Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ___________________________________________________
FORM 10-Q
 ___________________________________________________
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 30, 2017
or
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to          
Commission File Number: 001-33962 
COHERENT, INC.
Delaware
 
94-1622541
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
5100 Patrick Henry Drive, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 764-4000 
___________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer x
 
Accelerated filer ¨
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
(do not check if a smaller reporting company)
 
 
Emerging growth company ¨

 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨


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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x
 
The number of shares outstanding of registrant’s common stock, par value $.01 per share, on February 5, 2018 was 24,821,704.

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COHERENT, INC.

INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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


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PART I.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share data) 
 
Three Months Ended
 
December 30,
2017

December 31,
2016
Net sales
$
477,565


$
346,073

Cost of sales
260,542


204,559

Gross profit
217,023


141,514

Operating expenses:
 


 

Research and development
31,392


27,084

Selling, general and administrative
73,437


73,768

Gain from business combination


(5,416
)
Impairment of assets held for sale
265

 

Amortization of intangible assets
2,606


3,878

Total operating expenses
107,700


99,314

Income from operations
109,323


42,200

Other income (expense):
 




Interest income
471


143

Interest expense
(8,747
)

(7,964
)
Other—net
(224
)

12,993

Total other income (expense), net
(8,500
)

5,172

Income from continuing operations before income taxes
100,823


47,372

Provision for income taxes
58,920


16,674

Net income from continuing operations
41,903


30,698

Loss from discontinued operations, net of income taxes
(2
)

(290
)
Net income
$
41,901


$
30,408

 

 
 
Basic net income per share:





Income per share from continuing operations
$
1.70


$
1.26

Loss per share from discontinued operations, net of income taxes


(0.01
)
Net income per share
$
1.70


$
1.25







Diluted net income per share:
 


 

Income per share from continuing operations
$
1.67


$
1.25

Loss per share from discontinued operations, net of income taxes


(0.01
)
Net income per share
$
1.67


$
1.23







Shares used in computation:
 


 

Basic
24,635


24,347

Diluted
25,025


24,644

 
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
 
December 30,
2017
 
December 31,
2016
 
 
 
 
Net income
$
41,901

 
$
30,408

Other comprehensive income (loss): (1)
 
 
 
  Translation adjustment, net of taxes (2)
92

 
(5,495
)
Changes in unrealized losses on available-for-sale securities, net of taxes (3)
(7
)
 
(3,334
)
Defined benefit pension plans, net of taxes (4)

147

 
376

  Other comprehensive income (loss), net of tax
232

 
(8,453
)
Comprehensive income
$
42,133

 
$
21,955


(1)
Reclassification adjustments were not significant during the three months ended December 30, 2017 and December 31, 2016.

(2)
Tax benefits of $0 and $1,266 were provided on translation adjustments during the three months ended December 30, 2017 and December 31, 2016, respectively. 

(3)
Tax benefits of $4 and $1,878 were provided on changes in unrealized gains (losses) on available-for-sale securities for the three months ended December 30, 2017 and December 31, 2016, respectively.

(4)
Tax expenses (benefits) of $(46) and $21 were provided on changes in defined benefit pension plans for the three months ended December 30, 2017 and December 31, 2016, respectively.





See Accompanying Notes to Condensed Consolidated Financial Statements.

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COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except par value)
 
December 30,
2017
 
September 30,
2017
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
385,735

 
$
443,066

Restricted cash
1,100


1,097

Short-term investments
37,711

 
32,510

Accounts receivable—net of allowances of $6,715 and $6,890, respectively
309,132

 
305,668

Inventories
432,809

 
414,807

Prepaid expenses and other assets
77,003

 
70,268

Assets held for sale
8,577

 
44,248

Total current assets
1,252,067

 
1,311,664

Property and equipment, net
291,308

 
278,850

Goodwill
418,080

 
417,694

Intangible assets, net
174,531

 
190,027

Non-current restricted cash
12,957


12,924

Other assets
127,716

 
126,641

Total assets
$
2,276,659

 
$
2,337,800

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Short-term borrowings and current-portion of long-term obligations
$
6,928


$
5,078

Accounts payable
81,397

 
75,860

Income taxes payable
114,036

 
103,206

Other current liabilities
190,840

 
235,001

Total current liabilities
393,201

 
419,145

Long-term obligations
503,005

 
589,001

Other long-term liabilities
185,072

 
166,390

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 

 
 

Common stock, Authorized—500,000 shares, par value $.01 per share:
 

 
 

Outstanding—24,822 shares and 24,631 shares, respectively
247

 
245

Additional paid-in capital
147,764

 
171,403

Accumulated other comprehensive income
20,138

 
19,906

Retained earnings
1,027,232

 
971,710

Total stockholders’ equity
1,195,381

 
1,163,264

Total liabilities and stockholders’ equity
$
2,276,659

 
$
2,337,800


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)
 
Three Months Ended
 
December 30,
2017

December 31,
2016
Cash flows from operating activities:
 

 
 

Net income
$
41,901

 
$
30,408

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 

Depreciation and amortization
12,555

 
8,995

Amortization of intangible assets
15,100

 
12,088

Gain on business combination

 
(5,416
)
Deferred income taxes
13,121

 
1,291

Amortization of debt issuance cost
3,815

 
600

Stock-based compensation
7,076

 
5,503

Non-cash restructuring charges
430

 
4,359

Other non-cash expense
377

 
456

Changes in assets and liabilities, net of effect of acquisitions:
 

 
 

Accounts receivable
(1,219
)
 
4,417

Inventories
(16,128
)
 
6,613

Prepaid expenses and other assets
(6,364
)
 
(3,559
)
Other long-term assets
(3,365
)
 
(1,083
)
Accounts payable
4,676

 
1,439

Income taxes payable/receivable
29,751

 
(1,428
)
Other current liabilities
(39,336
)
 
17,911

Other long-term liabilities
2,588

 
1,330

Cash flows from discontinued operations
2

 
(1,283
)
Net cash provided by operating activities
64,980

 
82,641

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(23,683
)
 
(15,390
)
Proceeds from dispositions of property and equipment
26

 
123

Purchases of available-for-sale securities
(14,894
)
 

Proceeds from sales and maturities of available-for-sale securities
9,711

 
25,108

Acquisition of businesses, net of cash acquired

 
(740,481
)
Proceeds from sale of discontinued operation
25,000

 

Cash flows from discontinued operations

 
(153
)
Net cash used in investing activities
(3,840
)
 
(730,793
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Short-term borrowings
2,354

 
3,920

Repayments of short-term borrowings
(622
)
 
(23,920
)
Proceeds from long-term borrowings

 
740,685

Repayments of long-term borrowings
(90,363
)
 
(2,171
)
Issuance of common stock under employee stock option and purchase plans
4,899

 
3,866

Net settlement of restricted common stock
(35,646
)
 
(15,255
)
Debt issuance costs

 
(25,824
)
Net cash provided by (used in) financing activities
(119,378
)
 
681,301

Effect of exchange rate changes on cash, cash equivalents and restricted cash
943

 
(13,504
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(57,295
)

19,645

Cash, cash equivalents and restricted cash, beginning of period
457,087

 
354,347

Cash, cash equivalents and restricted cash, end of period
$
399,792

 
$
373,992

 
 
 
 
Non-cash investing and financing activities:
 
 
 
  Unpaid property and equipment purchases
$
3,853

 
$
4,084

  Use of previously owned equity shares in acquisition
$

 
$
20,685


The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows.
 
December 30,
2017
 
December 31,
2016
Cash and cash equivalents
$
385,735

 
$
360,217

Restricted cash, current
1,100

 
2,232

Restricted cash, non-current
12,957

 
11,543

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
$
399,792

 
$
373,992

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 condensed consolidated financial statements and notes thereto filed by Coherent, Inc. on Form 10-K for the fiscal year ended September 30, 2017. In the opinion of management, all adjustments necessary for a fair presentation of financial condition and results of operation as of and for the periods presented have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year or any other interim periods. Our fiscal year ends on the Saturday closest to September 30 and our first fiscal quarters include 13 weeks of operations in each fiscal year presented. Fiscal year 2018 and 2017 both include 52 weeks.

The consolidated financial statements include the accounts of Coherent, Inc. and its direct and indirect subsidiaries (collectively, the "Company", "we", "our", "us" or "Coherent"). Intercompany balances and transactions have been eliminated.

On November 7, 2016, we acquired Rofin-Sinar Technologies, Inc. and its direct and indirect subsidiaries ("Rofin"). The significant accounting policies of Rofin have been aligned to conform to those of Coherent, and the consolidated financial statements include the results of Rofin as of the acquisition date.

