Edgar Filing: COHERENT INC

2014.6.28_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________________

FORM 10-Q

___________________________________________________

(Mark One)



x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 28, 2014



¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33962

COHERENT, INC.



Delaware		94-1622541
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

5100 Patrick Henry Drive, Santa Clara, California 95054

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 764-4000

___________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x		Accelerated filer ¨

Non-accelerated filer ¨		Smaller reporting company ¨
(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of registrant’s common stock, par value $.01 per share, on August 1, 2014 was 24,942,555.

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COHERENT, INC.

INDEX



		Page
Part I.	Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Statements of Operations
	Three and nine months ended June 28, 2014 and June 29, 2013	4

	Condensed Consolidated Statements of Comprehensive Income
	Three and nine months ended June 28, 2014 and June 29, 2013	5

	Condensed Consolidated Balance Sheets
	June 28, 2014 and September 28, 2013	6

	Condensed Consolidated Statements of Cash Flows
	Nine months ended June 28, 2014 and June 29, 2013	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	42

Part II.	Other Information

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 6.	Exhibits	58

Signatures		59

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)



	Three Months Ended						Nine Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Net sales	$	196,517		$	213,725		$	589,295		$	596,985
Cost of sales	122,256			130,461			356,823			359,755
Gross profit	74,261			83,264			232,472			237,230
Operating expenses:
Research and development	19,046			21,782			60,396			61,229
Selling, general and administrative	37,226			38,748			116,413			113,076
Amortization of intangible assets	841			1,290			2,691			4,086
Total operating expenses	57,113			61,820			179,500			178,391
Income from operations	17,148			21,444			52,972			58,839
Other income (expense):
Interest and dividend income	201			48			318			161
Interest expense	(9		)	(37		)	(40		)	(60		)
Other—net	(415		)	(964		)	319			(1,196		)
Total other income (expense), net	(223		)	(953		)	597			(1,095		)
Income before income taxes	16,925			20,491			53,569			57,744
Provision for income taxes	3,926			3,806			13,560			11,904
Net income	$	12,999		$	16,685		$	40,009		$	45,840

Net income per share:
Basic	$	0.52		$	0.69		$	1.62		$	1.91
Diluted	$	0.52		$	0.68		$	1.60		$	1.87

Shares used in computation:
Basic	24,837			24,310			24,720			24,055
Diluted	25,115			24,690			25,025			24,462

See Accompanying Notes to Condensed Consolidated Financial Statements.

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COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in thousands)



	Three Months Ended						Nine Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013

Net income	$	12,999		$	16,685		$	40,009		$	45,840
Other comprehensive income (loss) (1):
Translation adjustment (2)	(800		)	7,558			3,215			450
Net gain (loss) on derivative instruments, net of taxes (3)	(157		)	—			(157		)	—
Changes in unrealized gains (losses) on available-for-sale securities, net of taxes (4)	25			(14		)	8			(21		)
Other comprehensive income (loss), net of tax	(932		)	7,544			3,066			429
Comprehensive income	$	12,067		$	24,229		$	43,075		$	46,269


(1)	Reclassification adjustments were not significant during the three and nine months ended June 28, 2014 and June 29, 2013.


(2)	Tax expense (benefit) of $118 and $1,457 was provided on translation adjustments during the three and nine months ended June 28, 2014, respectively. Tax expense (benefit) of $(226) and $(1,365) was provided on translation adjustments during the three and nine months ended June 29, 2013, respectively.


(3)	Tax expense (benefit) of $(91) was provided on net gain (loss) on derivative instruments during the three and nine months ended June 28, 2014.


(4)	Tax expense (benefit) on changes in unrealized gains (losses) on available-for-sale securities was insignificant.

See Accompanying Notes to Condensed Consolidated Financial Statements.

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COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except par value data)



	June 28, 2014		September 28, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	149,568	$	110,444
Short-term investments	153,692		139,666
Accounts receivable—net of allowances of $1,439 and $1,386, respectively	130,833		136,759
Inventories	179,767		168,067
Prepaid expenses and other assets	67,644		52,577
Deferred tax assets	23,333		21,713
Total current assets	704,837		629,226
Property and equipment, net	112,530		114,333
Goodwill	114,779		113,408
Intangible assets, net	36,041		42,971
Other assets	68,986		66,540
Total assets	$	1,037,173	$	966,478

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short term borrowings and current portion of long-term obligations	$	836	$	2
Accounts payable	32,691		36,565
Income taxes payable	13,900		24,695
Other current liabilities	105,330		84,566
Total current liabilities	152,757		145,828
Other long-term liabilities	65,900		62,132
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock, Authorized—500,000 shares, par value $.01 per share:
Outstanding—24,942 shares and 24,464 shares, respectively	248		244
Additional paid-in capital	179,172		162,253
Accumulated other comprehensive income	57,516		54,450
Retained earnings	581,580		541,571
Total stockholders’ equity	818,516		758,518
Total liabilities and stockholders’ equity	$	1,037,173	$	966,478

See Accompanying Notes to Condensed Consolidated Financial Statements.

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COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)



	Nine Months Ended
	June 28, 2014			June 29, 2013
Cash flows from operating activities:
Net income	$	40,009		$	45,840
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,006			19,386
Amortization of intangible assets	7,281			7,313
Deferred income taxes	(3,115		)	(225		)
Stock-based compensation	14,207			14,276
Other non-cash (income) expense	(376		)	483
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable	5,749			(6,981		)
Inventories	(10,262		)	(76		)
Prepaid expenses and other assets	(11,898		)	(9,936		)
Other assets	(2,714		)	(535		)
Accounts payable	(3,855		)	10,487
Income taxes payable/receivable	(13,808		)	(23,800		)
Other current liabilities	19,944			8,902
Other long-term liabilities	3,729			1,625
Net cash provided by operating activities	64,897			66,759

Cash flows from investing activities:
Purchases of property and equipment	(17,862		)	(15,366		)
Proceeds from dispositions of property and equipment	417			131
Purchases of available-for-sale securities	(161,180		)	(170,306		)
Proceeds from sales and maturities of available-for-sale securities	147,285			206,652
Acquisition of businesses, net of cash acquired	—			(67,289		)
Net cash used in investing activities	(31,340		)	(46,178		)

Cash flows from financing activities:
Short-term borrowings	45,927			9,540
Repayments of short-term borrowings	(45,091		)	(9,540		)
Capital lease repayments	(2		)	(13		)
Issuance of common stock under employee stock option and purchase plans	10,513			15,708
Cash dividend paid on common stock	—			(24,040		)
Net settlement of restricted common stock	(7,793		)	(4,163		)
Net cash provided by/(used in) financing activities	3,554			(12,508		)
Effect of exchange rate changes on cash and cash equivalents	2,013			5,477
Net increase in cash and cash equivalents	39,124			13,550
Cash and cash equivalents, beginning of period	110,444			67,761
Cash and cash equivalents, end of period	$	149,568		$	81,311

See Accompanying Notes to Condensed Consolidated Financial Statements.

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COHERENT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the Coherent, Inc. (referred to herein as the “Company,” “we,” “our,” “us” or “Coherent”) consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended September 28, 2013. In the opinion of management, all adjustments necessary for a fair presentation of financial condition and results of operation as of and for the periods presented have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year or any other interim periods. Our fiscal year ends on the Saturday closest to September 30 and our third fiscal quarters include 13 weeks of operations in each fiscal year presented. Fiscal years 2014 and 2013 each include 52 weeks.

2. RECENT ACCOUNTING STANDARDS

Adoption of New Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (the “FASB") issued guidance which requires an entity to disclose information about offsetting and related arrangements to enable financial statement users to evaluate the effect or potential effect of netting arrangements, including rights of setoff associated with the entity's recognized financial assets and liabilities, on the entity's financial position. The new disclosures will enable financial statement users to compare balance sheets prepared under U.S. GAAP and International Financial Reporting Standards ("IFRS"), which are subject to different offsetting models. The disclosures will be limited to financial instruments (and derivatives) subject to enforceable master netting arrangements or similar agreements. Similar agreements include derivative clearing agreements, global master repurchase agreements, and global master securities lending agreements. Financial instruments and transactions that will be subject to the disclosure requirements may include derivatives, repurchase and reverse repurchase agreements, and securities lending and borrowing arrangements. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We adopted this authoritative guidance in fiscal 2014. See Note 5.

In February 2013, the FASB issued guidance which requires an entity to disclose additional information for items reclassified out of accumulated other comprehensive income ("AOCI"). For items reclassified out of AOCI and into net income in their entirety, entities are required to disclose the effect of the reclassification on each affected net income line item. For AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other disclosures is required. This information may be provided either in the notes or parenthetically on the face of the statement that reports net income as long as all the information is disclosed in a single location. We adopted this authoritative guidance in the first quarter of fiscal 2014. The adoption of this accounting standard did not have an impact on our consolidated financial position, results of operations and cash flows.

Recently Issued Accounting Pronouncements

In May 2014, the FASB amended the Accounting Standards Codification and created a new Topic 606, Revenue from Contracts with Customers. The new guidance establishes a single comprehensive contract-based model for entities to use in accounting for revenue arising from contracts with customers. The new model significantly changes existing GAAP, requires substantial judgment in its application, and will generally require companies to make more disclosures about revenue. The core principle of the amendment is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new standard provides for two alternative implementation methods. The first is to apply the new standard retrospectively to each prior reporting period presented. This method does allow the use of certain practical expedients. The second method is to apply the new standard retrospectively in the year of initial adoption and record a cumulative effect adjustment for the impact of adjusting contracts open at the date of adoption. Under this transition method, we

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would apply this guidance retrospectively only to contracts that are not completed contracts at the date of initial application. We would then recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. This method also requires us to disclose comparative information for the year of adoption. We will adopt the FASB’s amended guidance for our fiscal year beginning October 1, 2017. We are currently evaluating the new guidance and have not determined the impact this standard may have on our financial statements nor decided upon the method of adoption.

In July 2013, the FASB issued amended guidance that resolves the diversity in practice for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This new accounting guidance requires the netting of unrecognized tax benefits ("UTBs") against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, UTBs will be netted against all available same-jurisdiction losses or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. The new standard requires prospective adoption but allows retrospective adoption for all periods presented. We are considering the adoption of the FASB’s amended guidance for our fiscal year beginning September 28, 2014. We do not expect the amended guidance to have a significant impact on our consolidated financial position, results of operations and cash flows.

3. BUSINESS COMBINATIONS

Fiscal 2013 Acquisitions

Lumera Laser GmbH

On December 20, 2012, we acquired privately held Lumera Laser GmbH (Kaiserslautern, Germany) ("Lumera") for approximately $51.5 million, excluding transaction costs. Lumera manufactures ultrafast solid state lasers for microelectronics, OEM medical and materials processing applications. Lumera has been included in our Specialty Lasers and Systems segment.

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



Tangible assets
Inventories	$	7,364
Accounts receivable	2,770
Other tangible assets	4,380
Goodwill	24,640
Intangible assets:
Existing technology	21,000
In-process R&D	1,800
Trade name	200
Customer lists	6,500
Backlog	900
Deferred tax liabilities	(9,300)
Liabilities assumed	(8,793)
Total	$	51,461

Results of operations for the business have been included in our condensed consolidated financial statements subsequent to the date of acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisition was not material to our prior period consolidated financial results.

None of the goodwill from this purchase is deductible for tax purposes.

The identifiable intangible assets are being amortized over their respective useful lives of less than one to six years.

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In-process research and development (“IPR&D”) consists of two projects that had not yet reached technological feasibility. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. The value assigned to IPR&D was determined by considering the value of the products under development to the overall development plan, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. During the development period, these assets will not be amortized as charges to earnings; instead these assets will be subject to periodic impairment testing. The development process for the acquired IPR&D projects was completed and amortization of the assets, as existing technologies, began in the third quarter of fiscal 2014.

We expensed $0.6 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in fiscal 2013.

Innolight Innovative Laser and Systemtechnik GmbH

On October 30, 2012, we acquired all of the outstanding shares of Innolight Innovative Laser and Systemtechnik GmbH ("Innolight") for approximately $18.3 million, excluding transaction costs. Innolight provides a core technology building block for an emerging class of commercial, sub-nanosecond lasers for microelectronics manufacturing. Its semiconductor-based architecture delivers pulsed output that can be amplified by conventional or fiber amplifiers to ultimately deliver infrared, green or ultraviolet light capable of processing a range of materials. Innolight has been included in our Specialty Lasers and Systems segment.

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



Tangible assets	$	2,510
Goodwill	8,312
Intangible assets:
Existing technology	8,500
In-process R&D	430
Trade name	100
Customer lists	2,800
Deferred tax liabilities	(3,836		)
Liabilities assumed	(480		)
Total	$	18,336

Results of operations for the business have been included in our consolidated financial statements subsequent to the date of acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisition was not material to our prior period consolidated financial results.

None of the goodwill from this purchase is deductible for tax purposes.

The identifiable intangible assets are being amortized over their respective useful lives of six to seven years.

IPR&D consists of two projects that have not yet reached technological feasibility and have not been completed as of June 28, 2014.

We expensed $0.2 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in fiscal 2013.

4. FAIR VALUES

We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from quoted market prices in active markets involving similar assets; these instruments, which mature within two years and are issued by counterparties with high credit ratings, include U.S.

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Treasury and international government obligations, investment-grade corporate bonds, certificates of deposit and commercial paper. Level 3 valuations would be based on unobservable inputs to a valuation model and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances. As of June 28, 2014 and September 28, 2013, we did not have any assets or liabilities valued based on Level 3 valuations.

Financial assets and liabilities measured at fair value as of June 28, 2014 are summarized below (in thousands):



	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
	June 28, 2014					September 28, 2013
	(Level 1)		(Level 2)			(Level 1)		(Level 2)
Money market fund deposits (1)	$	9,061	$	—		$	12,468	$	—
Certificates of deposit (1)	—		41,584			—		28,447
U.S. and international government obligations (2)(5)	—		113,071			—		109,263
Corporate notes and obligations (2)(5)	—		28,631			—		20,408
Commercial paper (2)(5)	—		11,990			—		9,995
Foreign currency contracts (3)(6)	—		(372		)	—		746
Mutual funds — Deferred comp and supplemental plan (4)(7)	14,541		—			13,419		—

___________________________________________________

(1) Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet. The carrying amounts approximate fair value due to the short-term maturities of the cash equivalents.


(2)	Included in short-term investments on the Condensed Consolidated Balance Sheet.


(3)	June 28, 2014: Includes $46 recorded in prepaid expenses and other assets, all of which was for non-designated forward contracts and $418 recorded in other current liabilities on the Condensed Consolidated Balance Sheet (see Note 5), of which $231was designated as cash flow contracts and the remainder was for non-designated forward contracts.

September 28, 2013: Includes $1,270 recorded in prepaid expenses and other assets and $524 recorded in other current liabilities on the Condensed Consolidated Balance Sheet (see Note 5), all of which were non-designated forward contracts.

(4) June 28, 2014: Includes $1,456 recorded in prepaid expenses and other assets and $13,085 recorded in other assets on the Condensed Consolidated Balance Sheet.

September 28, 2013: Includes $1,361 recorded in prepaid expenses and other assets and $12,058 recorded in other assets on the Condensed Consolidated Balance Sheet.

(5)

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

(6)

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


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

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5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

All derivatives, whether designated in hedging relationships or not, are recorded on the Condensed Consolidated Balance Sheet at fair value. We enter into foreign exchange forwards to minimize the risks of foreign currency fluctuation of specific assets and liabilities on the balance sheet; these are not designated as hedging instruments.

We maintain operations in various countries outside of the United States and have foreign subsidiaries that manufacture and sell our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the Japanese Yen, the Euro and the Korean Won. As a result, our earnings, cash flows and cash balances are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of three months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for speculative or trading purposes. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material financial losses.

For derivative instruments that are not designated as hedging instruments, gains and losses are recognized in other income (expense).

Cash flow hedges related to anticipated transactions are designated and documented at the inception of the hedge when we enter into contracts for specific future transactions. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of OCI in stockholder's equity and is reclassified into earnings when the underlying transaction affects earnings. The majority of the after-tax net income or loss related to derivative instruments included in OCI at June 28, 2014 is expected to be reclassified into earnings within 12 months. Changes in the fair value of currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and recognized in other income (expense) as incurred. We classify the cash flows from the foreign exchange forward contracts that are accounted for as cash flow hedges in the same section as the underlying item, primarily within cash flows from operating activities.

