUMMARY COMPENSATION AND EQUITY TABLES
Option Exercises and Stock Vested at 2013 Fiscal Year-End
The table below sets forth certain information for each Named Executive Officer regarding the exercise of options and the vesting of stock awards
during the year ended September 28, 2013, including the aggregate value realized upon such exercise or vesting.
Option Awards
Stock Awards
John Ambroseo
Helene Simonet
Mark Sobey
Paul Sechrist
Bret DiMarco
(1) Reflects the difference between the exercise price of the option and market price of our Common Stock on the exercise date.
Number
of Shares
Acquired on
Exercise (#)
121,853
27,651
4,000
26,500
7,000
Value Realized
on Exercise ($)(1)
2,751,660
887,410
131,572
809,945
236,880
Number
of Shares
Acquired on
Vesting (#)
40,734
14,241
12,936
10,393
9,884
Value Realized
on Vesting ($)(2)
1,821,459
631,620
573,956
448,410
438,141
(2) Reflects the market price of our Common Stock on the vesting date.
COHERENT, INC. - 2013 Proxy Statement 29
SUMMARY COMPENSATION AND EQUITY TABLES
Outstanding Equity Awards at Fiscal 2013 Year-End
The following table presents information concerning unexercised options and stock that has not yet vested for each Named Executive Officer
outstanding as of September 28, 2013.
Option Awards(1)
Number of
Securities
Underlying
Number of
Securities
Underlying Unexercised Option
Options (#) Options (#)
Exercise
exercisable unexercisable Price ($)
—
—
—
—
—
—
26.16
23.16
—
—
—
—
—
—
75,000
25,200
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,000
—
—
—
—
—
—
—
—
18,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26.16
—
—
—
—
—
—
—
—
26.16
—
—
—
—
—
—
Option
Expiration
Date
—
—
—
—
—
—
11/20/2016
11/17/2014
—
—
—
—
—
—
—
—
—
—
—
—
11/20/2016
—
—
—
—
—
—
—
—
11/20/2016
—
—
—
—
—
—
Name
John Ambroseo
Helene Simonet
Mark Sobey
Paul Sechrist
Bret DiMarco
Grant Date
11/14/2012
11/14/2012
11/8/2011
11/8/2011
11/29/2010
11/29/2010
11/20/2009
11/17/2008
11/14/2012
11/14/2012
11/8/2011
11/8/2011
11/29/2010
11/29/2010
11/14/2012
11/14/2012
11/8/2011
11/8/2011
11/29/2010
11/29/2010
11/20/2009
11/14/2012
11/14/2012
11/8/2011
11/8/2011
3/30/2011
3/30/2011
11/3/2010
11/3/2010
11/20/2009
11/14/2012
11/14/2012
11/8/2011
11/8/2011
11/29/2010
11/29/2010
Stock Awards
Number of Market Value
of Shares or
Units of
Have Not
Vested ($)(2)
—
1,471,680
Equity
incentive
Equity
plan awards:
incentive
Market or
plan awards:
payout value
Number of
of unearned
unearned
shares, units
shares, units
Stock That or other rights or other rights
that have
that have
not vested ($)
not vested (#)
5,764,080
—
4,415,040
—
1,430,718
—
—
—
735,840
—
408,759
—
—
Shares or
Units of
Stock That
Have Not
Vested (#)
—
24,000
—
12,000
—
6,666
—
—
94,000(6)
—
72,000(5)
—
23,332(3)
—
—
—
11,000(6)
—
9,900(5)
—
5,000(3)
—
10,400(6)
—
9,240(5)
—
4,666(3)
—
—
8,800(6)
—
7,920(5)
—
666(4)
—
3,000(4)
—
—
7,400(6)
—
6,600(5)
—
3,332(3)
—
674,520
—
607,068
—
306,600
—
637,728
—
566,597
—
286,119
—
—
539,616
—
485,654
—
40,839
—
183,960
—
—
453,768
—
404,712
—
204,318
—
—
11,100
—
5,025
—
2,500
—
10,400
—
4,690
—
2,333
—
—
8,900
—
4,020
—
333
—
1,500
—
—
7,400
—
3,350
—
1,666
—
680,652
—
308,133
—
153,300
—
637,728
—
287,591
—
143,060
—
—
545,748
—
246,506
—
20,420
—
91,980
—
—
453,768
—
205,422
—
102,159
(1) Each of the unvested option grants set forth above vest in three equal installments on the anniversary of the date of grant.
(2) Market value is determined by multiplying the number of shares by $61.32, the closing price of the Company’s common stock on September 27, 2013, the last trading
date of the fiscal year.
(3) The performance-based RSU vesting determination dates are November 29, 2011, November 29, 2012 and November 29, 2013. The performance based RSUs will vest
in an amount which is 0-200% subject to the achievement of certain performance metrics. The amount reflected in the table is the maximum amount or 200%.
(4) The performance-based RSU vesting determination dates are November 3, 2011, November 2, 2012 and November 1, 2013. The performance based RSUs will vest in an
amount which is 0-200% subject to the achievement of certain performance metrics. The amount reflected in the table is the maximum amount or 200%.
(5) The performance-based RSU vesting determination date is November 7, 2014. The performance based RSUs will vest in an amount which is 0-200% subject to the
achievement of certain performance metrics. The amount reflected in the table is the maximum amount or 200%.
(6) The performance-based RSU vesting determination date is November 14, 2015. The performance based RSUs will vest in an amount which is 0-200% subject to the
achievement of certain performance metrics. The amount reflected in the table is the maximum amount or 200%.
30 COHERENT, INC. - 2013 Proxy Statement
SUMMARY COMPENSATION AND EQUITY TABLES
Fiscal 2013 Non-Qualified Deferred Compensation
For a description of our Deferred Compensation Plan, see ‘‘Compensation Discussion and Analysis-Retirement Plans.’’ The following table
presents information regarding the non-qualified deferred compensation activity for each Named Executive Officer during fiscal 2013:
Aggregate
Balance at Last
FYE ($)(3)
Name
7,016,417
John Ambroseo
SRP(4)
1,390,981
935,456
Helene Simonet
SRP(4)
142,931
677,828
Paul Sechrist
SRP(4)
181,174
79,378
Mark Sobey
Bret DiMarco
70,186
(1) Amounts in this column consist of salary and/or bonus earned by the individual during fiscal year 2013, which is also reported in the Summary Compensation Table.
Aggregate
Aggregate
Earnings in
Withdrawals/
Last FY ($) Distributions ($)
—
—
—
—
—
—
—
—
Registrant
Contributions
in Last FY ($)(2)
—
—
—
—
—
—
—
—
Executive
Contributions
in last FY ($)(1)
96,581
—
—
—
46,007
—
39,918
—
Executive Deferrals
including Company
Contribution in
Last FY ($)
—
—
—
—
—
—
—
—
829,531
167,303
50,303
15,842
90,883
34,122
9,118
12,358
(2) Deferred Compensation company contributions were terminated on December 31, 2010.
(3) The deferred compensation in a participant’s account is fully vested and is credited with positive or negative investment results based upon plan investment options
selected by the participant.
(4) Amounts represent account balances and earnings from the Supplementary Retirement Plan (SRP) which was suspended on December 31, 2004. Deferrals (both executive
and company) into this plan have been suspended. The Deferred Compensation Plan is the only non-qualified deferred compensation plan available for executive
management.
COHERENT, INC. - 2013 Proxy Statement 31
SUMMARY COMPENSATION AND EQUITY TABLES
Potential Payments upon Termination or Change of Control
The following table shows the potential payments and benefits that
we (or our successor) would be obligated to make or provide upon
termination of employment of each our Named Executive Officers
pursuant to the terms of the Change of Control Severance Plan. Other
than this plan, there are no other executive employment agreements or
other contractual obligations triggered upon a change of control. For
purposes of this table, it is assumed that each Named Executive
Officer’s employment terminated at the close of business on
September 27, 2013 (the last business day before the end of our fiscal
year end on September 28, 2013). These payments are conditioned
upon the execution of a form release of claims by the Named
Executive Officer in favor of us. The amounts reported below do not
include the nonqualified deferred compensation distributions that
would be made to the Named Executive Officers following a
termination of employment (for those amounts and descriptions, see
the prior table). There can be no assurance that a triggering event
would produce the same or similar results as those estimated below if
such event occurs on any other date or at any other price, of if any
other assumption used to estimate potential payments and benefits is
not correct. Due to the number of factors that affect the nature and
amount of any potential payments or benefits, any actual payments
and benefits may be different. These are aggregate payments and do
not reflect such individual’s net after tax benefit. No officer is entitled
to any ‘‘gross up’’ to offset the impact of IRS Code Section 280G.
2X
2X
Mark Sobey
Helene Simonet
Termination
for Cause
Named Executive Officer
John Ambroseo
Multiplier for Base
Salary and Bonus
2.99X
Any Other
Termination
1,868,807
— $
— $
1,868,807
— $ 14,226,117
99,000
— $
$ 18,062,731
810,036
567,025
2,730,273
66,000
4,173,334
720,012
468,008
2,558,822
66,000
3,812,842
700,004
350,002
2,154,723
66,000
3,270,729
670,010
335,005
1,824,147
66,000
2,895,162
(1) Equity Compensation Acceleration is the in-the-money value of unvested stock options, time-based restricted stock units and performance-based restricted stock units, in
each case as of September 27, 2013 at the closing stock price on that date ($61.32). The value of accelerated stock options are thus calculated by multiplying the number of
unvested shares subject to acceleration by the difference between the exercise price and the closing stock price on September 27, 2013; the value of accelerated restricted
stock is calculated by multiplying the number of unvested shares subject to acceleration by the closing stock price on September 27, 2013. This assumes immediate release
and vesting of the performance-based restricted stock units at the maximum, or 200% of target, achievement. The amounts reflected for Equity Compensation
Acceleration do not reflect any applicable taxes, just gross proceeds. Since the table assumes a triggering event on September 27, 2013, only those stock options and
restricted stock/RSU grants outstanding as of that date are included in the table.
Nature of Benefit
Salary Severance
Bonus Severance
Equity Compensation Acceleration(1)
Aggregate Healthcare Related Monthly Payment(2)
TOTAL BENEFIT
Salary Severance
Bonus Severance
Equity Compensation Acceleration(1)
Aggregate Healthcare Related Monthly Payment(2)
TOTAL BENEFIT
Salary Severance
Bonus Severance
Equity Compensation Acceleration(1)
Aggregate Healthcare Related Monthly Payment(2)
TOTAL BENEFIT
Salary Severance
Bonus Severance
Equity Compensation Acceleration(1)
Aggregate Healthcare Related Monthly Payment(2)
TOTAL BENEFIT
Salary Severance
Bonus Severance
Equity Compensation Acceleration(1)
Aggregate Healthcare Related Monthly Payment(2)
TOTAL BENEFIT
— $
— $
— $
— $
$
— $
— $
— $
— $
$
— $
— $
— $
— $
$
— $
— $
— $
— $
$
Bret DiMarco
Paul Sechrist
2X
2X
(2) Aggregate Monthly Payment is a monthly payment of $2,750 in lieu of receiving company subsidized COBRA benefits, life insurance premiums and/or other welfare
benefits, 36 months for the Chief Executive Officer and 24 months for the other named executive officers.
32 COHERENT, INC. - 2013 Proxy Statement
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of September 28, 2013 about the Company’s equity compensation plans under which shares of our
common stock may be issued to employees, consultants or members of our Board:
Plan category
(a) Number of
securities to be issued
upon exercise of
outstanding options,
warrants and rights
(b) Weighted-average
exercise price of
outstanding options,
warrants and rights(1)
(c) Number of securities
remaining available for
future issuance under equity
compensation plans (excluding
securities reflected in column (a))
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
TOTAL
(1) These weighted average exercise prices do not reflect the shares that will be issued upon the payment of outstanding awards of RSUs.
$26.90
—
$26.90
—
937,256
937,256(2)
6,935,735(3)
—
6,935,735
(2) This number does not include any options which may be assumed by us through mergers or acquisitions, however, we do have the authority, if necessary, to reserve
additional shares of common stock under these plans to the extent necessary for assuming such options.
(3) This number of shares includes 928,225 shares of common stock reserved for future issuance under the Employee Stock Purchase Plan and 6,007,510 shares reserved for
future issuance under the 2011 Plan.
CERTAIN RELATIONSHIPS AND RELATED
PERSON TRANSACTIONS
Review, Approval or Ratification of Related Person Transactions
(cid:129) Any immediate family member, as defined in Item 404(a) of
Regulation S-K, of a director, nominee for director, executive officer
and 5% Stockholder. We will report all such material related person
transactions under applicable accounting rules, federal securities
laws and SEC rules and regulations.
In accordance with the charter for the Audit Committee of the Board,
the members of the Audit Committee, all of whom are independent
directors, review and approve in advance any proposed related person
transactions. Additionally, from time to time the Board may directly
consider these transactions. For purposes of these procedures, the
individuals and entities that are considered ‘‘related persons’’ include:
(cid:129) Any of our directors, nominees for director and executive officers;
(cid:129) Any person known to be the beneficial owner of five percent or
more of our common stock (a ‘‘5% Stockholder’’); and
Related Person Transactions
We have entered into indemnification agreements with each of our executive officers and directors. Such indemnification agreements require us to
indemnify these individuals to the fullest extent permitted by law. We also intend to execute these agreements with our future directors and
officers.
COHERENT, INC. - 2013 Proxy Statement 33
REPORT OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
The Audit Committee is responsible for overseeing our accounting
and financial reporting processes and audits of our financial
statements. As set forth in its charter, the Audit Committee acts only
in an oversight capacity and relies on the work and assurances of both
management, which has primary responsibilities for our financial
statements and reports, as well as the independent registered public
accounting firm that is responsible for expressing an opinion on the
conformity of our audited financial statements to generally accepted
accounting principles.
The Audit Committee met thirteen (13) times either in person or by
telephone during fiscal 2013. In the course of these meetings, the
Audit Committee met with management, the internal auditors and
our independent registered public accounting firm and reviewed the
results of the internal and external audit examinations, evaluations of
our internal controls and the overall quality of our financial reporting.
The Audit Committee believes that a candid, substantive and focused
dialogue with the internal auditors and the independent registered
public accounting firm is fundamental to the Audit Committee’s
oversight responsibilities. To support this belief, the Audit Committee
periodically meets separately with the internal auditors and the
independent auditors, without management present. In the course of
its discussions in these meetings, the Audit Committee asked a
number of questions intended to bring to light any areas of potential
concern related to our financial reporting and internal controls. These
questions include:
(cid:129) Are there any significant accounting judgments, estimates or
adjustments made by management in preparing the financial
statements that would have been made differently had the auditors
themselves prepared and been responsible for the financial
statements;
(cid:129) Based on the auditors’ experience, and their knowledge of our
business, do our financial statements fairly present to investors, with
clarity and completeness, our financial position and performance
for the reporting period in accordance with generally accepted
accounting principles and SEC disclosure requirements;
(cid:129) Based on the auditors’ experience, and their knowledge of our
business, have we implemented internal controls and internal audit
procedures that are appropriate for our business.
The Audit Committee approved the engagement of Deloitte &
Touche LLP as our independent registered public accounting firm for
fiscal 2013 and reviewed with the internal auditors and independent
registered public accounting firm their respective overall audit scope
and plans. In approving Deloitte & Touche LLP, the Audit
Committee considered the qualifications of Deloitte & Touche LLP
and discussed with Deloitte & Touche LLP their independence,
including a review of the audit and non-audit services provided by
them to us. The Audit Committee also discussed with Deloitte &
Touche LLP the matters required to be discussed by Statement on
Auditing Standards No. 61, as amended, (AICPA, Professional
Standards, Vol. 1 AU section 380), as adopted by the Public Company
Accounting Oversight Board in Rule 3200T, and it received the
written disclosures and the letter from Deloitte & Touche LLP
required by the applicable requirements of the Public Company
Accounting Oversight Board regarding Deloitte & Touche LLP’s
communications with Audit Committee concerning independence
and has discussed Deloitte & Touche LLP’s independence with
Deloitte & Touche LLP.
Management has reviewed and discussed the audited financial
statements for fiscal 2013 with the Audit Committee, including a
discussion of the quality and acceptability of the financial reporting,
the reasonableness of significant accounting judgments and estimates
and the clarity of disclosures in the financial statements. In
connection with this review and discussion, the Audit Committee
asked a number of follow-up questions of management and the
independent registered public accounting firm to help give the Audit
Committee comfort in connection with its review.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board that the audited financial
statements be included in the annual report on Form 10-K for the
fiscal year ended September 28, 2013, for filing with the SEC.
Respectively submitted by the Audit Committee
Susan James, Chair
Garry Rogerson
Lawrence Tomlinson
34 COHERENT, INC. - 2013 Proxy Statement
OTHER MATTERS
We know of no other matters to be submitted to the meeting. If any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form Proxy to vote the shares they represent as the Board may recommend.
Dated: January 23, 2014
By Order of the Board of Directors
13JAN201423125288
John R. Ambroseo
President and Chief Executive Officer
COHERENT, INC. - 2013 Proxy Statement 35
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 28, 2013
or
(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-33962
COHERENT, INC.
Delaware
(State or other jurisdiction of
incorporation or organization)
5100 Patrick Henry Drive, Santa Clara, California
(Address of principal executive offices)
94-1622541
(I.R.S. Employer
Identification No.)
95054
(Zip Code)
Registrant’s telephone number, including area code: (408) 764-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:2) No (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 (the ‘‘Exchange Act’’). Yes (cid:3) No (cid:2)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:2) No (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files. Yes (cid:2) No (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of ‘‘large accelerated filer’’, ‘‘accelerated filer’’ and ‘‘smaller
reporting company’’ in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:2)
Accelerated filer (cid:3)
Smaller reporting company (cid:3)
Non-accelerated filer (cid:3)
(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes (cid:3) No (cid:2)
As of November 22, 2013, 24,816,399 shares of common stock were outstanding. The aggregate market value of the
voting shares (based on the closing price reported on the NASDAQ Global Select Market on March 30, 2013, of
Coherent, Inc., held by nonaffiliates was approximately $1,100,770,185. For purposes of this disclosure, shares of common
stock held by persons who own 5% or more of the outstanding common stock and shares of common stock held by each
officer and director have been excluded in that such persons may be deemed to be ‘‘affiliates’’ as that term is defined
under the Rules and Regulations of the Exchange Act. This determination of affiliate status is not necessarily conclusive.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the registrant’s fiscal 2014 Annual Meeting of Stockholders are
incorporated by reference into Part III of the Form 10-K to the extent stated herein. The Proxy Statement or an
amended report on Form 10-K will be filed within 120 days of the registrant’s fiscal year ended September 28, 2013.
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2.
ITEM 3.
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4. MINE SAFEFTY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
5
22
38
39
40
40
41
43
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . .
44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
ITEM 8.
ITEM 9.
RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . .
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . .
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
65
66
66
67
70
71
72
MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . .
73
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . .
ITEM 14.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
73
75
79
2
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This annual report contains forward-looking statements. These forward-looking statements include,
without limitation, statements relating to:
(cid:129) expansion into, and financial returns from, new markets;
(cid:129) optimization of financial returns;
(cid:129) maintenance and development of current and new customer relationships;
(cid:129) enhancement of market position through existing or new technologies;
(cid:129) optimization of product mix;
(cid:129) future trends in microelectronics, scientific research and government programs, OEM
components and instrumentation and materials processing;
(cid:129) utilization of vertical integration;
(cid:129) adoption of our products or lasers generally;
(cid:129) applications and processes that will use lasers, including the suitability of our products;
(cid:129) capitalization on market trends;
(cid:129) alignment with current and new customer demands;
(cid:129) positioning in the marketplace and gains of market share;
(cid:129) design and development of products, services and solutions;
(cid:129) control of supply chain and partners;
(cid:129) realization of restructuring benefits;
(cid:129) protection of intellectual property rights;
(cid:129) compliance with environmental and safety regulations;
(cid:129) net sales and operating results;
(cid:129) variations in stock price;
(cid:129) market acceptance of products;
(cid:129) trends in the instrumentation market;
(cid:129) sufficiency and management of cash, cash equivalents and investments;
(cid:129) acquisition efforts and utilization of technology from our acquisitions;
(cid:129) accounting for goodwill and intangible assets, inventory valuation, warranty reserves and taxes;
In addition, we include forward-looking statements under the ‘‘Our Strategy’’ and ‘‘Future Trends’’
headings set forth below in ‘‘Business’’ and under the ‘‘Bookings and Book-to-Bill Ratio’’ heading set
forth below in ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations.’’
You can identify these and other forward-looking statements by the use of the words such as
‘‘may,’’ ‘‘will,’’ ‘‘could,’’ ‘‘would,’’ ‘‘should,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘anticipates,’’ ‘‘estimates,’’ ‘‘intends,’’
‘‘potential,’’ ‘‘projected,’’ ‘‘continue,’’ ‘‘our observation,’’ or the negative of such terms, or other
comparable terminology. Forward-looking statements also include the assumptions underlying or
relating to any of the foregoing statements.
3
Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below in ‘‘Business,’’ ‘‘Management’s
Discussion and Analysis of Financial Condition and Results of Operations’’ and under the heading
‘‘Risk Factors.’’ All forward-looking statements included in this document are based on information
available to us on the date hereof. We undertake no obligation to update these forward-looking
statements as a result of events or circumstances or to reflect the occurrence of unanticipated events or
non-occurrence of anticipated events, except to the extent required by law.
4
PART I
ITEM 1. BUSINESS
GENERAL
Business Overview
Our fiscal year ends on the Saturday closest to September 30. Fiscal years 2013, 2012 and 2011
ended on September 28, September 29, and October 1, respectively, and are referred to in this annual
report as fiscal 2013, fiscal 2012 and fiscal 2011 for convenience. Fiscal years 2013, 2012 and 2011
included 52 weeks.
We are one of the world’s leading suppliers of photonics-based solutions in a broad range of
commercial and scientific research applications. We design, manufacture, service and market lasers and
related accessories for a diverse group of customers. Since inception in 1966, we have grown through
internal expansion and through strategic acquisitions of complementary businesses, technologies,
intellectual property, manufacturing processes and product offerings.
We are organized into two operating segments: Specialty Lasers and Systems (‘‘SLS’’) and
Commercial Lasers and Components (‘‘CLC’’). This segmentation reflects the go-to-market strategies
for various products and markets. While both segments deliver cost-effective photonics solutions, SLS
develops and manufactures configurable, advanced performance products largely serving the
microelectronics, scientific research and government programs and OEM components and
instrumentation markets. The size and complexity of many of the SLS products require service to be
performed at the customer site by factory-trained field service engineers. CLC focuses on higher
volume products that are offered in set configurations. The product architectures are designed for easy
exchange at the point of use such that substantially all product service and repairs are based upon
advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include materials
processing, original equipment manufacturer (‘‘OEM’’) components and instrumentation and
microelectronics.
Income (loss) from operations is the measure of profit and loss that our chief operating decision
maker (‘‘CODM’’) uses to assess performance and make decisions. Income (loss) from operations
represents the sales less the cost of sales and direct operating expenses incurred within the operating
segments as well as allocated expenses such as shared sales and manufacturing costs. We do not
allocate to our operating segments certain operating expenses, which we manage separately at the
corporate level. These unallocated costs include stock-based compensation and corporate functions
(certain advanced research and development, management, finance, legal and human resources) and
are included in Corporate and other. Management does not consider unallocated Corporate and other
costs in its measurement of segment performance.
We were originally incorporated in California on May 26, 1966 and reincorporated in Delaware on
October 1, 1990. Our common stock is listed on the NASDAQ Global Select Market and we are a
member of the Standard & Poor’s SmallCap 600 Index and the Russell 2000 Index.
Additional information about Coherent, Inc. (referred to herein as the Company, we, our, or
Coherent) is available on our web site at www.coherent.com. We make available, free of charge on our
web site, access to our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), as soon as reasonably
practicable after we file or furnish them electronically with the Securities and Exchange Commission
(‘‘SEC’’). Information contained on our web site is not part of this annual report or our other filings
with the SEC. Any product, product name, process, or technology described in these materials is the
property of Coherent.
5
INDUSTRY BACKGROUND
The word ‘‘laser’’ is an acronym for ‘‘light amplification by stimulated emission of radiation.’’ A
laser emits an intense coherent beam of light with some unique and highly useful properties. Most
importantly, a laser is orders of magnitude brighter than any lamp. As a result of its coherence, the
beam can be focused to a very small and intense spot, useful for applications requiring very high power
densities including cutting and other materials processing procedures. The laser’s high spatial resolution
is also useful for microscopic imaging and inspection applications. Laser light can be monochromatic—
all the beam energy is confined to a narrow wavelength band. Some lasers can be used to create
ultrafast output—a series of pulses with pulse durations as short as attoseconds (i.e., 10-18 seconds).
There are many types of lasers and one way of classifying them is by the material or medium used
to create the lasing action. This can be in the form of a gas, liquid, semiconductor, solid state crystal or
fiber. Lasers can also be classified by their output wavelength: ultraviolet, visible, infrared or
wavelength tunable. We manufacture all of these laser types. There are also many options in terms of
pulsed output versus continuous wave, pulse duration, output power, beam dimensions, etc. In fact,
each application has its specific requirements in terms of laser performance. The broad technical depth
at Coherent enables us to offer a diverse set of product lines characterized by lasers targeted at growth
opportunities and key applications. In all cases, we aim to be the supplier of choice by offering a
high-value combination of superior technical performance and high reliability.
Photonics has taken its place alongside electronics as a critical enabling technology for the twenty-
first century. Photonics based solutions are entrenched in a broad array of industries that include
industrial automation, textile processing, microelectronics, flat panel displays and medical diagnostics,
with adoption continuing in ever more diverse applications. Growth in these applications stems from
two sources. First, there are many applications where the laser is displacing conventional technology
because it can do the job faster, better or more economically. Second, there are new applications where
the laser is the enabling tool that makes the work possible (e.g., the production of sub 50 micron
microvias); these lasers are used in the manufacturing of high density printed circuit boards (‘‘PCBs’’)
found in the latest smart phones and tablet computers.
Key laser applications include: semiconductor inspection; manufacturing of advanced PCBs; flat
panel display manufacturing; solar cell production; medical and bio-instrumentation; materials
processing; industrial process and quality control; marking; imaging and printing; graphic arts and
display; and, research and development. For example, ultraviolet (‘‘UV’’) lasers are enabling the move
towards miniaturization, which drives innovation and growth in many markets. In addition, the advent
of industrial grade ultrafast lasers continues to open up new applications for laser processing.
OUR STRATEGY
We strive to develop innovative and proprietary products and solutions that meet the needs of our
customers and that are based on our core expertise in lasers and optical technologies. In pursuit of our
strategy, we intend to:
(cid:129) Leverage our technology portfolio and application engineering to lead the proliferation of
photonics into broader markets—We will continue to identify opportunities in which our
technology portfolio and application engineering can be used to offer innovative solutions and
gain access to new markets. We plan to utilize our expertise to increase our market share in the
mid to high power material processing applications.
(cid:129) Optimize our leadership position in existing markets—There are a number of markets where we
have historically been at the forefront of technological development and product deployment
and from which we have derived a substantial portion of our revenues. We plan to optimize our
financial returns from these markets.
6
(cid:129) Maintain and develop additional strong collaborative customer and industry relationships—We
believe that the Coherent brand name and reputation for product quality, technical performance
and customer satisfaction will help us to further develop our loyal customer base. We plan to
maintain our current customer relationships and develop new ones with customers who are
industry leaders and work together with these customers to design and develop innovative
product systems and solutions as they develop new technologies.
(cid:129) Develop and acquire new technologies and market share—We will continue to enhance our
market position through our existing technologies and develop new technologies through our
internal research and development efforts, as well as through the acquisition of additional
complementary technologies, intellectual property, manufacturing processes and product
offerings.
(cid:129) Streamline our manufacturing structure and improve our cost structure—We will focus on
optimizing the mix of products that we manufacture internally and externally. We will utilize
vertical integration where our internal manufacturing process is considered proprietary and seek
to leverage external sources when the capabilities and cost structure are well developed and on a
path towards commoditization.
(cid:129) Focus on long-term improvement of adjusted EBITDA, in dollars and as a percentage of net
sales—We define adjusted EBITDA as operating income adjusted for depreciation, amortization,
stock compensation expenses, major restructuring costs and certain other non-operating income
and expense items. Key initiatives to reach our goals for EBITDA improvements include
utilization of our Asian manufacturing locations, rationalizing our supply chain and continued
leveraging of our infrastructure.
APPLICATIONS
Our products address a broad range of applications that we group into the following markets:
Microelectronics, Materials Processing, OEM Components and Instrumentation and Scientific Research
and Government Programs.
Microelectronics
Nowhere is the trend towards miniaturization more prevalent than in the Microelectronics market
where smart phones, tablets, ultrabooks, personal computers (‘‘PC’s’’) and televisions (‘‘TV’s’’) are
driving advances in displays, integrated circuits and PCBs. In response to market demands and
expectations, semiconductor and device manufacturers are continually seeking to improve their process
and design technologies in order to manufacture smaller, more powerful and more reliable devices at
lower cost. New laser applications and new laser technologies are a key element in delivering higher
resolution and higher precision at lower manufacturing cost.
We support three major markets in the microelectronics industry: (1) flat panel display (‘‘FPDs’’)
manufacturing, (2) advanced packaging and interconnects and (3) semiconductor front-end.
Microelectronics—flat panel display manufacturing
The high-volume consumer market is driving the production of FPDs in applications such as
mobile phones, tablets, ultrabooks, laptop computers, and TVs. There are several types of established
and emerging displays based on quite different technologies, including liquid crystal (‘‘LCD’’) and
organic polymers (‘‘OLED’’). Each of these technologies utilize laser applications given that lasers
provide higher process speed, better yield, improved battery life, lower cost and/or superior display
brightness and resolution.
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Several display types require a high-density pattern of silicon thin film transistors (‘‘TFTs’’). If this
silicon is polycrystalline, the display performance is greatly enhanced. In the past, these polysilicon
layers could only be produced on expensive special glass at high temperatures. However, excimer-based
processes, such as excimer laser annealing (‘‘ELA’’) have allowed high-volume production of
low-temperature polysilicon (‘‘LTPS’’) on conventional glass substrates. Our excimer lasers provide an
invaluable solution for LTPS because they are the only industrial-grade excimer lasers with the high
pulse energy optimized for this application. The current state-of-the-art product for this application is
our excimer VYPER laser, which delivers over 1000W of power, enabling customers to scale to current
Generation 5 & 5.5 substrates all the way up to Generation 8 sizes. These systems are integral to the
manufacturing process on all leading LTPS-based smart phone displays, with the highest commercially
available pixel densities of greater than 300 pixels per inch (ppi) and hold the potential for deployment
in tablet display and OLED TV manufacturing.
Our AVIA, Rapid, Talisker and DIAMOND lasers are also used in other production processes for
FPDs. These processes include drilling, cutting, patterning, marking and yield improvement.
Lasers have also become a valuable tool in high-brightness (‘‘HB’’) LED manufacturing, improving
LED performance and yield. LED has seen rapid growth over the last several years due to widespread
adoption as the light source in all categories of LCD displays, from phones all the way to full size TVs.
Our lasers are used in the back-end processing of HB-LEDs.
Microelectronics—advanced packaging and interconnects
After a wafer is patterned, there are then a host of other processes, referred to as back-end
processing, which finally result in a packaged encapsulated silicon chip. Ultimately, these chips are then
assembled into finished products. The advent of high-speed logic and high-memory content devices has
caused chip manufacturers to look for alternative technologies to improve performance and lower
process costs. In terms of materials, this search includes new types of materials, such as low-k and
thinner silicon. Our AVIA, Rapid, Talisker and Matrix lasers provide economical methods of cutting
and scribing these wafers while delivering higher yields than traditional mechanical methods.
There are similar trends in chip packaging and PCB manufacturing requiring more compact
packaging and denser interconnects. In many cases, lasers present enabling technologies. For instance,
lasers are now the only economically practical method for drilling microvias in chip substrates and in
both rigid and flexible PCBs. These microvias are tiny interconnects that are essential for enabling
high-density circuitry commonly used in smart phones, tablets and advanced computing systems. Our
DIAMOND carbon dioxide (‘‘CO2’’) and AVIA diode pumped solid state (‘‘DPSS’’) lasers are the
lasers of choice in this application. The ability of these lasers to operate at very high repetition rates
translates into faster drilling speeds and increased throughput in microvia processing applications. In
addition, multi-layer circuit boards require more flexible production methods than conventional printing
technologies can offer, which has led to widespread adoption of laser direct imaging (‘‘LDI’’). Our
Paladin laser is used for this application.
Microelectronics—semiconductor front-end
The term ‘‘front-end’’ refers to the production of semiconductor devices which occurs prior to
packaging.
As semiconductor device geometries decrease in size, devices become increasingly susceptible to
smaller defects during each phase of the manufacturing process and these defects can negatively impact
yield. One of the semiconductor industry’s responses to the increasing vulnerability of semiconductor
devices to smaller defects has been to use defect detection and inspection techniques that are closely
linked to the manufacturing process. For example, automated laser-based inspection systems are now
8
used to detect and locate defects as small as 0.01 micron, which may not be observable by conventional
optical microscopes.
Detecting the presence of defects is only the first step in preventing their recurrence. After
detection, defects must be examined in order to identify their size, shape and the process step in which
the defect occurred. This examination is called defect classification. Identification of the sources of
defects in the lengthy and complex semiconductor manufacturing process has become essential for
maintaining high yield production. Semiconductor manufacturing has become an around-the-clock
operation and it is important for products used for inspection, measurement and testing to be reliable
and to have long lifetimes. Our Azure, Paladin and Excimer lasers are used to detect and characterize
defects in semiconductor chips.
Materials Processing
Lasers are widely accepted today in many important industrial manufacturing applications
including cutting, welding, joining, drilling, perforating, and marking of metals and nonmetals. We
supply high-power lasers for metal processing and low-to-medium power lasers for laser marking,
nonmetals processing and precision micromachining.
Our high power industrial laser systems are used for cutting, welding, cladding and hardening of
metals, as well as other materials processing applications.
Our Semiconductor business provides higher power arrays with powers in excess of 50 kilowatts
through proprietary cooling and stacking technology. This unique technology provides the engine for
both our Highlight direct diode systems as well as our kW class fiber lasers. Our differentiated fiber
laser design offers our customers a higher level of integration and additional options for product
serviceability. Our fiber lasers are used for metal cutting, cladding and welding applications.
Complementing our high power solid state lasers is our industry leading DIAMOND E1000 CO2
laser. Introduced in 2009, this laser remains in high demand due to its high power, small size and
completely sealed design—all ideal for material processing.
Combining the high power Direct Diode, Fiber and CO2 offerings with our MetaBeam 1000
flatbed cutting tool provides a strong, compelling four-pronged approach to meeting the needs of our
diverse materials processing customers. The new METABEAM 1000 offers the industry’s most compact
1kW tool, with tool footprints at least 50% smaller than competitive designs. Operating costs, due to a
combination of input power efficiencies and the sealed nature of the DIAMOND series of CO2 lasers,
are 50% less than similar, but larger tools.
We also participate in the low to medium power area, including such applications as the cutting,
drilling and joining of a host of materials using our DIAMOND CO2 lasers; Highlight fiber array
product (‘‘FAP’’) semiconductor lasers in OEM opportunities and direct end user applications with the
lower power OMNIBEAM and METABEAM cutting tools; applications including cutting, perforating
and scoring of paper, thin metals and packaging materials; and various cutting and patterning
applications in the textile, wood and sign industries. In the specific area of textiles and clothing, our
DIAMOND lasers service older applications, such as cutting complex shapes in leather for footwear, as
well as newer applications such as creating detailed fade patterns on designer denims.
Laser marking and coding are generally considered part of the precision materials processing
applications market for which we remain a leading supplier. One such area where applications are
growing rapidly is the displacement of ink-jet coding due to both aesthetic and environmental
pressures. The optimum choice of laser depends on the material being marked, whether it is a surface
mark (engraved) or a sub-surface mark, and the specific economics of the application. Our
DIAMOND C and GEM Series of CO2 lasers provide many systems manufacturers with a reliable cost
effective source for marking and engraving on non-metals. In addition, our Matrix product line of
9
reliable, compact and low-cost DPSS lasers provides an ideal solution for marking of other materials in
high volume manufacturing.
OEM components and instrumentation
Instrumentation is one of our more mature commercial applications. Representative applications
within this market include bio-instrumentation, medical OEMs, graphic arts and display and machine
vision. We also support the laser-based instrumentation market with a range of laser-related
components, including diode lasers for optical pumping. Our OEM component business includes sales
to other, less integrated laser manufacturers participating in OEM markets such as materials
processing, scientific, and medical.
Bio-instrumentation
Bio-instrumentation applications for lasers include bio-agent detection for point source and
standoff detection of pathogens or other bio-toxins; confocal microscopy for biological imaging that
allows researchers and clinicians to visualize cellular and subcellular structures and processes with an
incredible amount of detail; DNA sequencing that provides automation and data acquisition rates that
would be impossible by any other method; drug discovery—genomic and proteomic analyses that enable
drug discovery to proceed at very high throughput rates; and flow cytometry for analyzing single cells or
populations of cells in a heterogeneous mixture, including blood samples. Our OBIS, Galaxy, Sapphire,
Compass and Coherent CUBE lasers are used in several bio-instrumentation applications.
Medical Therapy
We sell a variety of components and lasers to medical laser companies in end-user applications
such as ophthalmology, aesthetic, surgical, therapeutic and dentistry. Our DIAMOND series CO2 lasers
are widely used in ophthalmic, aesthetic and surgical markets. We have a leading position in Lasik and
photorefractive keratectomy surgery methods with our ExciStar XS excimer laser platform. With the
acquisition of Lumera, we now have ultrafast lasers targeted for use in laser cataract surgery.
The unique ability of our optically pumped semiconductor lasers (‘‘OPSL’’) technology to match a
wavelength to an application has led to the development of a high-power yellow (577nm) laser for the
treatment of eye related diseases, such as Age Related Macular Degeneration and retinal diseases
associated with diabetes. The 577nm wavelength was designed to match the peak in absorption of
oxygenated hemoglobin thereby allowing treatment to occur at a lower power level, and thus reducing
stress and heat-load placed on the eye with traditional green-based (530nm) solid state lasers. Other
applications where our OBIS, Genesis and Sapphire series of lasers are used include the retinal
scanning market in diagnostic imaging systems as well as new ground breaking in-vivo imaging.
Scientific research and government programs
We are widely recognized as a technology innovator and the scientific market has historically
provided an ideal ‘‘test market’’ for our leading-edge innovations. These have included ultrafast lasers,
DPSS lasers, continuous-wave (‘‘CW’’) systems, excimer gas lasers and water-cooled ion gas lasers. Our
portfolio of lasers that address the scientific research market is broad and includes our Chameleon,
COMPexPro, Evolution, Legend, Libra, MBD, MBR, Vitara, Mira and Verdi lasers. Many of the
innovations and products pioneered in the scientific marketplace have become commercial successes for
both our OEM customers and us.
