Edgar Filing: COHERENT INC

2011.7.2_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________________

FORM 10-Q

___________________________________________________

(Mark One)



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

For the Quarterly Period Ended July 2, 2011



£		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 S 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 S 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 £		Accelerated filer S

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 S

The number of shares outstanding of registrant’s common stock, par value $.01 per share, on July 29, 2011 was 25,045,671.

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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 July 2, 2011 and July 3, 2010	3

	Condensed Consolidated Balance Sheets
	July 2, 2011 and October 2, 2010	4

	Condensed Consolidated Statements of Cash Flows
	Nine months ended July 2, 2011 and July 3, 2010	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	43

Part II.	Other Information

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 6.	Exhibits	58

Signatures		60

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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,” “forecast” or the negative of such terms, or other comparable terminology, including without limitation statements made under “Future Trends,” “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 “Future Trends,” “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 event.

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
	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Net sales	$	210,882		$	166,697		$	594,873		$	438,669
Cost of sales	120,720			92,350			333,548			247,677
Gross profit	90,162			74,347			261,325			190,992
Operating expenses:
Research and development	21,738			18,264			61,514			53,162
Selling, general and administrative	37,983			31,584			113,040			90,727
Amortization of intangible assets	1,851			2,041			6,203			5,958
Total operating expenses	61,572			51,889			180,757			149,847
Income from operations	28,590			22,458			80,568			41,145
Other income (expense):
Interest and dividend income	258			274			602			1,712
Interest expense	(54		)	(159		)	(86		)	(229		)
Other—net	562			(300		)	11,329			616
Total other income (expense), net	766			(185		)	11,845			2,099
Income before income taxes	29,356			22,273			92,413			43,244
Provision for income taxes	10,334			7,869			30,555			16,181
Net income	$	19,022		$	14,404		$	61,858		$	27,063

Net income per share:
Basic	$	0.76		$	0.58		$	2.47		$	1.09
Diluted	$	0.74		$	0.57		$	2.42		$	1.08

Shares used in computation:
Basic	25,066			25,022			25,000			24,732
Diluted	25,587			25,438			25,562			25,037

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 data)



	July 2, 2011		October 2, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	199,681	$	245,380
Restricted cash	—		625
Short-term investments	67,758		17,391
Accounts receivable—net of allowances of $1,493 and $1,655, respectively	143,400		110,211
Inventories	149,465		113,858
Prepaid expenses and other assets	63,240		35,002
Deferred tax assets	21,226		20,050
Total current assets	644,770		542,517
Property and equipment, net	103,249		90,339
Goodwill	79,824		70,796
Intangible assets, net	20,178		19,931
Other assets	72,372		79,521
Total assets	$	920,393	$	803,104

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term obligations	$	14	$	18
Accounts payable	45,287		39,737
Income taxes payable	17,901		4,267
Other current liabilities	112,658		87,898
Total current liabilities	175,860		131,920
Long-term obligations	23		33
Other long-term liabilities	82,070		79,688
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock, par value $.01 per share:
Authorized—500,000 shares
Outstanding—24,976 shares and 24,554 shares, respectively	249		245
Additional paid-in capital	183,245		186,078
Accumulated other comprehensive income	74,032		62,084
Retained earnings	404,914		343,056
Total stockholders’ equity	662,440		591,463
Total liabilities and stockholders’ equity	$	920,393	$	803,104

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
	July 2, 2011			July 3, 2010
Cash flows from operating activities:
Net income	$	61,858		$	27,063
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	14,853			16,707
Amortization of intangible assets	6,203			5,958
Deferred income taxes	17,249			13,922
Tax benefit from employee stock options	296			—
Loss on disposal of property and equipment	239			451
Stock-based compensation	9,521			6,083
Excess tax benefit from stock-based compensation arrangements	(4,368		)	(619		)
Non-cash translation adjustment related to Finland dissolution	(6,511		)	—
Other non-cash (income) expense	(120		)	1,354
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable	(27,572		)	(25,633		)
Inventories	(30,760		)	(3,405		)
Prepaid expenses and other assets	(23,376		)	(19,488		)
Other assets	(4,105		)	8
Accounts payable	4,830			8,927
Income taxes payable/receivable	10,730			565
Other current liabilities	21,106			37,181
Other long-term liabilities	4,161			(735		)
Net cash provided by operating activities	54,234			68,339

Cash flows from investing activities:
Purchases of property and equipment	(27,448		)	(10,117		)
Proceeds from dispositions of property and equipment	338			753
Purchases of available-for-sale securities	(172,719		)	(99,628		)
Proceeds from sales and maturities of available-for-sale securities	122,542			97,149
Acquisition of businesses, net of cash acquired	(14,589		)	(20,745		)
Investment in SiOnyx	—			(2,000		)
Other	20			—
Changes in restricted cash	625			(625		)
Net cash used in investing activities	(91,231		)	(35,213		)

Cash flows from financing activities:
Short-term borrowings	1,551			—
Repayments of short-term borrowing	(1,551		)	—
Net change in capital lease obligations	(15		)	(14		)
Issuance of common stock under employee stock option and purchase plans	32,432			19,416
Repurchase of common stock	(41,938		)	(16,752		)
Net settlement of restricted common stock	(3,279		)	(1,193		)
Excess tax benefits from stock-based compensation arrangements	4,368			619
Net cash provided by (used in) financing activities	(8,432		)	2,076
Effect of exchange rate changes on cash and cash equivalents	(270		)	(24,801		)
Net increase (decrease) in cash and cash equivalents	(45,699		)	10,401
Cash and cash equivalents, beginning of period	245,380			199,950
Cash and cash equivalents, end of period	$	199,681		$	210,351
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	57		$	206
Income taxes	$	16,206		$	9,263
Cash received during the period for:
Income taxes	$	5,585		$	5,938

Non-cash investing and financing activities:
Unpaid property and equipment	$	982		$	784

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 October 2, 2010. 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 presented therein. 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 2011 and 2010 each include 52 weeks.

2. RECENT ACCOUNTING STANDARDS

Adoption of New Accounting Pronouncement and Update to Significant Accounting Policies

In October 2009, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard for multiple deliverable revenue arrangements. The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. The FASB also issued a new accounting standard for certain revenue arrangements that include software elements. This new standard excludes software that is contained on a tangible product from the scope of software revenue guidance if the software is essential to the tangible product’s functionality. We prospectively adopted both these standards in the first quarter of fiscal 2011. The impact of adopting these standards was not material to net sales or our condensed consolidated financial statements for the three and nine months ended July 2, 2011. The new accounting standards for revenue recognition if applied in the same manner to the year ended October 2, 2010 would not have had a material impact on net sales or to our consolidated financial statements for that fiscal year.