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



	U.S. Notional Contract Value						U.S. Notional Fair Value
	June 28, 2014			September 28, 2013			June 28, 2014			September 28, 2013
Euro currency hedge contracts
Purchase	$	35,599		$	46,248		$	35,580		$	47,299

Japanese YEN currency hedge contracts
Purchase	$	971		$	5,211		$	960		$	5,307
Sell	$	(8,175	)	$	(11,860	)	$	(8,136	)	$	(11,753	)

Korean Won currency hedge contracts
Sell	$	(3,308	)	$	(17,345	)	$	(3,277	)	$	(17,545	)

Chinese RMB currency hedge contracts
Sell	$	(11,551	)	$	(11,524	)	$	(11,478	)	$	(11,793	)

Other foreign currency hedge contracts
Purchase	$	3,053		$	1,466		$	3,037		$	1,481
Sell	$	(2,784	)	$	(2,512	)	$	(2,741	)	$	(2,568	)

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The outstanding notional contract and fair value amounts of designated cash flow hedge contracts, with maximum maturity of twelve months, are as follows (in thousands):



	U.S. Notional Contract Value				U.S. Notional Fair Value
	June 28, 2014		September 28, 2013		June 28, 2014		September 28, 2013
Euro currency hedge contracts
Purchase	$	11,149	$	—	$	11,397	$	—

The fair value of our derivative instruments are included in prepaid expenses and other assets and in other current liabilities in our Condensed Consolidated Balance Sheets as of June 28, 2014 and September 28, 2013. See details at Note 4 "Fair Values".

The locations and amounts of designated and non-designated derivative instruments’ gains and losses in the condensed consolidated financial statements for the indicated periods were as follows (in thousands):



	Location in financial statements	Three Months Ended					Nine Months Ended
	Location in financial statements	June 28, 2014			June 29, 2013		June 28, 2014			June 29, 2013
Derivatives designated as hedging instruments
Gains(losses) in AOCI on derivatives (effective portion), after tax	AOCI	$	(248	)	$	—	$	(248	)	$	—
Gains(losses) reclassified from AOCI into income (effective portion)	Cost of sales	$	—		$	—	$	—		$	—
Gains(losses) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Other income(expense)	$	17		$	—	$	17		$	—
Derivatives not designated as hedging instruments
Gains(losses) recognized in income	Other income(expense)	$	(1,367	)	$	338	$	(1,208	)	$	1,476

The amounts that will be reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., anticipated sales) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies and will vary from the expected amounts presented above as a result of changes in foreign exchange rates.

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

Offsetting of Financial Assets/Liabilities under Master Netting Agreements with Derivative Counterparties as of June 28, 2014 and September 28, 2013 (in thousands):

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							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
	Gross Amounts of Recognized Derivative Assets		Gross Amounts Offset in the Condensed Consolidated Balance Sheets		Net Amounts of Derivative Assets Presented in the Condensed Consolidated Balance Sheets		Financial Instruments (1)			Cash Collateral Received		Net Amounts
As of June 28, 2014:
Foreign exchange contracts	$	46	$	—	$	46	$	(41	)	$	—	$	5
As of September 28, 2013:
Foreign exchange contracts	$	1,270	$	—	$	1,270	$	(524	)	$	—	$	746

(1) The balances at June 28, 2014 and September 28, 2013 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with the master netting agreements.



									Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
	Gross Amounts of Recognized Derivative Liabilities			Gross Amounts Offset in the Condensed Consolidated Balance Sheets		Net Amounts of Derivative Liabilities Presented in the Condensed Consolidated Balance Sheets			Financial Instruments (1)		Cash Collateral Paid		Net Amounts
As of June 28, 2014:
Foreign exchange contracts	$	(418	)	$	—	$	(418	)	$	41	$	—	$	(377	)
As of September 28, 2013:
Foreign exchange contracts	$	(524	)	$	—	$	(524	)	$	524	$	—	$	—

(1) The balances at June 28, 2014 and September 28, 2013 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with the master netting agreements.

6. SHORT-TERM INVESTMENTS

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

Cash, cash equivalents and short-term investments consist of the following (in thousands):

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	June 28, 2014
	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	149,568	$	—	$	—		$	149,568

Short-term investments:
Available-for-sale securities:
Commercial paper	$	11,990	$	—	$	—		$	11,990
U.S. Treasury and agency obligations	112,443		635		(7		)	113,071
Corporate notes and obligations	28,537		98		(4		)	28,631
Total short-term investments	$	152,970	$	733	$	(11	)	$	153,692



	September 28, 2013
	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	110,444	$	—	$	—		$	110,444

Short-term investments:
Available-for-sale securities:
Commercial paper	$	9,995	$	—	$	—		$	9,995
U.S. Treasury and agency obligations	103,694		507		(1		)	104,200
International government obligations	5,040		28		(5		)	5,063
Corporate notes and obligations	20,352		66		(10		)	20,408
Total short-term investments	$	139,081	$	601	$	(16	)	$	139,666

None of the unrealized losses as of June 28, 2014 or September 28, 2013 were considered to be other-than-temporary impairments.

The amortized cost and estimated fair value of available-for-sale investments in debt securities as of June 28, 2014 and September 28, 2013 classified as short-term investments on our condensed consolidated balance sheet were as follows (in thousands):



	June 28, 2014				September 28, 2013
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Investments in available-for-sale debt securities due in less than one year	$	103,239	$	103,801	$	139,081	$	139,666
Investments in available-for-sale debt securities due in one to five years	$	49,731	$	49,891	$	—	$	—

During the three and nine months ended June 28, 2014, we received proceeds totaling $7.0 million and $21.1 million, respectively, from the sale of available-for-sale securities and realized gross gains of less than $0.1 million and $0.1 million, respectively. During the three and nine months ended June 29, 2013, we received proceeds totaling $3.0 million and $68.7 million, respectively, from the sale of available-for-sale securities and realized gross gains of less than $0.1 million and $0.1 million, respectively.

7. GOODWILL AND INTANGIBLE ASSETS

Goodwill is tested for impairment on an annual basis and between annual tests if events or circumstances indicate that an impairment loss may have occurred, and we write down these assets when impaired. We perform our annual impairment

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tests during the fourth quarter of each fiscal year using the opening balance sheet as of the first day of the fourth quarter, with any resulting impairment recorded in the fourth quarter of the fiscal year.

During the nine months ended June 28, 2014, we noted no indications of impairment or triggering events to cause us to review goodwill for potential impairment. We will conduct our annual goodwill testing during the fourth fiscal quarter.

The changes in the carrying amount of goodwill by segment for the period from September 28, 2013 to June 28, 2014 are as follows (in thousands):



	Specialty Lasers and Systems		Commercial Lasers and Components		Total
Balance as of September 28, 2013	$	107,045	$	6,363	$	113,408
Translation adjustments and other	1,371		—		1,371
Balance as of June 28, 2014	$	108,416	$	6,363	$	114,779

Components of our amortizable intangible assets are as follows (in thousands):



	June 28, 2014							September 28, 2013
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Existing technology	$	84,423	$	(57,342	)	$	27,081	$	82,220	$	(51,570	)	$	30,650
Customer lists	17,410		(9,008		)	8,402		17,341		(7,465		)	9,876
Trade name	452		(351		)	101		710		(576		)	134
Non-compete agreement	60		(57		)	3		570		(558		)	12
In-process research & development	454		—			454		2,299		—			2,299
Total	$	103,709	$	(67,668	)	$	36,041	$	103,140	$	(60,169	)	$	42,971

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

Amortization expense for intangible assets for the nine months ended June 28, 2014 and June 29, 2013 was $7.3 million and $7.3 million, respectively.

At June 28, 2014, estimated amortization expense for the remainder of fiscal 2014, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):



	Estimated Amortization Expense
2014 (remainder)	$	2,355
2015	9,375
2016	8,990
2017	7,903
2018	4,641
2019	2,470
Thereafter	307
Total	$	36,041

8. BALANCE SHEET DETAILS

Inventories consist of the following (in thousands):

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	June 28, 2014		September 28, 2013
Purchased parts and assemblies	$	54,054	$	50,275
Work-in-process	70,568		60,089
Finished goods	55,145		57,703
Total inventories	$	179,767	$	168,067

Prepaid expenses and other assets consist of the following (in thousands):



	June 28, 2014		September 28, 2013
Prepaid and refundable income taxes	$	27,090	$	23,939
Other taxes receivable	28,693		16,225
Prepaid expenses and other	11,861		12,413
Total prepaid expenses and other assets	$	67,644	$	52,577

Other assets consist of the following (in thousands):



	June 28, 2014		September 28, 2013
Assets related to deferred compensation arrangements	$	25,731	$	23,446
Deferred tax assets	37,439		37,637
Other assets	5,816		5,457
Total other assets	$	68,986	$	66,540

Other current liabilities consist of the following (in thousands):



	June 28, 2014		September 28, 2013
Accrued payroll and benefits	$	30,736	$	29,723
Deferred income	16,631		16,994
Reserve for warranty	17,875		18,508
Accrued expenses and other	9,735		11,552
Other taxes payable	27,666		6,147
Customer deposits	2,687		1,642
Total other current liabilities	$	105,330	$	84,566

We provide warranties on the majority of our product sales and reserves for estimated warranty costs are recorded during the period of sale. The determination of such reserves requires us to make estimates of product return rates and expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line. The weighted average warranty period covered is approximately 15 months. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in future periods.

Components of the reserve for warranty costs during the first nine months of fiscal 2014 and 2013 were as follows (in thousands):

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	Nine Months Ended
	June 28, 2014			June 29, 2013
Beginning balance	$	18,508		$	17,442
Additions related to current period sales	17,990			18,739
Warranty costs incurred in the current period	(18,320		)	(19,681		)
Accruals resulting from acquisitions	—			1,728
Adjustments to accruals related to foreign exchange and other	(303		)	(154		)
Ending balance	$	17,875		$	18,074

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



	June 28, 2014		September 28, 2013
Long-term taxes payable	$	15,786	$	15,715
Deferred compensation	27,042		24,723
Deferred tax liabilities	10,565		10,487
Deferred income	3,896		2,734
Asset retirement obligations liability	2,276		2,247
Other long-term liabilities	6,335		6,226
Total other long-term liabilities	$	65,900	$	62,132

9. SHORT-TERM BORROWINGS

We have several lines of credit which allow us to borrow in the applicable local currency. We have a total of $15.6 million of unsecured foreign lines of credit as of June 28, 2014. At June 28, 2014, $0.8 million was used as a cash overdraft in Japan and we had used $3.0 million of these available foreign lines of credit as guarantees. These credit facilities were used in Europe and Japan during the third fiscal quarter of 2014. In addition, our domestic line of credit consists of a $50.0 million unsecured revolving credit account with Union Bank of California. The agreement will expire on May 31, 2017. The line of credit is subject to covenants related to financial ratios and tangible net worth with which we are currently in compliance. No amounts have been drawn upon our domestic line of credit as of June 28, 2014.

10. STOCK-BASED COMPENSATION

Fair Value of Stock Compensation

We recognize compensation expense for all share based payment awards based on the fair value of such awards. The expense is recognized on a straight-line basis over the respective requisite service period of the awards.

Determining Fair Value

The fair values of shares purchased under the Employee Stock Purchase Plan (“ESPP”) for the three and nine months ended June 28, 2014 and June 29, 2013, respectively, were estimated using the following weighted-average assumptions:



	Employee Stock Purchase Plan
	Three Months Ended						Nine Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Expected life in years	0.5			0.5			0.5			0.5
Expected volatility	24.2		%	30.8		%	23.9		%	33.3		%
Risk-free interest rate	0.06		%	0.11		%	0.07		%	0.14		%
Expected dividend yield	—		%	—		%	—		%	1.0		%
Weighted average fair value per share	$	13.55		$	10.60		$	13.64		$	10.49

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There were no stock options granted during the three and nine months ended June 28, 2014 and June 29, 2013.

Restricted stock awards and restricted stock units are independent of option grants and are typically subject to vesting restrictions—either time-based or performance-based conditions for vesting. Until restricted stock vests, shares (including those issuable upon vesting of the applicable restricted stock unit) are subject to forfeiture if employment terminates prior to the release of restrictions and cannot be transferred.

•The service based restricted stock awards generally vest three years from the date of grant.

•The service based restricted stock unit awards are generally subject to annual vesting over three years from the date of grant.

•The market-based performance restricted stock unit award grants are generally either subject to annual vesting over three years from the date of grant or subject to a single vest measurement three years from the date of grant, depending upon achievement of performance measurements based on the performance of the Company's total shareholder returns (as defined in the plan) compared with the performance of the Russell 2000 Index.

We grant market-based performance restricted stock unit award grants to officers and certain employees. The performance stock unit agreements provide for the award of performance stock units with each unit representing the right to receive one share of our common stock to be issued after the applicable award period. The final number of units awarded for this grant will be determined as of the vesting dates, based upon our total shareholder return over the performance period compared to the Russell 2000 Index and could range from a minimum of no units to a maximum of twice the initial award. The weighted average fair value for these performance units was determined using a Monte Carlo simulation model incorporating the following weighted average assumptions:



	Nine Months Ended
	June 28, 2014		June 29, 2013
Risk-free interest rate	0.62	%	0.33	%
Volatility	36.9	%	37.9	%
Weighted average fair value	$77.10		$48.48

We recognize the estimated cost of these awards, as determined under the simulation model, over the related service period, with no adjustment in future periods based upon the actual shareholder return over the performance period.

Stock-Based Compensation Expense

The following table shows total stock-based compensation expense and related tax benefits included in the condensed consolidated statements of operations for the three and nine months ended June 28, 2014 and June 29, 2013 (in thousands):



	Three Months Ended						Nine Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Cost of sales	$	611		$	576		$	1,797		$	1,605
Research and development	504			455			1,526			1,398
Selling, general and administrative	3,552			3,610			10,884			11,274
Income tax benefit	(1,270		)	(1,195		)	(3,935		)	(3,823		)
	$	3,397		$	3,446		$	10,272		$	10,454

During the three and nine months ended June 28, 2014, $0.6 million and $1.9 million was capitalized into inventory for all stock plans, $0.6 million and $1.8 million was amortized to cost of sales and $0.7 million remained in inventory at June 28, 2014. During the three and nine months ended June 29, 2013, $0.5 million and $1.7 million was capitalized into inventory for all stock plans, $0.6 million and $1.6 million was amortized to cost of sales and $0.7 million remained in inventory at June 29, 2013. Management has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

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At June 28, 2014, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock plans but not yet recognized was approximately $21.2 million, net of estimated forfeitures of $0.8 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.5 years and will be adjusted for subsequent changes in estimated forfeitures.

At June 28, 2014, total compensation cost related to options to purchase common shares under the ESPP but not yet vested was approximately $0.6 million, which will be recognized over the six month offering period.

The stock option exercise tax benefits reported in the statement of cash flows results from the excess tax benefits arising from tax deductions in excess of the stock-based compensation cost recognized, determined on a grant-by-grant basis. During the first nine months of fiscal 2014 and fiscal 2013, we have not generated any excess tax benefits as cash flows from financing activities.

Stock Options & Awards Activity

The following is a summary of option activity for our Stock Option Plans (in thousands, except per share amounts and weighted average remaining contractual term in years):



	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at September 28, 2013	270		$	26.90
Granted	—		—
Exercised	(156	)	25.45
Forfeitures	—		—
Expirations	—		—
Outstanding at June 28, 2014	114		$	28.87	4.0 years	$	3,759
Vested and expected to vest at June 28, 2014	114		$	28.87	4.0 years	$	3,759
Exercisable at June 28, 2014	106		$	27.68	3.7 years	$	3,622

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock at the end of the reporting period. The aggregate intrinsic value of options exercised under the Company’s stock plans for the three and nine months ended June 28, 2014 were $0.1 million and $6.3 million, respectively, determined as of the date of option exercise. The aggregate intrinsic value of options exercised under the Company’s stock plans for the three and nine months ended June 29, 2013 were $0.5 million and $8.5 million, respectively, determined as of the date of option exercise.

The following table summarizes the activity of our time based and market- performance based restricted stock units for the first nine months of fiscal 2014 (in thousands, except per share amounts):



	Time Based Restricted Stock Units				Market-Based Performance Restricted Stock Units
	Number of Shares(1)		Weighted Average Grant Date Fair Value		Number of Shares(2)		Weighted Average Grant Date Fair Value
Nonvested stock at September 28, 2013	453		$	48.22	213		$	54.63
Granted	226		65.80		52		77.10
Vested	(273	)	47.78		(33	)	43.25
Forfeited	(8	)	56.47		(3	)	46.99
Nonvested stock at June 28, 2014	398		$	58.31	229		$	61.46

__________________________________________

(1)Service-based restricted stock vested during each fiscal year.

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(2)Performance-based awards and units included at 100% of target goal; under the terms of the awards, the recipient may earn between 0% and 200% of the award.