We have a large installed base of scientific lasers which are used in a wide range of applications
spanning virtually every branch of science and engineering. These applications include biology and life
science, engineering, physical chemistry and physics. Most of these applications require the use of
ultrafast lasers that enable the generation of pulses short enough to be measured in femto- or
10
attoseconds (10-15 to 10-18 seconds). Because of these very short pulse durations, ultrafast lasers enable
the study of fundamental physical and chemical processes with temporal resolution unachievable with
any other tool. These lasers also deliver very high peak power and large bandwidths, which can be used
to generate many exotic effects. Some of these are now finding their way into mainstream applications,
such as microscopy or materials processing. The use of ultrafast lasers such as the Chameleon in
microscopy is now a common occurrence in bio-imaging labs.
FUTURE TRENDS
Microelectronics
Lasers are widely used in mass production microelectronics applications largely because they
enable entirely new application capabilities that cannot be realized by any other known means. These
laser-based fabrication and testing methods provide a level of precision, typically on a micrometer and
nanometer level, that are unique, faster, are touch free, deliver superior end products, increase yields,
and/or cut production costs. We anticipate this trend to continue, driven primarily by the increasing
sophistication of consumer electronic goods and their convergence via the internet, resulting in
increasing demand for better displays, more bandwidth and memory, and all packaged into devices
which are lighter, thinner and consume less power. Although this market follows the macro-economic
trends and carries inherent risks, we believe that we are well positioned to continue to capitalize on the
current market trends and that we will see continued increased adoption of our solid-state, CO2, pulsed
fiber, direct diode and excimer lasers, as all these lasers enable entirely new applications, performance
improvements and reduced process costs.
LTPS-based high resolution mobile displays (greater than 300ppi), and especially the emergence of
OLED technology, is evolving as the prevalent FPD technology. We believe we are well positioned,
especially with our Vyper Excimer lasers and LB optical systems, to take advantage of this trend,
including the possibility of LTPS-based OLED TVs and flexible OLED displays.
CO2, Avia, Rapid, Talisker, Helios and direct diode lasers all seem aligned with the need for
related FPD touch panel, film cutting, light guide technology, repair, frit welding and glass cutting
applications.
The trend for thinner and lighter devices is impacting the glass substrates used in today’s mobile
devices requiring thinner glass with higher degrees of mechanical strength and scratch resistance.
Mechanical means of cutting these glass panels are no longer adequate to meet future requirements
and we expect lasers to play an increased role. Our CO2 and Rapid lasers are well positioned to take
advantage of this trend.
Semiconductor devices look set to continue Moore’s Law, shrinking device geometries for at least
another decade, as well as expanding vertically into new 3D structures. As a result we believe our many
UV laser sources (such as Azure, Paladin, Avia, Talisker, ExiStar and Matrix) will continue to find
increasing adoption, since their unique optical properties align well with the process demands of a
nanometer scale world.
The same lasers plus CO2 are also widely adopted for back end Advanced Packaging and
Interconnect (API) applications. With dimension roadmaps showing a decade of dimension shrink on
PCBs, interconnects, Silicon & LED scribe widths and glass thickness, we believe that our portfolio of
lasers aligns well with these demands as well as new processes that seem likely to be enabled by our
lasers, to meet the increasing demands and decreasing tolerances of these markets.
Materials processing
The market for low to medium power CO2, solid state and semiconductor lasers used in industrial
materials processing has experienced a nice rebound and is expected to see continued growth driven by
11
wider adoption of lasers in new processes especially in emerging markets. Key design wins as well as
more favorable markets continue to support our growth in this area. These lasers represent a
cost-effective manufacturing solution for cutting, joining, marking and engraving of non-metal materials
including marking/coding, flat bed cutting, engraving, as well as the production of capital equipment for
apparel and leather goods manufacturing.
The market for kW class fiber lasers has seen strong growth in recent years, replacing legacy
multi-kW CO2 lasers in metal cutting and other applications. This trend will likely continue into the
future. We believe we are well positioned to benefit from this large and growing market with our line
of kW fiber lasers.
Our four-pronged approach to the higher power industrial laser market provides us with a unique
combination of high power, precision and compact size, which we believe will be highly desirable in
existing manufacturing environments as well as those of the future. We offer kilowatt Diamond CO2
lasers, Highlight fiber and direct diode lasers as well as the MetaBEAM family of turnkey laser
machine tools. Several factors are enabling us to gain market share in the materials processing market.
We have developed an expanded portfolio of lasers with a broad spectrum of wavelengths, enabling
optimum solutions for virtually every metal and non-metal material type. At the same time, the
reliability of these products has been achieved at even higher levels, lowering the cost of ownership.
OEM components and instrumentation
The instrumentation market is seeing a gradual migration from the use of mature laser
technologies, such as water-cooled ion gas lasers, to new technologies, primarily based on solid state
and semiconductor lasers. Using our unique portfolio of such lasers, as well as our patented OPSL
technology, we are able to both assist and stimulate this transition as well as to be the technology of
choice for developing applications such as security and clinical diagnostics. Our OPSL technology
resulted in the first truly continuous wave solid-state UV laser which enables the use of UV in a
clinical as well as a research environment. Furthermore we anticipate greater future opportunities in
bio-instrumentation, including DNA sequencing, drug discovery, flow cytometry, and microscopy, based
on our product enhancements and evolving market developments, particularly in increased migration
from clinical to point-of-care diagnostics. Our newer laser technologies are the basis of a number of
clinical procedures. In the area of photocoagulation, our Genesis OPSL yellow lasers are being used as
the wavelength is particularly suitable for the treatment of blood vessels. In aesthetic laser procedures,
we are an OEM supplier of CO2 and semiconductor lasers to the major manufacturers of equipment
used in the latest procedures in dermatology and hair removal. We supply excimer lasers used in
refractive eye surgery and are actively involved in further developments in laser vision correction
including use of ultrafast lasers in applications such as laser cataract surgery where higher precision and
use of advanced implants enable better and more reliable patient outcomes. Laser cataract surgery is a
relatively new application which is expected to see strong growth over the next several years.
Scientific research and government programs
The scientific market benefited from stimulus funding during fiscal 2011, with applications in
ultrashort pulses and in bio-research being the drivers of this anticipated expansion. We have recently
seen the total amount of government-related funding for scientific research decline to pre-stimulus
levels and it is unclear whether or to what extent the recent ‘‘U.S. fiscal cliff’’ experience will impact
future government research funding. However, we believe that as we push the boundaries of
performance and ease of use in our ultrafast lasers, we have the potential to capture a large share of
the available market by enabling our customers to win funding for new research fields that drive
discovery. While these markets remain highly competitive, we believe our leadership position and new
product pipeline will drive attosecond science boundaries and biological imaging ease of use, enabling
new research frontiers to be forged and we would expect a gain in market share as a result.
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MARKET APPLICATIONS
We design, manufacture and market lasers, laser tools, precision optics and related accessories for
a diverse group of customers. The following table lists our major markets and the Coherent
technologies serving these markets.*
Market
Application
Technology
Microelectronics
Flat panel display
Advanced packaging and
interconnects
Semiconductor front-end
Materials processing
Metal cutting, joining, surface
treatment
Laser marking and coding
Non-metal cutting, drilling
OEM components and
instrumentation
Bio-Instrumentation
Graphic arts and display
Medical therapy (OEM)
Scientific research and
government programs
All scientific applications
CO2
DPSS
Excimer
Ultrafast
Semiconductor
CO2
DPSS
Excimer
Ultrafast
CO2
DPSS
OPSL
Excimer
Ion
CO2
Fiber
Semiconductor
Laser Machine Tools
CO2
DPSS
CO2
DPSS
Excimer
Semiconductor
Laser Machine Tools
DPSS
OPSL
Semiconductor
Ultrafast
OPSL
CO2
CO2
DPSS
Ultrafast
Excimer
OPSL
Semiconductor
DPSS
Excimer
OPSL
Ultrafast
*
Coherent sells its laser measurement and control products into a number of these applications.
In addition to products we provide, we invest routinely in the core technologies needed to create
substantial differentiation for our products in the marketplace. Our semiconductor, crystal and fiber
13
facilities all maintain an external customer base providing value-added solutions. We direct significant
engineering efforts to produce unique solutions targeted for internal consumption. These investments,
once integrated into our broader product portfolio, provide our customers with uniquely differentiated
solutions and the opportunity to substantially enhance the performance, reliability and capability of the
products we offer.
TECHNOLOGIES
Diode-pumped solid-state lasers
DPSS lasers use semiconductor lasers to pump a crystal to produce a laser beam. By changing the
energy, optical components and the types of crystals used in the laser, different wavelengths and types
of laser light can be produced.
The efficiency, reliability, longevity and relatively low cost of DPSS lasers make them ideally suited
for a wide range of OEM and end-user applications, particularly those requiring 24-hour operations.
Our DPSS systems are compact and self-contained sealed units. Unlike conventional tools and other
lasers, our DPSS lasers require minimal maintenance since they do not have internal controls or
components that require adjusting and cleaning to maintain consistency. They are also less affected by
environmental changes in temperature and humidity, which can alter alignment and inhibit performance
in many systems.
We manufacture a variety of types of DPSS lasers for different applications including
semiconductor inspection; advanced packaging and interconnects; laser pumping; spectroscopy;
bio-agent detection; DNA sequencing; drug discovery; flow cytometry; forensics; computer-to-plate
printing; entertainment lighting (display); medical; rapid prototyping and marking, welding, engraving,
cutting and drilling.
Fiber lasers
Fiber lasers use semiconductor lasers to pump a doped optical fiber to produce a laser beam. The
unique features of a fiber laser make them suitable for producing high power, continuous wave laser
beams. We have introduced a 1 kilowatt fiber laser. Our fiber laser design has several unique features
including a modular design for improved serviceability and diode bar based pumping. Due to packaging
efficiency, diode bars reduce the overall cost of a fiber laser. Some of the most critical components
inside a fiber laser include the gain fiber itself and the diodes providing the pump power. We are well
positioned as a fiber laser supplier since we are vertically integrated with respect to these key
technologies; we use diode bars and fiber manufactured in-house. We plan to continue to drive cost
reduction in our diode laser pumps and demonstrate the scalability of the platform by moving up the
power scale into the multi kilowatt regime. This platform will address the growing high power metal
cutting and joining market.
Gas lasers (CO2, Excimer, Ion)
The breadth of our gas laser portfolio is industry leading, encompassing CO2, excimer and ion
laser technologies. Gas lasers derive their name from the use of one or more gases as a lasing medium.
They collectively span an extremely diverse and useful emission range, from the very deep ultraviolet to
the far infrared. This diverse range of available wavelengths, coupled with high optical output power,
and an abundance of other attractive characteristics, makes gas lasers extremely useful and popular for
a variety of microelectronics, scientific, medical therapeutic and materials processing applications.
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Optically Pumped Semiconductor Lasers (‘‘OPSL’’)
Our OPSL platform is a surface emitting semiconductor laser that is energized or pumped by a
semiconductor laser. The use of optical pumping circumvents inherent power scaling limitations of
electrically pumped lasers, enabling very high powered devices. A wide range of wavelengths can be
achieved by varying the semiconductor materials used in the device and changing the frequency of the
laser beam using techniques common in solid state lasers. The platform leverages high reliability
technologies developed for telecommunications and produces a compact, rugged, high power,
single-mode laser.
Our OPSL products are well suited to a wide range of applications, including the
bio-instrumentation, medical therapeutics and graphic arts and display markets. In fiscal 2009, our
Genesis yellow laser continued to make progress in ophthalmology and we have expanded our offerings
in the area of entertainment lighting using a variety of products across the visible spectrum. We also
continue to expand our ultraviolet version of the OPSL platform called the Genesis, which was
developed for the bio-instrumentation market.
Semiconductor lasers
High power edge emitting semiconductor diode lasers use the same principles as widely-used CD
and DVD lasers, but produce significantly higher power levels. The advantages of this type of laser
include smaller size, longer life, enhanced reliability and greater efficiency. We manufacture a wide
range of discrete semiconductor laser products with wavelengths ranging from 650nm to over 1000nm
and output powers ranging from 1W to over 100W, with highly integrated products in the kW range.
These products are available in a variety of industry standard form factors including the following: bare
die, packaged and fiber coupled single emitters and bars, monolithic stacks, and fully integrated
modules with microprocessor controlled units that contain power supplies and active coolers.
Our semiconductor lasers are used internally as the pump lasers in DPSS, fiber and OPSL
products that are manufactured by us, as well as a wide variety of external medical, OEM, military and
industrial applications, including aesthetic (hair removal, cosmetic dentistry), graphic arts, counter
measures, rangefinders, target designators, and plastic welding.
Ultrafast (‘‘UF’’) Lasers
Ultrafast lasers are lasers generating light pulses with durations of a few femtoseconds (10-15
seconds) to a few tens of picoseconds (10-11 seconds). These types of lasers are used for medical,
advanced microelectronics and materials processing applications as well as scientific research. UF laser
oscillators generate a train of pulses at 50-100 MHz, with peak powers of tens of kilowatts, and UF
laser amplifiers generate pulses at 1-2000 kHz, with peak powers up to several Terawatts.
The extremely short duration of UF laser pulses enables temporally resolving fast events like the
dynamics of atoms or electrons. In addition, the high peak power enables so-called non-linear effects
where several photons can be absorbed by a molecule at the same time. This type of process enables
applications like multi-photon excitation microscopy or UF ablation of materials with high precision
and minimal thermal damage.
SALES AND MARKETING
We primarily market our products in the United States through a direct sales force. Our foreign
sales are made principally to customers in South Korea, Japan, Germany and other European and
Asia-Pacific countries. We sell internationally through direct sales personnel located in Canada, France,
Germany, Italy, Japan, the Netherlands, China, South Korea, Taiwan and the United Kingdom, as well
as through independent representatives in certain jurisdictions around the world. Foreign sales
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accounted for 77% of our total net sales in fiscal 2013, 76% of our total net sales in fiscal 2012 and
74% of our total net sales in fiscal 2011. In fiscal 2013, sales to Asian markets continued to grow at a
faster rate than sales to other geographic regions. Sales made to independent representatives and
distributors are generally priced in U.S. dollars. A large portion of foreign sales that we make directly
to customers are priced in local currencies and are therefore subject to currency exchange fluctuations.
Foreign sales are also subject to other normal risks of foreign operations such as protective tariffs,
export and import controls and political instability.
We had one customer during fiscal 2013 who contributed more than 10% of revenue, Advanced
Process Systems Corporation. We had two customers during fiscal 2012 who contributed more than
10% of revenue, Japan Steel Works, Ltd. and Advanced Process Systems Corporation. There were no
major customers over 10% of revenues for fiscal 2011.
To support our sales efforts we maintain and continue to invest in a number of applications centers
around the world, where our applications experts work closely with customers on developing laser
processes to meet their manufacturing needs. The applications span a wide range, but are mostly
centered around the materials processing and microelectronics markets. Locations include several
facilities in the US, Europe and Asia.
We maintain customer support and field service staff in major markets within the United States,
Europe, Japan, China, South Korea, Taiwan and other Asia-Pacific countries. This organization works
closely with customers, customer groups and independent representatives in servicing equipment,
training customers to use our products and exploring additional applications of our technologies.
We typically provide parts and service warranties on our lasers, laser-based systems, optical and
laser components and related accessories and services. Warranties on some of our products and services
may be shorter or longer than one year. Warranty reserves, as reflected on our consolidated balance
sheets, have generally been sufficient to cover product warranty repair and replacement costs. The
weighted average warranty period covered is approximately 15 months.
RESEARCH AND DEVELOPMENT
We are constantly developing and introducing new products as well as improving and refining
existing products to better serve the markets we participate in. Our development efforts are focused on
designing and developing products, services and solutions that anticipate customers’ changing needs and
emerging technological trends. Our efforts are also focused on identifying the areas where we believe
we can make valuable contributions. Research and development expenditures for fiscal 2013 were
$82.8 million, or 10.2% of net sales compared to $78.3 million, or 10.2% of net sales for fiscal 2012 and
$81.2 million, or 10.1% of net sales for fiscal 2011. We work closely with customers, both individually
and through our sponsored seminars, to develop products to meet customer application and
performance needs. In addition, we are working with leading research and educational institutions to
develop new photonics based solutions.
MANUFACTURING
Strategies
One of our core manufacturing strategies is to tightly control our supply of key parts, components,
sub-assemblies and outsourcing partners. We primarily utilize vertical integration when we have
proprietary internal capabilities that are not cost-effectively available from external sources. We believe
this is essential to maintain high quality products and enable rapid development and deployment of
new products and technologies. We provide customers with 24-hour technical expertise and quality that
is International Organization for Standardization (‘‘ISO’’) certified at our principal manufacturing sites.
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Committed to quality and customer satisfaction, we design and produce many of our own
components and sub-assemblies in order to retain quality and performance control. We have also
outsourced certain components, sub-assemblies and finished goods where we can maintain our high
quality standards while improving our cost structure.
As part of our strategy to increase our market share and customer support in Asia as well as our
continuing efforts to manage costs, we acquired the business assets of privately-held Hypertronics in the
second quarter of fiscal 2011. Hypertronics’ assets included an engineering and integration center in
Singapore and a low cost manufacturing facility in Penang, Malaysia. We have increased the footprint
of both the Singapore and Malaysia factories and are using these operations to expand our laser
manufacturing and repair activities in Asia. This will allow us to reduce service response time and
inventories, providing benefits to us and to our customers. We have also established an International
Procurement Office in Singapore and have started to increase our sourcing of materials from Asia to
reduce material costs on a global basis. In fiscal 2012, we opened a tube refurbishment manufacturing
site in South Korea to better service our customers in that region. In fiscal 2013, we expanded our
manufacturing presence in Germany through the acquisitions of Innolight and Lumera.
We have designed and implemented proprietary manufacturing tools, equipment and techniques in
an effort to provide products that differentiate us from our competitors. These proprietary
manufacturing techniques are utilized in a number of our product lines including our gas laser
production, crystal growth, beam alignment as well as the wafer growth for our semiconductor and
optically pumped semiconductor laser product family.
Raw materials or sub-components required in the manufacturing process are generally available
from several sources. However, we currently purchase several key components and materials, including
exotic materials, crystals and optics, used in the manufacture of our products from sole source or
limited source suppliers. We also purchase assemblies and turnkey solutions from contract
manufacturers based on our proprietary designs. We rely on our own production and design capability
to manufacture and specify certain strategic components, crystals, fibers, semiconductor lasers, lasers
and laser based systems.
For a discussion of the importance to our business of, and the risks attendant to sourcing, see
‘‘Risk Factors’’ in item 1A—‘‘We depend on sole source or limited source suppliers, both internal and
external, for some of our key components and materials, including exotic materials, certain cutting-edge
optics and crystals, in our products, which make us susceptible to supply shortages or price fluctuations
that could adversely affect our business.’’
Operations
Our products are manufactured at our sites in Santa Clara and Sunnyvale, California; Wilsonville,
Oregon; East Hanover, New Jersey; Bloomfield, Connecticut; Salem, New Hampshire; L¨ubeck,
Germany; G¨ottingen, Germany; Kaiserslautern, Germany; Hannover, Germany; Glasgow, Scotland;
Kallang Sector, Singapore; and Penang, Malaysia. In addition, we also use contract manufacturers for
the production of certain assemblies and turnkey solutions. Our ion gas lasers, a portion of our DPSS
lasers that are used in microelectronics, scientific research and materials processing applications,
semiconductor lasers, fiber lasers and ultrafast scientific lasers are manufactured at our Santa Clara,
California site. Our laser diode module products, laser instrumentation products, test and measurement
equipment products are manufactured in Wilsonville, Oregon. We manufacture exotic crystals in East
Hanover, New Jersey and both active and passive fibers are manufactured in our Salem, New
Hampshire facility. Our CO2 gas lasers are manufactured in Bloomfield, Connecticut. We manufacture
a portion of our DPSS lasers used in microelectronics and OEM components and instrumentation
applications in L¨ubeck, Germany. We manufacture a portion of our DPSS lasers used in
microelectronics, OEM components and instrumentation and materials processing applications in
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Kaiserslautern, Germany. We manufacture a portion of our DPSS lasers used in microelectronics and
scientific applications in Hannover, Germany. Our excimer gas laser products are manufactured in
G¨ottingen, Germany. We manufacture the fiber-based lasers and a portion of our DPSS lasers used in
microelectronics and scientific research applications in Glasgow, Scotland. Our facility in Sunnyvale,
California grows the aluminum-free materials that are incorporated into our semiconductor lasers. We
have transferred several products and subassemblies for manufacture at our Singapore and Malaysia
facilities and we are in the process of transferring additional product manufacturing to Singapore and
Malaysia as part of our Asia strategy. We refurbish excimer tubes at our manufacturing site in South
Korea.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on
disclosure to protect our intellectual property rights. As of September 28, 2013, we held approximately
429 U.S. and foreign patents, which expire from 2014 through 2030 (depending on the payment of
maintenance fees) and we have approximately 156 additional pending patent applications that have
been filed. The issued patents cover various products in all of the major markets that we serve.
For a discussion of the importance to our business of, and the risks attendant to intellectual
property rights, see ‘‘Risk Factors’’ in Item 1A—‘‘We may not be able to protect our proprietary
technology which could adversely affect our competitive advantage’’ and ‘‘We may, in the future, be
subject to claims or litigation from third parties, for claims of infringement of their proprietary rights or
to determine the scope and validity of our proprietary rights or the proprietary rights of competitors or
other rights holders. These claims could result in costly litigation and the diversion of our technical and
management personnel. Adverse resolution of litigation may harm our operating results or financial
condition.’’
COMPETITION
Competition in the various photonics markets in which we provide products is very intense. We
compete against a number of companies including CVI Melles Griot, GSI Group, Inc., IPG Photonics
Corporation, JDS Uniphase Corporation, Newport Corporation, Rofin-Sinar Technologies, Inc., and
Trumpf GmbH, as well as other smaller companies. We compete globally based on our broad product
offering, reliability, cost, and performance advantages for the widest range of commercial and scientific
research applications. Other considerations by our customers include warranty, global service and
support and distribution.
BACKLOG
At fiscal 2013 year-end, our backlog of orders scheduled for shipment (within one year) was
$285.8 million compared to $352.8 million at fiscal 2012 and $356.5 million at fiscal 2011 year-end. By
segment, backlog for SLS was $204.7 million, $272.1 million and $265.9 million, respectively, at fiscal
2013, 2012 and 2011 year-ends. Backlog for CLC was $81.1 million, $80.7 million and $90.6 million,
respectively, at fiscal 2013, 2012 and 2011 year-ends. The decrease in SLS backlog from fiscal 2012 to
fiscal 2013 year-end is primarily due to timing of large excimer laser annealing orders for the flat panel
display market. Orders used to compute backlog are generally cancelable without substantial penalties.
Historically, the rate of cancellation experienced by us has not been significant though we cannot
guarantee that cancellations will not increase in the future.
SEASONALITY
We have historically experienced decreased bookings and revenue in the first fiscal quarter
compared to other quarters in our fiscal year due to the impact of time off and business closures at
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many of our customers due to year-end holidays. This historical pattern should not be considered a
reliable indicator of the Company’s future net sales or financial performance.
EMPLOYEES
As of fiscal 2013 year-end, we had 2,514 employees. Approximately 391 of our employees are
involved in research and development; 1,530 of our employees are involved in operations,
manufacturing, service and quality assurance; and 593 of our employees are involved in sales, order
administration, marketing, finance, information technology and other administrative functions. Our
success will depend in large part upon our ability to attract and retain employees. We face competition
in this regard from other companies, research and academic institutions, government entities and other
organizations. We consider our relations with our employees to be good.
ACQUISITIONS
In December 2012, we acquired privately held Lumera Laser GmbH (Kaiserslautern, Germany) for
approximately $51.5 million, excluding transaction costs. Lumera manufactures ultrafast solid state
lasers for microelectronics, OEM medical and materials processing applications. Lumera has been
included in our Specialty Lasers and Systems segment.
In October 2012, we acquired all of the outstanding shares of Innolight Innovative Laser and
Systemtechnik GmbH for approximately $18.3 million, excluding transaction costs. Innolight provides a
core technology building block for an emerging class of commercial, sub-nanosecond lasers for
microelectronics manufacturing. Its semiconductor-based architecture delivers pulsed output that can be
amplified by conventional or fiber amplifiers to ultimately deliver infrared, green or ultraviolet light
capable of processing a range of materials. Innolight has been included in our Specialty Lasers and
Systems segment.
In July 2012, we acquired all of the outstanding shares of MiDAZ Lasers Ltd for approximately
$3.8 million in cash. MiDAZ was a technology-based acquisition. We intend to utilize the acquired
technology in low cost, compact pulsed solid state lasers. MiDAZ has been included in our Specialty
Lasers and Systems segment.
In January 2011, we acquired all of the assets and assumed certain liabilities of Hypertronics
Pte Ltd for approximately $14.5 million in cash. Hypertronics designs and manufactures laser-and
vision-based tools for flat panel, storage, semiconductor and solar applications at facilities in Singapore
and Malaysia. Hypertronics has been included in our Specialty Lasers and Systems segment.
Please refer to ‘‘Note 4. Business Combinations’’ of Notes to Consolidated Financial Statements
under Item 15 of this annual report for further discussion of the acquisition completed during fiscal
2013.
RESTRUCTURINGS AND CONSOLIDATION
There were no new restructuring activities undertaken during fiscal 2013 or fiscal 2012. During the
first quarter of fiscal 2010, we acquired the assets and certain liabilities of StockerYale’s laser module
product line in Montreal, Canada and began to transition those activities to contract manufacturers and
other Coherent facilities in Salem, Massachusetts, Wilsonville, Oregon and Sunnyvale, California. The
transfer was completed in the second quarter of fiscal 2011.
During the second quarter of fiscal 2009, we announced our plans to close our facilities in
Tampere, Finland and St. Louis, Missouri. The closure of our St. Louis, Missouri and Yokohama, Japan
sites were completed in the fourth quarter of fiscal 2009. The closure of our Finland site was scheduled
for completion by the end of fiscal 2010, but we decided to delay the closure due to increased demand
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for products manufactured in Finland. In the second quarter of fiscal 2011, we ceased manufacturing
operations in our Finland facility and we exited the facility in the third quarter of fiscal 2011.
GOVERNMENT REGULATION
Environmental regulation
Our operations are subject to various federal, state, local and foreign environmental protection
regulations relating to the use, storage, handling and disposal of regulated materials, chemicals, various
radioactive materials and certain waste products. In the United States, we are subject to the federal
regulation and control of the Environmental Protection Agency. Comparable authorities are involved in
other countries. Such rules are subject to change by the governing agency and we monitor those
changes closely. We expect all operations to meet the legal and regulatory environmental requirements
and believe that compliance with those regulations will not have a material adverse effect on our
capital expenditures, earnings and competitive and financial position.
Although we believe that our safety procedures for using, handling, storing and disposing of such
materials comply with the standards required by federal and state laws and regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these materials. In the event of
such an accident involving such materials, we could be liable for damages and such liability could
exceed the amount of our liability insurance coverage and the resources of our business.
We may face potentially increasing complexity in our product designs and procurement operations
due to the evolving nature of product compliance standards. Those standards may impact the material
composition of our products entering specific markets. Such regulations went into effect in the
European Union (‘‘EU’’) in 2006, and China in 2007. We could face significant costs and liabilities in
connection with product take-back legislation. Beginning in 2006, the EU Waste Electrical and
Electronic Equipment Directive made producers of electrical goods financially responsible for specified
collection, recycling, treatment and disposal of past and future covered products. In addition, the EU
has added the Registration, Evaluation and Authorization of Chemicals Regulation, otherwise known as
the REACH Regulation, which further regulates substances and products imported, manufactured or
sold within the EU. Similar laws are now pending in various jurisdictions around the world, including
the United States.
Environmental liabilities
Our operations are subject to various laws and regulations governing the environment, including
the discharge of pollutants and the management and disposal of hazardous substances. As a result of
our historic as well as on-going operations, we could incur substantial costs, including remediation
costs. The costs under environmental laws and the timing of these costs are difficult to predict. Our
accruals for such costs and liabilities may not be adequate because the estimates on which the accruals
are based depend on a number of factors including the nature of the matter, the complexity of the site,
site geology, the nature and extent of contamination, the type of remedy, the outcome of discussions
with regulatory agencies and other Potentially Responsible Parties (PRPs) at multi-party sites and the
number and financial viability of other PRPs.
We further discuss the impact of environmental regulation under ‘‘Risk Factors’’ in Item 1A—
‘‘Compliance or the failure to comply with current and future environmental regulations could cause us
significant expense.’’
SEGMENT INFORMATION
We are organized into two operating segments: Specialty Lasers and Systems (‘‘SLS’’) and
Commercial Lasers and Components (‘‘CLC’’). This segmentation reflects the go-to-market strategies
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for various products and markets. SLS develops and manufacturers configurable, advanced-performance
products largely serving the microelectronics, scientific research and government programs and OEM
components and instrumentation markets. The size and complexity of many of the SLS products
require service to be performed at the customer site by factory-trained field service engineers. While
both segments work to deliver cost-effective photonics solutions, CLC focuses on higher volume
products that are offered in set configurations. The product architectures are designed for easy
exchange at the point of use such that product service and repairs are based upon advanced
replacement and depot (i.e., factory) repair. CLC’s primary markets include materials processing, OEM
components and instrumentation and microelectronics.
We have identified SLS and CLC as operating segments for which discrete financial information
was available. Both units have dedicated engineering, manufacturing, product business management and
product line management functions. A small portion of our outside revenue is attributable to projects
and recently developed products for which a segment has not yet been determined. The associated
direct and indirect costs are presented in the category of Corporate and other, along with other
corporate costs.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Financial information relating to foreign and domestic operations for fiscal years 2013, 2012 and
2011, is set forth in Note 18, ‘‘Segment and Geographic Information’’ of our Notes to Consolidated
Financial Statements under Item 15 of this annual report.
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ITEM 1A. RISK FACTORS
You should carefully consider the followings risks when considering an investment in our Common
Stock. These risks could materially affect our business, results of operations or financial condition, cause the
trading price of our Common Stock to decline materially or cause our actual results to differ materially
from those expected or those expressed in any forward-looking statements made by us. These risks are not
exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned
under ‘‘Forward-Looking Statements’’ and the risk of our businesses described elsewhere in this annual
report. Additionally, these risks and uncertainties described herein are not the only ones facing us. Other
events that we do not currently anticipate or that we currently deem immaterial also may affect our business,
results of operations or financial condition.
BUSINESS ENVIRONMENT AND INDUSTRY TRENDS
Our operating results, including net sales, net income (loss) and adjusted EBITDA in dollars and
as a percentage of net sales, as well as our stock price have varied in the past, and our future
operating results will continue to be subject to quarterly and annual fluctuations based upon
numerous factors, including those discussed in this Item 1A and throughout this report. Our stock
price will continue to be subject to daily variations as well. Our future operating results and stock
price may not follow any past trends or meet our guidance and expectations.
Our net sales and operating results, such as adjusted EBITDA percentage, net income (loss) and
operating expenses, and our stock price have varied in the past and may vary significantly from quarter
to quarter and from year to year in the future. We believe a number of factors, many of which are
outside of our control, could cause these variations and make them difficult to predict, including:
(cid:129) general economic uncertainties in the macroeconomic and local economies facing us, our
customers and the markets we serve;
(cid:129) fluctuations in demand for our products or downturns in the industries that we serve;
(cid:129) the ability of our suppliers, both internal and external, to produce and deliver components and
parts, including sole or limited source components, in a timely manner, in the quantity, quality
and prices desired;
(cid:129) the timing of receipt and conversion of bookings to net sales;
(cid:129) the concentration of a significant amount of our backlog, and resultant net sales, with a few
customers;
(cid:129) cancellation of customer orders and rescheduling of shipments;
(cid:129) fluctuations in our product mix;
(cid:129) the ability of our customers’ other suppliers to provide sufficient material to support our
customers’ products;
(cid:129) currency fluctuations and stability, in particular the Euro, the Japanese Yen, the Korean Won,
the Chinese Renminbi and the US dollar as compared to other currencies;
(cid:129) commodity pricing;
(cid:129) introductions of new products and product enhancements by our competitors, entry of new
competitors into our markets, pricing pressures and other competitive factors;
(cid:129) our ability to develop, introduce, manufacture and ship new and enhanced products in a timely
manner without defects;
(cid:129) our ability to manage our capacity and that of our suppliers;
22
(cid:129) our increased reliance on contract manufacturing;
(cid:129) the rate of market acceptance of our new products;
(cid:129) the ability of our customers to pay for our products;
(cid:129) expenses associated with acquisition-related activities;
(cid:129) seasonal sales trends;
(cid:129) access to applicable credit markets by us, our customers and their end customers;
(cid:129) delays or reductions in customer purchases of our products in anticipation of the introduction of
new and enhanced products by us or our competitors;
(cid:129) our ability to control expenses;
(cid:129) the level of capital spending of our customers;
(cid:129) potential excess and/or obsolescence of our inventory;
(cid:129) costs and timing of adhering to current and developing governmental regulations and reviews
relating to our products and business;
(cid:129) costs related to acquisitions of technology or businesses;
(cid:129) impairment of goodwill, intangible assets and other long-lived assets;
(cid:129) our ability to meet our expectations and forecasts and those of public market analysts and
investors;
(cid:129) the availability of research funding by governments with regard to our customers in the scientific
business, such as universities;
(cid:129) continued government spending on defense-related projects where we are a subcontractor;
(cid:129) maintenance of supply relating to products sold to the government on terms which we would
prefer not to accept;
(cid:129) changes in policy, interpretations, or challenges to the allowability of costs incurred under
government cost accounting standards;
(cid:129) damage to our reputation as a result of coverage in social media, Internet blogs or other media
outlets;
(cid:129) managing our and other parties’ compliance with contracts in multiple languages and
jurisdictions;
(cid:129) managing our internal and third party sales representatives and distributors, including
compliance with all applicable laws;
(cid:129) impact of government economic policies on macroeconomic conditions;
(cid:129) costs and expenses from litigation;
(cid:129) costs associated with designing around or payment of licensing fees associated with issued
patents in our fields of business;
(cid:129) government support of the alternative energy industries, such as solar;
(cid:129) the future impact of legislation, rulemaking, and changes in accounting, tax, defense
procurement, or export policies; and
(cid:129) distraction of management related to acquisition or divestment activities.
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In addition, we often recognize a substantial portion of our sales in the last month of our fiscal
quarters. Our expenses for any given quarter are typically based on expected sales and if sales are
below expectations in any given quarter, the adverse impact of the shortfall on our operating results
may be magnified by our inability to adjust spending quickly enough to compensate for the shortfall.
We also base our manufacturing on our forecasted product mix for the quarter. If the actual product
mix varies significantly from our forecast, we may not be able to fill some orders during that quarter,
which would result in delays in the shipment of our products. Accordingly, variations in timing of sales,
particularly for our higher priced, higher margin products, can cause significant fluctuations in quarterly
operating results.
Due to these and other factors, such as varying product mix, we believe that quarter-to-quarter and
year-to-year comparisons of our historical operating results may not be meaningful. You should not rely
on our results for any quarter or year as an indication of our future performance. Our operating results
in future quarters and years may be below public market analysts’ or investors’ expectations, which
would likely cause the price of our stock to fall. In addition, over the past several years, the stock
market has experienced extreme price and volume fluctuations that have affected the stock prices of
many technology companies both in and outside our industry. There has not always been a direct
correlation between this volatility and the performance of particular companies subject to these stock
price fluctuations. Further, over the last twelve months, equity markets around the world have
significantly fluctuated across most sectors. These factors, as well as general economic and political
conditions or investors’ concerns regarding the credibility of corporate financial statements, may have a
material adverse effect on the market price of our stock in the future.
We are exposed to risks associated with worldwide economic conditions and related uncertainties which could
negatively impact demand for our products and results of operations.
Volatility and disruption in the capital and credit markets, depressed consumer confidence,
government economic policies, negative economic conditions, volatile corporate profits and reduced
capital spending could negatively impact demand for our products. In particular, it is difficult to
develop and implement strategy, sustainable business models and efficient operations, as well as
effectively manage supply chain relationships in the face of such conditions including uncertainty
regarding the ability of some of our suppliers to continue operations and provide us with uninterrupted
supply flow. Our ability to maintain our research and development investments in our broad product
offerings may be adversely impacted in the event that our sales decline and do not increase in the
future. Spending and the timing thereof by consumers and businesses have a significant impact on our
results and, where such spending is delayed or canceled, it could have a material negative impact on
our operating results. The current global economic conditions remain uncertain and challenging.
Weakness in our end markets could negatively impact our net sales, gross margin and operating
expenses, and consequently have a material adverse effect on our business, financial condition and
results of operations.
Continued uncertainty in U.S. and global fiscal policy has likely had a recent adverse impact on
global financial markets and overall economic activity. Should this uncertain financial policy continue, it
would likely negatively impact global economic activity, including possibly sending the U.S. into a new
recession. It would also likely have negative repercussions on U.S. and global credit and financial
markets, and further exacerbate sovereign debt concerns in the European Union. All of these factors
would likely adversely impact the global demand for our products and the performance of our
investments, and would likely have a material adverse effect on our business, results of operations and
financial condition.
The financial turmoil which recently affected the banking system and financial markets continues
to negatively impact financial institutions and has resulted in tighter credit markets, and lower levels of
liquidity in some financial markets. There could be a number of follow-on effects from the tightened
24
credit environment on our business, including the insolvency of key suppliers or their inability to obtain
credit to finance development and/or manufacture products resulting in product delays; inability of
customers to obtain credit to finance purchases of our products and/or customer insolvencies; and
failure of financial institutions negatively impacting our treasury functions. In the event our customers
are unable to obtain credit or otherwise pay for our shipped products it could significantly impact our
ability to collect on our outstanding accounts receivable. Other income and expense also could vary
materially from expectations depending on gains or losses realized on the sale or exchange of financial
instruments; impairment charges resulting from revaluations of debt and equity securities and other
investments; interest rates; cash balances; and changes in fair value of derivative instruments. Volatility
in the financial markets and any overall economic uncertainty increase the risk that the actual amounts
realized in the future on our financial instruments could differ significantly from the fair values
currently assigned to them. Uncertainty about current global economic conditions could also continue
to increase the volatility of our stock price.
In addition, political and social turmoil related to international conflicts, terrorist acts and civil
unrest may put further pressure on economic conditions in the United States and abroad. Unstable
economic, political and social conditions make it difficult for our customers, our suppliers and us to
accurately forecast and plan future business activities. If such conditions persist, our business, financial
condition and results of operations could suffer. Additionally, unstable economic conditions can provide
significant pressures and burdens on individuals, which could cause them to engage in inappropriate
business conduct. See ‘‘Part II, Item 9A. CONTROLS AND PROCEDURES.’’
We depend on sole source or limited source suppliers, both internal and external, for some of our key
components and materials, including exotic materials, certain cutting-edge optics and crystals, in our products,
which make us susceptible to supply shortages or price fluctuations that could adversely affect our business.