Under these new standards, when a sales arrangement contains multiple elements, such as products and/or services, we allocate revenue to each element based on a selling price hierarchy. Using the selling price hierarchy, we determine the selling price of each deliverable using vendor specific objective evidence (“VSOE”), if it exists, and otherwise third-party evidence (“TPE”). If neither VSOE nor TPE of selling price exists, we use estimated selling price (“ESP”). We generally expect that we will not be able to establish TPE due to the nature of the markets in which we compete, and, as such, we typically will determine selling price using VSOE or if not available, ESP.

Our basis for establishing VSOE of a deliverable’s selling price consists of standalone sales transactions when the same or similar product or service is sold separately. However, when services are never sold separately, such as product installation services, VSOE is based on the product’s estimated installation hours based on historical experience multiplied by the standard service billing rate. In determining VSOE, we require that a substantial majority of the selling price for a product or service fall within a reasonably narrow price range, as defined by us. We also consider the geographies in which the products or services are sold, major product and service groups, and other environmental variables in determining VSOE. Absent the existence of VSOE and TPE, our determination of a deliverable’s ESP involves evaluating several factors based on the specific facts and circumstances of these arrangements, which include pricing strategy and policies driven by geographies, market conditions, competitive landscape, correlation between proportionate selling price and list price established by management having the relevant authority, and other environmental variables in which the deliverable is sold.

For multiple element arrangements which include extended maintenance contracts, we allocate and defer the amount of consideration equal to the separately stated price and recognize revenue on a straight-line basis over the contract period.

Adoption of New Accounting Pronouncements

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In June 2009, the FASB issued amendments to the accounting rules for variable interest entities (VIEs) and for transfers of financial assets. The new guidance eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. In addition, qualifying special purpose entities (“QSPE”) are no longer exempt from consolidation under the amended guidance. The amendments also limit the circumstances in which a financial asset, or a portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented, and/or when the transferor has continuing involvement with the transferred financial asset. We adopted these amendments in our first quarter of fiscal year 2011 and it did not have a material impact on our consolidated financial position, results of operations and cash flows.

In July 2010, the FASB issued an accounting standard update defining a milestone and determining what criteria must be met to apply the milestone method of revenue recognition for research or development transactions. The update provides guidance on the criteria which must be met to determine if the milestone method of revenue recognition is appropriate, whether a milestone is substantive and the disclosures that must be made if the method is elected. We adopted this standard on a prospective basis in our first quarter of fiscal year 2011 and it did not have a material impact on our consolidated financial position, results of operations and cash flows.

Recently Issued Accounting Pronouncements

In June 2011, the FASB issued a final standard requiring the presentation of net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The new standard eliminates the option currently elected by the Company to present items of other comprehensive income in the annual statement of changes in stockholders' equity. The new requirements do not change the components of comprehensive income recognized in net income or other comprehensive income, or when an item of other comprehensive income must be reclassified to net income. Earnings per share computations do not change. The new requirements are effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. Full retrospective application is required. As this standard relates only to the presentation of other comprehensive income, the adoption of this accounting standard will not have an impact on our consolidated financial position, results of operations and cash flows.

In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our consolidated financial position, results of operations and cash flows.

In December 2010, the FASB amended its existing guidance for goodwill and other intangible assets. This authoritative guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists. The qualitative factors are consistent with the existing guidance which requires goodwill of a reporting unit to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This authoritative guidance becomes effective for us in fiscal 2012. The implementation of this authoritative guidance is not expected to have a material impact on our consolidated financial position, results of operations and cash flows.

3. BUSINESS COMBINATIONS

Hypertronics Pte Ltd

On January 5, 2011, we acquired all of the assets and certain liabilities of Hypertronics Pte Ltd for approximately $15.0 million in cash. Hypertronics designs and manufactures laser-and vision-based tools for flat panel, storage, semiconductor and biomedical applications at facilities in Singapore and Malaysia. Hypertronics has been included in our Specialty Lasers and Systems segment.

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



Tangible assets	$	4,617
Goodwill	6,288
Intangible assets:
Existing technology	3,120
In-process R&D	570
Customer lists	1,880
Trade name	410
Non-compete agreements	60
Liabilities assumed	(1,965		)
Total	$	14,980

The goodwill recognized from this acquisition resulted primarily from anticipated revenue growth and synergies of integrating Hypertronics scan vision technology and system capabilities with our laser technology and global sales, marketing, distribution and service network. The goodwill was included in our Specialty Lasers and Systems segment.

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

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

In-process research and development (“IPR&D”) consists of seven interrelated projects that will be incorporated into one product and 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. Upon successful completion of the development process for the acquired IPR&D projects, the assets would then be considered finite-lived intangible assets and amortization of the assets will commence. None of the projects had been completed as of July 2, 2011.

We expensed $0.6 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in the nine months ended July 2, 2011.

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

Beam Dynamics, Inc.

On April 29, 2010, we acquired Beam Dynamics, Inc. for $5.9 million in cash as allocated below and $0.3 million in deferred compensation related to an employment contract, which is being recognized in expense as earned. Beam Dynamics manufactures flexible laser cutting tools for the materials processing market. Beam Dynamics has been included in our Commercial Lasers and Components segment.

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

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Tangible assets	$	1,132
Goodwill	3,841
Intangible assets:
Existing technology	2,130
In-process R&D	650
Customer lists	360
Trade name	140
Order backlog	30
Non-compete agreements	10
Liabilities assumed	(2,371		)
Total	$	5,922

The goodwill recognized from this acquisition resulted primarily from access to anticipated growth in the laser tool market and was included in our Commercial Lasers and Components segment. 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 one to six years.

In-process research and development (“IPR&D”) consists of three development projects that have not yet reached technological feasibility. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. The value assigned to IPR&D was determined by considering the value of the products under development to the overall development plan, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. During the development period, these assets will not be amortized as charges to earnings; instead these assets will be subject to periodic impairment testing. Upon successful completion of the development process for all of the acquired IPR&D projects, the assets would then be considered finite-lived intangible assets and amortization of the assets will commence. None of the projects had been completed as of July 2, 2011.

We expensed $0.2 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in fiscal 2010.