11. COMMITMENTS AND CONTINGENCIES

We are subject to legal claims and litigation arising in the ordinary course of business, such as product liability, employment or intellectual property claims, including, but not limited to, the matters described below. On May 14, 2013, IMRA America (“Imra”) filed a complaint for patent infringement against two of our subsidiaries in the Regional Court of Düsseldorf, Germany, captioned In re IMRA America Inc. versus Coherent Kaiserslautern GmbH et. al. 4b O 38/13. The complaint alleges that the use of certain of the Company’s lasers infringes upon EP Patent No. 754,103, entitled “Method For Controlling Configuration of Laser Induced Breakdown and Ablation,” issued November 5, 1997. The patent is owned by the University of Michigan and licensed to Imra. The complaint seeks unspecified compensatory damages, the cost of court proceedings and seeks to permanently enjoin the Company from infringing the patent in the future. Management has made an accrual with respect to this matter and has determined, based on its current knowledge, that the amount or range of reasonably possible losses in excess of the amounts already accrued, is not reasonably estimable. Although we do not expect that such legal claims and litigation will ultimately have a material adverse effect on our consolidated financial position, results of operations or cash flows, an adverse result in one or more matters could negatively affect our results in the period in which they occur.

12. ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income (net of tax) at June 28, 2014 and September 28, 2013 is substantially comprised of accumulated translation adjustments of $57.8 million and $54.4 million, respectively.

13. EARNINGS PER SHARE

Basic earnings per share is computed based on the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive employee stock awards, including stock options, restricted stock awards and stock purchase plan contracts, using the treasury stock method.

The following table presents information necessary to calculate basic and diluted earnings per share (in thousands, except per share data):

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	Three Months Ended				Nine Months Ended
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Weighted average shares outstanding —basic	24,837		24,310		24,720		24,055
Dilutive effect of employee stock awards	278		380		305		407
Weighted average shares outstanding—diluted	25,115		24,690		25,025		24,462

Net income	$	12,999	$	16,685	$	40,009	$	45,840

Net income per basic share	$	0.52	$	0.69	$	1.62	$	1.91
Net income per diluted share	$	0.52	$	0.68	$	1.60	$	1.87

A total of 758 and 44,563 potentially dilutive securities have been excluded from the diluted share calculation for the three and nine months ended June 28, 2014 as their effect was anti-dilutive. A total of 2,999 and 82,053 potentially dilutive securities have been excluded from the diluted share calculation for the three and nine months ended June 29, 2013 as their effect was anti-dilutive.

14. OTHER INCOME (EXPENSE)

Other income (expense) is as follows (in thousands):



	Three Months Ended						Nine Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Foreign exchange gain (loss)	$	(736	)	$	(1,927	)	$	(3,248	)	$	(3,655	)
Gain on deferred compensation investments, net	331			1,010			3,498			2,287
Other—net	(10		)	(47		)	69			172
Other income (expense), net	$	(415	)	$	(964	)	$	319		$	(1,196	)

15. STOCK REPURCHASES AND DIVIDENDS

On October 4, 2012, the Board of Directors authorized a buyback program whereby we are authorized to repurchase up to $25.0 million of our common stock. The program was authorized for 12 months from the date of authorization. No shares had been purchased under this program at its expiration in October 2013.

On December 10, 2012, we announced that the Board of Directors approved a $1.00 per share special cash dividend on our outstanding common stock payable on December 27, 2012 to stockholders of record on December 19, 2012, resulting in a payment of $24.0 million in the first quarter of fiscal 2013.

See Note 18 "Subsequent Event".

16. INCOME TAXES

Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries, adjusted for items which are considered discrete to the period. Our effective tax rates for the three and nine months ended June 28, 2014 were 23.2% and 25.3%. Our effective tax rates for the three and nine months ended June 28, 2014 were lower than the statutory rate of 35% primarily due to permanent differences related to the benefit of income subject to foreign tax rates that are lower than U.S. tax rates including Korea and Singapore tax exemptions and the benefit of foreign tax credits. These amounts are partially offset by deemed dividend inclusions under the Subpart F tax rules, stock compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m).

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

We are subject to taxation and file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. For U.S. federal income tax purposes, all years prior to 2011 are closed. In our major foreign jurisdictions and our major state jurisdictions, the years prior to 2006 and 2009, respectively, are closed to examination. Earlier years in our various jurisdictions may remain open for adjustment to the extent that we have tax attribute carryforwards from those years. In December 2011 and January 2012, three of our German subsidiaries received notices of tax audits for the fiscal years 2006 through 2010. In fiscal year 2013, we received a preliminary assessment for two of the German subsidiaries and the amount is immaterial; the audit for the other German subsidiary is currently in process. In addition, we received in July 2014 a final tax assessment for our German subsidiary of Coherent Kaiserslautern GmbH (formerly Lumera Laser GmbH) that was acquired in December 2012 and was under audit for the fiscal years 2007 through 2009. The tax assessment is immaterial and since the years under the audit for Coherent Kaiserslautern GmbH are related to the pre-acquisition periods, the amount should be recoverable from the escrow account for the acquisition.

Management believes that it has adequately provided for any adjustments that may result from tax examinations. We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign and state tax matters may be concluded in the next 12 months.

17. SEGMENT INFORMATION

We are organized into two reportable operating segments: Specialty Lasers and Systems ("SLS") and Commercial Lasers and Components ("CLC"). This segmentation reflects the go-to-market strategies for various products and markets. While both segments work to deliver cost-effective solutions, SLS develops and manufacturers configurable, advanced-performance products largely serving the microelectronics, scientific research and government programs and OEM components and instrumentation markets. The size and complexity of many of our SLS products require service to be performed at the customer site by factory-trained field service engineers. CLC focuses on higher volume products that are offered in set configurations. The product architectures are designed for easy exchange at the point of use such that product service and repairs are based upon advanced replacement and depot (i.e., factory) repair. CLC's primary markets include materials processing, OEM components and instrumentation and microelectronics.

We have identified SLS and CLC as operating segments for which discrete financial information is available. Both units have dedicated engineering, manufacturing, product business management and product line management functions. Occasionally, a small portion of our outside revenue is attributable to projects and recently developed products for which a segment has not yet been determined. The associated direct and indirect costs are presented in the category of Corporate and other, along with other corporate costs as described below.

Our Chief Executive Officer has been identified as the chief operating decision maker (CODM) as he assesses the performance of the segments and decides how to allocate resources to the segments. Income (loss) from operations is the measure of profit and loss that our CODM uses to assess performance and make decisions. As assets are not a measure used to assess the performance of the company by the CODM, asset information is not tracked or compiled by segment and is not available to be reported in our disclosures. Income (loss) from operations represents the net sales less the cost of sales and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain operating expenses which we manage separately at the corporate level. These unallocated costs include stock-based compensation and corporate functions (certain research and development, management, finance, legal and human resources) and are included in the results below under Corporate and other in the reconciliation of operating results. Management does not consider unallocated Corporate and other costs in its measurement of segment performance.

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The following table provides net sales and income (loss) from operations for our operating segments (in thousands):



	Three Months Ended						Nine Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Net sales:
Specialty Laser Systems	$	137,590		$	149,466		$	418,208		$	423,608
Commercial Lasers and Components	58,927			64,259			171,087			173,377
Total net sales	$	196,517		$	213,725		$	589,295		$	596,985

Income (loss) from operations:
Specialty Laser Systems	$	27,144		$	28,071		$	86,893		$	84,990
Commercial Lasers and Components	(162		)	4,395			15			7,667
Corporate and other	(9,834		)	(11,022		)	(33,936		)	(33,818		)
Total income from operations	$	17,148		$	21,444		$	52,972		$	58,839

The following table provides a reconciliation of our total income (loss) from operations to net income (in thousands):



	Three Months Ended						Nine Months Ended
Reconciliation of Income From Operations to Net Income	June 28, 2014			June 29, 2013			June 28, 2014		June 29, 2013
Total income from operations	$	17,148		$	21,444		$	52,972	$	58,839
Total other income (expense), net	(223		)	(953		)	597		(1,095		)
Income before income taxes	16,925			20,491			53,569		57,744
Provision for income taxes	3,926			3,806			13,560		11,904
Net Income	$	12,999		$	16,685		$	40,009	$	45,840

Major Customers

We had one customer who accounted for 13.9% and 13.0% of consolidated net sales during the three and nine months ended June 28, 2014, respectively. This customer purchased primarily from our SLS segment. There were two customers who accounted for 16.2% and 11.2% of consolidated net sales for the three months ended June 29, 2013 and the same two customers accounted for 13.3% and 10.0%, respectively, of consolidated revenue for the nine months ended June 29, 2013; both customers purchased primarily from our SLS segment.

We had one customer who accounted for 16.5% of accounts receivable at June 28, 2014. There were two customers who accounted for 15.2% and 11.7%, respectively, of accounts receivable at September 28, 2013.

18. SUBSEQUENT EVENT

On July 25, 2014, our Board of Directors authorized a buyback program authorizing the Company to repurchase up to $25 million of our common stock from time to time through July 31, 2015.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMPANY OVERVIEW

BUSINESS BACKGROUND

We are one of the world’s leading suppliers of photonics-based solutions in a broad range of commercial and scientific research applications. We design, manufacture, service and market lasers and related accessories for a diverse group of customers. Since

inception in 1966, we have grown through internal expansion and through strategic acquisitions of complementary businesses, technologies, intellectual property, manufacturing processes and product offerings.

We are organized into two operating segments: Specialty Lasers and Systems (“SLS”) and Commercial Lasers and Components (“CLC”). This segmentation reflects the go-to-market strategies for various products and markets. While both segments deliver cost-effective photonics solutions, SLS develops and manufactures configurable, advanced performance products largely serving the microelectronics, scientific research and government programs and OEM components and instrumentation markets. The size and complexity of many of the SLS products require service to be performed at the customer site by factory trained field service engineers. CLC focuses on higher volume products that are offered in set configurations. The product architectures are designed for easy exchange at the point of use such that substantially all product service and repairs are based upon advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include materials processing, original equipment manufacturer (“OEM”) components and instrumentation and microelectronics.

Income (loss) from operations is the measure of profit and loss that our chief operating decision maker (“CODM”) uses to assess performance and make decisions. Income (loss) from operations represents the sales less the cost of sales and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain operating expenses, which we manage separately at the corporate level. These unallocated costs include stock-based compensation and corporate functions (certain advanced research and development, management, finance, legal and human resources) and are included in Corporate and other. Management does not consider unallocated Corporate and other costs in its measurement of segment performance.

MARKET APPLICATIONS

Our products address a broad range of applications that we group into the following markets: Microelectronics, Scientific Research and Government Programs, OEM Components and Instrumentation and Materials Processing.

OUR STRATEGY

We strive to develop innovative and proprietary products and solutions that meet the needs of our customers and that are based on our core expertise in lasers and optical technologies. In pursuit of our strategy, we intend to:

•

Leverage our technology portfolio and application engineering to lead the proliferation of photonics into broader markets—We will continue to identify opportunities in which our technology portfolio and application engineering can be used to offer innovative solutions and gain access to new markets. We plan to utilize our expertise to increase our market share in the mid to high power material processing applications.


•	Optimize our leadership position in existing markets—There are a number of markets where we have historically been at the forefront of technological development and product deployment and from which we have derived a substantial portion of our revenues. We plan to optimize our financial returns from these markets.

•

Maintain and develop additional strong collaborative customer and industry relationships—We believe that the Coherent brand name and reputation for product quality, technical performance and customer satisfaction will help us to further develop our loyal customer base. We plan to maintain our current customer relationships and develop new ones with customers who are industry leaders and work together with these customers to design and develop innovative product systems and solutions as they develop new technologies.


•	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.

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•

Streamline our manufacturing structure and improve our cost structure—We will focus on optimizing the mix of products that we manufacture internally and externally. We will utilize vertical integration where our internal manufacturing process is considered proprietary and seek to leverage external sources when the capabilities and cost structure are well developed and on a path towards commoditization.

•

Focus on long-term improvement of adjusted EBITDA, in dollars and as a percentage of net sales—We define adjusted EBITDA as operating income adjusted for depreciation, amortization, stock compensation expenses, major restructuring costs and certain other non-operating income and expense items. Key initiatives to reach our goals for EBITDA improvements include utilization of our Asian manufacturing locations, rationalizing our supply chain and continued leveraging of our infrastructure.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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 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, accounting for long-lived assets (including goodwill and intangible assets), inventory valuation, warranty reserves, stock-based compensation 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 ended September 28, 2013.

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.



	Three Months Ended
	June 28, 2014			June 29, 2013			Change			% Change
	(Dollars in thousands)

Bookings	$	244,527		$	189,206		$	55,321		29.2	%
Book-to-bill ratio	1.24			0.89			0.35			39.3	%
Net sales—Specialty Lasers and Systems	$	137,590		$	149,466		$	(11,876	)	(7.9	)%
Net sales—Commercial Lasers and Components	$	58,927		$	64,259		$	(5,332	)	(8.3	)%
Gross profit as a percentage of net sales— Specialty Lasers and Systems	40.9		%	40.3		%	0.6		%	1.5	%
Gross profit as a percentage of net sales—Commercial Lasers and Components	31.6		%	36.7		%	(5.1		)%	(13.9	)%
Research and development as a percentage of net sales	9.7		%	10.2		%	(0.5		)%	(4.9	)%
Income before income taxes	$	16,925		$	20,491		$	(3,566	)	(17.4	)%
Net cash provided by (used in) operating activities	$	20,478		$	(3,665	)	$	24,143		(658.7	)%
Days sales outstanding in receivables	59.9			61.6			(1.7		)	(2.8	)%
Annualized third quarter inventory turns	2.7			3.1			(0.4		)	(12.9	)%
Capital spending as a percentage of net sales	2.0		%	2.3		%	(0.3		)%	(13.0	)%
Net income as a percentage of net sales	6.6		%	7.8		%	(1.2		)%	(15.4	)%
Adjusted EBITDA as a percentage of net sales	15.8		%	17.3		%	(1.5		)%	(8.7	)%

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	Nine Months Ended
	June 28, 2014			June 29, 2013			Change			% Change
	(Dollars in thousands)

Bookings	$	707,826		$	567,004		$	140,822		24.8	%
Book-to-bill ratio	1.20			0.95			0.25			26.3	%
Net sales—Specialty Lasers and Systems	$	418,208		$	423,608		$	(5,400	)	(1.3	)%
Net sales—Commercial Lasers and Components	$	171,087		$	173,377		$	(2,290	)	(1.3	)%
Gross profit as a percentage of net sales— Specialty Lasers and Systems	42.5		%	41.6		%	0.9		%	2.2	%
Gross profit as a percentage of net sales—Commercial Lasers and Components	33.2		%	36.3		%	(3.1		)%	(8.5	)%
Research and development as a percentage of net sales	10.2		%	10.3		%	(0.1		)%	(1.0	)%
Income before income taxes	$	53,569		$	57,744		$	(4,175	)	(7.2	)%
Net cash provided by operating activities	$	64,897		$	66,759		$	(1,862	)	(2.8	)%
Capital spending as a percentage of net sales	3.0		%	2.6		%	0.4		%	15.4	%
Net income as a percentage of net sales	6.8		%	7.7		%	(0.9		)%	(11.7	)%
Adjusted EBITDA as a percentage of net sales	16.6		%	17.4		%	(0.8		)%	(4.6	)%

Definitions and analysis of these performance indicators are as follows:

Bookings and Book-to-Bill Ratio

Bookings represent orders received during the current period for products and services to be provided pursuant to service contracts. While we generally have not experienced a significant rate of cancellation, bookings are generally cancelable by our customers without substantial penalty and, therefore, we cannot assure all bookings will be converted to net sales.

The book-to-bill ratio is calculated as quarterly bookings divided by quarterly net sales. This is an indication of the strength of our business but can sometimes be impacted by a single large order. A ratio of greater than 1.0 indicates that demand for our products is greater than what we supply in the quarter whereas a ratio of less than 1.0 indicates that demand for our products is less than what we supply in the quarter.

Bookings increased 29.2% in the third quarter of fiscal 2014 compared to the same quarter one year ago, with increases in the microelectronics and OEM components and instrumentation markets partially offset by decreases in the materials processing market. Compared to the second quarter of fiscal 2014, bookings decreased 6.6% with decreases in the microelectronic markets partially offset by increases in the OEM components and instrumentation, materials processing and scientific and government programs markets. The book-to-bill ratio was 1.24 in the third quarter of fiscal 2014.

Microelectronics

Microelectronics bookings increased 40% compared to the same quarter one year ago due to the timing of large excimer laser annealing orders for the flat panel display market and decreased 28% from bookings in the second quarter of fiscal 2014. The microelectronics book-to-bill ratio for the third quarter of fiscal 2014 was 1.30.

