COHERENT, INC. COMPANY OVERVIEW
BUSINESS BACKGROUND
We are one of the world's leading providers of laser solutions and optics for
microelectronics, life sciences, industrial manufacturing, scientific and
aerospace and defense markets. More than a provider of lasers, we deliver
systems to the world's leading brands, innovators, and researchers, all backed
with a global service and support network. Since inception in 1966, we have
grown through internal expansion and through strategic acquisitions of
complementary businesses, technologies, intellectual property, manufacturing
processes and product offerings.
We are organized into two reporting segments: OEM Laser Sources ("OLS") and
Industrial Lasers & Systems ("ILS"), based on the organizational structure of
the company and how the chief operating decision maker ("CODM") receives and
utilizes information provided to allocate resources and make decisions. This
segmentation reflects the go-to-market strategies and synergies for our broad
portfolio of laser technologies and products. While both segments deliver
cost-effective, highly reliable photonics solutions, the OLS business segment 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. Our ILS business
segment 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 as well as applications in aerospace and defense.
Income (loss) from operations is the measure of profit and loss that our CODM
uses to assess performance and make decisions. Income (loss) from operations
represents the net sales less the cost of sales and direct operating expenses
incurred within the operating segments as well as allocated expenses such as
shared sales and manufacturing costs. We do not allocate certain operating
expenses to our operating segments and we manage them at the corporate level.
These unallocated costs include stock-based compensation and corporate functions
(certain management, finance, legal and human resources) and are included in
Corporate and other. Management does not consider unallocated Corporate and
other costs in its measurement of segment performance.
SIGNIFICANT EVENTS - MERGER
Merger Agreements and Termination Fee
OnJanuary 18, 2021 , we entered into an Agreement and Plan of Merger with Lumentum Holdings Inc. ("Lumentum"),Cheetah Acquisition Sub, Inc. ("Lumentum Merger Sub I") andCheetah Acquisition Sub LLC ("Lumentum Merger Sub II"), pursuant to which we agreed to be acquired for$100.00 in cash per Coherent share and 1.1851 shares of Lumentum common stock per Coherent share. In light of unsolicited proposals received from each of MKS Instruments, Inc. and II-VI Incorporated ("II-VI"), onMarch 9, 2021 , we entered into an Amended and Restated Agreement and Plan of Merger with Lumentum, Lumentum Merger Sub I and Lumentum Merger Sub II (the "Amended Lumentum Agreement"), pursuant to which we agreed to be acquired for$175.00 in cash per Coherent share and 1.0109 shares of Lumentum common stock per Coherent share. OnMarch 25, 2021 , we terminated the Amended Lumentum Agreement and entered into an Agreement and Plan of Merger with II-VI andWatson Merger Sub Inc. ("II-VI Merger Sub") (the "II-VI Merger Agreement"), pursuant to which we agreed to be acquired for$220.00 in cash per Coherent share and 0.91 of a share of II-VI common stock per Coherent share. In connection with terminating the Amended Lumentum Agreement, we paid a termination fee of$217.6 million to Lumentum during our second quarter of fiscal 2021. The termination fee, in addition to other costs related to the merger agreements with Lumentum and II-VI, is included in merger and acquisition costs in our condensed consolidated statements of operations. Pursuant to the terms of the II-VI Merger Agreement, the acquisition of Coherent will be accomplished through a merger of II-VI Merger Sub with and into Coherent (the "Merger"), with Coherent surviving the Merger as a wholly owned subsidiary of II-VI. Pursuant to the terms of the II-VI Merger Agreement, and subject to the terms and conditions set forth therein, at the effective time of the Merger (the "Effective Time"), each share of the common stock of Coherent (the "Coherent Common Stock") issued and outstanding immediately prior to the Effective Time (other than (x) shares of Coherent Common Stock owned by II-VI, Coherent, or any direct or indirect wholly owned subsidiary of II-VI or Coherent or (y) shares of Coherent Common Stock owned by stockholderswho have properly exercised and perfected appraisal rights underDelaware law, in each case, 30 -------------------------------------------------------------------------------- Table of Content s immediately prior to the Effective Time), will be cancelled and extinguished and automatically converted into the right to receive the following consideration:
(A)
(B) 0.91 of a validly issued, fully paid and non-assessable share of the common stock of II-VI.
The completion of the proposed Merger is subject to customary closing conditions, including, among others the expiration or termination of the required waiting periods under the HSR Act and regulatory approvals in applicable jurisdictions includingGermany ,China andSouth Korea . As previously disclosed, II-VI and Coherent refiled their respective HSR Notification onMay 2, 2022 . The HSR Notification, which triggers a 30-day review period, was made prior to the one-year expiration of II-VI's and Coherent's initial HSR Notification filed last year. II-VI and Coherent continue cooperative discussions with SAMR. Accordingly, other than the regulatory approval inChina andthe United States , there are no other open regulatory closing conditions to the proposed Merger. We anticipate that the closing of the Merger will occur prior toJune 30, 2022 . MARKET APPLICATIONS
Our products address a broad range of applications that we group into the
following markets: Microelectronics, Precision Manufacturing,
OUR STRATEGY We strive to develop innovative and proprietary products and solutions that meet the needs of our customers and that are based on our core expertise in lasers and optical technologies. In pursuit of our strategy, we intend to: •Execute our good to great transformation-Since our incorporation, we have developed critical technology and have built this company into a multinational corporation and leader in the photonics industry. We are engaged in a multi-pronged and multi-year transformation focusing on all aspects of our company. Namely, we are working to:
•Transform the operational efficiency of all our processes; •Reduce the complexity of our portfolio; •Focus our investments on growth opportunities; and •Enhance the focus and alignment with our customers
•Streamline our manufacturing structure and improve our cost structure-We are focusing on optimizing the mix of products that we manufacture internally and externally. We expect to further utilize vertical integration where our internal manufacturing process is considered proprietary and seek to leverage external sources when the capabilities and cost structure are well developed and on a path towards commoditization. •Focus on long-term improvement of adjusted EBITDA, in dollars and as a percentage of net sales, and drive free cash flow and gross margin as a percentage of 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 and gross margin improvements include utilization of our manufacturing locations inAsia , optimizing our supply chain and continued leveraging of our infrastructure. Our focus on free cash flow is to generate cash over the long term as it is essential to maintaining a healthy business and providing funds to help fuel growth. •Leverage our technology portfolio and application engineering to lead the expansion of photonics into broader markets-We will continue to identify opportunities in which our technology portfolio and application engineering can be used to offer innovative solutions and gain access to new markets. •Optimize our leadership position in existing markets-There are a number of markets where we are at the forefront of technological development and product deployment and from which we have derived a substantial portion of our revenues. We plan to optimize our financial returns from these markets. •Maintain and develop additional strong collaborative customer and industry relationships-We believe that the Coherent brand name and reputation for product quality, technical performance and customer satisfaction will help us 31 -------------------------------------------------------------------------------- Table of Content s to further develop our loyal customer base. We plan to maintain our current customer relationships as well as develop new ones with customerswho are industry leaders and work together with these customers to design and develop innovative product systems and solutions as they develop new technologies. •Develop and acquire new technologies and market share-We will continue to enhance our market position through our existing technologies and develop new technologies through our internal research and development efforts, as well as through the acquisition of additional complementary technologies, intellectual property, manufacturing processes and product offerings.