Results of operations for the business have been included in our consolidated financial statements subsequent to the date of acquisition.

During the quarter ended July 2, 2011, we paid out $0.6 million that had been held in an escrow account to be applied towards any remaining closing costs for the acquisition and payments to the shareholders. The amount was previously included in current restricted cash on our consolidated balance sheet.

StockerYale, Inc.

On October 13, 2009, we acquired all the assets and certain liabilities of the StockerYale, Inc. (“StockerYale”) laser module product line in Montreal, Canada and its specialty fiber product line in Salem, New Hampshire for $15.0 million in cash. StockerYale designs, develops and manufactures low power laser modules, light emitting diode (LED) systems and specialty optical fiber products. These assets and liabilities have been included in our Commercial Lasers and Components segment.

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

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Tangible assets	$	9,770
Goodwill	2,580
Intangible assets:
Existing technology	610
Production know-how	910
Customer lists	3,170
Non-compete agreements	60
Order backlog	600
Liabilities assumed	(2,700		)
Total	$	15,000

The goodwill recognized from this acquisition resulted primarily from anticipated increases in market share and synergies of combining these entities and was included in our Commercial Lasers and Components segment. 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 one to seven years.

We expensed $0.2 million of acquisition-related costs incurred as selling, general and administrative expenses in our consolidated statements of operations for our fiscal year 2010.

Results of operations for the acquired product lines have been included in our consolidated financial statements subsequent to the date of acquisition.

4. FAIR VALUES

Cash Equivalents and Marketable Securities

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. 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 July 2, 2011 and October 2, 2010, we did not have any assets or liabilities valued based on Level 3 valuations.

Financial assets and liabilities measured at fair value as of July 2, 2011 are summarized below (in thousands):



	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Total Fair Value
	(Level 1)		(Level 2)

Money market fund deposits (1)	$	38,351	$	—	$	38,351
Certificates of deposit (2)	—		66,196		66,196
U.S. and international government obligations (3)	—		67,163		67,163
State and municipal obligations (4)	—		750		750
Corporate notes and obligations (4)	—		57,467		57,467
Commercial paper (4)	—		1,999		1,999
Foreign currency contracts (5)	—		98		98
Mutual funds — Deferred comp and supplemental plan (6)	8,312		—		8,312

___________________________________________________

(1) Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet.

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(2) Includes $65,695 recorded in cash and cash equivalents and $501 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(3) Includes $60,122 recorded in cash and cash equivalents and $7,041 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

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

(5) Includes $266 recorded in prepaid expenses and other assets and $168 recorded in other current liabilities on the Condensed Consolidated Balance Sheet

(6) Includes $2,777 recorded in prepaid expenses and other assets and $5,535 recorded in other assets on the Condensed Consolidated Balance Sheet.

Financial assets and liabilities measured at fair value as of October 2, 2010 are summarized below (in thousands):



	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Total Fair Value
	(Level 1)		(Level 2)

Money market fund deposits(1)	$	39,677	$	—	$	39,677
Certificates of deposit(1)	—		90,986		90,986
U.S. and international government obligations(2)	—		92,298		92,298
Corporate notes and obligations(3)	—		15,445		15,445
Commercial paper(4)	—		7,000		7,000
Foreign currency contracts(5)	—		1,401		1,401
Mutual funds—Deferred comp and supplemental plan(6)	6,711		—		6,711

___________________________________________________


(1)	Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet.


(2)	Includes $90,299 recorded in cash and cash equivalents and $1,999 recorded in short-term investments on the Condensed Consolidated Balance Sheet.


(3)	Includes $1,303 recorded in cash and cash equivalents and $14,142 recorded in short-term investments on the Condensed Consolidated Balance Sheet.


(4)	Includes $5,750 recorded in cash and cash equivalents and $1,250 recorded in short-term investments on the Condensed Consolidated Balance Sheet.


(5)	Includes $1,636 recorded in prepaid expenses and other assets and $235 recorded in other current liabilities on the Condensed Consolidated Balance Sheet.


(6)	Includes $2,340 recorded in prepaid expenses and other assets and $4,371 recorded in other assets on the Condensed Consolidated Balance Sheet.

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 forward contracts 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 Euro and the Japanese Yen. As a result, our earnings and cash flows are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of two months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for speculative or trading purposes. 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).

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The outstanding notional contract and fair value amounts of hedge contracts, with maximum maturity of 2 months, are as follows (in thousands):



	U.S. Notional Contract Value						U.S. Notional Fair Value
	July 2, 2011			October 2, 2010			July 2, 2011			October 2, 2010
Euro currency hedge contracts
Purchase	$	32,227		$	25,686		$	32,312		$	27,320
Sell	—			—			—			—
Net	$	32,227		$	25,686		$	32,312		$	27,320
Other foreign currency hedge contracts
Purchase	$	11,221		$	4,843		$	11,177		$	4,845
Sell	(14,964		)	(9,444		)	(14,908		)	(9,679		)
Net	$	(3,743	)	$	(4,601	)	$	(3,731	)	$	(4,834	)

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; such amounts were not material as of July 2, 2011 and October 2, 2010.

The location and amount of non-designated derivative instruments’ gain (loss) in the Condensed Consolidated Statements of Operations for the three and nine months ended July 2, 2011 and July 3, 2010 is as follows (in thousands):



	Amount of Gain or (Loss) Recognized in
	Income on Derivatives
	Three Months Ended		Nine Months Ended
	July 2, 2011		July 2, 2011
Derivatives not designated as hedging instruments
Foreign exchange contracts	$	751	$	1,835



	Amount of Gain or (Loss) Recognized in
	Income on Derivatives
	Three Months Ended			Nine Months Ended
	July 3, 2010			July 3, 2010
Derivatives not designated as hedging instruments
Foreign exchange contracts	$	(1,153	)	$	(2,164	)

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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	July 2, 2011
	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	199,681	$	—	$	—		$	199,681
	$	199,681						$	199,681
Short-term investments:
Available-for-sale securities:
Certificates of deposit	$	500	$	1	$	—		$	501
Commercial paper	1,999		—		—			1,999
State and municipal obligations	750		—		—			750
U.S. Treasury and agency obligations	7,028		14		(1		)	7,041
Corporate notes and obligations	57,212		262		(7		)	57,467
Total short-term investments	$	67,489	$	277	$	(8	)	$	67,758