Flat panel display (FPD) orders in the third quarter of fiscal 2014 increased 109% from the same quarter one year ago and decreased 44% from orders in the second quarter of fiscal 2014. The decrease from the second quarter of fiscal 2014 to the third quarter of fiscal 2014 was primarily due to the receipt of a large order from one customer for excimer laser annealing systems for low-temperature polycrystalline silicon (LTPS) processing in the second quarter of fiscal 2014, some of which are expected to ship during the fourth quarter of fiscal 2014 with the majority scheduled for shipment during fiscal 2015. The increase in bookings year over year was primarily due to our receipt of additional system orders from other mobile display customers in the third quarter of fiscal 2014, with deliveries scheduled to begin in the fourth quarter of fiscal 2014 and continuing into the second quarter of fiscal 2015. These new orders are destined for a different set of end customers whose primary emphasis is LTPS-backplanes for LCDs. The added capacity at our customers will support further smartphone share and expected growth in tablet penetration. Given our customers' interest for capacity beyond our existing backlog, we elected to

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deploy additional demo systems into the field to enable integrators to run test panels for prospective customers. The conversion rate for Linebeam demo systems has been historically high and thus the outlook for new orders in calendar 2015 is currently strong. Our development efforts on the Linebeam 1500 are progressing as planned and we continue to forecast first shipments towards the end of calendar 2014 or early in calendar 2015. We expect continued fluctuations in order volumes on a quarterly basis.

Orders in the advanced packaging (API) market decreased 48% from the same quarter one year ago and increased 6% from orders in the second quarter of fiscal 2014. The market remains constrained despite reasonably high utilization rates at major PCB makers. We believe that overall slowing mobile growth rates, an increase in imbedded capability and a lack of unit volume transparency at Chinese handset manufacturers have led to a cautious capacity investment model. Customers are utilizing on-hand inventory which will necessitate some level of reordering in the second half of calendar 2014.

Orders from semiconductor capital equipment OEMs increased 72% from the third quarter of fiscal 2013 and 74% from the second quarter of fiscal 2014. Semiconductor capital equipment orders increased significantly due to strong service bookings, which is consistent with high fab utilization rates reported by industry experts. When comparing semiconductor device revenues with equipment and materials spending, we believe that fabs are focused on improving yield and throughput which we believe will result in higher capital equipment spending in calendar 2015, especially as 3D structures at 14nm and below become more prevalent in logic and memory devices. Continued delays in extreme ultra-violet (EUV) deployment also help our semiconductor capital equipment business since double-patterning requires roughly twice as many process steps, including inspection and metrology, than EUV.

We had previously reported a large order for sapphire cover glass processing, but process issues slowed the acceptance of the laser-based tools by our customer, resulting in lower revenues for the third quarter of fiscal 2014 and a possible delay of the next volume order into the first quarter of fiscal 2015 as we complete shipments for the initial order. In the short to mid-term, the interest in this and similar processing techniques combined with the device manufacturers’ desire to use local integrators creates a challenge as the integrators are very good at cost engineering and providing fast service support, but have limited experience with these types of processes. We plan to provide greater process and tool design support to help them grow the market and consume more lasers.

Materials Processing

Materials processing orders decreased 7% compared to the same quarter one year ago and increased 37% from the second quarter of fiscal 2014. The materials processing book-to-bill ratio for the third quarter of fiscal 2014 was 1.21.

In the third quarter of fiscal 2014, we received a number of annual orders across the materials processing market with much of it coming from outside of China. Marking and engraving applications were the biggest contributors to bookings and included record orders for short pulse lasers from the automotive and tool industries. Marking has traditionally been a monochromatic experience, but there has been long-term fascination with color marking, usually involving photochemical manipulation of the bulk material to create an indelible mark in the material rather than a surface effect. There is the potential for a broad range of uses from customizing cell phone cases to branded dishware for airlines. Recently, we installed a HOPS™-based marking system with a major automotive manufacturer for color marking of auto interiors with favorable results and the first cars with color-marking will be delivered to a professional sports team.

We have made further progress in high power lasers and systems, with several new OEMs placing orders for kilowatt fiber lasers including multiple volume customers in China and India. We booked initial orders for new additive manufacturing customers in the U.S. and Europe. Our laser manufacturing workstations have been well received since their recent release and additional launches specifically targeting the metal cutting market are scheduled for later this calendar year.

OEM Components and Instrumentation

Record-setting OEM Components and Instrumentation orders increased 72% compared to the same quarter one year ago and 45% from the second quarter of fiscal 2014 driven largely by timing of volume orders from medical OEM accounts. The corresponding book-to-bill ratio for the third quarter of fiscal 2014 was 1.28.

Exceptionally strong orders for medical OEM products were 232% higher in the third quarter of fiscal 2014 compared to the same quarter one year ago and 102% higher than orders in the second quarter of fiscal 2014. One of our major LASIK customers placed a large multi-year order and the cataract market was higher than forecast. Dental bookings were ahead of forecast and demand for ophthalmic lasers was strong. These orders signal confidence in both patient-pay and insurance-

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covered procedures. We expect continued growth for cataract and dental applications over the next few years and are developing new products in support of this.

Instrumentation orders decreased 7% compared to the same quarter one year ago and 5% compared to the second quarter of fiscal 2014. Flow cytometry and microscopy applications drove most of the OEM instrumentation bookings, which is consistent with trends over the past few years. The cytometry market is seeing an influx of products from Chinese manufacturers, whose market share is small today, but could grow substantially in the next 3-5 years as they broaden their reagent offerings, advance their cytometers and address both the high-end and budget markets. This is one of the reasons we developed the BioRay™ product, which offers performance advantages and a competitive cost of ownership compared to light-emitting diodes (LEDs). We are also pursuing some interesting business in rapid DNA sequencing with our high-performance HOPS™ platform for use in a diverse range of applications from agriculture to cancer gene analysis and we expect deployment decisions will be made in calendar year 2015.

Scientific and Government Programs

Scientific and government programs orders were flat compared to the same quarter one year ago and increased 16% from the second quarter of fiscal 2014. The book-to-bill for the third quarter of fiscal 2014 was 1.03.

Compared to the second quarter of fiscal 2014, third quarter bookings increased due to better demand in the U.S. and Europe during the third quarter. The Japanese research market remains weak while the rest of Asia was in-line with expectations. Roughly two-thirds of all orders in the third quarter of fiscal 2014 were for ultrafast lasers used in biological imaging, applied physics, chemistry and materials science.

Optogenetics is still among the hottest research topics. While Western scientists have pioneered the field, Asian researchers are entering this market, driving the emergence of niche, high-performance imaging systems from a variety of start-up companies. This, in turn, is creating new requirements for laser sources used in these systems. Our next generation lasers due out in fiscal 2015 have a performance envelope that overlaps nicely with these requirements.

Net Sales

Net sales include sales of lasers, laser tools, related accessories and service. Net sales for the third fiscal quarter decreased 7.9% in our SLS segment and decreased 8.3% in our CLC segment from the same quarter one year ago. Net sales for the first nine months decreased 1.3% in both our SLS and CLC segments 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 of this quarterly report.

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 in the third quarter increased from 40.3% to 40.9% in our SLS segment and decreased from 36.7% to 31.6% in our CLC segment from the same quarter one year ago. Gross profit percentage in the first nine months increased from 41.6% to 42.5% in our SLS segment and decreased from 36.3% to 33.2% in our CLC segment from the same period one year ago. For a description of the reasons for changes in gross profit refer to the “Results of Operations” section of this quarterly report.

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 9.7% from 10.2% in our third fiscal quarter and decreased to 10.2% from 10.3% for the first nine months of fiscal 2014 compared to the same periods one year ago. For a description of the reasons for changes in R&D spending refer to the “Results of Operations” section of this quarterly report.

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

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indicator because cash generation over the long term is essential to maintaining a healthy business and providing funds to help fuel growth. For a description of the reasons for changes in Net Cash Provided by Operating Activities refer to the “Liquidity and Capital Resources” section of this quarterly report.

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 third quarter of fiscal 2014 decreased 1.7 days from the same quarter one year ago primarily due to the timing of payments at quarter end, a higher concentration of sales in the U.S. where DSO is typically lower and a lower concentration of sales with longer payment terms in Japan.

Annualized Third Quarter Inventory Turns

We calculate annualized third quarter inventory turns as the cost of sales during the third quarter annualized and divided by net inventories at the end of the third quarter. This indicates how well we are managing our inventory levels, with higher inventory turns resulting in more working capital availability and a higher return on our investments in inventory. The more money we have tied up in inventory, the less money we have available for research and development, acquisitions, expansion, marketing and other activities to grow our business. Our annualized inventory turns for the third quarter of fiscal 2014 decreased by 0.4 turns from the same quarter one year ago primarily due to the timing of inventory levels to both support the large annealing laser systems and as a result of the timing of shipments as well as the impact of foreign exchange rates.

Capital Spending as a Percentage of Net Sales

Capital spending as a percentage of net sales (“capital spending percentage”) is calculated as capital expenditures for the period divided by net sales for the period. Capital spending percentage indicates the extent to which we are expanding or improving our operations, including investments in technology and equipment. Management monitors capital spending levels as this assists management in measuring our cash flows, net of capital expenditures. Our capital spending percentage decreased to 2.0% from 2.3% for the third quarter and increased to 3.0% from 2.6% for the first nine months of fiscal 2014 compared to the same periods one year ago. The quarterly decrease was due to delayed timing of spending on various capital projects. The year-to-date increase was primarily due to higher purchases of production-related assets to support new product introductions and continued growth in Asia.

Adjusted EBITDA as a Percentage of Net Sales

We define adjusted EBITDA as operating income adjusted for depreciation, amortization, stock compensation expenses, major restructuring costs and certain other non-operating income and expense items. Key initiatives to reach our goals for EBITDA improvements include utilization of our Asian manufacturing locations, rationalizing our supply chain and continued leveraging of our infrastructure.

We utilize a number of different financial measures, both GAAP and non-GAAP, such as adjusted EBITDA as a percentage of net sales, in analyzing and assessing our overall business performance, for making operating decisions and for forecasting and planning future periods. We consider the use of non-GAAP financial measures helpful in assessing our current financial performance and ongoing operations. While we use non-GAAP financial measures as a tool to enhance our understanding of certain aspects of our financial performance, we do not consider these measures to be a substitute for, or superior to, the information provided by GAAP financial measures. We provide adjusted EBITDA in order to enhance investors' understanding of our ongoing operations. This measure is used by some investors when assessing our performance.

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

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	Three Months Ended				Nine Months Ended
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Net income as a percentage of net sales	6.6	%	7.8	%	6.8	%	7.7	%
Income tax expense	2.0	%	1.8	%	2.3	%	2.0	%
Interest and other income (expense), net	0.3	%	1.0	%	0.5	%	0.6	%
Depreciation and amortization	4.5	%	4.3	%	4.7	%	4.5	%
Inventory step up	—	%	0.2	%	—	%	0.2	%
Stock based compensation	2.4	%	2.2	%	2.4	%	2.4	%
Adjusted EBITDA as a percentage of net sales	15.8	%	17.3	%	16.7	%	17.4	%

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				Nine Months Ended
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	62.2	%	61.0	%	60.6	%	60.3	%
Gross profit	37.8	%	39.0	%	39.4	%	39.7	%
Operating expenses:
Research and development	9.7	%	10.2	%	10.2	%	10.3	%
Selling, general and administrative	19.0	%	18.1	%	19.7	%	18.9	%
Amortization of intangible assets	0.4	%	0.6	%	0.5	%	0.7	%
Total operating expenses	29.1	%	28.9	%	30.4	%	29.9	%
Income from operations	8.7	%	10.1	%	9.0	%	9.8	%
Other income (net)	(0.1	)%	(0.5	)%	0.1	%	(0.1	)%
Income before income taxes	8.6	%	9.6	%	9.1	%	9.7	%
Provision for income taxes	2.0	%	1.8	%	2.3	%	2.0	%
Net income	6.6	%	7.8	%	6.8	%	7.7	%

Net income for the third quarter of fiscal 2014 was $13.0 million ($0.52 per diluted share) including $3.4 million of after-tax stock-related compensation expense and $1.8 million amortization of intangible assets. Net income for the third quarter of fiscal 2013 was $16.7 million ($0.68 per diluted share) including $3.4 million of after-tax stock-related compensation expense, $2.2 million amortization of intangible assets and $0.3 million of purchase accounting adjustments related to inventory step up. Net income for the first nine months of fiscal 2014 was $40.0 million ($1.60 per diluted share) including $10.3 million of after-tax stock-related compensation expense and $5.4 million amortization of intangible assets. Net income for the first nine months of fiscal 2013 was $45.8 million ($1.87 per diluted share) including $10.5 million of after-tax stock-related compensation expense, $5.8 million amortization of intangible assets, $1.1 million of purchase accounting adjustments related to inventory step up and a benefit of $1.4 million related to the renewal of the federal research and development tax credits for fiscal 2012.

NET SALES

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):

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	Three Months Ended
	June 28, 2014				June 29, 2013
	Amount		Percentage of total net sales		Amount		Percentage of total net sales
Consolidated:
Microelectronics	$	94,935	48.3	%	$	112,000	52.4	%
OEM components and instrumentation	42,581		21.7	%	37,358		17.5	%
Materials processing	30,992		15.8	%	34,415		16.1	%
Scientific and government programs	28,009		14.2	%	29,952		14.0	%
Total	$	196,517	100.0	%	$	213,725	100.0	%



	Nine Months Ended
	June 28, 2014				June 29, 2013
	Amount		Percentage of total net sales		Amount		Percentage of total net sales
Consolidated:
Microelectronics	$	281,744	47.8	%	$	301,052	50.4	%
OEM components and instrumentation	128,620		21.8	%	114,130		19.1	%
Materials processing	86,516		14.7	%	90,002		15.1	%
Scientific and government programs	92,415		15.7	%	91,801		15.4	%
Total	$	589,295	100.0	%	$	596,985	100.0	%

Quarterly

Net sales for the third quarter of fiscal 2014 decreased by $17.2 million, or 8%, compared to the third quarter of fiscal 2013, led by the microelectronics market. Sales decreases in the microelectronics, materials processing and scientific and government programs markets were partially offset by increases in the OEM components and instrumentation market.

The decrease in the microelectronics market of $17.1 million, or 15%, was primarily due to lower shipments for flat panel display and advanced packaging applications partially offset by higher sales in semiconductor applications. Sales in the materials processing market decreased $3.4 million, or 10%, primarily due to lower shipments for marking applications. Sales in the scientific and government programs market decreased $1.9 million, or 6%, primarily due to lower demand for advanced research applications used by university and government research groups. The increase in the OEM components and instrumentation market of $5.2 million, or 14%, was due primarily to higher shipments for medical applications.

Year-to-date

Net sales for the first nine months of fiscal 2014 decreased by $7.7 million, or 1% compared to the first nine months of fiscal 2013. The decrease reflects $15.0 million higher revenues from Lumera and Innolight who were acquired in the beginning of fiscal 2013. Sales decreases in the microelectronics and materials processing markets were partially offset by increases in the OEM components and instrumentation and scientific and government programs markets.

The decrease in the microelectronics market of $19.3 million, or 6%, was primarily due to lower shipments for flat panel display and advanced packaging applications partially offset by higher sales in semiconductor applications. Sales in the material processing market decreased $3.5 million, or 4%, primarily due to lower shipments for marking and non-metal drilling applications. The increase in the OEM components and instrumentation market of $14.5 million, or 13%, was due primarily to higher shipments for medical and bio-instrumentation (including the acquisition of Lumera at the end of the first quarter of fiscal 2013) applications partially offset by lower shipments for military applications. Sales in the scientific and government programs market increased $0.6 million, or 1%, primarily due to higher demand for advanced research applications used by university and government research groups.

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 cancelable and subject to rescheduling by our customers without substantial penalties.

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Historically, we have not experienced a significant rate of cancellation or rescheduling outside the 12 month period, though we cannot guarantee that the rate of cancellations or rescheduling will not increase in the future. We continue to have a sizable backlog of orders shippable within 12 months of $344.3 million at June 28, 2014, including a significant concentration in the flat panel display market (45%).

The timing for shipments of our higher average selling price excimer products in the flat panel display market have historically fluctuated and are in the future expected to fluctuate from quarter-to-quarter due to customer scheduling, our ability to manufacture these products and/or availability of supplies. As a result, the timing to convert orders for these products to net sales will likely fluctuate from quarter-to-quarter.

Segments

We are organized into two reportable operating segments: Specialty Lasers and Systems (“SLS”) and Commercial Lasers and Components (“CLC”). SLS develops and manufactures configurable, advanced-performance products largely serving the microelectronics, scientific research and government programs and OEM components and instrumentation markets. CLC focuses on higher volume products that are offered in set configurations. CLC’s primary markets include materials processing, OEM components and instrumentation and microelectronics.