The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") 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. Actual results could differ from those estimates.


2.    RECENT ACCOUNTING STANDARDS

Adoption of New Accounting Pronouncement

In October 2016, the FASB issued amended guidance that improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under the new guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard is required to be adopted in the first quarter of our fiscal 2019. We elected to early adopt the amended guidance in the first quarter of fiscal 2018. The effect of adoption is a decrease in our opening retained earnings by $6.1 million with a comparable decrease to our non-current prepaid income tax balance.

In March 2016, the FASB issued amended guidance that simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under the new guidance, an entity recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. This change eliminates the notion of the APIC pool and significantly reduces the complexity and cost of accounting for excess tax benefits and tax deficiencies. Upon our adoption in the first quarter of fiscal 2018, we recognized a windfall tax benefit as a cumulative effect adjustment increase to our opening retained earnings of $19.8 million together with a comparable increase in deferred tax assets. With adoption occurring at the beginning of fiscal 2018, we recognized excess tax benefits from stock award exercises and restricted stock unit vesting in the first quarter of fiscal 2018 as a discrete tax benefit which reduced the provision for income taxes for the three months ended December 30, 2017 by $12.5 million. The adoption also changed the calculation of fully diluted shares outstanding for the three months ended December 30, 2017. The excess tax benefits have been excluded from the calculation of assumed proceeds in our calculation of diluted weighted average shares under the new standard. Our diluted weighted average shares outstanding as of December 30, 2017 increased by 123,470 shares due to adoption of the new standard. Additionally, effective in the first quarter of fiscal 2018, excess tax benefits are classified as an operating activity in the statement of cash flows instead of as a financing activity where they were previously presented. We adopted this guidance on a prospective basis and, accordingly, prior periods have not been

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adjusted. We have elected to not estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The remaining provisions of this amended guidance did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

In August 2017, the FASB issued amended guidance to address the current limitation on how an entity can designate the hedged risk in certain cash flow and fair value hedging relationships pursuant to U.S. GAAP. This amendment better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendment made specific improvements on hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk for cash flow hedges of forecasted purchases or sales of a nonfinancial asset, cash flow hedges of interest rate risk of variable-rate financial instruments and fair value hedges of interest rate risk. Upon adoption, for cash flow and net investment hedges existing, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendment. The amended presentation and disclosure guidance is required only prospectively. The new standard will become effective for our fiscal year 2020 which begins on September 29, 2019. We are currently assessing the impact of this amended guidance.

In May 2017, the FASB issued amended guidance about which changes to the terms or conditions of a share-based payment require an entity to apply modification accounting. Under the new guidance, an entity should account for the effects of a modification unless, comparing to the original award prior to modification, the fair value, the vesting conditions and the classification as equity or as a liability of the modified award are all the same. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The new standard will become effective for our fiscal year 2019 which begins on September 30, 2018. We do not expect the adoption of this standard to have a material impact on our financial statements.

In May 2016, accounting guidance was issued to clarify the not yet effective revenue recognition guidance issued in May 2014. This additional guidance does not change the core principle of the revenue recognition guidance issued in May 2014, rather, it provides clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications, (ii) for non-cash consideration, and (iii) based on the collectability of the consideration from the customer. The guidance also specifies when a contract should be considered “completed” for purposes of applying the transition guidance. The effective date and transition requirements for this guidance are the same as the effective date and transition requirements for the guidance previously issued in 2014, which is effective for our fiscal year 2019 which begins on September 30, 2018. We have elected to not adopt the standard earlier. We are currently evaluating our contracts subject to the new guidance and have not determined the impact this standard may have on our financial statements nor have we decided upon the method of adoption.

In February 2016, the FASB issued amended guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance clarifies the criteria for distinguishing between a finance lease and operating lease, as well as classification between the two types of leases, which is substantially unchanged from the previous lease guidance. Further, the new guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset, initially measured at the present value of the lease payments. For finance leases, a lessee should recognize interest on the lease liability separately from amortization of the right-of-use asset. For operating leases, a lessee should recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The new standard will become effective for our fiscal year 2020 which begins on September 29, 2019. We are currently assessing the impact of this amended guidance.


3.     BUSINESS COMBINATIONS
Fiscal 2017 Acquisitions
Rofin
On November 7, 2016, we completed our acquisition of Rofin pursuant to the Merger Agreement dated March 16, 2016. Rofin is one of the world's leading developers and manufacturers of high-performance industrial laser sources and laser-

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based solutions and components. Rofin's operating results have been included primarily in our Industrial Lasers & Systems segment. See Note 16, "Segment Information".

As a condition of the acquisition, we were required to divest and hold separate Rofin’s low power CO2 laser business based in Hull, United Kingdom (the "Hull Business"), and had reported this business separately as a discontinued operation until its divestiture. We completed the divestiture of the Hull Business on October 11, 2017, after receiving approval for the terms of the sale from the European Commission. See Note 18, "Discontinued Operations and Assets Held for Sale".

The total purchase consideration has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on a valuation analysis.

The total purchase consideration allocated to net assets acquired was approximately $936.3 million and consisted of the following (in thousands):
Cash consideration to Rofin's shareholders
$
904,491

Cash settlement paid for Rofin employee stock options
15,290

Total cash payments to Rofin shareholders and option holders
919,781

Add: fair value of previously owned Rofin shares
20,685

Less: post-merger stock compensation expense
(4,152
)
Total purchase price to allocate
$
936,314


The acquisition was an all-cash transaction at a price of $32.50 per share of Rofin common stock. We funded the payment of the aggregate consideration with a combination of our available cash on hand and the proceeds from the Euro Term Loan described in Note 9, "Borrowings". The total payment of $15.3 million due to the cancellation of options held by employees of Rofin was allocated between total estimated merger consideration of $11.1 million and post-merger stock-based compensation expense of $4.2 million based on the portion of the total service period of the underlying options that had not been completed by the merger date.

We recognized a gain of $5.4 million in the first quarter of fiscal 2017 on the increase in fair value from the date of purchase for the shares of Rofin we owned before the acquisition.

Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Rofin based on their fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. We concluded that all such goodwill will not be deductible for tax purposes.

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

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Cash, cash equivalents and short-term investments
$
163,425

Accounts receivable
90,877

Inventory
189,869

Prepaid expenses and other assets
15,362

Assets held-for-sale, current
29,545

Property and equipment
125,723

Other assets
31,854

Intangible assets:

  Existing technology
169,029

  In-process research and development
6,000

  Backlog
5,600

  Customer relationships
39,209

  Trademarks
5,699

  Patents
300

Goodwill
298,170

Current portion of long-term obligations
(3,633
)
Current liabilities held for sale
(7,001
)
Accounts payable
(21,314
)
Other current liabilities
(68,242
)
Long-term debt
(11,641
)
Other long-term liabilities
(122,517
)
Total
$
936,314

The fair value write-up of acquired finished goods and work-in-process inventory was $26.4 million, which was amortized over the expected period during which the acquired inventory was sold, or 6 months. Accordingly, for fiscal 2017, we recorded $26.4 million of incremental cost of sales associated with the fair value write-up of inventory acquired in the merger with Rofin. The fair value write-up of inventory acquired was fully amortized in fiscal 2017.

The fair value write-up of acquired property, plant and equipment of $36.0 million will be amortized over the useful lives of the assets, ranging from 3 to 31 years. Property, plant and equipment is valued at its value-in-use, unless there was a known plan to dispose of the asset.

The acquired existing technology, backlog, trademarks and patents are being amortized on a straight-line basis, which approximates the economic use of the asset, over their estimated useful lives of 3 to 5 years, 6 months, 3 years, and 5 years, respectively. Customer relationships are being amortized on an accelerated basis utilizing free cash flows over periods ranging from 5 to 10 years. The useful lives of in-process research and development will be defined in the future upon further evaluation of the status of these applications. The fair value of the acquired intangibles was determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of tangible and intangible assets, which was allocated to goodwill.

We believe the amount of goodwill relative to identifiable intangible assets relates to several factors including: (1) potential buyer-specific synergies related to market opportunities for a combined product offering; and (2) potential to leverage our sales force to attract new customers and revenue and cross sell to existing customers.

In-process research and development (“IPR&D”) consists of two projects that had not yet reached technological feasibility as of the date of the acquisition. 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

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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. One project was completed in December 2017 and amortization for that project will begin in the quarter ending March 31, 2018. The other project has not been completed as of December 30, 2017, but is expected to be completed in fiscal 2019.

