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    COHR   US1924791031

COHERENT, INC.

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05/11COHERENT : Fiscal Q2 Earnings Snapshot
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05/11COHERENT INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)
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05/11Earnings Flash (COHR) COHERENT Reports Q2 EPS $1.70
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COHERENT INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

11/30/2021 | 06:04am EDT
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 under Item 8 of 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."
We have applied the FAST Act Modernization and Simplification of Regulation S-K,
which limits the discussion to the two most recent fiscal years. This discussion
and analysis deals with comparisons of material changes in the consolidated
financial statements for fiscal 2021 and fiscal 2020. For the comparison of
fiscal 2020 and fiscal 2019, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of our 2020 Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on
December 1, 2020.
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 or liquidity that is calculated in accordance with generally
accepted accounting principles.
                                                                         Fiscal
                                                                 2021             2020

Net Sales-OEM Laser Sources                                  $  913,636       $  758,929
Net Sales-Industrial Lasers & Systems                        $  573,832       $  470,070

Gross Profit as a Percentage of Net Sales-OEM Laser Sources 45.4 % 46.0 % Gross Profit as a Percentage of Net Sales-Industrial Lasers & Systems

                                                          28.2  %          14.5  %

Research and Development Expenses as a Percentage of Net Sales

                                                               8.4  %           9.4  %
Loss Before Income Taxes                                     $ (115,538)      $ (442,723)
Net Cash Provided by Operating Activities                    $   72,938       $  206,907
Free Cash Flow                                               $   (9,625)      $  141,988
Days Sales Outstanding in Receivables                                60               65
Annualized Fourth Quarter Inventory Turns                           2.4              1.9
Net Loss as a Percentage of Net Sales                              (7.2) %         (33.7) %
Adjusted EBITDA as a Percentage of Net Sales                       17.3  %          12.3  %


Definitions and analysis of these performance indicators are as follows:
Net Sales
Net sales include sales of lasers, laser systems, laser components, related
accessories and services. Net sales for fiscal 2021 increased 20.4% in our OLS
segment and increased 22.1% in our ILS segment from fiscal 2020. 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 OLS decreased to 45.4% in fiscal 2021 from 46.0% in
fiscal 2020. Gross profit percentage for ILS increased to 28.2% in fiscal 2021
from 14.5% in fiscal 2020. For a description of the reasons for changes in gross
profit refer to the "Results of Operations" section below.
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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 decreased to 8.4% in fiscal 2021 from 9.4% in
fiscal 2020. For a description of the reasons for changes in R&D spending refer
to the "Results of Operations" section below.
Net Cash Provided by Operating Activities
Net cash provided by operating activities as reflected 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 is 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. Net cash provided by operating activities in fiscal
2021 was unfavorably impacted by merger and acquisition costs, including our
payment of a termination fee of $217.6 million to Lumentum. For a description of
the reasons for changes in Net Cash Provided by Operating Activities refer to
the "Liquidity and Capital Resources" section below.
Free Cash Flow
Free cash flow represents net cash provided by operating activities reduced by
purchases of property and equipment, both as reflected on our Consolidated
Statements of Cash Flows. We believe that free cash flow is an important
performance indicator because it is a measure of cash generation after
accounting for cash outflows to support operations and maintain capital assets.
Cash generation over the long term is essential to maintaining a healthy
business and providing funds to help fuel growth. Free cash flow in fiscal 2021
was unfavorably impacted by merger and acquisition costs, including our payment
of a termination fee of $217.6 million to Lumentum. For a description of the
reasons for changes in free cash flow refer to the "Liquidity and Capital
Resources" section below, where we discuss the reasons for changes in net cash
provided by operating and investing activities.
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 a 360 day year. 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 2021 improved to 60 days as
compared to 65 days in fiscal 2020. This improvement was primarily due to
increased collections of past due receivables, primarily in China, Japan and
Europe, improved linearity with a lower concentration of sales in September 2021
compared to September 2020 and the favorable impact of foreign exchange rates.
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. Our annualized fourth quarter
inventory turns for fiscal 2021 increased to 2.4 turns from 1.9 turns in fiscal
2020 primarily due to lower inventory levels, primarily in our OLS segment, due
to higher flat panel display shipments and higher service parts demand partially
offset by lower inventory provisions for excess and obsolete inventory in
certain ILS business units and improved manufacturing absorption in both
segments.
Adjusted EBITDA as a Percentage of Net Sales
We define adjusted EBITDA as operating income adjusted for depreciation,
amortization, stock-based compensation expense, restructuring costs, and certain
other non-operating income and expense items, such as merger and acquisition
costs. Key initiatives to reach our goals for EBITDA improvements include
utilization of our manufacturing locations in Asia, optimizing our supply chain
and continued leveraging of our infrastructure.
We utilize a number of different financial measures, both GAAP and non-GAAP,
such as free cash flow and 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
free cash flow and adjusted EBITDA as
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a percentage of sales in order to enhance investors' understanding of our ongoing operations. These measures are used by some investors when assessing our performance. Below is the reconciliation of our net cash provided by operating activities to our free cash flow:

                                                     Fiscal
                                               2021          2020

Net cash provided by operating activities $ 72,938 $ 206,907 Less: Purchases of property and equipment 82,563 64,919 Free cash flow

                              $ (9,625)     $ 141,988



Below is the reconciliation of our net income (loss) as percentage of net sales to our adjusted EBITDA as a percentage of net sales:

                                                        Fiscal
                                                   2021        2020

Net income (loss) as a percentage of net sales (7.2) % (33.7) % Income tax benefit

                                (0.5) %      (2.3) %
Interest and other income (expense), net           1.4  %       1.5  %
Depreciation and amortization                      3.7  %       6.3  %
Purchase accounting step-up                        0.1  %         -  %
Restructuring charges and other                    1.2  %       0.3  %

Merger and acquisition costs                      15.8  %         -  %
Goodwill and other impairment charges                -  %      36.6  %
Stock-based compensation                           2.8  %       3.6  %