The following 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
	June 28, 2014				June 29, 2013
	Amount		Percentage of total net sales		Amount		Percentage of total net sales
Consolidated:
Specialty Lasers and Systems (SLS)	$	137,590	70.0	%	$	149,466	69.9	%
Commercial Lasers and Components (CLC)	58,927		30.0	%	64,259		30.1	%
Total	$	196,517	100.0	%	$	213,725	100.0	%



	Nine Months Ended
	June 28, 2014				June 29, 2013
	Amount		Percentage of total net sales		Amount		Percentage of total net sales
Consolidated:
Specialty Lasers and Systems (SLS)	$	418,208	71.0	%	$	423,608	71.0	%
Commercial Lasers and Components (CLC)	171,087		29.0	%	173,377		29.0	%
Total	$	589,295	100.0	%	$	596,985	100.0	%

Quarterly

Net sales for the third quarter of fiscal 2014 decreased by $17.2 million, or 8%, compared to the third quarter of fiscal 2013, with decreases of $11.9 million, or 8%, in our SLS segment and decreases of $5.3 million, or 8%, in our CLC segment.

The decrease in our SLS segment sales was primarily due to lower shipments for flat panel display applications due to timing for shipment of large systems and lower demand for advanced research applications used by university and government research groups partially offset by higher medical and semiconductor application sales. The decrease in our CLC segment sales was primarily due to lower advanced packaging application sales due to market softness partially offset by higher sales for medical applications.

Year-to-date

Net sales for the first nine months of fiscal 2014 decreased by $7.7 million, or 1%, compared to the first nine months of fiscal 2013, with decreases of $5.4 million, or 1%, in our SLS segment and decreases of $2.3 million, or 1%, in our CLC segment.

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The decrease in our SLS segment sales was primarily due to lower shipments for flat panel display applications due to timing for shipment of large systems and lower materials processing applications sales partially offset by higher shipments for semiconductor and medical applications. The decrease in our CLC segment sales was primarily due to lower advanced packaging and military application sales partially offset by higher medical and instrumentation application sales.

GROSS PROFIT

Consolidated

Our gross profit rate decreased to 37.8% in the third quarter of fiscal 2014 from 39.0% and decreased to 39.4% from 39.7% in the first nine months of fiscal 2014 compared to the same periods one year ago.

The third quarter decrease in the gross profit rate of 1.2% was primarily due to unfavorable product margins (2.0%) resulting from unfavorable mix with lower sales to the instrumentation market and higher sales to the materials processing market as well as lower service revenue in the flat panel display market; higher intangibles amortization (0.1%) as a percentage of sales due to lower sales volumes and the amortization of IPR&D for Lumera; and higher stock-related compensation expense (0.1%). These decreases were partially offset by lower warranty costs (0.5%) due to fewer warranty events and lower other costs (0.5%) primarily due to lower freight and duty and lower inventory step up amortization from the acquisition of Lumera recorded in the third quarter of fiscal 2013 as a percentage of sales.

The 0.3% decrease in the gross profit rate during the first nine months of fiscal 2014 was primarily due to unfavorable product margins (0.3%) resulting from unfavorable mix in the OEM and instrumentation and material processing markets in the CLC segment and higher intangibles amortization (0.2%) due to the acquisitions of Lumera at the end of the first quarter of fiscal 2013 and Innolight in the first quarter of fiscal 2013 partially offset by lower other costs (0.2%) primarily due to lower inventory step up amortization from the acquisition of Lumera recorded in the third quarter of fiscal 2013 and lower freight and duty as a percentage of sales.

Our gross profit rate has been and will continue to be affected by a variety of factors including market mix, pricing on volume orders, our ability to manufacture advanced and more complex products, manufacturing efficiencies, excess and obsolete inventory write-downs, warranty costs, amortization of intangibles, pricing by competitors or suppliers, new product introductions, production volume, customization and reconfiguration of systems, commodity prices and foreign currency fluctuations, particularly the recent weakening of the Japanese Yen and strengthening of the Euro.

Specialty Lasers and Systems

The gross profit rate in our SLS segment increased to 40.9% in the third quarter of fiscal 2014 from 40.3% and increased to 42.5% from 41.6% in the first nine months of fiscal 2014 compared to the same periods one year ago.

The 0.6% third quarter increase in the gross profit rate was primarily due to lower warranty costs (1.0%) due to fewer warranty events and lower other costs (0.4%) primarily due to lower freight and duty and lower inventory step up amortization from the acquisition of Lumera recorded in the third quarter of fiscal 2013 as a percentage of sales. These increases were partially offset by unfavorable product costs (0.6%) resulting from higher rework costs and higher intangibles amortization (0.2%) as a percentage of sales due to lower sales volumes and the beginning of amortization of IPR&D for Lumera in the third quarter of fiscal 2014.

The 0.9% increase in the gross profit rate during the first nine months of fiscal 2014 was primarily due to lower warranty costs (0.6%) due to fewer warranty events, lower other costs (0.5%) due to inventory step up amortization from the acquisition of Lumera recorded in fiscal 2013, lower inventory provisions and lower freight and duty as a percentage of sales as well as favorable product costs (0.1%) due to favorable mix in the microelectronics market net of the unfavorable impact of foreign exchange rates. The increases were partially offset by higher intangibles amortization (0.3%) due to the acquisitions of Lumera at the end of the first quarter of fiscal 2013 and Innolight in the first quarter of fiscal 2013 and the beginning of amortization of IPR&D for Lumera in the third quarter of fiscal 2014.

Commercial Lasers and Components

The gross profit rate in our CLC segment decreased to 31.6% in the third quarter of fiscal 2014 from 36.7% in the third quarter of fiscal 2012 and decreased to 33.2% from 36.3% compared to the same periods one year ago.

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The 5.1% third quarter decrease in the gross profit rate was primarily due to unfavorable product costs (5.3%) resulting from unfavorable product mix within the OEM components and instrumentation, and materials processing markets and the impact of lower volumes in the microelectronics market and higher warranty costs due to higher warranty events and the impact of lower sales volumes (0.4%) partially offset by lower other costs (0.6%) due to lower inventory provisions and lower freight and duty as a percentage of sales.

The 3.1% decrease in the gross profit rate during the first nine months of fiscal 2014 was primarily due to unfavorable product costs (1.3%) resulting from unfavorable mix in the OEM components and instrumentation, and material processing markets, higher warranty costs (1.2%) due to increased warranty events and the impact of a higher installed base on lower revenues and higher other costs (0.6%) due to higher inventory provisions and higher freight and duty as a percentage of sales.

OPERATING EXPENSES:



	Three Months Ended
	June 28, 2014				June 29, 2013
	Amount		Percentage of total net sales		Amount		Percentage of total net sales
	(Dollars in thousands)
Research and development	$	19,046	9.7	%	$	21,782	10.2	%
Selling, general and administrative	37,226		19.0	%	38,748		18.1	%
Amortization of intangible assets	841		0.4	%	1,290		0.6	%
Total operating expenses	$	57,113	29.1	%	$	61,820	28.9	%



	Nine Months Ended
	June 28, 2014				June 29, 2013
	Amount		Percentage of total net sales		Amount		Percentage of total net sales
	(Dollars in thousands)
Research and development	$	60,396	10.2	%	$	61,229	10.3	%
Selling, general and administrative	116,413		19.7	%	113,076		18.9	%
Amortization of intangible assets	2,691		0.5	%	4,086		0.7	%
Total operating expenses	$	179,500	30.4	%	$	178,391	29.9	%

Research and development

Quarterly

Research and development (“R&D”) expenses decreased $2.7 million, or 13%, during the third fiscal quarter ended June 28, 2014 compared to the same quarter one year ago. The $2.9 million decrease was primarily due to higher customer reimbursements and lower other spending on various projects and headcount partially offset by the unfavorable impact of foreign exchange rates.

On a segment basis as compared to the prior year period, SLS research and development spending decreased $2.4 million primarily due to lower net spending on projects due to higher customer reimbursements. CLC spending decreased $0.2 million due to lower project spending. Corporate and other spending decreased $0.1 million.

Year-to-date

R&D expenses decreased $0.8 million, or 1%, during the nine months ended June 28, 2014 compared to the same period one year ago. The $2.0 million decrease for the first nine months was primarily due to higher customer reimbursements for development projects net of higher other spending on various projects and headcount partially offset by the unfavorable impact of foreign exchange rates ($0.9 million) and $0.3 million other spending including higher charges for increases in deferred compensation plan liabilities with the related expenses for decreases in deferred compensation assets recorded in other income (expense) and higher stock-related compensation expense.

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On a segment basis for the first nine months of fiscal 2014 as compared to the prior year period, SLS research and development spending decreased $1.0 million primarily due to lower net spending on projects due to higher customer reimbursements for net of higher other spending on projects partially offset by the impact of foreign exchange rates. CLC project spending was flat. Corporate and other spending increased $0.2 million due to higher charges for increases in deferred compensation plan liabilities and higher stock-related compensation expense.

Selling, general and administrative

Quarterly

Selling, general and administrative (“SG&A”) expenses decreased $1.5 million or 4%, during the third fiscal quarter ended June 28, 2014 compared to the same quarter one year ago. The decrease was primarily due to lower representative commissions ($0.8 million), $0.3 million lower payroll spending primarily due to lower variable compensation net of increased salaries and benefits and $0.4 million lower other net variable spending.

On a segment basis as compared to the prior year period, SLS segment expenses decreased $0.3 million primarily due to the lower representative commissions partially offset by higher other variable spending. CLC spending decreased $0.1 million primarily due to lower representative commissions partially offset by higher other variable spending. Spending for Corporate and other decreased $1.1 million primarily due to lower payroll spending and lower other variable spending including lower charges for increases in deferred compensation plan liabilities and lower spending on legal and other consulting.

Year-to-date

SG&A expenses increased $3.3 million, or 3%, during the nine months ended June 28, 2014 compared to the same period one year ago. The increase for the first nine months was primarily due to $2.1 million higher payroll spending due to higher headcount and increased salaries and benefits and higher variable compensation; $0.7 million related to the acquisitions of Lumera and Innolight in the first quarter of fiscal 2013 and $0.6 million higher charges for increases in deferred compensation plan liabilities with the related expenses for decreases in deferred compensation assets recorded in other income (expense). The increases were partially offset by $0.1 million lower other variable spending on consulting and legal costs for acquisitions and lower representative commissions net of the unfavorable impact of foreign exchange rates.

On a segment basis for the first nine months of fiscal 2014 as compared to the prior year period, SLS segment expenses increased $1.8 million primarily due to the acquisitions of Lumera and Innolight, the impact of foreign exchange rates and higher and payroll spending partially offset by lower other variable spending including lower representative commissions. CLC spending increased $1.7 million primarily due to higher payroll and other variable spending. Spending for Corporate and other decreased $0.2 million primarily due to lower legal and consulting related to acquisitions and lower other variable spending partially offset by higher charges for increases in deferred compensation plan liabilities and higher headcount spending.

Amortization of intangible assets

Amortization of intangible assets decreased $0.4 million in the three months ended June 28, 2014 and decreased $1.4 million during the nine months ended June 28, 2014 compared to the same periods last year. The decreases were primarily due to the completion of amortization of certain intangibles from the acquisition of Lumera and other prior acquisitions.

OTHER INCOME (EXPENSE) — NET

Other income, net of other expense, increased $0.7 million and $1.7 million during the three and nine months ended June 28, 2014 compared to the same periods one year ago. The quarterly decrease in net other expense was primarily due to lower net foreign exchange losses ($1.2 million) due to the significant movement in the Japanese Yen in April and June 2013 and $0.2 million higher interest income partially offset by lower gains, net of expenses, on our deferred compensation plan assets ($0.7 million). The increase in net other income for the first nine months of fiscal 2014 was primarily due to $1.2 million higher gains, net of expenses, on our deferred compensation plan assets and lower net foreign exchange losses ($0.4 million).

On June 8, 2010, we invested $2.0 million in SiOnyx, Inc., a privately-held company. The investment is included in other assets and is being carried on a cost basis. Certain events have occurred at SiOnyx during the third quarter of fiscal 2014 that may indicate our investment is impaired. We are currently determining if such impairment is temporary or other-than-temporary and any impairment charge would result in a non-cash charge to other income (expense) in our results of operations.

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INCOME TAXES

The effective tax rate on income before income taxes for the third quarter of fiscal 2014 of 23.2% and the effective tax rate on income before income taxes of 25.3% for the nine months ended June 28, 2014 were lower than the statutory rate of 35.0%

primarily due to permanent differences related to the benefit of income subject to foreign tax rates that are lower than U.S. tax rates including Korea and Singapore tax exemptions and the benefit of foreign tax credits. These amounts are partially offset by deemed dividend inclusions under the Subpart F tax rules, stock compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m).

The effective tax rate for the third quarter of fiscal 2013 of 18.6% and the effective tax rate of 20.6% for the nine months ended June 29, 2013 were lower than the statutory rate of 35.0% primarily due to permanent differences related to the benefit of income subject to foreign tax rates that are lower than U.S. tax rates including Korea and Singapore tax exemptions, the benefit of foreign tax credits, the benefit of the federal research and development tax credits including renewal of the federal research and development tax credits for fiscal 2012 and the benefit of releasing foreign tax reserves accrued under ASC 740-10 and related interest. These amounts are partially offset by deemed dividend inclusions under the Subpart F tax rules, stock compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m).

LIQUIDITY AND CAPITAL RESOURCES

At June 28, 2014, we had assets classified as cash and cash equivalents, as well as time deposits and fixed income securities classified as short-term investments, in an aggregate amount of $303.3 million, compared to $250.1 million at September 28, 2013. At June 28, 2014, approximately $197.4 million of this cash and securities was held in certain of our foreign subsidiaries, $125.5 million of which was denominated in currencies other than the U.S. dollar. We currently have approximately $196.4 million of the cash, including investments in U.S. Treasury securities, held by our foreign subsidiaries where we intend to permanently reinvest our accumulated earnings in these entities and our current plans do not demonstrate a need for these funds to support our domestic operations. If, however, a portion of these funds were needed for and distributed to our operations in the United States, we would be subject to additional U.S. income taxes and foreign withholding taxes. The amount of the taxes due would depend on the amount and manner of repatriation, as well as the location from where the funds are repatriated. We actively monitor the third-party depository institutions that hold these assets, primarily focusing on the safety of principal and secondarily maximizing yield on these assets. We diversify our cash and cash equivalents and investments among various financial institutions, money market funds and sovereign debt in order to reduce our exposure should any one of these financial institutions or financial instruments fail or encounter difficulties. To date, we have not experienced any material loss or lack of access to our invested cash, cash equivalents or short-term 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.

Subsequent to the end of the third fiscal quarter of 2014, in July 2014, we converted $62.7 million of cash and securities held in certain of our foreign subsidiaries to U.S. dollars and invested those funds in U.S. Treasury securities within a European subsidiary whose functional currency is the U.S. dollar. Accordingly, there will be no future translation expense arising from this entity holding U.S. dollar denominated investments. The converted funds were not repatriated to the U.S. and no U.S. tax was triggered on the transfer of these funds to the European subsidiary.

Sources and Uses of Cash

Historically, our primary source of cash has been provided by operations. Other sources of cash in the past three fiscal years include proceeds received from the sale of our stock through our employee stock option and purchase plans. Our historical uses of cash have primarily been for the repurchase of our common stock, capital expenditures, acquisitions of businesses and technologies and the payment of a cash dividend in the first quarter of fiscal 2013. Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our condensed consolidated statements of cash flows and the notes to condensed consolidated financial statements:

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	Nine Months Ended
	June 28, 2014			June 29, 2013
	(in thousands)
Net cash provided by operating activities	$	64,897		$	66,759
Sales of shares under employee stock plans	10,513			15,708
Cash dividend paid on common stock	—			(24,040		)
Capital expenditures	(17,862		)	(15,366		)
Acquisition of businesses, net of cash acquired	—			(67,289		)

Net cash provided by operating activities decreased by $1.9 million for the first nine months of fiscal 2014 compared to the same period one year ago. The decrease in cash provided by operating activities was primarily due to lower cash flows from the timing of accounts payable and inventory purchases as well as lower income from operations partially offset by higher cash flows from the timing of accounts receivable and other current liabilities as well as the timing of tax payments. We believe that our existing cash, cash equivalents and short term investments combined with cash to be provided by operating activities will be adequate to cover our working capital needs and planned capital expenditures for at least the next 12 months to the extent such items are known or are reasonably determinable based on current business and market conditions. However, we may elect to finance certain of our capital expenditure requirements through borrowings under our bank credit facilities or other sources of capital. We continue to follow our strategy to further strengthen our financial position by using available cash flow to fund operations.

We intend to continue pursuing acquisition opportunities at valuations we believe are reasonable based upon market conditions. However, we cannot accurately predict the timing, size and success of our acquisition efforts or our associated potential capital commitments. Furthermore, we cannot assure you that we will be able to acquire businesses on terms acceptable to us. We expect to fund future acquisitions through existing cash balances and cash flows from operations. If required, we will look for additional borrowings or consider the issuance of securities. The extent to which we will be willing or able to use our common stock to make acquisitions will depend on its market value at the time and the willingness of potential sellers to accept it as full or partial payment.