•Focus on our core end markets-While we are organized around our two segments of OLS and ILS, we also take a holistic approach to aligning and driving our business to focus on our four core markets:
•Microelectronics (which captures the 3 sub-markets of Display, Semiconductor, andAdvanced Packaging & Interconnect ); •Precision Manufacturing; •Instrumentation (which captures the 3 sub-markets of Bio-Instrumentation, Therapeutics & Research); and •Aerospace & Defense
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America and pursuant to the rules and regulations of theSEC . The preparation of these condensed 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 condensed 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. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for our fiscal year endedOctober 2, 2021 . 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.
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Three Months Ended
April 2, 2022 April 3, 2021 Change % Change
(Dollars in thousands)
Net sales-OEM Laser Sources $ 231,301 $ 223,248 $ 8,053 3.6 %
Net sales-Industrial Lasers & Systems $ 138,903 $ 150,734 $ (11,831) (7.8) %
Gross profit as a percentage of net sales-OEM
Laser Sources 47.9 % 45.2 % 2.7 % N/A
Gross profit as a percentage of net
sales-Industrial Lasers & Systems 32.8 % 27.7 % 5.1 % N/A
Research and development as a percentage of net
sales 8.6 % 8.6 % - % N/A
Income (loss) before income taxes $ 49,002 $ (198,762) $ 247,764 124.7 %
Net cash provided by (used in) operating
activities $ 26,728 $ (143,250) $ 169,978 118.7 %
Free cash flow $ 8,611 $ (165,222) $ 173,833 105.2 %
Days sales outstanding in receivables 64 60 4 N/A
Annualized second quarter inventory turns 2.1 2.4 (0.3) N/A
Net income (loss) as a percentage of net sales 9.1 % (42.3) % 51.4 % N/A
Adjusted EBITDA as a percentage of net sales 19.9 % 17.3 % 2.6 % N/A
Six Months Ended
April 2, 2022 April 3, 2021 Change % Change
(Dollars in thousands)
Net sales-OEM Laser Sources $ 474,271 $ 434,410 $ 39,861 9.2 %
Net sales-Industrial Lasers & Systems $ 280,440 $ 265,625 $ 14,815 5.6 %
Gross profit as a percentage of net sales-OEM
Laser Sources 49.1 % 45.2 % 3.9 % N/A
Gross profit as a percentage of net
sales-Industrial Lasers & Systems 33.2 % 25.6 % 7.6 % N/A
Research and development as a percentage of net
sales 8.1 % 8.6 % (0.5) % N/A
Income (loss) before income taxes $ 85,296 $ (184,101) $ 269,397 146.3 %
Net cash provided by (used in) operating
activities $ 38,809 $ (68,319) $ 107,128 156.8 %
Free cash flow $ 3,807 $ (105,364) $ 109,171 103.6 %
Net income (loss) as a percentage of net sales 8.5 % (22.6) % 31.1 % N/A
Adjusted EBITDA as a percentage of net sales 21.3 % 16.4 % 4.9 % N/A
Net Sales
Net sales include sales of lasers, laser systems, laser components, related
accessories and services. Net sales for the second quarter of fiscal 2022
increased 3.6% in our OLS segment and decreased 7.8% in our ILS segment from the
same quarter one year ago. Net sales for the first six months of fiscal 2022
increased 9.2% in our OLS segment and increased 5.6% in our ILS segment from the
same period one year ago. 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
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 in the second quarter of fiscal 2022 increased
to 47.9% from 45.2% in our OLS segment and increased to 32.8% from 27.7% in our
ILS segment as compared to the same quarter one year ago. Gross profit
percentage in the first six months of fiscal 2022 increased to 49.1% from 45.2%
in our OLS segment and increased to 33.2% from 25.6% in our ILS segment as
compared to the same period one year ago. 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
Research and development as a percentage of net sales ("R&D percentage") is
calculated as research and development expense for the period divided by net
sales for the period. Management considers R&D percentage to be an important
indicator in managing our business as investing in new technologies is a key to
future growth. R&D percentage was 8.6% for the second quarter of fiscal 2022 and
the same quarter one year ago and decreased to 8.1% for the first six months of
fiscal 2022 from 8.6% for the same period one year ago. 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 condensed 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 the second quarter and first six months of 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 condensed 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 the second quarter and first six months of 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 90 days for quarters. 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 the second
quarter of fiscal 2022 increased to 64 days from 60 days for the same quarter
one year ago. The increase was primarily due to the delay in collections of
certain receivables, which slipped to April 2022 , partially due to the shutdown
of all businesses in Shanghai by the Chinese government at the end of the second
quarter of fiscal 2022. In addition, we experienced a higher concentration of
sales in the last month of the quarter ended April 2, 2022 compared to the last
month of the quarter ended April 3, 2021 as well as a higher concentration of
receivables with longer payment terms.
Annualized Second Quarter Inventory Turns
We calculate annualized second quarter inventory turns as the cost of sales
during the second quarter annualized and divided by net inventories at the end
of the second 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
inventory turns for the second quarter of fiscal 2022 decreased to 2.1 turns
from 2.4 turns for the same quarter a year ago primarily due to the favorable
impact of foreign exchange rates and higher inventory levels, primarily in our
ILS segment, resulting from higher purchases due to longer lead times and/or
anticipated supply constraints.