We currently purchase several key components and materials used in the manufacture of our
products from sole source or limited source suppliers, both internal and external. Our failure to timely
receive these key components and materials, such as the large optics used in our flat panel display
manufacturing applications, could cause delays in the shipment of our products. Some of these
suppliers are relatively small private companies that may discontinue their operations at any time and
which may be particularly susceptible to prevailing economic conditions. Some of our suppliers are
located in regions which may be susceptible to natural disasters, such as the flooding in Thailand and
the earthquake, tsunami and resulting nuclear disaster in Japan in recent years and last year’s severe
flooding and power loss in the Eastern part of the United States. We typically purchase our
components and materials through purchase orders or agreed upon terms and conditions and we do
not have guaranteed supply arrangements with many of these suppliers. Some of our products,
particularly in the flat panel display industry, require designs and specifications which are at the
cutting-edge of available technologies. Our and our customers’ designs and specifications frequently
change to meet rapidly evolving market demands. Accordingly certain of our products require
components and supplies which may be technologically difficult and unpredictable to manufacture.
These characteristics further pressure the timely delivery of such components. We may fail to obtain
these supplies in a timely manner in the future. We may experience difficulty identifying alternative
sources of supply for certain components used in our products and may have to incur expenses and
management distraction in assisting our current and future suppliers to meet our and our customers’
technical requirements. We would experience further delays while identifying, evaluating and testing the
products of these potential alternative suppliers. Furthermore, financial or other difficulties faced by
these suppliers or significant changes in demand for these components or materials could limit their
availability. We continue to consolidate our supply base and move supplier locations. When we
transition locations we may increase our inventory of such products as a ‘‘safety stock’’ during the
transition, which may cause the amount of inventory reflected on our balance sheet to increase.
25
Additionally, many of our customers rely on sole source suppliers. In the event of a disruption of our
customers’ supply chain, orders from our customers could decrease or be delayed.
Any interruption or delay in the supply of any of these components or materials, or the inability to
obtain these components and materials from alternate sources at acceptable prices and within a
reasonable amount of time, or our failure to properly manage these moves, would impair our ability to
meet scheduled product deliveries to our customers and could cause customers to cancel orders. We
have historically relied exclusively on our own production capability to manufacture certain strategic
components, crystals, semiconductor lasers, lasers and laser-based systems. Because we manufacture,
package and test these components, products and systems at our own facilities, and such components,
products and systems are not readily available from other sources, any interruption in manufacturing
would adversely affect our business. In addition, our failure to achieve adequate manufacturing yields
of these items at our manufacturing facilities may materially and adversely affect our operating results
and financial condition.
We participate in the microelectronics market, which requires significant research and development expenses to
develop and maintain products and a failure to achieve market acceptance for our products could have a
significant negative impact on our business and results of operations.
The microelectronics market is characterized by rapid technological change, frequent product
introductions, the volatility of product supply and demand, changing customer requirements and
evolving industry standards. The nature of this market requires significant research and development
expenses to participate, with substantial resources invested in advance of material sales of our products
to our customers in this market. Additionally, our product offerings may become obsolete given the
frequent introduction of alternative technologies. In the event either our customers’ or our products fail
to gain market acceptance, or the microelectronics market fails to grow, it would likely have a
significant negative effect on our business and results of operations.
We participate in the flat panel display market, which has a relatively limited number of end customer
manufacturers. Our backlog, timing of net sales and results of operations could be negatively impacted in the
event our customers reschedule orders.
In the flat panel display market, there are a relatively limited number of manufacturers who are
the end customers for our annealing products. Given macroeconomic conditions, varying consumer
demand and technical process limitations at manufacturers, our customers may seek to reschedule or
cancel orders. Challenges in meeting evolving technological requirements for these complex products by
us and our suppliers could also result in delays in shipments, rescheduled or canceled orders by our
customers. This could negatively impact our backlog, timing of net sales and results of operations.
Additionally, as our backlog includes higher average selling price flat panel display systems, any
delays or cancellation of shipments could have a material adverse effect on our financial results.
Some of our laser systems are complex in design and may contain defects that are not detected until deployed
by our customers, which could increase our costs and reduce our net sales.
Lasers and laser systems are inherently complex in design and require ongoing regular
maintenance. The manufacture of our lasers, laser products and systems involves a highly complex and
precise process. As a result of the technological complexity of our products, in particular the flat panel
annealing systems, changes in our or our suppliers’ manufacturing processes or the inadvertent use of
defective materials by us or our suppliers could result in a material adverse effect on our ability to
achieve acceptable manufacturing yields and product reliability. To the extent that we do not achieve
and maintain our projected yields or product reliability, our business, operating results, financial
condition and customer relationships would be adversely affected. We provide warranties on a majority
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of our product sales, and reserves for estimated warranty costs are recorded during the period of sale.
The determination of such reserves requires us to make estimates of failure rates and expected costs to
repair or replace the products under warranty. We typically establish warranty reserves based on
historical warranty costs for each product line. If actual return rates and/or repair and replacement
costs differ significantly from our estimates, adjustments to cost of sales may be required in future
periods which could have an adverse effect on our results of operations.
Our customers may discover defects in our products after the products have been fully deployed
and operated under the end user’s peak stress conditions. In addition, some of our products are
combined with products from other vendors, which may contain defects. As a result, should problems
occur, it may be difficult to identify the source of the problem. If we are unable to identify and fix
defects or other problems, we could experience, among other things:
(cid:129) loss of customers or orders;
(cid:129) increased costs of product returns and warranty expenses;
(cid:129) damage to our brand reputation;
(cid:129) failure to attract new customers or achieve market acceptance;
(cid:129) diversion of development and engineering resources; and
(cid:129) legal actions by our customers and/or their end users.
The occurrence of any one or more of the foregoing factors could seriously harm our business,
financial condition and results of operations.
Continued volatility in the semiconductor manufacturing industry could adversely affect our business,
financial condition and results of operations.
A portion of our net sales in the microelectronics market depend on the demand for our products
by semiconductor equipment companies. The semiconductor market has historically been characterized
by sudden and severe cyclical variations in product supply and demand, which have often severely
affected the demand for semiconductor manufacturing equipment, including laser-based tools and
systems. The timing, severity and duration of these market cycles are difficult to predict, and we may
not be able to respond effectively to these cycles. The continuing uncertainty in this market severely
limits our ability to predict our business prospects or financial results in this market.
During industry downturns, our net sales from this market may decline suddenly and significantly.
Our ability to rapidly and effectively reduce our cost structure in response to such downturns is limited
by the fixed nature of many of our expenses in the near term and by our need to continue our
investment in next-generation product technology and to support and service our products. In addition,
due to the relatively long manufacturing lead times for some of the systems and subsystems we sell to
this market, we may incur expenditures or purchase raw materials or components for products we
cannot sell. Accordingly, downturns in the semiconductor capital equipment market may materially
harm our operating results. Conversely, when upturns in this market occur, we must be able to rapidly
and effectively increase our manufacturing capacity to meet increases in customer demand that may be
extremely rapid, and if we fail to do so we may lose business to our competitors and our relationships
with our customers may be harmed.
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Our cash and cash equivalents and short-term investments are managed through various banks around the
world and volatility in the capital and credit market conditions could cause financial institutions to fail or
materially harm service levels provided by such banks, both of which could have an adverse affect on our
ability to timely access funds.
World capital and credit markets have been and may continue to experience volatility and
disruption. In some cases, the markets have exerted downward pressure on stock prices and credit
capacity for certain issuers, as well as pressured the solvency of some financial institutions. These
financial institutions, including banks, have had difficulty timely performing regular services and in
some cases have failed or otherwise been largely taken over by governments. We maintain our cash,
cash equivalents and short-term investments with a number of financial institutions around the world.
Should some or all of these financial institutions fail or otherwise be unable to timely perform
requested services, we would likely have a limited ability to timely access our cash deposited with such
institutions, or, in extreme circumstances the failure of such institutions could cause us to be unable to
access cash for the foreseeable future. If we are unable to quickly access our funds when we need
them, we may need to increase the use of our existing credit lines or access more expensive credit, if
available. If we are unable to access our cash or if we access existing or additional credit or are unable
to access additional credit, it could have a negative impact on our operations, including our reported
net income.
We are exposed to credit risk and fluctuations in the market values of our investment portfolio.
Although we have not recognized any material losses on our cash, cash equivalents and short-term
investments, future declines in their market values could have a material adverse effect on our financial
condition and operating results. Given the global nature of our business, we have investments both
domestically and internationally. There has recently been growing pressure on the creditworthiness of
sovereign nations, particularly in Europe where a significant portion of our cash, cash equivalents and
short-term investments are invested, which results in corresponding pressure on the valuation of the
securities issued by such nations. Additionally, our overall investment portfolio is often concentrated in
certificates of deposit and money market funds. We maintain a mix of government-issued securities.
Credit ratings and pricing of these investments can be negatively impacted by liquidity, credit
deterioration or losses, financial results, or other factors. Additionally, liquidity issues or political
actions by sovereign nations could result in decreased values for our investments in certain government
securities. As a result, the value or liquidity of our cash, cash equivalents and short-term investments
could decline or become materially impaired, which could have a material adverse effect on our
financial condition and operating results. See ‘‘Item 7A. Quantitative and Qualitative Disclosures about
Market Risk.’’
Our future success depends on our ability to increase our sales volumes and decrease our costs to offset
potential declines in the average selling prices (‘‘ASPs’’) of our products and, if we are unable to realize
greater sales volumes and lower costs, our operating results may suffer.
Our ability to increase our sales volume and our future success depends on the continued growth
of the markets for lasers, laser systems and related accessories, as well as our ability to identify, in
advance, emerging markets for laser-based systems. We cannot assure you that we will be able to
successfully identify, on a timely basis, new high-growth markets in the future. Moreover, we cannot
assure you that new markets will develop for our products or our customers’ products, or that our
technology or pricing will enable such markets to develop. Future demand for our products is uncertain
and will depend to a great degree on continued technological development and the introduction of new
or enhanced products. If this does not continue, sales of our products may decline and our business will
be harmed.
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We have in the past experienced decreases in the ASPs of some of our products. As competing
products become more widely available, the ASPs of our products may decrease. If we are unable to
offset any decrease in our ASPs by increasing our sales volumes, our net sales will decline. In addition,
to maintain our gross margins, we must continue to reduce the cost of manufacturing our products
while maintaining their high quality. From time to time, our products, like many complex technological
products, may fail in greater frequency than anticipated. This can lead to further charges, which can
result in higher costs, lower gross margins and lower operating results. Furthermore, as ASPs of our
current products decline, we must develop and introduce new products and product enhancements with
higher margins. If we cannot maintain our gross margins, our operating results could be seriously
harmed, particularly if the ASPs of our products decrease significantly.
Our future success depends on our ability to develop and successfully introduce new and enhanced products
that meet the needs of our customers.
Our current products address a broad range of commercial and scientific research applications in
the photonics markets. We cannot assure you that the market for these applications will continue to
generate significant or consistent demand for our products. Demand for our products could be
significantly diminished by disrupting technologies or products that replace them or render them
obsolete. Furthermore, the new and enhanced products in certain markets generally continue to be
smaller in size and have lower ASPs, and therefore, we have to sell more units to maintain revenue
levels. Accordingly, we must continue to invest in research and development in order to develop
competitive products.
Our future success depends on our ability to anticipate our customers’ needs and develop products
that address those needs. Introduction of new products and product enhancements will require that we
effectively transfer production processes from research and development to manufacturing and
coordinate our efforts with those of our suppliers to achieve volume production rapidly. If we fail to
transfer production processes effectively, develop product enhancements or introduce new products in
sufficient quantities to meet the needs of our customers as scheduled, our net sales may be reduced
and our business may be harmed.
We face risks associated with our foreign operations and sales that could harm our financial condition and
results of operations.
For fiscal 2013, fiscal 2012 and fiscal 2011, 77%, 76% and 74%, respectively, of our net sales were
derived from customers outside of the United States. We anticipate that foreign sales, particularly in
Asia, will continue to account for a significant portion of our net sales in the foreseeable future.
A global economic slowdown or a natural disaster could have a negative effect on various foreign
markets in which we operate, such as the earthquake, tsunami and resulting nuclear disaster during
fiscal 2011 in Japan and last year’s flooding in Thailand. Such a slowdown may cause us to reduce our
presence in certain countries, which may negatively affect the overall level of business in such countries.
Our foreign sales are primarily through our direct sales force. Additionally, some foreign sales are
made through foreign distributors and resellers. Our foreign operations and sales are subject to a
number of risks, including:
(cid:129) longer accounts receivable collection periods;
(cid:129) the impact of recessions and other economic conditions in economies outside the United States;
(cid:129) unexpected changes in regulatory requirements;
(cid:129) certification requirements;
(cid:129) environmental regulations;
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(cid:129) reduced protection for intellectual property rights in some countries;
(cid:129) potentially adverse tax consequences;
(cid:129) political and economic instability;
(cid:129) import/export regulations, tariffs and trade barriers;
(cid:129) compliance with applicable United States and foreign anti-corruption laws;
(cid:129) cultural and management differences;
(cid:129) preference for locally produced products; and
(cid:129) shipping and other logistics complications.
Our business could also be impacted by international conflicts, terrorist and military activity, civil
unrest and pandemic illness which could cause a slowdown in customer orders or cause customer order
cancellations.
We are also subject to the risks of fluctuating foreign currency exchange rates, which could
materially adversely affect the sales price of our products in foreign markets, as well as the costs and
expenses of our foreign subsidiaries. While we use forward exchange contracts and other risk
management techniques to hedge our foreign currency exposure, we remain exposed to the economic
risks of foreign currency fluctuations.
We may not be able to protect our proprietary technology which could adversely affect our competitive
advantage.
Maintenance of intellectual property rights and the protection thereof is important to our business.
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on
disclosure to protect our intellectual property rights. We cannot assure you that our patent applications
will be approved, that any patents that may be issued will protect our intellectual property or that any
issued patents will not be challenged by third parties. Other parties may independently develop similar
or competing technology or design around any patents that may be issued to us. We cannot be certain
that the steps we have taken will prevent the misappropriation of our intellectual property, particularly
in foreign countries where the laws may not protect our proprietary rights as fully as in the United
States. Further, we may be required to enforce our intellectual property or other proprietary rights
through litigation, which, regardless of success, could result in substantial costs and diversion of
management’s attention. Additionally, there may be existing patents of which we are unaware that
could be pertinent to our business and it is not possible for us to know whether there are patent
applications pending that our products might infringe upon since these applications are often not
publicly available until a patent is issued or published.
We may, in the future, be subject to claims or litigation from third parties, for claims of infringement of their
proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of
competitors or other rights holders. These claims could result in costly litigation and the diversion of our
technical and management personnel. Adverse resolution of litigation may harm our operating results or
financial condition.
In recent years, there has been significant litigation in the United States involving patents and
other intellectual property rights. This has been seen in our industry, for example in the recently
concluded patent-related litigation between IMRA America, Inc. (‘‘Imra’’) and IPG Photonics
Corporation and in Imra’s recently brought litigation against two of our German subsidiaries. From
time to time, like many other technology companies, we have received communications from other
parties asserting the existence of patent rights, copyrights, trademark rights or other intellectual
30
property rights which such third parties believe may cover certain of our products, processes,
technologies or information. In the future, we may be a party to litigation to protect our intellectual
property or as a result of an alleged infringement of others’ intellectual property whether through
direct claims or by way of indemnification claims of our customers, as, in some cases, we contractually
agree to indemnify our customers against third-party infringement claims relating to our products.
These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages
or invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be
time-consuming and expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation could also force us to do one or more of the following:
(cid:129) stop manufacturing, selling or using our products that use the infringed intellectual property;
(cid:129) obtain from the owner of the infringed intellectual property right a license to sell or use the
relevant technology, although such license may not be available on reasonable terms, or at all; or
(cid:129) redesign the products that use the technology.
If we are forced to take any of these actions or are otherwise a party to lawsuits of this nature, we
may incur significant losses for which we do not have insurance and our business may be seriously
harmed. We do not have insurance to cover potential claims of this type.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to
earnings.
Under accounting principles generally accepted in the United States, we review our intangible
assets for impairment when events or changes in circumstances indicate the carrying value may not be
recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be
considered in determining whether a change in circumstances indicating that the carrying value of our
goodwill or other intangible assets may not be recoverable include declines in our stock price and
market capitalization or future cash flows projections. We recorded a charge during the fourth quarter
of fiscal 2012 related to the impairment of intangibles in our SLS operating segment relating to the
decision to discontinue the legacy Hypertronics products. A decline in our stock price, or any other
adverse change in market conditions, particularly if such change has the effect of changing one of the
critical assumptions or estimates we used to calculate the estimated fair value of our reporting units,
could result in a change to the estimation of fair value that could result in an impairment charge. Any
such material charges, whether related to goodwill or purchased intangible assets, may have a material
negative impact on our financial and operating results.
We depend on skilled personnel to operate our business effectively in a rapidly changing market, and if we are
unable to retain existing or hire additional personnel when needed, our ability to develop and sell our products
could be harmed.
Our ability to continue to attract and retain highly skilled personnel will be a critical factor in
determining whether we will be successful in the future. Recruiting and retaining highly skilled
personnel in certain functions continues to be difficult. At certain locations where we operate, the cost
of living is extremely high and it may be difficult to retain key employees and management at a
reasonable cost. We may not be successful in attracting, assimilating or retaining qualified personnel to
fulfill our current or future needs. Our failure to attract additional employees and retain our existing
employees could adversely affect our growth and our business.
Our future success depends upon the continued services of our executive officers and other key
engineering, sales, marketing, manufacturing and support personnel, any of whom may leave, which
could harm our business and our results of operations.
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The long sales cycles for our products may cause us to incur significant expenses without offsetting net sales.
Customers often view the purchase of our products as a significant and strategic decision. As a
result, customers typically expend significant effort in evaluating, testing and qualifying our products
before making a decision to purchase them, resulting in a lengthy initial sales cycle. While our
customers are evaluating our products and before they place an order with us, we may incur substantial
sales and marketing and research and development expenses to customize our products to the
customers’ needs. We may also expend significant management efforts, increase manufacturing capacity
and order long lead-time components or materials prior to receiving an order. Even after this
evaluation process, a potential customer may not purchase our products. As a result, these long sales
cycles may cause us to incur significant expenses without ever receiving net sales to offset such
expenses.
The markets in which we sell our products are intensely competitive and increased competition could cause
reduced sales levels, reduced gross margins or the loss of market share.
Competition in the various photonics markets in which we provide products is very intense. We
compete against a number of large public and private companies, including CVI Melles Griot, GSI
Group, Inc., IPG Photonics Corporation, JDS Uniphase Corporation, Newport Corporation, Rofin-
Sinar Technologies, Inc., and Trumpf GmbH, as well as other smaller companies. Some of our
competitors are large companies that have significant financial, technical, marketing and other
resources. These competitors may be able to devote greater resources than we can to the development,
promotion, sale and support of their products. Some of our competitors are much better positioned
than we are to acquire other companies in order to gain new technologies or products that may
displace our product lines. Any of these acquisitions could give our competitors a strategic advantage.
Any business combinations or mergers among our competitors, forming larger companies with greater
resources, could result in increased competition, price reductions, reduced margins or loss of market
share, any of which could materially and adversely affect our business, results of operations and
financial condition.
Additional competitors may enter the markets in which we serve, both foreign and domestic, and
we are likely to compete with new companies in the future. We may encounter potential customers
that, due to existing relationships with our competitors, are committed to the products offered by these
competitors. Further, our current or potential customers may determine to develop and produce
products for their own use which are competitive to our products. As a result of the foregoing factors,
we expect that competitive pressures may result in price reductions, reduced margins, loss of sales and
loss of market share. In addition, in markets where there are a limited number of customers,
competition is particularly intense.
If we fail to accurately forecast component and material requirements for our products, we could incur
additional costs and incur significant delays in shipments, which could result in a loss of customers.
We use rolling forecasts based on anticipated product orders and material requirements planning
systems to determine our product requirements. It is very important that we accurately predict both the
demand for our products and the lead times required to obtain the necessary components and
materials. We depend on our suppliers for most of our product components and materials. Lead times
for components and materials that we order vary significantly and depend on factors including the
specific supplier requirements, the size of the order, contract terms and current market demand for
components. For substantial increases in our sales levels of certain products, some of our suppliers may
need at least nine months lead-time. If we overestimate our component and material requirements, we
may have excess inventory, which would increase our costs. If we underestimate our component and
material requirements, we may have inadequate inventory, which could interrupt and delay delivery of
our products to our customers. Any of these occurrences would negatively impact our net sales,
business or operating results.
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Our increased reliance on contract manufacturing and other outsourcing may adversely impact our financial
results and operations due to our decreased control over the performance and timing of certain aspects of our
manufacturing.
Our manufacturing strategy includes partnering with contract manufacturers to outsource non-core
subassemblies and less complex turnkey products, including some performed at international sites
located in Asia and Eastern Europe. Additionally, we have outsourced the manufacture of certain of
our optics components to certain third parties. Our ability to resume internal manufacturing operations
for certain products and components in a timely manner may be eliminated. The cost, quality,
performance and availability of contract manufacturing operations are and will be essential to the
successful production and sale of many of our products. Our financial condition or results of operation
could be adversely impacted if any contract manufacturer or other supplier is unable for any reason,
including as a result of the impact of worldwide economic conditions, to meet our cost, quality,
performance, and availability standards. We may not be able to provide contract manufacturers with
product volumes that are high enough to achieve sufficient cost savings. If shipments fall below
forecasted levels, we may incur increased costs or be required to take ownership of the inventory. Also,
our ability to control the quality of products produced by contract manufacturers may be limited and
quality issues may not be resolved in a timely manner, which could adversely impact our financial
condition or results of operations.
If we fail to effectively manage our growth or, alternatively, our spending during downturns, our business
could be disrupted, which could harm our operating results.
Growth in sales, combined with the challenges of managing geographically dispersed operations,
can place a significant strain on our management systems and resources, and our anticipated growth in
future operations could continue to place such a strain. The failure to effectively manage our growth
could disrupt our business and harm our operating results. Our ability to successfully offer our products
and implement our business plan in evolving markets requires an effective planning and management
process. In economic downturns, we must effectively manage our spending and operations to ensure
our competitive position during the downturn, as well as our future opportunities when the economy
improves, remain intact. The failure to effectively manage our spending and operations could disrupt
our business and harm our operating results.
Historically, acquisitions have been an important element of our strategy. However, we may not find suitable
acquisition candidates in the future and we may not be able to successfully integrate and manage acquired
businesses. Any acquisitions we make could disrupt our business and harm our financial condition.
We have in the past made strategic acquisitions of other corporations and entities, as well as asset
purchases, and we continue to evaluate potential strategic acquisitions of complementary companies,
products and technologies. In the event of any future acquisitions, we could:
(cid:129) issue stock that would dilute our current stockholders’ percentage ownership;
(cid:129) pay cash that would decrease our working capital;
(cid:129) incur debt;
(cid:129) assume liabilities; or
(cid:129) incur expenses related to impairment of goodwill and amortization.
Acquisitions also involve numerous risks, including:
(cid:129) problems combining the acquired operations, systems, technologies or products;
(cid:129) an inability to realize expected operating efficiencies or product integration benefits;
33
(cid:129) difficulties in coordinating and integrating geographically separated personnel, organizations,
systems and facilities;
(cid:129) difficulties integrating business cultures;
(cid:129) unanticipated costs or liabilities, including the costs associated with improving the internal
controls of the acquired company;
(cid:129) diversion of management’s attention from our core businesses;
(cid:129) adverse effects on existing business relationships with suppliers and customers;
(cid:129) potential loss of key employees, particularly those of the purchased organizations;
(cid:129) incurring unforeseen obligations or liabilities in connection with acquisitions; and
(cid:129) the failure to complete acquisitions even after signing definitive agreements which, among other
things, would result in the expensing of potentially significant professional fees and other charges
in the period in which the acquisition or negotiations are terminated.
We cannot assure you that we will be able to successfully identify appropriate acquisition
candidates, to integrate any businesses, products, technologies or personnel that we might acquire in
the future or achieve the anticipated benefits of such transactions, which may harm our business.
We are exposed to lawsuits in the normal course of business which could have a material adverse effect on our
business, operating results, or financial condition.
We are exposed to lawsuits in the normal course of our business, including product liability claims,
if personal injury, death or commercial losses occur from the use of our products. While we typically
maintain business insurance, including directors’ and officers’ policies, litigation can be expensive,
lengthy, and disruptive to normal business operations, including the potential impact of indemnification
obligations for individuals named in any such lawsuits. We may not, however, be able to secure
insurance coverage on terms acceptable to us in the future. Moreover, the results of complex legal
proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit, including a recall
or redesign of products if ultimately determined to be defective, could have a material adverse effect
on our business, operating results, or financial condition.
We use standard laboratory and manufacturing materials that could be considered hazardous and we could be
liable for any damage or liability resulting from accidental environmental contamination or injury.
Although most of our products do not incorporate hazardous or toxic materials and chemicals,
some of the gases used in our excimer lasers and some of the liquid dyes used in some of our scientific
laser products are highly toxic. In addition, our operations involve the use of standard laboratory and
manufacturing materials that could be considered hazardous. Also, if a facility fire were to occur at our
Sunnyvale, California site and were to spread to a reactor used to grow semiconductor wafers, it could
release highly toxic emissions. We believe that our safety procedures for handling and disposing of such
materials comply with all federal, state and offshore regulations and standards. However, the risk of
accidental environmental contamination or injury from such materials cannot be entirely eliminated. In
the event of such an accident involving such materials, we could be liable for damages and such liability
could exceed the amount of our liability insurance coverage and the resources of our business which
could have an adverse effect on our financial results or our business as a whole.
Compliance or the failure to comply with current and future environmental regulations could cause us
significant expense.
We are subject to a variety of federal, state, local and foreign environmental regulations relating to
the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process
or requiring design changes or recycling of products we manufacture. If we fail to comply with any
34
present and future regulations, we could be subject to future liabilities, the suspension of production or
a prohibition on the sale of products we manufacture. In addition, such regulations could restrict our
ability to expand our facilities or could require us to acquire costly equipment, or to incur other
significant expenses to comply with environmental regulations, including expenses associated with the
recall of any non-compliant product and the management of historical waste.
From time to time new regulations are enacted, and it is difficult to anticipate how such
regulations will be implemented and enforced. We continue to evaluate the necessary steps for
compliance with regulations as they are enacted. These regulations include, for example, the
Registration, Evaluation, Authorization and Restriction of Chemical substances (‘‘REACH’’), the
Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment
Directive (‘‘RoHS’’) and the Waste Electrical and Electronic Equipment Directive (‘‘WEEE’’) enacted
in the European Union which regulate the use of certain hazardous substances in, and require the
collection, reuse and recycling of waste from, certain products we manufacture. This and similar
legislation that has been or is in the process of being enacted in Japan, China, Korea and various states
of the United States may require us to re-design our products to ensure compliance with the applicable
standards, for example by requiring the use of different types of materials. These redesigns or
alternative materials may detrimentally impact the performance of our products, add greater testing
lead-times for product introductions or have other similar effects. We believe we comply with all such
legislation where our products are sold and we will continue to monitor these laws and the regulations
being adopted under them to determine our responsibilities. In addition, we are monitoring legislation
relating to the reduction of carbon emissions from industrial operations to determine whether we may
be required to incur any additional material costs or expenses associated with our operations. We are
not currently aware of any such material costs or expenses. The SEC has promulgated rules requiring
disclosure regarding the use of certain ‘‘conflict minerals’’ mined from the Democratic Republic of
Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the
sourcing of such minerals. The implementation of such rules has required us to incur additional
expense and internal resources and may continue to do so in the future, particularly in the event that
only a limited pool of suppliers are available to certify that products are free from ‘‘conflict minerals.’’
Our failure to comply with any of the foregoing regulatory requirements or contractual obligations
could result in our being directly or indirectly liable for costs, fines or penalties and third-party claims,
and could jeopardize our ability to conduct business in the United States and foreign countries.
Our and our customers’ operations would be seriously harmed if our logistics or facilities or those of our
suppliers, our customers’ suppliers or our contract manufacturers were to experience catastrophic loss.
Our and our customers’ operations, logistics and facilities and those of our suppliers and contract
manufacturers could be subject to a catastrophic loss from fire, flood, earthquake, volcanic eruption,
work stoppages, power outages, acts of war, pandemic illnesses, energy shortages, theft of assets, other
natural disasters or terrorist activity. A substantial portion of our research and development activities,
manufacturing, our corporate headquarters and other critical business operations are located near
major earthquake faults in Santa Clara, California, an area with a history of seismic events. Any such
loss or detrimental impact to any of our operations, logistics or facilities could disrupt our operations,
delay production, shipments and net sales and result in large expenses to repair or replace the facility.
While we have obtained insurance to cover most potential losses, after reviewing the costs and
limitations associated with earthquake insurance, we have decided not to procure such insurance. We
believe that this decision is consistent with decisions reached by numerous other companies located
nearby. We cannot assure you that our existing insurance coverage will be adequate against all other
possible losses.
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Difficulties with our enterprise resource planning (‘‘ERP’’) system and other parts of our global information
technology system could harm our business and results of operation. If our network security measures are
breached and unauthorized access is obtained to a customer’s data or our data or our information technology
systems, we may incur significant legal and financial exposure and liabilities.
Like many modern multinational corporations, we maintain a global information technology
system, including software products licensed from third parties. Any system, network or Internet
failures, misuse by system users, the hacking into or disruption caused by the unauthorized access by
third parties or loss of license rights could disrupt our ability to timely and accurately manufacture and
ship products or to report our financial information in compliance with the timelines mandated by the
SEC. Any such failure, misuse, hacking, disruptions or loss would likely cause a diversion of
management’s attention from the underlying business and could harm our operations. In addition, a
significant failure of our global information technology system could adversely affect our ability to
complete an evaluation of our internal controls and attestation activities pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002.
As part of our day-to-day business, we store our data and certain data about our customers in our
global information technology system. While our system is designed with access security, if a third party
gains unauthorized access to our data, including any regarding our customers, such a security breach
could expose us to a risk of loss of this information, loss of business, litigation and possible liability.
These security measures may be breached as a result of third-party action, including intentional
misconduct by computer hackers, employee error, malfeasance or otherwise. Additionally, third parties
may attempt to fraudulently induce employees or customers into disclosing sensitive information such
as user names, passwords or other information in order to gain access to our customers’ data or our
data, including our intellectual property and other confidential business information, or our information
technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems,
change frequently and generally are not recognized until launched against a target, we may be unable
to anticipate these techniques or to implement adequate preventative measures. Any security breach
could result in a loss of confidence by our customers, damage our reputation, disrupt our business, lead
to legal liability and negatively impact our future sales.
Changes in tax rates, tax liabilities or tax accounting rules could affect future results.
As a global company, we are subject to taxation in the United States and various other countries
and jurisdictions. Significant judgment is required to determine worldwide tax liabilities. Our future tax
rates could be affected by changes in the composition of earnings in countries or states with differing
tax rates, changes in the valuation of our deferred tax assets and liabilities, or changes in the tax laws.
In addition, we are subject to regular examination of our income tax returns by the Internal Revenue
Service (‘‘IRS’’) and other tax authorities. From time to time the United States, foreign and state
governments make substantive changes to tax rules and the application of rules to companies, including
various announcements from the United States government potentially impacting our ability to defer
taxes on international earnings. We regularly assess the likelihood of favorable or unfavorable outcomes
resulting from these examinations to determine the adequacy of our provision for income taxes.
Although we believe our tax estimates are reasonable, there can be no assurance that any final
determination will not be materially different than the treatment reflected in our historical income tax
provisions and accruals, which could materially and adversely affect our operating results and financial
condition.
Changing laws, regulations and standards relating to corporate governance and public disclosure may create
uncertainty regarding compliance matters.
Federal securities laws, rules and regulations, as well as the rules and regulations of self-regulatory
organizations such as NASDAQ and the NYSE, require companies to maintain extensive corporate
36
governance measures, impose comprehensive reporting and disclosure requirements, set strict
independence and financial expertise standards for audit and other committee members and impose
civil and criminal penalties for companies and their chief executive officers, chief financial officers and
directors for securities law violations. These laws, rules and regulations have increased and will
continue to increase the scope, complexity and cost of our corporate governance, reporting and
disclosure practices, which could harm our results of operations and divert management’s attention
from business operations. Changing laws, regulations and standards relating to corporate governance
and public disclosure may create uncertainty regarding compliance matters. New or changed laws,
regulations and standards are subject to varying interpretations in many cases. As a result, their
application in practice may evolve over time. We are committed to maintaining high standards of ethics,
corporate governance and public disclosure. Complying with evolving interpretations of new or changed
legal requirements may cause us to incur higher costs as we revise current practices, policies and
procedures, and may divert management time and attention from revenue generating to compliance
activities. If our efforts to comply with new or changed laws, regulations and standards differ from the
activities intended by regulatory or governing bodies due to ambiguities related to practice, our
reputation may also be harmed.
Governmental regulations, including duties, affecting the import or export of products could negatively affect
our net sales.
The United States and many foreign governments impose tariffs and duties on the import and
export of products, including some of those which we sell. In particular, given our worldwide
operations, we pay duties on certain products when they are imported into the United States for repair
work as well as on certain of our products which are manufactured by our foreign subsidiaries. These
products can be subject to a duty on the product value. Additionally, the United States and various
foreign governments have imposed tariffs, controls, export license requirements and restrictions on the
import or export of some technologies, especially encryption technology. From time to time,
government agencies have proposed additional regulation of encryption technology, such as requiring
the escrow and governmental recovery of private encryption keys. Governmental regulation of
encryption technology and regulation of imports or exports, or our failure to obtain required import or
export approval for our products, could harm our international and domestic sales and adversely affect
our net sales. From time to time our duty calculations and payments are audited by government
agencies.
In addition, compliance with the directives of the Directorate of Defense Trade Controls
(‘‘DDTC’’) may result in substantial expenses and diversion of management. Any failure to adequately
address the directives of DDTC could result in civil fines or suspension or loss of our export privileges,
any of which could have a material adverse effect on our business or financial position, results of
operations, or cash flows.
Our market is unpredictable and characterized by rapid technological changes and evolving standards
demanding a significant investment in research and development, and, if we fail to address changing market
conditions, our business and operating results will be harmed.
The photonics industry is characterized by extensive research and development, rapid technological
change, frequent new product introductions, changes in customer requirements and evolving industry
standards. Because this industry is subject to rapid change, it is difficult to predict its potential size or
future growth rate. Our success in generating net sales in this industry will depend on, among other
things:
(cid:129) maintaining and enhancing our relationships with our customers;
(cid:129) the education of potential end-user customers about the benefits of lasers and laser systems; and
(cid:129) our ability to accurately predict and develop our products to meet industry standards.
37
For our fiscal years 2013, 2012 and 2011, our research and development costs were $82.8 million
(10.2% of net sales), $78.3 million (10.2% of net sales) and $81.2 million (10.1% of net sales),
respectively. We cannot assure you that our expenditures for research and development will result in
the introduction of new products or, if such products are introduced, that those products will achieve
sufficient market acceptance or to generate sales to offset the costs of development. Our failure to
address rapid technological changes in our markets could adversely affect our business and results of
operations.
Failure to maintain effective internal controls may cause a loss of investor confidence in the reliability of our
financial statements or to cause us to delay filing our periodic reports with the SEC and adversely affect our
stock price.
The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring
public companies to include a report of management on internal control over financial reporting in
their annual reports on Form 10-K that contain an assessment by management of the effectiveness of
our internal control over financial reporting. In addition, our independent registered public accounting
firm must attest to and report on the effectiveness of our internal control over financial reporting.
Although we test our internal control over financial reporting in order to ensure compliance with the
Section 404 requirements, our failure to maintain adequate internal controls over financial reporting
could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in
the reliability of our financial statements or a delay in our ability to timely file our periodic reports
with the SEC, which ultimately could negatively impact our stock price.
Provisions of our charter documents and Delaware law, and our Change-of-Control Severance Plan may have
anti-takeover effects that could prevent or delay a change in control.
Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger
or acquisition or make removal of incumbent directors or officers more difficult. These provisions may
discourage takeover attempts and bids for our common stock at a premium over the market price.
These provisions include:
(cid:129) the ability of our Board of Directors to alter our bylaws without stockholder approval;
(cid:129) limiting the ability of stockholders to call special meetings; and
(cid:129) establishing advance notice requirements for nominations for election to our Board of Directors
or for proposing matters that can be acted on by stockholders at stockholder meetings.
We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a
publicly-held Delaware corporation from engaging in a merger, asset or stock sale or other transaction
with an interested stockholder for a period of three years following the date such person became an
interested stockholder, unless prior approval of our board of directors is obtained or as otherwise
provided. These provisions of Delaware law also may discourage, delay or prevent someone from
acquiring or merging with us without obtaining the prior approval of our board of directors, which may
cause the market price of our common stock to decline. In addition, we have adopted a change of
control severance plan, which provides for the payment of a cash severance benefit to each eligible
employee based on the employee’s position. If a change of control occurs, our successor or acquirer
will be required to assume and agree to perform all of our obligations under the change of control
severance plan which may discourage potential acquirers or result in a lower stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
38
ITEM 2. PROPERTIES
Our corporate headquarters is located in Santa Clara, California. At fiscal 2013 year-end, our
primary locations were as follows (all square footage is approximate) (unless otherwise indicated, each
property is utilized jointly by our two segments):
Description
Use
Term
Santa Clara, CA . . . . . . . .
8.5 acres of land, 200,000
square foot building
Corporate headquarters,
manufacturing, R&D
Owned
Santa Clara, CA . . . . . . . .
90,120 square foot building
Office, manufacturing
Leased through July 2020
Sunnyvale, CA(1) . . . . . . . .
24,159 square foot building
Office, manufacturing, R&D
Bloomfield, CT(1) . . . . . . .
63,421 square foot building
Office, manufacturing, R&D
Bloomfield, CT(1) . . . . . . .
4,500 square foot building
Manufacturing, warehouse
Leased through December
2018
Leased through December
2017
Leased through July 2014,
12 month extension options
East Hanover, NJ(2) . . . . . .
30,000 square foot building
Office, manufacturing, R&D
Leased through October 2014
Wilsonville, OR(1) . . . . . . .
41,250 square foot building
Office, manufacturing, R&D
Leased through December
2018
Salem, NH(1) . . . . . . . . . .
44,153 square foot building
Office, manufacturing, R&D
Leased through October 2019
Dieburg, Germany . . . . . . .
32,123 square foot building
Office
Leased through December
2020
G¨ottingen, Germany(2) . . . .
7.6 acres of land, several
buildings totaling 136,380
square feet
Office, manufacturing, R&D
Owned
L¨ubeck, Germany(2) . . . . . .
41,328 square foot building
Office, manufacturing, R&D
L¨ubeck, Germany(2) . . . . . .
22,583 square foot building
Office, manufacturing, R&D
L¨ubeck, Germany(2) . . . . . .
8,159 square foot building
Manufacturing
L¨ubeck, Germany(2) . . . . . .
7,578 square foot building
Manufacturing, warehouse
Kaiserslautern, Germany(2)
.
33,745 square foot building
Office, manufacturing, R&D
Hannover, Germany(2) . . . .
11,759 square foot building
Manufacturing, R&D
Tokyo, Japan . . . . . . . . . . .