	October 2, 2010
	Cost Basis			Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	246,004		$	1	$	—		$	246,005
Less: restricted cash	(625		)						(625		)
	$	245,379							$	245,380
Short-term investments:
Available-for-sale securities:
Commercial paper	$	1,250		$	—	$	—		$	1,250
U.S. Treasury and agency obligations	1,999			—		—			1,999
Corporate notes and obligations	14,062			82		(2		)	14,142
Total short-term investments	$	17,311		$	82	$	(2	)	$	17,391

The amortized cost and estimated fair value of available-for-sale investments in debt securities as of July 2, 2011 and October 2, 2010 classified as short-term investments on our condensed consolidated balance sheet were as follows (in thousands):



	July 2, 2011				October 2, 2010
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in less than 1 year	$	66,240	$	66,507	$	17,307	$	17,387
Due in 1 to 5 years	—		—		—		—
Due in 5 to 10 years	—		—		—		—
Due beyond 10 years	750		750		4		4
Total investments in available-for-sale debt securities	$	66,990	$	67,257	$	17,311	$	17,391

During the three and nine months ended July 2, 2011, we received proceeds totaling $65.7 million and $103.3 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 July 3, 2010, we received proceeds totaling $7.1 million and $28.4 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.

At October 2, 2010, $0.6 million of cash was restricted for remaining closing costs related to the Beam Dynamics acquisition and payments to former shareholders. The cash was paid during the third fiscal quarter and no cash was restricted as of July 2, 2011.

At July 2, 2011, gross unrealized losses on our investments with unrealized losses that are not deemed to be other-than-

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temporarily impaired were $8,219 on corporate notes and obligations of $29.4 million and US treasury and agency obligations of $7.0 million.

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 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.

We evaluate long-lived assets and amortizable intangible assets whenever events or changes in business circumstances or our planned use of assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. Reviews are performed to determine whether the carrying values of assets are impaired based on comparison to the undiscounted expected future cash flows identifiable to such long-lived and amortizable intangible assets. If the comparison indicates that impairment exists, the impaired asset is written down to its fair value.

During the nine months ended July 2, 2011, 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 October 2, 2010 to July 2, 2011 are as follows (in thousands):



	Commercial Lasers and Components			Specialty Lasers and Systems		Total
Balance as of October 2, 2010	$	6,364		$	64,432	$	70,796
Additions (see Note 3)	—			6,288		6,288
Translation adjustments and other	(2		)	2,742		2,740
Balance as of July 2, 2011	$	6,362		$	73,462	$	79,824

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



	July 2, 2011							October 2, 2010
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Existing technology	$	60,452	$	(48,519	)	$	11,933	$	56,194	$	(43,666	)	$	12,528
Patents	9,273		(9,246		)	27		9,852		(9,326		)	526
Order backlog	5,627		(5,546		)	81		5,361		(5,054		)	307
Customer lists	10,926		(5,760		)	5,166		8,808		(4,635		)	4,173
Trade name	4,393		(3,115		)	1,278		3,766		(2,666		)	1,100
Non-compete agreement	1,721		(1,654		)	67		1,616		(1,583		)	33
Production know-how	910		(536		)	374		910		(296		)	614
In-process research & development	1,252		—			1,252		650		—			650
Total	$	94,554	$	(74,376	)	$	20,178	$	87,157	$	(67,226	)	$	19,931

Amortization expense for intangible assets for the nine months ended July 2, 2011 and July 3, 2010 was $6.2 million and $6.0 million, respectively. At July 2, 2011, estimated amortization expense for the remainder of fiscal 2011, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):

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	Estimated Amortization Expense
2011 (remainder)	$	1,907
2012	6,908
2013	4,561
2014	3,473
2015	2,001
2016	1,232
Thereafter	96
Total	$	20,178

8. BALANCE SHEET DETAILS

Inventories consist of the following (in thousands):



	July 2, 2011		October 2, 2010
Purchased parts and assemblies	$	48,447	$	38,449
Work-in-process	49,995		40,010
Finished goods	51,023		35,399
Total inventories	$	149,465	$	113,858

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



	July 2, 2011		October 2, 2010
Prepaid and refundable income taxes	$	11,799	$	8,407
Prepaid expenses and other	51,441		26,595
Total prepaid expenses and other assets	$	63,240	$	35,002

Other assets consist of the following (in thousands):



	July 2, 2011		October 2, 2010
Assets related to deferred compensation arrangements	$	24,553	$	21,418
Deferred tax assets	42,371		53,219
Other assets	5,448		4,884
Total other assets	$	72,372	$	79,521

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



	July 2, 2011		October 2, 2010
Accrued payroll and benefits	$	34,144	$	35,716
Deferred income	15,692		13,471
Reserve for warranty	15,832		13,499
Accrued expenses and other	11,827		9,947
Other taxes payable	30,202		10,095
Accrued restructuring charges	1,050		2,232
Customer deposits	3,911		2,938
Total other current liabilities	$	112,658	$	87,898

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During the second quarter of fiscal 2009, we announced our plans to close our facilities in Tampere, Finland and St. Louis, Missouri. The closure of our St. Louis site was completed in the fourth quarter of fiscal 2009. The closure of our Finland site was scheduled for completion by the end of fiscal 2010, but we decided to delay the closure due to increased demand for products manufactured in Finland. In the second quarter of fiscal 2011, we ceased manufacturing operations in our Finland facility and recognized a $6.1 million gain, primarily in other income (expense), due to a non-recurring translation adjustment related to the dissolution of our Finland operations. We exited the facility in the third quarter of fiscal 2011. These closure plans have resulted in charges primarily for employee termination and other exit related costs associated with a plan approved by management.

Restructuring charges for the first nine months of fiscal 2011 and 2010 are recorded in cost of sales, research and development and selling, general and administrative expenses in our condensed consolidated statements of operations.

The following table presents our current liability as accrued on our balance sheet for restructuring charges. The table sets forth an analysis of the components of the restructuring charges and payments and other deductions made against the accrual for the first nine months of fiscal 2011 and 2010 (in thousands):



	Severance Related			Facilities- related Charges			Other Restructuring Costs			Total
Balance at October 3, 2009	$	488		$	357		$	807		$	1,652
Provisions	1,420			17			2,335			3,772
Payments and other	(312		)	(309		)	(2,051		)	(2,672		)
Balance at July 3, 2010	$	1,596		$	65		$	1,091		$	2,752

Balance at October 2, 2010	$	912		$	17		$	1,303		$	2,232
Provisions	218			—			680			898
Payments and other	(808		)	(17		)	(1,255		)	(2,080		)
Balance at July 2, 2011	$	322		$	—		$	728		$	1,050

The current year severance related costs are primarily comprised of severance pay, outplacement services, medical and other related benefits for employees being terminated due to the transition of activities out of Tampere, Finland.