Adjusted EBITDA as a percentage of net sales 17.3 % 12.3 %




SIGNIFICANT EVENTS
Merger Agreement and related fees
See "Recent Events - Merger Agreement and Termination Fee" in Item 1 of this
report for a description of the Agreement and Plan of Merger we entered into on
January 18, 2021, and the Amended Lumentum Agreement we entered into on March 9,
2021 with Lumentum, Lumentum Merger Sub I and Lumentum Merger Sub II, the
termination of the Amended Lumentum Agreement and the payment of a termination
fee to Lumentum in the second quarter of fiscal 2021, as well as the II-VI
Merger Agreement we entered into with II-VI and II-VI Merger Sub on March 25,
2021.
The termination fee, in addition to other costs related to the merger agreements
is included in merger and acquisition costs in our consolidated statements of
operations.
Coronavirus pandemic (COVID-19)
In December 2019, COVID-19 cases were reported, and in January 2020, the World
Health Organization ("WHO") declared it a Public Health Emergency of
International Concern. On February 28, 2020, the WHO raised its assessment of
the COVID-19 threat from high to very high at a global level due to the
continued increase in the number of cases and affected countries, and on March
11, 2020, the WHO characterized COVID-19 as a pandemic. In an effort to contain
COVID-19 or slow its spread, governments around the world have enacted various
measures from time to time, including orders to close all businesses not deemed
"essential," isolate residents in their homes or places of residence, and
practice social distancing at and away from work. These actions and the global
health crisis caused by COVID-19 will continue to negatively impact global
business activity, which could negatively affect our revenue and results of
operations. Each of the regions where we generate a majority of our revenue
including Asia, Europe, and North America have been and may continue to be
impacted by COVID-19 in the future. The timing and extent of impact related to
COVID-19 varies by country and region.
In determining the impact of the COVID-19 pandemic in relation to our net sales,
in fiscal 2020 we compared our actual results to our most recently published
forecast and the net sales guidance range communicated in our quarterly earnings
call.
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This forecast has been adjusted for known direct impacts to our bookings and net
sales from COVID-19 and other factors. Using this criteria, we estimate that our
sales for fiscal 2020 were negatively impacted by the COVID-19 pandemic by
approximately $40.0 million. We believe the impact on fiscal 2021 sales was
immaterial.
During fiscal 2020 and 2021, the global demand environment was uncertain at
times given the effects of COVID-19 on many businesses, including manufacturing
facilities and customer confidence around the world. While we saw a partial
recovery in order volumes in China in the latter half of March and the third
quarter of fiscal 2020, this coincided with declining bookings in other regions,
particularly in North America, and to a lesser extent in Europe and other
countries in Asia. Beginning in the fourth quarter of fiscal 2020 and continuing
in fiscal 2021, we saw global demand recover in all regions and begin to return
to a more normalized demand trend. However, we cannot predict future resurgences
of COVID-19, particularly in light of the recent Delta variant, and the impact
that it may have on future demand for our products and services, particularly
given the recent shutdown measures taken in certain countries in Europe and
Asia.
Currently, our major production facilities in Europe, Southeast Asia, and the
United States remain open. At all of our locations, we have transitioned from
business continuity plans to return-to-operations plans while continuing to
maintain high standards of employee safety and sanitization protocols. Our
Return to Operations Plans have a phased approach with the primary focus on
employee safety, with a continuing requirement for "working from home" for other
members of our workforce wherever possible. We have vertically integrated
manufacturing, and many of the components produced at certain of our facilities
supply other company facilities, are single sourced internally and are not
available from third-party suppliers (for example our semiconductor diodes are
manufactured in Sunnyvale, California). While we do maintain a safety stock of
critical components at our various locations, the scope, timing, and duration of
various government restrictions to address the COVID-19 pandemic could impact
our internal supply chain. We have implemented certain policy changes to help
support our employees impacted by COVID-19. These measures have and will
continue to increase the cost of our operations but the magnitude and length of
time of this impact is difficult to quantify at this time and may continue to be
difficult to estimate in the future. If our sales are reduced for an extended
period or if our production output falls because of government restrictions, we
may be required to reduce payroll-related costs and other expenses in the future
through layoffs or furloughs, even though we have not done so to date.
We continue to experience various supply disruptions throughout the supply chain
and are working closely with our supply base to mitigate or remove constraints
as they become known. Supply constraints due to COVID-19 may impact the speed
with which we are able to ramp up production if we experience strong demand on
certain products. We also continue to face supply chain constraints primarily
related to logistics, including available air cargo space and higher freight
rates. Available cargo space on flights between the U.S. and Europe, and Europe
and Asia has been and remains limited as a result of the impact from COVID-19
and government and business responses to it, and this has increased shipping
time and costs. In addition, shipments between countries have been more severely
impacted by COVID-19 and we are experiencing delays due to additional checks at
border crossings, including within Europe and Asia. There has also been sporadic
restrictions on individual travel between certain states in the United States of
America as well. Government actions related to COVID-19 come on the heels of
trade tensions between the United States and China, which may continue. We
believe we have the ability to meet the near-term demand for our products, but
the situation is fluid and subject to change.
We continue to monitor the rapidly evolving conditions and circumstances as well
as guidance from international and domestic authorities, including public health
authorities, and we may need to take additional actions based on their
recommendations. There is considerable uncertainty regarding the impact on our
business stemming from current measures and potential future measures that could
restrict access to our facilities, limit our manufacturing and support
operations, and place restrictions on our workforce, customers, and suppliers.
The measures implemented by various authorities related to the COVID-19 outbreak
have caused us to change our business practices including those related to where
employees work, the distance between employees in our facilities, limitations on
in-person meetings between employees and with customers, suppliers, service
providers, and stakeholders as well as restrictions on some shipping activities,
business travel to domestic and international locations or to attend trade
shows, investor conferences and other events. In March of 2020, we formed a
COVID Steering Committee to, among other things, propose, discuss, and implement
best practices in response to COVID-19. The COVID Steering Committee meets
weekly and more often if required. All of our executive officers and many of our
key senior-level employees are members of the COVID Steering Committee.
The COVID-19 pandemic has significantly increased worldwide and regional
economic uncertainty and decreased demand for our products in many markets we
serve, which could continue for an unknown period of time. In these
circumstances, there may be developments outside of our control, including the
length and extent of the COVID-19 outbreak, government-imposed measures and our
ability to ship as well as install products and/or service installed products
that may require us to adjust our operating plans. As such, given the dynamic
nature of this situation, we cannot estimate with certainty the future impacts
of COVID-19 on our financial condition, results of operations or cash flows.
However, we do expect that it could have an adverse impact on our revenue as
well as our overall profitability and could lead to an increase in inventory
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provisions, allowances for credit losses, and a volatile effective tax rate
driven by changes in the mix of earnings across our markets.
See "Risks Related to COVID-19 Pandemic" included under the heading "Risk
Factors" in Item 1A of this annual report regarding the impact of COVID-19.
Goodwill and other impairment charges
Based on our internal projections and the preparation of our financial
statements for the quarter ended April 4, 2020, and considering the
then-expected decrease in demand due to the COVID-19 pandemic and other factors,
we believed that the fair value of our ILS reporting unit might no longer have
exceeded its carrying value and performed an interim goodwill impairment test on
the ILS and OLS reporting units. Based on the estimated fair value of the ILS
reporting unit, we recorded non-cash pre-tax goodwill impairment charges of
$327.2 million in the quarter ended April 4, 2020. In addition, we performed
impairment tests on the long-lived assets allocated to the asset group of the
ILS reporting unit, including intangible assets, property, plant and equipment
and right of use ("ROU") assets as of April 4, 2020 and recorded non-cash
pre-tax charges related to the impairment intangible assets, property, plant and
equipment and ROU assets of the ILS reporting unit of $33.9 million, $85.6
million and $1.8 million, respectively, in the quarter ended April 4, 2020. See
Note 8, "Goodwill and Intangible Assets" and Note 11, "Leases" in the Notes to
Consolidated Financial Statements under Item 8 of this annual report.
Restructuring
In June 2019, we announced our plans to exit a portion of our High Power Fiber
Laser ("HPFL") business and consolidate all HPFL manufacturing and engineering
functions in our Tampere, Finland facility by transferring certain HPFL
activities from our Hamburg, Germany facility. In conjunction with this
announcement, we recorded restructuring charges in fiscal 2019 of $19.7 million.
The charges primarily related to write-offs of excess inventory, which is
recorded in cost of sales, and estimated severance. We recorded charges of $1.1
million in fiscal 2020, primarily related to accelerated depreciation and
project management consulting. We recorded no charges related to this project in
fiscal 2021 as the project was completed in fiscal 2020.
We also vacated our leased facility in Santa Clara at the end of the lease term
on July 31, 2020 and combined operations into our owned Santa Clara
headquarters. We did not incur material expenses in fiscal 2019 related to this
project. In fiscal 2021 and 2020, we incurred costs of $0.1 million and $1.5
million, respectively, primarily related to accelerated depreciation, and
completed the project in fiscal 2021.
In the fourth quarter of fiscal 2020, we began a restructuring program in our
ILS segment which includes management reorganizations, the planned closure of
multiple manufacturing sites, and the right-sizing of global sales, service,
order admin, marketing communication and certain administrative functions, among
others. In fiscal 2020, we incurred costs of $2.6 million, primarily related to
severance. In fiscal 2021, we incurred costs of $12.2 million, primarily related
to write-offs of excess inventory, accruals for vendor commitments and warranty
provisions, which are recorded in cost of sales, estimated severance, facility
exit costs and accelerated depreciation.
See Note 19, "Restructuring Charges" in the Notes to Consolidated Financial
Statements under Item 8 of this annual report for further discussion of the
restructuring charges.
Acquisitions
On April 19, 2021, we acquired Electro-Optics Technology, Inc. ("EOT") for
approximately $29.3 million, excluding transaction costs. EOT is a specialized
U.S.-based components company, which we expect will enable us to vertically
integrate and improve the performance of our directed energy amplifier
technology. See Note 4, "Business Combinations" in the Notes to Consolidated
Financial Statements under Item 8 of this annual report.