We expensed $17.6 million of acquisition-related costs as selling, general and administrative expenses in our condensed consolidated statements of operations in fiscal 2017.

The results of this acquisition were included in our consolidated operations beginning on November 7, 2016. The amount of continuing Rofin net sales and net loss from continuing operations included in our condensed consolidated statements of operations for the three months ended December 31, 2016 was approximately $74.4 million and $12.0 million, respectively.

Unaudited Pro Forma Information (in thousands, except per share data)

The following unaudited pro forma financial information presents our combined results of operations as if the acquisition of Rofin and the related issuance of our Euro Term Loan had occurred on October 4, 2015. The unaudited pro forma financial information is not necessarily indicative of what our condensed consolidated results of operations actually would have been had the acquisition been completed on October 4, 2015. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company. The actual results may differ significantly from the pro forma results presented here due to many factors.
 
 
Three Months Ended
 
 
December 31,
2016
Total net sales
 
$
389,816

Net income
 
$
39,183

Net income per share:
 


Basic
 
$
1.61

Diluted
 
$
1.59

The unaudited pro forma financial information above includes the net income of Rofin’s low power CO2 laser business based in Hull, United Kingdom, which was recorded as a discontinued operation in the three months ended December 31, 2016. See Note 18, "Discontinued Operations and Assets Held for Sale".

The unaudited pro forma financial information above reflects the following material adjustments:

Incremental amortization and depreciation expense related to the estimated fair value of identifiable intangible assets and property, plant and equipment from the purchase price allocation.
The exclusion of amortization of inventory step-up to its estimated fair value from the three months ended December 31, 2016.
The exclusion of revenue adjustments as a result of the reduction in customer deposits and deferred revenue related to its estimated fair value from the three months ended December 31, 2016.
Incremental interest expense and amortization of debt issuance costs related to our Euro Term Loan and Revolving Credit Facility (as defined in Note 9, "Borrowings").
The exclusion of acquisition costs incurred by both Coherent and Rofin from the three months ended December 31, 2016.
The exclusion of a stock-based compensation charge related to the acceleration of Rofin options from the three months ended December 31, 2016.
The exclusion of a gain on business combination for our previously owned shares of Rofin from the three months ended December 31, 2016.
The exclusion of a foreign exchange gain on forward contracts related to our debt commitment and debt issuance from the three months ended December 31, 2016.
The estimated tax impact of the above adjustments.



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4.     FAIR VALUES
 
We have not changed our valuation techniques in measuring the fair value of any financial assets and liabilities during the period. We recognize transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers between levels during the periods presented. As of December 30, 2017 and September 30, 2017, we did not have any assets or liabilities valued based on Level 3 valuations.

We measure the fair value of outstanding debt obligations for disclosure purposes on a recurring basis. As of December 30, 2017, the current and long-term portion of long-term obligations of $5.1 million and $503.0 million, respectively, are reported at amortized cost. These outstanding obligations are classified as Level 2 as they are not actively traded and are valued using a discounted cash flow model that uses observable market inputs. Based on the discounted cash flow model, the fair value of the outstanding debt approximates amortized cost.

Financial assets and liabilities measured at fair value as of December 30, 2017 and September 30, 2017 are summarized below (in thousands):
 
 
Aggregate Fair Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Aggregate Fair Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
 
December 30, 2017
 
September 30, 2017
 
 
 
 
(Level 1)
 
(Level 2)
 
 
 
(Level 1)
 
(Level 2)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
Money market fund deposits
 
$
38,383

 
$
38,383

 
$

 
$
61,811

 
$
61,811

 
$

U.S. Treasury and agency obligations (1)

 
20,020

 

 
20,020

 
14,986

 

 
14,986

Commercial paper (1)
 
4,997

 

 
4,997

 
21,991

 

 
21,991

Short-term investments:
 
 
 
 
 
 
 


 


 


U.S. Treasury and agency obligations (1)
 
18,605

 

 
18,605

 
21,087

 

 
21,087

Corporate notes and obligations (1)
 
9,149

 

 
9,149

 
11,423

 

 
11,423

Commercial paper (1)
 
9,957

 

 
9,957

 

 

 

Prepaid and other assets:
 
 
 
 
 
 
 


 


 


Foreign currency contracts (2)
 
588

 

 
588

 
1,270

 

 
1,270

Money market fund deposits — Deferred comp and supplemental plan (3)
 
270

 
270

 

 
285

 
285

 

Mutual funds — Deferred comp and supplemental plan (3)
 
19,969

 
19,969

 

 
17,585

 
17,585

 

Total
 
$
121,938

 
$
58,622

 
$
63,316

 
$
150,438

 
$
79,681

 
$
70,757

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts (3)
 
(962
)
 

 
(962
)
 
(1,475
)
 

 
(1,475
)
Total
 
$
120,976

 
$
58,622

 
$
62,354

 
$
148,963

 
$
79,681

 
$
69,282



 ___________________________________________________
(1)
Valuations are based upon quoted market prices in active markets involving similar assets. The market inputs used to value these instruments generally consist of market yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources include industry standard data providers, security master files from large financial institutions, and other third party sources which are input into a distribution-curve-based algorithm to determine a daily market value. This creates a “consensus price” or a weighted average price for each security.


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(2)
The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large commercial banks. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. See Note 6, "Derivative Instruments and Hedging Activities".

(3)
The fair value of mutual funds is determined based on quoted market prices. Securities traded on a national exchange are stated at the last reported sales price on the day of valuation; other securities traded in over-the-counter markets and listed securities for which no sale was reported on that date are stated as the last quoted bid price.  

5.              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):
 
 
December 30, 2017
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash and cash equivalents
$
385,710

 
$
25

 
$

 
$
385,735

 
 
 
 

 
 

 
 
Short-term investments:
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

Commercial paper
$
9,957

 
$

 
$

 
$
9,957

U.S. Treasury and agency obligations
18,588

 
19

 
(2
)
 
18,605

Corporate notes and obligations
9,127

 
25

 
(3
)
 
9,149

Total short-term investments
$
37,672

 
$
44

 
$
(5
)
 
$
37,711

 
 
September 30, 2017
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash and cash equivalents
$
443,066

 
$

 
$

 
$
443,066

 
 
 
 

 
 

 
 
Short-term investments:
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

       U.S. Treasury and agency obligations
$
21,074

 
$
13

 
$

 
$
21,087

Corporate notes and obligations
11,390

 
34

 
(1
)
 
11,423

Total short-term investments
$
32,464

 
$
47

 
$
(1
)
 
$
32,510


None of the $5,000 in unrealized losses at December 30, 2017 were considered to be other-than-temporary impairments.

The amortized cost and estimated fair value of available-for-sale investments in debt securities as of December 30, 2017 and September 30, 2017 classified as short-term investments on our condensed consolidated balance sheet were as follows

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(in thousands):
 
December 30, 2017
 
September 30, 2017
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Investments in available-for-sale debt securities due in less than one year
$
37,672

 
$
37,711

 
$
30,214

 
$
30,251

Investments in available-for-sale debt securities due in one to five years (1)
$

 
$

 
$
2,250

 
$
2,259

 
(1) Classified as short-term investments because these securities are highly liquid and can be sold at any time.

During the three months ended December 30, 2017, we received proceeds totaling $2.4 million from the sale of available-for-sale securities and realized no gross gains or losses. During the three months ended December 31, 2016, we received proceeds totaling $0.1 million from the sale of available-for-sale securities and realized no gross gains or losses.
 
6.    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
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, Japanese Yen, South Korean Won and Chinese Renminbi (RMB). 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. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency rates at each respective date.

On August 1, 2016, we purchased forward contracts totaling 670.0 million Euro, with a value date of November 30, 2016, to limit our foreign exchange risk related to the commitment of our Euro Term Loan (denominated in Euros) in an amount of the Euro equivalent of $750.0 million to finance the U.S. dollar payment for our acquisition of Rofin. In the fourth quarter of fiscal 2016, we recognized an unrealized loss of $2.2 million on these forward contracts. In the first quarter of fiscal 2017, we settled these forward contracts at a net gain of $9.1 million, resulting in a realized gain of $11.3 million in the first quarter of fiscal 2017.
 
