Edgar Filing: COHERENT INC

2012.3.31_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 March 31, 2012



£		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 S		Accelerated filer £

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

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

The number of shares outstanding of registrant’s common stock, par value $.01 per share, on April 27, 2012 was 23,670,820.

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COHERENT, INC.

INDEX



		Page
Part I.	Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Statements of Operations
	Three and six months ended March 31, 2012 and April 2, 2011	4

	Condensed Consolidated Statements of Comprehensive Income
	Three and six months ended March 31, 2012 and April 2, 2011	5

	Condensed Consolidated Balance Sheets
	March 31, 2012 and October 1, 2011	6

	Condensed Consolidated Statements of Cash Flows
	Six months ended March 31, 2012 and April 2, 2011	7

	Notes to Condensed Consolidated Financial Statements	8

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	40

Part II.	Other Information

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 5.	Other Information	55

Item 6.	Exhibits	56

Signatures		57

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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.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)



	Three Months Ended						Six Months Ended
	March 31, 2012			April 2, 2011			March 31, 2012			April 2, 2011
Net sales	$	193,284		$	200,880		$	384,051		383,991
Cost of sales	115,636			112,111			226,044			212,828
Gross profit	77,648			88,769			158,007			171,163
Operating expenses:
Research and development	20,323			21,246			39,102			39,776
Selling, general and administrative	35,377			38,979			70,008			75,057
Amortization of intangible assets	1,611			2,257			3,247			4,352
Total operating expenses	57,311			62,482			112,357			119,185
Income from operations	20,337			26,287			45,650			51,978
Other income (expense):
Interest and dividend income	29			161			231			344
Interest expense	(5		)	(17		)	(7		)	(32		)
Other—net	1,888			9,181			2,206			10,767
Total other income (expense), net	1,912			9,325			2,430			11,079
Income before income taxes	22,249			35,612			48,080			63,057
Provision for income taxes	6,094			11,889			14,874			20,221
Net income	$	16,155		$	23,723		$	33,206		$	42,836

Net income per share:
Basic	$	0.69		$	0.94		$	1.41		$	1.72
Diluted	$	0.67		$	0.92		$	1.38		$	1.68

Shares used in computation:
Basic	23,521			25,246			23,491			24,967
Diluted	23,996			25,832			23,979			25,550

See Accompanying Notes to Condensed Consolidated Financial Statements.

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COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in thousands)



	Three Months Ended					Six Months Ended
	March 31, 2012			April 2, 2011		March 31, 2012			April 2, 2011

Net income	$	16,155		$	23,723	$	33,206		$	42,836
Other comprehensive income (loss):
Translation adjustment	3,530			11,986		(6,791		)	560
Changes in unrealized gains on available-for-sale securities, net of taxes	(30		)	17		(14		)	16
Other comprehensive income (loss), net of tax	3,500			12,003		(6,805		)	576
Comprehensive income	$	19,655		$	35,726	$	26,401		$	43,412

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)



	March 31, 2012		October 1, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	86,064	$	167,061
Short-term investments	129,111		53,142
Accounts receivable—net of allowances of $1,563 and $1,439, respectively	126,588		141,037
Inventories	157,057		152,385
Prepaid expenses and other assets	59,174		44,964
Deferred tax assets	21,974		22,057
Total current assets	579,968		580,646
Property and equipment, net	114,439		104,504
Goodwill	75,806		75,954
Intangible assets, net	14,746		17,980
Other assets	63,062		64,182
Total assets	$	848,021	$	843,266

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term obligations	$	16	$	15
Accounts payable	40,831		39,841
Income taxes payable	13,305		23,929
Other current liabilities	99,419		98,620
Total current liabilities	153,571		162,405
Long-term obligations	11		19
Other long-term liabilities	57,594		62,841
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock, par value $.01 per share:
Authorized—500,000 shares
Outstanding—23,668 shares and 23,722 shares, respectively	236		236
Additional paid-in capital	122,693		130,250
Accumulated other comprehensive income	44,416		51,221
Retained earnings	469,500		436,294
Total stockholders’ equity	636,845		618,001
Total liabilities and stockholders’ equity	$	848,021	$	843,266

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)



	Six Months Ended
	March 31, 2012			April 2, 2011
Cash flows from operating activities:
Net income	$	33,206		$	42,836
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,506			9,717
Amortization of intangible assets	3,247			4,352
Deferred income taxes	91			8,179
Tax benefit from employee stock options	1,519			248
Loss on disposal of property and equipment	212			567
Stock-based compensation	8,183			6,084
Excess tax benefit from stock-based compensation arrangements	(2,593		)	(3,247		)
Non-cash translation adjustment related to Finland dissolution	—			(6,511		)
Other non-cash (income) expense	(112		)	—
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable	11,686			(20,894		)
Inventories	(4,961		)	(21,874		)
Prepaid expenses and other assets	(10,079		)	(14,515		)
Other assets	654			(3,453		)
Accounts payable	(1,314		)	5,072
Income taxes payable/receivable	(19,887		)	6,016
Other current liabilities	1,479			20,858
Other long-term liabilities	(91		)	2,409
Net cash provided by operating activities	32,746			35,844

Cash flows from investing activities:
Purchases of property and equipment	(19,575		)	(16,242		)
Proceeds from dispositions of property and equipment	—			33
Purchases of available-for-sale securities	(146,499		)	(101,378		)
Proceeds from sales and maturities of available-for-sale securities	70,870			48,309
Acquisition of businesses, net of cash acquired	—			(14,589		)
Net cash used in investing activities	(95,204		)	(83,867		)