RESULTS OF OPERATIONS-FISCAL 2021 AND 2020
Fiscal 2021 consisted of 52 weeks and fiscal 2020 consisted of 53 weeks.
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 statements
of operations:
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                                                              Fiscal
                                                         2021                      2020
                                                  (As a percentage of net sales)
Net sales                                                            100.0  %     100.0  %
Cost of sales                                                         61.8  %      66.6  %
Gross profit                                                          38.2  %      33.4  %
Operating expenses:
Research and development                                               8.4  %       9.4  %
Selling, general and administrative                                   20.4  %      22.0  %
Merger and acquisition costs                                          15.8  %         -  %
Goodwill and other impairment charges                                    -  %      36.7  %
Amortization of intangible assets                                      0.2  %       0.3  %
Total operating expenses                                              44.8  %      68.4  %
Loss from operations                                                  (6.6) %     (35.0) %
Other income (expense), net                                           (1.2) %      (1.0) %
Loss before income taxes                                              (7.8) %     (36.0) %
Benefit from income taxes                                             (0.6) %      (2.3) %
Net loss                                                              (7.2) %     (33.7) %



Net loss for fiscal 2021 was $106.8 million ($4.38 per diluted share). This
included after tax charges of $182.3 million for merger and acquisition costs
(primarily due to a termination fee of $217.6 million paid to Lumentum), $36.0
million of after-tax stock-based compensation expense, $10.4 million of
after-tax restructuring costs, $9.3 million of after-tax amortization of
intangible assets, $5.3 million of after-tax losses on the dissolution of our OR
Laser operations, $1.1 million of purchase accounting step-up and $13.1 million
non-recurring income tax net expense.
Net loss for fiscal 2020 was $414.1 million ($17.18 per diluted share). This
included after tax charges of $423.2 million for goodwill and other impairment,
$39.1 million of after-tax stock-based compensation expense, $21.9 million of
after-tax amortization of intangible assets, $2.1 million of after-tax
restructuring costs (net of the gain on the sale-leaseback of our Hamburg
facility), $0.7 million after-tax of accelerated compensation for our former
CEO, $0.6 million non-recurring income tax net expense and $0.9 million of
excess tax benefit for employee stock-based compensation.
Backlog
Backlog represents orders which we expect to be shipped within 12 months and the
current portion of service contracts. Orders used to compute backlog are
generally cancellable and, depending on the notice period, are subject to
rescheduling by our customers without substantial penalties. We have not
historically experienced a significant rate of cancellation or rescheduling,
however the rate of cancellations or rescheduling may increase in the future.
We had a backlog of orders shippable within 12 months of $717.1 million at
October 2, 2021.
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 2021                      Fiscal 2020
                                            Percentage                       Percentage
                                             of total                         of total
                             Amount         net sales         Amount         net sales
Microelectronics          $   664,535           44.7  %    $   538,535           43.8  %
Precision manufacturing       399,049           26.8  %        335,750           27.3  %
Instrumentation               374,075           25.2  %        300,321           24.5  %
Aerospace and defense          49,809            3.3  %         54,393            4.4  %
Total                     $ 1,487,468          100.0  %    $ 1,228,999          100.0  %