Non-Designated Derivatives

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

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U.S. Notional Contract Value
 
U.S. Fair Value
 
December 30, 2017
 
September 30, 2017
 
December 30, 2017
 
September 30, 2017
Euro currency hedge contracts
 

 
 

 
 

 
 

Purchase
$
116,372

 
$
109,641

 
$
(669
)
 
$
(1,397
)
Sell
$
(33,588
)
 
$

 
$
(44
)
 
$

 
 
 
 
 
 
 
 
Japanese Yen currency hedge contracts
 
 
 
 
 
 
 
Sell
$
(10,818
)
 
$
(25,126
)
 
$
224

 
$
591

 
 
 
 
 
 
 
 
South Korean Won currency hedge contracts
 
 
 
 
 
 
 
Purchase
$
29,580

 
$

 
$
362

 
$

  Sell
$
(49,721
)
 
$
(28,996
)
 
$
(140
)
 
$
551

 
 
 
 
 
 
 
 
Chinese RMB currency hedge contracts
 
 
 
 
 
 
 
Sell
$
(15,138
)
 
$
(13,744
)
 
$
(97
)
 
$
128

 
 
 
 
 
 
 
 
Other foreign currency hedge contracts
 

 
 

 
 

 
 

Purchase
$
9,562

 
$
3,668

 
$
2

 
$
(4
)
Sell
$
(2,077
)
 
$
(2,971
)
 
$
(12
)
 
$
(74
)

The fair value of our derivative instruments is included in prepaid expenses and other assets and in other current liabilities in our Condensed Consolidated Balance Sheets. See Note 4, "Fair Values".

During the three months ended December 30, 2017 and December 31, 2016, we recognized a loss of $2.6 million and a gain of $9.5 million, respectively, in other income (expense) for derivative instruments not designated as hedging instruments.

Designated Derivatives

Cash flow hedges related to anticipated transactions are designated and documented at the inception of the hedge when we enter into contracts for specific future transactions. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of OCI in stockholder's equity and is reclassified into earnings when the underlying transaction affects earnings. We had no cash flow hedges outstanding at December 30, 2017 or September 30, 2017. Changes in the fair value of currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and recognized in other income (expense) as incurred. We classify the cash flows from the foreign exchange forward contracts that are accounted for as cash flow hedges in the same section as the underlying item, primarily within cash flows from operating activities since we do not designate our cash flow hedges as investing or financing activities.

During the three months ended December 30, 2017 and December 31, 2016, we did not have any activities related to designated cash flow hedges.

Master Netting Arrangements

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



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7.    GOODWILL AND INTANGIBLE ASSETS 

During the three months ended December 30, 2017, we noted no indications of impairment or triggering events to cause us to review goodwill for potential impairment. We will conduct our annual goodwill testing during the fourth fiscal quarter.
 
The changes in the carrying amount of goodwill by segment for the period from September 30, 2017 to December 30, 2017 are as follows (in thousands):
 
OEM Laser Sources
 
Industrial Lasers & Systems
 
Total
Balance as of September, 30, 2017
$
102,178

 
$
315,516

 
$
417,694

Translation adjustments and other
235

 
151

 
386

Balance as of December 30, 2017
$
102,413

 
$
315,667

 
$
418,080

 
Components of our amortizable intangible assets are as follows (in thousands):
 
 
December 30, 2017
 
September 30, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Existing technology
$
189,282

 
$
(60,146
)
 
$
129,136

 
$
208,341

 
$
(66,793
)
 
$
141,548

Patents

 

 

 
330

 
(58
)
 
272

Customer relationships
51,708

 
(16,631
)
 
35,077

 
51,687

 
(14,259
)
 
37,428

Trade Name
6,172

 
(2,302
)
 
3,870

 
6,171

 
(1,824
)
 
4,347

In-process research & development
6,448

 

 
6,448

 
6,432

 

 
6,432

Total
$
253,610

 
$
(79,079
)
 
$
174,531

 
$
272,961

 
$
(82,934
)
 
$
190,027


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

Amortization expense for intangible assets for the three months ended December 30, 2017 and December 31, 2016 was $15.1 million and $12.1 million, respectively. The change in the accumulated amortization also includes $0.1 million and $2.1 million of foreign exchange impact for the three months ended December 30, 2017 and December 31, 2016, respectively.

At December 30, 2017, estimated amortization expense for the remainder of fiscal 2018, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):
 
Estimated
Amortization
Expense
2018 (remainder)
$
41,627

2019
53,131

2020
45,583

2021
14,103

2022
3,525

2023
2,615

Thereafter
7,499

Total (excluding IPR&D)
$
168,083


8.     BALANCE SHEET DETAILS
 
Inventories consist of the following (in thousands):

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Table of Contents

 
December 30,
2017
 
September 30,
2017
Purchased parts and assemblies
$
124,544

 
$
114,285

Work-in-process
159,280

 
159,784

Finished goods
148,985

 
140,738

Total inventories
$
432,809

 
$
414,807

 
Prepaid expenses and other assets consist of the following (in thousands):
 
December 30,
2017
 
September 30,
2017
Prepaid and refundable income taxes
$
27,606

 
$
28,712

Other taxes receivable
16,865

 
15,327

Prepaid expenses and other assets
32,532

 
26,229

Total prepaid expenses and other assets
$
77,003

 
$
70,268

 
Other assets consist of the following (in thousands):
 
December 30,
2017
 
September 30,
2017
Assets related to deferred compensation arrangements
$
33,930

 
$
31,008

Deferred tax assets
86,831

 
82,691

Other assets
6,955

 
12,942

Total other assets
$
127,716

 
$
126,641


Other current liabilities consist of the following (in thousands):
 
December 30,
2017
 
September 30,
2017
Accrued payroll and benefits
$
55,697

 
$
72,327

Deferred revenue
44,709

 
65,237

Warranty reserve
37,809

 
36,149

Accrued expenses and other
31,699

 
34,215

Current liabilities held for sale (See Note 18)
735

 
7,021

Customer deposits
20,191

 
20,052

Total other current liabilities
$
190,840

 
$
235,001

 
Components of the reserve for warranty costs during the first three months of fiscal 2018 and 2017 were as follows (in thousands):
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Beginning balance
$
36,149

 
$
15,949

Additions related to current period sales
14,140

 
8,814

Warranty costs incurred in the current period
(12,404
)
 
(6,399
)
Accruals resulting from acquisitions

 
12,593

Adjustments to accruals related to foreign exchange and other
(76
)
 
(2,357
)
Ending balance
$
37,809

 
$
28,600

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

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December 30,
2017
 
September 30,
2017
Long-term taxes payable
$
54,779

 
$
35,866

Deferred compensation
37,291

 
34,160

Deferred tax liabilities
42,457

 
45,373

Deferred revenue
4,400

 
4,765

Asset retirement obligations liability
4,779

 
5,382

Defined benefit plan liabilities
40,157

 
39,454

Other long-term liabilities
1,209

 
1,390

Total other long-term liabilities
$
185,072

 
$
166,390

 

9.     BORROWINGS
 
On November 4, 2016, we repaid the outstanding balance, plus accrued interest, on our former domestic line of credit and terminated the $50.0 million credit facility with Union Bank of California. We assumed two term loans having an aggregated principal amount of $15.3 million as of November 7, 2016 and several lines of credit totaling approximately $18.1 million with the completion of the Rofin acquisition.

On November 7, 2016 (the "Closing Date"), we entered into a Credit Agreement by and among us, Coherent Holding BV & Co. K.G. (formerly Coherent Holding GmbH), as borrower (the “Borrower”), and certain of our direct and indirect subsidiaries from time to time party thereto, as guarantors, the lenders from time to time party thereto, Barclays Bank PLC, as administrative agent and an L/C Issuer, Bank of America, N.A., as an L/C Issuer, and MUFG Union Bank, N.A., as an L/C Issuer (the "Credit Agreement"). The Credit Agreement provided for a 670.0 million Euro senior secured term loan facility (the "Euro Term Loan") and a $100.0 million senior secured revolving credit facility (the "Revolving Credit Facility") with a $30.0 million letter of credit sublimit and a $10.0 million swing line sublimit. The Borrower may increase the aggregate revolving commitments or borrow incremental term loans in an aggregate principal amount not to exceed the sum of $150.0 million and an amount that would not cause the senior secured net leverage ratio to be greater than 2.75 to 1.00, subject to certain conditions, including obtaining additional commitments from the lenders then party to the Credit Agreement or new lenders. On November 7, 2016, the Borrower borrowed the full 670.0 million Euros under the Euro Term Loan and its proceeds were used to finance the acquisition of Rofin and pay related fees and expenses. On November 7, 2016, we also used 10.0 million Euros of the capacity under the Revolving Credit Facility for the issuance of a letter of credit.

