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EX-32.2 - EXHIBIT 32.2 - COHERENT INCcohr-ex322_2018q2.htm
EX-32.1 - EXHIBIT 32.1 - COHERENT INCcohr-ex321_2018q2.htm
EX-31.2 - EXHIBIT 31.2 - COHERENT INCcohr-ex312_2018q2.htm
EX-31.1 - EXHIBIT 31.1 - COHERENT INCcohr-ex311_2018q2.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ___________________________________________________
FORM 10-Q
 ___________________________________________________
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2018
or
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to          
Commission File Number: 001-33962 
COHERENT, INC.
Delaware
 
94-1622541
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
5100 Patrick Henry Drive, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 764-4000 
___________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 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 x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer x
 
Accelerated filer ¨
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
(do not check if a smaller reporting company)
 
 
Emerging growth company ¨

 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨


1


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x
 
The number of shares outstanding of registrant’s common stock, par value $.01 per share, on May 7, 2018 was 24,873,439.

2


COHERENT, INC.

INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in or incorporated by reference in this quarterly report, other than statements of historical fact, are forward-looking statements. These statements are generally accompanied by words such as “trend,” “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “rely,” “believe,” “estimate,” “predict,” “intend,” “potential,” “continue,” "outlook," “forecast” or the negative of such terms, or other comparable terminology, including without limitation statements made under “Our Strategy” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Actual results of Coherent, Inc. (referred to herein as the Company, we, our or Coherent) may differ significantly from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections captioned “Our Strategy,” “Risk Factors,” “Key Performance Indicators,” as well as any other cautionary language in this quarterly report. All forward-looking statements included in the document are based on information available to us on the date hereof. We undertake no obligation to update these forward-looking statements as a result of events or circumstances or to reflect the occurrence of unanticipated events or non-occurrence of anticipated events.


3


PART I.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share data) 
 
Three Months Ended
 
Six Months Ended
 
 
March 31,
2018

April 1,
2017
 
March 31,
2018
 
April 1,
2017
 
Net sales
$
481,118


$
422,833

 
$
958,683

 
$
768,906

 
Cost of sales
265,688


243,318

 
526,230

 
447,877

 
Gross profit
215,430


179,515

 
432,453

 
321,029

 
Operating expenses:
 


 

 


 
 
 
Research and development
34,783


30,536

 
66,175

 
57,620

 
Selling, general and administrative
77,146


72,451

 
150,583

 
146,219

 
Gain from business combination



 

 
(5,416
)
 
Other impairment charges (recoveries)
(110
)
 

 
155

 

 
Amortization of intangible assets
2,950


5,439

 
5,556

 
9,317

 
Total operating expenses
114,769


108,426

 
222,469

 
207,740

 
Income from operations
100,661


71,089

 
209,984

 
113,289

 
Other income (expense):
 




 


 
 
 
Interest income
440


135

 
911

 
278

 
Interest expense
(7,725
)

(8,998
)
 
(16,472
)
 
(16,962
)
 
Other—net
(2,225
)

(1,392
)
 
(2,449
)
 
11,601

 
Total other income (expense), net
(9,510
)

(10,255
)
 
(18,010
)
 
(5,083
)
 
Income from continuing operations before income taxes
91,151


60,834

 
191,974

 
108,206

 
Provision for income taxes
25,849


18,646

 
84,769

 
35,320

 
Net income from continuing operations
65,302


42,188

 
107,205

 
72,886

 
Loss from discontinued operations, net of income taxes


(343
)
 
(2
)
 
(633
)
 
Net income
$
65,302


$
41,845

 
$
107,203

 
$
72,253

 
 

 
 
 

 
 
 
Basic net income per share:





 


 
 
 
Income per share from continuing operations
$
2.64


$
1.72

 
$
4.34

 
$
2.98

 
Loss per share from discontinued operations, net of income taxes
$


$
(0.01
)
 
$

 
$
(0.03
)
 
Net income per share
$
2.64


$
1.71

 
$
4.34

 
$
2.96

 






 


 
 
 
Diluted net income per share:
 


 

 


 
 
 
Income per share from continuing operations
$
2.61


$
1.70

 
$
4.29

 
$
2.95

 
Loss per share from discontinued operations, net of income taxes
$


$
(0.01
)
 
$

 
$
(0.03
)
 
Net income per share
$
2.61


$
1.69

 
$
4.29

 
$
2.93

 






 


 
 
 
Shares used in computation:
 


 

 


 
 
 
Basic
24,761


24,496

 
24,698

 
24,422

 
Diluted
25,010


24,757

 
25,018

 
24,700

 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.


4



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

 
Three Months Ended
 
Six Months Ended
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
 
 
 
 
 
 
 
 
Net income
$
65,302

 
$
41,845

 
$
107,203

 
$
72,253

Other comprehensive income (loss): (1)
 
 
 
 
 
 
 
  Translation adjustment, net of taxes (2)
21,344

 
1,417

 
21,436

 
(4,078
)
Changes in unrealized losses on available-for-sale securities, net of taxes (3)
(1
)
 

 
(8
)
 
(3,334
)
Defined benefit pension plans, net of taxes (4)

(344
)
 
158

 
(197
)
 
534

  Other comprehensive income (loss), net of tax
20,999

 
1,575

 
21,231


(6,878
)
Comprehensive income
$
86,301

 
$
43,420

 
$
128,434

 
$
65,375


(1)
Reclassification adjustments were not significant during the three and six months ended March 31, 2018 and April 1, 2017.

(2)
Tax expenses (benefits) were not provided on translation adjustments during the three and six months ended March 31, 2018. Tax benefits of $0 and $326 were provided on translation adjustments during the three and six months ended April 1, 2017, respectively. 

(3)
Tax expenses (benefits) of $1 and $(3) were provided on changes in unrealized gains (losses) on available-for-sale securities for the three and six months ended March 31, 2018, respectively. Tax benefits of $0 and $1,878 were provided on changes in unrealized gains (losses) on available-for-sale securities for the three and six months ended April 1, 2017, respectively.

(4)
Tax benefits of $9 and $55 were provided on changes in defined benefit pension plans for the three and six months ended March 31, 2018, respectively. Tax expenses of $0 and $21 were provided on changes in defined benefit pension plans for the three and six months ended April 1, 2017, respectively.





See Accompanying Notes to Condensed Consolidated Financial Statements.

5



COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except par value)
 
March 31,
2018
 
September 30,
2017
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
308,987

 
$
443,066

Restricted cash
1,144


1,097

Short-term investments
37,127

 
32,510

Accounts receivable—net of allowances of $6,671 and $6,890, respectively
312,938

 
305,668

Inventories
492,686

 
414,807

Prepaid expenses and other assets
85,446

 
70,268

Assets held for sale
9,079

 
44,248

Total current assets
1,247,407

 
1,311,664

Property and equipment, net
307,330

 
278,850

Goodwill
460,921

 
417,694

Intangible assets, net
180,642

 
190,027

Non-current restricted cash
13,432


12,924

Other assets
126,853

 
126,641

Total assets
$
2,336,585

 
$
2,337,800

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Short-term borrowings and current-portion of long-term obligations
$
7,422


$
5,078

Accounts payable
93,309

 
75,860

Income taxes payable
105,395

 
103,206

Other current liabilities
195,842

 
235,001

Total current liabilities
401,968

 
419,145

Long-term obligations
449,653

 
589,001

Other long-term liabilities
195,283

 
166,390

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 

 
 

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

 
 

Outstanding—24,834 shares and 24,631 shares, respectively
247

 
245

Additional paid-in capital
155,763

 
171,403

Accumulated other comprehensive income
41,137

 
19,906

Retained earnings
1,092,534

 
971,710

Total stockholders’ equity
1,289,681

 
1,163,264

Total liabilities and stockholders’ equity
$
2,336,585

 
$
2,337,800


See Accompanying Notes to Condensed Consolidated Financial Statements.