17,602 square foot building
Office
Leased through December
2014
Leased through December
2014 with option to purchase
building
Leased through December
2018
Leased through December
2015
Leased through September
2015
Leased through December
2014
Leased through April 2015
Glasgow, Scotland(2)
. . . . .
2 acres of land, 31,600 square Office, manufacturing, R&D
foot building
Owned
YongIn-Si, South Korea(2) . .
33,074 square foot building
Office, manufacturing
Leased through November
2017
Kallang Sector, Singapore . .
31,894 square foot building
Office, manufacturing
Leased through March 2016
Penang, Malaysia . . . . . . . .
12,519 square foot building
Office, manufacturing
Leased through August 2014,
with renewal option
(1) This facility is utilized primarily by our CLC operating segment.
(2) This facility is utilized primarily by our SLS operating segment.
39
We maintain other sales and service offices under varying leases expiring from 2014 through 2020
in the United States, Japan, South Korea, China, Taiwan, Germany, France, Italy, the United Kingdom
and the Netherlands.
We consider our facilities to be both suitable and adequate to provide for current and near term
requirements and that the productive capacity in our facilities is substantially being utilized or we have
plans to utilize it.
We plan to renew leases on buildings as they expire.
ITEM 3. LEGAL PROCEEDINGS
We are subject to legal claims and litigation arising in the ordinary course of business, such as
product liability, employment or intellectual property claims, including, but not limited to, the matters
described below. On May 14, 2013, Imra America (‘‘Imra’’) filed a complaint for patent infringement
against two of the Company’s subsidiaries in the Regional Court of D¨usseldorf, Germany, captioned In
re IMRA America Inc. versus Coherent Kaiserslautern GmbH et. al. 4b O 38/13. The complaint alleges
that the use of certain of the Company’s lasers infringes upon EP Patent No. 754,103, entitled ‘‘Method
For Controlling Configuration of Laser Induced Breakdown and Ablation,’’ issued November 5, 1997.
The patent is owned by the University of Michigan and licensed to Imra. The complaint seeks
unspecified compensatory damages, the cost of court proceedings and seeks to permanently enjoin the
Company from infringing the patent in the future. With respect to this matter, management has
determined that a potential loss is not probable and accordingly, no amount has been accrued.
Management has determined a potential loss is reasonably possible as it is defined by ASC 450;
however, based on its current knowledge, management does not believe that the amount of such
possible loss or a range of potential loss is reasonably estimable. Although we do not expect that such
legal claims and litigation will ultimately have a material adverse effect on our consolidated financial
position, results of operations or cash flows, an adverse result in one or more matters could negatively
affect our results in the period in which they occur.
Income Tax Audits
We are subject to taxation and file income tax returns in the U.S. federal jurisdiction and in many
state and foreign jurisdictions. For U.S. federal income tax purposes, all years prior to 2010 are closed.
In our major foreign jurisdictions and our major state jurisdictions, the years prior to 2006 and 2009,
respectively, are closed to examination. Earlier years in our various jurisdictions may remain open for
adjustment to the extent that we have tax attribute carryforwards from those years. In December 2011
and January 2012, three of our German subsidiaries received notices of tax audits for the fiscal years
2006 through 2010. We received a preliminary assessment for two of the German subsidiaries and the
amount is immaterial; the audit for the other German subsidiary is currently in process. In addition,
our German subsidiary of Coherent Kaiserslautern GmbH (formerly Lumera Laser GmbH) that was
acquired in December 2012 is currently under audit for the fiscal years 2007 through 2009. As the years
under the audit for Coherent Kaiserslautern GmbH are related to the pre-acquisition periods, the tax
assessment should be recoverable from the escrow account for the acquisition.
Management believes that it has adequately provided for any adjustments that may result from tax
examinations. We regularly engage in discussions and negotiations with tax authorities regarding tax
matters in various jurisdictions. It is reasonably possible that certain federal, foreign and state tax
matters may be concluded in the next 12 months. Although the timing of the resolution and/or closure
of audits is highly uncertain, it is reasonably possible that the balance of net unrecognized tax benefits
including interest and penalties could be reduced by approximately $0.3 million to $2.4 million in the
next 12 months.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
40
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the NASDAQ Stock Market under the symbol ‘‘COHR.’’ The
following table sets forth the high and low sales prices for each quarterly period during the past two
fiscal years as reported on the Nasdaq Global Select Market.
Fiscal
2013
2012
High
Low
High
Low
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . .
$49.74
$59.99
$58.80
$62.68
$42.08
$50.63
$50.65
$55.19
$54.50
$59.70
$59.28
$50.46
$40.50
$52.29
$39.76
$42.59
The number of stockholders of record as of November 22, 2013 was 875. On December 10, 2012,
we announced that the Board of Directors approved a $1.00 per share special cash dividend on our
outstanding common stock payable on December 27, 2012 to stockholders of record on December 19,
2012, resulting in a payment of $24.0 million in the first quarter of fiscal 2013. While we paid a cash
dividend in fiscal 2013 and may elect to pay dividends in the future, we have no present intention to
declare cash dividends. Our line of credit agreement requires bank pre-approval for the payment of
cash dividends.
There were no sales of unregistered securities in fiscal 2013.
There were no stock repurchases during the three months ended September 28, 2013. Our most
recent repurchase authorization expired in October 2013.
41
COMPANY STOCK PRICE PERFORMANCE
The following graph shows a five-year comparison of cumulative total stockholder return,
calculated on a dividend reinvestment basis and based on a $100 investment, from September 27, 2008
through September 28, 2013 comparing the return on our common stock with the Russell 2000 Index,
the Standard and Poors Technology Index and the Nasdaq Composite Index. No dividends have been
declared or paid on our common stock during such period. The stock price performance shown on the
following graph is not necessarily indicative of future price performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG COHERENT, INC.,
THE RUSSELL 2000 INDEX, THE S&P TECHNOLOGY INDEX AND
THE NASDAQ COMPOSITE INDEX.
Comparison of Cumulative Five Year Total Return
$250
$200
$150
$100
$50
$0
9/27/08
10/03/09
10/02/10
10/01/11
9/29/12
9/28/13
Coherent, Inc.
Russell 2000 Index
S&P Technology Index
Nasdaq Composite Index
14DEC201300585120
Company Name / Index
Base
Period
9/27/2008
INDEXED RETURNS
Years Ending
10/3/2009
10/2/2010
10/1/2011
9/29/2012
9/28/2013
. . . . . . . . . . . . . . . . . . . . .
Coherent, Inc.
Russell 2000 Index . . . . . . . . . . . . . . . . . .
S&P Technology Index . . . . . . . . . . . . . . .
NASDAQ Composite Index . . . . . . . . . . .
100
100
100
100
65.65
83.75
100.49
103.76
114.89
99.33
114.74
116.52
122.78
95.38
119.28
120.44
131.07
125.81
157.94
157.60
178.88
163.68
169.80
195.67
The information contained above under the caption ‘‘Company Stock Price Performance’’ shall not
be deemed to be ‘‘soliciting material’’ or to be ‘‘filed’’ with the SEC, nor will such information be
incorporated by reference into any future SEC filing except to the extent that we specifically
incorporate it by reference into such filing.
42
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below is not necessarily indicative of results of future operations and
should be read in conjunction with Item 7. ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations’’ and the Consolidated Financial Statements and Notes to
Consolidated Financial Statements included elsewhere in this annual report.
We derived the selected consolidated financial data as of fiscal 2013 and 2012 year-end and for
fiscal 2013, 2012 and 2011 from our audited consolidated financial statements, and accompanying notes,
contained in this annual report. The consolidated statements of operations data for fiscal 2010 and
2009 and the consolidated balance sheet data as of fiscal 2011, 2010 and 2009 year-end are derived
from our consolidated financial statements which are not included in this report.
Consolidated financial data
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income(loss) . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share(6):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares used in computation(6):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . .
Fiscal
2013(1)
Fiscal
2012(2)
Fiscal
2011(3)
Fiscal
2010(4)
Fiscal
2009(5)
$810,126
$322,271
$ 66,355
(in thousands, except per share data)
$605,067
$802,834
$769,088
$260,811
$350,822
$315,985
$ 36,916
$ 93,238
$ 62,962
$435,882
$161,110
$ (35,319)
$
$
2.75
2.70
$
$
2.67
2.62
$
$
3.74
3.66
$
$
1.49
1.47
$
$
(1.45)
(1.45)
24,138
24,555
$966,478
$
$ 62,132
$758,518
23,561
24,026
$880,772
2
$ 55,326
$671,656
24,924
25,464
$843,266
$
19
$ 62,841
$618,001
24,718
25,091
$803,104
$
33
$ 79,688
$591,463
24,281
24,281
$753,604
$
6
$ 91,685
$575,571
— $
(1) Includes a tax benefit of $1.4 million from the renewal of the R&D tax credit for fiscal 2012.
(2) Includes a charge of $4.3 million after tax related to the write-off of previously acquired intangible
assets and inventories, a $2.8 million tax benefit due to decreases in valuation allowances against
deferred tax assets and a $1.6 million tax benefit related to the release of tax reserves and related
interest as a result of the closure of open tax years.
(3) Includes a gain of $6.1 million after tax related to the dissolution of our Finland operations, a
$9.7 million tax benefit from the release of tax reserves and related interest as a result of an IRS
settlement and the closure of open tax years and a $1.5 million tax charge due to an increase in
valuation allowances against deferred tax assets.
(4) Includes restructuring expenses of $5.8 million after tax primarily related to the closure of our
Finland site and the consolidation of our Montreal, Canada site under the management of our
Wilsonville, Oregon site and a net benefit after tax of $1.4 million related to a receipt from the
settlement of litigation resulting from our internal stock option investigation.
(5) Includes $19.3 million in after-tax expense related to the impairment of goodwill, restructuring
expenses of $11.5 million after tax primarily related to the consolidation of our Munich site into
our Gottingen and Lubeck, Germany sites and our Finland site, the exit of our Auburn, California
facility, the exit of our St. Louis, Missouri facility and headcount reductions due to the evolving
global economic conditions, $0.8 million in after-tax costs related to our stock option investigation
and litigation and a tax charge of $3.8 million composed of the impact of a change in state tax law
and a valuation allowance in one of our European subsidiaries.
(6) See Note 2, ‘‘Significant Accounting Policies’’ in our Notes to Consolidated Financial Statements
under Item 15 of this annual report for an explanation of the determination of the number of
shares used in computing net income (loss) per share.
43
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be
read in conjunction with our Consolidated Financial Statements and related notes included in Item 8,
‘‘Financial Statements and Supplementary Data’’ in this annual report. This discussion contains
forward-looking statements, which involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result of certain factors,
including but not limited to those discussed in Item 1A,’’Risk Factors’’ and elsewhere in this annual
report. Please see the discussion of forward-looking statements at the beginning of this annual report
under ‘‘Special Note Regarding Forward-Looking Statements.’’
KEY PERFORMANCE INDICATORS
Below is a summary of some of the quantitative performance indicators (as defined below) that are
evaluated by management to assess our financial performance. Some of the indicators are non-GAAP
measures and should not be considered as an alternative to any other measure for determining
operating performance that is calculated in accordance with generally accepted accounting principles.
2013
Fiscal
2012
2011
Bookings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book-to-bill ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Sales—Specialty Lasers and Systems . . . . . . . . . . . . . . . . . . .
Net Sales—Commercial Lasers and Components . . . . . . . . . . . . . .
Gross Profit as a Percentage of Net Sales—Specialty Lasers and
Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross Profit as a Percentage of Net Sales—Commercial Lasers and
Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Development Expenses as a Percentage of Net Sales
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by Operating Activities . . . . . . . . . . . . . . . . . .
Days Sales Outstanding in Receivables . . . . . . . . . . . . . . . . . . . . .
Annualized Fourth Quarter Inventory Turns . . . . . . . . . . . . . . . . .
Capital Spending as a Percentage of Net Sales . . . . . . . . . . . . . . .
Net Income as a Percentage of Net Sales . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA as a Percentage of Net Sales . . . . . . . . . . . . . .
$767,329
0.95
$571,644
$238,482
(Dollars in thousands)
$773,199
1.01
$548,848
$220,240
$895,017
1.11
$519,736
$283,098
41.7%
43.2%
45.4%
36.2%
10.2%
$ 83,496
$115,522
60.8
3.0
2.7%
8.2%
17.8%
36.7%
10.2%
$ 90,622
$ 64,771
67.6
2.8
4.7%
8.2%
18.4%
41.1%
10.1%
$123,829
$ 86,676
63.2
3.1
4.6%
11.6%
19.5%
Definitions and analysis of these performance indicators are as follows:
Bookings and Book-to-Bill Ratio
Bookings represent orders received during the current period for products and services to be
provided pursuant to service contracts. While we generally have not experienced a significant rate of
cancellation, bookings are generally cancelable by our customers without substantial penalty and,
therefore, we cannot assure all bookings will be converted to net sales.
The book-to-bill ratio is calculated as annual bookings divided by annual net sales. This is an
indication of the strength of our business but can sometimes be impacted by a single large order. A
ratio greater than 1.0 indicates that demand for our products is greater than what we supply in the year
whereas a ratio of less than 1.0 indicates that demand for our products is less than what we supply in
the year.
44
Fiscal 2013 bookings decreased slightly from bookings in fiscal 2012 and our book-to-bill ratio
decreased from 1.01 in fiscal 2012 to 0.95 in fiscal 2013. Bookings decreased 0.8% from fiscal 2012,
with decreases in the microelectronics (10%) and scientific (4%) markets partially offset by increases in
the materials processing (18%) and OEM components and instrumentation (13%) markets. Compared
to the third quarter of fiscal 2013, decreases in bookings in the fourth quarter of fiscal 2013 in the
materials processing market were partially offset by increases in the OEM components and
instrumentation, microelectronics and scientific markets.
Fiscal 2012 bookings decreased from record bookings in fiscal 2011. Although we maintained a
positive book-to-bill of 1.01, the book-to-bill ratio declined to 0.90 in the fourth quarter of fiscal 2012.
Bookings decreased 13.6% from fiscal 2011, with decreases in all markets. Bookings decreases by
market compared to fiscal 2011 were microelectronics (16%), OEM components and instrumentation
(14%), scientific (13%) and materials processing (2%). Although fiscal 2012 bookings decreased in all
markets, decreases in bookings in the fourth quarter of fiscal 2012 in the microelectronics market due
to timing of large orders were partially offset by increases in the OEM components and
instrumentation, scientific and materials processing markets.
Microelectronics
Although fiscal 2013 bookings decreased 10% from bookings in fiscal 2012 and the book-to-bill
ratio for the year was 0.85, bookings in the fourth quarter of fiscal 2013 increased 10% from the third
quarter of fiscal 2013 primarily due to timing of large excimer laser annealing orders for the flat panel
display market and strength in the semiconductor capital equipment market.
Flat panel display orders for fiscal 2013 decreased 24% from orders in fiscal 2012, but fourth
quarter fiscal 2013 orders continued to be strong primarily due to timing of large excimer laser
annealing orders. The flat panel display market remains very dynamic with high utilization rates for
low-temperature polycrystalline silicon (‘‘LTPS’’) backplanes. The trend for new product launches in the
smartphone market for full HD screens that place more process restrictions on the manufacturing
equipment benefits service revenues. Another important development is the release of the first
smartphones to incorporate flexible displays. Although flexible displays will eventually cannibalize glass
displays, their robustness and shapes should drive an increase in demand across various applications. In
the television market, there are some interesting developments including the potential of the adoption
of LTPS-equipped organic light-emitting diode (‘‘OLED’’) screens, but these devices are expensive. Due
to their clarity and more manageable price, Ultra HD televisions (‘‘4k’’) are gaining traction, leading to
a resurgence in two laser-based manufacturing steps for light guide panels. We expect to see
incremental business during 2014 from these processes. Activity around glass cutting is also very high
with most of the development work focused on edge strength of the processed glass, which is key to
broad adoption. In the fourth quarter of fiscal 2013, we received the first tranche of the next round of
orders for excimer laser annealing equipment for Gen 5.5 systems; the total order was for more than
$15 million and we expect to complete delivery within fiscal 2014. We are actively engaged on a second
tranche that we expect to receive in fiscal 2014. In addition, our integrator partners have a robust
forecast for customers across Asia.
Advanced packaging (‘‘API’’) orders increased significantly for the full fiscal year signaling an
overall recovery in the segment, but decreased from orders in the third quarter of fiscal 2013 due to
the seasonal capital expenditure slowdown despite high utilization among board manufacturers. The
fourth quarter decrease was primarily the result of a reduced response to new smartphones as well as
the sale of Hitachi Via Mechanics, a leading supplier of printed circuit board manufacturing equipment,
as customers may wait to see what changes, if any, occur as result of the sale before increasing order
quantities. Products and technologies from Innolight and Lumera will play important roles in our
product offerings for advanced packaging applications.
45
Orders from semiconductor capital equipment OEMs decreased 11% for the full fiscal 2013, but
were strong in the fourth quarter of fiscal 2013 due to new inspection and metrology tool introductions
from leading customers. We are working with customers on next generation devices that will support
nodes at 20nm and below. Industry analysts are forecasting rising utilization rates, which boosts capacity
expansion and service revenues, due to increasing demand for advanced components for smartphones,
tablets, set-top boxes and automotive electronics. Growth in these devices offset the continued
deterioration of the personal computer market. Demand should also be bolstered by shifts within the
internet download manager (‘‘IDM’’) universe. The combination of these factors has led industry
reports to project strong growth in equipment spending in fiscal 2014.
OEM Components and Instrumentation
Bookings in fiscal 2013 increased 13% from fiscal 2012 and the book-to-bill ratio for the year was
1.04. Additionally, orders in the fourth quarter of fiscal 2013 increased significantly from those in the
third quarter of fiscal 2013 led by strength in the medical OEM and instrumentation markets.
Medical OEM orders increased significantly in the fourth quarter of fiscal 2013 with a number of
the orders from existing customers in the aesthetic and ophthalmic markets. We found that consumer
confidence has been generally good during fiscal 2013, notwithstanding the recent U.S. budget delays
and government shutdown. Our business in medical consumables, primarily single-use fibers for benign
prostatic hyperplasia (‘‘BPH’’) and kidney stone treatment, is doing well and we received an initial
order for a new dental device that is effective for both hard and soft tissue treatment. We have also
broadened our market opportunities through our recent acquisition as Lumera gives us immediate entry
into the fast evolving cataract market, where we have been working on design wins and received orders
for cataract treatment. We are also working on a next generation laser for flap cutting in LASIK, which
has the potential to displace much more complex and costly competitive offerings.
Demand for instrumentation lasers was very strong during both the fourth quarter of fiscal 2013
and the full fiscal year, which is significant given the effects of sequestration on the research side of the
instrumentation market. Two factors influenced these results. We continue to capture design wins for
the OBIS(cid:4) platform, especially in flow cytometry, and we also enjoyed success in the subsystems
market for bioinstrumentation. A subsystem or laser engine combines lasers with beam delivery
technology to provide a plug-and-play solution. The ease of integration and performance flexibility has
increased customer interest in subsystems. Part of the strength comes from new products including
OBIS(cid:4) and Galaxy(cid:4) that have broadened our market participation while our legacy products such as
Sapphire(cid:4) remain a cornerstone in the cytometry market.
Materials Processing
Annual bookings increased 18% from fiscal 2012 and fiscal 2013’s book-to-bill ratio was 1.05.
However, bookings in the fourth quarter of fiscal 2013 decreased significantly from the third quarter of
fiscal 2013 following a record-setting performance in the prior quarter and reduced bookings in China
due to timing of orders for marking and non-metal cutting applications.
In general, demand for CO2 lasers for marking, packaging and engraving has been strong. Our
recent introduction of the Diamond(cid:4) E-250, a new embodiment of CO2 technology, has created new
opportunities. We have made steady progress in additive manufacturing with the Highlight(cid:4) direct
diode system and we are optimistic about the longer term potential of additive manufacturing; we will
be releasing a series of new solutions to address this market. Although fiber laser orders are still at an
early stage for us, they contributed to our fiscal 2013 bookings increase. In the third quarter of fiscal
2013, we also shipped a three kilowatt prototype to a leading system integrator for metal cutting. The
system delivers the required cutting speed and quality in a package considerably smaller than fiber
46
lasers of comparable output power, thereby saving space on the production floor. In an OEM
configuration, we believe our laser may fit inside the customer’s tool.
Scientific and Government Programs
Although fiscal 2013 orders decreased 4% from bookings in fiscal 2012, the book-to-bill ratio for
the year was 1.05. Orders in the fourth quarter of fiscal 2013 increased significantly from the third
quarter of fiscal 2013 as the U.S. market shrugged off some of the sequestration effects and displayed
typical seasonal strength in our fourth quarter.
Ultrafast imaging using our Chameleon(cid:4) platform was the largest application for the quarter and
fiscal year. Orders for large systems used in chemistry and physics have reverted to pre-stimulus levels
with many researchers once again bundling funding to purchase these high-performance systems.
However, short- and long-term funding remains uncertain given the budget discussions in Congress.
Orders from Europe were in-line with our expectations and exhibited similar application trends to
the U.S. There are a few developments to watch in the European market which could contribute to
increased booking activity in fiscal 2014 and beyond. The Extreme Lightsource Project is a
pan-European effort to develop high-intensity lasers similar to the National Ignition Facility at the
Livermore National Lab. In addition, Horizon 2020 is a 7-year, A70 billion program to drive innovation
and global competitiveness. Embedded within the Horizon program are two flagship projects to study
the human brain and grapheme, a potential successor to silicon in microelectronics, which should
impact the photonics industry.
In Asia excluding Japan, we continue to see strong demand which contributed to record scientific
orders in that region for fiscal 2013. The Pacific Rim market was more balanced between the physical
sciences and biological imaging. Bookings in Japan were slower than expected due to delays in the
release of stimulus funding. Once the stimulus reaches end users, we expect to see funding skewed
towards biological imaging since stem cell research is one of the key targets in the package.
Net Sales
Net sales include sales of lasers, laser tools, related accessories and service contracts. Net sales for
fiscal 2013 increased 5.3% from fiscal 2012. Net sales for fiscal 2012 decreased 4.2% from fiscal 2011.
For a description of the reasons for changes in net sales refer to the ‘‘Results of Operations’’ section
below.
Gross Profit as a Percentage of Net Sales
Gross profit as a percentage of net sales (‘‘gross profit percentage’’) is calculated as gross profit for
the period divided by net sales for the period. Gross profit percentage for SLS decreased to 41.7% in
fiscal 2013 from 43.2% in fiscal 2012 and from 45.4% in fiscal 2011. Gross profit percentage for CLC
decreased to 36.2% in fiscal 2013 from 36.7% in fiscal 2012 and from 41.1% in fiscal 2011. For a
description of the reasons for changes in gross profit refer to the ‘‘Results of Operations’’ section
below.
Research and Development as a Percentage of Net Sales
Research and development as a percentage of net sales (‘‘R&D percentage’’) is calculated as
research and development expense for the period divided by net sales for the period. Management
considers R&D percentage to be an important indicator in managing our business as investing in new
technologies is a key to future growth. R&D percentage was flat at 10.2% from fiscal 2012 and
increased from 10.1% in fiscal 2011. For a description of the reasons for changes in R&D spending
refer to the ‘‘Results of Operations’’ section below.
47
Net Cash Provided by Operating Activities
Net cash provided by operating activities shown on our Consolidated Statements of Cash Flows
primarily represents the excess of cash collected from billings to our customers and other receipts over
cash paid to our vendors for expenses and inventory purchases to run our business. We believe that
cash flows from operations are an important performance indicator because cash generation over the
long term is essential to maintaining a healthy business and providing funds to help fuel growth. For a
description of the reasons for changes in Net Cash Provided by Operating Activities refer to the
‘‘Liquidity and Capital Resources’’ section below.
Days Sales Outstanding in Receivables
We calculate days sales outstanding (‘‘DSO’’) in receivables as net receivables at the end of the
period divided by net sales during the period and then multiplied by the number of days in the period,
using 360 days for years. DSO in receivables indicates how well we are managing our collection of
receivables, with lower DSO in receivables resulting in higher working capital availability. The more
money we have tied up in receivables, the less money we have available for research and development,
acquisitions, expansion, marketing and other activities to grow our business. Our DSO in receivables for
fiscal 2013 decreased 6.8 days from fiscal 2012 to 60.8 days. The decrease in DSO in receivables is
primarily due to a lower concentration of sales in the last month of the fiscal year, particularly in Asia
and Japan, a lower concentration of sales with longer payment terms in Japan and improved collections
in Korea, Japan and Europe.
Annualized Fourth Quarter Inventory Turns
We calculate annualized fourth quarter inventory turns as cost of sales during the fourth quarter
annualized and divided by net inventories at the end of the fourth quarter. This indicates how well we
are managing our inventory levels, with higher inventory turns resulting in more working capital
availability and a higher return on our investments in inventory. The more money we have tied up in
inventory, the less money we have available for research and development, acquisitions, expansion,
marketing and other activities to grow our business. Our annualized inventory turns for fiscal 2013
increased to 3.0 turns from 2.8 turns in fiscal 2012. The improvement in inventory turns is primarily
due to the impact of increased sales volumes in relation to inventory levels in certain businesses.
Capital Spending as a Percentage of Net Sales
Capital spending as a percentage of net sales (‘‘capital spending percentage’’) is calculated as
capital expenditures for the period divided by net sales for the period. Capital spending percentage
indicates the extent to which we are expanding or improving our operations, including investments in
technology and equipment. Management monitors capital spending levels as this assists management in
measuring our cash flows, net of capital expenditures. Our capital spending percentage decreased to
2.7% in fiscal 2013 from 4.7% in fiscal 2012 and 4.6% in fiscal 2011. The fiscal 2013 decrease was
primarily due to investments made in fiscal 2012 for manufacturing and refurbishment capacity in
Germany and Korea. The fiscal 2012 increase was primarily due to building improvements and
purchases of production-related assets to support our expansion in Asia (South Korea and Singapore)
and Germany. We expect capital spending for fiscal 2014 to be approximately 4.0% to 4.5% of net
sales.
Adjusted EBITDA as a Percentage of Net Sales
We define adjusted EBITDA as operating income adjusted for depreciation, amortization, stock
compensation expenses, major restructuring costs and certain other non-operating income and expense
48
items. Key initiatives to reach our goals for EBITDA improvements include utilization of our Asian
manufacturing locations, rationalizing our supply chain and continued leveraging of our infrastructure.
We utilize a number of different financial measures, both GAAP and non-GAAP, such as adjusted
EBITDA as a percentage of net sales, in analyzing and assessing our overall business performance, for
making operating decisions and for forecasting and planning future periods. We consider the use of
non-GAAP financial measures helpful in assessing our current financial performance and ongoing
operations. While we use non-GAAP financial measures as a tool to enhance our understanding of
certain aspects of our financial performance, we do not consider these measures to be a substitute for,
or superior to, the information provided by GAAP financial measures. We provide adjusted EBITDA in
order to enhance investors’ understanding of our ongoing operations. This measure is used by some
investors when assessing our performance.
Below is the reconciliation of our net income as a percentage of net sales to our adjusted EBITDA
as a percentage of net sales:
Net income as a percentage of net sales . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income (expense), net . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . .
Purchase accounting step up . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other one-time charges . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal
2012
2011
2013
8.2% 8.2% 11.6%
2.1% 3.6% 3.8%
0.5% 0.1% (1.2)%
4.5% 3.9% 3.6%
0.2% —% —%
—% 0.5% 0.1%
2.3% 2.1% 1.6%
Adjusted EBITDA as a percentage of net sales . . . . . . . . . . .
17.8% 18.4% 19.5%
SIGNIFICANT EVENTS
Restructuring Activities
During fiscal 2008, we initiated restructuring plans to decrease costs by consolidating facilities and
reducing our workforce. As of September 29, 2012, we had made payments in connection with the
restructuring plans in the amount of $27.7 million; we made no payments during fiscal 2013. We
completed payments for substantially all anticipated costs related to the restructuring plans in the third
quarter of fiscal 2011. In the second quarter of fiscal 2011, we ceased manufacturing operations in our
Finland facility and recognized a $6.1 million gain, primarily in other income (expense), due to a
non-recurring translation adjustment related to the dissolution of our Finland operations.
Acquisitions
On December 20, 2012, we acquired all of the outstanding shares of Lumera for approximately
$51.5 million, excluding transaction costs. Lumera manufactures ultrafast solid state lasers for
microelectronics, OEM medical and materials processing applications. These assets and liabilities have
been included in our Specialty Lasers and Systems segment.
On October 30, 2012, we acquired all of the outstanding shares of Innolight for approximately
$18.3 million, excluding transaction costs. Innolight provides a core technology building block for an
emerging class of commercial, sub-nanosecond lasers for microelectronics manufacturing and its
semiconductor-based architecture delivers pulsed output that can be amplified by conventional or fiber
amplifiers to ultimately deliver infrared, green or ultraviolet light capable of processing a range of
materials. These assets and liabilities have been included in our Specialty Lasers and Systems segment.
49
On July 23, 2012, we acquired all of the outstanding shares of MiDAZ Lasers Limited ‘‘Midaz’’ for
$3.8 million in cash, excluding transaction fees. Midaz was a technology based-acquisition and we
intend to utilize the acquired technology in low cost, compact pulsed solid state lasers. These assets and
liabilities have been included in our Specialty Lasers and Systems segment.
On January 5, 2011, we acquired all the assets and assumed certain liabilities of Hypertronics
Pte Ltd for $14.5 million, excluding transaction fees. Hypertronics designs and manufactures laser- and
vision-based tools for flat panel display, storage, semiconductor and solar applications at facilities in
Singapore and Malaysia. These assets and liabilities have been included in our Specialty Lasers and
Systems segment. During the fourth quarter of fiscal 2012, we decided to no longer pursue orders of
Hypertronics legacy products and we performed an impairment analysis of Hypertronics’ intangible
assets and determined that such assets were impaired. As a result, we recorded a $4.0 million non-cash
intangibles amortization charge and a $0.3 million inventory write-off in the fourth quarter of fiscal
2012.
Stock Repurchases and Stock Dividend
In March 2011, we repurchased and retired 454,682 shares of outstanding common stock at an
average price of $59.00 per share for a total of $26.8 million, excluding expenses. During the third and
fourth quarters of fiscal 2011, we repurchased and retired 1,024,409 shares of outstanding common
stock at an average price of $47.03 per share for a total of $48.2 million, excluding expenses.
On August 25, 2011, we announced that the Board of Directors had authorized the repurchase of
up to $50.0 million of our common stock. During fiscal 2011, we repurchased and retired 586,200
shares of outstanding common stock at an average price of $42.67 per share for a total of $25.0 million
excluding expenses. During fiscal 2012, we repurchased and retired 543,200 shares of outstanding
common stock at an average price of $45.99 per share for a total of $25.0 million, excluding expenses.
On October 4, 2012, the Board of Directors authorized a buyback program whereby we are
authorized to repurchase up to $25.0 million of our common stock. The program was authorized for
12 months from the date of authorization. No shares were purchased under this program.
On December 10, 2012, we announced that the Board of Directors approved a $1.00 per share
special cash dividend on our outstanding common stock payable on December 27, 2012 to stockholders
of record on December 19, 2012, resulting in a payment of $24.0 million.
RESULTS OF OPERATIONS—FISCAL 2013, 2012 AND 2011
Fiscal 2013, 2012 and 2011 consist of 52 weeks.
50
Consolidated Summary
The following table sets forth, for the years indicated, the percentage of total net sales represented
by the line items reflected in our consolidated statement of operations:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
Fiscal
2012
2011
(As a percentage of net
sales)
100.0% 100.0% 100.0%
60.2% 58.9% 56.3%
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.8% 41.1% 43.7%
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . .
10.2% 10.2% 10.1%
18.5% 18.0% 18.6%
0.6% 1.3% 1.0%
Total operating expenses . . . . . . . . . . . . . . . . . . . . . .
29.3% 29.5% 29.7%
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.5% 11.6% 14.0%
(0.2)% 0.2% 1.4%
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . .
10.3% 11.8% 15.4%
2.1% 3.6% 3.8%
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.2% 8.2% 11.6%
Refer to Item 6 ‘‘Selected Financial Data’’ for a description of significant events that impacted the
results of operations for fiscal years 2013, 2012 and 2011.
Net Sales
Market Application
The following table sets forth, for the periods indicated, the amount of net sales and their relative
percentages of total net sales by market application (dollars in thousands):
Fiscal 2013
Fiscal 2012
Fiscal 2011
Percentage
of total
net sales
Amount
Percentage
of total
net sales
Amount
Percentage
of total
net sales
Amount
Consolidated:
Microelectronics . . . . . . . . . . . . . .
OEM components and
instrumentation . . . . . . . . . . . . .
Materials processing . . . . . . . . . . .
Scientific and government programs
$416,550
51.4% $373,696
48.6% $377,331
47.0%
149,974
121,660
121,942
18.5% 143,729
15.0% 108,666
15.1% 142,997
18.7% 164,508
14.1% 104,497
18.6% 156,498
20.5%
13.0%
19.5%
Total . . . . . . . . . . . . . . . . . . . . .
$810,126
100.0% $769,088
100.0% $802,834
100.0%
During fiscal 2013, net sales increased by $41.0 million, or 5%, compared to fiscal 2012, net of a
decrease of $16.1 million due to the impact of foreign currency exchange rates, with sales increases in
the microelectronics, materials processing and OEM components and instrumentation markets partially
offset by decreases in the scientific and government program market. Microelectronics sales increased
$42.9 million, or 11%, primarily due to higher sales in flat panel display applications. Materials
processing sales increased $13.0 million, or 12%, during fiscal 2013 primarily due to higher shipments
51
for marking, heat treating and cutting applications and the acquisition of Lumera at the end of the first
quarter of fiscal 2013. The increase in the OEM components and instrumentation market of
$6.2 million, or 4%, during fiscal 2013 was primarily due to higher shipments for bio-instrumentation
and medical (including the acquisition of Lumera at the end of the first quarter of fiscal 2013)
applications partially offset by lower shipments for military and graphic arts and display applications.
Military shipments were lower due to timing of military project spending and the impact from
sequestration budget cuts and graphic arts and display shipments decreased due primarily to lower
demand for light show lasers from entertainment customers. The decrease in scientific and government
program market sales of $21.1 million, or 15%, during fiscal 2013 was primarily due to lower demand
for advanced research applications used by university and government research groups partly due to
lower U.S. and global stimulus funding and from budget cuts from government agencies.
During fiscal 2012, net sales decreased by $33.7 million, or 4%, compared to fiscal 2011, including
a decrease of $2.4 million due to the impact of foreign currency exchange rates, with sales decreases in
the OEM components and instrumentation, scientific and government program and microelectronics
markets partially offset by increases in the materials processing market. Microelectronics sales
decreased $3.6 million, or 1%, primarily due to lower shipments for advanced packaging and solar
applications partially offset by higher sales in flat panel display applications. The decrease in the OEM
components and instrumentation market of $20.8 million, or 13%, during fiscal 2012 was primarily due
to lower shipments for bio-instrumentation, military and machine vision applications partially offset by
higher shipments for medical applications. Materials processing sales increased $4.2 million, or 4%,
during fiscal 2012 primarily due to higher shipments for marking and heat treating applications as well
as higher shipments of laser system tools. The decrease in scientific and government program market
sales of $13.5 million, or 9%, during fiscal 2012 was due to lower demand for advanced research
applications used by university and government research groups partly due to lower U.S. stimulus
funding.
In fiscal 2013, one customer accounted for 14% of net sales; in fiscal 2012 two customers
accounted for 11% each of net sales; and in fiscal 2011, no customers accounted for greater than 10%
of net sales.
Segments
We are organized into two reportable operating segments: Specialty Lasers and Systems (‘‘SLS’’)
and Commercial Lasers and Components (‘‘CLC’’). SLS develops and manufactures configurable,
advanced-performance products largely serving the microelectronics, scientific research and government
programs and OEM components and instrumentation markets. CLC focuses on higher volume products
that are offered in set configurations. CLC’s primary markets include materials processing, OEM
components and instrumentation and microelectronics.
The following table sets forth, for the periods indicated, the amount of net sales and their relative
percentages of total net sales by segment (dollars in thousands):
Consolidated:
Specialty Lasers and Systems (SLS)
Commercial Lasers and
Fiscal 2013
Fiscal 2012
Fiscal 2011
Percentage
of total
net sales
Amount
Percentage
of total
net sales
Amount
Percentage
of total
net sales
Amount
$571,644
70.6% $548,848
71.4% $519,736
64.7%
Components (CLC) . . . . . . . . . .
238,482
29.4% 220,240
28.6% 283,098
35.3%
Total . . . . . . . . . . . . . . . . . . . . .
$810,126
100.0% $769,088
100.0% $802,834
100.0%
52
Net sales for fiscal 2013 increased $41.0 million, or 5%, compared to fiscal 2012, with increases of
$22.8 million, or 4%, in our SLS segment and increases of $18.2 million, or 8%, in our CLC segment.
Net sales for fiscal 2012 decreased $33.7 million, or 4%, compared to fiscal 2011, with decreases of
$62.9 million, or 22%, in our CLC segment and increases of $29.1 million, or 6%, in our SLS segment.
The increase in our SLS segment sales in fiscal 2013 was primarily due to a $23.3 million increase
from the sale of products acquired through our acquisitions of Lumera and Innolight at the end of the
first quarter of fiscal 2013. The increase was offset by a $0.5 million decrease in sales of our other SLS
products primarily due to lower shipments for scientific and government programs, solar, advanced
packaging, medical and semiconductor applications partially offset by higher revenue for flat panel
display annealing applications. The increase in our SLS segment sales from fiscal 2011 to fiscal 2012
was primarily due to higher revenue for flat panel display annealing applications partially offset by
lower shipments for scientific and government programs, instrumentation and solar applications.
The increase in our CLC segment sales from fiscal 2012 to fiscal 2013 was primarily due to higher
advanced packaging, instrumentation and materials processing application sales partially offset by lower
sales for scientific and military applications. The decrease in our CLC segment sales from fiscal 2011 to
fiscal 2012 was primarily due to lower advanced packaging and certain flat panel display application
sales as well as lower instrumentation application sales.
Gross Profit
Consolidated
Our gross profit rate decreased by 1.3% to 39.8% in fiscal 2013 from 41.1% in fiscal 2012
primarily due to unfavorable product margins (0.8%) resulting from the unfavorable impact of foreign
exchange rates, the impact of lower volumes in several business units in the first two quarters of fiscal
2013 and higher than expected manufacturing costs due to longer cycle times related to the production
of our complex flat panel annealing systems, partially offset by favorable product mix in the
microelectronics market due to a higher concentration of service business; higher intangibles
amortization (0.6%) due to the acquisitions of Lumera at the end of the first quarter of fiscal 2013 and
Innolight in the first quarter of fiscal 2013; and higher other costs (0.3%) primarily due to inventory
step up amortization from the acquisition of Lumera and slightly higher inventory provisions. These
decreases were net of lower warranty costs (0.4%) due to lower warranty expenses as a percentage of
net sales in the microelectronics market.