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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 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 (used in) operating activities to our free cash flow:
Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Net cash provided by (used in) operating
activities $ 26,728 $
(143,250)
18,117 21,972 35,002 37,045
Free cash flow $ 8,611 $ (165,222) $ 3,807 $ (105,364) Below is the reconciliation of our net income (loss) as a percentage of net sales to our adjusted EBITDA as a percentage of net sales:
Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Net income (loss) as a percentage of net sales 9.1 % (42.3) % 8.5 % (22.6) %
Income tax expense (benefit) 4.1 % (10.8) % 2.8 % (3.7) %
Interest and other income (expense), net 1.1 % 1.4 % 1.3 % 1.4 %
Depreciation and amortization 3.4 % 3.6 % 3.3 % 3.8 %
Restructuring charges (benefits) and other (0.6) % 1.0 % (0.3) % 1.3 %
Merger and acquisition costs 0.3 % 62.0 % 0.3 % 33.2 %
Stock-based compensation 2.5 % 2.4 % 5.4 % 3.0 %
Adjusted EBITDA as a percentage of net sales 19.9 % 17.3 % 21.3 % 16.4 %
SIGNIFICANT EVENTS
Russia /Ukraine Conflict
In February 2022 , Russia invaded Ukraine , resulting in the United States ,
Canada , the European Union ("EU") and other countries imposing economic
sanctions on Russia , some of which have been expanded to include Belarus . The
military conflict and the resulting sanctions have caused and are expected to
continue to cause significant disruptions in logistics, availability of
components and supplies used in the manufacture and services of our products and
global markets. The largest source of certain gases which are utilized in the
use and servicing of some of our products, including our largest excimer lasers,
has historically been located in Ukraine . We have accelerated purchases of this
gas from other limited sources outside of the conflict and, to date, have
avoided any material disruption to our business. Similarly, our end customers
for these products are largely located in geographies which have access to these
gases from local suppliers.
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Numerous logistic companies have meaningfully limited their capacity for
shipping goods as a result of the closing of certain air and land routes related
to the sanctions and conflict zones, which has resulted in significant increases
in inbound and outbound shipment costs.
As of the date hereof, it has been publicly reported that Russia has been
willing to leverage its supply of gasoline, oil and other fossil fuels in a
manner which could greatly limit the availability thereof to the EU, including
Germany . Relatedly, Germany and other countries in the EU have announced their
intention to meaningfully limit their importation of fuels which are supplied by
Russia at some point in the future.
We have managed through these situations and, to date, have not seen materially
negative consequences from the foregoing. A material reduction in our access to
critical gases, the disruption in the ability to source components and supplies
used in the manufacture, service or use of our products and the availability of
shipping and the increased costs therefor would likely negatively impact the
results of our operations. Additionally, the consequences of the foregoing or
other limitation on the availability of fuels to provide electricity in the EU
to businesses at the same current levels could have a material adverse effect on
our business, particularly with regards to our ability to manufacture and ship
products at our manufacturing locations in Germany .
We have historically had less than 1% of our revenues derived from customers in
Russia or Ukraine . Accordingly, compliance with the economic sanctions has not
had a material adverse impact on our results of operations through the period
reflected herein. As a result, based on available information to date, our
estimate of potential future impairments on our businesses in Russia or Ukraine
related to customer sales would not be material with respect to our consolidated
financial position. However, the conflict's continued impact of logistic and
supply chain challenges could result in a materially negative impact on our
results of operations in future periods.
Merger Agreement and related fees
See "Significant Events - Merger" above in this Item 2 for a description of the Agreement and Plan of Merger we entered into onJanuary 18, 2021 , and the Amended Lumentum Agreement we entered into onMarch 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 onMarch 25, 2021 .
The termination fee, in addition to other costs related to the merger agreements is included in merger and acquisition costs in our condensed consolidated statements of operations.
Coronavirus pandemic (COVID-19)
InDecember 2019 , COVID-19 cases were reported, and inJanuary 2020 , theWorld Health Organization ("WHO") declared it a Public Health Emergency of International Concern. OnFebruary 28, 2020 , theWHO 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 onMarch 11, 2020 , theWHO 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 includingAsia ,Europe andNorth America have been and may continue to be impacted by COVID-19. The timing and extent of impact related to COVID-19 varies by country and region. Although we estimated that our sales for fiscal 2020 were negatively impacted by the COVID-19 pandemic, we believe the impact on sales in fiscal 2021 and the first two quarters of fiscal 2022 was immaterial. However, prolonged lockdowns inShanghai or any other major region inChina may impact portions of our supply chain and limit our ability to logistically fulfill customer commitments in future quarters, which would negatively impact our sales and margins. 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. In fiscal 2021, and continuing into fiscal 2022, 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 Delta and Omicron variants, and the impact that it 36 -------------------------------------------------------------------------------- Table of Content s may have on future demand for our products and services, particularly given the recent shutdown measures taken in certain countries inEurope andAsia , particularly inShanghai and other regions inChina . Currently, our major production facilities inEurope ,Asia , andthe 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 inSunnyvale, 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 for certain products. We also continue to face supply chain constraints primarily related to electronic components and freight cargo capacity limitations, including available air cargo space and higher freight rates. Available cargo space on flights between theU.S. andEurope , andEurope andAsia 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. As noted above, these logistical challenges have been exacerbated by theRussia /Ukraine conflict. 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 withinEurope andAsia . For example, we have seen significant delays for the importation of goods intoChina as a result of checks on containers for the presence of COVID-19. Government actions related to COVID-19 come on the heels of trade tensions betweenthe United States andChina , 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 aCOVID 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 theCOVID Steering Committee . The COVID-19 pandemic has significantly increased worldwide and regional economic uncertainty and, at times, 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 provisions, allowances for credit losses, and a volatile effective tax rate driven by changes in the mix of earnings across our markets. In the second quarter of fiscal 2022, product material shortages and the lockdown of business and other activity in regions ofChina , includingShanghai , caused an unfavorable revenue impact of approximately$19 million spread across all markets, with our ILS segment impacted by$11 million and our OLS segment impacted by$8 million . 37 -------------------------------------------------------------------------------- Table of Content s See "Risks Related to COVID-19 Pandemic" in Part II, Item 1A of this quarterly report regarding the impact of COVID-19.
Restructuring
In the fourth quarter of fiscal 2020, we began a restructuring program in our ILS segment which included management reorganizations, the planned closure of certain manufacturing sites, and the right-sizing of global sales, service, order admin, marketing communication and certain administrative functions, among others. In the first and second quarters of fiscal 2022, we incurred benefits of$0.0 million and$2.3 million , respectively, primarily related to a gain from the sale of assets and other cost reimbursements partially offset by estimated severance, which is primarily recorded in selling, general and administrative expenses. In the first and second quarters of fiscal 2021, we incurred costs of$5.4 million and$3.6 million , respectively, primarily related to write-offs of excess inventory and accruals for vendor commitments, which are recorded in cost of sales, estimated severance and accelerated depreciation. The project is substantially complete as ofApril 2, 2022 .