On December 10, 2012, we announced that our Board of Directors approved a $1.00 per share special cash dividend on our outstanding common stock payable on December 27, 2012 to stockholders of record on December 19, 2012, resulting in a payment of $24.0 million in the first quarter of fiscal 2013. We do not expect to pay any additional dividends in the foreseeable future.

On July 25, 2014, our Board of Directors authorized a buyback program whereby we are authorized to repurchase up to $25 million of our common stock from time to time through July 31, 2015. See Note 18 "Subsequent Events".

Additional sources of cash available to us were domestic and international currency lines of credit and bank credit facilities totaling $65.6 million as of June 28, 2014, of which $61.8 million was unused and available. These unsecured credit facilities were used in Europe and Japan during the first nine months of fiscal 2014. Our domestic line of credit consists of a $50 million unsecured revolving credit account with Union Bank of California, which expires on May 31, 2017 and is subject to covenants related to financial ratios and tangible net worth. No amounts have been drawn upon our domestic line of credit, $0.8 million was used as a cash overdraft in Japan and $3.0 million of the international currency lines has been used as guarantees as of June 28, 2014.

Our ratio of current assets to current liabilities was 4.6:1 at June 28, 2014 compared to 4.3:1 at September 28, 2013. The increase in our ratio is primarily due to increases in cash and short-term investments, prepaid and other assets and inventories as well as lower taxes payable partially offset by increase in other current liabilities. Our cash and cash equivalents, short-term investments, working capital and debt obligations are as follows:



	June 28, 2014		September 28, 2013
	(in thousands)
Cash and cash equivalents	$	149,568	$	110,444
Short-term investments	153,692		139,666
Working capital	552,080		483,398
Total debt obligations	836		2

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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 long-term debt payments, operating lease payments, asset retirement obligations, purchase commitments with suppliers and purchase obligations is provided in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended September 28, 2013. There have been no material changes in contractual obligations outside of the ordinary course of business since September 28, 2013. Information regarding our other financial commitments at June 28, 2014 is provided in the notes to the condensed consolidated financial statements in this filing.

Changes in Financial Condition

Cash provided by operating activities during the first nine months of fiscal 2014 was $64.9 million, which included net income of $40.0 million, depreciation and amortization of $27.3 million, stock-based compensation expense of $14.2 million partially offset by cash used by operating assets and liabilities of $13.1 million, net increases in deferred tax assets of $3.1 million and $0.4 million other. Cash provided by operating activities during the first nine months of fiscal 2013 was $66.8 million, which included net income of $45.8 million, depreciation and amortization of $26.7 million, stock-based compensation expense of $14.3 million and $0.3 million other partially offset by cash used by operating assets and liabilities of $20.3 million.

Cash used in investing activities during the first nine months of fiscal 2014 was $31.3 million, which included $17.4 million used to acquire property and equipment and improve buildings net of proceeds from dispositions and $13.9 million net purchases of available-for-sale securities. Cash used in investing activities during the first nine months of fiscal 2013 was $46.2 million, which included $67.3 million used to acquire Lumera and Innolight and $15.2 million used to acquire property and equipment and improve buildings partially offset by $36.3 million net sales of available-for-sale securities.

Cash provided by financing activities during the first nine months of fiscal 2014 was $3.6 million, which included $10.5 million generated from our employee stock option and purchase plans and $0.9 million net borrowings partially offset by $7.8 million outflows due to net settlement of restricted stock. Cash used by financing activities during the first nine months of fiscal 2013 was $12.5 million, which included a $24.0 million cash dividend on our common stock and $4.2 million outflows due to net settlement of restricted stock partially offset by $15.7 million generated from our employee stock option and stock purchase plans.

Changes in exchange rates during the first nine months of fiscal 2014 increased our cash balances by $2.0 million. Changes in exchange rates during the first nine months of fiscal 2013 increased our cash balances by $5.5 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk disclosures

We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

Interest rate sensitivity

A portion of our investment portfolio is composed of fixed income securities. These securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately (whether due to changes in overall market rates or credit worthiness of the issuers of our individual securities) and uniformly by 10% from levels at June 28, 2014, the fair value of the portfolio, based on quoted market prices in active markets involving similar assets, would decline by an immaterial amount due to their short-term maturities. We have the ability to generally hold our fixed income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. If necessary, we may sell short-term investments prior to maturity to meet our liquidity needs.

At June 28, 2014, the fair value of our available-for-sale debt securities was $153.7 million, all of which were classified as short-term investments. Gross unrealized gains and losses on available-for-sale debt securities were $733,000 and $(11,000), respectively, at June 28, 2014.

Foreign currency exchange risk

We maintain operations in various countries outside of the United States and have foreign subsidiaries that manufacture and sell our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do generate net revenues in other currencies, primarily the Japanese Yen, the Euro and the Korean Won. As a result, our earnings, cash flows and cash balances are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of three months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for trading purposes.

Coherent on occasion enters into currency forward exchange contracts to hedge specific anticipated foreign currency denominated transactions generally expected to occur within the next 12 months. These cash flow hedges are designated for hedge accounting treatment and gains and losses on these contracts are recorded in accumulated other comprehensive income in stockholder's equity and reclassified into earnings at the time that the related transactions being hedged are recognized in earnings. See Note 5 "Derivative instruments and hedging activities".

We do not anticipate any material adverse effect on our consolidated financial position, results of operations or cash flows resulting from the use of these instruments. There can be no assurance that these strategies will be effective or that transaction losses can be minimized or forecasted accurately. For example, the Japanese Yen has recently decreased significantly in value and the Euro has recently strengthened in value. While we model currency valuations and fluctuations, these may not ultimately be accurate. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material financial losses. In the current economic environment, the risk of failure of a financial party remains high.

At June 28, 2014, approximately $197.4 million of our cash, cash equivalents and short-term investments were held outside of U.S. in certain of our foreign operations, $125.5 million of which was denominated in currencies other than the U.S. dollar.

A hypothetical 10% change in foreign currency rates on our forward contracts would not have a material impact on our results of operations, cash flows or financial position.

The following table provides information about our foreign exchange forward contracts at June 28, 2014. The table presents the weighted average contractual foreign currency exchange rates, the value of the contracts in U.S. dollars at the contract exchange rate as of the contract maturity date and fair value. The U.S. notional fair value represents the contracted amount valued at June 28, 2014 rates.

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Forward contracts to sell (buy) foreign currencies for U.S. dollars (in thousands, except contract rates):



	Average Contract Rate	U.S. Notional Contract Value			U.S. Notional Fair Value
Non-Designated - For US Dollars
Euro	1.3619	$	(35,599	)	$	(35,580	)
Japanese Yen	101.7559	$	5,186		$	5,167
British Pound	1.6760	$	2,784		$	2,741
Korean Won	1,023.6000	$	3,308		$	3,277
Chinese Renminbi	6.1935	$	11,551		$	11,478
Singapore Dollar	1.256	$	(3,053	)	$	(3,037	)

Non- Designated - For Euros:
Japanese Yen	101.8345	$	2,018		$	2,009

Designated - For US Dollars
Euro	1.3936	$	(11,149	)	$	(11,397	)

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ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of June 28, 2014 (“Evaluation Date”). The controls evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 28, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations over Internal Control

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ("GAAP"). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:


(i)	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;


(ii)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and


(iii)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information with respect to this item may be found in Note 11 to our condensed consolidated financial statements in Part I, Item 1 of this report and is incorporated herein by reference.

Income Tax Audits

We are subject to taxation and file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. For U.S. federal income tax purposes, all years prior to 2011 are closed. In our major foreign jurisdictions and our major state jurisdictions, the years prior to 2006 and 2009, respectively, are closed to examination. Earlier years in our various jurisdictions may remain open for adjustment to the extent that we have tax attribute carryforwards from those years. In December 2011 and January 2012, three of our German subsidiaries received notices of tax audits for the fiscal years 2006 through 2010. We received a preliminary assessment for two of the German subsidiaries and the amount is immaterial; the audit for the other German subsidiary is currently in process. In addition, we received in July 2014 a final tax assessment for our German subsidiary of Coherent Kaiserslautern GmbH (formerly Lumera Laser GmbH) that was acquired in December 2012 and was under audit for the fiscal years 2007 through 2009. The tax assessment is immaterial and since the years under the audit for Coherent Kaiserslautern GmbH are related to the pre-acquisition periods, the amount should be recoverable from the escrow account for the acquisition.

ITEM 1A. RISK FACTORS

You should carefully consider the followings risks when considering an investment in our Common Stock. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our Common Stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by us. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” and the risk of our businesses described elsewhere in this annual report. Additionally, these risks and uncertainties described herein are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our business, results of operations or financial condition.

BUSINESS ENVIRONMENT AND INDUSTRY TRENDS

Our operating results, including net sales, net income (loss) and adjusted EBITDA in dollars and as a percentage of net sales, as well as our stock price have varied in the past, and our future operating results will continue to be subject to quarterly and annual fluctuations based upon numerous factors, including those discussed in this Item 1A and throughout this report. Our stock price will continue to be subject to daily variations as well. Our future operating results and stock price may not follow any past trends or meet our guidance and expectations.

Our net sales and operating results, such as adjusted EBITDA percentage, net income (loss) and operating expenses, and our stock price have varied in the past and may vary significantly from quarter to quarter and from year to year in the future. We believe a number of factors, many of which are outside of our control, could cause these variations and make them difficult to predict, including:


•	general economic uncertainties in the macroeconomic and local economies facing us, our customers and the markets we serve;


•	fluctuations in demand for our products or downturns in the industries that we serve;


•	the ability of our suppliers, both internal and external, to produce and deliver components and parts, including sole or limited source components, in a timely manner, in the quantity, quality and prices desired;

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•	the timing and receipt of bookings and the timing of conversion of bookings to net sales;


•	the concentration of a significant amount of our backlog, and resultant net sales, with a few customers;


•	cancellation of customer orders and rescheduling of shipments;


•	fluctuations in our product mix;


•	the ability of our customers' other suppliers to provide sufficient material to support our customers' products;


•	currency fluctuations and stability, in particular the Euro, the Japanese Yen, the Korean Won, the Chinese Renminbi and the US dollar as compared to each other and other currencies;


•	commodity pricing;


•	introductions of new products and product enhancements by our competitors, entry of new competitors into our markets, pricing pressures and other competitive factors;


•	our ability to develop, introduce, manufacture and ship new and enhanced products in a timely manner without defects;


•	our customers ability to integrate our products into their products;


•	the ability of our customers to timely meet the requirements of their end customers;


•	our ability to manage our capacity and that of our suppliers;


•	our increased reliance on contract manufacturing;


•	the rate of market acceptance of our new products;


•	the ability of our customers to pay for our products;


•	expenses associated with acquisition-related activities;


•	seasonal sales trends;


•	access to applicable credit markets by us, our customers and their end customers;


•	delays or reductions in customer purchases of our products in anticipation of the introduction of new and enhanced products by us or our competitors;


•	our ability to control expenses;


•	the level of capital spending of our customers;


•	potential excess and/or obsolescence of our inventory;


•	costs and timing of adhering to current and developing governmental regulations and reviews relating to our products and business;


•	costs related to acquisitions of technology or businesses;


•	impairment of goodwill, intangible assets and other long-lived assets;


•	our ability to meet our expectations and forecasts and those of public market analysts and investors;


•	the availability of research funding by governments with regard to our customers in the scientific business, such as universities;

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•	continued government spending on defense-related projects where we are a subcontractor;


•	maintenance of supply relating to products sold to the government on terms which we would prefer not to accept;


•	changes in policy, interpretations, or challenges to the allowability of costs incurred under government cost accounting standards;


•	damage to our reputation as a result of coverage in social media, Internet blogs or other media outlets;


•	managing our and other parties' compliance with contracts in multiple languages and jurisdictions;


•	managing our internal and third party sales representatives and distributors, including compliance with all applicable laws;


•	impact of government economic policies on macroeconomic conditions;


•	costs and expenses from litigation;


•	costs associated with designing around or payment of licensing fees associated with issued patents in our fields of business;


•	government support of the alternative energy industries, such as solar;


•	the future impact of legislation, rulemaking, and changes in accounting, tax, defense procurement, or export policies; and


•	distraction of management related to acquisition or divestment activities.

In addition, we often recognize a substantial portion of our sales in the last month of our fiscal quarters. Our expenses for any given quarter are typically based on expected sales and if sales are below expectations in any given quarter, the adverse impact of the shortfall on our operating results may be magnified by our inability to adjust spending quickly enough to compensate for the shortfall. We also base our manufacturing on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which would result in delays in the shipment of our products. Accordingly, variations in timing of sales, particularly for our higher priced, higher margin products, can cause significant fluctuations in quarterly operating results.

Due to these and other factors, such as varying product mix, we believe that quarter-to-quarter and year-to-year comparisons of our historical operating results may not be meaningful. You should not rely on our results for any quarter or year as an indication of our future performance. Our operating results in future quarters and years may be below public market analysts' or investors' expectations, which would likely cause the price of our stock to fall. In addition, over the past several years, the stock market has experienced extreme price and volume fluctuations that have affected the stock prices of many technology companies both in and outside our industry. There has not always been a direct correlation between this volatility and the performance of particular companies subject to these stock price fluctuations. Further, over the last twelve months, equity markets around the world have significantly fluctuated across most sectors. These factors, as well as general economic and political conditions or investors' concerns regarding the credibility of corporate financial statements, may have a material adverse effect on the market price of our stock in the future.

We are exposed to risks associated with worldwide economic conditions and related uncertainties which could negatively impact demand for our products and results of operations.

Volatility and disruption in the capital and credit markets, depressed consumer confidence, government economic policies, negative economic conditions, volatile corporate profits and reduced capital spending could negatively impact demand for our products. In particular, it is difficult to develop and implement strategy, sustainable business models and efficient operations, as well as effectively manage supply chain relationships in the face of such conditions including uncertainty regarding the ability of some of our suppliers to continue operations and provide us with uninterrupted supply flow. Our ability to maintain our research and development investments in our broad product offerings may be adversely impacted in the event that our sales decline and do not increase in the future. Spending and the timing thereof by consumers and businesses have a significant impact on our results and, where such spending is delayed or canceled, it could have a material negative impact on our

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operating results. The current global economic conditions remain uncertain and challenging. Weakness in our end markets could negatively impact our net sales, gross margin and operating expenses, and consequently have a material adverse effect on our business, financial condition and results of operations.

Continued uncertainty in U.S. and global fiscal policy has likely had a recent adverse impact on global financial markets and overall economic activity. Should this uncertain financial policy continue, it would likely negatively impact global economic activity, including possibly sending the U.S. into a new recession. It would also likely have negative repercussions on U.S. and global credit and financial markets, and further exacerbate sovereign debt concerns in the European Union. All of these factors would likely adversely impact the global demand for our products and the performance of our investments, and would likely have a material adverse effect on our business, results of operations and financial condition.

The financial turmoil which recently affected the banking system and financial markets continues to negatively impact financial institutions and has resulted in tighter credit markets, and lower levels of liquidity in some financial markets. There could be a number of follow-on effects from the tightened credit environment on our business, including the insolvency of key suppliers or their inability to obtain credit to finance development and/or manufacture products resulting in product delays; inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies; and failure of financial institutions negatively impacting our treasury functions. In the event our customers are unable to obtain credit or otherwise pay for our shipped products it could significantly impact our ability to collect on our outstanding accounts receivable. Other income and expense also could vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges resulting from revaluations of debt and equity securities and other investments; interest rates; cash balances; and changes in fair value of derivative instruments. Volatility in the financial markets and any overall economic uncertainty increase the risk that the actual amounts realized in the future on our financial instruments could differ significantly from the fair values currently assigned to them. Uncertainty about current global economic conditions could also continue to increase the volatility of our stock price.

In addition, political and social turmoil related to international conflicts, terrorist acts and civil unrest may put further pressure on economic conditions in the United States and abroad. Unstable economic, political and social conditions make it difficult for our customers, our suppliers and us to accurately forecast and plan future business activities. If such conditions persist, our business, financial condition and results of operations could suffer. Additionally, unstable economic conditions can provide significant pressures and burdens on individuals, which could cause them to engage in inappropriate business conduct. See “Part I, Item 4. CONTROLS AND PROCEDURES.”

We depend on sole source or limited source suppliers, both internal and external, for some of our key components and materials, including exotic materials, certain cutting-edge optics and crystals, in our products, which make us susceptible to supply shortages or price fluctuations that could adversely affect our business.