Cash flows from financing activities:
Short-term borrowings	9,262			864
Repayments of short-term borrowings	(9,262		)	(864		)
Net change in capital lease obligations	(7		)	(10		)
Issuance of common stock under employee stock option and purchase plans	7,720			25,969
Repurchase of common stock	(20,665		)	(27,397		)
Net settlement of restricted common stock	(4,431		)	(3,189		)
Excess tax benefits from stock-based compensation arrangements	2,593			3,247
Net cash used in financing activities	(14,790		)	(1,380		)
Effect of exchange rate changes on cash and cash equivalents	(3,749		)	4,140
Net decrease in cash and cash equivalents	(80,997		)	(45,263		)
Cash and cash equivalents, beginning of period	167,061			245,380
Cash and cash equivalents, end of period	$	86,064		$	200,117
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	7		$	13
Income taxes	$	42,787		$	11,431
Cash received during the period for:
Income taxes	$	10,054		$	5,387

Non-cash investing and financing activities:
Unpaid property and equipment	$	3,777		$	2,828

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 1, 2011. 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 second fiscal quarters include 13 weeks of operations in each fiscal year presented. Fiscal years 2012 and 2011 each include 52 weeks.

2. RECENT ACCOUNTING STANDARDS

Adoption of New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued additional guidance on fair value measurements that clarified the application of existing guidance and disclosure requirements, changed certain fair value measurement principles and required additional disclosures about fair value measurements. We adopted this standard on a prospective basis in the second quarter of fiscal 2012. The adoption of this accounting standard did not have an impact on our consolidated financial position, results of operations and cash flows.

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 eliminated the option previously elected by the Company to present items of other comprehensive income in the annual statement of changes in stockholders' equity. The new requirements did 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. We adopted this standard on a full retrospective basis, as required, in the second quarter of fiscal 2012. As this standard relates only to the presentation of other comprehensive income, the adoption of this accounting standard did not have an impact on our consolidated financial position, results of operations and cash flows.

In September 2011, the FASB amended existing guidance related to goodwill and other intangible assets by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. 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. If this is the case, companies will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. We adopted this authoritative guidance in the first quarter of fiscal 2012. We do not expect the implementation of this authoritative guidance to have a material impact on our consolidated financial position, results of operations and cash flows in connection with our impairment test, which we perform annually in the fourth quarter.

Recently Issued Accounting Pronouncement

In December 2011, the FASB issued guidance which requires an entity to disclose information about offsetting and related arrangements to enable financial statement users to evaluate the effect or potential effect of netting arrangements, including rights of setoff associated with the entity's recognized financial assets and liabilities, on the entity's financial position. The new disclosures will enable financial statement users to compare balance sheets prepared under U.S. GAAP and International Financial Reporting Standards ("IFRS"), which are subject to different offsetting models. The disclosures will

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be limited to financial instruments (and derivatives) subject to enforceable master netting arrangements or similar agreements. Similar agreements include derivative clearing agreements, global master repurchase agreements, and global master securities lending agreements. Financial instruments and transactions that will be subject to the disclosure requirements may include derivatives, repurchase and reverse repurchase agreements, and securities lending and borrowing arrangements. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The guidance is effective for us beginning in fiscal 2014. We are currently evaluating the potential impact, if any, of the adoption of this guidance on our consolidated financial position, results of operations and cash flows.

3. BUSINESS COMBINATIONS

On January 5, 2011, we acquired all of the assets and certain liabilities of Hypertronics Pte Ltd for approximately $14.5 million in cash. Hypertronics designs and manufactures laser-and vision-based tools for flat panel, storage, semiconductor and solar applications at facilities in Singapore and Malaysia. Hypertronics was included in our Specialty Lasers and Systems segment.

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



Tangible assets	$	4,617
Goodwill	5,807
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	$	14,499

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. During the fiscal quarter ended March 31, 2012, we determined that one of the hardware projects would not be completed. We reviewed the original IPR&D valuation and determined an appropriate value for the project to be discontinued. As a result, $0.2 million was included in research and development expense in the second fiscal quarter. None of the remaining projects had been completed as of March 31, 2012.

We expensed $0.6 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in the fiscal year ended October 1, 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.

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4. FAIR VALUES

We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from quoted market prices in active markets involving similar assets. 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 March 31, 2012 and October 1, 2011, we did not have any assets or liabilities valued based on Level 3 valuations.

Financial assets and liabilities measured at fair value as of March 31, 2012 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)	$	9,351	$	—	$	9,351
Certificates of deposit (2)	—		8,003		8,003
U.S. government obligations (3)	—		91,675		91,675
Corporate notes and obligations (4)	—		43,278		43,278
Foreign currency contracts (5)	—		1,162		1,162
Mutual funds — Deferred comp and supplemental plan (6)	6,174		—		6,174

___________________________________________________

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

(2) Includes $6,000 recorded in cash and cash equivalents and $2,003 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(3) Includes $6,020 recorded in cash and cash equivalents and $85,655 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(4) Includes $1,825 recorded in cash and cash equivalents and $41,453 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(5) Includes $1,324 recorded in prepaid expenses and other assets and $162 recorded in other current liabilities on the Condensed Consolidated Balance Sheet (see Note 5).

(6) Includes $2,841 recorded in prepaid expenses and other assets and $3,333 recorded in other assets on the Condensed Consolidated Balance Sheet.