Our gross profit rate decreased by 2.6% to 41.1% in fiscal 2012 from 43.7% in fiscal 2011
primarily due to unfavorable product margins (1.6%) due to lower volumes in several business units
serving particularly the advanced packaging and components markets and higher manufacturing expense
and start-up costs to expand manufacturing capacity in Germany and Excimer tube production in
Korea. These decreases were net of the favorable impact of foreign exchange rates and favorable
product mix in the microelectronics market as well as higher installation and warranty costs (0.9%)
including installations and higher service events in flat panel display markets.
Our gross profit rate has been and will continue to be affected by a variety of factors including
market mix, pricing on volume orders, our ability to manufacture advanced and more complex
products, manufacturing efficiencies, excess and obsolete inventory write-downs, warranty costs, pricing
by competitors or suppliers, new product introductions, production volume, customization and
reconfiguration of systems, commodity prices and foreign currency fluctuations, particularly the recent
weakening of the Japanese Yen and strengthening of the Euro.
53
Specialty Lasers and Systems
Our SLS gross profit rate decreased by 1.5% to 41.7% in fiscal 2013 from 43.2% in fiscal 2012
primarily due to unfavorable product costs (0.9%) due to the unfavorable impact of foreign exchange
rates, lower volumes in several business units and higher than expected manufacturing costs due to
longer cycle times related to the production of our complex flat panel annealing systems net of
favorable mix in the microelectronics market; higher intangibles amortization (0.8%) due to the
acquisitions of Lumera at the end of the first quarter of fiscal 2013 and Innolight in the first quarter of
fiscal 2013; and higher other costs (0.1%) primarily due to inventory step up amortization from the
acquisition of Lumera. These decreases were partially offset by lower warranty costs (0.3%) due to
fewer warranty events and higher sales volumes.
Our SLS gross profit rate decreased by 2.2% to 43.2% in fiscal 2012 from 45.4% in fiscal 2011
primarily due to unfavorable product costs (1.4%) due to increased investments in Excimer
manufacturing capabilities to support the growing flat panel display revenue net of the favorable impact
of exchange rates and favorable product mix within the microelectronics market and higher installation
and warranty costs (1.0%) due to higher service events and costs to support installations of a growing
number of laser annealing systems in the flat panel display market partially offset by lower other costs
(0.3%).
Commercial Lasers and Components
Our CLC gross profit rate decreased by 0.5% to 36.2% in fiscal 2013 from 36.7% in fiscal 2012
primarily due to unfavorable product costs (0.6%) resulting from unfavorable mix in the OEM
components and instrumentation market net of the impact of higher volumes, higher other costs (0.5%)
due to higher inventory provisions as a percentage of revenue and higher intangibles amortization
(0.1%) partially offset by lower warranty and installation costs (0.7%) due to fewer warranty events.
Our CLC gross profit rate decreased by 4.4% to 36.7% in fiscal 2012 from 41.1% in fiscal 2011
primarily due to unfavorable product costs (2.9%) resulting from the impact of lower volumes in a few
business units serving primarily the advanced packaging and components markets and unfavorable
product mix within the instrumentation and semiconductor markets, higher other costs (1.0%) due to
higher inventory provisions and the impact of lower sales volumes and higher warranty and installation
costs (0.5%) due to a higher installed base and the impact of lower sales volumes.
Operating Expenses
The following table sets forth, for the periods indicated, the amount of operating expenses and
their relative percentages of total net sales by the line items reflected in our consolidated statement of
operations (dollars in thousands):
2013
Percentage
of total
net sales
Amount
Fiscal
2012
Percentage
of total
net sales
Amount
Amount
(Dollars in thousands)
2011
Percentage
of total
net sales
Research and development . . . . . . .
Selling, general and administrative .
Amortization of intangible assets . .
$ 82,785
149,513
5,074
10.2% $ 78,260
18.5% 138,519
10,376
0.6%
10.2% $ 81,232
18.0% 149,499
8,082
1.3%
Total operating expenses . . . . . . . .
$237,372
29.3% $227,155
29.5% $238,813
10.1%
18.6%
1.0%
29.7%
54
Research and development
Fiscal 2013 research and development (‘‘R&D’’) expenses increased $4.5 million, or 6%, from
fiscal 2012, but remained flat as a percentage of sales. The increase was primarily due to the
acquisitions of Lumera and Innolight in the first quarter of fiscal 2013 ($3.9 million), higher payroll and
other spending on projects ($0.5 million) and higher stock-related compensation expense ($0.3 million)
partially offset by the favorable impact of foreign exchange rates ($0.2 million). On a segment basis,
SLS spending increased $2.7 million primarily due to the acquisitions of Lumera and Innolight partially
offset by lower project spending and the impact of foreign exchange rates. CLC spending increased
$1.5 million primarily due to higher payroll and other spending on projects. Corporate and other
spending increased $0.3 million.
Fiscal 2012 research and development (‘‘R&D’’) expenses decreased $3.0 million, or 4%, from
fiscal 2011. The decrease was due primarily to lower payroll spending ($4.9 million) due to lower
performance-related compensation net of increased headcount partially offset by higher project and
other spending ($1.9 million). As a percentage of sales, the slight increase was primarily due to
decreased sales volumes. On a segment basis, CLC spending decreased $2.2 million primarily due to
lower payroll spending partially offset by higher project spending. SLS spending increased $0.1 million
primarily due to higher project and other spending partially offset by lower payroll spending and the
impact of foreign exchange rates. Corporate and other spending decreased $0.8 million.
Selling, general and administrative
Fiscal 2013 selling, general and administrative (‘‘SG&A’’) expenses increased $11.0 million, or 8%,
from fiscal 2012. The increase was primarily due to the acquisitions of Lumera and Innolight in the
first quarter of fiscal 2013 ($4.0 million), $3.3 million higher payroll spending due to higher headcount
and increased salaries, higher performance-related compensation spending and higher sales
commissions, $2.7 million higher other variable spending on consulting and legal costs, sales
representative commissions, tradeshows and other as well as $1.9 million higher stock-related
compensation expense partially offset by the favorable impact of foreign exchange rates ($0.9 million).
On a segment basis, SLS segment expenses increased $5.6 million primarily due to the acquisitions of
Lumera and Innolight, higher payroll spending and higher other variable spending partially offset by
the favorable impact of foreign exchange rates. CLC spending increased $2.0 million primarily due to
higher other variable spending and higher payroll spending. Spending for Corporate and other
increased $3.4 million primarily due to higher stock-related compensation expense, higher other
variable spending and higher payroll spending.
Fiscal 2012 selling, general and administrative (‘‘SG&A’’) expenses decreased $11.0 million, or 7%,
from fiscal 2011. The decrease was primarily due to $12.1 million lower payroll spending due to lower
performance-related compensation spending net of higher headcount and increased salaries and
$1.8 million lower other variable spending partially offset by $2.9 million higher stock-related
compensation expense. On a segment basis, CLC spending decreased $4.2 million primarily due to
lower payroll spending and lower other variable spending. SLS segment expenses decreased $4.4 million
primarily due to lower payroll spending and lower other variable spending. Spending for Corporate and
other decreased $2.4 million primarily due to lower payroll spending and lower other variable spending
partially offset by higher stock-related compensation expense.
Amortization of intangible assets
Amortization of intangible assets decreased $5.3 million, or 51%, from fiscal 2012 to fiscal 2013
primarily due to the fourth quarter fiscal 2012 impairment of $4.0 million of Hypertronics intangibles
and the completion of amortization of certain intangibles (including Hypertronics) related to prior
55
acquisitions partially offset by amortization from the acquisitions of Lumera and Innolight in the first
quarter of fiscal 2013.
Amortization of intangible assets increased $2.3 million, or 28%, from fiscal 2011 to fiscal 2012
primarily due to the fourth quarter fiscal 2012 impairment of $4.0 million of Hypertronics intangibles
partially offset by completion of amortization of certain intangibles related to prior acquisitions.
Other income (expense), net
Other income (expense), net, decreased $3.2 million from fiscal 2012 to fiscal 2013. The decrease
was primarily due to higher net foreign currency exchange losses ($3.3 million) primarily due to the
significant movement in the Japanese Yen at certain times in the first and third quarters of fiscal 2013.
Other income (expense), net, decreased $10.0 million from fiscal 2011 to fiscal 2012. The decrease
was primarily due to the $6.5 million non-recurring translation adjustment related to the dissolution of
our Finland operations in the second quarter of fiscal 2011, lower net foreign currency exchange gains
($1.9 million) and lower gains on our deferred compensation plan assets net of expenses ($1.5 million)
including death benefits of $0.2 million in fiscal 2012 and $1.5 million in fiscal 2011.
Income taxes
The effective tax rate on income before income taxes for fiscal 2013 of 20.5% was lower than the
statutory rate of 35.0%. This was primarily due to permanent differences related to the benefit of
income subject to foreign tax rates that are lower than U.S. tax rates including Korea and Singapore
tax exemptions, the benefit of foreign tax credits, the benefit of the federal research and development
tax credits including renewal of the federal research and development tax credits for fiscal 2012 and the
benefit of releasing foreign tax reserves accrued under ASC 740-10 and related interest. These amounts
are partially offset by deemed dividend inclusions under the Subpart F tax rules, stock compensation
not deductible for tax purposes and limitations on the deductibility of compensation under IRC
Section 162(m).
During fiscal 2013, we increased our valuation allowance on deferred tax assets by $4.3 million to
$13.4 million primarily due to the reduced ability to utilize California and other states research and
development tax credits. During fiscal 2012, we increased our valuation allowance on deferred tax
assets by $0.3 million to $9.1 million primarily due to the reduced ability to utilize California research
and development tax credits and offset by the net increased ability to utilize foreign tax attributes and
net operating losses of our subsidiaries. During fiscal 2011, we increased our valuation allowance on
deferred tax assets by $1.5 million to $8.8 million, primarily due to the reduced ability to utilize foreign
tax attributes and net operating losses and the reduced ability to utilize California research and
development tax credits as a result of releasing net unrecognized tax benefits under ASC 740-10 that
supported the credits.
In making the determination to record the valuation allowance, management considered the
likelihood of future taxable income and feasible and prudent tax planning strategies to realize deferred
tax assets. In the future, if we determine that we expect to realize deferred tax assets, an adjustment to
the valuation allowance will affect income in the period such determination is made.
The effective tax rate on income before income taxes for fiscal 2012 of 30.5% was lower than the
statutory rate of 35.0%. This was primarily due to the benefit of income subject to foreign tax rates
that are lower than U.S. tax rates and the benefit of releasing state tax reserves accrued under
ASC 740-10 Income Taxes (formerly FASB Financial Interpretation No. 48, ‘‘Accounting for Uncertainty
in Income Taxes’’) and related interest.
The effective tax rate on income before income taxes for fiscal 2011 of 24.7% was lower than the
statutory rate of 35.0%. This was primarily due to the benefit of releasing unrecognized tax benefits
56
under ASC 740-10 and related interest, the benefit of federal research and development credits,
including additional credits reinstated from fiscal 2010 resulting from the enactment of the ‘‘Tax Relief,
Unemployment Insurance Reauthorization and Jobs Creation Acts of 2010,’’ the benefit of foreign tax
credits, the benefit of currency translation adjustments related to closure of Coherent Finland’s
operations, the benefit from income subject to foreign tax rates that are lower than U.S. tax rates and
the benefit from the unrealized gain on life insurance policy investments related to our deferred
compensation plans. These amounts are partially offset by state income tax, limitations on the
utilization of certain foreign tax attributes and net operating losses, limitations on the deductibility of
compensation under IRC Section 162(m), deemed dividend inclusions under the Subpart F tax rules
and a currency translation adjustment related to a dividend from a foreign subsidiary.
The American Taxpayer Relief Act of 2012 (‘‘the Act’’) was enacted on January 2, 2013. Under the
Act, the federal research and development tax credit was retroactively extended for amounts paid or
incurred after December 31, 2011 through December 31, 2013. The prior period effects of the change
in the tax law were recognized in our second quarter of fiscal 2013, which is the quarter that the law
was enacted. Accordingly, prior year research and development tax credits of approximately $1.4 million
less appropriate reserves were recognized in the second quarter of fiscal 2013.
Coherent Korea received the final approval for a High-Tech tax exemption on March 26, 2013
from the Korean authorities. The High-Tech tax exemption is effective retroactively to the beginning of
fiscal 2013 and is subject to capital contribution limitations. The impact of this tax exemption decreased
Korean income taxes by approximately $2.1 million in fiscal 2013. The benefit of the tax holiday on net
income per share (diluted) was $0.09.
Coherent Singapore had previously received a Pioneer Status tax exemption from the Singapore
authorities effective from fiscal 2012 through fiscal 2017, and may be extended if certain additional
requirements are satisfied. The tax holiday is conditional upon our meeting certain revenue, business
spending and employment thresholds. Although Coherent Singapore had income in fiscal 2013, this
amount was offset by a loss carryforward from fiscal 2012 and therefore we did not realize a benefit for
the Singapore tax holiday in fiscal 2013 and 2012.
FINANCIAL CONDITION
Liquidity and capital resources
At September 28, 2013, we had assets classified as cash and cash equivalents, as well as time
deposits and fixed income securities classified as short-term investments, in an aggregate amount of
$250.1 million, compared to $224.9 million at September 29, 2012. At September 28, 2013,
approximately $157.5 million of the cash and securities was held in certain of our foreign subsidiaries,
$89.9 million of which was denominated in currencies other than the U.S. dollar. We currently have
approximately $150.6 million of cash, including investments in U.S. Treasury securities, held by foreign
subsidiaries where we intend to permanently reinvest our accumulated earnings in these entities and
our current plans do not demonstrate a need for these funds to support our domestic operations. If,
however, a portion of these funds were needed for and distributed to our operations in the United
States, we would be subject to additional U.S. income taxes and foreign withholding taxes. The amount
of the taxes due would depend on the amount and manner of repatriation, as well as the location from
where the funds are repatriated. We actively monitor the third-party depository institutions that hold
these assets, primarily focusing on the safety of principal and secondarily maximizing yield on these
assets. We diversify our cash and cash equivalents and investments among various financial institutions,
money market funds and sovereign debt in order to reduce our exposure should any one of these
financial institutions or financial instruments fail or encounter difficulties. To date, we have not
experienced any material loss or lack of access to our invested cash, cash equivalents or short-term
57
investments. However, we can provide no assurances that access to our invested cash, cash equivalents
or short-term investments will not be impacted by adverse conditions in the financial markets.
Sources and Uses of Cash
Historically, our primary source of cash has been provided by operations. Other sources of cash in
the past three fiscal years include proceeds received from the sale of our stock through our employee
stock option and purchase plans. Our historical uses of cash have primarily been for the repurchase of
our common stock, capital expenditures, acquisitions of businesses and technologies and the payment of
a cash dividend in the first quarter of fiscal 2013. Supplemental information pertaining to our historical
sources and uses of cash is presented as follows and should be read in conjunction with our
Consolidated Statements of Cash Flows and notes thereto (in thousands):
2013
Fiscal
2012
Net cash provided by operating activities . . . . . . . .
Sales of shares under employee stock plans . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . .
Cash dividend paid on common stock . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . .
$115,522
16,541
$ 64,771
13,288
— (24,999)
—
(36,051)
(3,687)
(24,040)
(21,988)
(67,289)
2011
$ 86,676
34,720
(100,637)
—
(37,117)
(14,108)
Net cash provided by operating activities increased by $50.8 million in fiscal 2013 compared to
fiscal 2012 and decreased by $21.9 million in fiscal 2012 compared to fiscal 2011. The increase in cash
provided by operating activities in fiscal 2013 was primarily due to higher cash flows from timing of
accounts payable payments, improved inventory turns, timing of other current assets and liabilities as
well as improved accounts receivable days sales outstanding partially offset by timing of tax payments.
The decrease in cash provided by operating activities in fiscal 2012 was primarily due to lower net
income, higher tax payments and lower cash flows from other current liabilities including variable
compensation and accounts payable partially offset by higher cash flows from inventories and accounts
receivable. We believe that our existing cash, cash equivalents and short term investments combined
with cash to be provided by operating activities will be adequate to cover our working capital needs and
planned capital expenditures for at least the next 12 months to the extent such items are known or are
reasonably determinable based on current business and market conditions. However, we may elect to
finance certain of our capital expenditure requirements through borrowings under our bank credit
facilities or other sources of capital. We continue to follow our strategy to further strengthen our
financial position by using available cash flow to fund operations.
We intend to continue pursuing acquisition opportunities at valuations we believe are reasonable
based upon market conditions. However, we cannot accurately predict the timing, size and success of
our acquisition efforts or our associated potential capital commitments. Furthermore, we cannot assure
you that we will be able to acquire businesses on terms acceptable to us. We expect to fund future
acquisitions primarily through existing cash balances and cash flows from operations. If required, we
will look for additional borrowings or consider the issuance of securities. The extent to which we will
be willing or able to use our common stock to make acquisitions will depend on its market value at the
time and the willingness of potential sellers to accept it as full or partial payment.
On December 10, 2012, we announced that the Board of Directors approved a $1.00 per share
special cash dividend on our outstanding common stock payable on December 27, 2012 to stockholders
of record on December 19, 2012, resulting in a payment of $24.0 million in the first quarter of fiscal
2013. While we paid a cash dividend in fiscal 2013 and may elect to pay dividends in the future, we
have no present intention to declare cash dividends.
58
On January 26, 2011, the Board authorized the repurchase of up to $75.0 million of our common
stock. The program was authorized for 12 months from the date of authorization. In March 2011, we
repurchased and retired 454,682 shares of outstanding common stock under a modified ‘‘Dutch
Auction’’ tender offer at an average price of $59.00 per share for a total of $26.8 million, excluding
expenses. During the third and fourth quarters of fiscal 2011, we repurchased and retired an additional
1,024,409 shares of outstanding common stock at an average price of $47.03 per share for a total of
$48.2 million, excluding expenses.
On August 25, 2011, we announced that the Board of Directors had authorized the repurchase of
up to $50.0 million of our common stock. The program was authorized for 12 months from the date of
authorization. During fiscal 2011, we repurchased and retired 586,200 shares of outstanding common
stock at an average price of $42.67 per share for a total of $25.0 million, excluding expenses.
During fiscal 2012, we repurchased and retired 543,200 shares of outstanding common stock at an
average price of $45.99 per share for a total of $25.0 million, excluding expenses, completing the
repurchase.
On October 4, 2012, the Board of Directors authorized the repurchase of up to $25.0 million of
our common stock. The program was authorized for 12 months from the date of authorization. No
shares were purchased under this program.
During fiscal year 2008, we initiated restructuring plans to decrease costs by consolidating facilities
and reducing our workforce. As of September 28, 2013, we had made payments in connection with the
restructuring plans in the amount of $27.7 million. We completed payments for substantially all
anticipated costs related to the restructuring plans in the third quarter of fiscal 2011.
Additional sources of cash available to us were domestic and international currency lines of credit
and bank credit facilities totaling $64.7 million as of September 28, 2013, of which $62.5 million was
unused and available. These unsecured credit facilities were used in Europe and Japan during fiscal
2013. Our domestic line of credit consists of a $50.0 million unsecured revolving credit account with
Union Bank of California, which expires on May 31, 2014 and is subject to covenants related to
financial ratios and tangible net worth. No amounts have been drawn upon our domestic line of credit
and $2.3 million of the international currency lines has been used as guarantees as of September 28,
2013.
Our ratio of current assets to current liabilities was 4.3:1 at September 28, 2013, compared to 4.0:1
at September 29, 2012. The increase in our ratio is primarily due increases in cash and short-term
investments and inventories as well as decreases in income taxes payable. Our cash and cash
equivalents, short-term investments, working capital and debt obligations are as follows (in thousands):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$110,444
139,666
483,398
2
$ 67,761
157,168
460,697
19
Fiscal
2013
2012
59
Contractual Obligations and Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Regulation S-K of the Securities Act of
1933. The following summarizes our contractual obligations at September 28, 2013 and the effect such
obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
Long-term debt payments . . . . . . . . . . . . . . . .
Operating lease payments . . . . . . . . . . . . . . . .
Asset retirement obligations . . . . . . . . . . . . . .
Purchase commitments for inventory . . . . . . . .
Purchase obligations-other . . . . . . . . . . . . . . .
Total
$
2
40,749
2,474
40,214
5,177
Less than
1 year
$
2
9,335
—
40,214
5,177
$ —
13,253
1,269
—
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$88,616
$54,728
$14,522
$ —
9,731
—
—
—
$9,731
$ —
8,430
1,205
—
—
$9,635
1 to 3 years
3 to 5 years
More than
5 years
Because of the uncertainty as to the timing of such payments, we have excluded cash payments
related to our contractual obligations for our deferred compensation plans aggregating $26.1 million at
September 28, 2013.
As of September 28, 2013, we recorded gross unrecognized tax benefits of $23.2 million including
gross interest and penalties of $1.8 million. As of September 29, 2012, we recorded gross unrecognized
tax benefits of $27.6 million including gross interest and penalties of $1.6 million. Both gross
unrecognized tax benefits and gross interest and penalties are classified as non-current liabilities in the
consolidated balance sheet. At this time, we are unable to make a reasonably reliable estimate of the
timing of payments in individual years due to uncertainties in the timing of tax audit outcomes. As a
result, these amounts are not included in the table above.
Changes in financial condition
Cash provided by operating activities in fiscal 2013 was $115.5 million, which included net income
of $66.4 million, depreciation and amortization of $36.1 million, stock-based compensation expense of
$18.9 million and $0.3 million other partially offset by cash used by operating assets and liabilities of
$5.1 million and increases in net deferred tax assets of $1.1 million. Cash provided by operating
activities in fiscal 2012 was $64.8 million, which included net income of $63.0 million, depreciation and
amortization of $29.6 million, stock-based compensation expense of $16.3 million and the $4.1 million
write-off of Hypertronics intangibles partially offset by cash used by operating assets and liabilities of
$42.0 million, increases in net deferred tax assets of $4.8 million and $1.4 million other.
Cash used in investing activities in fiscal 2013 of $70.7 million included $20.5 million, net, used to
acquire property and equipment and improve buildings and $67.3 million used to acquire Lumera and
Innolight partially offset by $17.1 million net sales of available-for-sale securities. Cash used in investing
activities in fiscal 2012 of $142.9 million included $103.5 million net purchases of available-for-sale
securities, $35.7 million, net, used to acquire property and equipment and improve buildings and
$3.7 million used to acquire Midaz.
Cash used in financing activities in fiscal 2013 was $11.7 million, including $24.0 million cash
dividend on our common stock and $4.2 million other partially offset by $16.5 million generated from
our employee stock purchase plans. Cash used in financing activities in fiscal 2012 was $15.0 million,
including $25.0 million used to repurchase our common stock and $3.3 million other partially offset by
$13.3 million generated from our employee stock purchase plans.
Changes in exchange rates in fiscal 2013 resulted in a decrease in cash balances of $9.5 million.
Changes in exchange rates in fiscal 2012 resulted in a decrease in cash balances of $6.1 million.
60
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2. ‘‘Significant Accounting Policies’’ in the Notes to Consolidated Financial Statements
for a full description of recent accounting pronouncements, including the respective dates of adoption
or expected adoption and effects on our consolidated financial position, results of operations and cash
flows.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America and pursuant to the rules and regulations of the
SEC. The preparation of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. We have identified the following as the items that require the
most significant judgment and often involve complex estimation: revenue recognition, accounting for
long-lived assets (including goodwill and intangible assets), inventory valuation, warranty reserves,
stock-based compensation and accounting for income taxes.
Revenue Recognition
We recognize revenue when all four revenue recognition criteria have been met: persuasive
evidence of an arrangement exists, the product has been delivered or the service has been rendered,
the price is fixed or determinable and collection is probable. Revenue from product sales is recorded
when all of the foregoing conditions are met and risk of loss and title passes to the customer. Our
products typically include a warranty and the estimated cost of product warranty claims (based on
historical experience) is recorded at the time the sale is recognized. Sales to customers are generally
not subject to any price protection or return rights.
The vast majority of our sales are made to original equipment manufacturers (‘‘OEMs’’),
distributors, resellers and end-users in the non-scientific market. Sales made to these customers do not
require installation of the products by us and are not subject to other post-delivery obligations, except
in occasional instances where we have agreed to perform installation or provide training. In those
instances, we defer revenue related to installation services or training until these services have been
rendered. We allocate revenue from multiple element arrangements to the various elements based upon
fair values or a selling price hierarchy, for arrangements entered into subsequent to October 2, 2010, as
more fully described in Note 2, ‘‘Significant Accounting Policies—Revenue Recognition,’’ in our
consolidated financial statements.
Should changes in conditions cause management to determine these criteria are not met for
certain future transactions, revenue recognized for any reporting period could be adversely affected.
Failure to obtain anticipated orders due to delays or cancellations of orders could have a material
adverse effect on our revenue. In addition, pressures from customers to reduce our prices or to modify
our existing sales terms may have a material adverse effect on our revenue in future periods.
Our sales to distributors, resellers and end-user customers typically do not have customer
acceptance provisions and only certain of our sales to OEM customers and integrators have customer
acceptance provisions. Customer acceptance is generally limited to performance under our published
product specifications. For the few product sales that have customer acceptance provisions because of
higher than published specifications, (1) the products are tested and accepted by the customer at our
site or the customer accepts the results of our testing program prior to shipment to the customer, or
(2) the revenue is deferred until customer acceptance occurs.
61
Sales to end-users in the scientific market typically require installation and, thus, involve
post-delivery obligations; however our post-delivery installation obligations are not essential to the
functionality of our products. We defer revenue related to installation services until completion of these
services.
For most products, training is not provided; therefore, no post-delivery training obligation exists.
However, when training is provided to our customers, it is typically priced separately and recognized as
revenue as these services are provided.
For multiple element arrangements which include extended maintenance contracts, we allocate and
defer the amount of consideration equal to the separately stated price and recognize revenue on a
straight-line basis over the contract period.
Long-Lived Assets and Goodwill
We evaluate long-lived assets and amortizable intangible assets whenever events or changes in
business circumstances or our planned use of assets indicate that their carrying amounts may not be
fully recoverable or that their useful lives are no longer appropriate. Reviews are performed to
determine whether the carrying values of the assets are impaired based on comparison to the
undiscounted expected future cash flows identifiable to such long-lived and amortizable intangible
assets. If the comparison indicates that impairment exists, the impaired asset is written down to its fair
value.
We have determined that our reporting units are the same as our operating segments as each
constitutes a business for which discrete financial information is available and for which segment
management regularly reviews the operating results. We make this determination in a manner
consistent with how the operating segments are managed. Based on this analysis, we have identified two
reporting units which are our reportable segments: SLS and CLC.
Goodwill is tested for impairment on an annual basis and between annual tests in certain
circumstances, and written down when impaired (see Note 8 ‘‘Goodwill and Intangible Assets’’ in the
Notes to Consolidated Financial Statements). We generally perform our annual impairment tests during
the fourth quarter of each fiscal year using the opening balance sheet as of the first day of the fourth
fiscal quarter, with any resulting impairment recorded in the fourth quarter of the fiscal year.
In September 2011, the FASB amended its guidance to simplify testing goodwill for impairment,
allowing an entity to first assess qualitative factors to determine whether it is necessary to perform the
two-step quantitative goodwill impairment test. If an entity determines as a result of the qualitative
assessment that it is more likely than not (> 50% likelihood) that the fair value of a reporting unit is
less than its carrying amount, then the quantitative test is required. Moreover, an entity can bypass the
qualitative assessment for any reporting unit in any period and proceed directly to step one of the
impairment test, and then resume performing the qualitative assessment in any subsequent period.
Otherwise, no further testing is required. We adopted this accounting guidance for our impairment
testing in fiscal 2012.
Under the goodwill standards in effect for fiscal 2011, a company could carry forward the detailed
determination of a reporting unit from one year to the next if certain criteria have been met. Those
criteria include: the assets and liabilities that make up the reporting unit have not changed significantly
since the most recent fair value determination, the most recent fair value determination resulted in an
amount that exceeded the carrying amount of the reporting unit by a substantial margin, and based on
an analysis of events that have occurred and circumstances that have changed since the most recent fair
value determination, the likelihood that a current fair value determination would be less than the
current carrying amount of the reporting unit is remote.
Based on our analysis and a review of the criteria, using the opening balance sheet as of the first
day of the fourth quarter of fiscal 2011, we determined that we had met the requirements of the
62
goodwill standard for carrying forward our fair value determination from fiscal 2010, and did not
perform detailed testing of the fair value of our reporting units for fiscal 2011. Between the completion
of that testing and the end of the fourth quarter of fiscal 2011, we noted no indications of impairment
or triggering events to cause us to review goodwill for potential impairment; based on our evaluation,
the fair values of each of the two operating segments significantly exceeded their carrying value as of
that date.
In our fiscal 2012 annual testing, we performed a qualitative assessment of the goodwill by
reporting unit during the fourth quarter of fiscal 2012 using the opening balance sheet as of the first
day of the fourth quarter and concluded that it was more likely than not that the fair value of each of
the reporting units exceeded its carrying amount. In assessing the qualitative factors, we considered the
impact of these key factors: macroeconomic conditions, fluctuations in foreign currency, market and
industry conditions, our operating and competitive environment, regulatory and political developments,
the overall financial performance of our reporting units including cost factors and budgeted-to-actual
revenue results. We also considered market capitalization and stock price performance. Based on our
assessment, goodwill in the reporting units was not impaired as of the first day of the fourth quarter of
fiscal 2012. As such, it was not necessary to perform the two-step goodwill impairment test at that time.
In fiscal 2013, we elected to bypass the qualitative assessment and proceed directly to performing
the first step of the goodwill impairment test. This election was made because we had last performed
this impairment test in fiscal 2010 and we have subsequently added a substantial amount of goodwill
balances as a result of our acquisitions of Midaz in the fourth quarter of fiscal 2012 and the
acquisitions of Innolight and Lumera in the first quarter of fiscal 2013. We performed our Step 1 test
during the fourth quarter of fiscal 2013 using the opening balance sheet as of the first day of the fourth
quarter and noted no impairment. We determined the fair value of our reporting units for the Step 1
test using a 50-50% weighting of the Income (discounted cash flow) approach and Market (market
comparable) approach. The Income approach utilizes the discounted cash flow model to provide an
estimation of fair value based on the cash flows that a business expects to generate. These cash flows
are based on forecasts developed internally by management which are then discounted at an after tax
rate of return required by equity and debt market participants of a business enterprise. This rate of
return or cost of capital is weighted based on the capitalization of comparable companies. The Market
approach determines fair value by comparing the reporting units to comparable companies in similar
lines of business that are publicly traded. Total Enterprise Value (TEV) multiples such as TEV to
revenues and TEV to earnings (if applicable) before interest and taxes of the publicly traded companies
are calculated. These multiples are then applied to the reporting unit’s operating results to obtain an
estimate of fair value. Each of these two approaches captures aspects of value in each reporting unit.
The Income approach captures our expected future performance, and the Market approach captures
how investors view the reporting units through other competitors. We believe these valuation
approaches are proven valuation techniques and methodologies for our industry and are widely
accepted by investors. As neither was perceived by us to deliver any greater indication of value than the
other, we weighted each of the approaches equally. Management completed and reviewed the results of
the Step 1 analysis and concluded that a Step 2 analysis was not required as the estimated fair values
of both of our reporting units were substantially in excess of their carrying values. Between the
completion of that testing and the end of the fourth quarter of fiscal 2013, we noted no indications of
impairment or triggering events to cause us to review goodwill for potential impairment.
At September 28, 2013, we had $113.4 million of goodwill, $43.0 million of purchased intangible
assets and $114.3 million of property and equipment on our consolidated balance sheet.
Inventory Valuation
We record our inventory at the lower of cost (computed on a first-in, first-out basis) or market. We
write-down our inventory to its estimated market value based on assumptions about future demand and
63
market conditions. Inventory write-downs are generally recorded within guidelines set by management
when the inventory for a device exceeds 12 months of its demand and when individual parts have been
in inventory for greater than 12 months. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required which could materially
affect our future results of operations. Due to rapidly changing forecasts and orders, additional write-
downs for excess or obsolete inventory, while not currently expected, could be required in the future. In
the event that alternative future uses of fully written down inventories are identified, we may
experience better than normal profit margins when such inventory is sold. Differences between actual
results and previous estimates of excess and obsolete inventory could materially affect our future results
of operations. We write-down our demo inventory by amortizing the cost of demo inventory over a
twenty month period starting from the fourth month after such inventory is placed in service.
Warranty Reserves
We provide warranties on the majority of our product sales and allowances for estimated warranty
costs are recorded during the period of sale. The determination of such allowances requires us to make
estimates of product return rates and expected costs to repair or replace the products under warranty.
We currently establish warranty reserves based on historical warranty costs for each product line. The
weighted average warranty period covered is approximately 15 months. If actual return rates and/or
repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be
required in future periods.
Stock-Based Compensation
We account for stock-based compensation using fair value. We estimate the fair value of stock
options granted using the Black-Scholes Merton model and estimate the fair value of market-based
performance restricted stock units granted using a Monte Carlo simulation model. We use historical
data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for
those awards that are expected to vest. We amortize the fair value of stock options on a straight-line
basis over the requisite service periods of the awards, which are generally the vesting periods. We value
service-based restricted stock units using the intrinsic value method and amortize the value on a
straight-line basis over the restriction period. We value market-based performance restricted stock units
using a Monte Carlo simulation model and amortize the value over the performance period, with no
adjustment in future periods, based upon the actual shareholder return over the performance period.
U.S. Generally Accepted Accounting Principles (‘‘GAAP’’) requires the use of option pricing
models that were not developed for use in valuing employee stock options. The Black-Scholes option-
pricing model was developed for use in estimating the fair value of short-lived exchange traded options
that have no vesting restrictions and are fully transferable. In addition, option-pricing models require
the input of highly subjective assumptions, including the options expected life, the expected price
volatility of the underlying stock and an estimate of expected forfeitures. Our computation of expected
volatility considers historical volatility and market-based implied volatility. Our estimate of expected
forfeitures is based on historical employee data and could differ from actual forfeitures.
See Note 14 ‘‘Employee Stock Option and Benefit Plans’’ in the notes to the Consolidated
Financial Statements for a description of our stock-based employee compensation plans and the
assumptions we use to calculate the fair value of stock-based employee compensation.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This
process involves us estimating our current income tax provision (benefit) together with assessing
temporary differences resulting from differing treatment of items for tax and accounting purposes.
64
These differences result in deferred tax assets and liabilities, which are included within our consolidated
balance sheets.
We record a valuation allowance to reduce our deferred tax assets to an amount that more likely
than not will be realized. While we have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were
to determine that we would be able to realize our deferred tax assets in the future in excess of our net
recorded amount, an adjustment to the allowance for the deferred tax asset would increase income in
the period such determination was made. Likewise, should we determine that we would not be able to
realize all or part of our net deferred tax asset in the future, an adjustment to the valuation allowance
for the deferred tax asset would be charged to income in the period such determination was made.
Federal income taxes have not been provided for on a portion of the unremitted earnings of
foreign subsidiaries because such earnings are intended to be permanently reinvested. The total amount
of unremitted earnings and accumulated translation adjustments of foreign subsidiaries for which we
have not yet recorded federal and state income taxes was approximately $335.4 million and
$52.7 million, respectively, at fiscal 2013 year-end. The amount of federal and state income taxes that
would be payable upon repatriation of such earnings are not practicably determinable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk disclosures
We are exposed to market risk related to changes in interest rates and foreign currency exchange
rates. We do not use derivative financial instruments for speculative or trading purposes.
Interest rate sensitivity
A portion of our investment portfolio is composed of fixed income securities. These securities are
subject to interest rate risk and will fall in value if market interest rates increase. If interest rates were
to increase immediately (whether due to changes in overall market rates or credit worthiness of the
issuers of our individual securities) and uniformly by 10% from levels at fiscal 2013 year-end, the fair
value of the portfolio, based on quoted market prices in active markets involving similar assets, would
decline by an immaterial amount due to their short-term maturities. We have the ability to generally
hold our fixed income investments until maturity and therefore we would not expect our operating
results or cash flows to be affected to any significant degree by the effect of a sudden change in market
interest rates on our securities portfolio. If necessary, we may sell short-term investments prior to
maturity to meet our liquidity needs.
At fiscal 2013 year-end, the fair value of our available-for-sale debt securities was $139.7 million,
all of which was classified as short-term investments. Gross unrealized gains and losses on
available-for-sale debt securities were $601,000 and $(16,000), respectively, at fiscal 2013 year-end. At
fiscal 2012 year-end, the fair value of our available-for-sale debt securities was $155.1 million, all of
which was classified as short-term investments. Gross unrealized gains and losses on available-for-sale
debt securities were $952,000 and ($3,000), respectively, at fiscal 2012 year-end.
Foreign currency exchange risk
We maintain operations in various countries outside of the United States and have foreign
subsidiaries that manufacture and sell our products in various global markets. The majority of our sales
are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the
Japanese Yen, the Euro and the Korean Won. As a result, our earnings, cash flows and cash balances
are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures
through financial market instruments. We utilize derivative instruments, primarily forward contracts
with maturities of three months or less, to manage our exposure associated with anticipated cash flows
65
and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward
contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative
financial instruments for trading purposes.
We do not anticipate any material adverse effect on our consolidated financial position, results of
operations or cash flows resulting from the use of these instruments. There can be no assurance that
these strategies will be effective or that transaction losses can be minimized or forecasted accurately.
For example, the Japanese Yen has recently decreased significantly in value and the Euro has recently
strengthened in value. While we model currency valuations and fluctuations, these may not ultimately
be accurate. If a financial counterparty to any of our hedging arrangements experiences financial
difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience
material financial losses. In the current economic environment, the risk of failure of a financial party
remains high.
At September 28, 2013, approximately $157.5 million of our cash, cash equivalents and short-term
investments were held outside the U.S. in certain of our foreign operations, $89.9 million of which was
denominated in currencies other than the U.S. dollar.
A hypothetical 10% change in foreign currency rates on our forward contracts would not have a
material impact on our results of operations, cash flows or financial position.
The following table provides information about our foreign exchange forward contracts at
September 28, 2013. The table presents the weighted average contractual foreign currency exchange
rates, the value of the contracts in U.S. dollars at the contract exchange rate as of the contract maturity
date and fair value. The U.S. notional fair value represents the contracted amount valued at
September 28, 2013 rates.
Forward contracts to sell (buy) foreign currencies (in thousands, except contract rates):
For US Dollars:
Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Korean Won . . . . . . . . . . . . . . . . . . . . . .
Chinese Renminbi
. . . . . . . . . . . . . . . . . .
British Pound Sterling . . . . . . . . . . . . . . . .
Japanese Yen . . . . . . . . . . . . . . . . . . . . . .
Singapore Dollar . . . . . . . . . . . . . . . . . . .
Malaysian Ringgit . . . . . . . . . . . . . . . . . . .
For Euros:
Japanese Yen . . . . . . . . . . . . . . . . . . . . . .