The terms of the Credit Agreement require the Borrower to prepay the term loans in certain circumstances, including from excess cash flow beyond a threshold amount, from the receipt of proceeds from certain dispositions or from the incurrence of certain indebtedness, and from extraordinary receipts resulting in net cash proceeds in excess of $10.0 million in any fiscal year. The Borrower has the right to prepay loans under the Credit Agreement in whole or in part at any time without premium or penalty, subject to customary breakage costs. Revolving loans may be borrowed, repaid and reborrowed until the fifth anniversary of the Closing Date, at which time all outstanding revolving loans must be repaid. The Euro Term Loan matures on the seventh anniversary of the Closing Date, at which time all outstanding principal and accrued and unpaid interest on the Euro Term Loan must be repaid.

In the first quarter of fiscal 2018 and during fiscal 2017, we made voluntary principal payments of 75.0 million Euros and 150.0 million Euros, respectively, on the Euro Term Loan. As of December 30, 2017, the outstanding principal amount of the Euro Term Loan was 436.6 million Euros. As of December 30, 2017, the outstanding principal amount of the Revolving Credit Facility was 10.0 million Euros.

Loans under the Credit Agreement bear interest, at the Borrower’s option, at a rate equal to either (i)(x) in the case of calculations with respect to U.S. Dollars or certain other alternative currencies, the London interbank offered rate (the “LIBOR”) or (y) in the case of calculations with respect to the Euro, the euro interbank offered rate ("EURIBOR" and, together with LIBOR, the "Eurocurrency Rate") or (ii) a base rate (the “Base Rate”) equal to the highest of (x) the federal funds rate, plus 0.50%, (y) the prime rate then in effect and (z) the Eurocurrency Rate for loans denominated in U.S. dollars applicable to a one-month interest period, plus 1.0%, in each case, plus an applicable margin. The applicable margin for Euro Term Loan borrowed as Eurocurrency Rate loans, is 3.50% initially, and following the first anniversary of the Closing Date ranges from 3.50% to 3.00% depending on the consolidated total gross leverage ratio at the time of

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determination. For Euro Term Loan borrowed as Base Rate loans, the applicable margin initially is 2.50%, and following the first anniversary of the Closing Date ranges from 2.50% to 2.00% depending upon the consolidated total gross leverage ratio at the time of determination. The applicable margin for revolving loans borrowed as Eurocurrency Rate loans, ranges from 4.25% to 3.75%, and for revolving loans borrowed as Base Rate loans, ranges from 3.25% to 2.75%, in each case, based on the consolidated total gross leverage ratio at the time of determination. Interest on Base Rate Loans is payable quarterly in arrears. Interest on Eurocurrency Rate loans is payable at the end of the applicable interest period (or at three month intervals if the interest period exceeds three months). Interest periods for Eurocurrency Rate loans may be, at the Borrower’s option, one, two, three or six months.

On May 8, 2017, we entered into Amendment No. 1 and Waiver (the "Repricing Amendment") to the Credit Agreement to, among other things, (i) reduce the applicable interest rate margins with respect to the Euro Term Loans to 1.25% for Euro Term Loans maintained as Base Rate loans and 2.25% for Euro Term Loans maintained as Eurocurrency Rate loans, with stepdowns to 1.00% and 2.00%, respectively, available after May 8, 2018 if the consolidated total gross leverage ratio for Coherent and its restricted subsidiaries is less than 1.50:1.00 and (ii) extend the period during which a prepayment premium may be required for a repricing transaction until six months after the effective date of the Repricing Amendment. In connection with the execution of the Repricing Amendment, we paid arrangement fees of approximately $0.5 million in fiscal 2017, as well as certain fees and expenses of the administrative agent and the lenders, in accordance with the terms of the Credit Agreement.

The Credit Agreement requires the Borrower to make scheduled quarterly payments on the Euro Term Loan of 0.25% of the original principal amount of the Euro Term Loan, with any remaining principal payable at maturity. A commitment fee accrues on any unused portion of the revolving loan commitments under the Credit Agreement at a rate of 0.375% or 0.5% depending on the consolidated total gross leverage ratio at any time of determination. The Borrower is also obligated to pay other customary fees for a credit facility of this size and type.

On the Closing Date, we and certain of our direct and indirect subsidiaries, as guarantors, provided an unconditional guaranty of all obligations of the Borrower and the other loan parties arising under the Credit Agreement, the other loan documents and under swap contracts and treasury management agreements with the lenders or their affiliates (with certain limited exceptions). The Borrower and the guarantors have also granted security interests in substantially all of their assets to secure such obligations.

The Credit Agreement contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations, and negative covenants, including covenants limiting the ability of us and our subsidiaries to, among other things, incur debt, grant liens, make investments, make certain restricted payments, transact with affiliates, and sell assets. The Credit Agreement also requires us and our subsidiaries to maintain a senior secured net leverage ratio as of the last day of each fiscal quarter of less of than or equal to 3.50 to 1.00. The Credit Agreement contains customary events of default that include, among other things, payment defaults, cross defaults with certain other indebtedness, violation of covenants, inaccuracy of representations and warranties in any material respect, change in control of us and the Borrower, judgment defaults, and bankruptcy and insolvency events. If an event of default exists, the lenders may require the immediate payment of all Obligations, as defined in the Credit Agreement, and may exercise certain other rights and remedies provided for under the Credit Agreement, the other loan documents and applicable law. The acceleration of such obligations is automatic upon the occurrence of a bankruptcy and insolvency event of default. We were in compliance with all covenants at December 30, 2017.

We incurred $28.5 million of debt issuance costs related to the Euro Term Loan and $0.5 million of debt issuance costs to the original lenders related to the Repricing Amendment, which are included in short-term borrowings and current portion of long-term obligations and long-term obligations in the condensed consolidated balance sheets and will be amortized to interest expense over the seven year life of the Euro Term Loan using the effective interest method, adjusted to accelerate amortization related to voluntary repayments. We incurred $2.3 million of debt issuance costs in connection with the Revolving Credit Facility which were capitalized and included in prepaid expenses and other assets and other assets in the condensed consolidated balance sheets and will be amortized to interest expense using the straight-line method over the contractual term of five years of the Revolving Credit Facility.

Additional sources of cash available to us were international currency lines of credit and bank credit facilities totaling $29.2 million as of December 30, 2017, of which $21.4 million was unused and available. These unsecured international credit facilities were used in Europe and Japan during the first three months of fiscal 2018. As of December 30, 2017, we had utilized $6.0 million of the international credit facilities as guarantees in Europe and $1.8 million as short-term borrowings in Japan.

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Short-term borrowings and current portion of long-term obligations consist of the following (in thousands):
 
December 30,
2017
 
September 30,
2017
Current portion of Euro Term Loan (1)
$
3,255

 
$
3,230

1.3% Term loan due 2024
1,482

 
1,477

1.0% State of Connecticut term loan due 2023
371

 
371

Line of credit borrowings
1,820

 

Total short-term borrowings and current portion of long-term obligations
$
6,928

 
$
5,078

(1) Net of debt issuance costs of $4.7 million and $4.7 million at December 30, 2017 and September 30, 2017, respectively.

Long-term obligations consist of the following (in thousands):
 
December 30,
2017
 
September 30,
2017
Euro Term Loan due 2024 (1)
$
492,799

 
$
578,356

1.3% Term loan due 2024
8,519

 
8,865

1.0% State of Connecticut term loan due 2023
1,687

 
1,780

Total long-term obligations
$
503,005

 
$
589,001

(1) Net of debt issuance costs of $16.8 million and $20.4 million at December 30, 2017 and September 30, 2017, respectively.

Contractual maturities of our debt obligations as of December 30, 2017 are as follows (in thousands):
 
Amount
2018 (remainder)
$
7,346

2019
9,795

2020
9,795

2021
9,795

2022
9,795

2023
9,714

Thereafter
473,351

Total
$
529,591


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.
 

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Determining Fair Value
 
The fair values of shares purchased under the Employee Stock Purchase Plan (“ESPP”) for the three months ended December 30, 2017 and December 31, 2016, respectively, were estimated using the following weighted-average assumptions:
 
 
Employee Stock Purchase Plan
 
 
Three Months Ended
 
 
December 30,
2017
 
December 31,
2016
Expected life in years
 
0.5

 
0.5

Expected volatility
 
47.9
%
 
31.6
%
Risk-free interest rate
 
1.21
%
 
0.47
%
Expected dividend yield
 
%
 
%
Weighted average fair value per share
 
$
70.75

 
$
23.37


There were no stock options granted during the three months ended December 30, 2017 and December 31, 2016.