We currently purchase several key components and materials used in the manufacture of our products from sole source or limited source suppliers, both internal and external. Our failure to timely receive these key components and materials, such as the large optics used in our flat panel display manufacturing applications, could cause delays in the shipment of our products. Some of these suppliers are relatively small private companies that may discontinue their operations at any time and which may be particularly susceptible to prevailing economic conditions. Some of our suppliers are located in regions which may be susceptible to natural disasters, such as the flooding in Thailand and the earthquake, tsunami and resulting nuclear disaster in Japan in recent years and last year's severe flooding and power loss in the Eastern part of the United States. We typically purchase our components and materials through purchase orders or agreed upon terms and conditions and we do not have guaranteed supply arrangements with many of these suppliers. Some of our products, particularly in the flat panel display industry, require designs and specifications which are at the cutting-edge of available technologies. Our and our customers' designs and specifications frequently change to meet rapidly evolving market demands. Accordingly certain of our products require components and supplies which may be technologically difficult and unpredictable to manufacture. These characteristics further pressure the timely delivery of such components. We may fail to obtain these supplies in a timely manner in the future. We may experience difficulty identifying alternative sources of supply for certain components used in our products and may have to incur expenses and management distraction in assisting our current and future suppliers to meet our and our customers' technical requirements. We would experience further delays while identifying, evaluating and testing the products of these potential alternative suppliers. Furthermore, financial or other difficulties faced by these suppliers or significant changes in demand for these components or materials could limit their availability. We continue to consolidate our supply base and move supplier locations. When we transition locations we may increase our inventory of such products as a “safety stock” during the transition, which may cause the amount of inventory reflected on our balance sheet to increase. Additionally, many of our customers rely on sole source suppliers. In the event of a disruption of our customers' supply chain, orders from our customers could decrease or be delayed.

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Any interruption or delay in the supply of any of these components or materials, or the inability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable amount of time, or our failure to properly manage these moves, would impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders. We have historically relied exclusively on our own production capability to manufacture certain strategic components, crystals, semiconductor lasers, lasers and laser-based systems. Because we manufacture, package and test these components, products and systems at our own facilities, and such components, products and systems are not readily available from other sources, any interruption in manufacturing would adversely affect our business. In addition, our failure to achieve adequate manufacturing yields of these items at our manufacturing facilities may materially and adversely affect our operating results and financial condition.

We participate in the microelectronics market, which requires significant research and development expenses to develop and maintain products and a failure to achieve market acceptance for our products could have a significant negative impact on our business and results of operations.

The microelectronics market is characterized by rapid technological change, frequent product introductions, the volatility of product supply and demand, changing customer requirements and evolving industry standards. The nature of this market requires significant research and development expenses to participate, with substantial resources invested in advance of material sales of our products to our customers in this market. Additionally, our product offerings may become obsolete given the frequent introduction of alternative technologies. In the event either our customers' or our products fail to gain market acceptance, or the microelectronics market fails to grow, it would likely have a significant negative effect on our business and results of operations.

We participate in the flat panel display market, which has a relatively limited number of end customer manufacturers. Our backlog, timing of net sales and results of operations could be negatively impacted in the event our customers reschedule orders.

In the flat panel display market, there are a relatively limited number of manufacturers who are the end customers for our annealing products. Given macroeconomic conditions, varying consumer demand and technical process limitations at manufacturers, our customers may seek to reschedule or cancel orders. Challenges in meeting evolving technological requirements for these complex products by us and our suppliers could also result in delays in shipments, rescheduled or canceled orders by our customers. This could negatively impact our backlog, timing of net sales and results of operations.

Additionally, as our backlog includes higher average selling price flat panel display systems, any delays or cancellation of shipments could result in significant quarterly fluctuation in our financial statements and could have a material adverse effect on our financial results.

Some of our laser systems are complex in design and may contain defects that are not detected until deployed by our customers, which could increase our costs and reduce our net sales.

Lasers and laser systems are inherently complex in design and require ongoing regular maintenance. The manufacture of our lasers, laser products and systems involves a highly complex and precise process. As a result of the technological complexity of our products, in particular the flat panel annealing systems, changes in our or our suppliers' manufacturing processes or the inadvertent use of defective materials by us or our suppliers could result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product reliability. To the extent that we do not achieve and maintain our projected yields or product reliability, our business, operating results, financial condition and customer relationships would be adversely affected. We provide warranties on a majority of our product sales, and reserves for estimated warranty costs are recorded during the period of sale. The determination of such reserves requires us to make estimates of failure rates and expected costs to repair or replace the products under warranty. We typically establish warranty reserves based on historical warranty costs for each product line. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in future periods which could have an adverse effect on our results of operations.

Our customers may discover defects in our products after the products have been fully deployed and operated under the end user's peak stress conditions. In addition, some of our products are combined with products from other vendors, which may contain defects. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to identify and fix defects or other problems, we could experience, among other things:


•	loss of customers or orders;


•	increased costs of product returns and warranty expenses;

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•	damage to our brand reputation;


•	failure to attract new customers or achieve market acceptance;


•	diversion of development and engineering resources; and


•	legal actions by our customers and/or their end users.

The occurrence of any one or more of the foregoing factors could seriously harm our business, financial condition and results of operations.

Continued volatility in the semiconductor manufacturing industry could adversely affect our business, financial condition and results of operations.

A portion of our net sales in the microelectronics market depend on the demand for our products by semiconductor equipment companies. The semiconductor market has historically been characterized by sudden and severe cyclical variations in product supply and demand, which have often severely affected the demand for semiconductor manufacturing equipment, including laser-based tools and systems. The timing, severity and duration of these market cycles are difficult to predict, and we may not be able to respond effectively to these cycles. The continuing uncertainty in this market severely limits our ability to predict our business prospects or financial results in this market.

During industry downturns, our net sales from this market may decline suddenly and significantly. Our ability to rapidly and effectively reduce our cost structure in response to such downturns is limited by the fixed nature of many of our expenses in the near term and by our need to continue our investment in next-generation product technology and to support and service our products. In addition, due to the relatively long manufacturing lead times for some of the systems and subsystems we sell to this market, we may incur expenditures or purchase raw materials or components for products we cannot sell. Accordingly, downturns in the semiconductor capital equipment market may materially harm our operating results. Conversely, when upturns in this market occur, we must be able to rapidly and effectively increase our manufacturing capacity to meet increases in customer demand that may be extremely rapid, and if we fail to do so we may lose business to our competitors and our relationships with our customers may be harmed.

Our cash and cash equivalents and short-term investments are managed through various banks around the world and volatility in the capital and credit market conditions could cause financial institutions to fail or materially harm service levels provided by such banks, both of which could have an adverse affect on our ability to timely access funds.

World capital and credit markets have been and may continue to experience volatility and disruption. In some cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers, as well as pressured the solvency of some financial institutions. These financial institutions, including banks, have had difficulty timely performing regular services and in some cases have failed or otherwise been largely taken over by governments. We maintain our cash, cash equivalents and short-term investments with a number of financial institutions around the world. Should some or all of these financial institutions fail or otherwise be unable to timely perform requested services, we would likely have a limited ability to timely access our cash deposited with such institutions, or, in extreme circumstances the failure of such institutions could cause us to be unable to access cash for the foreseeable future. If we are unable to quickly access our funds when we need them, we may need to increase the use of our existing credit lines or access more expensive credit, if available. If we are unable to access our cash or if we access existing or additional credit or are unable to access additional credit, it could have a negative impact on our operations, including our reported net income.

We are exposed to credit risk and fluctuations in the market values of our investment portfolio.

Although we have not recognized any material losses on our cash, cash equivalents and short-term investments, future declines in their market values could have a material adverse effect on our financial condition and operating results. Given the global nature of our business, we have investments both domestically and internationally. There has recently been growing pressure on the creditworthiness of sovereign nations, particularly in Europe where a significant portion of our cash, cash equivalents and short-term investments are invested, which results in corresponding pressure on the valuation of the securities issued by such nations. Additionally, our overall investment portfolio is often concentrated in certificates of deposit and money market funds. We maintain a mix of government-issued securities. Credit ratings and pricing of these investments can be negatively impacted by liquidity, credit deterioration or losses, financial results, or other factors. Additionally, liquidity issues or political actions by sovereign nations could result in decreased values for our investments in certain government securities. As a result, the value or liquidity of our cash, cash equivalents and short-term investments could decline or become materially impaired, which could

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have a material adverse effect on our financial condition and operating results. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk.”

Our future success depends on our ability to increase our sales volumes and decrease our costs to offset potential declines in the average selling prices (“ASPs”) of our products and, if we are unable to realize greater sales volumes and lower costs, our operating results may suffer.

Our ability to increase our sales volume and our future success depends on the continued growth of the markets for lasers, laser systems and related accessories, as well as our ability to identify, in advance, emerging markets for laser-based systems. We cannot assure you that we will be able to successfully identify, on a timely basis, new high-growth markets in the future. Moreover, we cannot assure you that new markets will develop for our products or our customers' products, or that our technology or pricing will enable such markets to develop. Future demand for our products is uncertain and will depend to a great degree on continued technological development and the introduction of new or enhanced products. If this does not continue, sales of our products may decline and our business will be harmed.

We have in the past experienced decreases in the ASPs of some of our products. As competing products become more widely available, the ASPs of our products may decrease. If we are unable to offset any decrease in our ASPs by increasing our sales volumes, our net sales will decline. In addition, to maintain our gross profits, we must continue to reduce the cost of manufacturing our products while maintaining their high quality. From time to time, our products, like many complex technological products, may fail in greater frequency than anticipated. This can lead to further charges, which can result in higher costs, lower gross profits and lower operating results. Furthermore, as ASPs of our current products decline, we must develop and introduce new products and product enhancements with higher margins. If we cannot maintain our gross profits, our operating results could be seriously harmed, particularly if the ASPs of our products decrease significantly.

Our future success depends on our ability to develop and successfully introduce new and enhanced products that meet the needs of our customers.

Our current products address a broad range of commercial and scientific research applications in the photonics markets. We cannot assure you that the market for these applications will continue to generate significant or consistent demand for our products. Demand for our products could be significantly diminished by disrupting technologies or products that replace them or render them obsolete. Furthermore, the new and enhanced products in certain markets generally continue to be smaller in size and have lower ASPs, and therefore, we have to sell more units to maintain revenue levels. Accordingly, we must continue to invest in research and development in order to develop competitive products.

Our future success depends on our ability to anticipate our customers' needs and develop products that address those needs. Introduction of new products and product enhancements will require that we effectively transfer production processes from research and development to manufacturing and coordinate our efforts with those of our suppliers to achieve volume production rapidly. If we fail to transfer production processes effectively, develop product enhancements or introduce new products in sufficient quantities to meet the needs of our customers as scheduled, our net sales may be reduced and our business may be harmed.

We face risks associated with our foreign operations and sales that could harm our financial condition and results of operations.

For the three and nine months ended June 28, 2014, 74% of our net sales were derived from customers outside of the United States. For fiscal 2013, fiscal 2012 and fiscal 2011, 77%, 76%, and 74%, respectively, of our net sales were derived from customers outside of the United States. We anticipate that foreign sales, particularly in Asia, will continue to account for a significant portion of our net sales in the foreseeable future.

A global economic slowdown or a natural disaster could have a negative effect on various foreign markets in which we operate, such as the earthquake, tsunami and resulting nuclear disaster during fiscal 2011 in Japan and the flooding in Thailand in fiscal 2012. Such a slowdown may cause us to reduce our presence in certain countries, which may negatively affect the overall level of business in such countries. Our foreign sales are primarily through our direct sales force. Additionally, some foreign sales are made through foreign distributors and resellers. Our foreign operations and sales are subject to a number of risks, including:


•	longer accounts receivable collection periods;


•	the impact of recessions and other economic conditions in economies outside the United States;

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•	unexpected changes in regulatory requirements;


•	certification requirements;


•	environmental regulations;


•	reduced protection for intellectual property rights in some countries;


•	potentially adverse tax consequences;


•	political and economic instability;


•	import/export regulations, tariffs and trade barriers;


•	compliance with applicable United States and foreign anti-corruption laws;


•	cultural and management differences;


•	preference for locally produced products; and


•	shipping and other logistics complications.

Our business could also be impacted by international conflicts, terrorist and military activity, civil unrest and pandemic illness which could cause a slowdown in customer orders or cause customer order cancellations.

We are also subject to the risks of fluctuating foreign currency exchange rates, which could materially adversely affect the sales price of our products in foreign markets, as well as the costs and expenses of our foreign subsidiaries. While we use forward exchange contracts and other risk management techniques to hedge our foreign currency exposure, we remain exposed to the economic risks of foreign currency fluctuations.

We may not be able to protect our proprietary technology which could adversely affect our competitive advantage.

Maintenance of intellectual property rights and the protection thereof is important to our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We cannot assure you that our patent applications will be approved, that any patents that may be issued will protect our intellectual property or that any issued patents will not be challenged by third parties. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Further, we may be required to enforce our intellectual property or other proprietary rights through litigation, which, regardless of success, could result in substantial costs and diversion of management's attention. Additionally, there may be existing patents of which we are unaware that could be pertinent to our business and it is not possible for us to know whether there are patent applications pending that our products might infringe upon since these applications are often not publicly available until a patent is issued or published.

We may, in the future, be subject to claims or litigation from third parties, for claims of infringement of their proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors or other rights holders. These claims could result in costly litigation and the diversion of our technical and management personnel. Adverse resolution of litigation may harm our operating results or financial condition.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. This has been seen in our industry, for example in the recently concluded patent-related litigation between IMRA America, Inc. ("Imra") and IPG Photonics Corporation and in Imra's litigation against two of our German subsidiaries. From time to time, like many other technology companies, we have received communications from other parties asserting the existence of patent rights, copyrights, trademark rights or other intellectual property rights which such third parties believe may cover certain of our products, processes, technologies or information. In the future, we may be a party to litigation to protect our intellectual property or as a result of an alleged infringement of others' intellectual property whether through direct claims or by way of indemnification claims of our customers, as, in some cases, we contractually agree to indemnify our customers against third-party infringement claims relating to our products. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages or invalidation of our proprietary rights. These lawsuits, regardless of their success, would

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likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation could also force us to do one or more of the following:


•	stop manufacturing, selling or using our products that use the infringed intellectual property;


•	obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, although such license may not be available on reasonable terms, or at all; or


•	redesign the products that use the technology.

If we are forced to take any of these actions or are otherwise a party to lawsuits of this nature, we may incur significant losses for which we do not have insurance and our business may be seriously harmed. We do not have insurance to cover potential claims of this type.

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

Under accounting principles generally accepted in the United States, we review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered in determining whether a change in circumstances indicating that the carrying value of our goodwill or other intangible assets may not be recoverable include declines in our stock price and market capitalization or future cash flows projections. We recorded a charge during the fourth quarter of fiscal 2012 related to the impairment of intangibles in our SLS operating segment relating to the decision to discontinue the legacy Hypertronics products. A decline in our stock price, or any other adverse change in market conditions, particularly if such change has the effect of changing one of the critical assumptions or estimates we used to calculate the estimated fair value of our reporting units, could result in a change to the estimation of fair value that could result in an impairment charge. Any such material charges, whether related to goodwill or purchased intangible assets, may have a material negative impact on our financial and operating results.

We depend on skilled personnel to operate our business effectively in a rapidly changing market, and if we are unable to retain existing or hire additional personnel when needed, our ability to develop and sell our products could be harmed.

Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Recruiting and retaining highly skilled personnel in certain functions continues to be difficult. At certain locations where we operate, the cost of living is extremely high and it may be difficult to retain key employees and management at a reasonable cost. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs. Our failure to attract additional employees and retain our existing employees could adversely affect our growth and our business.

Our future success depends upon the continued services of our executive officers and other key engineering, sales, marketing, manufacturing and support personnel, any of whom may leave, which could harm our business and our results of operations.

The long sales cycles for our products may cause us to incur significant expenses without offsetting net sales.

Customers often view the purchase of our products as a significant and strategic decision. As a result, customers typically expend significant effort in evaluating, testing and qualifying our products before making a decision to purchase them, resulting in a lengthy initial sales cycle. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales and marketing and research and development expenses to customize our products to the customers' needs. We may also expend significant management efforts, increase manufacturing capacity and order long lead-time components or materials prior to receiving an order. Even after this evaluation process, a potential customer may not purchase our products. As a result, these long sales cycles may cause us to incur significant expenses without ever receiving net sales to offset such expenses.

The markets in which we sell our products are intensely competitive and increased competition could cause reduced sales levels, reduced gross margins or the loss of market share.