Average
Contract Rate
U.S. Notional
Contract Value
U.S. Notional
Fair Value
1.3244
1,088.1900
6.1690
1.5689
100.2589
1.2679
3.2755
$(46,248)
$ 17,345
$ 11,524
$ 1,870
$ (5,212)
$ (1,465)
642
$
$(47,299)
$ 17,545
$ 11,793
$ 1,919
$ (5,308)
$ (1,480)
649
$
98.4463
$ 11,860
$ 11,753
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15-(a) for an index to the Consolidated Financial Statements and Supplementary
Financial Information, which are attached hereto and incorporated by reference herein. The financial
statements and notes thereto can be found beginning on page 63 of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
66
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
We have evaluated the effectiveness of the design and operation of our disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of
the end of the period covered by this annual report (‘‘Evaluation Date’’). The controls evaluation was
done under the supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were
effective in providing reasonable assurance that information required to be disclosed by us in reports
that we file or submit under the Securities Exchange Act of 1934, as amended, is (i) recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and (ii) accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting
Management, including our Chief Executive Officer and Chief Financial Officer, is responsible for
establishing and maintaining adequate internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the Company.
Management assessed the effectiveness of our internal control over financial reporting as of
September 28, 2013, utilizing the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (‘‘COSO’’) in Internal Control-Integrated Framework (1992). Based on the
assessment by management, we determined that our internal control over financial reporting was
effective as of September 28, 2013. The effectiveness of our internal control over financial reporting as
of September 28, 2013 has been audited by Deloitte & Touche LLP, our independent registered public
accounting firm, as stated in their report which appears below.
Inherent Limitations Over Internal Controls
Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles (‘‘GAAP’’). Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness for future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in accordance with GAAP. Our internal
control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the financial
statements.
67
Management, including our CEO and CFO, does not expect that our internal controls will prevent
or detect all errors and all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of internal controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls
in future periods are subject to the risk that those internal controls may become inadequate because of
changes in business conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the
quarter ended September 28, 2013 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Coherent, Inc.:
We have audited the internal control over financial reporting of Coherent, Inc. and its subsidiaries
(collectively, the ‘‘Company’’) as of September 28, 2013, based on the criteria established in Internal
Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons performing
similar functions, and effected by the company’s board of directors, management, and other personnel
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation
of the effectiveness of the internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of September 28, 2013, based on the criteria established in Internal Control—
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and for the year ended
September 28, 2013, of the Company and our report dated November 27, 2013, expressed an
unqualified opinion on those consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
November 27, 2013
69
ITEM 9B. OTHER INFORMATION
Not applicable.
70
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding: (i) our directors will be set forth under the caption ‘‘Proposal One—
Election of Directors—Nominees’’; (ii) compliance with Section 16(a) of the Securities Act of 1933 will
be set forth under the caption ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’; (iii) the
process for stockholders to nominate directors will be set forth under the caption ‘‘Proposal One—
Election of Directors—Process for Recommending Candidates for Election to the Board of Directors’’;
(iv) our audit committee and audit committee financial expert will be set forth under the caption
‘‘Proposal One—Election of Directors—Board Meetings and Committees—Audit Committee’’; in our
proxy statement for use in connection with an upcoming Annual Meeting of Stockholders to be held in
2014 (the ‘‘2014 Proxy Statement’’) and is incorporated herein by reference or included in a
Form 10-K/A as an amendment to this Form 10-K. The 2014 Proxy Statement or Form 10-K/A will be
filed with the SEC within 120 days after the end of our fiscal year.
Business Conduct Policy
We have adopted a worldwide Business Conduct Policy that applies to the members of our Board
of Directors, executive officers and other employees. This policy is posted on our Website at
www.coherent.com and may be found as follows:
1.
From our main Web page, first click on ‘‘Company’’ and then on ‘‘corporate governance.’’
2. Next, click on ‘‘Business Conduct Policy.’’
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an
amendment to, or waiver from, a provision of this Business Conduct Policy by posting such information
on our Website, at the address and location specified above.
Stockholders may request free printed copies of our worldwide Business Conduct Policy from:
Coherent, Inc.
Attention: Investor Relations
5100 Patrick Henry Drive
Santa Clara, California 95054
Executive Officers
The name, age, position and a brief account of the business experience of our executive officers as
of November 27, 2013 are set forth below:
Name
Age
Office Held
John R. Ambroseo . . .
Helene Simonet . . . . .
Mark Sobey . . . . . . . .
. . . . . . .
Paul Sechrist
Luis Spinelli . . . . . . . .
Bret M. DiMarco . . . .
President and Chief Executive Officer
52
61 Executive Vice President and Chief Financial Officer
53 Executive Vice President and General Manager, Specialty Laser Systems
54 Executive Vice President, Worldwide Sales and Service
65 Executive Vice President and Chief Technology Officer
45 Executive Vice President, General Counsel and Corporate Secretary
John R. Ambroseo. Mr. Ambroseo has served as our President and Chief Executive Officer as
well as a member of the Board of Directors since October 2002. Mr. Ambroseo served as our Chief
Operating Officer from June 2001 through September 2002. Mr. Ambroseo served as our Executive
Vice President and as President and General Manager of the Coherent Photonics Group from
September 2000 to June 2001. From September 1997 to September 2000, Mr. Ambroseo served as our
Executive Vice President and as President and General Manager of the Coherent Laser Group. From
71
March 1997 to September 1997, Mr. Ambroseo served as our Scientific Business Unit Manager. From
August 1988, when Mr. Ambroseo joined us, until March 1997, he served as a Sales Engineer, Product
Marketing Manager, National Sales Manager and Director of European Operations. Mr. Ambroseo
received a Bachelor degree from SUNY-College at Purchase and a PhD in Chemistry from the
University of Pennsylvania.
Helene Simonet. Ms. Simonet has served as our Executive Vice President and Chief Financial
Officer since April 2002. Ms. Simonet served as Vice President of Finance of our former Medical
Group and Vice President of Finance, Photonics Division from December 1999 to April 2002. Prior to
joining Coherent, she spent over twenty years in senior finance positions at Raychem Corporation’s
Division and Corporate organizations, including Vice President of Finance of Raynet Corporation.
Ms. Simonet has both Master’s and Bachelor degrees from the University of Leuven, Belgium.
Mark Sobey. Mr. Sobey was appointed Executive Vice President of Coherent and General
Manager of Specialty Laser Systems (SLS) in April 2010. He has served as Senior Vice President and
General Manager for the SLS Business Group, which primarily serves the Microelectronics and
Research markets, since joining Coherent in July 2007. Prior to Coherent, Mr. Sobey has spent over
20 years in the Laser and Fiber Optics Telecommunications industries, including roles as Senior Vice
President Product Management at Cymer from January 2006 through June 2007 and previously as
Senior Vice President Global Sales at JDS Uniphase through October 2005. He received his PhD in
Engineering and BSc in Physics, both from the University of Strathclyde in Scotland.
Paul Sechrist. Mr. Paul Sechrist was appointed Executive Vice President, Worldwide Sales and
Service in March 2011. He has over 30 years of experience with Coherent, including roles as Senior
Vice President and General Manager of Commercial Lasers and Components from October 2008 to
March 2011, Vice President and General Manager of Specialty Laser Systems, Santa Clara from March
2008 to October 2008 and Vice President for Components from April 2005 to October 2008.
Mr. Sechrist received an AA degree from San Jose City College, with Physics studies at California State
University, Hayward.
Luis Spinelli. Mr. Spinelli has served as our Executive Vice President and Chief Technology
Officer since February 2004. Mr. Spinelli joined the Company in May 1985 and has since held various
engineering and managerial positions, including Vice President, Advanced Research from April 2000 to
September 2002 and Vice President, Corporate Research from September 2002 to February 2004.
Mr. Spinelli has led the Advanced Research Unit from its inception in 1998, whose charter is to
identify and evaluate new and emerging technologies of interest for us across a range of disciplines in
the laser field. Mr. Spinelli holds a degree in Electrical Engineering from the University of Buenos
Aires, Argentina with post-graduate work at the Massachusetts Institute of Technology.
Bret M. DiMarco. Mr. DiMarco has served as our Executive Vice President and General Counsel
since June 2006 and our Corporate Secretary since February 2007. From February 2003 until May 2006,
Mr. DiMarco was a member and from October 1995 until January 2003 was an associate at Wilson
Sonsini Goodrich & Rosati, P.C., a law firm. Mr. DiMarco received a Bachelor’s degree from the
University of California at Irvine and a Juris Doctorate degree from the Law Center at the University
of Southern California. He is also an adjunct professor of law at the University of California Hastings
College of the Law, teaching corporate law and mergers & acquisitions.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding: (i) executive officer and director compensation will be set forth under the
captions ‘‘Election of Directors—Director Compensation’’ and ‘‘Executive Officers and Executive
Compensation’’ and (ii) compensation committee interlocks will be set forth under the caption
‘‘Executive Officers and Executive Compensation—Compensation Committee Interlocks and Insider
72
Participation and Committee Independence’’ in the 2014 Proxy Statement or included in a
Form 10-K/A as an amendment to our Form 10-K for the fiscal year ended September 28, 2013. The
2014 Proxy Statement or Form 10-K/A will be filed with the SEC within 120 days after the end of our
fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information regarding: (i) equity compensation plan information will be set forth under the
caption ‘‘Equity Compensation Plan Information’’; and (ii) security ownership of certain beneficial
owners and management will be set forth under the caption ‘‘Security Ownership of Certain Beneficial
Owners and Management’’; in our 2014 Proxy Statement and is incorporated herein by reference or
included in a Form 10-K/A as an amendment to our Form 10-K for the fiscal year ended
September 28, 2013.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required under this item will be set forth under the caption ‘‘Certain
Relationships and Related Party Transactions’’ in our 2014 Proxy Statement and is incorporated herein
by reference or included in a Form 10-K/A as an amendment to our Form 10-K for the fiscal year
ended September 28, 2013.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Principal Accounting Fees and Services
The following table sets forth fees for services provided by Deloitte & Touche LLP, the member
firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, ‘‘Deloitte’’) during fiscal
years 2013 and 2012:
Audit fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit-related fees(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax fees(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other fees(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,818,000
79,126
135,337
2,200
$1,725,000
172,632
—
2,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,034,663
$1,899,832
2013
2012
(1) Represents fees for professional services provided in connection with the integrated audit
of our annual financial statements and internal control over financial reporting and review
of our quarterly financial statements, advice on accounting matters that arose during the
audit and audit services provided in connection with other statutory or regulatory filings.
(2) For fiscal 2013, represents $79,126 in fees for due diligence associated with our
acquisition activities in fiscal 2013. For fiscal 2012, represents $146,874 in fees for due
diligence associated with our acquisition activities in fiscal 2012 and $25,578 for services
related to the review of our XBRL filings.
(3) Represents tax compliance and related services.
(4) Represents the annual subscription for access to the Deloitte Accounting Research Tool,
which is a searchable on-line accounting database.
73
Pre-Approval of Audit and Non-Audit Services
The Audit Committee has determined that the provision of non-audit services by Deloitte is
compatible with maintaining Deloitte’s independence. In accordance with its charter, the Audit
Committee approves in advance all audit and non-audit services to be provided by Deloitte. In other
cases, the Chairman of the Audit Committee has the delegated authority from the Committee to
pre-approve certain additional services, and such pre-approvals are communicated to the full
Committee at its next meeting. During fiscal year 2013, all services were pre-approved by the Audit
Committee in accordance with this policy.
74
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Index to Consolidated Financial Statements
PART IV
The following Consolidated Financial Statements of Coherent, Inc. and its subsidiaries are filed as
part of this annual report on Form 10-K:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets—September 28, 2013 and September 29, 2012 . . . . . . . . . . . . . . . .
Consolidated Statements of Operations—Years ended September 28, 2013, September 29, 2012
and October 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income—Years ended September 28, 2013,
September 29, 2012 and October 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity—Years ended September 28, 2013,
September 29, 2012 and October 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows—Years ended September 28, 2013, September 29, 2012
81
82
83
84
85
and October 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarterly Financial Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86
87
129
75
2. Consolidated Financial Statement Schedules
Financial statement schedules have been omitted because they are either not required, not
applicable or the information required to be set forth therein is included in the Consolidated Financial
Statements hereto.
3. Exhibits
Exhibit
Numbers
3.1*
3.2*
Restated and Amended Certificate of Incorporation. (Previously filed as Exhibit 3.1 to
Form 10-K for the fiscal year ended September 29, 1990)
Certificate of Amendment of Restated and Amended Certificate of Incorporation of
Coherent, Inc. (Previously filed as Exhibit 3.2 to Form 10-K for the fiscal year ended
September 28, 2002)
3.3*
Bylaws. (Previously filed as Exhibit 3.1 to Form 8-K, filed on December 12, 2012)
10.1*‡
10.2*‡
10.3*
10.4*‡
10.5*‡
10.6*‡
10.7*‡
10.8*‡
Amended and Restated Employee Stock Purchase Plan. (Previously filed as Exhibit 10.1 to
Form S-8 filed on June 12, 2012)
Coherent Employee Retirement and Investment Plan. (Previously filed as Exhibit 10.23 to
Form 8, Amendment No. 1 to Annual Report on Form 10-K for the fiscal year ended
September 25, 1982)
1998 Director Option Plan. (Previously filed as Appendix B to Schedule 14A filed
February 28, 2006)
2001 Stock Plan. (Previously filed as Exhibit 10.1 to Form 10-Q for the quarter ended
March 29, 2008)
Change of Control Severance Plan, as amended and restated effective December 7, 2012.
(Previously filed as Exhibit 10.1 to Form 8-K, filed on December 12, 2012)
Variable Compensation Plan, as amended. (Previously filed as Exhibit 10.7 to Form 10-K
for the fiscal year ended October 1, 2011)
Fiscal 2011 Variable Compensation Plan Payout Scale. (Previously filed as Exhibit 10.8 to
Form 10-K for the fiscal year ended October 1, 2011)
Fiscal 2012 Variable Compensation Plan Payout Scale. (Previously filed as Exhibit 10.9 to
Form 10-K for the fiscal year ended October 1, 2011)
10.9***‡ Fiscal 2013 Variable Compensation Plan Payout Scale for Named Executive Officers.
(Previously filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended December 29,
2012)
10.10*‡
10.11*‡
10.12*‡
10.13*‡
Supplementary Retirement Plan. (Previously filed as Exhibit 10.5 to Form 10-Q for the
quarter ended April 1, 2006)
2005 Deferred Compensation Plan. (Previously filed as Exhibit 10.1 to Form 10-Q for the
fiscal quarter ended December 31, 2011)
Form of 2001 Stock Plan Terms and Conditions of Restricted Stock Units. (Previously
filed as Exhibit 10.1 to Form 8-K filed on November 27, 2009)
Form of 2001 Stock Plan Amended Global Stock Option Agreement. (Previously filed as
Exhibit 10.2 to Form 8-K filed on November 27, 2009)
76
Exhibit
Numbers
10.14*
10.15*
10.16*
10.17*
10.18*‡
10.19*‡
10.20*‡
10.21*‡
10.22*‡
10.23*‡
Amended and Restated Loan Agreement by and between Coherent, Inc. and Union Bank
of California, N.A. dated as of May 30, 2012. (Previously filed as Exhibit 10.1 to Form 8-K
filed on June 5, 2012)
Amended and Restated Promissory Note (Base Rate) (Previously filed as Exhibit 10.2 to
Form 8-K filed on June 5, 2012)
Second Lease Amendment by and between Coherent, Inc. and 5200 Patrick Henry
Associates LLC dated as of July 23, 2010. (Previously filed as Exhibit 10.1 to Form 10-Q
for the quarter ended July 3, 2010)
Form of Indemnification Agreement (Previously filed as Exhibit 10.18 to Form 10-K for
the year ended October 2, 2010)
2011 Equity Incentive Plan. (incorporated by reference to Exhibit 10.1 to the Company’s
Registration Statement on Form S-8 (File No. 333-174019) filed on May 6, 2011)
Form of RSU Agreement for members of the Board of Directors under the Company’s
2011 Equity Incentive Plan. (Previously filed as Exhibit 10.1 to Form 10-Q for the fiscal
quarter ended July 2, 2011)
Form of Option Agreement for members of the Board of Directors under the Company’s
2011 Equity Incentive Plan. (Previously filed as Exhibit 10.1 to Form 10-Q for the fiscal
quarter ended July 2, 2011)
Form of Performance RSU Agreement under the 2011 Equity Incentive Plan. (Previously
filed as Exhibit 10.22 to Form 10-K for the fiscal year ended October 1, 2011)
Form of Time-Based RSU Agreement under the 2011 Equity Incentive Plan. (Previously
filed as Exhibit 10.23 to Form 10-K for the fiscal year ended October 1, 2011)
Form of Performance RSU Agreement under the 2011 Equity Incentive Plan (Amended)
(Previously filed as Exhibit 10.23 to Form 10-K for the fiscal year ended September 29,
2012)
10.24*‡
Form of Performance RSU Agreement under the 2011 Equity Incentive Plan, as amended
November 8, 2013. (Previously filed as Exhibit 10.1 to Form 8-K filed November 14, 2013)
21.1
23.1
24.1
31.1
31.2
32.1
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Power of Attorney (see signature page)
Certification of Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Chief Financial Officer pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
77
Exhibit
Numbers
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
These exhibits were previously filed with the Commission as indicated and are incorporated herein
by reference.
** Portions of this exhibit are redacted and confidential treatment has been requested.
‡
Identifies management contract or compensatory plans or arrangements required to be filed as an
exhibit.
78
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
COHERENT, INC.
Date: November 27, 2013
By:
/s/ JOHN R. AMBROSEO
John R. Ambroseo
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints John R. Ambroseo and Helene Simonet, and each of them
individually, as his attorney-in-fact, each with full power of substitution, for him in any and all
capacities to sign any and all amendments to this Report on Form 10-K, and to file the same with, with
exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or his or her substitute, may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
/s/ JOHN R. AMBROSEO
John R. Ambroseo
(Director and Principal Executive Officer)
/s/ HELENE SIMONET
Helene Simonet
(Principal Financial and Accounting Officer)
/s/ JAY T. FLATLEY
Jay T. Flatley
(Director)
/s/ SUSAN M. JAMES
Susan M. James
(Director)
/s/ L. WILLIAM KRAUSE
L. William Krause
(Director)
/s/ GARRY W. ROGERSON
Garry W. Rogerson
(Director)
/s/ LAWRENCE TOMLINSON
Lawrence Tomlinson
(Director)
/s/ SANDEEP VIJ
Sandeep Vij
(Director)
79
November 27, 2013
Date
November 27, 2013
Date
November 27, 2013
Date
November 27, 2013
Date
November 27, 2013
Date
November 27, 2013
Date
November 27, 2013
Date
November 27, 2013
Date
STATEMENT OF MANAGEMENT RESPONSIBILITY
Management is responsible for the preparation, integrity, and objectivity of the Consolidated
Financial Statements and other financial information included in the Company’s 2013 Annual Report
on Form 10-K. The Consolidated Financial Statements have been prepared in conformity with U.S.
generally accepted accounting principles and reflect the effects of certain estimates and judgments
made by management. It is critical for investors and other readers of the Consolidated Financial
Statements to have confidence that the financial information that we provide is timely, complete,
relevant and accurate
Management, with oversight by the Company’s Board of Directors, has established and maintains a
corporate culture that requires that the Company’s affairs be conducted to the highest standards of
business ethics and conduct. Management also maintains a system of internal control that is designed to
provide reasonable assurance that assets are safeguarded and that transactions are properly recorded
and executed in accordance with management’s authorization. This system is regularly monitored
through direct management review, as well as extensive audits conducted by internal auditors
throughout the organization.
Our Consolidated Financial Statements as of and for the year ended September 28, 2013 have
been audited by Deloitte & Touche LLP, an independent registered public accounting firm. Their audit
was conducted in accordance with the standards of the Public Company Accounting Oversight Board
(United States) and included an integrated audit under such standards.
The Audit Committee of the Board of Directors meets regularly with management, the internal
auditors and the independent registered public accounting firm to review accounting, reporting,
auditing and internal control matters. The Audit Committee has direct and private access to both
internal and external auditors.
See Item 9A for Management’s Report on Internal Control Over Financing Reporting.
We are committed to enhancing shareholder value and fully understand and embrace our fiduciary
oversight responsibilities. We are dedicated to ensuring that our high standards of financial accounting
and reporting as well as our underlying system of internal controls are maintained. Our culture
demands integrity and we have the highest confidence in our processes, internal controls, and people,
who are objective in their responsibilities and operate under the highest level of ethical standards.
/s/ JOHN R. AMBROSEO
/s/ HELENE SIMONET
John R. Ambroseo
President and Chief Executive Officer
Helene Simonet
Executive Vice President and Chief Financial Officer
80
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Coherent, Inc.:
We have audited the accompanying consolidated balance sheets of Coherent, Inc. and its
subsidiaries (collectively, the ‘‘Company’’) as of September 28, 2013 and September 29, 2012, and the
related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash
flows for each of the three years in the period ended September 28, 2013. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of September 28, 2013 and September 29, 2012, and the results of
its operations and its cash flows for each of the three years in the period ended September 28, 2013, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
September 28, 2013, based on the criteria established in Internal Control—Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated November 27, 2013 expressed an unqualified opinion on the Company’s internal control over
financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
November 27, 2013
81
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
September 28,
2013
September 29,
2012
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable—net of allowances of $1,386 in 2013 and $1,443 in
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$110,444
139,666
$ 67,761
157,168
136,759
168,067
52,577
21,713
629,226
114,333
113,408
42,971
66,540
144,345
160,113
61,730
23,368
614,485
115,096
77,689
9,473
64,029
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$966,478
$880,772
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term obligations . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, par value $.01:
Authorized—500,000 shares;
Outstanding—24,464 shares in 2013 and 23,746 shares in 2012 . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2
36,565
24,695
84,566
145,828
—
62,132
$
17
29,088
33,944
90,739
153,788
2
55,326
244
162,253
54,450
541,571
758,518
237
131,708
40,455
499,256
671,656
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
$966,478
$880,772
See accompanying Notes to Consolidated Financial Statements.
82
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended
September 28,
2013
September 29, October 1,
2012
2011
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$810,126
487,855
$769,088
453,103
$802,834
452,012
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
322,271
315,985
350,822
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income (expense), net . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82,785
149,513
5,074
237,372
84,899
230
(164)
(1,469)
(1,403)
83,496
17,141
78,260
138,519
10,376
227,155
88,830
311
(86)
1,567
1,792
81,232
149,499
8,082
238,813
112,009
909
(147)
11,058
11,820
90,622
27,660
123,829
30,591
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 66,355
$ 62,962
$ 93,238
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2.75
2.70
$
$
2.67
2.62
$
$
3.74
3.66
Shares used in computation:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,138
24,555
23,561
24,026
24,924
25,464
See accompanying Notes to Consolidated Financial Statements.
83
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss):
Translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in unrealized gains (losses) on available-for-sale
Year Ended
September 28,
2013
September 29, October 1,
2012
2011
$66,355
$ 62,962
$ 93,238
13,998
(10,796)
(10,842)
securities, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3)
30
(21)
Other comprehensive income (loss), net of tax(1) . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . .
13,995
$80,350
(10,766)
(10,863)
$ 52,196
$ 82,375
(1) Tax expense (benefit) of $(746), $(166) and $(2,283) was provided on translation adjustments
during fiscal 2013, 2012 and 2011, respectively. Tax expense (benefit) on changes in unrealized
gains (losses) on available-for-sale securities was insignificant.
84
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Years in the Period Ended September 28, 2013
(In thousands)
Balances, October 2, 2010 . . . . . . . .
Common stock issued under stock
plans, net of shares withheld for
employee taxes . . . . . . . . . . . . . . .
Tax impact from employee stock
options . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . .
Stock-based compensation . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax
Balances, October 1, 2011 . . . . . . . .
Common stock issued under stock
plans, net of shares withheld for
employee taxes . . . . . . . . . . . . . . .
Tax impact from employee stock
options . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . .
Stock-based compensation . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of
tax . . . . . . . . . . . . . . . . . . . . . . . .
Balances, September 29, 2012 . . . . . .
Common stock issued under stock
plans, net of shares withheld for
employee taxes . . . . . . . . . . . . . . .
Tax impact from employee stock
options . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . .
Cash dividends paid ($1.00 per
common share) . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of
tax . . . . . . . . . . . . . . . . . . . . . . . .
Common
Stock
Shares
Common
Stock
Par
Value
Add.
Paid-in
Capital
Accum.
Other
Comp.
Income
Retained
Earnings
Total
24,554
$245
$ 186,078
$ 62,084
$343,056
$ 591,463
1,233
11
31,403
—
—
31,414
—
(2,065)
—
—
—
—
(20)
—
—
—
—
290
—
(100,617)
—
13,096
—
—
— (10,863)
—
290
— (100,637)
13,096
—
93,238
93,238
(10,863)
—
23,722
$236
$ 130,250
$ 51,221
$436,294
$ 618,001
567
—
(543)
—
—
—
6
—
(5)
—
—
—
8,745
1,264
(24,994)
16,443
—
—
—
—
—
—
—
8,751
—
—
—
62,962
1,264
(24,999)
16,443
62,962
— (10,766)
—
(10,766)
23,746
$237
$ 131,708
$ 40,455
$499,256
$ 671,656
718
—
—
—
—
—
7
—
—
—
—
—
12,364
(836)
19,017
—
—
—
—
—
—
—
—
—
12,371
(836)
19,017
— (24,040)
66,355
—
(24,040)
66,355
13,995
—
13,995
Balances, September 28, 2013 . . . . . .
24,464
$244
$ 162,253
$ 54,450
$541,571
$ 758,518
See accompanying Notes to Consolidated Financial Statements
85
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
September 28,
2013
September 29, October 1,
2012
2011
$ 66,355
$ 62,962
$ 93,238
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of Hypertronics intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation arrangements . . . . . . . . .
Non-cash translation adjustment related to Finland dissolution . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable/receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,356
9,767
—
18,891
—
—
(1,107)
353
4,226
4,260
10,128
34
6,116
(20,574)
(11,185)
1,902
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . .
115,522
Cash flows from investing activities:
. . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment
Proceeds from dispositions of property and equipment
. . . . . . . . . . . . . . .
Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and maturities of available-for-sale securities . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . .
Change in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock under employee stock option and purchase plans . .
Cash dividend paid ($1.00 per common share) . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation arrangements . . . . . . . . .
Net settlement of restricted common stock . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year
(21,988)
1,482
(228,231)
245,361
(67,289)
—
(70,665)
20,717
(20,717)
(17)
—
16,541
(24,040)
—
(4,170)
(11,686)
9,512
42,683
67,761
23,243
6,406
4,142
16,315
(1,264)
—
(4,763)
(192)
(5,146)
(9,767)
(5,294)
147
(10,443)
(6,922)
(5,360)
707
64,771
(36,051)
280
(244,186)
140,700
(3,687)
—
(142,944)
9,262
(9,262)
(15)
(24,999)
13,288
—
1,264
(4,537)
(14,999)
(6,128)
(99,300)
167,061
20,539
8,082
—
12,963
(5,111)
(6,511)
22,089
68
(26,185)
(38,570)
(8,098)
(1,194)
(161)
4,272
8,712
2,543
86,676
(37,117)
355
(230,992)
195,570
(14,108)
625
(85,667)
2,344
(2,344)
(18)
(100,637)
34,720
—
5,111
(3,306)
(64,130)
(15,198)
(78,319)
245,380
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 110,444
$ 67,761
$ 167,061
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
164
$ 54,047
$
86
$ 49,755
Cash received during the year for:
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,538
$ 11,855
Noncash investing and financing activities:
Unpaid property and equipment purchases . . . . . . . . . . . . . . . . . . . . . . .
$
1,550
$
1,031
$
108
$ 17,291
$
$
5,250
1,334
See accompanying Notes to Consolidated Financial Statements
86
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Founded in 1966, Coherent, Inc. provides photonics-based solutions in a broad range of
commercial and scientific research applications. We design, manufacture, service and market lasers,
laser tools and related accessories for a diverse group of customers. Headquartered in Santa Clara,
California, the Company has worldwide operations including research and development, manufacturing,
sales, service and support capabilities.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
Our fiscal year ends on the Saturday closest to September 30. Fiscal years 2013, 2012 and 2011
ended on September 28, 2013, September 29, 2012 and October 1, 2011, respectively, and are referred
to in these financial statements as fiscal 2013, fiscal 2012, and fiscal 2011 for convenience. All fiscal
years include 52 weeks. Accordingly, the financial statements of these subsidiaries as of that date and
for the years then ended have been used for our consolidated financial statements. Management
believes that the impact of the use of different year-ends is immaterial to our consolidated financial
statements taken as a whole.
Use of Estimates
The preparation of consolidated financial statements in conformity with Generally Accepted
Accounting Principles (‘‘GAAP’’) requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Basis of Presentation
The consolidated financial statements include the accounts of Coherent, Inc. and its majority-
owned subsidiaries (collectively, ‘‘the Company’’, ‘‘we’’, ‘‘our’’, or ‘‘Coherent’’). Intercompany balances
and transactions have been eliminated. Investments in business entities in which we do not have
control, but have the ability to exercise significant influence over operating and financial policies
(generally 20%-50% ownership) are accounted for by the equity method. We currently do not have any
investments accounted for by the equity method. Minority interests in non-wholly owned subsidiaries
are insignificant.
Fair Value of Financial Instruments
The carrying amounts of certain of our financial instruments including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short
maturities. Short-term investments are comprised of available-for-sale securities, which are carried at
fair value. Other non-current assets include trading securities and life insurance contracts related to our
deferred compensation plans; trading securities are carried at fair value and life insurance contracts are
carried at cash surrender values, which due to their ability to be converted to cash at that amount,
approximate their fair values. The recorded carrying amount of our long-term obligations approximates
fair value at fiscal 2013 and 2012 year-ends. Foreign exchange contracts are stated at fair value based
on prevailing financial market information.
87
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
All highly liquid investments with maturities of three months or less at the time of purchase are
classified as cash equivalents.
Concentration of Credit Risk
Financial instruments that may potentially subject us to concentrations of credit risk consist
principally of cash equivalents, short-term investments and accounts receivable. At fiscal 2013 year-end,
the majority of our short-term investments are in US Treasury and federal agency obligations and
corporate notes and obligations. Cash equivalents and short-term investments are maintained with
several financial institutions and may exceed the amount of insurance provided on such balances. At
September 28, 2013, we held cash and cash equivalents and short-term investments outside the U.S. in
certain of our foreign operations totaling approximately $157.5 million, $89.9 million of which was
denominated in currencies other than the U.S. dollar. The majority of our accounts receivable are
derived from sales to customers for commercial applications. We perform ongoing credit evaluations of
our customers’ financial condition and limit the amount of credit extended when deemed necessary but
generally require no collateral. We maintain reserves for potential credit losses. Our products are
broadly distributed and there were two customers who accounted for 15.2% and 11.7% of accounts
receivable at fiscal 2013 year-end. There were two customers who accounted for 14.9% and 14.8% of
accounts receivable at fiscal 2012 year-end.
Accounts Receivable Allowances
Accounts receivable allowances reflect our best estimate of probable losses inherent in our
accounts receivable balances. We regularly review allowances by considering factors such as historical
experience, credit quality, the age of the accounts receivable balances and current economic conditions
that may affect a customer’s ability to pay.
Activity in accounts receivable allowance is as follows (in thousands):
Fiscal year-end
2013
2012
2011
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions charged to expenses . . . . . . . . . . . . . . . . . . .
Accruals resulting from acquisitions . . . . . . . . . . . . . . .
Deductions from reserves . . . . . . . . . . . . . . . . . . . . . .
$ 1,443
1,622
—
(1,679)
$ 1,439
1,362
—
(1,358)
$ 1,655
1,329
184
(1,729)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,386
$ 1,443
$ 1,439
88
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories are as follows
(in thousands):
Purchased parts and assemblies . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal year-end
2013
2012
$ 50,275
60,089
57,703
$ 46,526
60,171
53,416
$168,067
$160,113
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized using the straight-line
method. Cost, accumulated depreciation and amortization, and estimated useful lives are as follows
(dollars in thousands):
Land . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . .
Equipment, furniture and fixtures . . . .
Leasehold improvements . . . . . . . . . .
Fiscal year-end
2013
2012
Useful Life
$
6,295
73,139
220,133
29,763
329,330
$
6,251
67,916
205,479
28,162 Lesser of useful life or terms of leases
5 - 40 years
3 - 10 years
307,808
Accumulated depreciation and
amortization . . . . . . . . . . . . . . . . .
(214,997)
(192,712)
Property and equipment, net . . . . . . .
$ 114,333
$ 115,096
Asset Retirement Obligations
The fair value of a liability for an asset retirement obligation is recognized in the period in which
it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added
to the carrying amount of the associated asset and this additional carrying amount is depreciated over
the life of the asset. All of our existing asset retirement obligations are associated with commitments to
return the property to its original condition upon lease termination at various sites and costs to clean
up and dispose of certain fixed assets at our Sunnyvale, California site. We estimated that as of fiscal
2013 year-end, gross expected future cash flows of $2.5 million would be required to fulfill these
obligations.
89
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following table reconciles changes in our asset retirement liability for fiscal 2013 and 2012 (in
thousands):
Asset retirement liability as of October 1, 2011 . . . . . . . . . . . . . . . . . . . . . .
Payment of asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to asset retirement obligations recognized . . . . . . . . . . . . . . .
Accretion recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes due to foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . .
Asset retirement liability as of September 29, 2012 . . . . . . . . . . . . . . . . . . .
Payment of asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to asset retirement obligations recognized . . . . . . . . . . . . . . .
Accretion recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes due to foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . .
$1,878
—
69
113
(31)
2,029
—
253
70
(105)
Asset retirement liability as of September 28, 2013 . . . . . . . . . . . . . . . . . . .
$2,247
At September 28, 2013 and September 29, 2012, the asset retirement liability is included in other
long-term liabilities on our consolidated balance sheets.
Long-lived Assets
We evaluate the carrying value of long-lived assets, including intangible assets, whenever events or
changes in business circumstances or our planned use of long-lived assets indicate that their carrying
amounts may not be fully recoverable or that their useful lives are no longer appropriate. Reviews are
performed to determine whether the carrying values of long-lived assets are impaired based on a
comparison to the undiscounted expected future net cash flows. If the comparison indicates that
impairment exists, long-lived assets that are classified as held and used are written down to their
respective fair values. When long-lived assets are classified as held for sale, they are written down to
their respective fair values less costs to sell. Significant management judgment is required in the
forecast of future operating results that is used in the preparation of expected undiscounted cash flows.
For fiscal years 2013, 2012 and 2011, there were no significant asset impairments recorded.
Goodwill
Goodwill is tested for impairment on an annual basis and between annual tests in certain
circumstances, and written down when impaired (see Note 8. ‘‘Goodwill and Intangible Assets’’). In
testing for impairment, we have the option to first assess qualitative factors to determine whether it is
more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is
less than its carrying amount. Moreover, an entity can bypass the qualitative assessment for any
reporting unit in any period and proceed directly to step one of the impairment test, and then resume
performing the qualitative assessment in any subsequent period. In fiscal 2012, we performed a
qualitative assessment. In fiscal 2013, we elected to bypass the qualitative assessment and proceed
directly to performing the first step of the goodwill impairment test. This election was made because
we had last performed this impairment test in fiscal 2010 and we have subsequently added a substantial
amount of goodwill balances as a result of our acquisitions of Midaz in the fourth quarter of fiscal 2012
and the acquisitions of Innolight and Lumera in the first quarter of fiscal 2013. We performed our
90
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Step 1 test during the fourth quarter of fiscal 2013 using the opening balance sheet as of the first day
of the fourth quarter and noted no impairment. Between the completion of that testing and the end of
the fourth quarter of fiscal 2013, we noted no indications of impairment or triggering events to cause
us to review goodwill for potential impairment. Absent any impairment indicators, we perform our
annual impairment tests during the fourth quarter of each fiscal year using opening balance sheet as of
the first day of the fourth fiscal quarter, with any resulting impairment recorded in the fourth quarter
of the fiscal year.
Intangible Assets
Intangible assets, including acquired existing technology, customer lists, trade name and
non-compete agreements are amortized on a straight-line basis over estimated useful lives of 1 year to
15 years.
Warranty Reserves
We provide warranties on the majority of our product sales and reserves for estimated warranty
costs are recorded during the period of sale. The determination of such reserves requires us to make
estimates of product return rates and expected costs to repair or replace the products under warranty.
We currently establish warranty reserves based on historical warranty costs for each product line. The
weighted average warranty period covered is approximately 15 months. If actual return rates and/or
repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be
required in future periods.
Components of the reserve for warranty costs during fiscal 2013, 2012 and 2011 were as follows (in
thousands):
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . .
Additions related to current period sales . . . . . . . . .
Warranty costs incurred in the current period . . . . .
Accruals resulting from acquisitions . . . . . . . . . . . .
Adjustments to accruals related to foreign exchange
and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
Fiscal
2012
2011
$ 17,442
26,721
(27,975)
1,735
$ 16,704
29,425
(28,263)
—
$ 13,499
27,900
(24,671)
178
585
(424)
(202)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18,508
$ 17,442
$ 16,704
Revenue Recognition
When a sales arrangement contains multiple elements, such as products and/or services, we
allocate revenue to each element based on a selling price hierarchy. Using the selling price hierarchy,
we determine the selling price of each deliverable using vendor specific objective evidence (‘‘VSOE’’),
if it exists, and otherwise third-party evidence (‘‘TPE’’). If neither VSOE nor TPE of selling price
exists, we use estimated selling price (‘‘ESP’’). We generally expect that we will not be able to establish
TPE due to the nature of the markets in which we compete, and, as such, we typically will determine
selling price using VSOE or if not available, ESP.
91
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Our basis for establishing VSOE of a deliverable’s selling price consists of standalone sales
transactions when the same or similar product or service is sold separately. However, when services are
never sold separately, such as product installation services, VSOE is based on the product’s estimated
installation hours based on historical experience multiplied by the standard service billing rate. In
determining VSOE, we require that a substantial majority of the selling price for a product or service
fall within a reasonably narrow price range, as defined by us. We also consider the geographies in
which the products or services are sold, major product and service groups, and other environmental
variables in determining VSOE. Absent the existence of VSOE and TPE, our determination of a
deliverable’s ESP involves evaluating several factors based on the specific facts and circumstances of
these arrangements, which include pricing strategy and policies driven by geographies, market
conditions, competitive landscape, correlation between proportionate selling price and list price
established by management having the relevant authority, and other environmental variables in which
the deliverable is sold.
For multiple element arrangements which include extended maintenance contracts, we allocate and
defer the amount of consideration equal to the separately stated price and recognize revenue on a
straight-line basis over the contract period.
We recognize revenue when all four revenue recognition criteria have been met: persuasive
evidence of an arrangement exists, the product has been delivered or the service has been rendered,
the price is fixed or determinable and collection is reasonably assured. Revenue from product sales is
recorded when all of the foregoing conditions are met and risk of loss and title passes to the customer.
Sales to customers are generally not subject to any price protection or return rights.
The vast majority of our sales are made to original equipment manufacturers (‘‘OEMs’’),
distributors, resellers and end-users in the non-scientific market. Sales made to these customers do not
require installation of the products by us and are not subject to other post-delivery obligations, except
in occasional instances where we have agreed to perform installation or provide training. In those
instances, we defer revenue related to installation services or training until these services have been
rendered. We allocate revenue from multiple element arrangements to the various elements based upon
relative fair values.