We provide warranties on certain of our product sales and allowances 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 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 2011 and 2010 were as follows (in thousands):



	Nine Months Ended
	July 2, 2011			July 3, 2010
Beginning balance	$	13,499		$	10,211
Additions related to current period sales	20,038			14,219
Warranty costs incurred in the current period	(18,425		)	(11,919		)
Accruals resulting from acquisition	178			160
Adjustments to accruals related to prior period sales	542			(466		)
Ending balance	$	15,832		$	12,205

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

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	July 2, 2011		October 2, 2010
Long-term taxes payable	$	43,005	$	42,902
Deferred compensation	24,381		21,927
Deferred tax liabilities	4,464		6,231
Deferred income	2,824		1,786
Asset retirement obligations	1,560		1,409
Other long-term liabilities	5,836		5,433
Total other long-term liabilities	$	82,070	$	79,688

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 $16.8 million of foreign lines of credit as of July 2, 2011. At July 2, 2011, we had used $2.2 million of these available foreign lines of credit. These credit facilities were used in Europe during the second fiscal quarter of 2011 as guarantees. In addition, our domestic line of credit consists of a $40.0 million unsecured revolving credit account with Union Bank of California. The agreement will expire on March 31, 2012 and 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 July 2, 2011.

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 our stock options granted to employees for the three and nine months ended July 3, 2010 and shares purchased under the Employee Stock Purchase Plan (“ESPP”) for three and nine months ended July 2, 2011 and July 3, 2010, respectively, were estimated using the following weighted-average assumptions:



	Employee Stock Option Plans (1)												Employee Stock Purchase Plan
	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Expected life in years	—			4.5			—			4.6			0.5			0.5			0.5			0.5
Expected volatility	—			35.2		%	—			33.0		%	34.1		%	30.9		%	31.7		%	34.2		%
Risk-free interest rate	—		%	2.0		%	—		%	2.0		%	0.1		%	0.2		%	0.2		%	0.2		%
Expected dividends	—			—			—			—			—			—			—			—
Weighted average fair value per share	$	—		$	11.41		$	—		$	8.27		$	13.88		$	8.09		$	11.35		$	6.63

___________________________________________________

(1) There were no options granted during the three and nine months ended July 2, 2011.

During the first quarter of fiscal 2011, we granted market-based performance restricted stock units to officers and certain employees. There were two grants of market-based performance restricted stock units during the second quarter of fiscal 2011. The performance stock unit agreements provide for the award of performance stock units with each unit representing the right to receive one share of Coherent, Inc. common stock to be issued after the applicable award period. The final number of units awarded for this grant will be determined as of vesting dates in November 2011, November 2012 and November 2013, 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 $49.37 and was determined using a Monte Carlo simulation

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model incorporating the following weighted average assumptions:



Risk-free interest rate	0.65	%
Volatility	38.8	%

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 July 2, 2011 and July 3, 2010 (in thousands):



	Three Months Ended						Nine Months Ended
	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Cost of sales	$	369		$	233		$	957		$	708
Research and development	384			309			1,084			862
Selling, general and administrative	2,686			1,650			7,482			4,834
Income tax benefit	(1,327		)	(602		)	(2,851		)	(1,422		)
	$	2,112		$	1,590		$	6,672		$	4,982

During the three and nine months ended July 2, 2011, $0.4 million and $1.1 million was capitalized into inventory for all stock plans, $0.4 million and $1.0 million was amortized to cost of sales and $0.4 million remained in inventory at July 2, 2011. During the three and nine months ended July 3, 2010, $0.2 million and $0.7 million was capitalized into inventory for all stock plans, $0.2 million and $0.7 million was amortized to cost of sales and $0.3 million remained in inventory at July 3, 2010. Management has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

At July 2, 2011, 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 $14.4 million, net of estimated forfeitures of $1.3 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.3 years and will be adjusted for subsequent changes in estimated forfeitures.

At July 2, 2011, total compensation cost related to options to purchase common shares under the ESPP but not yet vested was approximately $0.5 million, which will be recognized over the offering period.

The cash flows resulting from excess tax benefits (tax benefits related to the excess of tax deduction resulting from an employee’s exercises of stock options over the stock-based compensation cost recognized for those options) are classified as financing cash flows. During the first nine months of fiscal 2011 and fiscal 2010, we recorded $4.4 million and $0.6 million, respectively, of excess tax benefits as cash flows from financing activities.

Stock Options & Awards Activity

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

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	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at October 2, 2010	1,893		$	28.96
Granted	—		—
Exercised	(906	)	30.33
Forfeitures	(19	)	25.23
Expirations	(4	)	34.14
Outstanding at July 2, 2011	964		$	27.73	4.2	$	27,247
Vested and expected to vest at July 2, 2011	954		$	27.75	4.2	$	26,931
Exercisable at July 2, 2011	533		$	29.67	3.6	$	14,032

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. There were approximately 1.0 million outstanding options that were in-the-money as of July 2, 2011. The aggregate intrinsic value of options exercised under the Company’s stock plans for the three and nine months ended July 2, 2011 were $3.4 million and $16.9 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 July 3, 2010 were $0.8 million and $2.9 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 2011 (in thousands, except per share amounts):



	Number of Shares		Weighted Average Grant Date Fair Value per Share
Nonvested stock at October 2, 2010	481		$	26.22
Granted	287		46.98
Vested	(182	)	26.19
Forfeited	(83	)	28.62
Nonvested stock at July 2, 2011 (1)	503		$	37.69

(1) Includes 99,525 market-based performance restricted stock units which may vest anywhere between 0% and 200% of targeted amounts. Such units are included at 100% in this table.

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. The outcome of any such matters is currently not determinable. Although we do not expect that such legal claims and litigation will ultimately have a material adverse effect on our consolidated financial position or results of operations, an adverse result in one or more matters could negatively affect our results in the period in which they occur.

Set forth below is the description of our historical derivative litigation which was settled in the first quarter of fiscal 2010.