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During fiscal 2021, net sales increased by $258.5 million, or 21%, compared to
fiscal 2020, with increases in the microelectronics, instrumentation and
precision manufacturing markets partially offset by decreases in the aerospace
and defense market. The increase included higher net sales due to the negative
impact in fiscal 2020 of approximately $40.0 million from COVID-19 shelter-in
place orders and/or delays in restarting non-essential manufacturing activity at
many of our customers, primarily in the precision manufacturing, instrumentation
and aerospace and defense markets. In fiscal 2020, we continued to experience
weaker demand in the microelectronics and materials processing markets. We
finished fiscal 2021 with a positive book-to-bill ratio, in all four
end-markets, and increased backlog levels compared to fiscal 2020 across all
end-markets. Entering fiscal 2022, we believe that we are well-positioned with
our laser-based technology to benefit from technology proliferation in rapid
growth areas such as 5G, flexible OLED and MicroLED. In addition, we believe the
market for laser-based medical instrumentation, devices and procedures will
continue to grow with the aging population around the globe. We also anticipate
that technology advances will result in increased defense spending globally.
During fiscal 2021, microelectronics sales increased $126.0 million, or 23%,
compared to fiscal 2020 primarily due to increased shipments for flat panel
display (higher shipments related to ELA tools used in the flat panel display
market and higher revenues from consumable service parts), advanced packaging
and semiconductor applications, and partially due to the negative impact of
COVID-19 in fiscal 2020. In microelectronics, we expect future increases in ELA
tool shipments as Asian manufacturers improve yields and ramp manufacturing as
indicated by the fact that we have received new orders for these products in
fiscal 2021 and we expect many of these orders to ship in fiscal 2022. In
addition, it is expected that the handset market will continue to transition to
5G and newer technologies over time. This technology requires more power from
the battery which we expect will result in the handset manufacturers having to
decide between shorter talk times or placement of larger batteries in existing
form factors. Since OLED displays are much thinner than liquid crystal displays
(LCD), we believe 5G will increase demand for OLED displays to accommodate
larger batteries. In addition, we are seeing demand for laser solutions for
MicroLED pilot production. We believe that these technological demands will
allow us to continue to maintain a leadership position in flat panel display
applications. We are also seeing higher demand for semiconductor applications,
somewhat tempered by rolling blackouts in China. Demand is being driven by
continuous strength in cloud computing and data centers as well as in advanced
packaging applications driven by 5G demand for smaller geometry, better power
management and next generation printed circuit boards.
Precision manufacturing sales increased $63.3 million, or 19%, during fiscal
2021 primarily due to increased sales in materials processing components and
automotive applications, partially offset by lower shipments for machine tools
applications. The increase in fiscal 2021 was partially due to the negative
impact of COVID-19 in fiscal 2020, which was not an impact in fiscal 2021. The
Purchasing Managers Index ("PMI") is a measure of the prevailing economic trends
in manufacturing, and often correlates to materials processing sales. The
manufacturing PMI for the U.S. and Germany rose in the first few quarters of
fiscal 2021, with the U.S. and Germany hitting near record levels, followed by a
slight reduction in the fourth quarter of fiscal 2021. The fourth quarter PMI
reduction was partially due to supply chain pressures from extended lead time,
rapidly rising materials prices and recent power supply problems in China. In
addition, we saw customer demand for automobiles and production return to
pre-COVID-19 levels. Although unfavorably impacted by the global semiconductor
chip shortage, we expect continued strong demand for laser based welding
products, especially for battery applications in EVs (Electronic Vehicles).
Medical device manufacturing had record orders in fiscal 2021, with increases in
the U.S., China and Europe.
The increase in the instrumentation market of $73.8 million, or 25%, during
fiscal 2021 was primarily due to higher shipments for biomedical instrumentation
and scientific applications, as scientific applications shipments were
negatively impacted by COVID-19 in fiscal 2020 due to closures of universities
as a result of COVID-19 shelter-in-place orders, as well as higher shipments for
medical applications. We supply lasers and optical systems for biomedical
instrumentation applications and our lasers have been used in diagnostic
instruments in applications including gene sequencing, biomarker identification
and vaccine development. We expect demand in the scientific and government
program applications to continue to fluctuate from quarter to quarter.
Sales in the aerospace and defense market decreased $4.6 million, or 8%, during
fiscal 2021 primarily due to lower optics shipments in defense and aerospace
applications. We anticipate the defense market, especially amplifiers for
directed energy and specialty optics for aerospace, to be a multi-year growth
opportunity for us.
The timing for shipments of our higher average selling price ELA tools in the
flat panel display market has historically fluctuated and is expected to
continue to fluctuate from quarter-to-quarter due to customer scheduling, market
conditions, our ability to manufacture these products and/or availability of
critical component parts and supplies. As a result, the timing to convert orders
for these products to net sales will likely fluctuate from quarter-to-quarter.
We have historically generally experienced decreased net sales in the first
fiscal quarter compared to other quarters in our fiscal year due to the impact
of time off and business closures at our facilities and those of many of our
customers due to year-
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end holidays. For example, over the past 10 years, excluding certain recovery
years, our first fiscal quarter net sales have ranged 2%-17% below the fourth
quarter of the prior fiscal years.
In fiscal 2021 and 2020, one customer accounted for 16% and 17%, respectively,
of net sales.
Segments
We are organized into two reportable operating segments: OLS and ILS. While both
segments deliver cost-effective, highly reliable photonics solutions, OLS is
focused on high performance laser sources and complex optical sub-systems,
typically used in microelectronics manufacturing, medical diagnostics and
therapeutic applications, as well as in scientific research. ILS delivers high
performance laser sources, sub-systems and machine tools primarily used for
industrial laser materials processing, serving important end markets like
automotive, machine tools, consumer goods and medical device manufacturing.
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):
                                             Fiscal 2021                      Fiscal 2020
                                                      Percentage                       Percentage
                                                       of total                         of total
                                       Amount         net sales         Amount         net sales
OEM Laser Sources (OLS)             $   913,636           61.4  %    $   758,929           61.8  %
Industrial Lasers & Systems (ILS)       573,832           38.6  %        470,070           38.2  %
Total                               $ 1,487,468          100.0  %    $ 1,228,999          100.0  %