Our sales to distributors, resellers and end-user customers typically do not have customer
acceptance provisions and only certain of our sales to OEM customers and integrators have customer
acceptance provisions. Customer acceptance is generally limited to performance under our published
product specifications. For the few product sales that have customer acceptance provisions because of
higher than published specifications, (1) the products are tested and accepted by the customer at our
site or the customer accepts the results of our testing program prior to shipment to the customer, or
(2) the revenue is deferred until customer acceptance occurs.
Sales to end-users in the scientific market typically require installation and, thus, involve
post-delivery obligations; however, our post-delivery installation obligations are not essential to the
functionality of our products. We defer revenue related to installation services until completion of these
services.
For most products, training is not provided; therefore, no post-delivery training obligation exists.
However, when training is provided to our customers, it is typically priced separately and is recognized
as revenue as these services are provided.
92
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
We record taxes collected on revenue-producing activities on a net basis.
Research and Development
Research and development expenses include salaries, contractor and consultant fees, supplies and
materials, as well as costs related to other overhead such as depreciation, facilities, utilities and other
departmental expenses. The costs we incur with respect to internally developed technology and
engineering services are included in research and development expenses as incurred as they do not
directly relate to any particular licensee, license agreement or license fee.
We treat third party and government funding of our research and development activity, where we
are the primary beneficiary of such work conducted, as a credit to research and development cost.
Amounts offset against research and development costs were not material in any of the periods
presented.
Foreign Currency Translation
The functional currencies of our foreign subsidiaries are generally their respective local currencies.
Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries
are reported as a separate component of accumulated other comprehensive income (‘‘OCI’’). Foreign
currency transaction gains and losses are included in earnings.
Derivatives
U.S. GAAP requires that all derivatives, whether designated in hedging relationships or not, be
recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of the
changes in the fair value of the derivative are recorded in OCI and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of
cash flow hedges are recognized in other income (expense).
Our objective of holding derivatives is to minimize the risks of foreign currency fluctuation by
using the most effective methods to eliminate or reduce the impact of these exposures. Principal
currencies hedged include the Euro, Korean Won, Japanese Yen, British Pound, Chinese Renminbi and
Singapore dollar.
Forwards not designated as hedging instruments are also used to hedge the impact of the
variability in exchange rates on accounts receivable and collections denominated in certain foreign
currencies. Our forward contracts have maturities of two months or less and changes in fair value of
these derivatives are recognized in other income (expense).
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources and is presented
in our Consolidated Statements of Comprehensive Income and in Note 15, ‘‘Accumulated Other
Comprehensive Income (Loss).’’
93
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of shares outstanding
during the period, excluding unvested restricted stock. Diluted earnings per share is computed based on
the weighted average number of shares outstanding during the period increased by the effect of dilutive
employee stock awards, including stock options, restricted stock awards and stock purchase contracts,
using the treasury stock method.
The following table presents information necessary to calculate basic and diluted earnings (loss)
per share (in thousands, except per share data):
Weighted average shares outstanding—basic(1) . . . . . .
Dilutive effect of employee awards . . . . . . . . . . . . . . .
Weighted average shares outstanding—diluted . . . . . . .
2013
24,138
417
24,555
Fiscal
2012
23,561
465
24,026
2011
24,924
540
25,464
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$66,355
$62,962
$93,238
Net income—basic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income—diluted . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2.75
2.70
$
$
2.67
2.62
$
$
3.74
3.66
(1) Net of unvested restricted stock
A total of 883; 99,912; and 2,416 potentially dilutive securities have been excluded from the
dilutive share calculation for fiscal 2013, 2012 and 2011, respectively, as their effect was anti-dilutive.
Stock-Based Compensation
We account for stock-based compensation using the fair value of the awards granted. We estimate
the fair value of stock options granted using the Black-Scholes Merton model. We value restricted stock
units using the intrinsic value method. We use a Monte Carlo simulation model to estimate the fair
value of market-based performance restricted stock units. We use historical data to estimate pre-vesting
option and restricted stock unit forfeitures and record stock-based compensation expense only for those
options and awards that are expected to vest. We amortize the fair value of stock options and awards
on a straight-line basis over the requisite service periods of the awards, which are generally the vesting
periods. See Note 14 ‘‘Employee Stock Option and Benefit Plans’’ for a description of our stock-based
employee compensation plans and the assumptions we use to calculate the fair value of stock-based
employee compensation.
Shipping and Handling Costs
We record costs related to shipping and handling of revenue in cost of sales for all periods
presented.
Advertising Costs
Advertising costs are expensed as incurred and were $3.4 million, $3.5 million and $4.1 million in
fiscal 2013, fiscal 2012 and fiscal 2011, respectively.
94
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This
process involves us estimating our current income tax provision (benefit) together with assessing
temporary differences resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are included within our consolidated
balance sheets.
We account for uncertain tax issues pursuant to ASC 740-10 (formerly FASB Financial
Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes’’), which creates a single model to
address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that
a tax position is required to meet before being recognized in the financial statements. This standard
provides a two-step approach for evaluating tax positions. The first step, recognition, occurs when a
company concludes (based solely on the technical aspects of the matter) that a tax position is more
likely than not to be sustained upon examination by a taxing authority. The second step, measurement,
is only considered after step one has been satisfied and measures any tax benefit at the largest amount
that is deemed more likely than not to be realized upon ultimate settlement of the uncertainty. These
determinations involve significant judgment by management. Tax positions that fail to qualify for initial
recognition are recognized in the first subsequent interim period that they meet the more likely than
not standard or when they are resolved through negotiation or litigation with factual interpretation,
judgment and certainty. Tax laws and regulations themselves are complex and are subject to change as
a result of changes in fiscal policy, changes in legislation, evolution of regulations and court filings.
Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates,
which could result in the need to record additional tax liabilities or potentially to reverse previously
recorded tax liabilities.
We record a valuation allowance to reduce our deferred tax assets to an amount that more likely
than not will be realized. While we have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were
to determine that we would be able to realize our deferred tax assets in the future in excess of our net
recorded amount, an adjustment to the allowance for the deferred tax asset would increase income in
the period such determination was made. Likewise, should we determine that we would not be able to
realize all or part of our net deferred tax asset in the future, an adjustment to the allowance for the
deferred tax asset would be charged to income in the period such determination was made.
Federal income taxes have not been provided for on a portion of the unremitted earnings of
foreign subsidiaries because such earnings are intended to be permanently reinvested. The total amount
of unremitted earnings and accumulated translation adjustments of foreign subsidiaries for which we
have not yet recorded federal and state income taxes was approximately $335.4 million and
$52.7 million respectively, at fiscal 2013 year-end. The amount of federal and state income taxes that
would be payable upon repatriation of such earnings are not practicably determinable.
Adoption of New Accounting Pronouncement and Update to Significant Accounting Policies
In July 2013, the Financial Accounting Standards Board (‘‘FASB’’) issued guidance that permits the
Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge
accounting purposes, in addition to the direct Treasury obligations of the U.S. government (UST) and
95
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
London Interbank Offered Rate (LIBOR). The amendments also remove the restriction on using
different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying
new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this
amendment did not have a material impact on our consolidated financial statements.
In July 2012, the FASB amended existing guidance related to goodwill and other intangible assets
by giving an entity testing an indefinite-lived intangible asset for impairment the option to first assess
qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than
50 percent) that the fair value of an intangible asset is less than its carrying amount. If the entity
determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset
is not more likely than not impaired, the entity would not need to calculate the fair value of the asset.
The guidance does not revise the requirement to test indefinite-lived intangible assets annually for
impairment or to test these assets for impairment between annual tests if there is a change in events or
circumstances. This amended guidance was effective for annual and interim impairment tests performed
for fiscal years beginning after September 15, 2012. We adopted this authoritative guidance in the
fourth quarter of fiscal 2012. As of September 2013 and 2012, the implementation of this authoritative
guidance did not have a material impact on our consolidated financial position, results of operations
and cash flows in connection with our impairment testing.
Recently Issued Accounting Pronouncements
In July of 2013, the FASB issued amended guidance that resolves the diversity in practice for the
presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward exists. This new accounting guidance requires the netting of unrecognized
tax benefits (‘‘UTBs’’) against a deferred tax asset for a loss or other carryforward that would apply in
settlement of the uncertain tax positions. Under the new standard, UTBs will be netted against all
available same-jurisdiction losses or other tax carryforwards that would be utilized, rather than only
against carryforwards that are created by the UTBs. The new standard requires prospective adoption
but allows retrospective adoption for all periods presented. We will consider the FASB’s amended
guidance for our fiscal year beginning September 28, 2014. We do not expect the amended guidance to
have a significant impact on our consolidated financial position, results of operations and cash flows.
In March 2013, the FASB issued guidance regarding the treatment of cumulative translation
adjustment (‘‘CTA’’) by a parent company upon de-recognition of a subsidiary or group of assets within
a foreign entity. The objective is to resolve the diversity in practice regarding the release into net
income of such CTA. The guidance is effective for us beginning in the second quarter of fiscal 2014.
We are currently evaluating the potential impact, if any, of the adoption of this guidance on our
consolidated financial position, results of operations and cash flows.
In February 2013, the FASB issued guidance which requires an entity to disclose additional
information for items reclassified out of accumulated other comprehensive income (‘‘AOCI’’). For items
reclassified out of AOCI and into net income in their entirety, entities are required to disclose the
effect of the reclassification on each affected net income line item. For AOCI reclassification items that
are not reclassified in their entirety into net income, a cross reference to other disclosures is required.
This information may be provided either in the notes or parenthetically on the face of the statement
that reports net income as long as all the information is disclosed in a single location. The guidance is
effective for us beginning in the first quarter of fiscal 2014 and we plan to adopt this guidance at the
effective date. We do not expect the adoption of this accounting standard will have an impact on our
consolidated financial position, results of operations and cash flows.
96
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2011, the FASB issued guidance which requires an entity to disclose information
about offsetting and related arrangements to enable financial statement users to evaluate the effect or
potential effect of netting arrangements, including rights of setoff associated with the entity’s
recognized financial assets and liabilities, on the entity’s financial position. The new disclosures will
enable financial statement users to compare balance sheets prepared under U.S. GAAP and
International Financial Reporting Standards (‘‘IFRS’’), which are subject to different offsetting models.
The disclosures will be limited to financial instruments (and derivatives) subject to enforceable master
netting arrangements or similar agreements. Similar agreements include derivative clearing agreements,
global master repurchase agreements, and global master securities lending agreements. Financial
instruments and transactions that will be subject to the disclosure requirements may include derivatives,
repurchase and reverse repurchase agreements, and securities lending and borrowing arrangements. An
entity should provide the disclosures required by those amendments retrospectively for all comparative
periods presented. The guidance is effective for us beginning in fiscal 2014. We are currently evaluating
the additional disclosures required, if any, from the adoption of this guidance.
3. RESTRUCTURING ACTIVITIES
During fiscal 2008, we initiated restructuring plans to decrease costs by consolidating facilities and
reducing our workforce. During the second quarter of fiscal 2009, we announced our plans to close our
facilities in Tampere, Finland and St. Louis, Missouri. The closure of our St. Louis site was completed
in the fourth quarter of fiscal 2009. The closure of our Finland site was scheduled for completion by
the end of fiscal 2010, but we delayed the closure due to increased demand for products manufactured
in Finland. In the second quarter of fiscal 2011, we ceased manufacturing operations in our Finland
facility and recognized a $6.1 million gain, primarily in other income (expense), due to a non-recurring
translation adjustment related to the dissolution of our Finland operations. We exited the facility in the
third quarter of fiscal 2011. These closure plans resulted in charges primarily for employee termination
and other exit related costs associated with a plan approved by management.
During the first quarter of fiscal 2010, we acquired the assets and certain liabilities of StockerYale,
Inc’s laser module product line in Montreal, Canada and transitioned those activities to other Coherent
facilities in Salem, Massachusetts, Wilsonville, Oregon and Sunnyvale, California. The transfer was
completed in the second quarter of fiscal 2011. These closure plans resulted in charges primarily for
employee termination and other exit related costs associated with a plan approved by management.
There were no new restructuring charges during fiscal 2013 and all charges related to restructuring
activities discussed above were expensed as of the end of fiscal 2012. Restructuring charges during fiscal
2012 and fiscal 2011 are recorded in cost of sales, research and development and selling, general and
administrative expenses in our consolidated statements of operations.
97
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. RESTRUCTURING ACTIVITIES (Continued)
The following table presents our current liability as accrued on our balance sheets for restructuring
charges. The table sets forth an analysis of the components of the restructuring charges and payments
and other deductions made against the accrual for fiscal 2012 and 2011 (in thousands):
Balances, October 2, 2010 . . . . . . . . . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances, October 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance
Related
$
912
218
(1,130)
—
—
—
Facilities
Related
Charges
Other
Restructuring
Costs
$ 17
—
(17)
—
—
—
$ 1,303
680
(1,349)
634
—
(634)
Total
$ 2,232
898
(2,496)
634
—
(634)
Balances, September 29, 2012 . . . . . . . . . . . . . . . . . . . . . .
$ — $ —
$ —
$ —
The fiscal 2011 severance related costs were primarily comprised of severance pay, outplacement
services, medical and other related benefits for employees being terminated due to the transition of
activities out of Tampere, Finland. At September 29, 2012 and September 28, 2013, there were no
remaining accrued restructuring costs.
The following table presents our restructuring charges incurred by segment (no charges were
incurred in fiscal 2012 and 2013):
By Segment
Commercial
Lasers and
Components
Specialty Laser
Systems
Costs incurred and charged to expense in fiscal 2011 . . . . . . . . . .
Costs incurred and charged to expense in fiscal 2010 . . . . . . . . . .
Costs incurred and charged to expense in fiscal 2009 . . . . . . . . . .
Costs incurred and charged to expense in fiscal 2008 . . . . . . . . . .
$
898
8,368
8,674
4,160
Cumulative costs incurred to date . . . . . . . . . . . . . . . . . . . . . . . .
$22,100
$ —
—
6,763
1,644
$8,407
Total
$
898
8,368
15,437
5,804
$30,507
4. BUSINESS COMBINATIONS
Lumera Laser GmbH
On December 20, 2012, we acquired privately held Lumera Laser GmbH (Kaiserslautern,
Germany) (‘‘Lumera’’) for approximately $51.5 million, excluding transaction costs. Lumera
manufactures ultrafast solid state lasers for microelectronics, OEM medical and materials processing
applications. Lumera has been included in our Specialty Lasers and Systems segment.
98
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BUSINESS COMBINATIONS (Continued)
Our allocation of the purchase price is as follows (in thousands):
Tangible assets:
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Intangible assets:
Existing technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,364
2,770
4,380
24,640
21,000
1,800
200
6,500
900
(9,300)
(8,793)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$51,461
Results of operations for the business have been included in our consolidated financial statements
subsequent to the date of acquisition and pro forma results of operations in accordance with
authoritative guidance for prior periods have not been presented because the effect of the acquisition
was not material to our prior period consolidated financial results.
None of the goodwill from this purchase is deductible for tax purposes.
The identifiable intangible assets are being amortized over their respective useful lives of less than
one to six years.
In-process research and development (‘‘IPR&D’’) consists of two projects that have not yet
reached technological feasibility. Acquired IPR&D assets are initially recognized at fair value and are
classified as indefinite-lived assets until the successful completion or abandonment of the associated
research and development efforts. The value assigned to IPR&D was determined by considering the
value of the products under development to the overall development plan, estimating the resulting net
cash flows from the projects when completed and discounting the net cash flows to their present value.
During the development period, these assets will not be amortized as charges to earnings; instead these
assets will be subject to periodic impairment testing. Upon successful completion of the development
process for the acquired IPR&D projects, the assets would then be considered finite-lived intangible
assets and amortization of the assets will commence. The projects have not been completed as of
September 28, 2013.
We expensed $0.6 million of acquisition-related costs as selling, general and administrative
expenses in our consolidated statements of operations for our fiscal year 2013, and expensed
$0.3 million of acquisition-related costs as selling, general and administrative expenses in our
consolidated statements of operations for our fiscal year 2012.
99
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BUSINESS COMBINATIONS (Continued)
Innolight Innovative Laser and Systemtechnik GmbH
On October 30, 2012, we acquired all of the outstanding shares of Innolight Innovative Laser and
Systemtechnik GmbH (‘‘Innolight’’) for approximately $18.3 million, excluding transaction costs.
Innolight provides a core technology building block for an emerging class of commercial,
sub-nanosecond lasers for microelectronics manufacturing. Its semiconductor-based architecture delivers
pulsed output that can be amplified by conventional or fiber amplifiers to ultimately deliver infrared,
green or ultraviolet light capable of processing a range of materials. Innolight has been included in our
Specialty Lasers and Systems segment.
Our allocation of the purchase price is as follows (in thousands):
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets:
Existing technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,510
8,312
8,500
430
100
2,800
(3,836)
(480)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,336
Results of operations for the business have been included in our consolidated financial statements
subsequent to the date of acquisition and pro forma results of operations in accordance with
authoritative guidance for prior periods have not been presented because the effect of the acquisition
was not material to our prior period consolidated financial results.
None of the goodwill from this purchase is deductible for tax purposes.
The identifiable intangible assets are being amortized over their respective useful lives of six to
seven years.
IPR&D consists of two projects that have not yet reached technological feasibility. The projects
have not been completed as of September 28, 2013.
We expensed $0.2 million of acquisition-related costs as selling, general and administrative
expenses in our consolidated statements of operations for our fiscal year 2013 and expensed
$0.1 million of acquisition-related costs as selling, general and administrative expenses in our
consolidated statements of operations for our fiscal year 2012.
MiDAZ Lasers Ltd
On July 23, 2012, we acquired all of the outstanding shares of MiDAZ Lasers Ltd ‘‘Midaz’’ for
approximately $3.8 million, excluding transaction fees. Midaz was a technology-based acquisition. We
intend to utilize the acquired technology in low cost, compact pulsed solid state lasers. Midaz has been
included in our Specialty Lasers and Systems segment.
100
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BUSINESS COMBINATIONS (Continued)
Our allocation of the purchase price is as follows (in thousands):
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets:
$ 187
2,809
Existing technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,800
(428)
(582)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,786
Results of operations for the business have been included in our consolidated financial statements
subsequent to the date of acquisition and pro forma results of operations in accordance with
authoritative guidance for prior periods have not been presented because the effect of the acquisition
was not material to our prior period consolidated financial results.
None of the goodwill from this purchase is deductible for tax purposes.
The identifiable intangible assets are being amortized over their respective useful life of seven
years.
We expensed $0.2 million of acquisition-related costs as selling, general and administrative
expenses in our consolidated statements of operations in the fiscal year ended September 29, 2012.
Hypertronics Pte Ltd
On January 5, 2011, we acquired all of the assets and certain liabilities of Hypertronics Pte Ltd for
approximately $14.5 million in cash. Hypertronics designs and manufactures laser-and vision-based tools
for flat panel, storage, semiconductor and solar applications at facilities in Singapore and Malaysia.
Hypertronics has been included in our Specialty Lasers and Systems segment.
Our allocation of the purchase price is as follows (in thousands):
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets:
Existing technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development
. . . . . . . . . . . . . . . . . . . . . . . . . .
Customer lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,617
5,807
3,120
570
1,880
410
60
(1,965)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,499
The goodwill recognized from this acquisition resulted primarily from anticipated revenue growth
and synergies of integrating Hypertronics scan vision technology and system capabilities with our laser
technology and global sales, marketing, distribution and service network. The goodwill was included in
our Specialty Lasers and Systems segment.
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COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BUSINESS COMBINATIONS (Continued)
None of the goodwill from this purchase is deductible for tax purposes.
The identifiable intangible assets are being amortized over their respective useful lives of two to six
years.
In-process research and development (‘‘IPR&D’’) consisted of seven interrelated projects to be
incorporated into one product and had not yet reached technological feasibility at the time of purchase.
During the second quarter of fiscal 2012, we determined that one of the hardware projects
classified as IPR&D acquired from Hypertronics would not be completed. As a result, $0.2 million was
expensed in the second fiscal quarter for that project. During the fourth quarter of fiscal 2012, we
decided to no longer pursue orders of Hypertronics’ legacy products and thus determined that an
impairment review of the intangible assets was required. As a result of our analysis, we determined that
the intangible assets were fully impaired and that the remaining hardware projects classified as IPR&D
acquired from Hypertronics would not be completed. As a result, we recorded a $4.0 million charge in
amortization expense in the fourth quarter of fiscal 2012. We also wrote off $0.3 million of inventory
unique to these products that were not expected to be resold.
We expensed $0.6 million of acquisition-related costs as selling, general and administrative
expenses in our consolidated statements of operations in the fiscal year ended October 1, 2011.
Results of operations for the business have been included in our consolidated financial statements
subsequent to the date of acquisition and pro forma results of operations in accordance with
authoritative guidance for prior periods have not been presented because the effect of the acquisition
was not material to our prior period consolidated financial results.
5. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
We measure our cash equivalents and marketable securities at fair value. The fair values of our
financial assets and liabilities are determined using quoted market prices of identical assets or quoted
market prices of similar assets from active markets. Level 1 valuations are obtained from real-time
quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are
obtained from quoted market prices in active markets involving similar assets; these instruments, which
mature within one year and are issued by counterparties with high credit ratings, include U.S. Treasury
and international government obligations, investment-grade corporate bonds, certificates of deposit and
commercial paper. Level 3 valuations would be based on unobservable inputs to a valuation model and
include our own data about assumptions market participants would use in pricing the asset or liability
based on the best information available under the circumstances; as of September 28, 2013 and
September 29, 2012, we did not have any assets or liabilities valued based on Level 3 valuations.
102
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (Continued)
Financial assets and liabilities measured at fair value as of September 28, 2013 and September 29,
2012 are summarized below (in thousands):
Money market fund deposits(1) . . . . . . . . . . . . . .
Commercial paper(2)(7) . . . . . . . . . . . . . . . . . . . .
Certificates of deposit(3) . . . . . . . . . . . . . . . . . . .
U.S. and international government
obligations(2)(7)
. . . . . . . . . . . . . . . . . . . . . . .
Corporate notes and obligations(4)(7) . . . . . . . . . .
Foreign currency contracts(5)(8) . . . . . . . . . . . . . .
Mutual funds—Deferred comp and supplemental
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
September 28, 2013
September 29, 2012
(Level 1)
$12,468
—
—
—
—
—
(Level 2)
—
$
9,995
28,447
109,263
20,408
746
(Level 1)
$10,340
—
—
—
—
—
(Level 2)
—
$
2,000
31,253
110,967
43,406
(21)
plan(6)(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,419
—
6,400
—
(1) Included in cash and cash equivalents on the Consolidated Balance Sheet. The carrying amounts
approximate fair value due to the short-term maturities of the cash equivalents.
(2) Included in short-term investments on the Consolidated Balance Sheet.
(3) September 28, 2013: Included in cash and cash equivalents on the Consolidated Balance Sheet.
The carrying amounts approximate fair value due to the short-term maturities of the cash
equivalents.
September 29, 2012: Includes $29,234 recorded in cash and cash equivalents and $2,019 recorded
in short-term investments on the Consolidated Balance Sheet. Valuations are based upon quoted
market prices in active markets involving similar assets. The market inputs used to value these
instruments generally consist of market yields, reported trades, broker/dealer quotes or alternative
pricing sources with reasonable levels of price transparency. Pricing sources include industry
standard data providers, security master files from large financial institutions, and other third party
sources which are input into a distribution-curve-based algorithm to determine a daily market
value. This creates a ‘‘consensus price’’ or a weighted average price for each security.
(4) September 28, 2013: Included in short-term investments on the Consolidated Balance Sheet.
September 29, 2012: Includes $1,223 recorded in cash and cash equivalents and $42,183 recorded
in short-term investments on the Consolidated Balance Sheet.
(5) September 28, 2013: Includes $1,270 recorded in prepaid expenses and other assets and $524
recorded in other current liabilities on the Consolidated Balance Sheet (see Note 7).
September 29, 2012: Includes $626 recorded in prepaid expenses and other assets and $645
recorded in other current liabilities on the Consolidated Balance Sheet (see Note 7).
(6) September 28, 2013: Includes $1,361 recorded in prepaid expenses and other assets and $12,058
recorded in other assets on the Consolidated Balance Sheet (see Note 14).
103
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (Continued)
September 29, 2012: Includes $2,891 recorded in prepaid expenses and other assets and $3,509
recorded in other assets on the Consolidated Balance Sheet (see Note 14).
(7) Valuations are based upon quoted market prices in active markets involving similar assets. The
market inputs used to value these instruments generally consist of market yields, reported trades,
broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency.
Pricing sources include industry standard data providers, security master files from large financial
institutions, and other third party sources which are input into a distribution-curve-based algorithm
to determine a daily market value. This creates a ‘‘consensus price’’ or a weighted average price
for each security.
(8) The principal market in which we execute our foreign currency contracts is the institutional market
in an over-the-counter environment with a relatively high level of price transparency. The market
participants usually are large commercial banks. Our foreign currency contracts’ valuation inputs
are based on quoted prices and quoted pricing intervals from public data sources and do not
involve management judgment.
(9) The fair value of mutual funds is determined based on quoted market prices. Securities traded on
a national exchange are stated at the last reported sales price on the day of valuation; other
securities traded in over-the-counter market and listed securities for which no sale was reported on
that date are stated as the last quoted bid price.
6. SHORT-TERM INVESTMENTS
We consider all highly liquid investments with maturities of three months or less at the time of
purchase to be cash equivalents. Investments classified as available-for-sale are reported at fair value
with unrealized gains and losses, net of related income taxes, recorded as a separate component of
other comprehensive income (‘‘OCI’’) in stockholders’ equity until realized. Interest and amortization
of premiums and discounts for debt securities are included in interest income. Gains and losses on
securities sold are determined based on the specific identification method and are included in other
income (expense).
Cash, cash equivalents and short-term investments consist of the following (in thousands):
Fiscal 2013 Year-end
Unrealized
Gains
Unrealized
Losses
Fair Value
Cost Basis
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
$110,444
$ —
$ —
$110,444
Short-term investments:
Available-for-sale securities:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit
. . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury and agency obligations . . . . . . . . . . . . .
International government obligations . . . . . . . . . . . . .
Corporate notes and obligations . . . . . . . . . . . . . . . .
$
9,995
—
103,694
5,040
20,352
Total short-term investments . . . . . . . . . . . . . . . . .
$139,081
$ —
—
507
28
66
$601
$ —
—
(1)
(5)
(10)
$(16)
$
9,995
—
104,200
5,063
20,408
$139,666
104
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. SHORT-TERM INVESTMENTS (Continued)
Fiscal 2012 Year-end
Unrealized
Gains
Unrealized
Losses
Fair Value
Cost Basis
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
$ 67,752
$
9
$—
$ 67,761
Short-term investments:
Available-for-sale securities:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit
. . . . . . . . . . . . . . . . . . . . . . .
International government obligations . . . . . . . . . . . . .
U.S. Treasury and agency obligations . . . . . . . . . . . . .
Corporate notes and obligations . . . . . . . . . . . . . . . .
$
2,000
2,017
2,004
108,284
41,912
Total short-term investments . . . . . . . . . . . . . . . . .
$156,217
$ —
2
14
666
272
$954
$—
—
—
(2)
(1)
$(3)
$
2,000
2,019
2,018
108,948
42,183
$157,168
None of the unrealized losses as of the end of fiscal 2013 or 2012 were considered to be
other-than-temporary impairments. The amortized cost and estimated fair value of available-for-sale
investments in debt securities at fiscal 2013 and 2012 year-ends, classified as short-term investments on
our consolidated balance sheets, were as follows (in thousands):
Fiscal Year-end
2013
2012
Amortized Cost
Estimated Fair
Value
Amortized Cost
Estimated Fair
Value
Investments in available-for-sale debt
securities due in less than 1 year . . . . . . .
$139,081
$139,666
$154,200
$155,149
During fiscal 2013, we received proceeds totaling $78.8 million from the sale of available-for-sale
securities and realized gross gains of less than $0.1 million. During fiscal 2012, we received proceeds
totaling $77.9 million from the sale of available-for-sale securities and realized gross gains of less than
$0.1 million.
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
All derivatives, whether designated in hedging relationships or not, are recorded on the balance
sheet at fair value. We enter into foreign exchange forwards to minimize the risks of foreign currency
fluctuation of specific assets and liabilities on the balance sheet; these are not designated as hedging
instruments. Our derivative contracts do not contain any credit risk related contingent features and do
not require collateral or other security to be furnished by us or the counterparties.
We maintain operations in various countries outside of the United States and have foreign
subsidiaries that manufacture and sell our products in various global markets. The majority of our sales
are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the
Japanese Yen, the Euro and the Korean Won. As a result, our earnings, cash flows and cash balances
are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures
through financial market instruments. We utilize derivative instruments, primarily forward contracts
with maturities of three months or less, to manage our exposure associated with anticipated cash flows
105
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward
contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative
financial instruments for speculative or trading purposes. If a financial counterparty to any of our
hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the
foreign currency hedge, we may experience material financial losses.
For derivative instruments that are not designated as hedging instruments, gains and losses are
recognized in other income (expense).
The outstanding notional contract and fair value amounts of hedge contracts, with maximum
maturity of three months are as follows (in thousands):
U.S. Notional Contract Value
U.S. Notional Fair Value
September 28,
2013
September 29,
2012
September 28,
2013
September 29,
2012
Euro currency hedge contracts
Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 46,248
$ 61,779
$ 47,299
$ 62,404
Korean WON currency hedge contracts
Sell
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(17,345)
$(39,039)
$(17,545)
$(39,559)
Chinese RMB currency hedge contracts
Sell
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(11,524)
$ (8,899)
$(11,793)
$ (8,911)
Other foreign currency hedge contracts
Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sell
$ 6,677
$(14,372)
$
—
$(11,553)
$ 6,788
$(14,321)
$
—
$(11,667)
The fair values of our derivative instruments are included in prepaid expenses and other assets and
in other current liabilities in our Consolidated Balance Sheets (see Note 5); such amounts were not
material as of September 28, 2013 and September 29, 2012.
The amount of non-designated derivative instruments’ gain(loss) in the Consolidated Statements of
Operations, included in other income (expense) for the fiscal year ended September 28, 2013 and
September 29, 2012 is as follows (in thousands):
Amount of Gain or (Loss) Recognized in
Income on Derivatives
Fiscal Year Ended
September 28, 2013
Fiscal Year Ended
September 29, 2012
Derivatives not designated as hedging
instruments
Foreign exchange contracts . . . . . . . . . . . . . . . .
$2,071
$(2,729)
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill is tested for impairment on an annual basis and between annual tests if events or
circumstances indicate that an impairment loss may have occurred, and we write down these assets
when impaired. We perform our annual impairment tests during the fourth quarter of each fiscal year
using the opening balance sheet as of the first day of the fourth quarter, with any resulting impairment
recorded in the fourth quarter of the fiscal year.
106
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. GOODWILL AND INTANGIBLE ASSETS (Continued)
Goodwill represents the excess of the purchase price over the fair value of the net tangible and
identifiable intangible assets acquired in each business combination. In September 2011, the FASB
amended its guidance to simplify testing goodwill for impairment, allowing an entity to first assess
qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill
impairment test. If an entity determines as a result of the qualitative assessment that it is more likely
than not (> 50% likelihood) that the fair value of a reporting unit is less than its carrying amount,
then the quantitative test is required. Otherwise, no further testing is required. Moreover, an entity can
bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one
of the impairment test, and then resume performing the qualitative assessment in any subsequent
period. We adopted this accounting guidance for our impairment testing in fiscal 2012.
Coherent has two reporting units: Specialty Laser Systems and Commercial Lasers and
Components. In our fiscal 2012 annual testing, we performed a qualitative assessment of the goodwill
by reporting unit during the fourth quarter of fiscal 2012 using the opening balance sheet as of the first
day of the fourth quarter and concluded that it was more likely than not that the fair value of each of
the reporting units exceeded its carrying amount. In assessing the qualitative factors, we considered the
impact of these key factors: macroeconomic conditions, fluctuations in foreign currency, market and
industry conditions, our operating and competitive environment, regulatory and political developments,
the overall financial performance of our reporting units including cost factors and budgeted-to-actual
revenue results. We also considered market capitalization and stock price performance. Based on our
assessment, goodwill in the reporting units was not impaired as of the first day of the fourth quarter of
fiscal 2012. As such, it was not necessary to perform the two-step goodwill impairment test at that time.
In fiscal 2013, we elected to bypass the qualitative assessment and proceed directly to performing
the first step of the goodwill impairment test. This election was made because we had last performed
this impairment test in fiscal 2010 and we have subsequently added a substantial amount of goodwill
balances as a result of our acquisitions of Midaz in the fourth quarter of fiscal 2012 and the
acquisitions of Innolight and Lumera in the first quarter of fiscal 2013. We performed our Step 1 test
during the fourth quarter of fiscal 2013 using the opening balance sheet as of the first day of the fourth
quarter and noted no impairment. We determined the fair value of our reporting units for the Step 1
test using a 50-50% weighting of the Income (discounted cash flow) approach and Market (market
comparable) approach. Management completed and reviewed the results of the Step 1 analysis and
concluded that a Step 2 analysis was not required as the estimated fair values of both of our reporting
units were substantially in excess of their carrying values. Between the completion of that testing and
the end of the fourth quarter of fiscal 2013, we noted no indications of impairment or triggering events
to cause us to review goodwill for potential impairment.
107
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. GOODWILL AND INTANGIBLE ASSETS (Continued)
The changes in the carrying amount of goodwill by segment for fiscal 2013 and 2012 are as follows
(in thousands):
Commercial
Lasers and
Components(1)
Specialty
Laser
Systems(2)
Total
Balance as of October 1, 2011 . . . . . . . . . . . . .
Additions (see Note 4) . . . . . . . . . . . . . . . . . .
Translation adjustments and other . . . . . . . . . .
Balance as of September 29, 2012 . . . . . . . . . .
Additions (see Note 4) . . . . . . . . . . . . . . . . . .
Translation adjustments and other . . . . . . . . . .
$6,365
—
(2)
6,363
—
—
$ 69,589
2,809
(1,072)
$ 75,954
2,809
(1,074)
71,326
32,952
2,767
77,689
32,952
2,767
Balance as of September 28, 2013 . . . . . . . . . .
$6,363
$107,045
$113,408
(1) Gross amount of goodwill for our CLC segment was $25.7 million at September 28, 2013
and September 29, 2012. For both periods, the accumulated impairment loss for the CLC
segment was $19.3 million reflecting an impairment charge in fiscal 2009.
(2) The gross amount of goodwill for our SLS segment was $109.4 million and $73.7 million
at September 28, 2013 and September 29, 2012. For both periods, the accumulated
impairment loss for the SLS segment was $2.4 million reflecting an impairment charge in
fiscal 2003.
We evaluate long-lived assets and amortizable intangible assets whenever events or changes in
business circumstances or our planned use of assets indicate that their carrying amounts may not be
fully recoverable or that their useful lives are no longer appropriate. Reviews are performed to
determine whether the carrying values of assets are impaired based on comparison to the undiscounted
expected future cash flows identifiable to such long-lived and amortizable intangible assets. If the
comparison indicates that impairment exists, the impaired asset is written down to its fair value.
During the second quarter of fiscal 2012, we determined that one of the hardware projects
classified as in-process research and development (‘‘IPR&D’’) acquired from Hypertronics would not be
completed. As a result, $0.2 million was included in research and development expense in the second
fiscal quarter for that project. During the fourth quarter of fiscal 2012, we decided to no longer pursue
orders of Hypertronics legacy products and determined that the carrying amounts of the amortizable
intangible assets, including the remaining IPR&D, acquired from Hypertronics may not be recoverable
and thus determined that an impairment review of the intangible assets was required. As a result of our
analysis, we determined that the intangible assets were fully impaired and that the remaining hardware
projects classified as in-process research and development (‘‘IPR&D’’) acquired from Hypertronics
would not be completed. As a result, we recorded a $4.0 million charge in amortization expense in the
fourth quarter of fiscal 2012. We also considered the valuation of the goodwill recorded upon the
acquisition of Hypertronics (approximately $5.9 million at September 29, 2012) and determined that the
goodwill was not impaired, and no write-off is warranted, as the goodwill is related to the key strategic
purpose of our acquisition—expansion into the Asian market with the addition of a full manufacturing
facility.
108
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. GOODWILL AND INTANGIBLE ASSETS (Continued)
During the year ended fiscal 2013, we did not have any impairment of intangible assets as a result
of the impairment analysis.
The components of our amortizable intangible assets are as follows (in thousands):
Existing technology . . . . . . . . . . . . .
Customer lists . . . . . . . . . . . . . . . . .
Trade name . . . . . . . . . . . . . . . . . .
Non-compete agreement . . . . . . . . .
Production know-how(1) . . . . . . . . .
In-process research and development
Fiscal 2013 Year-end
Fiscal 2012 Year-end
Gross
Carrying
Amount
$ 82,220
17,341
710
570
—
2,299
Accumulated
Amortization
$(51,570)
(7,465)
(576)
(558)
—
—
Net
$30,650
9,876
134
12
—
2,299
Gross
Carrying
Amount
$51,346
7,849
3,050
689
910
—
Accumulated
Amortization
$(44,457)
(5,666)
(2,749)
(661)
(838)
—
Net
$6,889
2,183
301
28
72
—
Total
. . . . . . . . . . . . . . . . . . . . . . .
$103,140
$(60,169)
$42,971
$63,844
$(54,371)
$9,473
(1) For accounting purposes, when an intangible asset is fully amortized, it is removed from the
disclosure schedule.
Amortizable intangible assets include intangible assets acquired through business combinations as
well as through direct purchases or licenses. All IPR&D projects outstanding at the end of fiscal 2011
were either written off as discussed above, or completed during fiscal 2012 and reclassified to ‘‘existing
technology’’ intangible assets with finite lives.
The weighted average remaining amortization period for existing technology, customer lists and
trade name are approximately 5 years, and the weighted average remaining amortization period for
non-compete agreements is less than 1 year. Patents, order backlog and production know-how are fully
amortized. Amortization expense for intangible assets during fiscal years 2013, 2012, and 2011 was
$9.8 million, $10.4 million and $8.1 million, respectively, which includes $6.6 million, $6.6 million and
$5.5 million, respectively, for amortization of existing technology and production know-how.
Estimated amortization expense for the next five fiscal years and all years thereafter are as follows
(in thousands):
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Amortization
Expense
$ 9,825
9,315
8,930
7,842
4,599
2,460
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$42,971
109
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. BALANCE SHEET DETAILS
Prepaid expenses and other assets consist of the following (in thousands):
Fiscal Year-end
2013
2012
Prepaid and refundable income taxes . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,939
28,638
$20,634
41,096
Total prepaid expenses and other assets . . . . . . . . . . . . . . . . . . .
$52,577
$61,730
Other assets consist of the following (in thousands):
Assets related to deferred compensation arrangements (see
Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,446
37,637
5,457
$21,990
37,160
4,879
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$66,540
$64,029
Fiscal Year-end
2013
2012
On June 8, 2010, we invested $2.0 million in SiOnyx, Inc., a privately-held company focused on
shallow junction photonics, used to enhance the performance of light sensing devices used in consumer,
industrial, medical and defense related applications using black silicon processing. The investment is
included in other assets and is being carried on a cost basis.
Other current liabilities consist of the following (in thousands):
Accrued payroll and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year-end
2013
2012
$29,723
11,552
18,508
6,147
1,642
16,994
$28,100
10,445
17,442
15,457
1,830
17,465
Total other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
$84,566
$90,739
110
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. BALANCE SHEET DETAILS (Continued)
Other long-term liabilities consist of the following (in thousands):
Long-term taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation (see Note 14) . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset retirement obligations liability (see Note 2) . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year-end
2013
2012
$15,715
24,723
10,487
2,734
2,247
6,226
$21,281
22,816
726
2,191
2,029
6,283
Total other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
$62,132
$55,326
10. SHORT-TERM BORROWINGS
We have several lines of credit which allow us to borrow in the applicable local currency. We have
a total of $14.7 million of unsecured foreign lines of credit as of September 28, 2013. At September 28,
2013, we had used $2.3 million of these available foreign lines of credit as guarantees. These credit
facilities were used in Europe and Japan during fiscal 2013. In addition, our domestic line of credit
consists of a $50.0 million unsecured revolving credit account with Union Bank of California. The
agreement will expire on May 31, 2014. The line of credit is subject to covenants related to financial
ratios and tangible net worth with which we are currently in compliance. No amounts have been drawn
upon our domestic line of credit as of September 28, 2013.
11. LONG-TERM OBLIGATIONS
The components of long-term obligations are as follows (in thousands):
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal
Year-end
2013
2012
$ 2
(2)
$ 19
(17)
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— $ 2
12. COMMITMENTS AND CONTINGENCIES
Commitments
We lease several of our facilities under operating leases.
111
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum payments under our non-cancelable operating leases at September 28, 2013 are
as follows (in thousands):
Fiscal
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter through 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,335
7,466
5,787
5,220
4,511
8,430
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$40,749
Rent expense, exclusive of sublease income, was $10.8 million, $10.0 million and $10.1 million in
fiscal 2013, 2012 and 2011, respectively. There was no sublease income for fiscal 2013 and 2012, and
sublease income was less than $0.1 million for fiscal year 2011.
As of September 28, 2013, we had total purchase commitments for inventory over the next year of
approximately $40.2 million and purchase obligations for fixed assets and services of $5.2 million
compared to $65.5 million of purchase commitments for inventory and $6.8 million of purchase
obligations for fixed assets and services at September 29, 2012.
Contingencies
We are subject to legal claims and litigation arising in the ordinary course of business, such as
product liability, employment or intellectual property claims, including, but not limited to, the matters
described below. Recently, IMRA America, Inc. (‘‘Imra’’) filed suit against two of our German
subsidiaries alleging infringement of a German patent which had been licensed to Imra by the
University of Michigan. The outcome of any such matters is currently not determinable. Although we
do not expect that such legal claims and litigation will ultimately have a material adverse effect on our
consolidated financial position, results of operations or cash flows, an adverse result in one or more
matters could negatively affect our results in the period in which they occur.
13. STOCK REPURCHASES AND DIVIDENDS
On January 26, 2011, the Board authorized the repurchase of up to $75.0 million of our common
stock. The program was authorized for 12 months from the date of authorization.
On February 10, 2011, we announced that the Company would repurchase up to 1,271,100 shares
of our common stock through a modified ‘‘Dutch Auction’’ tender offer. On March 14, 2011, we
completed our tender offer, repurchased and retired 454,682 shares of outstanding common stock at a
price of $59.00 per share for a total of $26.8 million excluding expenses. During the third and fourth
quarters of fiscal 2011, we repurchased and retired an additional 1,024,409 shares of outstanding
common stock at an average price of $47.03 per share for a total of $48.2 million, excluding expenses.
On August 25, 2011, we announced that the Board of Directors had authorized the repurchase of
up to $50.0 million of our common stock. The program was authorized for 12 months from the date of
112
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. STOCK REPURCHASES AND DIVIDENDS (Continued)
authorization. During fiscal 2011, we repurchased and retired 586,200 shares of outstanding common
stock at an average price of $42.67 per share for a total of $25.0 million, excluding expenses.
During fiscal 2012, we repurchased and retired 543,200 shares of outstanding common stock at an
average price of $45.99 per share for a total of $25.0 million, excluding expenses. There are no funds
remaining authorized for repurchase at September 28, 2013 under this repurchase program.
On October 4, 2012, the Board of Directors authorized a buyback program whereby we were
authorized to repurchase up to $25.0 million of our common stock. The program was authorized for
12 months from the date of authorization. No shares were purchased under this program.
On December 10, 2012, we announced that the Board of Directors approved a $1.00 per share
special cash dividend on our outstanding common stock payable on December 27, 2012 to stockholders
of record on December 19, 2012, resulting in a payment of $24.0 million in the first quarter of fiscal
2013.
14. EMPLOYEE STOCK AWARD, OPTION AND BENEFIT PLANS
Deferred Compensation Plans
Under our deferred compensation plans (‘‘plans’’), eligible employees are permitted to make
compensation deferrals up to established limits set under the plans and accrue income on these
deferrals based on reference to changes in available investment options. While not required by the
plan, the Company chooses to invest in insurance contracts and mutual funds in order to approximate
the changes in the liability to the employees. These investments and the liability to the employees were
as follows (in thousands):
Fiscal Year-end
2013
2012
Cash surrender value of life insurance contracts . . . . . . . . . . . . .
Fair value of mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,374
13,433
$18,481
6,400
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,807
$24,881
Total assets, included in:
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,361
23,446
$ 2,891
21,990
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,807
$24,881
Total deferred compensation liability, included in:
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,361
24,723
$ 2,891
22,816
Total deferred compensation liability . . . . . . . . . . . . . . . . . . . . .
$26,084
$25,707
Fiscal Year-end
2013
2012
113
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. EMPLOYEE STOCK AWARD, OPTION AND BENEFIT PLANS (Continued)
Life insurance premiums loads, policy fees and cost of insurance that are paid from the asset
investments and gains and losses from the asset investments for these plans are recorded as
components of other income or expense; such amounts were a net gain of $2.1 million in fiscal year
2013, a net gain of $1.6 million (including a $0.2 million death benefit) in fiscal year 2012 and a net
gain of $3.1 million (including a $1.5 million death benefit) in fiscal year 2011. Changes in the
obligation to plan participants are recorded as a component of operating expenses and cost of sales;
such amounts were an expense of $2.8 million in fiscal year 2013, an expense of $2.3 million in fiscal
year 2012 and an expense of $2.6 million in fiscal year 2011. Liabilities associated with participant
balances under our deferred compensation plans are affected by individual contributions and
distributions made, as well as gains and losses on the participant’s investment allocation election.
Coherent Employee Retirement and Investment Plan
Under the Coherent Employee Retirement and Investment Plan, we match employee contributions
to the plan up to a maximum of 4% of the employee’s individual earnings subject to IRS limitations.
Employees become eligible for participation on their first day of employment and for Company
matching contributions after completing one year of service. The Company’s contributions (net of
forfeitures) during fiscal 2013, 2012, and 2011 were $3.4 million, $3.2 million and $3.0 million,
respectively.
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan (‘‘ESPP’’) whereby eligible employees may authorize
payroll deductions of up to 10% of their regular base salary to purchase shares at the lower of 85% of
the fair market value of the common stock on the date of commencement of the offering or on the last
day of the six-month offering period. During fiscal 2013, 2012 and 2011, a total of 159,754 shares,
139,012 shares and 144,147 shares, respectively, were purchased by and distributed to employees at an
average price of $37.20, $42.19 and $34.47 per share, respectively. At fiscal 2013 year-end, we had
928,225 shares of our common stock reserved for future issuance under the plan.
Stock Award and Option Plans
We have a stock plan for which employees and non-employee directors are eligible participants.
This plan is the 2011 Equity Incentive Plan (the ‘‘2011 Plan’’) which includes our options, time-based
restricted stock units and market-based performance restricted stock units. In prior years, we have had
a stock plan for which employees and service providers were eligible participants and a non-employee
Directors’ Stock Option Plan for which only non-employee directors were eligible participants. Those
prior Plans have expired, and any future grants will be made from the 2011 Plan. Under the 2011 Plan,
Coherent may grant options and awards (time-based restricted stock units and market-based
performance restricted stock units) to purchase up to 6,882,000 shares of common stock, of which
6,007,510 shares remain available for grant at fiscal 2013 year end.
Employee options are generally exercisable between two and four years from the grant date at a
price equal to the fair market value of the common stock on the date of the grant and generally vest
25% to 50% annually. The Company settles stock option exercises with newly issued shares of common
stock. Grants to employees generally expire six years from the original grant date. Since adoption of
the 2011 Plan, no options have been granted to employees.
114
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. EMPLOYEE STOCK AWARD, OPTION AND BENEFIT PLANS (Continued)
Director options were previously automatically granted to our non-employee directors. New
directors now initially receive an award of restricted stock units of 3,500 shares which vest over a two
year period. Beginning with the annual meeting of stockholders in 2011, the annual grant for
non-employee directors became 3,500 shares of restricted stock units that vest on February 15 of the
calendar year following the grant.
Restricted stock awards and restricted stock units are independent of option grants and are
typically subject to vesting restrictions—either time-based or performance-based conditions for vesting.
Until restricted stock vests, shares (including those issuable upon vesting of the applicable restricted
stock unit) are subject to forfeiture if employment terminates prior to the release of restrictions and
cannot be transferred.
(cid:129) The service based restricted stock awards generally vest three years from the date of grant.
(cid:129) The service based restricted stock unit awards are generally subject to annual vesting over three
years from the date of grant.
(cid:129) The market-based performance restricted stock unit award grants are generally either subject to
annual vesting over three years from the date of grant or subject to a single vest measurement
three years from the date of grant, depending upon achievement of performance measurements
(‘‘Performance RSUs’’) based on the performance of the Company’s Total Shareholder Returns
(as defined) compared with the performance of the Russell 2000 Index.
The Company previously granted Performance RSUs during the second quarter of fiscal 2009
which had a single vesting measurement date of November 14, 2010. These RSUs would have vested
anywhere between 0% and 300% of the targeted amount based upon achievement by the Company of
(a) an annual revenue threshold amount and (b) adjusted EBITDA percentage targets. The Company
determined that the performance target had not been met and these awards were canceled in the first
quarter of fiscal 2011 with no shares vesting.
Fair Value of Stock Compensation
We recognize compensation expense for all share-based payment awards based on the fair value of
such awards. The expense is recognized on a straight-line basis over the respective requisite service
period of the awards.
Determining Fair Value
Stock Options
Valuation and amortization method—We estimate the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and a single option award approach. This fair value is
then amortized on a straight-line basis over the requisite service periods of the awards, which is
generally the vesting period.
Expected Term—The expected term represents the period that our stock-based awards are expected
to be outstanding and was determined based on historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of
future employee behavior as influenced by changes to the terms of its stock-based awards.
115
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. EMPLOYEE STOCK AWARD, OPTION AND BENEFIT PLANS (Continued)
Expected Volatility—Our process for computing expected volatility considers both historical volatility
and market-based implied volatility; however our estimate of expected forfeitures is based on historical
employee data and could differ from actual forfeitures.
Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes-Merton valuation
method is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term.
Expected Dividend—The expected dividend assumption is based on our current expectations about
our anticipated dividend policy.
The Company did not grant any stock options in fiscal 2013 or fiscal 2012. The fair values of the
Company’s stock options granted to employees for fiscal 2011, and of shares purchased under the stock
purchase plan for fiscal 2013, 2012 and 2011 were estimated using the following weighted-average
assumptions:
Employee Stock Option
Plans
Employee Stock Purchase
Plans
Fiscal
2013
2012
2011
2013
Fiscal
2012
2011
Expected life in years . . . . . . . . . . . . . . . . . . . . . . . . — —
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . — —
Expected dividends . . . . . . . . . . . . . . . . . . . . . . . . . . — —
Weighted average fair value per share . . . . . . . . . . . .
6.0
36.1% 32.3% 47.0% 32.8%
1.1% 0.1%
0.9% 0.1%
—
—
$— $— $16.26
$13.62
—
$10.56
—
$12.50
0.5
0.5
0.5
Time-Based Restricted Stock Units
Time-based restricted stock units are fair valued at the closing market price on the date of grant.
Market-Based Performance Restricted Stock Units
We grant market-based performance restricted stock units to officers and certain employees. The
performance stock unit agreements provide for the award of performance stock units with each unit
representing the right to receive one share of Coherent, Inc. common stock to be issued after the
applicable award period. The final number of units awarded for this grant will be determined as of the
vesting dates, based upon our total shareholder return over the performance period compared to the
Russell 2000 Index and could range from a minimum of no units to a maximum of twice the initial
award. The weighted average fair value for these performance units was determined using a Monte
Carlo simulation model incorporating the following weighted average assumptions:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.33% 0.39%
37.9% 41.8%
$48.48
$71.59
Fiscal
2013
2012
116
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. EMPLOYEE STOCK AWARD, OPTION AND BENEFIT PLANS (Continued)
We recognize the estimated cost of these awards, as determined under the simulation model, over
the related service period, with no adjustment in future periods based upon the actual shareholder
return over the performance period.
Stock Compensation Expense
The following table shows total stock-based compensation expense included in the Consolidated
Statements of Operations for fiscal 2013, 2012 and 2011 (in thousands):
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . .
$ 2,151
1,851
14,889
(5,292)
$ 1,670
1,628
13,015
(4,796)
$ 1,331
1,474
10,158
(3,802)
Fiscal 2013
Fiscal 2012
Fiscal 2011
$13,599
$11,517
$ 9,161
Total stock-based compensation cost capitalized as part of inventory during fiscal 2013 was
$2.2 million; $2.1 million was amortized into income during fiscal 2013, which includes amounts
capitalized in fiscal 2013 and amounts carried over from fiscal 2012. Total stock-based compensation
cost capitalized as part of inventory during fiscal 2012 was $1.8 million; $1.7 million was amortized into
income during fiscal 2012, which includes amounts capitalized in fiscal 2012 and amounts carried over
from fiscal 2011. Management has made an estimate of expected forfeitures and is recognizing
compensation costs only for those equity awards expected to vest.
At fiscal 2013 year-end, the total compensation cost related to unvested stock-based awards
granted to employees under the Company’s stock option and award plans but not yet recognized was
approximately $15.3 million, net of estimated forfeitures of $0.8 million. This cost will be amortized on
a straight-line basis over a weighted-average period of approximately 1.0 years and will be adjusted for
subsequent changes in estimated forfeitures.
At fiscal 2013 year-end, the total compensation cost related to options to purchase common shares
under the ESPP but not yet recognized was approximately $0.1 million. This cost will be amortized on
a straight-line basis over a weighted-average period of approximately one month.
The stock option exercise tax benefits reported in the statement of cash flows results from the
excess tax benefits arising from tax deductions in excess of the stock-based compensation cost
recognized, determined on a grant-by-grant basis. During fiscal 2013, we have not generated any excess
tax benefits as cash flows from financing activities. During fiscal 2012 and fiscal 2011 we recorded
approximately $1.3 million and $5.1 million, respectively, of excess tax benefits as cash flows from
financing activities.
117
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. EMPLOYEE STOCK AWARD, OPTION AND BENEFIT PLANS (Continued)
Stock Options & Awards Activity
The following is a summary of option activity for our Stock Option Plans for fiscal 2013, 2012 and
2011 (in thousands, except per share amounts and remaining contractual term in years):
Number of
Shares
Weighted
Average
Exercise Price
Per Share
Outstanding at October 2, 2010 . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at October 1, 2011 . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at September 29, 2012 . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at September 28, 2013 . . . . . . . . . . . . . .
Vested and expected to vest at September 28, 2013 . .
Exercisable at September 28, 2013 . . . . . . . . . . . . . .
1,893
24
(975)
(21)
(4)
917
—
(269)
(1)
(6)
641
—
(371)
—
—
270
270
262
$28.96
44.74
30.51
24.97
33.95
$27.80
—
27.56
26.16
32.10
$27.86
—
28.56
—
—
$26.90
$26.90
$26.35
Weighted
Average
Remaining
Contractual
Term in Years
4.0
Aggregate
Intrinsic
Value
$21,279
4.2
$13,952
3.5
$ 9,823
3.5
3.5
3.4
$ 9,299
$ 9,299
$ 9,167
The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying options and the quoted price of our common stock for in-the-money options. During fiscal
2013, 2012 and 2011, the aggregate intrinsic value of options exercised under the Company’s stock
option plans were $9.6 million, $6.8 million and $18.6 million, respectively, determined as of the date of
option exercise.
118
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. EMPLOYEE STOCK AWARD, OPTION AND BENEFIT PLANS (Continued)
The following table summarizes information about stock options outstanding at fiscal
2013 year-end:
Options Outstanding
Options Exercisable
Range of Exercise Prices
$18.91 - $20.20 . . . . . . . . . . . . . . . . . . . . . . . . .
$23.16 - $23.16 . . . . . . . . . . . . . . . . . . . . . . . . .
$26.16 - $26.16 . . . . . . . . . . . . . . . . . . . . . . . . .
$32.00 - $32.00 . . . . . . . . . . . . . . . . . . . . . . . . .
$44.74 - $44.74 . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
24,900
44,200
171,035
6,000
24,000
$18.91 - $44.74 . . . . . . . . . . . . . . . . . . . . . . . . .
270,135
Weighted
Average
Exercise
Price per
Share
Weighted
Average
Remaining
Contractual
Life (Years)
$20.15
23.16
26.16
32.00
44.74
$26.90
5.53
1.14
3.15
6.51
7.98
3.54
Number of
Shares
24,900
44,200
171,035
6,000
16,000
262,135
Weighted
Average
Exercise
Price per
Share
$20.15
23.16
26.16
32.00
44.74
$26.35
The following table summarizes our restricted stock award and restricted stock unit activity for
fiscal 2013, 2012 and 2011 (in thousands, except per share amounts):
Time Based Restricted
Stock Units
Weighted
Average
Market-Based
Performance
Restricted Stock Units
Weighted
Average
Number of Grant Date
Fair Value
Shares(1)
Number of Grant Date
Fair Value
Shares(2)
Nonvested stock at October 2, 2010 . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested stock at October 1, 2011 . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested stock at September 29, 2012 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested stock at September 28, 2013 . . . . . . . . . . . . .
481
191
(183)
(85)
404
250
(206)
(8)
440
273
(254)
(6)
453
$26.22
45.44
26.17
29.20
$34.71
53.59
32.66
49.07
$47.81
44.03
43.06
45.59
$48.22
—
101
—
—
101
95
(44)
—
152
97
(28)
(8)
213
$ —
49.77
—
—
$49.77
63.85
53.18
—
$57.55
48.48
49.50
53.30
$54.63
(1) Service-based restricted stock vested during each fiscal year
(2) Performance-based awards and units included at 100% of target goal; under the terms of the
awards, the recipient may earn between 0% and 200% of the award.
119
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. EMPLOYEE STOCK AWARD, OPTION AND BENEFIT PLANS (Continued)
Restricted Stock Units are converted into the right to receive common stock upon vesting; prior to
issuance, the Company permits the holders to satisfy their tax withholding requirements by net
settlement, whereby the Company withholds a portion of the shares to cover the applicable taxes based
on the fair market value of the Company’s stock at the vesting date. The number of shares withheld to
cover tax payments was 95,000 in fiscal 2013, 90,000 in fiscal 2012 and 70,000 in fiscal 2011; tax
payments made were $4.2 million, $4.5 million and $3.3 million, respectively.
At fiscal 2013 year-end, 6,007,510 options or restricted stock units were available for future grant
under all plans. At fiscal 2013 year-end, all outstanding stock options have been issued under plans
approved by our shareholders.
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (net of tax) at fiscal 2013 and fiscal 2012 year-ends are
substantially comprised of accumulated translation adjustments of $54.4 million and $40.4 million,
respectively.
16. OTHER INCOME (EXPENSE), NET
Other income (expense) includes other-net which is comprised of the following (in thousands):
Foreign exchange gain (loss) . . . . . . . . . . . . . . . . . . . .
Translation adjustment related to dissolution of
2013
Fiscal
2012
2011
$(3,762) $ (451) $ 1,457
Finland(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
6,511
Gain (loss) on deferred compensation investments, net
(Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,123
170
1,644
374
3,149
(59)
Other income (expense), net
. . . . . . . . . . . . . . . . . . . .
$(1,469) $1,567
$11,058
(1) In the second quarter of fiscal 2011, the Company had substantially completed the
liquidation of its Finland operations and recognized in other income the accumulated
translation gains for this subsidiary previously recorded in accumulated other
comprehensive income (loss) on the consolidated balance sheet.
120
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES
The provision for (benefit from) income taxes on income (loss) before income taxes consists of the
following (in thousands):
Currently payable:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1,796) $ (7,856) $(14,408)
677
(103)
31,098
38,259
(141)
27,152
2013
Fiscal
2012
2011
Deferred:
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,215
30,300
17,367
(4,022)
(16)
(4,036)
3,763
289
(6,692)
(8,074)
(2,640)
10,325
2,358
541
13,224
Provision for income taxes . . . . . . . . . . . . . . . . . . . .
$17,141
$27,660
$ 30,591
The components of income (loss) before income taxes consist of (in thousands):
United States
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (7,142) $ (9,212) $ 32,993
90,638
90,836
99,834
Income before income taxes . . . . . . . . . . . . . . . . . . .
$83,496
$90,622
$123,829
2013
Fiscal
2012
2011
121
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES (Continued)
The reconciliation of the income tax expense at the U.S. Federal statutory rate (35% in fiscal years
2013, 2012 and 2011) to actual income tax expense is as follows (in thousands):
Federal statutory tax expense . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign taxes at rates less than U.S. rates, net . . . . . . .
Currency translation adjustments recognized . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal income tax benefit . .
Research and development credit . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . .
Release of unrecognized tax benefits . . . . . . . . . . . . . .
Release of interest accrued for unrecognized tax
benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
$29,223
534
(8,219)
—
1,292
(143)
(4,131)
(257)
(407)
Fiscal
2012
2011
$31,718
(141)
(1,938)
$43,340
1,456
(2,818)
— (2,424)
885
2,409
(2,752)
(759)
(7,090)
1,176
204
(532)
(325)
(12)
(160)
(591)
(1,372)
(1,118)
(2,672)
1,016
Provision for income taxes . . . . . . . . . . . . . . . . . . . . .
$17,141
$27,660
$30,591
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.5%
30.5% 24.7%
Coherent Korea received the final approval for a High-Tech tax exemption on March 26, 2013
from the Korean authorities. The High-Tech tax exemption is effective retroactively to the beginning of
fiscal 2013 and is subject to capital contribution limitations. The impact of this tax exemption decreased
Korean income taxes by approximately $2.1 million in fiscal 2013. The benefit of the tax holiday on net
income per share (diluted) was $0.09.
Coherent Singapore had previously received a Pioneer Status tax exemption from the Singapore
authorities effective from fiscal 2012 through fiscal 2017, and may be extended if certain additional
requirements are satisfied. The tax holiday is conditional upon our meeting certain revenue, business
spending and employment thresholds. Although Coherent Singapore had income in fiscal 2013, this
amount was offset by a loss carryforward from fiscal 2012 and therefore we did not realize a benefit for
the Singapore tax holiday in fiscal years 2013 and 2012.
122
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES (Continued)
The significant components of deferred tax assets and liabilities were (in thousands):
Deferred tax assets:
Reserves and accruals not currently deductible . . . . . . . . . .
Operating loss carryforwards and tax credits . . . . . . . . . . . .
Capital loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred service revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
Inventory capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . .
Competent authority offset to transfer pricing tax reserves . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Gain on issuance of stock by subsidiary . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
Accumulated translation adjustment . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal year-end
2013
2012
$ 25,987
65,590
309
2,221
—
1,901
6,229
4,328
$ 25,217
62,720
301
2,135
2,590
1,629
6,503
7,901
106,565
(13,359)
108,996
(9,087)
93,206
99,909
21,144
16,342
1,363
5,758
44,607
20,296
9,004
796
10,510
40,606
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48,599
$ 59,303
In determining our fiscal 2013, 2012 and 2011 tax provisions under ASC Subtopic 740, ‘‘Income
Taxes’’, we calculated the deferred tax assets and liabilities for each separate tax entity. We then
considered a number of factors including the positive and negative evidence regarding the realization of
our deferred tax assets to determine whether a valuation allowance should be recognized with respect
to our deferred tax assets. We determined that a valuation allowance was appropriate for a portion of
the deferred tax assets of our California research and development tax credits, foreign tax attributes
and net operating losses and capital loss carryforwards at fiscal 2013, 2012 and 2011 year-ends.
During fiscal 2013, we increased our valuation allowance on deferred tax assets to $13.4 million,
primarily due to the reduced ability to utilize California research and development tax credits.
123
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES (Continued)
The net deferred tax asset is classified on the consolidated balance sheets as follows (in
thousands):
Current deferred income tax assets
. . . . . . . . . . . . . . . . . . . . .
Current deferred income tax liabilities . . . . . . . . . . . . . . . . . . .
Non-current deferred income tax assets . . . . . . . . . . . . . . . . . .
Non-current deferred income tax liabilities . . . . . . . . . . . . . . . .
$ 21,713
(264)
37,637
(10,487)
$23,368
(499)
37,160
(726)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48,599
$59,303
Fiscal year-end
2013
2012
We have various tax attribute carryforwards which include the following:
(cid:129) Foreign net operating loss carryforwards are $20.2 million, of which $18.3 million have no
expiration date and of which $1.9 million are scheduled to expire beginning in fiscal year 2030.
A valuation allowance totaling $7.8 million has been recorded against the foreign net operating
loss carryforwards since the recovery of the carryforwards are uncertain. California net operating
loss carryforwards are $19.8 million and are scheduled to expire in fiscal years 2017 to 2033. The
tax benefit relating to approximately $6.8 million of the state net operating loss carryforwards
will be credited to additional paid-in-capital when recognized.
(cid:129) Federal capital loss carryforwards of $0.8 million are scheduled to expire in fiscal year 2014 to
2015. State capital loss carryforwards of $0.8 million are scheduled to expire in fiscal 2014 to
2015. Full valuation allowances have been recorded against the federal capital loss and the state
capital loss carryforwards since the recovery of the carryforwards are uncertain.
(cid:129) Federal R&D credit carryforwards of $20.5 million are scheduled to expire in fiscal years 2024
to 2033.The tax benefit relating to approximately $0.9 million of the federal tax credit
carryforwards will be credited to additional paid-in-capital when recognized. California R&D
credit carryforwards of $17.9 million have no expiration date. The tax benefit relating to
approximately $0.5 million of the state tax credit carryforwards will be credited to additional
paid-in-capital when recognized. A valuation allowance totaling $10.4 million, before federal
benefit, has been recorded against California R&D credit carryforwards since the recovery of the
carryforwards are uncertain. Other states R&D credit carryforwards of $1.6 million are
scheduled to expire in fiscal years 2014 to 2027. A valuation allowance totaling $0.6 million,
before federal benefit, has been recorded against Oregon R&D credit carryforwards since the
recovery of the carryforwards are uncertain.
(cid:129) Federal foreign tax credit carryforwards of $21.3 million are scheduled to expire in fiscal years
2016 to 2023. The tax benefit relating to approximately $7.2 million of the federal foreign tax
credit carryforwards will be credited to additional paid-in-capital when recognized.
Included in the net deferred tax asset balance is $1.4 million of deferred tax liabilities related to
the currency translation adjustment. The associated tax expenses are recorded as a part of other
comprehensive income.
The American Taxpayer Relief Act of 2012 (‘‘the Act’’) was enacted on January 2, 2013. Under the
Act, the federal research and development tax credit was retroactively extended for amounts paid or
124
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES (Continued)
incurred after December 31, 2011 through December 31, 2013. The prior period effects of the change
in the tax law were recognized in our second quarter of fiscal 2013, which is the quarter that the law
was enacted. Accordingly, prior year research and development tax credits of approximately $1.4 million
less appropriate reserves were recognized in the second quarter of fiscal 2013.
We are subject to taxation and file income tax returns in the U.S. federal jurisdiction and in many
state and foreign jurisdictions. For U.S. federal income tax purposes, all years prior to 2010 are closed.
In our major foreign jurisdictions and our major state jurisdictions, the years prior to 2006 and 2009,
respectively, are closed to examination. Earlier years in our various jurisdictions may remain open for
adjustment to the extent that we have tax attribute carryforwards from those years. We believe that we
have provided adequate reserves for any adjustments that may be determined by the tax authorities.
As of September 28, 2013, the total amount of gross unrecognized tax benefits including gross
interest and penalties was $23.2 million, of which $17.9 million, if recognized, would affect our effective
tax rate. As of September 29, 2012, we recorded gross unrecognized tax benefits including gross interest
and penalties in the amount of $27.6 million of which $16.8 million, if recognized, would affect our
effective tax rate. Our total gross unrecognized tax benefit was classified as long-term taxes payable in
the consolidated balance sheets. We include interest and penalties related to unrecognized tax benefits
within the provision for income taxes. As of September 28, 2013, the total amount of gross interest and
penalties accrued was $1.8 million and it is classified as long-term taxes payable in the consolidated
balance sheets. As of September 29, 2012, we had accrued $1.6 million for the gross interest and
penalties related to the gross unrecognized tax benefits.
Management believes that it has adequately provided for any adjustments that may result from tax
examinations. The Company regularly engages in discussions and negotiations with tax authorities
regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign and
state tax matters may be concluded in the next 12 months. Although the timing of the resolution and/or
closure of audits is highly uncertain, it is reasonably possible that the balance of net unrecognized tax
benefits including interest and penalties could be reduced by approximately $0.3 million to $2.4 million
in the next 12 months.
A reconciliation of the change in gross unrecognized tax benefits, excluding interest and penalties,
is as follows (in thousands):
Balance as of the beginning of the year . . . . . . . . . . .
Tax positions related to current year:
Fiscal year-end
2013
2012
2011
$25,967
$30,301
$ 43,254
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,008
—
615
—
739
—
Tax positions related to prior year:
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapses in statutes of limitations . . . . . . . . . . . . . . . .
1,127
—
—
(6,724)
99
—
—
(5,048)
496
(1,125)
(913)
(12,150)
Balance as of end of year . . . . . . . . . . . . . . . . . . . . .
$21,378
$25,967
$ 30,301
125
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. INCOME TAXES (Continued)
Our unrecognized tax benefits decreased from $26.0 million in fiscal 2012 to $21.4 million in fiscal
2013, excluding interest and penalties. This reduction is primarily related to the closure of various
statutes of limitations.
A summary of the fiscal tax years that remain subject to examination, as of September 28, 2013,
for our major tax jurisdictions is:
United States—Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States—Various States . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010—forward
2009—forward
2007—forward
2006—forward
2007—forward
2012—forward
18. SEGMENT AND GEOGRAPHIC INFORMATION
We are organized into two reportable operating segments: Specialty Lasers and Systems (‘‘SLS’’)
and Commercial Lasers and Components (‘‘CLC’’). This segmentation reflects the go-to-market
strategies for various products and markets. While both segments work to deliver cost-effective
solutions, SLS develops and manufacturers configurable, advanced-performance products largely serving
the microelectronics, scientific research and government programs and OEM components and
instrumentation markets. The size and complexity of many of our SLS products require service to be
performed at the customer site by factory-trained field service engineers. CLC focuses on higher
volume products that are offered in set configurations. The product architectures are designed for easy
exchange at the point of use such that product service and repairs are based upon advanced
replacement and depot (i.e., factory) repair. CLC’s primary markets include materials processing, OEM
components and instrumentation and microelectronics.
We have identified SLS and CLC as operating segments for which discrete financial information is
available. Both units have dedicated engineering, manufacturing, product business management and
product line management functions. A small portion of our outside revenue is attributable to projects
and recently developed products for which a segment has not yet been determined. The associated
direct and indirect costs are presented in the category of Corporate and other, along with other
corporate costs as described below.
Our Chief Executive Officer has been identified as the chief operating decision maker (CODM) as
he assesses the performance of the segments and decides how to allocate resources to the segments.
Income (loss) from operations is the measure of profit and loss that our CODM uses to assess
performance and make decisions. As assets are not a measure used to assess the performance of the
company by the CODM, asset information is not tracked or compiled by segment and is not available
to be reported in our disclosures. Income (loss) from operations represents the net sales less the cost
of sales and direct operating expenses incurred within the operating segments as well as allocated
expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments
certain operating expenses which we manage separately at the corporate level. These unallocated costs
include stock-based compensation and corporate functions (certain research and development,
management, finance, legal and human resources) and are included in the results below under
126
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
Corporate and other in the reconciliation of operating results. Management does not consider
unallocated Corporate and other costs in its measurement of segment performance.
The following table provides net sales and income (loss) from operations for our operating
segments (in thousands):
2013
Fiscal
2012
2011
Net sales:
Specialty Laser Systems . . . . . . . . . . . . . . . . . . .
Commercial Lasers and Components . . . . . . . . .
$571,644
238,482
$548,848
220,240
$519,736
283,098
Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
$810,126
$769,088
$802,834
Income from operations:
Specialty Laser Systems . . . . . . . . . . . . . . . . . . .
Commercial Lasers and Components . . . . . . . . .
Corporate and other . . . . . . . . . . . . . . . . . . . . .
$115,931
12,411
(43,443)
$118,789
9,191
(39,150)
$116,383
37,709
(42,083)
Total income from operations . . . . . . . . . . . . . . . .
$ 84,899
$ 88,830
$112,009
The following table provides a reconciliation of our total income (loss) from operations to net
income (in thousands):
Reconciliation of Income From Operations to Net Income
2013
Fiscal
2012
2011
Total income from operations . . . . . . . . . . . . . . . . . .
Total other income, net . . . . . . . . . . . . . . . . . . . . .
$84,899
(1,403)
$88,830
1,792
$112,009
11,820
Income before income taxes . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . .
83,496
17,141
90,622
27,660
123,829
30,591
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$66,355
$62,962
$ 93,238
Geographic Information
Our foreign operations consist primarily of manufacturing facilities in Europe and Asia-Pacific and
sales offices in Europe and Asia-Pacific. Sales, marketing and customer service activities are conducted
through sales subsidiaries throughout the world. Geographic sales information for fiscal 2013, 2012 and
2011 is based on the location of the end customer. Geographic long-lived asset information presented
below is based on the physical location of the assets at the end of each year.
127
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
Sales to unaffiliated customers are as follows (in thousands):
SALES
2013
Fiscal
2012
2011
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$188,204
$184,958
$208,868
Foreign countries:
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe, other . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia-Pacific, other . . . . . . . . . . . . . . . . . . . . . . .
Rest of World . . . . . . . . . . . . . . . . . . . . . . . . . .
Total foreign countries sales . . . . . . . . . . . . . .
156,152
185,737
93,855
58,500
73,794
53,884
621,922
168,912
130,754
92,162
62,266
80,834
49,202
166,911
117,918
100,759
79,751
71,813
56,814
584,130
593,966
Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$810,126
$769,088
$802,834
Long-lived assets, which include all non-current assets other than goodwill, intangibles and
deferred taxes, by geographic region, are as follows (in thousands):
LONG-LIVED ASSETS
Fiscal Year-end
2013
2012
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 79,939
$ 79,618
Foreign countries:
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe, other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total foreign countries long-lived assets . . . . . . . . . . . . . .
43,410
3,192
14,693
61,295
43,572
3,106
13,666
60,344
Total long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$141,234
$139,962
Major Customers
We had one customer who accounted for 14% of consolidated revenue during fiscal 2013; we had
two customers who each accounted for 11% of consolidated revenue during fiscal 2012. These
customers purchased primarily from our SLS segment. There were no major customers over 10% of
revenues for fiscal 2011.
128
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for the years ended September 28, 2013 and September 29,
2012 are as follows (in thousands, except per share amounts):
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal 2013:
Net sales . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
Net income per basic share . . . . . . . . .
Net income per diluted share . . . . . . .
Fiscal 2012:
Net sales . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
Net income per basic share . . . . . . . . .
Net income per diluted share . . . . . . .
$183,202
77,635
14,153
0.60
0.58
$
$
$190,767
80,359
17,051
0.73
0.71
$
$
$200,058
76,331
15,002(1)
0.62
0.61
$
$
$213,725
83,264
16,685
0.69
0.68
$
$
$213,141
85,041
20,515
0.84
0.83
$
$
$193,284
77,648
16,155(2)
0.69
0.67
$
$
$196,383
80,245
17,208
0.73
0.72
$
$
$188,654
77,733
12,548(3)
0.53
0.52
$
$
(1) The second quarter of fiscal 2013 includes a $1,398 benefit from the renewal of the R&D
tax credit for fiscal 2012.
(2) The second quarter of fiscal 2012 includes a $1,647 benefit from the release of tax
reserves and related interest as a result of the closure of open tax years.
(3) The fourth quarter of fiscal 2012 includes a $4,260 after tax charge due to the write-off of
previously acquired intangible assets and inventories and a $2,790 benefit due to
decreases in valuation allowances against deferred tax assets.
129
Sequentially
Exhibit
Number
21.1
23.1
24.1
31.1
31.2
32.1
32.2
INDEX TO EXHIBITS
Exhibit
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Power of Attorney (see signature page)
Certification of Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
All other exhibits required to be filed as part of this report have been incorporated by reference.
See item 15 for a complete index of such exhibits.
130
FORWARD-LOOKING STATEMENTS
This letter contains forward-looking statements, as defined under the Federal securities laws. These forward-looking statements
include the statements that relate to: our position for growth in certain applications and product lines; future product deliveries of our
TwinVyper/Linebeam 1300 excimer laser annealing systems containing higher gross margins; the outlook for laser annealing systems in
the flat panel display manufacturing market; our involvement in new dental applications and the potential for such applications;
business opportunities in brain research for laser-based imaging systems; and the impact of stimulus money in Japan on the laser
industry. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions
that could cause our actual results to differ materially and adversely from those expressed in any forward-looking statement. Factors
that could cause actual results to differ materially include risks and uncertainties, including, but not limited to, risks associated with
any general market recovery, growth in demand for our products, the worldwide demand for flat panel displays, the demand for and
use of short-pulse lasers in commercial applications, our successful implementation of our customer design wins, our and our
customers’ exposure to risks associated with worldwide economic conditions and, the ability of our customers to forecast their own end
markets, our ability to accurately forecast future periods, customer acceptance and adoption of our new product offerings, continued
timely availability of products and materials from our suppliers, our ability to timely ship our products and our customers’ ability to
accept such shipments, our ability to have our customers qualify our product offerings, worldwide government economic policies and
other risks identified in the Company’s Securities and Exchange Commission filings. Readers are encouraged to refer to the risk
disclosures and critical accounting policies and estimates described in the Company’s reports on Forms 10-K, 10-Q and 8-K, as
applicable and as filed from time-to-time by the Company. Actual results, events and performance may differ materially from those
presented herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the
date of this letter. The Company undertakes no obligation to update these forward-looking statements as a result of events or
circumstances after the date hereof or to reflect the occurrence of unanticipated events.