Financial assets and liabilities measured at fair value as of October 1, 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)	$	8,135	$	—	$	8,135
Certificates of deposit(2)	—		65,941		65,941
U.S. and international government obligations(3)	—		62,079		62,079
Corporate notes and obligations(4)	—		48,967		48,967
Foreign currency contracts(5)	—		181		181
Mutual funds—Deferred comp and supplemental plan(6)	7,830		—		7,830

___________________________________________________


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


(2)	Includes $59,431 recorded in cash and cash equivalents and $6,510 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

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(3)	Includes $60,978 recorded in cash and cash equivalents and $1,101 recorded in short-term investments on the Condensed Consolidated Balance Sheet.


(4)	Includes $3,436 recorded in cash and cash equivalents and $45,531 recorded in short-term investments on the Condensed Consolidated Balance Sheet.


(5)	Includes $578 recorded in prepaid expenses and other assets and $397 recorded in other current liabilities on the Condensed Consolidated Balance Sheet.


(6)	Includes $2,844 recorded in prepaid expenses and other assets and $4,986 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, the Japanese Yen and the Korean Won. As a result, our earnings, cash flows and cash balances are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of 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).

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



	U.S. Notional Contract Value						U.S. Notional Fair Value
	March 31, 2012			October 1, 2011			March 31, 2012			October 1, 2011
Euro currency hedge contracts
Purchase	$	60,133		$	42,488		$	61,377		$	42,103
Sell	—			—			—			—
Net	$	60,133		$	42,488		$	61,377		$	42,103
Other foreign currency hedge contracts
Purchase	$	—		$	2,351		$	—		$	2,355
Sell	(43,565		)	(16,783		)	(43,647		)	(16,221		)
Net	$	(43,565	)	$	(14,432	)	$	(43,647	)	$	(13,866	)

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 March 31, 2012 and October 1, 2011.

The amount of non-designated derivative instruments’ gain (loss) in the Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2012 and April 2, 2011 is as follows (in thousands):

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	Amount of Gain or (Loss) Recognized in
	Income on Derivatives
	Three Months Ended			Six Months Ended
	March 31, 2012			March 31, 2012
Derivatives not designated as hedging instruments
Foreign exchange contracts	$	(1,571	)	$	411



	Amount of Gain or (Loss) Recognized in
	Income on Derivatives
	Three Months Ended		Six Months Ended
	April 2, 2011		April 2, 2011
Derivatives not designated as hedging instruments
Foreign exchange contracts	$	2,188	$	1,084

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):



	March 31, 2012
	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	86,030	$	34	$	—		$	86,064

Short-term investments:
Available-for-sale securities:
Certificates of deposit	$	2,000	$	3	$	—		$	2,003
U.S. Treasury and agency obligations	85,220		454		(19		)	85,655
Corporate notes and obligations	41,209		262		(18		)	41,453
Total short-term investments	$	128,429	$	719	$	(37	)	$	129,111



	October 1, 2011
	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	166,931	$	131	$	(1	)	$	167,061

Short-term investments:
Available-for-sale securities:
Certificates of deposit	$	6,500	$	10	$	—		$	6,510
International government obligations	1,101		1		(1		)	1,101
Corporate notes and obligations	45,282		275		(26		)	45,531
Total short-term investments	$	52,883	$	286	$	(27	)	$	53,142

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The amortized cost and estimated fair value of available-for-sale investments in debt securities as of March 31, 2012 and October 1, 2011 classified as short-term investments on our condensed consolidated balance sheet were as follows (in thousands):



	March 31, 2012				October 1, 2011
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in less than 1 year	$	126,429	$	127,108	$	46,383	$	46,632
Total investments in available-for-sale debt securities	$	126,429	$	127,108	$	46,383	$	46,632

During the three and six months ended March 31, 2012, we received proceeds totaling $32.7 million and $60.1 million, respectively, from the sale of available-for-sale securities and realized gross gains of less than $0.1 million and $0.1 million, respectively. During the three and six months ended April 2, 2011, we received proceeds totaling $19.1 million and $37.5 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 March 31, 2012, gross unrealized losses on our investments with unrealized losses that are not deemed to be other-than-temporarily impaired were $35,000 on corporate notes and obligations of $38.1 million and U.S. treasury and agency obligations of $81.2 million.

At March 31, 2012, approximately $149.3 million of our cash, cash equivalents and short-term investments were held outside the U.S. in certain of our foreign operations, $54.8 million of which was denominated in currencies other than the U.S. dollar. In January 2012 we converted $89.8 million of assets formerly denominated in Euro to U.S. dollars and invested those funds in U.S. Treasury securities within a European subsidiary whose functional currency is the U.S. dollar. Accordingly, there is no translation adjustment arising from these U.S. dollar denominated investments.

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 six months ended March 31, 2012, 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 1, 2011 to March 31, 2012 are as follows (in thousands):



	Commercial Lasers and Components			Specialty Lasers and Systems			Total
Balance as of October 1, 2011	$	6,365		$	69,589		$	75,954
Translation adjustments and other	(2		)	(146		)	(148		)
Balance as of March 31, 2012	$	6,363		$	69,443		$	75,806

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

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	March 31, 2012							October 1, 2011
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Existing technology	$	52,301	$	(43,962	)	$	8,339	$	52,283	$	(41,615	)	$	10,668
Patents	7,162		(7,137		)	25		7,246		(7,220		)	26
Customer lists	9,852		(5,652		)	4,200		9,807		(5,142		)	4,665
Trade name	3,553		(2,692		)	861		3,566		(2,504		)	1,062
Non-compete agreement	837		(778		)	59		837		(784		)	53
Production know-how	910		(713		)	197		910		(621		)	289
In-process research & development	1,065		—			1,065		1,217		—			1,217
Total	$	75,680	$	(60,934	)	$	14,746	$	75,866	$	(57,886	)	$	17,980

Amortization expense for intangible assets for the six months ended March 31, 2012 and April 2, 2011 was $3.2 million and $4.4 million, respectively, which includes $2.3 million and $3.0 million, respectively, for amortization of existing technology and production know-how.