6


COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Six Months Ended
 
March 31,
2018

April 1,
2017
Cash flows from operating activities:
 

 
 

Net income
$
107,203

 
$
72,253

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

Depreciation and amortization
25,399

 
19,958

Amortization of intangible assets
30,429

 
28,851

Gain on business combination

 
(5,416
)
Deferred income taxes
14,079

 
(5,620
)
Amortization of debt issuance cost
7,221

 
1,707

Stock-based compensation
15,486

 
12,186

Non-cash restructuring charges
439

 
4,313

Other non-cash expense
92

 
567

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

 
 

Accounts receivable
5,785

 
(2,798
)
Inventories
(59,678
)
 
4,962

Prepaid expenses and other assets
(5,193
)
 
(3,634
)
Other long-term assets
(3,753
)
 
(2,292
)
Accounts payable
13,587

 
8,672

Income taxes payable/receivable
20,815

 
12,854

Other current liabilities
(41,575
)
 
47,046

Other long-term liabilities
2,463

 
2,051

Cash flows from discontinued operations

 
(1,301
)
Net cash provided by operating activities
132,799

 
194,359

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(44,951
)
 
(29,543
)
Proceeds from dispositions of property and equipment
90

 
144

Purchases of available-for-sale securities
(32,838
)
 

Proceeds from sales and maturities of available-for-sale securities
28,197

 
25,108

Acquisition of businesses, net of cash acquired
(45,448
)
 
(740,481
)
Other
470

 

Proceeds from sale of discontinued operation
25,000

 

Cash flows from discontinued operations

 
(316
)
Net cash used in investing activities
(69,480
)
 
(745,088
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Short-term borrowings
36,672

 
6,930

Repayments of short-term borrowings
(36,955
)
 
(28,700
)
Proceeds from long-term borrowings

 
740,685

Repayments of long-term borrowings
(166,913
)
 
(36,349
)
Cash paid to subsidiaries' minority shareholders

 
(816
)
Issuance of common stock under employee stock option and purchase plans
4,899

 
3,866

Net settlement of restricted common stock
(36,250
)
 
(15,675
)
Debt issuance costs

 
(25,892
)
Net cash provided by (used in) financing activities
(198,547
)
 
644,049

Effect of exchange rate changes on cash, cash equivalents and restricted cash
1,704

 
(1,617
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(133,524
)

91,703

Cash, cash equivalents and restricted cash, beginning of period
457,087

 
354,347

Cash, cash equivalents and restricted cash, end of period
$
323,563

 
$
446,050

 
 
 
 
Non-cash investing and financing activities:
 
 
 
  Unpaid property and equipment purchases
$
3,362

 
$
2,722

  Use of previously owned equity shares in acquisition
$

 
$
20,685


The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows.
 
March 31,
2018
 
April 1,
2017
Cash and cash equivalents
$
308,987

 
$
432,980

Restricted cash, current
1,144

 
1,284

Restricted cash, non-current
13,432

 
11,786

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
$
323,563

 
$
446,050


7


See Accompanying Notes to Condensed Consolidated Financial Statements.

8


COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto filed by Coherent, Inc. on Form 10-K for the fiscal year ended September 30, 2017. In the opinion of management, all adjustments necessary for a fair presentation of financial condition and results of operation as of and for the periods presented have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year or any other interim periods. Our fiscal year ends on the Saturday closest to September 30 and our second fiscal quarters include 13 weeks of operations in each fiscal year presented. Fiscal year 2018 and 2017 both include 52 weeks.

The consolidated financial statements include the accounts of Coherent, Inc. and its direct and indirect subsidiaries (collectively, the "Company", "we", "our", "us" or "Coherent"). Intercompany balances and transactions have been eliminated.

On November 7, 2016, we acquired Rofin-Sinar Technologies, Inc. and its direct and indirect subsidiaries ("Rofin"). On March 8, 2018, we acquired privately held O. R. Lasertechnologie GmbH ("OR Laser"). The significant accounting policies of Rofin and OR Laser have been aligned to conform to those of Coherent, and the consolidated financial statements include the results of Rofin and OR Laser as of their acquisition dates.

The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


2.    RECENT ACCOUNTING STANDARDS

Adoption of New Accounting Pronouncement

In October 2016, the FASB issued amended guidance that improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under the new guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard is required to be adopted in the first quarter of our fiscal 2019. We elected to early adopt the amended guidance in the first quarter of fiscal 2018. The effect of adoption is a decrease in our opening retained earnings by $6.1 million with a comparable decrease to our non-current prepaid income tax balance.

In March 2016, the FASB issued amended guidance that simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under the new guidance, an entity recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. This change eliminates the notion of the APIC pool and significantly reduces the complexity and cost of accounting for excess tax benefits and tax deficiencies. Upon our adoption in the first quarter of fiscal 2018, we recognized a windfall tax benefit as a cumulative effect adjustment increase to our opening retained earnings of $19.8 million together with a comparable increase in deferred tax assets. With adoption occurring at the beginning of fiscal 2018, we recognized excess tax benefits from stock award exercises and restricted stock unit vesting as a discrete tax benefit which reduced the provision for income taxes for the three and six months ended March 31, 2018 by $0.3 million and $12.8 million, respectively. The adoption also changed the calculation of fully diluted shares outstanding for the three and six months ended March 31, 2018. The excess tax benefits have been excluded from the calculation of assumed proceeds in our calculation of diluted weighted average shares under the new standard. Our diluted weighted average shares outstanding for the three and six months ended March 31, 2018 increased by 74,891 and 99,577 shares, respectively, due to adoption of the new standard. Additionally, effective in the first quarter of fiscal 2018, excess tax benefits are classified as an operating activity in the statement of cash

9


flows instead of as a financing activity where they were previously presented. We adopted this guidance on a prospective basis and, accordingly, prior periods have not been adjusted. We have elected to not estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The remaining provisions of this amended guidance did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

In February 2018, the FASB issued amended guidance to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects. The new standard will become effective for our fiscal year 2020 which begins on September 29, 2019. We are currently assessing the impact of this amended guidance.

In August 2017, the FASB issued amended guidance to address the current limitation on how an entity can designate the hedged risk in certain cash flow and fair value hedging relationships pursuant to U.S. GAAP. This amendment better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendment made specific improvements on hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk for cash flow hedges of forecasted purchases or sales of a nonfinancial asset, cash flow hedges of interest rate risk of variable-rate financial instruments and fair value hedges of interest rate risk. Upon adoption, for cash flow and net investment hedges existing, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendment. The amended presentation and disclosure guidance is required only prospectively. The new standard will become effective for our fiscal year 2020 which begins on September 29, 2019. We are currently assessing the impact of this amended guidance.