See Note 19, "Restructuring Charges" in the Notes to Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS CONSOLIDATED SUMMARY
The following table sets forth, for the periods indicated, the percentage of total net sales represented by the line items reflected in our condensed consolidated statements of operations:
Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 58.3 % 62.3 % 57.3 % 62.7 %
Gross profit 41.7 % 37.7 % 42.7 % 37.3 %
Operating expenses:
Research and development 8.6 % 8.6 % 8.1 % 8.6 %
Selling, general and administrative 18.0 % 19.4 % 21.2 % 21.0 %
Merger and acquisition costs 0.3 % 62.0 % 0.3 % 33.1 %
Amortization of intangible assets 0.1 % 0.2 % 0.2 % 0.2 %
Total operating expenses 27.0 % 90.2 % 29.8 % 62.9 %
Income (loss) from operations 14.7 % (52.5) % 12.9 % (25.6) %
Other expense, net (1.5) % (0.6) % (1.6) % (0.7) %
Income (loss) before income taxes 13.2 % (53.1) % 11.3 % (26.3) %
Provision for (benefit from) income taxes 4.1 % (10.8) % 2.8 % (3.7) %
Net income (loss) 9.1 % (42.3) % 8.5 % (22.6) %
Net income for the second quarter of fiscal 2022 was $33.7 million ($1.35 per
diluted share). This included $7.7 million of after-tax stock-based compensation
expense, $1.6 million non-recurring income tax net charge, $0.8 million of
after-tax merger and acquisition costs, $0.7 million of after-tax amortization
of intangible assets, $1.8 million of after-tax restructuring benefit and $0.2
million of net excess tax benefit for employee stock-based compensation. Net
loss for the second quarter of fiscal 2021 was $158.2 million ($6.49 per diluted
share). This included $179.2 million of after-tax merger and acquisition costs
(primarily due to a termination fee paid to Lumentum), $7.7 million of after-tax
stock-based compensation expense, $3.1 million of after-tax restructuring costs,
$2.2 million of after-tax amortization of intangible assets, $1.9 million
non-recurring income tax net charge and $0.6 million of excess tax benefit for
employee stock-based compensation.
Net income for the first six months of fiscal 2022 was $63.9 million ($2.57 per
diluted share). This included $37.3 million of after-tax stock-based
compensation expense, $2.1 million non-recurring income tax net charge, $1.9
million of after-tax amortization of intangible assets, $1.6 million of
after-tax merger and acquisition costs, $4.8 million of net excess tax benefit
for employee stock-based compensation and $1.8 million of after-tax
restructuring benefit. Net loss for the first six months of fiscal 2021 was
$158.1 million ($6.50 per diluted share). This included $179.2 million of
after-tax merger and acquisition costs (primarily due to a termination fee paid
to Lumentum), $18.4 million of after-tax stock-based compensation expense, $7.5
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million of after-tax restructuring costs, $4.4 million of after-tax amortization
of intangible assets and $10.5 million non-recurring income tax net charge.
As previously noted, we continue to monitor supply chain and logistic
constraints and resultant cost increases related to COVID-19 and the
Russian/
Market Application
The following tables set forth, for the periods indicated, the amount of net
sales and their relative percentages of total net sales by market application
(dollars in thousands):
Three Months Ended
April 2, 2022 April 3, 2021
Percentage Percentage
of total of total
Amount net sales Amount net sales
Consolidated:
Microelectronics $ 160,360 43.3 % $ 168,277 45.0 %
Precision manufacturing 104,407 28.2 % 107,398 28.7 %
Instrumentation 90,239 24.4 % 88,333 23.6 %
Aerospace and defense 15,198 4.1 % 9,974 2.7 %
Total $ 370,204 100.0 % $ 373,982 100.0 %
Six Months Ended
April 2, 2022 April 3, 2021
Percentage Percentage
of total of total
Amount net sales Amount net sales
Consolidated:
Microelectronics $ 333,382 44.2 % $ 317,125 45.3 %
Precision manufacturing 208,961 27.7 % 188,848 27.0 %
Instrumentation 184,182 24.4 % 173,560 24.8 %
Aerospace and defense 28,186 3.7 % 20,502 2.9 %
Total $ 754,711 100.0 % $ 700,035 100.0 %
Quarterly
Net sales for the second quarter of fiscal 2022 decreased by $3.8 million , or
1%, compared to the second quarter of fiscal 2021, with decreases in the
microelectronics and precision manufacturing markets partially offset by
increases in the aerospace and defense and instrumentation markets. We finished
fiscal 2021 with a positive book-to-bill ratio in all four end-markets, as well
as increased backlog levels compared to fiscal 2020 across all end-markets. We
also had a positive book-to-bill ratio in the first and second quarters of
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 increase of an aging population around the globe. Furthermore, we
believe that technology advances will result in increased laser-based defense
spending globally.
The decrease in the microelectronics market of $7.9 million , or 5%, was
primarily due to decreased shipments for flat panel display (primarily lower
revenues from systems) and advanced packaging applications partially offset by
higher shipments for semiconductor applications. In microelectronics, we expect
future increases in ELA tool shipments as Asian manufacturers
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improve yields and ramp manufacturing as indicated by the fact that we received
new orders for these products in both fiscal 2021 and the first two quarters of
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 strong demand
for semiconductor applications, somewhat tempered by constraints in the supply
chain for semiconductor chips. 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.
The decrease in the precision manufacturing market of $3.0 million , or 3%, was
due to lower sales in machine tools and automotive applications partially offset
by higher sales in medical and materials processing applications. The Purchasing
Managers Index ("PMI") is a measure of the prevailing economic trends in
manufacturing, and often correlates to materials processing sales. In the second
quarter of fiscal 2022 compared to the prior quarter, decreases in the
manufacturing PMI for China and Europe were partially offset by increases in the
U.S. Supply chain constraints continued in all regions due to both the shutdowns
in China and the Russian invasion of Ukraine . 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 orders continued to be
strong in the first two quarters of fiscal 2022 after record orders in fiscal
2021, particularly in the U.S.
The increase in the instrumentation market of $1.9 million , or 2%, was due
primarily to higher shipments for biomedical instrumentation applications
partially offset by lower 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 scientific and government program applications to continue to fluctuate from
quarter to quarter.
Sales in the aerospace and defense ("A&D") market increased $5.2 million , or
52%, primarily due to higher shipments in aerospace and defense applications. We
anticipate the A&D market, especially amplifiers for directed energy and
specialty optics for aerospace, to be a multi-year growth opportunity for us.