At March 31, 2012, estimated amortization expense for the remainder of fiscal 2012, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):



	Estimated Amortization Expense
2012 (remainder)	$	3,082
2013	4,846
2014	3,374
2015	2,033
2016	1,267
2017	136
Thereafter	8
Total	$	14,746

8. BALANCE SHEET DETAILS

Inventories consist of the following (in thousands):



	March 31, 2012		October 1, 2011
Purchased parts and assemblies	$	44,614	$	44,824
Work-in-process	61,557		52,457
Finished goods	50,886		55,104
Total inventories	$	157,057	$	152,385

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



	March 31, 2012		October 1, 2011
Prepaid and refundable income taxes	$	13,830	$	9,193
Other taxes receivable	30,031		19,883
Prepaid expenses and other	15,313		15,888
Total prepaid expenses and other assets	$	59,174	$	44,964

Other assets consist of the following (in thousands):

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	March 31, 2012		October 1, 2011
Assets related to deferred compensation arrangements	$	21,977	$	22,737
Deferred tax assets	36,735		37,156
Other assets	4,350		4,289
Total other assets	$	63,062	$	64,182

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



	March 31, 2012		October 1, 2011
Accrued payroll and benefits	$	27,193	$	39,639
Deferred income	15,600		14,893
Reserve for warranty	16,812		16,704
Accrued expenses and other	11,881		12,473
Other taxes payable	25,552		11,067
Accrued restructuring charges	—		634
Customer deposits	2,381		3,210
Total other current liabilities	$	99,419	$	98,620

The closure of our St. Louis site was completed in the fourth quarter of fiscal 2009. The closure of our Finland site was completed in the third quarter of fiscal 2011. These closures resulted in charges primarily for employee termination and other exit related costs associated with a plan approved by management.

Restructuring charges for the first six months of fiscal 2011 were 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 six months of fiscal 2012 and 2011 (in thousands):



	Severance Related			Facilities- related Charges			Other Restructuring Costs			Total
Balance at October 2, 2010	$	912		$	17		$	1,303		$	2,232
Provisions	218			—			680			898
Payments and other	(562		)	(17		)	(488		)	(1,067		)
Balance at April 2, 2011	$	568		$	—		$	1,495		$	2,063

Balance at October 1, 2011	$	—		$	—		$	634		$	634
Payments and other	—			—			(634		)	(634		)
Balance at March 31, 2012	$	—		$	—		$	—		$	—

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

Components of the reserve for warranty costs during the first six months of fiscal 2012 and 2011 were as follows (in thousands):

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	Six Months Ended
	March 31, 2012			April 2, 2011
Beginning balance	$	16,704		$	13,499
Additions related to current period sales	14,445			12,742
Warranty costs incurred in the current period	(14,319		)	(10,825		)
Accruals resulting from acquisitions	—			178
Adjustments to accruals, including foreign exchange	(18		)	(259		)
Ending balance	$	16,812		$	15,335

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



	March 31, 2012		October 1, 2011
Long-term taxes payable	$	23,240	$	27,775
Deferred compensation	22,276		22,685
Deferred tax liabilities	1,867		2,194
Deferred income	2,435		2,636
Asset retirement obligations	1,954		1,878
Other long-term liabilities	5,822		5,673
Total other long-term liabilities	$	57,594	$	62,841

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 $19.6 million of foreign lines of credit as of March 31, 2012. At March 31, 2012, we had used $2.2 million of these available foreign lines of credit. These credit facilities were used in Europe and Japan during the second fiscal quarter of 2012. In addition, our domestic line of credit consists of a $40.0 million unsecured revolving credit account with Union Bank of California. The agreement was due to expire on March 31, 2012 but has been extended until May 30, 2012, while a longer-term agreement is being finalized. The line of credit is subject to covenants related to financial ratios and tangible net worth with which we are currently in compliance. No amounts have been drawn upon our domestic line of credit as of March 31, 2012.

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10. STOCK-BASED COMPENSATION

Fair Value of Stock Compensation

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

Determining Fair Value

The fair values of shares purchased under the Employee Stock Purchase Plan (“ESPP”) for the three and six months ended March 31, 2012 and April 2, 2011, respectively, were estimated using the following weighted-average assumptions:



	Employee Stock Purchase Plan
	Three Months Ended						Six Months Ended
	March 31, 2012			April 2, 2011			March 31, 2012			April 2, 2011
Expected life in years	0.5			0.5			0.5			0.5
Expected volatility	54.7		%	30.2		%	52.1		%	30.4	%
Risk-free interest rate	0.1		%	0.2		%	0.1		%	0.2	%
Expected dividends	—			—			—			—
Weighted average fair value per share	$	14.70		$	10.06		$	14.81		$9.92

There were no stock options granted during the three and six months ended March 31, 2012 and April 2, 2011.

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

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

•The automatic annual grants of restricted stock units for non-employee members of the board of directors vest on February 15 of the calendar year following the grant, which is made following our annual meeting of shareholders.