In May 2016, accounting guidance was issued to clarify the not yet effective revenue recognition guidance issued in May 2014. This additional guidance does not change the core principle of the revenue recognition guidance issued in May 2014, rather, it provides clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications, (ii) for non-cash consideration, and (iii) based on the collectability of the consideration from the customer. The guidance also specifies when a contract should be considered “completed” for purposes of applying the transition guidance. The effective date and transition requirements for this guidance are the same as the effective date and transition requirements for the guidance previously issued in 2014, which is effective for our fiscal year 2019 which begins on September 30, 2018. We have elected to not adopt the standard earlier. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We currently anticipate adopting the standard using the full retrospective method. However, our ability to apply the full retrospective method is dependent on the completion of our analysis that is on-going. We have established a cross-functional team to implement the new standard with respect to the recognition of revenue from contracts with customers. Based on our ongoing evaluation, we do not expect a material change to our current revenue recognition practices under the new guidance but such an expectation may change and will be further clarified as we complete our implementation of the new standard.  We will continue to assess the new standard along with industry trends and additional interpretive guidance, and may adjust our implementation plan accordingly.

In February 2016, the FASB issued amended guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance clarifies the criteria for distinguishing between a finance lease and operating lease, as well as classification between the two types of leases, which is substantially unchanged from the previous lease guidance. Further, the new guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset, initially measured at the present value of the lease payments. For finance leases, a lessee should recognize interest on the lease liability separately from amortization of the right-of-use asset. For operating leases, a lessee should recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The new standard will become

10


effective for our fiscal year 2020 which begins on September 29, 2019. We are currently assessing the impact of this amended guidance.


3.     BUSINESS COMBINATIONS
Fiscal 2018 Acquisitions
OR Laser
On March 8, 2018, we acquired OR Laser for approximately $47.4 million, excluding transaction costs. OR Laser produces laser-based material processing equipment for a variety of uses including additive manufacturing, welding, cladding, marking, engraving and drilling. OR Laser's operating results have been included in our Industrial Lasers & Systems segment. See Note 17, "Segment Information".
Our preliminary allocation of the purchase price is as follows (in thousands):
Tangible assets:
 
  Cash
$
1,936

  Accounts receivable
3,973

  Inventories
2,360

  Prepaid expenses and other assets
630

  Property and equipment
1,515

  Liabilities assumed
(4,963
)
  Deferred tax liabilities
(4,517
)
Intangible assets:
 
  Existing technology
14,100

  Non-competition
200

  Backlog
100

  Customer relationships
700

  Trademarks
50

Goodwill
31,300

Total
$
47,384

Results of operations for the business have been included in our condensed consolidated financial statements subsequent to the date of acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisition was not material to our prior period consolidated financial results.
The identifiable intangible assets are being amortized over their respective preliminary useful lives of 1 to 8 years. The fair value of the acquired intangibles was determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of tangible and intangible assets, which was allocated to goodwill.
We believe the amount of goodwill relative to identifiable intangible assets relates to several factors including: (1) potential buyer-specific synergies related to the development of new technologies related primarily to the additive manufacturing business; and (2) the potential to leverage our sales force to attract new customers and revenue and cross-sell to existing customers.
None of the goodwill from this purchase is deductible for tax purposes.
We expensed $0.4 million of acquisition-related costs as selling, general and administrative expenses in our condensed consolidated statement of operations for the three and six months ended March 31, 2018.
Fiscal 2017 Acquisitions

11


Rofin
On November 7, 2016, we completed our acquisition of Rofin pursuant to the Merger Agreement dated March 16, 2016. Rofin is one of the world's leading developers and manufacturers of high-performance industrial laser sources and laser-based solutions and components. Rofin's operating results have been included primarily in our Industrial Lasers & Systems segment. See Note 17, "Segment Information".

As a condition of the acquisition, we were required to divest and hold separate Rofin’s low power CO2 laser business based in Hull, United Kingdom (the "Hull Business"), and had reported this business separately as a discontinued operation until its divestiture. We completed the divestiture of the Hull Business on October 11, 2017, after receiving approval for the terms of the sale from the European Commission. See Note 19, "Discontinued Operations and Assets Held for Sale".

The total purchase consideration has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on a valuation analysis.

The total purchase consideration allocated to net assets acquired was approximately $936.3 million and consisted of the following (in thousands):
Cash consideration to Rofin's shareholders
$
904,491

Cash settlement paid for Rofin employee stock options
15,290

Total cash payments to Rofin shareholders and option holders
919,781

Add: fair value of previously owned Rofin shares
20,685

Less: post-merger stock compensation expense
(4,152
)
Total purchase price to allocate
$
936,314


The acquisition was an all-cash transaction at a price of $32.50 per share of Rofin common stock. We funded the payment of the aggregate consideration with a combination of our available cash on hand and the proceeds from the Euro Term Loan described in Note 9, "Borrowings". The total payment of $15.3 million due to the cancellation of options held by employees of Rofin was allocated between total estimated merger consideration of $11.1 million and post-merger stock-based compensation expense of $4.2 million based on the portion of the total service period of the underlying options that had not been completed by the merger date.

We recognized a gain of $5.4 million in the first quarter of fiscal 2017 on the increase in fair value from the date of purchase for the shares of Rofin we owned before the acquisition.

Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Rofin based on their fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. We concluded that all such goodwill will not be deductible for tax purposes.

Our allocation of the purchase price is as follows (in thousands):

12


Cash, cash equivalents and short-term investments
$
163,425

Accounts receivable
90,877

Inventory
189,869

Prepaid expenses and other assets
15,362

Assets held-for-sale, current
29,545

Property and equipment
125,723

Other assets
31,854

Intangible assets:

  Existing technology
169,029

  In-process research and development
6,000

  Backlog
5,600

  Customer relationships
39,209

  Trademarks
5,699

  Patents
300

Goodwill
298,170

Current portion of long-term obligations
(3,633
)
Current liabilities held for sale
(7,001
)
Accounts payable
(21,314
)
Other current liabilities
(68,242
)
Long-term debt
(11,641
)
Other long-term liabilities
(122,517
)
Total
$
936,314

The fair value write-up of acquired finished goods and work-in-process inventory was $26.4 million, which was amortized over the expected period during which the acquired inventory was sold, or 6 months. Accordingly, for fiscal 2017, we recorded $26.4 million of incremental cost of sales associated with the fair value write-up of inventory acquired in the merger with Rofin. The fair value write-up of inventory acquired was fully amortized in fiscal 2017.

The fair value write-up of acquired property, plant and equipment of $36.0 million will be amortized over the useful lives of the assets, ranging from 3 to 31 years. Property, plant and equipment is valued at its value-in-use, unless there was a known plan to dispose of the asset.

The acquired existing technology, backlog, trademarks and patents are being amortized on a straight-line basis, which approximates the economic use of the asset, over their estimated useful lives of 3 to 5 years, 6 months, 3 years, and 5 years, respectively. Customer relationships are being amortized on an accelerated basis utilizing free cash flows over periods ranging from 5 to 10 years. The useful lives of in-process research and development will be defined in the future upon further evaluation of the status of these applications. The fair value of the acquired intangibles was determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of tangible and intangible assets, which was allocated to goodwill.

We believe the amount of goodwill relative to identifiable intangible assets relates to several factors including: (1) potential buyer-specific synergies related to market opportunities for a combined product offering; and (2) the potential to leverage our sales force to attract new customers and revenue and cross-sell to existing customers.

In-process research and development (“IPR&D”) consists of two projects that had not yet reached technological feasibility as of the date of the acquisition. 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

13


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. One project was completed in December 2017 and amortization for that project began in the quarter ending March 31, 2018. The other project has not been completed as of March 31, 2018, but is expected to be completed in fiscal 2019.

We expensed $17.6 million of acquisition-related costs as selling, general and administrative expenses in our condensed consolidated statements of operations in fiscal 2017.