Competition in the various photonics markets in which we provide products is very intense. We compete against a number of large public and private companies, including CVI Melles Griot, GSI Group, Inc., IPG Photonics Corporation, JDS Uniphase Corporation, Newport Corporation, Rofin-Sinar Technologies, Inc., and Trumpf GmbH, as well as other smaller companies. Some of our competitors are large companies that have significant financial, technical, marketing and other resources. These

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competitors may be able to devote greater resources than we can to the development, promotion, sale and support of their products. Some of our competitors are much better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. Any of these acquisitions could give our competitors a strategic advantage. Any business combinations or mergers among our competitors, forming larger companies with greater resources, could result in increased competition, price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, results of operations and financial condition.

Additional competitors may enter the markets in which we serve, both foreign and domestic, and we are likely to compete with new companies in the future. We may encounter potential customers that, due to existing relationships with our competitors, are committed to the products offered by these competitors. Further, our current or potential customers may determine to develop and produce products for their own use which are competitive to our products. As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced margins, loss of sales and loss of market share. In addition, in markets where there are a limited number of customers, competition is particularly intense.

If we fail to accurately forecast component and material requirements for our products, we could incur additional costs and incur significant delays in shipments, which could result in a loss of customers.

We use rolling forecasts based on anticipated product orders and material requirements planning systems to determine our product requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. We depend on our suppliers for most of our product components and materials. Lead times for components and materials that we order vary significantly and depend on factors including the specific supplier requirements, the size of the order, contract terms and current market demand for components. For substantial increases in our sales levels of certain products, some of our suppliers may need at least nine months lead-time. If we overestimate our component and material requirements, we may have excess inventory, which would increase our costs. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers. Any of these occurrences would negatively impact our net sales, business or operating results.

Our increased reliance on contract manufacturing and other outsourcing may adversely impact our financial results and operations due to our decreased control over the performance and timing of certain aspects of our manufacturing.

Our manufacturing strategy includes partnering with contract manufacturers to outsource non-core subassemblies and less complex turnkey products, including some performed at international sites located in Asia and Eastern Europe. Additionally, we have outsourced the manufacture of certain of our optics components to certain third parties. Our ability to resume internal manufacturing operations for certain products and components in a timely manner may be eliminated. The cost, quality, performance and availability of contract manufacturing operations are and will be essential to the successful production and sale of many of our products. Our financial condition or results of operation could be adversely impacted if any contract manufacturer or other supplier is unable for any reason, including as a result of the impact of worldwide economic conditions, to meet our cost, quality, performance, and availability standards. We may not be able to provide contract manufacturers with product volumes that are high enough to achieve sufficient cost savings. If shipments fall below forecasted levels, we may incur increased costs or be required to take ownership of the inventory. Also, our ability to control the quality of products produced by contract manufacturers may be limited and quality issues may not be resolved in a timely manner, which could adversely impact our financial condition or results of operations.

If we fail to effectively manage our growth or, alternatively, our spending during downturns, our business could be disrupted, which could harm our operating results.

Growth in sales, combined with the challenges of managing geographically dispersed operations, can place a significant strain on our management systems and resources, and our anticipated growth in future operations could continue to place such a strain. The failure to effectively manage our growth could disrupt our business and harm our operating results. Our ability to successfully offer our products and implement our business plan in evolving markets requires an effective planning and management process. In economic downturns, we must effectively manage our spending and operations to ensure our competitive position during the downturn, as well as our future opportunities when the economy improves, remain intact. The failure to effectively manage our spending and operations could disrupt our business and harm our operating results.

Historically, acquisitions have been an important element of our strategy. However, we may not find suitable acquisition candidates in the future and we may not be able to successfully integrate and manage acquired businesses. Any acquisitions we make could disrupt our business and harm our financial condition.

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We have in the past made strategic acquisitions of other corporations and entities, as well as asset purchases, and we continue to evaluate potential strategic acquisitions of complementary companies, products and technologies. In the event of any future acquisitions, we could:


•	issue stock that would dilute our current stockholders' percentage ownership;


•	pay cash that would decrease our working capital;


•	incur debt;


•	assume liabilities; or


•	incur expenses related to impairment of goodwill and amortization.

Acquisitions also involve numerous risks, including:


•	problems combining the acquired operations, systems, technologies or products;


•	an inability to realize expected operating efficiencies or product integration benefits;


•	difficulties in coordinating and integrating geographically separated personnel, organizations, systems and facilities;


•	difficulties integrating business cultures;


•	unanticipated costs or liabilities, including the costs associated with improving the internal controls of the acquired company;


•	diversion of management's attention from our core businesses;


•	adverse effects on existing business relationships with suppliers and customers;


•	potential loss of key employees, particularly those of the purchased organizations;


•	incurring unforeseen obligations or liabilities in connection with acquisitions; and


•	the failure to complete acquisitions even after signing definitive agreements which, among other things, would result in the expensing of potentially significant professional fees and other charges in the period in which the acquisition or negotiations are terminated.

We cannot assure you that we will be able to successfully identify appropriate acquisition candidates, to integrate any businesses, products, technologies or personnel that we might acquire in the future or achieve the anticipated benefits of such transactions, which may harm our business.

We are exposed to lawsuits in the normal course of business which could have a material adverse effect on our business, operating results, or financial condition.

We are exposed to lawsuits in the normal course of our business, including product liability claims, if personal injury, death or commercial losses occur from the use of our products. While we typically maintain business insurance, including directors' and officers' policies, litigation can be expensive, lengthy, and disruptive to normal business operations, including the potential impact of indemnification obligations for individuals named in any such lawsuits. We may not, however, be able to secure insurance coverage on terms acceptable to us in the future. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit, including a recall or redesign of products if ultimately determined to be defective, could have a material adverse effect on our business, operating results, or financial condition.

We use standard laboratory and manufacturing materials that could be considered hazardous and we could be liable for any damage or liability resulting from accidental environmental contamination or injury.

Although most of our products do not incorporate hazardous or toxic materials and chemicals, some of the gases used in our excimer lasers and some of the liquid dyes used in some of our scientific laser products are highly toxic. In addition, our

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operations involve the use of standard laboratory and manufacturing materials that could be considered hazardous. Also, if a facility fire were to occur at our Sunnyvale, California site and were to spread to a reactor used to grow semiconductor wafers, it could release highly toxic emissions. We believe that our safety procedures for handling and disposing of such materials comply with all federal, state and offshore regulations and standards. However, the risk of accidental environmental contamination or injury from such materials cannot be entirely eliminated. In the event of such an accident involving such materials, we could be liable for damages and such liability could exceed the amount of our liability insurance coverage and the resources of our business which could have an adverse effect on our financial results or our business as a whole.

Compliance or the failure to comply with current and future environmental regulations could cause us significant expense.

We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process or requiring design changes or recycling of products we manufacture. If we fail to comply with any present and future regulations, we could be subject to future liabilities, the suspension of production or a prohibition on the sale of products we manufacture. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations, including expenses associated with the recall of any non-compliant product and the management of historical waste.

From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. These regulations include, for example, the Registration, Evaluation, Authorization and Restriction of Chemical substances (“REACH”), the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (“RoHS”) and the Waste Electrical and Electronic Equipment Directive (“WEEE”) enacted in the European Union which regulate the use of certain hazardous substances in, and require the collection, reuse and recycling of waste from, certain products we manufacture. This and similar legislation that has been or is in the process of being enacted in Japan, China, Korea and various states of the United States may require us to re-design our products to ensure compliance with the applicable standards, for example by requiring the use of different types of materials. These redesigns or alternative materials may detrimentally impact the performance of our products, add greater testing lead-times for product introductions or have other similar effects. We believe we comply with all such legislation where our products are sold and we will continue to monitor these laws and the regulations being adopted under them to determine our responsibilities. In addition, we are monitoring legislation relating to the reduction of carbon emissions from industrial operations to determine whether we may be required to incur any additional material costs or expenses associated with our operations. We are not currently aware of any such material costs or expenses. The SEC has promulgated rules requiring disclosure regarding the use of certain “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer's efforts to prevent the sourcing of such minerals. The implementation of such rules has required us to incur additional expense and internal resources and may continue to do so in the future, particularly in the event that only a limited pool of suppliers are available to certify that products are free from “conflict minerals.” Our failure to comply with any of the foregoing regulatory requirements or contractual obligations could result in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and could jeopardize our ability to conduct business in the United States and foreign countries.

Our and our customers' operations would be seriously harmed if our logistics or facilities or those of our suppliers, our customers' suppliers or our contract manufacturers were to experience catastrophic loss.

Our and our customers' operations, logistics and facilities and those of our suppliers and contract manufacturers could be subject to a catastrophic loss from fire, flood, earthquake, volcanic eruption, work stoppages, power outages, acts of war, pandemic illnesses, energy shortages, theft of assets, other natural disasters or terrorist activity. A substantial portion of our research and development activities, manufacturing, our corporate headquarters and other critical business operations are located near major earthquake faults in Santa Clara, California, an area with a history of seismic events. Any such loss or detrimental impact to any of our operations, logistics or facilities could disrupt our operations, delay production, shipments and net sales and result in large expenses to repair or replace the facility. While we have obtained insurance to cover most potential losses, after reviewing the costs and limitations associated with earthquake insurance, we have decided not to procure such insurance. We believe that this decision is consistent with decisions reached by numerous other companies located nearby. We cannot assure you that our existing insurance coverage will be adequate against all other possible losses.

Difficulties with our enterprise resource planning (“ERP”) system and other parts of our global information technology system could harm our business and results of operation. If our network security measures are breached and unauthorized access is obtained to a customer's data or our data or our information technology systems, we may incur significant legal and financial exposure and liabilities.

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Like many modern multinational corporations, we maintain a global information technology system, including software products licensed from third parties. Any system, network or Internet failures, misuse by system users, the hacking into or disruption caused by the unauthorized access by third parties or loss of license rights could disrupt our ability to timely and accurately manufacture and ship products or to report our financial information in compliance with the timelines mandated by the SEC. Any such failure, misuse, hacking, disruptions or loss would likely cause a diversion of management's attention from the underlying business and could harm our operations. In addition, a significant failure of our global information technology system could adversely affect our ability to complete an evaluation of our internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

As part of our day-to-day business, we store our data and certain data about our customers in our global information technology system. While our system is designed with access security, if a third party gains unauthorized access to our data, including any regarding our customers, such a security breach could expose us to a risk of loss of this information, loss of business, litigation and possible liability. These security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers' data or our data, including our intellectual property and other confidential business information, or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in a loss of confidence by our customers, damage our reputation, disrupt our business, lead to legal liability and negatively impact our future sales.

Changes in tax rates, tax liabilities or tax accounting rules could affect future results.

As a global company, we are subject to taxation in the United States and various other countries and jurisdictions. Significant judgment is required to determine worldwide tax liabilities. Our future tax rates could be affected by changes in the composition of earnings in countries or states with differing tax rates, changes in the valuation of our deferred tax assets and liabilities, or changes in the tax laws. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. From time to time the United States, foreign and state governments make substantive changes to tax rules and the application of rules to companies, including various announcements from the United States government potentially impacting our ability to defer taxes on international earnings. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different than the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our operating results and financial condition.

Changing laws, regulations and standards relating to corporate governance and public disclosure may create uncertainty regarding compliance matters.

Federal securities laws, rules and regulations, as well as the rules and regulations of self-regulatory organizations such as NASDAQ and the NYSE, require companies to maintain extensive corporate governance measures, impose comprehensive reporting and disclosure requirements, set strict independence and financial expertise standards for audit and other committee members and impose civil and criminal penalties for companies and their chief executive officers, chief financial officers and directors for securities law violations. These laws, rules and regulations have increased and will continue to increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management's attention from business operations. Changing laws, regulations and standards relating to corporate governance and public disclosure may create uncertainty regarding compliance matters. New or changed laws, regulations and standards are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time. We are committed to maintaining high standards of ethics, corporate governance and public disclosure. Complying with evolving interpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies and procedures, and may divert management time and attention from revenue generating to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may also be harmed.

Governmental regulations, including duties, affecting the import or export of products could negatively affect our net sales.

The United States and many foreign governments impose tariffs and duties on the import and export of products, including some of those which we sell. In particular, given our worldwide operations, we pay duties on certain products when they are imported into the United States for repair work as well as on certain of our products which are manufactured by our foreign

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subsidiaries. These products can be subject to a duty on the product value. Additionally, the United States and various foreign governments have imposed tariffs, controls, export license requirements and restrictions on the import or export of some technologies, especially encryption technology. From time to time, government agencies have proposed additional regulation of encryption technology, such as requiring the escrow and governmental recovery of private encryption keys. Governmental regulation of encryption technology and regulation of imports or exports, or our failure to obtain required import or export approval for our products, could harm our international and domestic sales and adversely affect our net sales. From time to time our duty calculations and payments are audited by government agencies. In the event of an adverse audit result, we could be liable for additional payments, duties, taxes and penalties, any of which could have a material adverse effect on our business or financial position, results of operations, or cash flows.

In addition, compliance with the directives of the Directorate of Defense Trade Controls (“DDTC”) may result in substantial expenses and diversion of management. Any failure to adequately address the directives of DDTC could result in civil fines or suspension or loss of our export privileges, any of which could have a material adverse effect on our business or financial position, results of operations, or cash flows.

Our market is unpredictable and characterized by rapid technological changes and evolving standards demanding a significant investment in research and development, and, if we fail to address changing market conditions, our business and operating results will be harmed.

The photonics industry is characterized by extensive research and development, rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. Because this industry is subject to rapid change, it is difficult to predict its potential size or future growth rate. Our success in generating net sales in this industry will depend on, among other things:


•	maintaining and enhancing our relationships with our customers;


•	the education of potential end-user customers about the benefits of lasers and laser systems; and


•	our ability to accurately predict and develop our products to meet industry standards.

For the three and nine months ended June 28, 2014, our research and development costs were $19.0 million (9.7% of net sales) and $60.4 million (10.2% of net sales). For our fiscal years 2013, 2012 and 2011, our research and development costs were $82.8 million (10.2% of net sales), $78.3 million (10.2% of net sales) and $81.2 million (10.1% of net sales), respectively. We cannot assure you that our expenditures for research and development will result in the introduction of new products or, if such products are introduced, that those products will achieve sufficient market acceptance or to generate sales to offset the costs of development. Our failure to address rapid technological changes in our markets could adversely affect our business and results of operations.

Failure to maintain effective internal controls may cause a loss of investor confidence in the reliability of our financial statements or to cause us to delay filing our periodic reports with the SEC and adversely affect our stock price.

The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on internal control over financial reporting in their annual reports on Form 10-K that contain an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Although we test our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, our failure to maintain adequate internal controls over financial reporting could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements or a delay in our ability to timely file our periodic reports with the SEC, which ultimately could negatively impact our stock price.

Provisions of our charter documents and Delaware law, and our Change-of-Control Severance Plan may have anti-takeover effects that could prevent or delay a change in control.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition or make removal of incumbent directors or officers more difficult. These provisions may discourage takeover attempts and bids for our common stock at a premium over the market price. These provisions include:


•	the ability of our Board of Directors to alter our bylaws without stockholder approval;

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•	limiting the ability of stockholders to call special meetings; and


•	establishing advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a merger, asset or stock sale or other transaction with an interested stockholder for a period of three years following the date such person became an interested stockholder, unless prior approval of our board of directors is obtained or as otherwise provided. These provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us without obtaining the prior approval of our board of directors, which may cause the market price of our common stock to decline. In addition, we have adopted a change of control severance plan, which provides for the payment of a cash severance benefit to each eligible employee based on the employee's position. If a change of control occurs, our successor or acquirer will be required to assume and agree to perform all of our obligations under the change of control severance plan which may discourage potential acquirers or result in a lower stock price.

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ITEM 6. EXHIBITS



Exhibit No.		Description

10.1+		First Modification Agreement to Amended and Restated Loan Agreement, dated as of May 30, 2014, by and between Coherent, Inc. and Union Bank, N.A. (Previously filed as Exhibit 10.1 to Form 8-K filed on June 3, 2014)

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		XBRL Taxonomy Extension Definition Linkbase

101.LAB*		XBRL Taxonomy Extension Label Linkbase

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase



+		This exhibit was previously filed with the Commission as indicated and are incorporated herein by reference.

*		In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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COHERENT, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.



		Coherent, Inc.
		(Registrant)

Date:	August 5, 2014	/s/:	JOHN R. AMBROSEO
			John R. Ambroseo
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	August 5, 2014	/s/:	HELENE SIMONET
			Helene Simonet
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)

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EXHIBIT INDEX



Exhibit No.		Description

10.1+		First Modification Agreement to Amended and Restated Loan Agreement, dated as of May 30, 2014, by and between Coherent, Inc. and Union Bank, N.A. (Previously filed as Exhibit 10.1 to Form 8-K filed on June 3, 2014)

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		XBRL Taxonomy Extension Definition Linkbase

101.LAB*		XBRL Taxonomy Extension Label Linkbase

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase



+		This exhibit was previously filed with the Commission as indicated and are incorporated herein by reference.

*		In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.