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

We granted market-based performance restricted stock units to officers and certain employees. The performance stock unit agreements provide for the award of performance stock units with each unit representing the right to receive one share of 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 the vesting dates, based upon our total shareholder return over the performance period compared to the Russell 2000 Index and could range from a minimum of no units to a maximum of twice the initial award. The weighted average fair value for these performance units was $71.59 and was determined using a Monte Carlo simulation model incorporating the following weighted average assumptions:



Risk-free interest rate	0.39	%
Volatility	41.8	%

We recognize the estimated cost of these awards, as determined under the simulation model, over the related service

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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 six months ended March 31, 2012 and April 2, 2011 (in thousands):



	Three Months Ended						Six Months Ended
	March 31, 2012			April 2, 2011			March 31, 2012			April 2, 2011
Cost of sales	$	441		$	344		$	810		$	588
Research and development	431			363			824			700
Selling, general and administrative	3,288			2,454			6,548			4,796
Income tax benefit	(1,265		)	(849		)	(2,593		)	(1,524		)
	$	2,895		$	2,312		$	5,589		$	4,560

During the three and six months ended March 31, 2012, $0.4 million and $0.9 million was capitalized into inventory for all stock plans, $0.4 million and $0.8 million was amortized to cost of sales and $0.5 million remained in inventory at March 31, 2012. During the three and six months ended April 2, 2011, $0.4 million and $0.7 million was capitalized into inventory for all stock plans, $0.3 million and $0.6 million was amortized to cost of sales and $0.4 million remained in inventory at April 2, 2011. Management has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

At March 31, 2012, 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 $22.1 million, net of estimated forfeitures of $2.5 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.4 years and will be adjusted for subsequent changes in estimated forfeitures.

At March 31, 2012, total compensation cost related to options to purchase common shares under the ESPP but not yet vested was approximately $0.2 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 six months of fiscal 2012 and fiscal 2011, we recorded $2.6 million and $3.2 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):



	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at October 1, 2011	917		$	27.80
Granted	—		—
Exercised	(177	)	27.57
Forfeitures	(1	)	26.16
Expirations	—		—
Outstanding at March 31, 2012	739		$	27.85	4.0	$	22,523
Vested and expected to vest at March 31, 2012	736		$	27.80	3.9	$	22,465
Exercisable at March 31, 2012	554		$	27.53	3.4	$	17,061

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and

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the quoted price of our common stock at the end of the reporting period. There were approximately 0.7 million outstanding options that were in-the-money as of March 31, 2012. The aggregate intrinsic value of options exercised under the Company’s stock plans for the three and six months ended March 31, 2012 were $3.1 million and $4.7 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 six months ended April 2, 2011 were $6.8 million and $13.4 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 six months of fiscal 2012 (in thousands, except per share amounts):



	Time Based Restricted Stock Units				Market-Based Performance Restricted Stock Units
	Number of Shares(1)		Weighted Average Grant Date Fair Value		Number of Shares(2)		Weighted Average Grant Date Fair Value
Nonvested stock at October 1, 2011	404		$	34.71	101		$	49.77
Granted	245		53.78		95		63.85
Vested	(198	)	32.65		(44	)	53.18
Forfeited	(6	)	48.11		—		—
Nonvested stock at March 31, 2012	445		$	47.30	152		$	57.55

__________________________________________

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

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

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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.

12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (net of tax) at March 31, 2012 is comprised of accumulated translation adjustments of $44.5 million. Accumulated other comprehensive income (net of tax) at October 1, 2011 is comprised of accumulated translation adjustments of $51.2 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.

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



	Three Months Ended				Six Months Ended
	March 31, 2012		April 2, 2011		March 31, 2012		April 2, 2011
Weighted average shares outstanding —basic	23,521		25,246		23,491		24,967
Dilutive effect of employee stock awards	475		586		488		583
Weighted average shares outstanding—diluted	23,996		25,832		23,979		25,550

Net income	$	16,155	$	23,723	$	33,206	$	42,836

Net income per basic share	$	0.69	$	0.94	$	1.41	$	1.72
Net income per diluted share	$	0.67	$	0.92	$	1.38	$	1.68

A total of 109,833 and 91,322 potentially dilutive securities have been excluded from the dilutive share calculation for the three and six months ended March 31, 2012, respectively, as their effect was anti-dilutive. A total of 832 and 74,775 potentially dilutive securities have been excluded from the dilutive share calculation for the three and six months ended April 2, 2011, respectively, as their effect was anti-dilutive.

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14. OTHER INCOME (EXPENSE)

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



	Three Months Ended						Six Months Ended
	March 31, 2012			April 2, 2011			March 31, 2012		April 2, 2011
Foreign exchange gain (loss)	$	(11	)	$	(451	)	$	302	$	(445	)
Gain (loss) on deferred compensation investments, net	1,541			3,117			1,488		4,670
Translation adjustment related to dissolution of Finland	—			6,511			—		6,511
Other—net	358			4			416		31
Other income (expense), net	$	1,888		$	9,181		$	2,206	$	10,767

15. STOCK REPURCHASES

On August 25, 2011, we announced that the Board of Directors had authorized the repurchase of up to $50.0 million of our common stock. The program is authorized for 12 months from the date of authorization. We purchased $25.0 million of our common stock during fiscal 2011 and at October 1, 2011, $25.0 million of shares remained authorized for repurchase under this stock repurchase program.

During the three and six months ended March 31, 2012, we repurchased and retired zero and 450,500 shares, respectively, of outstanding common stock at an average price of $45.84 per share for a total of $20.7 million, excluding expenses. Such repurchases were accounted for as a reduction in additional paid in capital.