The results of this acquisition were included in our consolidated operations beginning on November 7, 2016. The amount of continuing Rofin net sales and net loss from continuing operations included in our condensed consolidated statements of operations for the three months ended April 1, 2017 was approximately $110.7 million and $17.9 million, respectively. The amount of continuing Rofin net sales and net loss from continuing operations included in our condensed consolidated statements of operations for the six months ended April 1, 2017 was approximately $185.1 million and $29.9 million, respectively.

Unaudited Pro Forma Information (in thousands, except per share data)

The following unaudited pro forma financial information presents our combined results of operations as if the acquisition of Rofin and the related issuance of our Euro Term Loan had occurred on October 4, 2015. The unaudited pro forma financial information is not necessarily indicative of what our condensed consolidated results of operations actually would have been had the acquisition been completed on October 4, 2015. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company. The actual results may differ significantly from the pro forma results presented here due to many factors.
 
Three Months Ended
Six Months Ended
 
 
April 1,
2017
 
April 1,
2017
Total net sales
 
$
432,998

 
$
822,814

Net income
 
$
55,519

 
$
94,702

Net income per share:
 


 
 
Basic
 
$
2.27

 
$
3.88

Diluted
 
$
2.24

 
$
3.83

The unaudited pro forma financial information above includes the net income of Rofin’s low power CO2 laser business based in Hull, United Kingdom, which was recorded as a discontinued operation in the three and six months ended April 1, 2017. See Note 19, "Discontinued Operations and Assets Held for Sale".

The unaudited pro forma financial information above reflects the following material adjustments:

Incremental amortization and depreciation expense related to the estimated fair value of identifiable intangible assets and property, plant and equipment from the purchase price allocation.
The exclusion of amortization of inventory step-up to its estimated fair value from the three and six months ended April 1, 2017.
The exclusion of revenue adjustments as a result of the reduction in customer deposits and deferred revenue related to its estimated fair value from the three and six months ended April 1, 2017.
Incremental interest expense and amortization of debt issuance costs related to our Euro Term Loan and Revolving Credit Facility (as defined in Note 9, "Borrowings").
The exclusion of acquisition costs incurred by both Coherent and Rofin from the three and six months ended April 1, 2017.
The exclusion of a stock-based compensation charge related to the acceleration of Rofin options from the six months ended April 1, 2017.
The exclusion of a gain on business combination for our previously owned shares of Rofin from the six months ended April 1, 2017.
The exclusion of a foreign exchange gain on forward contracts related to our debt commitment and debt issuance from the six months ended April 1, 2017.
The estimated tax impact of the above adjustments.

14




4.     FAIR VALUES
 
We have not changed our valuation techniques in measuring the fair value of any financial assets and liabilities during the period. We recognize transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers between levels during the periods presented. As of March 31, 2018 and September 30, 2017, we did not have any assets or liabilities valued based on Level 3 valuations.

We measure the fair value of outstanding debt obligations for disclosure purposes on a recurring basis. As of March 31, 2018, the current and long-term portion of long-term obligations of $7.4 million and $449.7 million, respectively, are reported at amortized cost. These outstanding obligations are classified as Level 2 as they are not actively traded and are valued using a discounted cash flow model that uses observable market inputs. Based on the discounted cash flow model, the fair value of the outstanding debt approximates amortized cost.

Financial assets and liabilities measured at fair value as of March 31, 2018 and September 30, 2017 are summarized below (in thousands):
 
 
Aggregate Fair Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Aggregate Fair Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
 
March 31, 2018
 
September 30, 2017
 
 
 
 
(Level 1)
 
(Level 2)
 
 
 
(Level 1)
 
(Level 2)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
Money market fund deposits
 
$
57,047

 
$
57,047

 
$

 
$
61,811

 
$
61,811

 
$

U.S. Treasury and agency obligations (1)

 

 

 

 
14,986

 

 
14,986

Commercial paper (1)
 
4,975

 

 
4,975

 
21,991

 

 
21,991

Short-term investments:
 
 
 
 
 
 
 


 


 


U.S. Treasury and agency obligations (1)
 
14,993

 

 
14,993

 
21,087

 

 
21,087

Corporate notes and obligations (1)
 
7,140

 

 
7,140

 
11,423

 

 
11,423

Commercial paper (1)
 
14,994

 

 
14,994

 

 

 

Prepaid and other assets:
 
 
 
 
 
 
 


 


 


Foreign currency contracts (2)
 
65

 

 
65

 
1,270

 

 
1,270

Money market fund deposits — Deferred comp and supplemental plan (3)
 
244

 
244

 

 
285

 
285

 

Mutual funds — Deferred comp and supplemental plan (3)
 
19,474

 
19,474

 

 
17,585

 
17,585

 

Total
 
$
118,932

 
$
76,765

 
$
42,167

 
$
150,438

 
$
79,681

 
$
70,757

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts (3)
 
(1,494
)
 

 
(1,494
)
 
(1,475
)
 

 
(1,475
)
Total
 
$
117,438

 
$
76,765

 
$
40,673

 
$
148,963

 
$
79,681

 
$
69,282



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

15



(2)
The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large commercial banks. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. See Note 6, "Derivative Instruments and Hedging Activities".

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

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

Cash, cash equivalents and short-term investments consist of the following (in thousands):
 
 
March 31, 2018
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash and cash equivalents
$
308,987

 
$

 
$

 
$
308,987

 
 
 
 

 
 

 
 
Short-term investments:
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

Commercial paper
$
14,994

 
$

 
$

 
$
14,994

U.S. Treasury and agency obligations
14,994

 

 
(1
)
 
14,993

Corporate notes and obligations
7,117

 
27

 
(4
)
 
7,140

Total short-term investments
$
37,105

 
$
27

 
$
(5
)
 
$
37,127

 
 
September 30, 2017
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash and cash equivalents
$
443,066

 
$

 
$

 
$
443,066

 
 
 
 

 
 

 
 
Short-term investments:
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

       U.S. Treasury and agency obligations
$
21,074

 
$
13

 
$

 
$
21,087

Corporate notes and obligations
11,390

 
34

 
(1
)
 
11,423

Total short-term investments
$
32,464

 
$
47

 
$
(1
)
 
$
32,510


None of the $5,000 in unrealized losses at March 31, 2018 were considered to be other-than-temporary impairments.

The amortized cost and estimated fair value of available-for-sale investments in debt securities as of March 31, 2018 and September 30, 2017 classified as short-term investments on our condensed consolidated balance sheet were as follows (in

16


thousands):
 
March 31, 2018
 
September 30, 2017
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Investments in available-for-sale debt securities due in less than one year
$
34,105

 
$
34,119

 
$
30,214

 
$
30,251

Investments in available-for-sale debt securities due in one to five years (1)
$
3,000

 
$
3,008

 
$
2,250

 
$
2,259

 
(1) Classified as short-term investments because these securities are highly liquid and can be sold at any time.

During the three and six months ended March 31, 2018, we received proceeds totaling $0.0 million and $2.4 million, respectively, from the sale of available-for-sale securities and realized no gross gains or losses. During the three and six months ended April 1, 2017, we received proceeds totaling $0.0 million and $0.1 million, respectively, from the sale of available-for-sale securities and realized no gross gains or losses.
 
6.    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
We maintain operations in various countries outside of the United States and have foreign subsidiaries that manufacture and sell our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the Euro, Japanese Yen, South Korean Won and Chinese Renminbi (RMB). As a result, our earnings, cash flows and cash balances are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of two months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for speculative or trading purposes. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency rates at each respective date.