We grant performance restricted stock units to officers and certain employees. The performance restricted stock unit agreements provide for the award of performance restricted stock units with each unit representing the right to receive one share of our common stock to be issued after the applicable award vesting period. The final number of units awarded, if any, for these performance grants will be determined as of the vesting dates, based upon our total shareholder return over the performance period compared to the Russell 1000 Index and could range from no units to a maximum of twice the initial award units. The weighted average fair value for these performance units was determined using a Monte Carlo simulation model incorporating the following weighted average assumptions:
 
 
Three Months Ended
 
 
December 30, 2017
 
December 31, 2016
Risk-free interest rate
 
1.7
%
 
1.3
%
Volatility
 
37.0
%
 
31.0
%
Weighted average fair value
 
$315.05
 
$163.17

We recognize the estimated cost of these awards, as determined under the simulation model, over the related service period of approximately 3 years, with no adjustment in future periods based upon the actual shareholder return over the performance period.
 
Stock 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 months ended December 30, 2017 and December 31, 2016 (in thousands):
 
 
Three Months Ended
 
 
December 30,
2017
 
December 31,
2016
Cost of sales
 
$
988

 
$
960

Research and development
 
668

 
1,053

Selling, general and administrative
 
5,420

 
7,642

Income tax benefit
 
(1,609
)
 
(1,489
)
 
 
$
5,467

 
$
8,166


As a result of our acquisition of Rofin on November 7, 2016, we made a payment of $15.3 million due to the cancellation of options held by employees of Rofin. The payment was allocated between total estimated merger consideration of $11.1 million and post-merger stock-based compensation expense of $4.2 million, recorded in the three months ended December

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31, 2016, based on the portion of the total service period of the underlying options that have not been completed by the merger date.

During the three months ended December 30, 2017, $1.0 million was capitalized into inventory for all stock plans, $1.0 million was amortized to cost of sales and $1.3 million remained in inventory at December 30, 2017. During the three months ended December 31, 2016, $0.8 million was capitalized into inventory for all stock plans, $0.7 million was amortized to cost of sales and $1.0 million remained in inventory at December 31, 2016
 
At December 30, 2017, the total compensation cost related to unvested stock-based awards granted to employees under our stock plans but not yet recognized was approximately $57.4 million. We do not estimate forfeitures. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.8 years.

Stock Awards Activity

The following table summarizes the activity of our time-based and performance restricted stock units for the first three months of fiscal 2018 (in thousands, except per share amounts):
 
Time Based Restricted Stock Units
 
Performance Restricted Stock Units
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested stock at September 30, 2017
399

 
$
118.83

 
176

 
$
105.34

Granted
90

 
260.64

 
78

 
315.05

Vested (1)
(198
)
 
83.69

 
(95
)
 
70.57

Forfeited
(1
)
 
145.96

 

 

Nonvested stock at December 30, 2017
290

 
$
152.82

 
159

 
$
155.76


__________________________________________
(1)Service-based restricted stock units vested during the fiscal year. Performance-based restricted stock units included at 100% of target goal; under the terms of the awards, the recipient may earn between 0% and 200% of the award.


11.      COMMITMENTS AND CONTINGENCIES

We are subject to legal claims and litigation arising in the ordinary course of business, such as product liability, employment or intellectual property claims, including, but not limited to, the matters described below. On May 14, 2013, IMRA America (“Imra”) filed a complaint for patent infringement against two of our subsidiaries in the Regional Court of Düsseldorf, Germany, captioned In re IMRA America Inc. versus Coherent Kaiserslautern GmbH et. al. 4b O 38/13. The complaint alleges that the use of certain of the Company’s lasers infringes upon EP Patent No. 754,103, entitled “Method For Controlling Configuration of Laser Induced Breakdown and Ablation,” issued November 5, 1997. The patent, now expired in all jurisdictions, is owned by the University of Michigan and licensed to Imra. The complaint seeks unspecified compensatory damages, the cost of court proceedings and seeks to permanently enjoin the Company from infringing the patent in the future. Following the filing of the infringement suit, our subsidiaries filed a separate nullity action with the Federal Patent Court in Munich, Germany requesting that the court hold that the Patent was invalid based on prior art. On October 1, 2015, the Federal Patent Court ruled that the German portion of the Patent was invalid. Imra has appealed this decision to the Federal Court of Justice, the highest civil jurisdiction court in Germany. The infringement action is currently stayed pending the outcome of such appeal. Management has made an accrual with respect to this matter and has determined, based on its current knowledge, that the amount or range of reasonably possible losses in excess of the amounts already accrued is not reasonably estimable. Although we do not expect that such legal claims and litigation will ultimately have a material adverse effect on our consolidated financial position, results of operations or cash flows, an adverse result in one or more matters could negatively affect our results in the period in which they occur.

On November 7, 2016, we entered into a Credit Agreement, which was amended on May 8, 2017. See Note 9, "Borrowings" for further discussion of the issuance of the financing.



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12.  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
 
December 30,
2017
 
December 31,
2016
Weighted average shares outstanding—basic
24,635

 
24,347

Dilutive effect of employee stock awards
390

 
297

Weighted average shares outstanding—diluted
25,025

 
24,644

 
 
 
 
Net income from continuing operations
$
41,903

 
$
30,698

Loss from discontinued operations, net of income taxes
(2
)
 
(290
)
Net income
$
41,901

 
$
30,408

 
A total of 19,375 and 110,737 potentially dilutive securities have been excluded from the diluted share calculation for the three months ended December 30, 2017 and December 31, 2016, respectively, as their effect was anti-dilutive.

 
13.  OTHER INCOME (EXPENSE)
 
Other income (expense) is as follows (in thousands): 
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Foreign exchange gain (loss)
$
(2,235
)
 
$
13,099

Gain (loss) on deferred compensation investments, net
1,855

 
(52
)
Other
156

 
(54
)
Other - net
$
(224
)
 
$
12,993


14.  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.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act contains significant changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21.0% and implementing a territorial tax system. Since we have a September year-end, the lower U.S. corporate income tax rate will be phased in. Our U.S. federal blended tax rate will be approximately 24.5% for our fiscal year ending September 29, 2018 and 21.0% for subsequent fiscal years.

The reduction of the U.S. corporate income tax rate will cause us to adjust our U.S. deferred tax assets and liabilities to the lower U.S. federal tax rate of 21.0%. There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposes a one-time deemed repatriation tax on our foreign subsidiaries’ historical earnings. These transitional impacts resulted in a provisional net charge of $41.7 million for the quarter ended December 30, 2017. This is comprised of an estimated deemed repatriation tax charge of $48.7 million less a previously recorded deferred tax liability of $20.3 million for anticipated repatriation of our investment in a foreign subsidiary, plus an estimated deferred tax remeasurement charge of $13.3 million.


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The Tax Act changes are broad and complex. The final calculation of impacts of the Tax Act may materially differ from the above provisional estimates. Among other things, this may be due to changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the transitional impacts. The Securities Exchange Commission has issued guidance under Staff Accounting Bulletin No. 118 directing taxpayers to record impacts of the Tax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting under ASC 740. The guidance allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending September 29, 2018.

The Tax Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. In general, this income will effectively be taxed at a 10.5% tax rate reduced by any available current year foreign tax credits. This provision is effective for taxable years beginning after December 31, 2017. Because of the complexity of the new GILTI tax rules, we continue to evaluate this provision of the Tax Act including the associated forecast of GILTI and the application of ASC 740, Income Taxes. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into our measurement of our deferred taxes (the “deferred method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on not only our current structure and estimated future results of global operations, but also our intent and ability to modify our structure. We are currently in the process of analyzing our structure and, as a result, are not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred tax on GILTI.

Our effective tax rate on income from continuing operations before income taxes for the three months ended December 30, 2017 was 58.4%. Our effective tax rate for the three months ended December 30, 2017 was higher than the effective U.S. federal blended tax rate of 24.5% primarily due to the Tax Act one-time mandatory deemed repatriation transition tax, the impact of income subject to foreign tax rates that are higher than the U.S. tax rates, the remeasurement of deferred tax assets and liabilities based on the newly enacted U.S. federal tax rate of 21.0%, stock-based compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m). These amounts are partially offset by the excess tax benefits from stock award exercises and restricted stock unit vesting, the benefit of foreign tax credits, the benefit of federal research and development tax credits, the benefit of a domestic manufacturing deduction under IRC Section 199 and the Singapore tax exemption.