Net sales for fiscal 2021 increased $258.5 million, or 21%, compared to fiscal
2020, with increases of $154.7 million, or 20%, in our OLS segment and increases
of $103.8 million, or 22%, in our ILS segment. The fiscal 2021 increases in both
OLS and ILS segment sales included increases due to the favorable impact of
foreign exchange rates.
The increase in our OLS segment sales in fiscal 2021, including higher sales due
to the negative impact of COVID-19 in fiscal 2020 of approximately $26.0
million, was primarily due to higher demand for flat panel display applications,
with higher revenues from consumable service parts and higher shipments of ELA
tools, as well as higher shipments for biomedical instrumentation and scientific
applications in the instrumentation market, semiconductor applications in the
microelectronics market and applications in the precision manufacturing market.
The increased sales were partially offset by lower shipments for applications in
the aerospace and defense market.
The increase in our ILS segment sales from fiscal 2020 to fiscal 2021, including
higher sales due to the negative impact of COVID-19 in fiscal 2020 of
approximately $14.0 million, was primarily due to higher sales to the precision
manufacturing market, primarily for materials processing components and
automotive applications, higher sales for advanced packaging applications within
the microelectronics market and higher sales to the instrumentation market.
Gross Profit
Consolidated
Our gross profit percentage increased by 4.8% to 38.2% in fiscal 2021 from 33.4%
in fiscal 2020. The increase included 1.6% lower amortization of intangibles
primarily due to the impairment of ILS intangibles in the second quarter of
fiscal 2020, a 0.5% unfavorable impact of higher restructuring costs, primarily
related to the write-off of inventories, severance costs, warranty costs,
facility exit costs and accelerated depreciation in fiscal 2021 due to our
planned closure of multiple manufacturing sites, a 0.1% unfavorable impact due
to purchase accounting adjustments (inventory step-up in other costs) related to
our acquisition of EOT in April 2021 and 0.1% higher stock-based compensation
expense. Excluding the 0.9% favorable net impact of lower intangibles
amortization, higher restructuring costs, higher purchase accounting adjustments
and higher stock-based compensation expense, gross profit percentage increased
3.9% compared to fiscal 2020 primarily due to lower other costs (2.4%) and lower
warranty costs (1.5%). Product margins were flat year over year as a percentage
of sales. Other costs, excluding restructuring provisions, were lower primarily
due to lower inventory provisions for excess and obsolete inventory in certain
OLS and ILS business units in fiscal 2021 compared to fiscal 2020. The higher
excess and obsolete charges in fiscal 2020 were primarily due to the impact of
worldwide economic uncertainties on our demand forecasts due to COVID-19. The
lower warranty and installation costs as a percentage of sales were due to fewer
warranty events, particularly for our HPFL products sold in China, as well as
for fiber components in ILS and decreased warranty events in the instrumentation
and microelectronics markets within OLS. Although total product margins were
flat, unfavorable product margins in OLS resulted from unfavorable mix and
average selling prices and the unfavorable impact of the stronger Euro,
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which were partially offset by favorable mix and pricing for fiber components
and global tools products in ILS. In both segments, the unfavorable impact of
lower capitalized variances resulting from higher sales volumes were partially
offset by the favorable absorption of manufacturing costs.
Our gross profit percentage has been and will continue to be affected by a
variety of factors including the impact of shipment volumes, product mix,
pricing on volume orders, our ability to manufacture advanced and more complex
products, manufacturing efficiencies, excess and obsolete inventory write-downs,
warranty costs, amortization of intangibles, supply chain shortages, pricing by
competitors or suppliers, new product introductions, production volume,
customization and reconfiguration of systems, commodity prices and foreign
currency fluctuations against the U.S. Dollar, particularly the recent
volatility of the Euro and to a lesser extent, the Japanese Yen and South Korean
Won.
OEM Laser Sources
Our OLS gross profit percentage decreased by 0.6% to 45.4% in fiscal 2021 from
46.0% in fiscal 2020 and included a 0.2% unfavorable impact due to purchase
accounting adjustments (0.2% of inventory step-up in other costs) related to our
acquisition of EOT in April 2021. The decrease was primarily due to unfavorable
product margins (2.1%) (both mix of product and service revenues and lower
average selling prices) and the unfavorable impact of the stronger Euro against
the U.S. Dollar. In addition, the unfavorable impact of lower capitalized
variances resulting from higher sales volumes net of the favorable absorption of
manufacturing costs negatively impacted our gross profit percentage. The
unfavorable product costs were partially offset by lower warranty costs (0.8%)
due to decreased warranty events in the instrumentation and microelectronics
markets and lower other costs (0.7%) primarily due to lower inventory provisions
for excess and obsolete inventory in certain business units as a percentage of
sales partially offset by the unfavorable impact of EOT purchase accounting
adjustments.
Industrial Lasers & Systems
Our ILS gross profit percentage increased by 13.7% to 28.2% in fiscal 2021 from
14.5% in fiscal 2020. The increase included 4.2% lower amortization of
intangibles due to the impairment of ILS intangibles in the second quarter of
fiscal 2020 and a 1.3% unfavorable impact of higher restructuring costs,
primarily related to the write-off of inventories, severance, warranty and
facility exit costs, and accelerated depreciation in fiscal 2021 due to our
planned closure of multiple manufacturing sites. Excluding the net 2.9%
favorable impact of lower intangibles amortization and higher restructuring
costs, gross profit percentage increased 10.8% compared to fiscal 2020 primarily
due to lower other costs (5.2%) due to lower provisions for excess and obsolete
inventory, favorable product costs (3.5%) and lower warranty and installation
costs (2.1%) as a percentage of sales due to fewer warranty events, particularly
for our HPFL products sold in China, and for fiber components products. The
higher excess and obsolete charges in fiscal 2020 were primarily due to the
impact of worldwide economic uncertainties on our demand forecasts due to
COVID-19. Product costs, net of restructuring costs, were favorable primarily
due to the favorable absorption of manufacturing costs including the impact of
restructuring plans initiated in prior periods and favorable mix and pricing for
fiber components and global tools products partially offset by the unfavorable
impact of lower capitalized variances resulting from higher 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):
                                              Fiscal 2021                     Fiscal 2020
                                                       Percentage                      Percentage
                                                        of total                        of total
                                         Amount        net sales         Amount        net sales
                                                         (Dollars in thousands)
Research and development              $  124,266            8.4  %    $  115,578            9.4  %
Selling, general and administrative      303,863           20.4  %       270,464           22.0  %
Merger and acquisition costs             236,047           15.8  %             -              -  %
Impairment and other charges                   -              -  %       451,025           36.7  %
Amortization of intangible assets          2,877            0.2  %         3,987            0.3  %
Total operating expenses              $  667,053           44.8  %    $  841,054           68.4  %


Research and development Fiscal 2021 research and development ("R&D") expenses increased $8.7 million, or 8%, from fiscal 2020, but decreased to 8.4% of sales, compared to 9.4% in fiscal 2020. The increase in R&D expenses was primarily due to $6.8 million higher