Year-to-date
Net sales for the first six months of fiscal 2022 increased by$54.7 million , or 8%, compared to the first six months of fiscal 2021, with significant increases in the precision manufacturing and microelectronics markets and smaller increases in the instrumentation and aerospace and defense markets.
The increase in the microelectronics market of
The increase in the precision manufacturing market of$20.1 million , or 10.7%, was due to increased sales in medical, materials processing and consumer goods applications.
The increase in the instrumentation market of
Sales in the aerospace and defense market increased
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 as
well as applications in aerospace and defense.
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The following tables set forth, for the periods indicated, the amount of net
sales and their relative percentages of total net sales by segment (dollars in
thousands):
Three Months Ended
April 2, 2022 April 3, 2021
Percentage Percentage
of total of total
Amount net sales Amount net sales
Consolidated:
OEM Laser Sources (OLS) $ 231,301 62.5 % $ 223,248 59.7 %
Industrial Lasers & Systems (ILS) 138,903 37.5 % 150,734 40.3 %
Total $ 370,204 100.0 % $ 373,982 100.0 %
Six Months Ended
April 2, 2022 April 3, 2021
Percentage Percentage
of total of total
Amount net sales Amount net sales
Consolidated:
OEM Laser Sources (OLS) $ 474,271 62.8 % $ 434,410 62.1 %
Industrial Lasers & Systems (ILS) 280,440 37.2 % 265,625 37.9 %
Total $ 754,711 100.0 % $ 700,035 100.0 %
Quarterly
Net sales for the second quarter of fiscal 2022 decreased by $3.8 million , or
1%, compared to the second quarter of fiscal 2021, with increases of $8.1
million , or 4%, in our OLS segment and decreases of $11.8 million , or 8%, in our
ILS segment.
The increase in our OLS segment sales was primarily due to higher shipments for
semiconductor applications in the microelectronics market, biomedical
instrumentation applications in the instrumentation market, medical applications
in the precision manufacturing market and aerospace applications in the
aerospace and defense market partially offset by lower shipments for flat panel
display systems in the microelectronics market. The decrease in our ILS segment
sales was primarily due to lower sales for advanced packaging applications
within the microelectronics market, medical applications within the
instrumentation market and lower sales to the precision manufacturing market,
primarily for automotive and medical applications, partially offset by higher
sales for applications in the aerospace and defense market.
Year-to-date
Net sales for the first six months of fiscal 2022 increased by$54.7 million , or 8%, compared to the first six months of fiscal 2021, with increases of$39.9 million , or 9.2%, in our OLS segment and$14.8 million , or 5.6%, in our ILS segment. The increase in our OLS segment sales was primarily due to higher shipments for semiconductor and advanced packaging applications in the microelectronics market as well as biomedical instrumentation applications in the instrumentation market, medical applications in the precision manufacturing market and aerospace applications in the aerospace and defense market, partially offset by lower shipments for flat panel display systems in the microelectronics market. The sales increase in our ILS segment was primarily due to higher sales to the precision manufacturing market, primarily for materials processing, consumer goods and medical applications as well as higher sales for applications in the aerospace and defense market, partially offset by lower sales for advanced packaging applications within the microelectronics market.
GROSS PROFIT
Consolidated
Our gross profit percentage increased by 4.0% to 41.7% in the second quarter of
fiscal 2022 from 37.7% in the second quarter of fiscal 2021 and increased by
5.4% to 42.7% in the first six months of fiscal 2022 from 37.3% in the first six
months of fiscal 2021.
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The 4.0% increase in gross profit percentage during the second quarter of fiscal 2022 included a 0.6% favorable impact of lower restructuring costs, primarily related to lower severance costs, lower write-offs of inventories and lower accelerated depreciation due to our closure of certain manufacturing sites and 0.4% lower amortization of intangibles. Additionally, gross profit percentage increased 3.0% compared to the second quarter of fiscal 2021 primarily due to favorable product margins (4.7%) partially offset by higher other costs (1.0%) and higher warranty costs (0.7%). Product margins were favorable in both OLS and ILS due to the impact of favorable absorption of manufacturing costs from higher sales volumes, higher capitalized variances, and the favorable impact of the weaker Euro against theU.S. Dollar. Additionally, the favorable impact of selective price increases for certain products and services and favorable mix in both OLS and ILS favorably impacted product margins, which was partially offset by increased pricing for electronic components due to global supply chain and logistical constraints, and fuel and expedited order surcharges. Other costs, excluding restructuring provisions, were higher primarily due to increased freight costs resulting from shipping constraints and fuel surcharges in both segments and higher inventory provisions in ILS. The higher warranty and installation costs as a percentage of sales were due to increased warranty events for fiber components and CO2 and global tools products in ILS and lower tube salvage in OLS. The 5.4% increase in gross profit percentage during the first six months of fiscal 2022 included a 1.0% favorable impact of lower restructuring costs, primarily related to lower severance costs due to our closure of certain manufacturing sites and 0.4% lower amortization of intangibles. Additionally, gross profit percentage increased 4.0% compared to the first quarter of fiscal 2021 primarily due to favorable product margins (4.8%) partially offset by higher other costs (0.6%) and higher warranty costs (0.2%). Product margins were favorable in both OLS and ILS due to the impact of favorable absorption of manufacturing costs from higher sales volumes, higher capitalized variances, and the favorable impact of the weaker Euro against theU.S. Dollar. Additionally, the favorable impact of selective price increases for certain products and services and favorable mix in both OLS and ILS, partially offset by increased pricing for electronic components due to global supply chain and logistical constraints, and fuel and expedited order surcharges, favorably impacted product margins. Other costs, excluding restructuring provisions, were higher primarily due to higher freight costs resulting from shipping constraints and fuel surcharges in both segments. The higher warranty and installation costs as a percentage of sales were due to increased warranty events in both ILS and OLS. Our gross profit percentage has been and will continue to be affected by a variety of factors including the impact of shipping 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, pricing by competitors or suppliers (including the impact of increased pricing on some of our critical supplies due to global supply chain and logistical constraints, and fuel and expedited order surcharges), new product introductions, production volume, customization and reconfiguration of systems, commodity prices and foreign currency fluctuations against theU.S. Dollar, particularly the recent volatility of the Euro and to a lesser extent, the Japanese Yen and South Korean Won.