On August 1, 2016, we purchased forward contracts totaling 670.0 million Euro, with a value date of November 30, 2016, to limit our foreign exchange risk related to the commitment of our Euro Term Loan (denominated in Euros) in an amount of the Euro equivalent of $750.0 million to finance the U.S. dollar payment for our acquisition of Rofin. In the fourth quarter of fiscal 2016, we recognized an unrealized loss of $2.2 million on these forward contracts. In the first quarter of fiscal 2017, we settled these forward contracts at a net gain of $9.1 million, resulting in a realized gain of $11.3 million in the first quarter of fiscal 2017.
 
Non-Designated Derivatives

The outstanding notional contract and fair value asset (liability) amounts of non-designated hedge contracts, with maximum maturity of two months, are as follows (in thousands):

17


 
 
U.S. Notional Contract Value
 
U.S. Fair Value
 
March 31, 2018
 
September 30, 2017
 
March 31, 2018
 
September 30, 2017
Euro currency hedge contracts
 

 
 

 
 

 
 

Purchase
$
158,947

 
$
109,641

 
$
(294
)
 
$
(1,397
)
 
 
 
 
 
 
 
 
Japanese Yen currency hedge contracts
 
 
 
 
 
 
 
Purchase
$
760

 
$

 
$
(5
)
 
$

Sell
$
(33,521
)
 
$
(25,126
)
 
$
(218
)
 
$
591

 
 
 
 
 
 
 
 
South Korean Won currency hedge contracts
 
 
 
 
 
 
 
  Sell
$
(32,641
)
 
$
(28,996
)
 
$
(380
)
 
$
551

 
 
 
 
 
 
 
 
Chinese RMB currency hedge contracts
 
 
 
 
 
 
 
Sell
$
(47,307
)
 
$
(13,744
)
 
$
(565
)
 
$
128

 
 
 
 
 
 
 
 
Other foreign currency hedge contracts
 

 
 

 
 

 
 

Purchase
$
10,096

 
$
3,668

 
$
65

 
$
(4
)
Sell
$
(1,637
)
 
$
(2,971
)
 
$
(32
)
 
$
(74
)

The fair value of our derivative instruments is included in prepaid expenses and other assets and in other current liabilities in our Condensed Consolidated Balance Sheets. See Note 4, "Fair Values".

During the three and six months ended March 31, 2018, we recognized a gain of $1.0 million and a loss of $1.6 million, respectively, in other income (expense) for derivative instruments not designated as hedging instruments. During the three and six months ended April 1, 2017, we recognized a loss of $0.1 million and a gain of $9.4 million, respectively, in other income (expense) for derivative instruments not designated as hedging instruments.

Designated Derivatives

Cash flow hedges related to anticipated transactions are designated and documented at the inception of the hedge when we enter into contracts for specific future transactions. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of OCI in stockholder's equity and is reclassified into earnings when the underlying transaction affects earnings. We had no cash flow hedges outstanding at March 31, 2018 or September 30, 2017. Changes in the fair value of currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and recognized in other income (expense) as incurred. We classify the cash flows from the foreign exchange forward contracts that are accounted for as cash flow hedges in the same section as the underlying item, primarily within cash flows from operating activities since we do not designate our cash flow hedges as investing or financing activities.

During the three and six months ended March 31, 2018 and April 1, 2017, we did not have any activities related to designated cash flow hedges.

Master Netting Arrangements

To mitigate credit risk in derivative transactions, we enter into master netting arrangements that allow each counterparty in the arrangements to net settle amounts of multiple and separate derivative transactions under certain conditions. We present the fair value of derivative assets and liabilities within our condensed consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The impact of netting derivative assets and liabilities is not material to our financial position for any of the periods presented. Our derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by us or the counterparties.



18


7.    GOODWILL AND INTANGIBLE ASSETS 

During the six months ended March 31, 2018, we noted no indications of impairment or triggering events to cause us to review goodwill for potential impairment. We will conduct our annual goodwill testing during the fourth fiscal quarter.
 
The changes in the carrying amount of goodwill by segment for the period from September 30, 2017 to March 31, 2018 are as follows (in thousands):
 
OEM Laser Sources
 
Industrial Lasers & Systems
 
Total
Balance as of September, 30, 2017
$
102,178

 
$
315,516

 
$
417,694

Additions (see Note 3)

 
31,300

 
31,300

Translation adjustments and other
3,166

 
8,761

 
11,927

Balance as of March 31, 2018
$
105,344

 
$
355,577

 
$
460,921

 
Components of our amortizable intangible assets are as follows (in thousands):
 
 
March 31, 2018
 
September 30, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Existing technology
$
213,845

 
$
(75,211
)
 
$
138,634

 
$
208,341

 
$
(66,793
)
 
$
141,548

Patents

 

 

 
330

 
(58
)
 
272

Customer relationships
52,921

 
(19,259
)
 
33,662

 
51,687

 
(14,259
)
 
37,428

Trade Name
6,211

 
(2,983
)
 
3,228

 
6,171

 
(1,824
)
 
4,347

In-process research & development
5,118

 

 
5,118

 
6,432

 

 
6,432

Total
$
278,095

 
$
(97,453
)
 
$
180,642

 
$
272,961

 
$
(82,934
)
 
$
190,027


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

Amortization expense for intangible assets for the six months ended March 31, 2018 and April 1, 2017 was $30.4 million and $28.9 million, respectively. The change in the accumulated amortization also includes $4.5 million and $1.0 million of foreign exchange impact for the six months ended March 31, 2018 and April 1, 2017, respectively.

At March 31, 2018, estimated amortization expense for the remainder of fiscal 2018, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):
 
Estimated
Amortization
Expense
2018 (remainder)
$
30,815

2019
58,987

2020
51,425

2021
17,828

2022
5,783

2023
3,182

Thereafter
7,504

Total (excluding IPR&D)
$
175,524



8.     BALANCE SHEET DETAILS
 
Inventories consist of the following (in thousands):

19


 
March 31,
2018
 
September 30,
2017
Purchased parts and assemblies
$
137,511

 
$
114,285

Work-in-process
189,461

 
159,784

Finished goods
165,714

 
140,738

Total inventories
$
492,686

 
$
414,807

 
Prepaid expenses and other assets consist of the following (in thousands):
 
March 31,
2018
 
September 30,
2017
Prepaid and refundable income taxes
$
33,478

 
$
28,712

Other taxes receivable
20,577

 
15,327

Prepaid expenses and other assets
31,391

 
26,229

Total prepaid expenses and other assets
$
85,446

 
$
70,268

 
Other assets consist of the following (in thousands):
 
March 31,
2018
 
September 30,
2017
Assets related to deferred compensation arrangements
$
33,740

 
$
31,008

Deferred tax assets
85,034

 
82,691

Other assets
8,079

 
12,942

Total other assets
$
126,853

 
$
126,641


Other current liabilities consist of the following (in thousands):
 
March 31,
2018
 
September 30,
2017
Accrued payroll and benefits
$
68,203

 
$
72,327

Deferred revenue
34,608

 
65,237

Warranty reserve
37,479

 
36,149

Accrued expenses and other
35,050

 
34,215

Current liabilities held for sale (See Note 19)
732

 
7,021

Customer deposits
19,770

 
20,052

Total other current liabilities
$
195,842

 
$
235,001

 
Components of the reserve for warranty costs during the first six months of fiscal 2018 and 2017 were as follows (in thousands):
 
Six Months Ended
 
March 31,
2018
 
April 1,
2017
Beginning balance
$
36,149

 
$
15,949

Additions related to current period sales
24,290

 
16,135

Warranty costs incurred in the current period
(24,212
)
 
(15,105
)
Accruals resulting from acquisitions
179

 
14,314

Adjustments to accruals related to foreign exchange and other
1,073

 
(507
)
Ending balance
$
37,479

 
$
30,786

 
Other long-term liabilities consist of the following (in thousands):

20


 
March 31,
2018
 
September 30,
2017
Long-term taxes payable
$
60,259

 
$
35,866

Deferred compensation
37,137

 
34,160

Deferred tax liabilities
45,360

 
45,373

Deferred revenue
4,724

 
4,765

Asset retirement obligations liability
5,078

 
5,382

Defined benefit plan liabilities
41,719

 
39,454

Other long-term liabilities
1,006

 
1,390

Total other long-term liabilities
$
195,283

 
$
166,390

 

9.     BORROWINGS
 
With the March 8, 2018 acquisition of OR Laser, we assumed several term loans having an aggregate principal amount of $1.9 million as of March 31, 2018.