At March 31, 2012, $4.3 million remained authorized for repurchase under our current stock repurchase program. The timing and size of any purchases will be subject to, among other things, 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 six months ended March 31, 2012 were 27.4% and 30.9%. Our effective tax rate for the three and six months ended March 31, 2012 were lower than the statutory rate of 35% primarily due to permanent differences related to the benefit of foreign tax credits, the benefit of income subject to foreign tax rates that are lower than U.S. tax rates, the benefit of releasing state tax reserves accrued under ASC 740-10 (formerly FASB Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes") and related interest, the benefit of federal and California research and development tax credits, the benefit of a domestic production activities deduction and the benefit from the unrealized gain on life insurance policy investments related to our deferred compensation plans. These amounts are partially offset by deemed dividend inclusions under the Subpart F tax rules, a valuation allowance related to California research and development tax credits, state income taxes, limitations on the utilization of certain foreign losses, stock compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m).

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

As of March 31, 2012, the total amount of gross unrecognized tax benefits was $25.7 million of which $16.6 million, if recognized, would affect our effective tax rate. Our total gross unrecognized tax benefits, net of certain deferred tax assets, 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.

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As of March 31, 2012, the total amount of gross interest and penalties accrued was $1.3 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 2005 are closed. In our major state jurisdiction and our major foreign jurisdiction, the years subsequent to 2001 and 2005, respectively, currently remain open and could be subject to examination by the taxing authorities. In December 2011 and January 2012, our three German subsidiaries received notices of tax audits for the fiscal years 2006 through 2010. These audits are currently in process.

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 and we anticipate a lapse in certain statute of limitations which could result in a release of tax reserves and related interest expense under ASC Subtopic 740 "Income Taxes." 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 March 31, 2012 could be reduced by approximately $0.3 million to $1.1 million in the next 12 months.

Deferred Income Taxes

As of March 31, 2012, our condensed consolidated balance sheet included net deferred tax assets, before valuation allowance, of approximately $64.6 million, which consists of tax credits 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 $10.4 million as of March 31, 2012. 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 materials processing, original equipment manufacturer (“OEM”) components and instrumentation and microelectronics. SLS develops and manufactures configurable, advanced-performance products largely serving the microelectronics, scientific research and government programs and OEM components and instrumentation markets. The size and complexity of many of the SLS products 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 dedicated engineering, manufacturing, product business management and product line management functions. A small portion of our outside revenue is attributable to projects and recently developed products for which a segment has not yet been determined. The associated direct and indirect costs are presented in the category of Corporate and other, along with other corporate costs as described below.

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

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(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):



	Three Months Ended						Six Months Ended
	March 31, 2012			April 2, 2011			March 31, 2012			April 2, 2011
Net sales:
Commercial Lasers and Components	$	54,969		$	72,236		$	110,120		$	133,594
Specialty Laser Systems	138,315			128,644			273,931			250,397
Total net sales	$	193,284		$	200,880		$	384,051		$	383,991

Income (loss) from operations:
Commercial Lasers and Components	$	1,150		$	8,993		$	5,170		$	17,318
Specialty Laser Systems	30,069			29,397			61,099			58,258
Corporate and other	(10,882		)	(12,103		)	(20,619		)	(23,598		)
Total income from operations	$	20,337		$	26,287		$	45,650		$	51,978

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

COMPANY OVERVIEW

BUSINESS BACKGROUND

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

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

We are organized into two operating segments: 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, original equipment manufacturer (“OEM”) components and instrumentation and microelectronics. SLS develops and manufactures configurable, advanced performance products largely serving the microelectronics, scientific research and government programs and OEM components and instrumentation markets. The size and complexity of many of the SLS products require service to be performed at the customer site by factory trained field service engineers.

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:

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

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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,

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manufacturing processes and product offerings.

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

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We have identified the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition, accounting for long-lived assets (including goodwill and intangible assets), inventory valuation, warranty reserves, stock-based compensation and accounting for income taxes. See Item 7., Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for our fiscal year ended October 1, 2011.

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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
	March 31, 2012			April 2, 2011			Change			% Change
	(Dollars in thousands)

Bookings	$	183,137		$	236,706		$	(53,569	)	(22.6	)%
Book-to-bill ratio	0.95			1.18			(0.23		)	(19.5	)%
Net sales—Commercial Lasers and Components	$	54,969		$	72,236		$	(17,267	)	(23.9	)%
Net sales—Specialty Lasers and Systems	$	138,315		$	128,644		$	9,671		7.5	%
Gross profit as a percentage of net sales—Commercial Lasers and Components	35.4		%	40.1		%	(4.7		)%	(11.7	)%
Gross profit as a percentage of net sales— Specialty Lasers and Systems	42.3		%	46.8		%	(4.5		)%	(9.6	)%
Research and development as a percentage of net sales	10.5		%	10.6		%	(0.1		)%	(0.9	)%
Income before income taxes	$	22,249		$	35,612		$	(13,363	)	(37.5	)%
Net cash provided by operating activities	$	16,611		$	5,875		$	10,736		182.7	%
Days sales outstanding in receivables	58.9			60.1			(1.2		)	(2.0	)%
First quarter inventory turns	2.9			3.2			(0.3		)	(9.4	)%
Capital spending as a percentage of net sales	5.9		%	5.5		%	0.4		%	7.3	%



	Six Months Ended
	March 31, 2012			April 2, 2011			Change			% Change
	(Dollars in thousands)