OEM Laser Sources
The gross profit percentage in our OLS segment increased by 2.7% to 47.9% in the second quarter of fiscal 2022 from 45.2% in the second quarter of fiscal 2021. The gross profit percentage in our OLS segment increased by 3.9% to 49.1% in the first six months of fiscal 2022 from 45.2% in the first six months of fiscal 2021. The 2.7% increase in gross profit percentage during the second quarter of fiscal 2022 was primarily due to favorable product margins (3.7%) due to the favorable impacts of higher capitalized variances, the absorption of manufacturing costs on higher revenues, the weaker Euro against theU.S. Dollar, the favorable impact of selective price increases for certain products and services and improved mix (both mix of product and service revenues) partially offset by increased pricing for electronic components due to global supply chain and logistical constraints, and fuel and expedited order surcharges. The favorable product costs were partially offset by higher warranty and installation costs (0.7%) due to lower tube salvage for flat panel display systems, higher other costs (0.2%) primarily due to higher freight costs resulting from shipping constraints and fuel surcharges and higher intangibles amortization (0.1%) as a percentage of sales. The 3.9% increase in gross profit percentage during the first six months of fiscal 2022 was primarily due to favorable product margins (4.7%) due to the favorable impacts of higher capitalized variances, the absorption of manufacturing costs on higher revenues, the weaker Euro against theU.S. Dollar, the favorable impact of selective price increases for certain products and services and improved mix (both mix of product and service revenues) partially offset by increased pricing for electronic components due to global supply chain and logistical constraints, and fuel and expedited order surcharges. The favorable product costs were partially offset by higher other costs (0.5%) primarily due to higher freight costs resulting from shipping constraints and fuel surcharges and higher inventory provisions as well as higher warranty and installation costs (0.3%) as a percentage of sales due to increased warranty events. 42 -------------------------------------------------------------------------------- Table of Content s Industrial Lasers & Systems The gross profit percentage in our ILS segment increased by 5.1% to 32.8% in the second quarter of fiscal 2022 from 27.7% in the second quarter of fiscal 2021. The gross profit percentage in our ILS segment increased by 7.6% to 33.2% in the first six months of fiscal 2022 from 25.6% in the first six months of fiscal 2021. The 5.1% increase in gross profit percentage during the second quarter of fiscal 2022 included a 1.4% favorable impact of lower restructuring costs, primarily related to lower write-offs of inventories, lower accelerated depreciation and lower severance costs due to the closure of certain manufacturing sites and 1.2% lower amortization of intangibles. Additionally, gross profit percentage increased 2.5% compared to the second quarter of fiscal 2021 primarily due to favorable product costs (5.5%) partially offset by higher other costs (2.3%) due to higher freight costs resulting from shipping constraints and fuel surcharges and higher provisions for excess and obsolete inventory in our global tools products as well as higher warranty and installation costs (0.7%) as a percentage of sales due to increased warranty events, particularly for fiber components and CO2 and global tools products. Product costs, net of restructuring costs, were favorable primarily due to the favorable absorption of manufacturing costs due to higher sales volumes and the favorable impact of higher capitalized variances as well as favorable mix and pricing for HP FL and global tools products. The 7.6% increase in gross profit percentage during the first six months of fiscal 2022 included a 2.7% favorable impact of lower restructuring costs, primarily related to lower write-offs of inventories, lower accelerated depreciation and lower severance costs due to the closure of certain manufacturing sites and 1.2% lower amortization of intangibles. Additionally, gross profit percentage increased 3.7% compared to the first two quarters of fiscal 2021 primarily due to favorable product costs (4.4%) partially offset by higher other costs (0.6%) due to higher freight costs resulting from shipping constraints and fuel surcharges for global tools and fiber components and CO2 products and lower accruals for contract losses as well as higher warranty and installation costs (0.1%) as a percentage of sales due to increased warranty events. Product costs, net of restructuring costs, were favorable primarily due to the favorable absorption of manufacturing costs due to higher sales volumes and the favorable impact of higher capitalized variances as well as favorable mix and pricing for global tools products. 43 --------------------------------------------------------------------------------
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OPERATING EXPENSES:
Three Months Ended
April 2, 2022 April 3, 2021
Percentage of Percentage of
Amount total net sales Amount total net sales
(Dollars in thousands)
Research and development $ 31,679 8.6 % $ 32,007 8.6 %
Selling, general and administrative 66,517 18.0 % 72,662 19.4 %
Merger and acquisition costs 1,044 0.3 % 231,996 62.0 %
Amortization of intangible assets 563 0.1 % 596 0.2 %
Total operating expenses $ 99,803 27.0 % $ 337,261 90.2 %
Six Months Ended
April 2, 2022 April 3, 2021
Percentage of Percentage of
Amount total net sales Amount total net sales
(Dollars in thousands)
Research and development $ 61,448 8.1 % $ 60,228 8.6 %
Selling, general and administrative 160,291 21.2 % 146,890 21.0 %
Merger and acquisition costs 2,021 0.3 % 231,996 33.1 %
Amortization of intangible assets 1,128 0.2 % 1,193 0.2 %
Total operating expenses $ 224,888 29.8 % $ 440,307 62.9 %
Research and development
Quarterly
Research and development ("R&D") expenses decreased $0.3 million , or 1%, during
the second quarter of fiscal 2022 compared to the same quarter one year ago. The
decrease was primarily due to $1.0 million lower employee-related spending due
to lower variable compensation and lower severance costs partially offset by
headcount additions for certain projects as well as $0.6 million lower charges
for changes in deferred compensation plan liabilities. The decreases were
partially offset by $0.8 million incremental spending due to the acquisition of
EOT in April 2021 , $0.3 million higher project spending with higher spending on
materials offset by the favorable impact of higher customer reimbursements and
$0.2 million higher stock-based compensation expense.
On a segment basis as compared to the prior year period, OLS R&D spending
increased $1.0 million primarily due to the acquisition of EOT, higher spending
on materials and higher employee-related spending partially offset by higher
customer reimbursements. ILS R&D spending decreased $0.9 million primarily due
to lower employee-related spending partially offset by higher customer
reimbursements. Corporate and other R&D spending decreased $0.5 million
primarily due to lower charges for changes in deferred compensation plan
liabilities partially offset by higher stock-based compensation expense.
Year-to-date
Research and development ("R&D") expenses increased $1.2 million , or 2.0%,
during the first six months of fiscal 2022 compared to the same period one year
ago. The increase was primarily due to $1.5 million incremental spending due to
the acquisition of EOT in April 2021 , $0.5 million higher project spending with
higher spending on materials offset by the favorable impact of higher customer
reimbursements and $0.2 million higher stock-based compensation expense. The
increases were partially offset by $1.0 million lower charges for changes in
deferred compensation plan liabilities.