On November 4, 2016, we repaid the outstanding balance, plus accrued interest, on our former domestic line of credit and terminated the $50.0 million credit facility with Union Bank of California. We assumed two term loans having an aggregate principal amount of $15.3 million as of November 7, 2016 and several lines of credit totaling approximately $18.1 million with the completion of the Rofin acquisition.

On November 7, 2016 (the "Closing Date"), we entered into a Credit Agreement by and among us, Coherent Holding BV & Co. K.G. (formerly Coherent Holding GmbH), as borrower (the “Borrower”), and certain of our direct and indirect subsidiaries from time to time party thereto, as guarantors, the lenders from time to time party thereto, Barclays Bank PLC, as administrative agent and an L/C Issuer, Bank of America, N.A., as an L/C Issuer, and MUFG Union Bank, N.A., as an L/C Issuer (the "Credit Agreement"). The Credit Agreement provided for a 670.0 million Euro senior secured term loan facility (the "Euro Term Loan") and a $100.0 million senior secured revolving credit facility (the "Revolving Credit Facility") with a $30.0 million letter of credit sublimit and a $10.0 million swing line sublimit. The Borrower may increase the aggregate revolving commitments or borrow incremental term loans in an aggregate principal amount not to exceed the sum of $150.0 million and an amount that would not cause the senior secured net leverage ratio to be greater than 2.75 to 1.00, subject to certain conditions, including obtaining additional commitments from the lenders then party to the Credit Agreement or new lenders. On November 7, 2016, the Borrower borrowed the full 670.0 million Euros under the Euro Term Loan and its proceeds were used to finance the acquisition of Rofin and pay related fees and expenses. On November 7, 2016, we also used 10.0 million Euros of the capacity under the Revolving Credit Facility for the issuance of a letter of credit.

The terms of the Credit Agreement require the Borrower to prepay the term loans in certain circumstances, including from excess cash flow beyond a threshold amount, from the receipt of proceeds from certain dispositions or from the incurrence of certain indebtedness, and from extraordinary receipts resulting in net cash proceeds in excess of $10.0 million in any fiscal year. The Borrower has the right to prepay loans under the Credit Agreement in whole or in part at any time without premium or penalty, subject to customary breakage costs. Revolving loans may be borrowed, repaid and reborrowed until the fifth anniversary of the Closing Date, at which time all outstanding revolving loans must be repaid. The Euro Term Loan matures on the seventh anniversary of the Closing Date, at which time all outstanding principal and accrued and unpaid interest on the Euro Term Loan must be repaid.

In the first and second quarters of fiscal 2018 and during fiscal 2017, we made voluntary principal payments of 75.0 million Euros, 60.0 million Euros and 150.0 million Euros, respectively, on the Euro Term Loan. As of March 31, 2018, the outstanding principal amount of the Euro Term Loan was 375.0 million Euros. As of March 31, 2018, the outstanding principal amount of the Revolving Credit Facility was 10.0 million Euros.

Loans under the Credit Agreement bear interest, at the Borrower’s option, at a rate equal to either (i)(x) in the case of calculations with respect to U.S. Dollars or certain other alternative currencies, the London interbank offered rate (the “LIBOR”) or (y) in the case of calculations with respect to the Euro, the euro interbank offered rate ("EURIBOR" and, together with LIBOR, the "Eurocurrency Rate") or (ii) a base rate (the “Base Rate”) equal to the highest of (x) the federal funds rate, plus 0.50%, (y) the prime rate then in effect and (z) the Eurocurrency Rate for loans denominated in U.S.

21


dollars applicable to a one-month interest period, plus 1.0%, in each case, plus an applicable margin. The applicable margin for Euro Term Loan borrowed as Eurocurrency Rate loans, is 3.50% initially, and following the first anniversary of the Closing Date ranges from 3.50% to 3.00% depending on the consolidated total gross leverage ratio at the time of determination. For Euro Term Loan borrowed as Base Rate loans, the applicable margin initially is 2.50%, and following the first anniversary of the Closing Date ranges from 2.50% to 2.00% depending upon the consolidated total gross leverage ratio at the time of determination. The applicable margin for revolving loans borrowed as Eurocurrency Rate loans, ranges from 4.25% to 3.75%, and for revolving loans borrowed as Base Rate loans, ranges from 3.25% to 2.75%, in each case, based on the consolidated total gross leverage ratio at the time of determination. Interest on Base Rate Loans is payable quarterly in arrears. Interest on Eurocurrency Rate loans is payable at the end of the applicable interest period (or at three month intervals if the interest period exceeds three months). Interest periods for Eurocurrency Rate loans may be, at the Borrower’s option, one, two, three or six months.

On May 8, 2017, we entered into Amendment No. 1 and Waiver (the "Repricing Amendment") to the Credit Agreement to, among other things, (i) reduce the applicable interest rate margins with respect to the Euro Term Loans to 1.25% for Euro Term Loans maintained as Base Rate loans and 2.25% for Euro Term Loans maintained as Eurocurrency Rate loans, with stepdowns to 1.00% and 2.00%, respectively, available after May 8, 2018 if the consolidated total gross leverage ratio for Coherent and its restricted subsidiaries is less than 1.50:1.00 and (ii) extend the period during which a prepayment premium may be required for a repricing transaction until six months after the effective date of the Repricing Amendment. In connection with the execution of the Repricing Amendment, we paid arrangement fees of approximately $0.5 million in fiscal 2017, as well as certain fees and expenses of the administrative agent and the lenders, in accordance with the terms of the Credit Agreement.

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

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

The Credit Agreement contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations, and negative covenants, including covenants limiting the ability of us and our subsidiaries to, among other things, incur debt, grant liens, make investments, make certain restricted payments, transact with affiliates, and sell assets. The Credit Agreement also requires us and our subsidiaries to maintain a senior secured net leverage ratio as of the last day of each fiscal quarter of less of than or equal to 3.50 to 1.00. The Credit Agreement contains customary events of default that include, among other things, payment defaults, cross defaults with certain other indebtedness, violation of covenants, inaccuracy of representations and warranties in any material respect, change in control of us and the Borrower, judgment defaults, and bankruptcy and insolvency events. If an event of default exists, the lenders may require the immediate payment of all Obligations, as defined in the Credit Agreement, and may exercise certain other rights and remedies provided for under the Credit Agreement, the other loan documents and applicable law. The acceleration of such obligations is automatic upon the occurrence of a bankruptcy and insolvency event of default. We were in compliance with all covenants at March 31, 2018.

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

Additional sources of cash available to us were international currency lines of credit and bank credit facilities totaling $31.7 million as of March 31, 2018, of which $25.0 million was unused and available. These unsecured international credit

22


facilities were used in Europe and Japan during the first six months of fiscal 2018. As of March 31, 2018, we had utilized $6.7 million of the international credit facilities as guarantees in Europe.