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employee-related spending, $1.2 million incremental spending due to the
acquisition of EOT in April 2021 and $0.9 million higher charges for increases
in deferred compensation plan liabilities. Partially offsetting the increases
were $0.1 million lower spending on materials net of the impact of lower
customer reimbursements and $0.1 million lower stock-based compensation expense.
The higher employee-related spending was primarily due to higher variable
compensation, the unfavorable impact of foreign exchange rates and higher
severance costs partially offset by the impact of an extra week in fiscal 2020.
On a segment basis as compared to fiscal 2020, OLS R&D spending increased $6.1
million in fiscal 2021 with higher employee-related spending, the unfavorable
impact of foreign exchange rates and incremental spending from the acquisition
of EOT partially offset by lower net spending on materials. ILS R&D spending
increased $1.8 million primarily due to higher employee-related spending and the
unfavorable impact of foreign exchange rates partially offset by lower net
spending on materials. Corporate and other R&D spending increased $0.8 million
primarily due to higher charges for increases in deferred compensation plan
liabilities partially offset by lower stock-based compensation expense.
Selling, general and administrative
Fiscal 2021 selling, general and administrative ("SG&A") expenses increased
$33.4 million, or 12%, from fiscal 2020. The increase was primarily due to $31.3
million higher employee-related spending, $3.3 million higher other variable
spending, $2.9 million higher charges for increases in deferred compensation
plan liabilities and $1.6 million incremental spending due to the acquisition of
EOT in April 2021, partially offset by $5.7 million lower stock-based
compensation expense. The $31.3 million higher employee-related spending was
primarily due to higher variable compensation, the unfavorable impact of foreign
exchange rates and higher sales commissions partially offset by the impact of an
extra week in fiscal 2020, the impact of lower headcount and lower costs related
to the retirement of and transition of our former CEO to special advisor status.
The $3.3 million higher other variable spending included higher consulting on
special projects, the non-recurrence of a gain on the sale-leaseback of our
Hamburg facility in fiscal 2020, the unfavorable impact of foreign exchange
rates, the impact of a benefit in fiscal 2020 of amounts received from a $1.4
million legal settlement on a resolved asset recovery matter and higher sales
rep commissions partially offset by lower travel and other discretionary
spending due to COVID-19 and lower bad debts expense. The $5.7 million lower
stock-based compensation expense is primarily due to lower accounting
acceleration charges for equity grants for our former CEO and other executives
partially offset by increased equity grants to our employees, including our
executives.
On a segment basis as compared to fiscal 2020, OLS SG&A expenses increased $14.6
million primarily due to higher employee-related spending, the unfavorable
impact of foreign exchange rates and the acquisition of EOT partially offset by
lower variable spending on travel and other discretionary spending. ILS SG&A
spending increased $12.3 million primarily due to higher employee-related
spending including the favorable impact of lower headcount, the unfavorable
impact of foreign exchange rates, the prior year gain on the sale-leaseback of
our Hamburg facility and the prior year settlement on the resolved asset
recovery matter partially offset by lower variable spending on travel and other
discretionary spending. Corporate and other SG&A spending increased $6.5 million
primarily due to higher employee-related spending (including higher variable
compensation), higher charges for increases in deferred compensation plan
liabilities and higher consulting fees partially offset by lower stock-based
compensation expense, lower costs related to the retirement of our former CEO.
Merger and acquisition costs
In fiscal 2021, we recorded $236.0 million in merger and acquisition costs,
including $217.6 million paid to Lumentum as a termination fee, as well as costs
for investment banking, legal and other consultants related to our merger
agreements with Lumentum and II-VI and other acquisition-related costs.
Goodwill and other impairment charges
In fiscal 2020, we recorded non-cash pre-tax goodwill impairment charges of
$327.2 million related to our ILS segment to operating expense in our results of
operations. In addition, we recorded non-cash pre-tax charges related to the
impairment of intangible assets, property, plant and equipment and ROU assets of
the ILS reporting unit of $33.9 million, $85.6 million and $1.8 million,
respectively. See Note 8, "Goodwill and Intangible Assets" in the Notes to
Consolidated Financial Statements and Note 11, "Leases" in the Notes to
Consolidated Financial Statements under Item 8 of this annual report.
In fiscal 2019, we invested 3.0 million Euros ($3.4 million) in 3D-Micromac AG,
a private company in Germany. The investment is included in other assets and is
being carried on a cost basis. During fiscal 2020, we determined that our
investment became impaired and wrote it down to its fair value. As a result, we
recorded a non-cash impairment charge of $2.5 million to operating expense in
our results of operations in fiscal 2020.
Amortization of intangible assets
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Amortization of intangible assets decreased $1.1 million, or 28%, from fiscal
2020 to fiscal 2021 primarily due to the impairment of ILS intangibles in fiscal
2020 and the completion of the amortization of certain intangibles from
acquisitions partially offset by the unfavorable impact of foreign exchange
rates and the acquisition of EOT in April 2021.
Other income (expense), net
Other income (expense), net, increased by $4.8 million to other expense of $17.3
million in fiscal 2021 from other expense of $12.5 million in fiscal 2020. The
higher expenses were primarily due to the $5.3 million non-recurring translation
adjustment related to the dissolution of our OR Laser operations, $1.5 million
higher foreign exchange losses, $1.0 million higher interest expense due to the
unfavorable impact of foreign exchange rates and $0.6 million lower interest
income partially offset by $3.7 million higher gains, net of expenses, on our
deferred compensation plan assets.
Income taxes
Our effective tax rate on loss before income taxes for fiscal 2021 of 7.6% was
lower than the U.S. federal tax rate of 21%. Our effective tax rate benefit for
fiscal 2021 was unfavorably impacted primarily due to the establishment of
valuation allowances on certain deferred tax assets, income in foreign
jurisdictions subject to tax rates that are higher than the U.S. tax rates,
stock-based compensation not deductible for tax purposes and limitations on the
deductibility of compensation under Internal Revenue Code Section 162(m) and the
deferred taxes on foreign earnings not considered permanently reinvested,
partially offset by the benefit of federal research and development tax credits,
our Singapore tax exemption and the benefit of our FDII deduction.
Our results reflect the payment of a termination fee to Lumentum of $217.6
million in the second quarter of fiscal 2021. This amount was deducted for book
purposes in the current year and treated as a future deductible expense for tax
purposes in accordance with our accounting policy.
Our effective tax rate on loss before income taxes for fiscal 2020 of 6.5% was
lower than the U.S. federal tax rate of 21%. Our effective tax rate benefit for
fiscal 2020 was unfavorably impacted primarily due to the impairment of goodwill
that is not deductible for tax purposes and the establishment of valuation
allowances for certain deferred tax assets. These unfavorable impacts were
partially offset primarily from the release of unrecognized tax benefits net of
settlements and competent authority offsets and losses in foreign jurisdictions
subject to tax rates that are higher than the U.S. tax rates.
In September 2021, Coherent Singapore received an amended Pioneer Status tax
exemption from the Singapore authorities effective from fiscal 2022 through
fiscal 2026. The tax holiday continues to be conditional upon our meeting
certain revenue, business spending and employment thresholds. The impact of this
tax exemption decreased Coherent Singapore income taxes by approximately $3.7
million and $2.6 million in fiscal 2021 and 2020, respectively. The benefits of
the tax holiday on net income per diluted share were $0.15 and $0.11,
respectively.