On a segment basis as compared to the prior year period, OLS R&D spending
increased $1.4 million primarily due to the acquisition of EOT, higher spending
on materials and higher employee-related spending partially offset by higher
customer reimbursements. ILS R&D spending increased $0.6 million primarily due
to higher spending on materials and higher employee-related spending partially
offset by higher customer reimbursements. Corporate and other R&D spending
decreased $0.8
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million primarily due to lower charges for changes in deferred compensation plan
liabilities partially offset by higher stock-based compensation expense.
Selling, general and administrative
Quarterly
Selling, general and administrative ("SG&A") expenses decreased $6.1 million , or
8%, during the second quarter of fiscal 2022 compared to the same quarter one
year ago. The decrease was primarily due to $4.6 million lower employee-related
spending with lower variable compensation, lower severance costs, lower sales
commissions and the favorable impact of foreign exchange rates partially offset
by higher costs due to merit increases, higher employee benefits costs and
higher headcount. SG&A expenses also decreased due to $3.2 million lower charges
for changes in deferred compensation plan liabilities and $0.2 million lower
stock-based compensation expense. Partially offsetting the decreases, SG&A
expenses increased due to $1.3 million higher other variable spending including
higher consulting on special projects, higher spending on travel and higher
other discretionary spending partially offset by higher restructuring benefit
from the sale of assets. SG&A expenses also increased due to $0.6 million
incremental spending due to the acquisition of EOT in April 2021 .
On a segment basis as compared to the prior year period, OLS SG&A expenses
increased $0.6 million primarily due to the acquisition of EOT and higher
variable spending on travel and other discretionary spending partially offset by
lower employee-related spending. ILS SG&A spending decreased $3.9 million
primarily due to lower variable spending including higher restructuring benefit
and lower employee-related spending. Corporate and other SG&A spending decreased
$2.8 million primarily due to lower charges for changes in deferred compensation
plan liabilities and lower stock-based compensation expense partially offset by
higher consulting fees.
Year-to-date
Selling, general and administrative ("SG&A") expenses increased $13.4 million ,
or 9.1%, during the first six months of fiscal 2022 compared to the same period
one year ago. The increase was primarily due to $20.0 million higher stock-based
compensation expense primarily resulting from the acceleration of vesting of
restricted stock units for certain executives. SG&A expenses also increased due
to $2.5 million higher other variable spending including higher consulting on
special projects, higher spending on travel and higher other discretionary
spending partially offset by higher restructuring benefit from the sale of
assets. SG&A expenses also increased due to $1.0 million incremental spending
due to the acquisition of EOT in April 2021 . Partially offsetting the increases,
SG&A expenses decreased due to $5.4 million lower charges for changes in
deferred compensation plan liabilities and $4.7 million lower employee-related
spending with lower variable compensation, the favorable impact of foreign
exchange rates, lower commissions and lower severance costs partially offset by
higher costs due to merit increases, higher employee benefits costs and higher
headcount.
On a segment basis as compared to the prior year period, OLS SG&A expenses
increased $3.3 million primarily due to the acquisition of EOT, higher variable
spending on travel and other discretionary spending and higher employee-related
spending. ILS SG&A spending decreased $4.4 million primarily due to lower
variable spending including higher restructuring benefit and lower
employee-related spending. Corporate and other SG&A spending increased $14.5
million primarily due to higher stock-based compensation expense and higher
consulting fees partially offset by lower charges for increases in deferred
compensation plan liabilities and lower employee-related spending.
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Merger and acquisition costs
In the second quarter of fiscal 2022, we recorded $1.0 million in merger and
acquisition costs for legal and other consultants related to our merger
agreement with II-VI. In the first six months of fiscal 2022, we recorded $2.0
in merger and acquisition costs for legal and other consultants related to our
merger agreement with II-VI.
In the second quarter and first six months of fiscal 2021, we recorded
$232.0 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.
Amortization of intangible assets
Amortization of intangible assets decreased $0.0 million and $0.1 million ,
respectively, in the three and six months ended April 2, 2022 compared to the
same periods last year. The decreases were primarily due to the favorable impact
of foreign exchange rates.
OTHER INCOME (EXPENSE) - NET
Other income (expense), net, changed by $3.2 million to an expense of $5.7
million in the second quarter of fiscal 2022 from an expense of $2.5 million in
the second quarter of fiscal 2021. The increase in net other expense was
primarily due to $4.3 million lower gains/higher losses, net of expenses, on our
deferred compensation plan assets partially offset by $0.7 million lower
interest expense due to the payoff of our line of credit in October 2021 and the
favorable impact of foreign exchange rates.
Other income (expense), net, decreased by $7.1 million to an expense of $11.9
million in the first six months of fiscal 2022 from an expense of $4.8 million
in the first six months of fiscal 2021. The decrease in net other expense was
primarily due to $6.9 million lower gains/higher losses, net of expenses, on our
deferred compensation plan assets and $1.5 million higher foreign exchange
losses partially offset by $1.1 million lower interest expense due to the payoff
of our line of credit in October 2021 and the favorable impact of foreign
exchange rates.
INCOME TAXES
Our effective tax rates on income before income taxes for the three and six months endedApril 2, 2022 of 31.3% and 25.0%, respectively, were higher than theU.S. federal tax rate of 21% primarily due to the impact of income subject to foreign tax rates that are higher than theU.S. tax rates, limitations on the deductibility of compensation under Internal Revenue Code Section 162(m), stock-based compensation not deductible for tax purposes and the deferred taxes on foreign earnings not considered permanently reinvested. These amounts are partially offset by the benefit of federal research and development tax credits, the benefit of a foreign-derived intangible income deduction and ourSingapore tax exemption. Our effective tax rate for the six months endedApril 2, 2022 also reflected the excess tax benefits from restricted stock unit vesting. Our effective tax rates on loss before income taxes for the three and six months endedApril 3, 2021 of 20.4% and 14.1%, respectively, were lower than theU.S. federal tax rate of 21.0% primarily due to the benefit of federal research and development tax credits and ourSingapore tax exemption, partially offset by the establishment of valuation allowances for certain foreign deferred tax assets, the impact of income subject to foreign tax rates that are higher than theU.S. tax rates, the deferred taxes on foreign earnings not considered permanently reinvested, stock-based compensation not deductible for tax purposes and limitations on the deductibility of compensation under Internal Revenue Code Section 162(m).