Short-term borrowings and current portion of long-term obligations consist of the following (in thousands):
 
March 31,
2018
 
September 30,
2017
Current portion of Euro Term Loan (1)
$
4,119

 
$
3,230

1.3% Term loan due 2024
1,541

 
1,477

1.0% State of Connecticut term loan due 2023
373

 
371

OR Laser loans
1,389

 

Total short-term borrowings and current portion of long-term obligations
$
7,422

 
$
5,078

(1) Net of debt issuance costs of $4.1 million and $4.7 million at March 31, 2018 and September 30, 2017, respectively.

Long-term obligations consist of the following (in thousands):
 
March 31,
2018
 
September 30,
2017
Euro Term Loan due 2024 (1)
$
439,093

 
$
578,356

1.3% Term loan due 2024
8,476

 
8,865

1.0% State of Connecticut term loan due 2023
1,593

 
1,780

OR Laser loans
491

 

Total long-term obligations
$
449,653

 
$
589,001

(1) Net of debt issuance costs of $14.9 million and $20.4 million at March 31, 2018 and September 30, 2017, respectively.

Contractual maturities of our debt obligations as of March 31, 2018 are as follows (in thousands):
 
Amount
2018 (remainder)
$
6,529

2019
10,280

2020
10,279

2021
10,272

2022
10,264

2023
10,127

Thereafter
418,351

Total
$
476,102



10.  STOCK-BASED COMPENSATION
 
Fair Value of Stock Compensation
 
We recognize compensation expense for all share based payment awards based on the fair value of such awards. The expense is recognized on a straight-line basis over the respective requisite service period of the awards.
 

23


Determining Fair Value
 
The fair values of shares purchased under the Employee Stock Purchase Plan (“ESPP”) for the three and six months ended March 31, 2018 and April 1, 2017, respectively, were estimated using the following weighted-average assumptions:
 
 
Employee Stock Purchase Plan
 
 
Three Months Ended
 
Six Months Ended
 
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Expected life in years
 
0.5

 
0.5

 
0.5

 
0.5

Expected volatility
 
51.8
%
 
25.2
%
 
50.0
%
 
28.5
%
Risk-free interest rate
 
1.30
%
 
0.50
%
 
1.26
%
 
0.48
%
Expected dividend yield
 
%
 
%
 
%
 
%
Weighted average fair value per share
 
$
76.30

 
$
22.64

 
73.64

 
$
23.01


There were no stock options granted during the three and six months ended March 31, 2018 and April 1, 2017.

We grant performance restricted stock units to officers and certain employees. The performance restricted stock unit agreements provide for the award of performance restricted stock units with each unit representing the right to receive one share of our common stock to be issued after the applicable award vesting period. The final number of units awarded, if any, for these performance grants will be determined as of the vesting dates, based upon our total shareholder return over the performance period compared to the Russell 1000 Index and could range from no units to a maximum of twice the initial award units. The weighted average fair value for these performance units was determined using a Monte Carlo simulation model incorporating the following weighted average assumptions:
 
 
Six Months Ended
 
 
March 31, 2018
 
April 1, 2017
Risk-free interest rate
 
1.7
%
 
1.3
%
Volatility
 
37.0
%
 
31.0
%
Weighted average fair value
 
$315.05
 
$163.17

We recognize the estimated cost of these awards, as determined under the simulation model, over the related service period of approximately 3 years, with no adjustment in future periods based upon the actual shareholder return over the performance period.
 
Stock Compensation Expense
 
The following table shows total stock-based compensation expense and related tax benefits included in the condensed consolidated statements of operations for the three and six months ended March 31, 2018 and April 1, 2017 (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
 
Cost of sales
 
$
1,018

 
$
778

 
$
2,006

 
$
1,738

 
Research and development
 
872

 
597

 
1,540

 
1,650

 
Selling, general and administrative
 
6,520

 
5,308

 
11,940

 
12,950

 
Income tax benefit
 
(1,175
)
 
(1,815
)
 
(2,784
)
 
(3,304
)
 
 
 
$
7,235

 
$
4,868

 
$
12,702

 
$
13,034

 

As a result of our acquisition of Rofin on November 7, 2016, we made a payment of $15.3 million due to the cancellation of options held by employees of Rofin. The payment was allocated between total estimated merger consideration of $11.1 million and post-merger stock-based compensation expense of $4.2 million, recorded in the three months ended December 31, 2016, based on the portion of the total service period of the underlying options that have not been completed by the merger date.


24


During the three and six months ended March 31, 2018, $1.2 million and $2.2 million, respectively, was capitalized into inventory for all stock plans, $1.0 million and $2.0 million, respectively, was amortized to cost of sales and $1.4 million remained in inventory at March 31, 2018. During the three and six months ended April 1, 2017, $0.9 million and $1.7 million, respectively, was capitalized into inventory for all stock plans, $0.8 million and $1.5 million, respectively, was amortized to cost of sales and $1.0 million remained in inventory at April 1, 2017
 
At March 31, 2018, the total compensation cost related to unvested stock-based awards granted to employees under our stock plans but not yet recognized was approximately $51.1 million. We do not estimate forfeitures. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.6 years.

Stock Awards Activity

The following table summarizes the activity of our time-based and performance restricted stock units for the first six months of fiscal 2018 (in thousands, except per share amounts):
 
Time Based Restricted Stock Units
 
Performance Restricted Stock Units
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested stock at September 30, 2017
399

 
$
118.83

 
176

 
$
105.34

Granted
96

 
257.11

 
78

 
315.05

Vested (1)
(212
)
 
88.02

 
(95
)
 
70.57

Forfeited
(5
)
 
112.55

 

 

Nonvested stock at March 31, 2018
278

 
$
155.14

 
159

 
$
155.76


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


11.      COMMITMENTS AND 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. On May 14, 2013, IMRA America (“Imra”) filed a complaint for patent infringement against two of our subsidiaries in the Regional Court of Düsseldorf, 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, now expired in all jurisdictions, 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. Following the filing of the infringement suit, our subsidiaries filed a separate nullity action with the Federal Patent Court in Munich, Germany requesting that the court hold that the Patent was invalid based on prior art. On October 1, 2015, the Federal Patent Court ruled that the German portion of the Patent was invalid. Imra has appealed this decision to the Federal Court of Justice, the highest civil jurisdiction court in Germany. On March 27, 2018, the Federal Court of Justice dismissed Imra's appeal effectively ending the case in favor of Coherent.

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.

On November 7, 2016, we entered into a Credit Agreement, which was amended on May 8, 2017. See Note 9, "Borrowings" for further discussion of the issuance of the financing.


12.      STOCK REPURCHASES


25


On February 6, 2018, our board of directors authorized a buyback program authorizing the Company to repurchase up to $100.0 million of our common stock from time to time through January 31, 2019. No repurchases were made in the three and six months ended March 31, 2018.


13.  EARNINGS PER SHARE
 
Basic earnings per share is computed based on the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive employee stock awards, including stock options, restricted stock awards and stock purchase plan contracts, using the treasury stock method.
 
The following table presents information necessary to calculate basic and diluted earnings per share (in thousands, except per share data): 
 
Three Months Ended
 
Six Months Ended
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Weighted average shares outstanding—basic
24,761

 
24,496

 
24,698

 
24,422

Dilutive effect of employee stock awards
249

 
261

 
320

 
278

Weighted average shares outstanding—diluted
25,010

 
24,757

 
25,018

 
24,700

 
 
 
 
 
 
 
 
Net income from continuing operations
$
65,302

 
$
42,188

 
107,205

 
72,886

Loss from discontinued operations, net of income taxes

 
(343
)
 
(2
)
 
(633
)
Net income
$
65,302

 
$
41,845

 
$
107,203

 
72,253

 
A total of 32,221 and 25,864 potentially dilutive securities have been excluded from the diluted share calculation for the three and six months ended March 31, 2018, respectively, as their effect was anti-dilutive.