Derivative Lawsuit—Between February 15, 2007 and March 2, 2007, three purported shareholder derivative lawsuits were filed in the United States District Court for the Northern District of California against certain of the Company’s current and former officers and directors. The Company was named as a nominal defendant. The complaints generally alleged that the defendants breached their fiduciary duties and violated the securities laws in connection with the granting of stock options, the accounting treatment for such grants, the issuance of allegedly misleading public statements and stock sales by certain of the individual defendants. On May 30, 2007, these lawsuits were consolidated under the caption In re Coherent, Inc. Shareholder Derivative Litigation, Lead Case No. C-07-0955-JF (N.D. Cal.). On June 25, 2007, plaintiffs filed an amended consolidated complaint. The Company’s Board of Directors appointed a Special Litigation Committee (“SLC”) comprised

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of independent director Sandeep Vij to investigate and evaluate the claims asserted in the derivative litigation and to determine what action(s) should be taken with respect to the derivative litigation. On September 8, 2009, Coherent, Inc., by and through the SLC, plaintiffs, and certain of Coherent’s former and current officers and directors filed with the court a Stipulation of Settlement reflecting the terms of a settlement that would resolve all claims alleged in the consolidated complaint.

On September 14, 2009, the United States District Court for the Northern District of California issued an order granting preliminary approval of the settlement of the three purported shareholder derivative lawsuits. On November 20, 2009, the court held a hearing for final approval of the settlement, and on November 24, 2009, the court entered an Order and Final Judgment, which approved the settlement and dismissed the action with prejudice. Following receipt of insurance proceeds and the payment of the plaintiff attorneys’ fees and expenses, we received a net cash benefit of $2.2 million from the settlement on December 11, 2009, which has been recorded in selling general and administrative expenses in the Condensed Consolidated Statement of Operations for the first quarter of fiscal 2010.

12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss), net of income taxes, are as follows (in thousands):



	Three Months Ended						Nine Months Ended
	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010

Net income	$	19,022		$	14,404		$	61,858		$	27,063

Other comprehensive income (loss):
Translation adjustment (see Note 14)	11,390			(18,907		)	11,950			(39,190		)
Net gain (loss) on derivative instruments, net of taxes	—			1			—			(8		)
Changes in unrealized gains on available-for-sale securities, net of taxes	(18		)	7			(2		)	6
Other comprehensive income (loss), net of tax	11,372			(18,899		)	11,948			(39,192		)
Comprehensive income (loss)	$	30,394		$	(4,495	)	$	73,806		$	(12,129	)

The following summarizes activity in accumulated other comprehensive income (loss) ("OCI") related to derivatives, net of income taxes, held by us (in thousands):



Balance, October 3, 2009	$	(85	)
Changes in fair value of derivatives	—
Net losses reclassified from OCI	6
Balance, July 3, 2010	$	(79	)

There was no activity or balance in accumulated other comprehensive loss related to derivatives, net of income taxes in the first nine months of fiscal 2011.

Accumulated other comprehensive income (net of tax) at July 2, 2011 is comprised of accumulated translation adjustments of $74.0 million. Accumulated other comprehensive income (net of tax) at October 2, 2010 is comprised of accumulated translation adjustments of $62.1 million.

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.

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



	Three Months Ended				Nine Months Ended
	July 2, 2011		July 3, 2010		July 2, 2011		July 3, 2010
Weighted average shares outstanding —basic (1)	25,066		25,022		25,000		24,732
Dilutive effect of employee stock awards	521		416		562		305
Weighted average shares outstanding—diluted	25,587		25,438		25,562		25,037

Net income	$	19,022	$	14,404	$	61,858	$	27,063

Net income per basic share	$	0.76	$	0.58	$	2.47	$	1.09
Net income per diluted share	$	0.74	$	0.57	$	2.42	$	1.08

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(1) Net of restricted stock

No potentially dilutive securities were excluded for the three months ended July 2, 2011. A total of 44,755 potentially dilutive securities have been excluded from the dilutive share calculation for the nine months ended July 2, 2011, respectively, as their effect was anti-dilutive. A total of 299,925 and 1,710,047 potentially dilutive securities have been excluded from the dilutive share calculation for the three and nine months ended July 3, 2010, respectively, as their effect was anti-dilutive.

14. OTHER INCOME (EXPENSE)

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



	Three Months Ended						Nine Months Ended
	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Foreign exchange gain (loss)	$	446		$	(107	)	$	1		$	(383	)
Gain on deferred compensation investments, net	216			(341		)	4,886			819
Translation adjustment related to dissolution of Finland	—			—			6,511			—
Other—net	(100		)	148			(69		)	180
Other income (expense), net	$	562		$	(300	)	$	11,329		$	616

The gain on deferred compensation investments, net for the nine months ended July 2, 2011 included the death benefits from one of the insurance policies, net of its previously recorded cash surrender value, of approximately $1.5 million.

In the second quarter of fiscal 2011, the Company had substantially completed the liquidation of its Finland operations and recognized in other income the accumulated translation gains for this subsidiary previously recorded in accumulated other comprehensive income (loss) on the condensed consolidated balance sheets.

15. STOCK REPURCHASES

On January 26, 2011, we announced that the Board of Directors had authorized the repurchase of up to $75.0 million of our common stock. The program is authorized for 12 months from the date of authorization.

During the quarter ended April 2, 2011, we repurchased and retired 454,682 shares of outstanding common stock through a modified “Dutch Auction” tender offer, at a price of $59.00 per share for a total of $27.4 million including expenses. Such repurchases were accounted for as a reduction in additional paid in capital.

During the quarter ended July 2, 2011, we repurchased and retired 285,600 shares of outstanding common stock at an average price of $50.87 per share for a total of $14.5 million, including expenses. Such repurchases were accounted for as

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a reduction in additional paid in capital.

At July 2, 2011, $33.6 million of shares remain authorized for repurchase under our current stock repurchase program. The timing and size of any purchases will be subject to market conditions.