FINANCIAL CONDITION
Liquidity and capital resources
At October 2, 2021, we had assets classified as cash and cash equivalents and
short-term investments, in an aggregate amount of $456.5 million, compared to
$475.6 million at October 3, 2020. In addition, at October 2, 2021, we had $6.0
million of restricted cash. At October 2, 2021, approximately $310.6 million of
our cash and securities was held in certain of our foreign subsidiaries and
branches, $291.7 million of which was denominated in currencies other than the
U.S. Dollar. Our foreign subsidiaries loaned approximately $124.3 million of
funds to Coherent, Inc. to pay a termination fee of $217.6 million to Lumentum
in March 2021. Our current business plans do not demonstrate a need for
additional foreign funds to support our domestic operations and it is our
intention to repay our borrowings to our foreign subsidiaries. If, however, a
portion of these foreign funds are needed for and distributed to our operations
in the United States via a dividend, we may be subject to additional foreign
withholding taxes and certain state taxes. The amount of the U.S. and foreign
taxes due would depend on the amount and manner of repatriation, as well as the
location from where the funds are repatriated. We historically asserted our
intention to indefinitely reinvest foreign earnings. As a result of the
enactment of the Tax Act and certain income tax treaty updates, we no longer
consider foreign earnings to be indefinitely reinvested in our foreign
subsidiaries. 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, sovereign
debt and other securities 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 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. To date, we have had sufficient liquidity to manage
the financial impact of COVID-19. However, we can provide no assurance that this
will continue to be the case if the impact of COVID-19 is prolonged or if there
is an extended
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impact on us or the economy in general. Further, COVID-19 has caused significant
uncertainty and volatility in the credit markets. If our liquidity or access to
capital becomes significantly constrained, or if costs of capital increase
significantly due to the impact of COVID-19 as result of a volatility in the
capital markets, a reduction in our creditworthiness or other factors, then our
financial condition, results of operations and cash flows could be materially
adversely affected.
See ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK below
for more information about risks and trends related to foreign currencies.
Sources and Uses of Cash
Historically, our primary source of cash has been provided by operations. Other
sources of cash in the past few fiscal years include proceeds from our Euro Term
Loan used to finance our acquisition of Rofin, proceeds received from the sale
of our stock through our employee stock purchase plan as well as borrowings
under our Revolving Credit Facility and for the construction of a facility in
Germany. Our historical uses of cash have primarily been for acquisitions of
businesses and technologies, the repurchase of our common stock, merger and
acquisition costs, the purchases of property and equipment and debt issuance
costs. 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):
                                                           Fiscal
                                                     2021          2020

Net cash provided by operating activities $ 72,938 $ 206,907 Purchases of property and equipment

                (82,563)       (64,919)
Acquisition of businesses, net of cash acquired    (28,810)             -

Borrowings (repayments), net                        18,448         (9,699)

Issuance of shares under employee stock plans 12,483 13,362

Net settlement of restricted common stock (10,362) (13,549)

Net cash provided by operating activities decreased by $134.0 million in fiscal 2021 compared to fiscal 2020. The decrease in cash provided by operating activities in fiscal 2021 was primarily due to lower net income including the $217.6 million termination fee paid to Lumentum, non-cash adjustments and lower cash flows from accounts receivable and deferred taxes, partially offset by higher cash flows from income taxes payable, accounts payable and other current liabilities. In order to support our liquidity during the pandemic, we have and will continue to take measures to increase available cash on hand, including, but not limited to, reducing discretionary spending for operating and capital expenses. To further support our liquidity, we elected to defer the payment of our employer portion of social security taxes beginning in April 2020 and through the end of calendar 2020, which we expect to pay in equal installments in the first quarters of fiscal 2022 and 2023, as provided for under the CARES Act. 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, including consideration of the impact of COVID-19, and will be adequate to support our long-term liquidity needs. However, we may elect to finance certain of our capital expenditure requirements through other sources of capital. As of October 2, 2021, in the ordinary course of business, we had total estimated significant purchase commitments for inventory from our suppliers of approximately $63.8 million and significant purchase obligations for fixed assets and services of $50.6 million. In addition, as of October 2, 2021, we had obligations under our operating leases of approximately $99.5 million, $18.3 million of which will be paid in the next 12 months. We continue to follow our strategy to further strengthen our financial position by using available cash flow to fund operations. We intend to continue to consider 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, if any, through existing cash balances and cash flows from operations (as in our acquisition of EOT) and additional borrowings (as in our acquisition of Rofin). If required, we will 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 April 19, 2021, we acquired EOT for approximately $29.3 million in cash. In fiscal 2020, we made debt principal payments of $7.5 million, recorded interest expense on the Euro Term Loan of $12.3 million and recorded $3.3 million amortization of debt issuance costs. In fiscal 2020, we recorded interest expense related to our Revolving Credit Facility of $0.6 million.

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In fiscal 2021, we made debt principal payments of $8.0 million, recorded interest expense on the Euro Term Loan of $12.9 million and recorded $3.5 million amortization of debt issuance costs. In fiscal 2021, we recorded interest expense related to our Revolving Credit Facility of $0.4 million. On March 25, 2021, we paid a termination fee of $217.6 million to Lumentum. Additional sources of cash available to us, in addition to the amounts available under the Revolving Credit Facility, were international currency lines of credit and bank credit facilities totaling $15.0 million as of October 2, 2021, of which $13.1 million was unused and available. These unsecured international credit facilities were used in Europe during fiscal 2021. As of October 2, 2021, we had utilized $1.9 million of the international credit facilities as guarantees in Europe. On October 29, 2021, we entered into a 10.0 million Euro letter of credit facility, rolled our existing letter of credit into that facility and deposited 10.5 million Euros with Barclays as cash collateral to secure the payment obligations under such facility, resulting in restricted cash of $12.2 million. On October 29, 2021, we repaid the $10.0 million outstanding under the Revolving Credit Facility and the facility expired on November 5, 2021. Our ratio of current assets to current liabilities decreased to 3.1:1 at October 2, 2021 compared to 4.5:1 at October 3, 2020. The decrease in our ratio was primarily due to higher other current liabilities, higher accounts payable, higher income taxes payable and lower inventories. Our cash and cash equivalents, short-term investments and working capital are as follows (in thousands):

                                      Fiscal
                               2021           2020
Cash and cash equivalents   $ 456,534      $ 440,258
Short-term investments              -         35,346
Working capital               797,070        943,606


Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Regulation S-K of the
Securities Act of 1933.
Changes in financial condition
Cash provided by operating activities in fiscal 2021 was $72.9 million, which
included cash provided by operating assets and liabilities of $99.0 million
(primarily higher accounts payable, higher accrued payroll, lower inventories
and higher income taxes payable net of higher accounts receivable), depreciation
and amortization of $55.0 million, stock-based compensation expense of $41.4
million, amortization of operating right of use ("ROU") assets of $19.2 million,
non-cash restructuring charges of $5.6 million, non-cash loss on dissolution of
our OR Laser operations of $5.3 million and amortization of debt issuance cost
of $3.5 million partially offset by net loss of $106.8 million (including the
$217.6 million termination fee paid to Lumentum) and net increases in deferred
tax assets of $50.6 million. Cash provided by operating activities in fiscal
2020 was $206.9 million, which included non-cash goodwill and other impairment
charges of $451.0 million, depreciation and amortization of $76.8 million, cash
provided by operating assets and liabilities of $51.8 million (primarily lower
accounts receivable, lower inventories and higher accounts payable net of lower
income taxes payable and payments made for lease liabilities), stock-based
compensation expense of $44.8 million, amortization of operating ROU assets of
$16.0 million, amortization of debt issue costs of $3.3 million and non-cash
restructuring charges of $2.2 million, partially offset by net loss of $414.1
million and net increases in deferred tax assets of $24.5 million.
Cash used in investing activities in fiscal 2021 was $72.9 million, which
included $79.4 million, net of proceeds from dispositions, used to acquire
property and equipment and to purchase and upgrade buildings and $28.8 million,
net of cash acquired, used to purchase EOT partially offset by $35.3 million net
maturities of available-for-sale securities. Cash used in investing activities
in fiscal 2020 was $78.2 million, which included $43.0 million, net of proceeds
from dispositions including $21.5 million received from the sale-leaseback of
our Hamburg facility, used to acquire property and equipment and to purchase and
upgrade buildings and $35.2 million net purchases of available-for-sale
securities.
Cash provided by financing activities in fiscal 2021 was $20.6 million, which
included $18.4 million net debt borrowings and $12.5 million generated from our
employee stock purchase plan partially offset by $10.4 million in outflows due
to net settlement of restricted stock units. Cash used in financing activities
in fiscal 2020 was $9.9 million, which included $13.5 million in outflows due to
net settlement of restricted stock units and $9.7 million net debt payments
partially offset by $13.4 million generated from our employee stock option and
purchase plans.
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Changes in exchange rates in fiscal 2021 resulted in a decrease in cash balances
of $3.7 million. Changes in exchange rates in fiscal 2020 resulted in an
increase in cash balances of $8.0 million.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, "Significant Accounting Policies" in the Notes to Consolidated
Financial Statements under Item 8 of this annual report 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 AND ESTIMATES
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 consolidated 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 consolidated
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, business combinations, accounting for long-lived assets (including
goodwill and intangible assets), inventory valuation, warranty reserves and
accounting for income taxes.
Revenue Recognition
Revenue is recognized when transfer of control to the customer occurs in an
amount reflecting the consideration that we expect to be entitled. We determine
revenue recognition by applying the following five-step approach: (1)
identification of the contract, or contracts, with a customer; (2)
identification of the performance obligations in the contract; (3) determination
of the transaction price; (4) allocation of the transaction price to the
performance obligations in the contract; and (5) recognition of revenue when, or
as, we satisfy each performance obligation.
The transaction price is determined based on the consideration to which we will
be entitled in exchange for transferring goods or services to the customer
adjusted for estimated variable consideration, if any, as more fully described
in Note 2, "Significant Accounting Policies - Revenue Recognition," in the Notes
to Consolidated Financial Statements under Item 8 of this annual report. The
majority of products and services offered by us have readily observable selling
prices. As a part of our stand-alone selling price policy, we review product
pricing on a periodic basis to identify any significant changes and revise our
expected selling price assumptions as appropriate. Revenue is generally
recognized when control of the product is transferred to the customer (i.e.,
when our performance obligation is satisfied), which typically occurs at
shipment but which can occur over time for certain of our maintenance, extended
warranty or custom product contracts. When goods or services have been delivered
to the customer, but all conditions for revenue recognition have not been met,
deferred revenue and deferred costs are recorded on our consolidated balance
sheet. Recognizing revenue over time also includes an estimation of the progress
towards completion based on the projected costs for the contract.
Business Combinations
We include the results of operations of the businesses that we acquire as of the
respective dates of acquisition. We allocate the fair value of the purchase
price of our business acquisitions to the tangible assets acquired, liabilities
assumed, and intangible assets acquired, based on their estimated fair values.
The excess of the purchase price over the fair values of these identifiable
assets and liabilities is recorded as goodwill. Additional information existing
as of the acquisition date, but unknown to us at that time, may become known
during the remainder of the measurement period, not to exceed 12 months from the
acquisition date, which may result in changes to the amounts and allocations
recorded.
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: OLS and ILS.
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Goodwill is tested for impairment on an annual basis and between annual tests in
certain circumstances, and written down when impaired. 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.
See Note 8, "Goodwill and Intangible Assets" in the Notes to Consolidated
Financial Statements under Item 8 of this annual report for discussion of the
non-cash pre-tax charges we recorded in the quarter ended April 4, 2020 related
to the goodwill, intangible assets, property, plant and equipment and ROU assets
of the ILS reporting unit of $327.2 million, $33.9 million, $85.6 million and
$1.8 million, respectively.
For our annual impairment test in fiscal 2020 and 2021, for our OLS reporting
unit we conducted a qualitative assessment of the goodwill during the fourth
quarter 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
the reporting unit exceeded its carrying amounts. 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 our
market capitalization, stock price performance and the significant excess
calculated in the second quarter of fiscal 2020 between estimated fair value and
the carrying value of OLS. Based on our assessment, goodwill in the OLS
reporting unit was not impaired as of the first day of the fourth quarter of
fiscal 2020 or 2021. As such, it was not necessary to perform the goodwill
impairment test in the fourth quarter of fiscal 2020 or 2021. There is no
goodwill in the ILS reporting unit due to the impairment of all goodwill of the
ILS reporting unit in the second quarter of fiscal 2020.
At October 2, 2021, we had $105.3 million of goodwill, $14.7 million of
purchased intangible assets and $302.6 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 net realizable value. We write-down our inventory to its estimated
market value based on assumptions about future demand and 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 or when
management has deemed parts are no longer active or useful. 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 periods ranging from 24 to 36 months
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 to 18 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.
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 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
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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.
During fiscal 2021, we increased our valuation allowance on deferred tax assets
by $15.5 million to $73.2 million, primarily due to the net operating losses
generated from certain foreign entities, California and certain state research
and development tax credits which are not expected to be recognized. As of
October 2, 2021, we had U.S. federal deferred tax assets related to research and
development credits and other tax attributes that can be used to offset federal
taxable income in future periods. These credit carryforwards will expire if they
are not used within certain time periods. Management determined that there is
sufficient positive evidence to conclude that it is more likely than not
sufficient taxable income will exist in the future allowing us to recognize
these deferred tax assets.
We historically asserted our intention to indefinitely reinvest foreign
earnings. As a result of the enactment of the Tax Act and certain foreign tax
law changes, we no longer consider foreign earnings to be indefinitely
reinvested in our foreign subsidiaries. As a result of this change in assertion,
we recorded a $18.4 million tax expense against our foreign earnings that are
not indefinitely reinvested as of fiscal 2021. This is mainly related to foreign
withholding taxes and state income taxes. We have not recognized any deferred
taxes for outside basis differences in foreign subsidiaries.

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