The effective tax rate on income from continuing operations before income taxes for the first quarter of fiscal 2017 of 35.2% was higher than the U.S. federal rate of 35.0% primarily due to Rofin transaction costs not deductible for tax purposes, tax costs of Rofin restructuring, ASC 740-10 (formerly FIN48) tax liabilities for transfer pricing, stock-based compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m). These amounts are partially offset by differences related to the benefit of income subject to foreign tax rates that are lower than U.S. tax rates including the Singapore tax exemption and the benefit of federal research and development tax credits.

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

We adopted ASU No. 2016-09 in the first quarter of fiscal 2018. As a result of adopting the new standard, excess tax benefits from equity-based compensation are now reflected in the condensed consolidated statements of operations as a component of the provision for income taxes. The adoption of ASU No. 2016-09 resulted in a decrease in our provision for income taxes of $12.5 million for the three months ended December 30, 2017 due to the recognition of excess tax benefits for options exercised and the vesting of equity awards.

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 fiscal 2011 are closed. In September 2017, the

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Internal Revenue Service (IRS) completed its audit of Coherent, Inc.’s fiscal 2013 tax return with no adjustment. The extension of the statutes of limitations for its fiscal 2011 and 2012 tax returns will be closed on June 30, 2018. In our major foreign jurisdictions and our major state jurisdictions, the years prior to fiscal 2011 and 2013, respectively, are closed to examination. Earlier years in our various jurisdictions may remain open for adjustment to the extent that we have tax attribute carryforwards from those years.

In July 2015 and March 2016, Coherent Kaiserslautern GmbH (formerly Lumera Laser GmbH) received tax audit notices for the fiscal years 2010 to 2014. The audit began in August 2015. We acquired the shares of Lumera Laser GmbH in December 2012 and, pursuant to the terms of the acquisition agreement, we should not have responsibility for any assessments related to the pre-acquisition period. In July, 2016, Coherent Holding GmbH and Coherent Deutschland GmbH each received a tax audit notice for the fiscal years 2011 to 2014. The audit began in August 2016. In November 2016, Coherent GmbH, Coherent LaserSystems GmbH & Co. KG and Coherent Germany GmbH received audit notices for the period that they were in existence during the fiscal years 2011 through 2014. The audit work began in January 2017. In the fourth quarter of fiscal 2017, all German tax audits were extended to fiscal 2015 and are currently in progress.

We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions and management believes that it has adequately provided reserves for any adjustments that may result from tax examinations.


15.  DEFINED BENEFIT PLANS
 
Components of net periodic cost were as follows for the three months ended December 30, 2017 and December 31, 2016 (in thousands):

 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Service cost
$
469

 
$
385

Interest cost
195

 
189

Expected return on plan assets
(99
)
 
(123
)
Amortization of prior service cost
62

 
93

Amortization of prior net loss

 
13

Amortization of unrecognized gain from OCI
(125
)
 

Recognized net actuarial (gain) loss
(23
)
 
230

Net periodic pension cost
$
479

 
$
787



16.  SEGMENT INFORMATION

At December 30, 2017, we were organized into two reporting segments, OEM Laser Sources (“OLS”) and Industrial Lasers & Systems (“ILS”), based upon our organizational structure and how the chief operating decision maker ("CODM") receives and utilizes information provided to allocate resources and make decisions. This segmentation reflects the go-to-market strategies and synergies for our broad portfolio of laser technologies and products. While both segments deliver cost-effective, highly reliable photonics solutions, the OLS business segment is focused on high performance laser sources and complex optical sub-systems, typically used in microelectronics manufacturing, medical diagnostics and therapeutic medical applications, as well as in scientific research. Our ILS business segment delivers high performance laser sources, sub-systems and tools primarily used for industrial laser materials processing, serving important end markets like automotive, machine tool, consumer goods and medical device manufacturing. Rofin's operating results have been included primarily in our Industrial Lasers & Systems segment.
 
We have identified OLS and ILS 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.


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Our Chief Executive Officer has been identified as the CODM as he assesses the performance of the segments and decides how to allocate resources to the segments. Income from continuing 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 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 from continuing operations for our operating segments and a reconciliation of our total income from continuing operations to income from continuing operations before income taxes (in thousands):
 
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Net sales:
 
 
 
OEM Laser Sources
$
325,657

 
$
238,736

Industrial Lasers & Systems
151,908

 
107,337

Total net sales
$
477,565

 
$
346,073

 
 
 
 
Income (loss) from continuing operations:
 
 
 
OEM Laser Sources
$
127,717

 
$
83,590

Industrial Lasers & Systems
1,213

 
(16,508
)
Corporate and other
(19,607
)
 
(24,882
)
Total income from continuing operations
109,323

 
42,200

 Total other income (expense), net
(8,500
)
 
5,172

Income from continuing operations before income taxes
$
100,823

 
$
47,372

   
Major Customers

We had one customer during the three months ended December 30, 2017 that accounted for 32.8% of net sales. The same customer accounted for 23.0% of net sales for the three months ended December 31, 2016. The customer purchased primarily from our OLS segment.

We had one customer that accounted for 27.2% and 19.0% of accounts receivable at December 30, 2017 and September 30, 2017, respectively. We had another customer that accounted for 15.0% and 10.0% of accounts receivable at December 30, 2017 and September 30, 2017, respectively. The customers purchased primarily from our OLS segment.


17.  RESTRUCTURING CHARGES

In the first quarter of fiscal 2017, we began the implementation of planned restructuring activities in connection with the acquisition of Rofin. These activities primarily relate to exiting our legacy high power fiber laser product line, change of control payments to Rofin officers, the exiting of two product lines acquired in the acquisition of Rofin, realignment of our supply chain due to segment reorganization and consolidation of sales and distribution offices as well as certain manufacturing sites. These activities resulted in charges primarily for employee termination, other exit related costs associated with the write-off of property and equipment and inventory and early lease termination costs.

The following table presents our current liability as accrued on our balance sheets 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 three months of fiscal 2018 and 2017 (in thousands):

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Severance Related
 
Asset Write-Offs
 
Other
 
Total
Balances, September 30, 2017
$
1,301

 
$

 
$

 
$
1,301

Provision
629

 
430
 
105

 
1,164
Payments and other
(755
)
 
(430
)
 
(105
)
 
(1,290
)
Balances, December 30, 2017
$
1,175

 
$

 
$

 
$
1,175


 
Severance Related
 
Asset Write-Offs
 
Other
 
Total
Balances, October 1, 2016
$

 
$

 
$

 
$

Provision
2,703

 
4,359

 

 
7,062

Payments and other
(344
)
 
(4,359
)
 

 
(4,703
)
Balances, December 31, 2016
$
2,359

 
$

 
$

 
$
2,359


At December 30, 2017, $1.2 million of accrued restructuring costs were included in other current liabilities. The current quarter severance related costs are primarily comprised of severance pay for employees being terminated due to the consolidation of certain manufacturing sites. The current quarter asset write-offs are primarily comprised of inventory and equipment write-offs due to consolidation of certain manufacturing sites. The severance related costs in the first quarter of fiscal 2017 are primarily comprised of severance pay for employees being terminated due to the transition of activities out of Rofin including change of control payments to Rofin officers. The asset write-offs in the first quarter of fiscal 2017 are primarily comprised of write-offs of inventory and equipment due to exiting our legacy high power fiber laser product line and inventory write-offs due to the exit of other Rofin product lines.
By segment, $0.4 million and $6.9 million of restructuring costs were incurred in the ILS segment and $0.8 million and $0.2 million were incurred in the OLS segment in the three months ended December 30, 2017 and December 31, 2016, respectively. Restructuring charges are recorded in cost of sales, research and development and selling, general and administrative expenses in our condensed consolidated statements of operations.

18.  DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

Discontinued Operations

Discontinued operations are from the Hull Business that we acquired as part of our acquisition of Rofin. As a condition of the acquisition, we were required to divest and hold separate the Hull Business and reported this business separately as a discontinued operation until its divestiture. We completed the divestiture of the Hull Business on October 11, 2017, after receiving approval for the terms of the sale from the European Commission. As a result of the divestiture, we recorded a loss in discontinued operations of $2,000 in the first quarter of fiscal 2018. The results from discontinued operations in the first quarter of fiscal 2018 to the date of divestiture (October 11, 2017) were immaterial and were not included in our condensed consolidated results of operations.

For financial statement purposes, the results of operations for this discontinued business have been segregated from those of the continuing operations and are presented in our consolidated financial statements as discontinued operations and the net assets of the remaining discontinued business have been presented as current assets and current liabilities held for sale.