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 estimated effective tax rates for the three and nine months ended July 2, 2011 were 35.2% and 33.1%, respectively. Our effective tax rate of 35.2% for the three months ended July 2, 2011 was higher than the statutory rate of 35% primarily due to limitations on the utilization of certain foreign losses, deemed dividend inclusions under the Subpart F tax rules, state income taxes, a currency translation adjustment related to a dividend from a foreign subsidiary and limitations on the deductibility of compensation under IRC Section 162(m). These amounts are partially offset by the benefit of foreign tax credits, the benefit of federal research and development tax credits, the benefit from the unrealized gain on life insurance policy investments related to our deferred compensation plans and the benefit from income subject to foreign tax rates that are lower than U.S. tax rates. Our effective tax rate of 33.1% for the nine months ended July 2, 2011 was lower than the statutory rate of 35% primarily due the benefit of currency translation adjustments related to closure of Coherent Finland's operations, the benefit of federal research and development tax credits, including additional credits reinstated from fiscal 2010 resulting from the enactment of the “Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010,” the benefit of foreign tax credits, the benefits from life insurance proceeds and the unrealized gain on life insurance policy investments related to our deferred compensation plans and the benefit from income subject to foreign tax rates that are lower than U.S. tax rates. These amounts are partially offset by deemed dividend inclusions under the Subpart F tax rules, a valuation allowance against certain foreign deferred tax assets, state income taxes, limitations on the utilization of certain foreign losses, a currency translation adjustment related to a dividend from a foreign subsidiary and limitations on the deductibility of compensation under IRC Section 162(m).

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

As of July 2, 2011, the total amount of gross unrecognized tax benefits was $50.6 million of which $29.7 million, if recognized, would affect our effective tax rate. Our total gross unrecognized tax benefits were classified as other long-term liabilities in the condensed consolidated balance sheets.

Our policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of July 2, 2011, the total amount of gross interest and penalties accrued was $7.3 million, which is classified as other long-term liabilities in the condensed consolidated balance sheets.

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 1999 are closed. The IRS has audited the research and development credits generated in the years 1999 through 2001 and carried forward to future tax years. We received a notice of proposed adjustment (“NOPA”) from the IRS in October 2008 to decrease the amount of research and development credits generated in years 2000 and 2001. We have signed a Closing Agreement with the IRS which allows additional research and development credits for the years 2000 and 2001, respectively. Subsequent to our quarter end, the Joint Committee on Taxation approved this agreement. We have provided adequate tax reserves for any adjustments to these research and development credits for the years 2000 and 2001. This settlement will result in the closure of U.S. federal statutes of limitations for years through 2004. The IRS has also indicated that it may consider an audit of our 2005 and 2006 tax returns. In our major state jurisdiction and our major foreign jurisdiction, the years subsequent to 2000 and 2004, respectively, currently remain open and could be subject to examination by the taxing authorities.

Management believes that it has adequately provided for any adjustments that may result from tax examinations. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign and state tax matters may be concluded in the next 12 months. Specific positions that may be resolved include issues involving research and development credits, transfer pricing and various other matters. The Company estimates that the net unrecognized tax benefits and related interest at July 2, 2011 could be reduced by approximately $8 million to $13 million in the next 12 months. A significant portion of this

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range includes a net unrecognized tax benefit reduction resulting from the closure of U.S. federal statutes of limitations for years through 2004 based on the IRS settlement described above and will affect the Company's effective tax rate for the fiscal year 2011.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Act”), was enacted on December 17, 2010. Under the Act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2009 through December 31, 2011. The effects of the change in the tax law are recognized in our first quarter of fiscal 2011, which is the quarter that the law was enacted. In addition to the federal legislation, the state of California approved its 2010-2011 budget on October 8, 2010 that includes modifications to tax law provisions that were previously set to become effective with tax years beginning on or after January 1, 2011. We have assessed the effects of the change in the California tax law and there are no material impacts in fiscal year 2011.

Deferred Income Taxes

As of July 2, 2011, our condensed consolidated balance sheet included net deferred tax assets, before valuation allowance, of approximately $65.6 million, which consists of tax credit carryovers, accruals and reserves, competent authority offset to transfer pricing tax reserves, employee stock-based compensation expenses, and certain other liabilities. Management periodically evaluates the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is solely dependent on our ability to generate sufficient future taxable income in the applicable jurisdictions during periods prior to the expiration of tax statutes to fully utilize these assets. After evaluating all available evidence, we have determined that it is “more likely than not” that a portion of the deferred tax assets would not be realized and we have a total valuation allowance of $8.5 million as of July 2, 2011. This amount includes an increase in the valuation allowance of approximately $1.6 million for the nine months ended July 2, 2011 as a result of changes in the expected realization of these assets for one of our foreign subsidiaries. We intend to maintain the valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.

17. SEGMENT INFORMATION

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

We have identified CLC and SLS as operating segments for which discrete financial information is available. Both units have engineering, marketing, product business management and product line management. 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. Assets by segment are not a measure used to assess the performance of the company by the CODM; therefore we do not report assets by segment internally or 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.

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

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	Three Months Ended						Nine Months Ended
	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Net sales:
Commercial Lasers and Components	$	74,970		$	58,261		$	208,564		$	146,856
Specialty Laser Systems	135,912			108,411			386,309			291,738
Corporate and other	—			25			—			75
Total net sales	$	210,882		$	166,697		$	594,873		$	438,669

Income (loss) from operations:
Commercial Lasers and Components	$	9,514		$	3,667		$	26,832		$	368
Specialty Laser Systems	29,357			26,802			87,615			63,468
Corporate and other	(10,281		)	(8,011		)	(33,879		)	(22,691		)
Total income (loss) from operations	$	28,590		$	22,458		$	80,568		$	41,145

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

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

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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 expand into new markets, such as laser-based processing development tools for solar manufacturing and high power materials processing solutions.


•	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.

•

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 earnings before interest, taxes, depreciation, amortization, stock compensation expenses, major restructuring costs and certain other non-operating income and expense items. Key initiatives to reach our goals for adjusted EBITDA improvements include our program of consolidating manufacturing locations, rationalizing our supply chain and selective outsourcing of certain manufacturing operations.

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.

Revenue Recognition

We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, the product has been delivered or the service has been rendered, the price is fixed or determinable and collection is probable. Revenue from product sales is recorded when all of the foregoing conditions are met and risk of loss and title passes to the customer. Our products typically include a warranty and the estimated cost of product warranty claims (based on historical experience) is recorded at the time the sale is recognized. Sales to customers are generally not subject to any price protection or return rights.

The vast majority of our sales are made to OEMs, distributors, resellers and end-users in the non-scientific market. Sales made to these customers do not require installation of the products by us and are not subject to other post-delivery obligations, except in occasional instances where we have agreed to perform installation or provide training. In those instances, we defer revenue related to installation services or training until these services have been rendered. We allocate revenue from multiple element arrangements to the various elements based upon fair values or a selling price hierarchy, for arrangements entered into subsequent to October 2, 2010, as discussed below.

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Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Failure to obtain anticipated orders due to delays or cancellations of orders could have a material adverse effect on our revenue. In addition, pressures from customers to reduce our prices or to modify our existing sales terms may have a material adverse effect on our revenue in future periods.

Our sales to distributors, resellers and end-user customers typically do not have customer acceptance provisions and only certain of our sales to OEM customers have customer acceptance provisions. Customer acceptance is generally limited to performance under our published product specifications. For the few product sales that have customer acceptance provisions because of higher than published specifications, (1) the products are tested and accepted by the customer at our site or by the customer’s acceptance of the results of our testing program prior to shipment to the customer, or (2) the revenue is deferred until customer acceptance occurs.

Sales to end-users in the scientific market typically require installation and, thus, involve post-delivery obligations; however our post-delivery installation obligations are not essential to the functionality of our products. We defer revenue related to installation services until completion of these services.

For most products, training is not provided; therefore, no post-delivery training obligation exists. However, when training is provided to our customers, it is typically priced separately and recognized as revenue after these services have been provided.

In October 2009, the FASB issued a new accounting standard for multiple deliverable revenue arrangements. The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. The FASB also issued a new accounting standard for certain revenue arrangements that include software elements. This new standard excludes software that is contained on a tangible product from the scope of software revenue guidance if the software is essential to the tangible product’s functionality. We prospectively adopted both these standards in the first quarter of fiscal 2011. The impact of adopting these standards was not material to net sales or our condensed consolidated financial statements for the three months ended January 1, 2011. The new accounting standards for revenue recognition if applied in the same manner to the year ended October 2, 2010 would not have had a material impact on net sales or to our consolidated financial statements for that fiscal year.

Long-Lived Assets and Goodwill

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We have determined that our reporting units are the same as our operating segments as each constitutes a business for which discrete financial information is available and for which segment management regularly reviews the operating results. We make this determination in a manner consistent with how the operating segments are managed. Based on this analysis, we have identified two reporting units which are our reportable segments: CLC and SLS.

Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired (see Note 7 in the Notes to Condensed Consolidated Financial Statements). We perform our annual impairment tests during the fourth quarter of each fiscal year using the opening balance sheet as of the first day of the fourth quarter, with any resulting impairment recorded in the fourth quarter of the fiscal year.

During the nine months ended July 2, 2011, we noted no indications of impairment or triggering events to cause us to review goodwill for potential impairment.

At July 2, 2011, we had $79.8 million of goodwill, $20.2 million of purchased intangible assets and $103.2 million of property and equipment on our condensed consolidated balance sheet.

It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these assets. In addition, if the price of our common stock were to significantly decrease combined with any other adverse change in market conditions, thus indicating that the underlying fair value of our reporting units or other long-lived assets may have decreased, we may be required to assess the recoverability of such assets in the period such circumstances are identified. In that event, impairment charges or shortened useful lives of certain long-lived assets may be required.

Inventory Valuation

We record our inventory at the lower of cost (computed on a first-in, first-out basis) or market. We write-down our inventory to its estimated market value based on assumptions about future demand and market conditions. Inventory write-downs are generally recorded within guidelines set by management when the inventory for a device exceeds 12 months of its demand and when individual parts have been in inventory for greater than 12 months. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required which could materially affect our future results of operations. Due to rapidly changing forecasts and orders, additional write-downs for excess or obsolete inventory, while not currently expected, could be required in the future. In the event that alternative future uses of fully written down inventories are identified, we may experience better than normal profit margins when such inventory is sold. Differences between actual results and previous estimates of excess and obsolete inventory could materially affect our future results of operations. We write-down our demonstration inventory by amortizing the cost of demonstration inventory over a twenty month period starting from the fourth month after such inventory is placed in service.

Warranty Reserves

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

Stock-Based Compensation

We account for stock-based compensation using fair value. We estimate the fair value of stock options granted using the Black Scholes Merton model and estimate the fair value of market-based performance restricted stock units granted using a Monte Carlo simulation model. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. We amortize the fair value of stock options on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. We value restricted stock units using the intrinsic value method. We amortize the value of restricted stock units on a straight-line basis over the restriction period. We amortize the value of market-based performance restricted stock units over the performance period, with no adjustment in future periods based upon the actual shareholder return over the performance period. See Note 10 “Stock-Based Compensation” for a description of our stock-based employee compensation plans and the assumptions we use to calculate the fair value of stock-based employee compensation.

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Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our condensed consolidated balance sheets.

We record a valuation allowance to reduce our deferred tax assets to an amount that more likely than not will be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the allowance for the deferred tax assets would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance for the deferred tax assets would be charged to income in the period such determination was made.

We evaluate our need for reserves for our uncertain tax positions using a two-step approach. The first step, recognition, occurs when we conclude (based solely on the technical aspects of the matter) that a tax position is more likely than not to be sustained upon examination by a taxing authority. The second step, measurement, is only considered after step one has been satisfied and measures any tax benefit at the largest amount that is deemed more likely than not to be realized upon ultimate settlement of the uncertainty. These determinations involve significant judgment by management. Tax positions that fail to qualify for initial recognition are recognized in the first subsequent interim period that they meet the more likely than not standard or when they are resolved through negotiation or litigation with factual interpretation, judgment and certainty. Tax laws and regulations themselves are complex and are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court filings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially to reverse previously recorded tax liabilities.

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KEY PERFORMANCE INDICATORS

The following is a summary of some of the quantitative performance indicators (as defined below) that may be used to assess our results of operations and financial condition:



	Three Months Ended
	July 2, 2011			July 3, 2010			Change			% Change
	(Dollars in thousands)

Bookings	$	228,479		$	180,570		$	47,909		26.5	%
Book-to-bill ratio	1.08			1.08			—			—	%
Net sales—Commercial Lasers and Components	$	74,970		$	58,261		$	16,709		28.7	%
Net sales—Specialty Lasers and Systems	$	135,912		$	108,411		$	27,501		25.4	%
Gross profit as a percentage of net sales—Commercial Lasers and Components	40.4		%	38.4		%	2.0		%	5.2	%
Gross profit as a percentage of net sales— Specialty Lasers and Systems	44.4		%	48.1		%	(3.7		)%	(7.7	)%
Research and development as a percentage of net sales	10.3		%	11.0		%	(0.7		)%	(6.4	)%
Income before income taxes	$	29,356		$	22,273		$	7,083		31.8	%
Net cash provided by operating activities	$	18,390		$	22,160		$	(3,770	)	(17.0	)%
Days sales outstanding in receivables	61.2