Bookings	$	384,985		$	471,130		$	(86,145	)	(18.3	)%
Book-to-bill ratio	1.00			1.23			(0.23		)	(18.7	)%
Net sales—Commercial Lasers and Components	$	110,120		$	133,594		$	(23,474	)	(17.6	)%
Net sales—Specialty Lasers and Systems	$	273,931		$	250,397		$	23,534		9.4	%
Gross profit as a percentage of net sales—Commercial Lasers and Components	37.2		%	41.8		%	(4.6		)%	(11.0	)%
Gross profit as a percentage of net sales— Specialty Lasers and Systems	43.1		%	46.4		%	(3.3		)%	(7.1	)%
Research and development as a percentage of net sales	10.2		%	10.4		%	(0.2		)%	(1.9	)%
Income before income taxes	$	48,080		$	63,057		(14,977		)	(23.8	)%
Net cash provided by operating activities	$	32,746		$	35,844		(3,098		)	(8.6	)%
Capital spending as a percentage of net sales	5.1		%	4.2		%	0.9		%	21.4	%

Definitions and analysis of these performance indicators are as follows:

Bookings and Book-to-Bill Ratio

Bookings represent orders expected to be shipped within 12 months and services to be provided pursuant to service contracts. While we generally have not experienced a significant rate of cancellation, bookings are generally cancelable by our customers without substantial penalty and, therefore, we cannot assure all bookings will be converted to net sales.

The book-to-bill ratio is calculated as quarterly bookings divided by quarterly net sales. This is an indication of the strength of

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our business but can sometimes be impacted by a single large order. A ratio of greater than 1.0 indicates that demand for our products is greater than what we supply in the quarter.

Bookings decreased 22.6% in the second quarter of fiscal 2012 compared to the same quarter one year ago, led by a significant decrease in the microelectronics market, and the book-to-bill ratio was 0.95. Compared to the first quarter of fiscal 2012, bookings decreased 9.3% with decreases in the scientific and government programs, microelectronics and OEM components and instrumentation markets partially offset by increases in the materials processing market.

Microelectronics

Microelectronics bookings decreased 36% compared to the same quarter one year ago and decreased 8% from bookings in the first quarter of fiscal 2012. The book-to-bill ratio for the second quarter of fiscal 2012 was 1.01.

Flat panel display orders decreased from the first quarter of fiscal 2012. We expect this market to be strong in the remainder of fiscal 2012 driven by continued growth in high definition LCDs and OLEDs, first shipments of OLED TVs and the emergence of China-based low-temperature polycrystalline silicon (LTPS) manufacturing. Although we expect the order rate to be strong, we do expect fluctuations in order volumes on a quarterly basis. Our facility expansion in Göttingen and new service center in Korea will start shipping product by the end of the third quarter of fiscal 2012.

Although the advanced packaging (API) market is, in the current fiscal year, being impacted by tight credit in China where it is difficult for customers to establish letters of credit for new equipment purchases, we are experiencing an increase in sales inquiries. We expect that China's credit policies will improve in the second half of fiscal 2012. We anticipate market growth to come from increased 4G deployment as well as from the LED lighting market.

In the second quarter of fiscal 2012, the semiconductor capital equipment market continued to be strong, with increased orders for new systems resulting from increased deployment of 20nm nodes to multiple customers and higher utilization rates driving service demand. We continue to develop next generation technologies designed to increase accuracy, sensitivity and speed for the most advanced inspection and metrology applications. We expect the products to contribute to revenues in fiscal 2013 and/or 2014.

Materials Processing

Materials processing orders increased 11% compared to the same quarter one year ago and increased 31% from the first quarter of fiscal 2012. The book-to-bill ratio for the second quarter of fiscal 2012 was 1.13. During the second quarter of fiscal 2012, orders were close to record levels largely due to improved flow of orders from Asia, particularly China where interest remains strong for current applications including marking, textile processing and metal cutting.

Increased orders for marking and engraving lasers were driven by consumer electronics manufacturing and replacement of lost capacity in Japan from the Sendai earthquake in the second quarter of fiscal 2011. In the second quarter of fiscal 2012, we received sizable orders for lasers used in cutting and converting in textile applications as well as a modest increase in component demand, which are mostly OEM sales of semiconductor lasers.

We continue to make steady progress towards the release of our high-power fiber laser platform and we expect to release our first product within the next few months.

OEM Components and Instrumentation

OEM Components and Instrumentation orders decreased 5% compared to the same quarter one year ago and decreased 13% from the first quarter of fiscal 2012. The book-to-bill ratio for the second quarter of fiscal 2012 was 0.82.

Instrumentation orders decreased from the first quarter of fiscal 2012 due to the timing of larger orders and regional shifts in spending with decreased spending in the U.S. and Europe offset by investments in Asia. Orders for cytometry and microscopy remain strong. We expect low-cost genome testing to be a large market opportunity that our OBIS™ platform and optically pumped semiconductor ("OPS") laser products are positioned to address.

Orders from the medical OEM market benefitted from strong consumer demand for vision and aesthetic procedures. We expect current applications including refractive surgery, skin treatment and hair removal to remain stable and anticipate growth in several ophthalmic treatments such as laser-based cataract removal, microkeratotomy and inter-ocular therapy, which rely on short-pulse lasers that are part of our current and future product family.

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Scientific and Government Programs

Scientific and government programs orders decreased 8% compared to the same quarter one year ago and decreased 31% from the first quarter of fiscal 2012. The book-to-bill for the second quarter of fiscal 2012 was 0.79.

Orders decreased from the first quarter of fiscal 2012 due both to expected seasonality and high orders in the first quarter of fiscal 2012. Orders by application in the second quarter of fiscal 2012 were mixed, with decreases in orders for ultrafast amplifiers only partially offset by strong orders in multiphoton spectroscopy applications.