A total of 0 and 2,042 potentially dilutive securities have been excluded from the diluted share calculation for the three and six months ended April 1, 2017, respectively, as their effect was anti-dilutive.


 
14.  OTHER INCOME (EXPENSE)
 
Other income (expense) is as follows (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Foreign exchange gain (loss)
$
(3,175
)
 
$
(2,732
)
 
$
(5,410
)
 
$
10,367

Gain on deferred compensation investments, net
721

 
1,747

 
2,575

 
1,695

Other
229

 
(407
)
 
386

 
(461
)
Other - net
$
(2,225
)
 
$
(1,392
)
 
$
(2,449
)
 
$
11,601



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


26


On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act contains significant changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21.0% and implementing a territorial tax system. Since we have a September year-end, the lower U.S. corporate income tax rate will be phased in. Our U.S. federal blended tax rate will be approximately 24.5% for our fiscal year ending September 29, 2018 and 21.0% for subsequent fiscal years.

The reduction of the U.S. corporate income tax rate will cause us to adjust our U.S. deferred tax assets and liabilities to the lower U.S. federal tax rate of 21.0%. There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposes a one-time deemed repatriation tax on our foreign subsidiaries’ historical earnings. These transitional impacts resulted in a provisional net charge of $41.7 million for the quarter ended December 30, 2017. This is comprised of an estimated deemed repatriation tax charge of $48.7 million less a previously recorded deferred tax liability of $20.3 million for anticipated repatriation of our investment in a foreign subsidiary, plus an estimated deferred tax remeasurement charge of $13.3 million.

The Tax Act changes are broad and complex. The final calculation of impacts of the Tax Act may materially differ from the above provisional estimates. Among other things, this may be due to changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the transitional impacts. The Securities Exchange Commission has issued guidance under Staff Accounting Bulletin No. 118 directing taxpayers to record impacts of the Tax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting under ASC 740. The guidance allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. In the current quarter the IRS issued several notices clarifying the provisions of the Tax Act and the IRS is expected to issue more clarifying guidance in the future. The provisional amounts have not been modified since the quarter ended December 30, 2017 estimates. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending September 29, 2018.

The Tax Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. In general, this income will effectively be taxed at a 10.5% tax rate reduced by any available current year foreign tax credits. This provision is effective for taxable years beginning after December 31, 2017. Because of the complexity of the new GILTI tax rules, we continue to evaluate this provision of the Tax Act including the associated forecast of GILTI and the application of ASC 740, Income Taxes. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into our measurement of our deferred taxes (the “deferred method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on not only our current structure and estimated future results of global operations, but also our intent and ability to modify our structure. We are currently in the process of analyzing our structure and, as a result, are not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred tax on GILTI.

Our effective tax rates on income from continuing operations before income taxes for the three and six months ended March 31, 2018 were 28.4% and 44.2%, respectively. Our effective tax rate for the three months ended March 31, 2018 was higher than the effective U.S. federal blended tax rate of 24.5% primarily due to the impact of income subject to foreign tax rates that are higher than the U.S. tax rates. This amount is partially offset by the benefit of foreign tax credits, the benefit of federal research and development tax credits, the benefit of a domestic manufacturing deduction under IRC Section 199 and the Singapore tax exemption. Our effective tax rate for the six months ended March 31, 2018 was higher than the effective U.S. federal blended tax rate of 24.5% primarily due to the Tax Act one-time mandatory deemed repatriation transition tax, the impact of income subject to foreign tax rates that are higher than the U.S. tax rates, the remeasurement of deferred tax assets and liabilities based on the newly enacted U.S. federal tax rate of 21.0%, stock-based compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m). These amounts are partially offset by the excess tax benefits from stock award exercises and restricted stock unit vesting, the benefit of foreign tax credits, the benefit of federal research and development tax credits, the benefit of a domestic manufacturing deduction under IRC Section 199 and the Singapore tax exemption.

Our effective tax rates on income from continuing operations before income taxes for the three and six months ended April 1, 2017 were 30.7% and 32.6%, respectively. Our effective tax rates for the three and six months ended April 1, 2017 were lower than the U.S. federal rate of 35.0% primarily due to differences related to the benefit of income subject to

27


foreign tax rates that are lower than U.S. tax rates including the Singapore tax exemption, the benefit of foreign tax credits and the benefit of federal research and development tax credits. These amounts are partially offset by Rofin transaction costs not deductible for tax purposes, tax costs of Rofin restructuring, ASC 740-10 (formerly FIN48) tax liabilities for transfer pricing, stock-based compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m).

Determining the consolidated provision for income taxes, income tax liabilities and deferred tax assets and liabilities involves judgment. We calculate and provide for income taxes in each of the tax jurisdictions in which we operate, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.

We adopted ASU No. 2016-09 in the first quarter of fiscal 2018. As a result of adopting the new standard, excess tax benefits from equity-based compensation are now reflected in the condensed consolidated statements of operations as a component of the provision for income taxes. The adoption of ASU No. 2016-09 resulted in a decrease in our provision for income taxes of $0.3 million and $12.8 million for the three and six months ended March 31, 2018, respectively, due to the recognition of excess tax benefits for options exercised and the vesting of equity awards.

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 fiscal 2011 are closed. In September 2017, the Internal Revenue Service (IRS) completed its audit of Coherent, Inc.’s fiscal 2013 tax return with no adjustment. The extension of the statutes of limitations for its fiscal 2011 and 2012 tax returns will be closed on June 30, 2018. In our major foreign jurisdictions and our major state jurisdictions, the years prior to fiscal 2011 and 2013, 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 July 2015 and March 2016, Coherent Kaiserslautern GmbH (formerly Lumera Laser GmbH) received tax audit notices for the fiscal years 2010 to 2014. The audit began in August 2015. We acquired the shares of Lumera Laser GmbH in December 2012 and, pursuant to the terms of the acquisition agreement, we should not have responsibility for any assessments related to the pre-acquisition period. In July, 2016, Coherent Holding GmbH and Coherent Deutschland GmbH each received a tax audit notice for the fiscal years 2011 to 2014. The audit began in August 2016. In November 2016, Coherent GmbH, Coherent LaserSystems GmbH & Co. KG and Coherent Germany GmbH received audit notices for the period that they were in existence during the fiscal years 2011 through 2014. The audit work began in January 2017. In the fourth quarter of fiscal 2017, all German tax audits were extended to fiscal 2015 and are currently in progress. Rofin-Sinar Technologies Inc (now, “Rofin-Sinar Technologies LLC”) and Rofin-Baasel Italiana S.R.L. (now, “Coherent Italia SRL”) received tax audit notices for the fiscal year 2016 in January and April, 2018, respectively. Both audits are currently in progress.

We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions and management believes that it has adequately provided reserves for any adjustments that may result from tax examinations.


16.  DEFINED BENEFIT PLANS
 
Components of net periodic cost were as follows for the three and six months ended March 31, 2018 and April 1, 2017 (in thousands):


28


 
Three Months Ended
 
Six Months Ended
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Service cost
$
362

 
$
458

 
$
827

 
$
843

Interest cost
160

 
262

 
355

 
450

Expected return on plan assets
(99
)
 
(184