The results of discontinued operations for the three months ended December 30, 2017 and December 31, 2016 are as follows (in thousands):


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Three Months Ended
 
Three Months Ended
 
December 30,
2017
 
December 31,
2016
Net sales
$

 
$
4,511

Cost of sales

 
3,109

Operating expenses

 
1,546

Other expense

 
218

Loss from discontinued operations

 
(362
)
Loss on disposal of discontinued operations
(2
)
 

Total loss on discontinued operations
(2
)
 
(362
)
Income tax benefit

 
(72
)
Net loss from discontinued operations
$
(2
)
 
$
(290
)
Assets Held for Sale
Due to the divestiture of the Hull Business on October 11, 2017, there are no assets or liabilities related to the Hull Business classified as held for sale as of December 30, 2017. Current assets and current liabilities classified as held for sale as of September 30, 2017 related to the Hull Business are as follows (in thousands):

 
September 30,
2017
Cash
$
33

Accounts receivable
6,931

Inventories
5,586

Prepaid expenses and other assets
607

Property and equipment
10,705

Intangible assets
11,400

Total current assets held for sale
$
35,262

 
 
Accounts payable
$
1,129

Other current liabilities
4,875

Total current liabilities held for sale
$
6,004


In the fourth quarter of fiscal 2017, management decided to sell several entities that we acquired in the Rofin acquisition. Although the sale was not completed as of the end of fiscal 2017, we recorded a non-cash impairment charge of $2.9 million to operating expense in our results of operations in the fourth quarter of fiscal 2017 to reduce our carrying value in these entities to fair value. In the first quarter of fiscal 2018, we recorded an additional impairment charge of $0.3 million to operating expense in our results of operations to reduce our carrying value in these entities to fair value. Current assets and current liabilities classified as held for sale as of December 30, 2017 and September 30, 2017 related to continuing operations are as follows (in thousands):


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December 30,
2017
 
September 30,
2017
Accounts receivable
$
1,993

 
$
1,668

Inventories
5,024

 
5,202

Prepaid expenses and other assets
309

 
472

Property and equipment
445

 
457

Intangible assets
806

 
1,187

Total current assets held for sale
$
8,577

 
$
8,986

 
 
 
 
Accounts payable
$
264

 
$
189

Other current liabilities
471

 
828

Total current liabilities held for sale
$
735

 
$
1,017



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19.  SUBSEQUENT EVENT

On February 6, 2018, our board of directors authorized a buyback program authorizing the Company to repurchase up to $100.00 million of our common stock from time to time through January 31, 2019.

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 providers of lasers, laser-based technologies and laser-based system solutions in a broad range of commercial, industrial and scientific 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 reporting segments: OEM Laser Sources (“OLS”) and Industrial Lasers & Systems (“ILS”), based on the organizational structure of the company and how the chief operating decision maker ("CODM") receives and utilizes information provided to allocate resources and make decisions. This segmentation reflects the go-to-market strategies and synergies for our broad portfolio of laser technologies and products. While both segments deliver cost-effective, highly reliable photonics solutions, the OLS business segment is focused on high performance laser sources and complex optical sub-systems typically used in microelectronics manufacturing, medical diagnostics and therapeutic medical applications, as well as in scientific research. Our ILS business segment delivers high performance laser sources, sub-systems and tools primarily used for industrial laser materials processing, serving important end markets like automotive, machine tool, consumer goods and medical device manufacturing.

Income from operations is the measure of profit and loss that our CODM uses to assess performance and make decisions. Income 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, Materials Processing, OEM Components and Instrumentation and Scientific Research and Government Programs.
 
OUR STRATEGY

We strive to develop innovative and proprietary products and solutions that meet the needs of our customers and that are based on our core expertise in lasers and optical technologies. In pursuit of our strategy, we intend to:
Leverage our technology portfolio and application engineering to lead the proliferation of photonics into broader markets—We will continue to identify opportunities in which our technology portfolio and application engineering can be used to offer innovative solutions and gain access to new markets. We plan to utilize our expertise to increase our market share in the mid to high power material processing applications.
Streamline our manufacturing structure and improve our cost structure—We will focus on optimizing the mix of products that we manufacture internally and externally. We will utilize vertical integration where our internal manufacturing process is considered proprietary and seek to leverage external sources when the capabilities and cost structure are well developed and on a path towards commoditization.
Focus on long-term improvement of adjusted EBITDA, in dollars and as a percentage of net sales—We define adjusted EBITDA as operating income adjusted for depreciation, amortization, stock compensation expense, major restructuring costs and certain other non-operating income and expense items, such as costs related to our acquisition

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of Rofin. Key initiatives to reach our goals for EBITDA improvements include utilization of our Asian manufacturing locations, optimizing our supply chain and continued leveraging of our infrastructure.
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.


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 condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We have identified the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition, business combinations, accounting for long-lived assets (including goodwill and intangible assets), inventory valuation, warranty reserves, stock-based compensation and accounting for income taxes. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for our fiscal year ended September 30, 2017.
 

KEY PERFORMANCE INDICATORS
 
Below is a summary of some of the quantitative performance indicators (as defined below) that are evaluated by management to assess our financial performance. Some of the indicators are non-GAAP measures and should not be considered as an alternative to any other measure for determining operating performance or liquidity that is calculated in accordance with generally accepted accounting principles.

 
Three Months Ended
 
 
 
 
 
December 30, 2017
 
December 31, 2016
 
Change
 
% Change
 
(Dollars in thousands)
Net sales—OEM Laser Sources
$
325,657

 
$
238,736

 
$
86,921

 
36.4
 %
Net sales—Industrial Lasers & Systems
$
151,908

 
$
107,337

 
$
44,571

 
41.5
 %
Gross profit as a percentage of net sales—
OEM Laser Sources
53.9
%
 
52.1
%
 
1.8
 %
 
3.5
 %
Gross profit as a percentage of net sales—Industrial Lasers & Systems
28.0
%
 
17.0
%
 
11.0
 %
 
64.7
 %
Research and development as a percentage of net sales
6.6
%
 
7.8
%
 
(1.2
)%
 
(15.4
)%
Income from continuing operations before income taxes
$
100,823

 
$
47,372

 
$
53,451

 
112.8
 %
Net cash provided by operating activities
$
64,980

 
$
82,641

 
$
(17,661
)
 
(21.4
)%
Days sales outstanding in receivables
58.3

 
62.7

 
(4.4
)
 
(7.0
)%
Annualized first quarter inventory turns
2.4

 
2.1

 
0.3

 
14.3
 %
Capital spending as a percentage of net sales
5.0
%
 
4.4
%
 
0.6
 %
 
13.6
 %
Net income from continuing operations as a percentage of net sales
8.8
%
 
8.9
%
 
(0.1
)%
 
(1.1
)%
Adjusted EBITDA as a percentage of net sales
30.9
%
 
28.4
%
 
2.5
 %
 
8.8
 %
 


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Net Sales
 
Net sales include sales of lasers, laser tools, related accessories and service. Net sales for the first quarter of fiscal 2018 increased 36.4% in our OLS segment and increased 41.5% in our ILS segment from the same quarter 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 first quarter increased to 53.9% from 52.1% in our OLS segment and increased to 28.0% from 17.0% in our ILS segment from the same quarter 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 6.6% in our first fiscal quarter of fiscal 2018 from 7.8% in the same quarter one year ago. For a description of the reasons for changes in R&D spending refer to the “Results of Operations” section of this quarterly report.
 
Net Cash Provided by Operating Activities
 
Net cash provided by operating activities as reflected on our Condensed Consolidated Statements of Cash Flows primarily represents the excess of cash collected from billings to our customers and other receipts over cash paid to our vendors for expenses and inventory purchases to run our business. We believe that cash flows from operations is an important performance indicator because cash generation over the long term is essential to maintaining a healthy business and providing funds to help fuel growth.  For a description of the reasons for changes in net cash provided by operating activities refer to the “Liquidity and Capital Resources” section of this quarterly report.
 
Days Sales Outstanding in Receivables
 
We calculate days sales outstanding (“DSO”) in receivables as net receivables at the end of the period divided by net sales during the period and then multiplied by the number of days in the period, using 90 days for quarters. DSO in receivables indicates how well we are managing our collection of receivables, with lower DSO in receivables resulting in higher working capital availability. The more money we have tied up in receivables, the less money we have available for research and development, acquisitions, expansion, marketing and other activities to grow our business. Our DSO in receivables for the first quarter of fiscal 2018 decreased to 58.3 days from 62.7