LIQUIDITY AND CAPITAL RESOURCES
AtApril 2, 2022 , we had assets classified as cash and cash equivalents and short-term investments, in an aggregate amount of$402.0 million , compared to$456.5 million atOctober 2, 2021 . In addition, atApril 2, 2022 , we had$8.5 million of restricted cash. AtApril 2, 2022 , approximately$311.4 million of our cash and securities was held in certain of our foreign subsidiaries and branches,$274.9 million of which was denominated in currencies other than theU.S. Dollar. Our foreign subsidiaries loaned approximately$124.3 million of funds toCoherent, Inc. to pay a termination fee of$217.6 million to Lumentum inMarch 2021 . Our foreign subsidiaries also loaned approximately$20 million and$60 million of funds toCoherent, Inc. inFebruary 2022 andApril 2022 , respectively, in anticipated payment of certain acquisition-related fees and expenses. 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 our foreign funds are needed for and distributed to our operations inthe United States via a dividend, we may be subject to additional foreign withholding taxes and 46 -------------------------------------------------------------------------------- Table of Content s certain state taxes. The amount of theU.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 actively monitor the third-party depository institutions that hold these assets, primarily focusing on the safety of principal and secondarily maximizing yield on these assets. We diversify our cash and cash equivalents and investments among various financial institutions, money market funds and 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 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 "Part I, Item 3. 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 inGermany . 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 condensed consolidated statements of cash flows and the notes to condensed consolidated financial statements: Six Months EndedApril 2, 2022 April 3, 2021 (in thousands)
Net cash provided by (used in) operating activities
(68,319)
Issuance of shares under employee stock plans 6,566
5,896
Net settlement of restricted common stock (39,364)
(9,251)
Borrowings (repayments), net (14,692)
(5,160)
Purchases of property and equipment (35,002)
(37,045)
Net cash provided by operating activities increased by$107.1 million for the first six months of fiscal 2022 compared to the same period one year ago. The increase in cash provided by operating activities was primarily due to higher net income including non-cash adjustments and higher cash flows from deferred income taxes, partially offset by lower cash flows from accrued payroll, inventories, accounts payable, income taxes 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 inApril 2020 and through the end of calendar 2020, which we have paid or expect to pay in equal installments in the first quarters of fiscal 2022 (paid) 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. 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 47 -------------------------------------------------------------------------------- Table of Content s 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. OnApril 19, 2021 , we acquired EOT for approximately$29.3 million in cash.
On
In fiscal 2021, we made debt principal payments of
In the first six months of fiscal 2022, we made debt principal payments of$3.8 million , recorded interest expense on the Euro Term Loan of$5.9 million and recorded$1.4 million amortization of debt issuance costs.
On
OnOctober 29, 2021 , we entered into a10.0 million Euro letter of credit facility, rolled our existing letter of credit into that facility and deposited10.5 million Euros with Barclays as cash collateral to secure the payment obligations under such facility. We then terminated that facility onMarch 1, 2022 . No cash was restricted under this facility as ofApril 2, 2022 . Additional sources of cash available to us were international currency lines of credit and bank credit facilities totaling$13.8 million as ofApril 2, 2022 , of which$12.3 million was unused and available. These unsecured international credit facilities were used inEurope during the first six months of fiscal 2022. As ofApril 2, 2022 , we had utilized$1.5 million of the international credit facilities as guarantees inEurope . Our ratio of current assets to current liabilities increased to 3.3:1 atApril 2, 2022 compared to 3.1:1 atOctober 2, 2021 . The increase in our ratio was primarily due to lower other current liabilities, lower short-term borrowings and higher inventories partially offset by lower cash and cash-equivalents and higher income taxes payable. Our cash and cash equivalents and working capital are as follows: April 2, 2022 October 2, 2021 (in thousands) Cash and cash equivalents$ 402,020 $ 456,534 Working capital 821,629 797,070 Contractual Obligations and Off-Balance Sheet Arrangements We have no off-balance sheet arrangements as defined under Regulation S-K of the Securities Act of 1933. Information regarding our contractual obligations is provided in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8 "Notes to Consolidated Financial Statements" of our Annual Report on Form 10-K for the fiscal year endedOctober 2, 2021 . There have been no material changes in contractual obligations outside of the ordinary course of business sinceOctober 2, 2021 . Information regarding our other financial commitments atApril 2, 2022 is provided in the Notes to Condensed Consolidated Financial Statements in this report.
Changes in Financial Condition
Cash provided by operating activities during the first six months of fiscal 2022 was$38.8 million , which included net income of$63.9 million , stock-based compensation expense of$41.0 million , depreciation and amortization of$25.0 million , amortization of operating ROU assets of$7.5 million , amortization of debt issuance cost of$1.4 million and net decreases in deferred tax assets of$0.4 million partially offset by cash used by operating assets and liabilities of$101.9 million (primarily higher inventories, lower accrued payroll, higher accounts receivable and higher prepaid assets). Cash used in operating activities during the first six months of fiscal 2021 was$68.3 million , which included net loss of$158.1 million and net increases in deferred tax assets of$43.6 million partially offset by cash provided by operating assets and liabilities of$70.5 million (primarily higher accounts payable, lower inventories, higher accrued payroll and higher income taxes payable net of higher accounts receivable), depreciation and amortization of$26.7 million , stock-based compensation expense of$21.3 million , 48 -------------------------------------------------------------------------------- Table of Content s amortization of operating ROU assets of$8.9 million , non-cash restructuring charges of$4.1 million and amortization of debt issuance cost of$1.7 million . Cash used in investing activities during the first six months of fiscal 2022 was$31.8 million , which included$31.8 million , net of proceeds from dispositions, used to acquire property and equipment and purchase and upgrade buildings. Cash used in investing activities during the first six months of fiscal 2021 was$14.9 million , which included$35.1 million , net of proceeds from dispositions, used to acquire property and equipment and purchase and upgrade buildings partially offset by$20.2 million net maturities of available-for-sale securities. Cash used in financing activities during the first six months of fiscal 2022 was$47.5 million , which included$39.4 million in outflows due to net settlement of restricted stock units and$14.7 million net debt payments partially offset by$6.6 million generated from our employee stock purchase plan. Cash used in financing activities during the first six months of fiscal 2021 was$8.5 million , which included$9.3 million in outflows due to net settlement of restricted stock units and$5.2 million net debt payments partially offset by$5.9 million generated from our employee stock purchase plan Changes in exchange rates during the first six months of fiscal 2022 resulted in a decrease in cash balances of$11.6 million . Changes in exchange rates during the first six months of fiscal 2021 resulted in an increase in cash balances of$5.3 million . RECENT ACCOUNTING STANDARDS See Note 2, "Recent Accounting Standards" in the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption and effects on our condensed consolidated financial position, results of operations and cash flows. 49
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