Bookings for ultrafast amplifiers decreased due to the timing of orders in Asia after strong bookings in the first quarter of fiscal 2012. We expect the amplifier market to be strong, particularly in high performance systems, and our broad and deep portfolio, including recent product introductions, is well-positioned in this market.

Orders for multiphoton spectroscopy applications were very strong, particularly in the U.S. where we set a new quarterly record. We believe part of the strength arose from the expiration of a key application patent, which enabled a new set of OEM suppliers we are engaged with to enter the market.

Net Sales

Net sales include sales of lasers, laser tools, related accessories and service contracts. Net sales for the second fiscal quarter decreased 23.9% in our CLC segment and increased 7.5% in our SLS segment from the same quarter one year ago. Net sales for the first six months of fiscal 2012 decreased 17.6% in our CLC segment and increased 9.4% in our SLS segment from the same period one year ago. For a description of the reasons for changes in net sales refer to the “Results of Operations” section of this quarterly report.

Gross Profit as a Percentage of Net Sales

Gross profit as a percentage of net sales (“gross profit percentage”) is calculated as gross profit for the period divided by net sales for the period. Gross profit percentage in the second quarter decreased from 40.1% to 35.4% in our CLC segment and decreased from 46.8% to 42.3% in our SLS segment from the same quarter one year ago. Gross profit percentage for the first six months of fiscal 2012 decreased from 41.8% to 37.2% in our CLC segment and decreased from 46.4% to 43.1% in our SLS segment from the same period one year ago. For a description of the reasons for changes in gross profit refer to the “Results of Operations” section of this quarterly report.

Research and Development as a Percentage of Net Sales

Research and development as a percentage of net sales (“R&D percentage”) is calculated as research and development expense for the period divided by net sales for the period. Management considers R&D percentage to be an important indicator in managing our business as investing in new technologies is a key to future growth. R&D percentage decreased to 10.5% from 10.6% in our second fiscal quarter and to 10.2% from 10.4% for the first six months of fiscal 2012 compared to the same periods one year ago. For a description of the reasons for changes in R&D spending refer to the “Results of Operations” section of this quarterly report.

Net Cash Provided by Operating Activities

Net cash provided by operating activities as reflected on our Condensed Consolidated Statements of Cash Flows primarily represents the excess or shortfall of cash collected from billings to our customers and other receipts over cash paid to our vendors for expenses and inventory purchases to run our business. We believe that cash flows from operations is an important performance indicator because cash generation over the long term is essential to maintaining a healthy business and providing funds to help fuel growth. For a description of the reasons for changes in Net Cash Provided by Operating Activities refer to the “Liquidity and Capital Resources” section of this quarterly report.

Days Sales Outstanding in Receivables

We calculate days sales outstanding (“DSO”) in receivables as net receivables at the end of the period divided by net sales during the period and then multiplied by the number of days in the period, using 90 days for quarters. DSO in receivables indicates how well we are managing our collection of receivables, with lower DSO in receivables resulting in working capital availability. The more money we have tied up in receivables, the less money we have available for research and development,

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acquisitions, expansion, marketing and other activities to grow our business. Our DSO in receivables for the second quarter of fiscal 2012 decreased 1.2 days from the same quarter one year ago primarily due to a higher mix of receivables and revenue in regions with shorter payment terms and the impact of foreign exchange rates.

Annualized Inventory Turns

We calculate annualized inventory turns as the cost of sales during the quarter annualized and divided by net inventories at the end of the period. This indicates how well we are managing our inventory levels, with higher inventory turns resulting in more working capital availability and a higher return on our investments in inventory. The more money we have tied up in inventory, the less money we have available for research and development, acquisitions, expansion, marketing and other activities to grow our business. Our annualized inventory turns for the second quarter of fiscal 2012 decreased by 0.3 turns from the same quarter one year ago primarily due to the impact of decreased sales volumes in relation to inventory levels in certain businesses.

Capital Spending as a Percentage of Net Sales

Capital spending as a percentage of net sales (“capital spending percentage”) is calculated as capital expenditures for the period divided by net sales for the period. Capital spending percentage indicates the extent to which we are expanding or improving our operations, including investments in technology. Management monitors capital spending levels as this assists management in measuring our cash flows, net of capital expenditures. Our capital spending percentage increased to 5.9% from 5.5% for the second quarter and to 5.1% from 4.2% for the first six months of fiscal 2012 compared to the same periods one year ago primarily due to building improvements and purchases of production-related assets to support our expansion in Asia and Germany.

SIGNIFICANT EVENTS

On August 25, 2011, the Board of Directors authorized the repurchase of up to $50.0 million of our common stock. The program is authorized for 12 months from the date of authorization. At October 1, 2011, $25.0 million remained authorized for repurchase under this stock repurchase program. During the quarter ended December 31, 2011, we repurchased and retired 450,500 shares of outstanding common stock at an average price of $45.84 per share for a total of $20.7 million, excluding expenses. There were no repurchases during the quarter ended March 31, 2012.

RESULTS OF OPERATIONS

CONSOLIDATED SUMMARY

The following table sets forth, for the periods indicated, the percentage of total net sales represented by the line items reflected in our condensed consolidated statements of operations:



	Three Months Ended				Six Months Ended
	March 31, 2012		April 2, 2011		March 31, 2012		April 2, 2011
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	59.8	%	55.8	%	58.9	%	55.4	%
Gross profit	40.2	%	44.2	%	41.1	%	44.6	%
Operating expenses: