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ROFIN SINAR TECHNOLOGIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Note Regarding Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may", "believe", "will", "expect", "project", "anticipate", "estimate", "plan" or "continue" or other words or terms of similar meaning. These forward-looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results of operations and financial condition. In making these forward-looking statements, we claim the protection of the safe-harbor for forward-looking statements contained in the Reform Act. We do not assume any obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements. Overview Rofin-Sinar Technologies Inc. (herein also referred to as "RSTI", "Rofin-Sinar", or the "Company" or "we", "us" or "our") is a leader in the design, development, engineering, manufacture and marketing of laser-based products used for cutting, welding and marking a wide range of materials. Rofin-Sinar Technologies is a leader in the design, development, engineering, manufacturing and marketing of laser sources and laser-based system solutions for industrial material processing applications, which include primarily cutting, welding and marking a wide range of materials. The Company's product portfolio ranges from single laser-beam sources to highly complex systems, covering all of the key laser technologies such as CO2 lasers, fiber, solid-state and diode lasers, and the entire power spectrum, from single-digit watts up to multi-kilowatts, as well as a comprehensive spectrum of wavelengths. An extensive range of laser components completes the product portfolio. Lasers are a non-contact technology for material processing, which have several advantages compared to conventional manufacturing tools that are desirable in industrial applications. The Company's lasers all deliver a high-quality beam at guaranteed power outputs and feature compact design, high processing speed, flexibility, low operating and maintenance costs and easy integration into the customer's production process thus meeting a broad range of its customers' material processing requirements. Through its global manufacturing, distribution and service network, the Company provides a comprehensive range of laser sources and laser-based system solutions to the following principal target markets: the machine tool, automotive, semiconductor, electronics, and photovoltaic industries. The Company sells directly to end-users and to original equipment manufacturers ("OEMs") (principally in the machine tool industry) that integrate Rofin's laser sources with other system components. Many of Rofin's customers are among the largest global participants in their respective industries. Rofin's sales approach in the laser-related business reflects the many different requirements of its customers throughout a multitude of industries, and is divided into three areas of core competence: Macro, Micro and Marking. The core of the Macro business section is high-powered laser sources, primarily used for cutting and welding as well as surface treatment applications. The Micro section concentrates on laser sources and laser-based system solutions that require less power output for micro-processing of materials. The Marking section specializes in innovative marking solutions on both organic and inorganic materials for many different industries. The activities in the components sector which comprises of diodes and diode laser components, power supplies, fibers and fiber beam deliveries as well as fiber laser components round up the Company's business activities in the industrial laser market. During the first quarter of fiscal years 2013 and 2012, we realized approximately 34% and 35% of revenues, respectively, from the sale and servicing of laser products used for macro applications, approximately 54% and 55%, respectively, from the sale and servicing of laser products for marking and micro applications, and approximately 12% and 10%, respectively, from the sale of components. Fiscal year 2013 commenced with a very solid first quarter, with order entry, net sales and net income figures that exceeded our forecasts. The North American and European markets continued to deliver sales at the levels of the comparable period in the prior year, while the quarter's sales to the Asian markets were our third highest ever. We have experienced robust demand from the machine tool, automotive and medical device industries. Once again, demand from the consumer electronic industry 16 -------------------------------------------------------------------------------- generated increased revenues, whereas demand from the semiconductor industry, as expected, softened. Our goal for fiscal year 2013 is to capitalize on our broad CO2 and fiber laser product portfolios. Furthermore, we will focus on the Asian markets to provide cutting-edge technology for various applications to our customers, with an emphasis on the electronics industry. We expect global business conditions to improve throughout the calendar year, though of course with regional diversity. At December 31, 2012, Rofin-Sinar had 2,233 employees compared to 2,143 employees at December 31, 2011. Results of Operations For the periods indicated, the following table sets forth the percentage of net sales represented by the respective line items in the Company's consolidated statements of operations. Three months ended December 31, 2012 2011 Net sales 100.0 % 100.0 % Cost of goods sold 64.7 % 64.3 % Gross profit 35.3 % 35.7 % Selling, general and administrative expenses 17.7 % 18.8 % Research and development expenses 7.7 % 8.0 % Amortization expenses 0.4 % 0.5 % Income from operations 9.4 % 8.4 % Income before income taxes 9.1 % 9.3 % Net income attributable to RSTI 6.3 % 6.1 % Net Sales - Net sales of $142.2 million represent an increase of $10.7 million, or 8%, for the three-month period ended December 31, 2012, as compared to the corresponding period in fiscal year 2012. The increase for the three months ended December 31, 2012, resulted from a net sales increase of $11.0 million, or 11%, in Europe and Asia, partly offset by a slight decrease of $0.3 million, or 1%, in North America, compared to the corresponding period in fiscal year 2012. The U.S. dollar strengthened against foreign currencies, primarily against the Euro, which had an unfavorable effect on net sales of $1.6 million for the three-month period ended December 31, 2012. Net sales of laser products for macro applications increased by $2.0 million or 4%, to $48.4 million for the three-month period ended December 31, 2012, as compared to the corresponding period of fiscal year 2012. The increase was mainly attributable to the higher demand for our lasers for macro applications in the automotive and the machine tool industries. Net sales of lasers for marking and micro applications increased by $4.4 million, or 6%, to $77.0 million for the three-month period ended December 31, 2012, and reflect continued demand from the solar industry and higher demand from the consumer electronics industry. Revenues for the components business increased by $4.2 million, or 33%, to $16.8 million for the three-month period ended December 31, 2012. The increase was mainly attributable to stronger demand for laser diodes and fiber related components. Gross Profit - Our gross profit of $50.1 million for the three-month period ended December 31, 2012, represents an increase of $3.2 million, or 7%, from the corresponding period of fiscal year 2012. As a percentage of sales, gross profit decreased from 35.7% to 35.3% for the three-month period ended December 31, 2012, as compared to the corresponding period in fiscal year 2012. The 0.4% change is mainly due to a different product mix between the periods. Gross profit was also unfavorably affected by $0.1 million due to the strengthening of the U.S. dollar against foreign currencies, primarily against the Euro, in the three-month period ended December 31, 2012. Selling, General and Administrative Expenses - Selling, general and administrative ("SG&A") expenses of $25.2 million for the three-month period ended December 31, 2012, represent an increase of $0.5 million, or 2%, from the corresponding period of fiscal year 2012. The increase in SG&A expenses is mainly a result of increased commissions and allowance for bad debts related to the comparably higher level of business. SG&A, a significant 17 -------------------------------------------------------------------------------- portion of which is incurred in foreign currencies, was favorably affected by $0.4 million due to the strengthening of the U.S. dollar against foreign currencies, primarily the Euro, for the three-month period ended December 31, 2012. As a percentage of net sales, SG&A expenses decreased to 18% for the three-month period ended December 31, 2012 compared to 19%, for the corresponding period in fiscal year 2012. Research and Development - The Company spent net $11.0 million on research and development ("R&D") during the three-month period ended December 31, 2012, which represents an increase of $0.4 million , or 4% from the corresponding period of fiscal year 2012. Gross R&D expenses for the three-month periods ended December 31, 2012 and 2011, were $11.3 million and $10.8 million, respectively, and were reduced by$0.4 million and $0.3 million of government grants during each respective period. R&D, a significant portion of which is conducted in Europe, and therefore incurred in foreign currencies, was favorably affected by $0.2 million due to the strengthening of the U.S. dollar against foreign currencies, primarily the Euro, for the three-month period ended December 31, 2012. Amortization Expense - Amortization expense for the three-month period ended December 31, 2012, amounted to $0.6 million, consistent with the corresponding period of fiscal year 2012. Other (Income)Expense - Net other expenses of $0.4 million for the three-month period ended December 31, 2012, represent a decrease of $1.5 million compared to a net other income of $1.1 million in the corresponding period of fiscal year 2012. Net interest expense, within this category, includes $0.2 million of interest income offset by $0.2 million of interest expense for the three months ended December 31, 2012. The decrease in net foreign currency income in the three-month period ended December 31, 2012, is primarily due to net exchange losses in the current period compared to net exchange gains during the corresponding period of the prior year. Income Tax Expense - Income tax expense of $4.0 million for the three-month period ended December 31, 2012, represents an effective tax rate of 31% compared to 32% for the corresponding period of fiscal year 2012. The decrease in the effective tax rate is due to the generation of taxable income in countries with lower tax rates. Income tax expense, a significant portion of which is incurred in foreign currencies, was not significantly affected by the strengthening of the U.S. dollar against foreign currencies, primarily the Euro, in the three-month period ended December 31, 2012. Net Income Attributable to RSTI - As a result of the foregoing factors, the Company realized consolidated net income attributable to RSTI of $8.9 million for the three-month period ended December 31, 2012, which represents an increase of $0.8 million, or 10%, from the corresponding period in fiscal year 2012. For the three-month period ended December 31, 2012, both the basic and diluted earnings per common share calculation equaled $0.32, based upon a weighted average of 28.1 million and 28.2 million shares of common stock outstanding, as compared to basic and diluted earnings per common share calculation of $0.28 , based upon a weighted average of 28.5 million and 28.8 million shares of common stock outstanding for the corresponding period of fiscal year 2012. Liquidity and Capital Resources The Company's primary sources of liquidity at December 31, 2012, were cash and cash equivalents of $109.4 million, short-term investments of $5.8 million, short-term credit lines of $74.4 million and long-term credit lines of $7.1 million. As of December 31, 2012, $14.7 million was outstanding under the short-term lines of credit and $1.5 million was used for bank guarantees under these lines of credit, leaving $58.2 million available for borrowing under our short-term lines of credit. In addition, the Company maintained short-term credit lines specific to bank guarantees for $21.4 million, of which $11.6 million was used. Therefore, $68.0 million was unused and available under our short-term and bank guarantee lines of credit, in aggregate, at December 31, 2012. At such date the entire amount of our long-term lines of credit was fully drawn and $1.6 million was classified under short-term lines of credit for the current portion of the long-term debt. The Company is subject to financial covenants, which could restrict the Company from drawing money under these lines of credit. At December 31, 2012, the Company was in compliance with these covenants. Cash and cash equivalents increased by $10.6 million during the three-month period ended December 31, 2012. Approximately $22.0 million in cash and cash equivalents were provided by operating activities, mainly as the result of net income for the three months ended December 31, 2012, a decrease in inventories and a positive change in other operating assets and liabilities, partially offset by a decrease in accounts payable. 18 -------------------------------------------------------------------------------- Net cash used in investing activities totaled $7.8 million for the three-month period ended December 31, 2012, and was primarily related to the additions to property and equipment and net purchases of short-term and long-term investments. Net cash used in financing activities totaled $4.7 million for the three-month period ended December 31, 2012, and was primarily related to the purchase of non-controlling interests and repayments to banks, partially offset by borrowings from banks. Management believes that the Company's cash flow from operations, along with existing cash and cash equivalents and availability under the credit facilities and lines of credit, will provide adequate resources to meet both our capital requirements and operational needs on both a short-term and long-term basis. As of December 31, 2012, $98.5 million of the total $115.1 million of our cash, cash equivalents and short-term investments, was held by our non-US subsidiaries, with the balance of $16.6 million held by our US subsidiaries. As of that date, our indebtedness to banks, owed by our US subsidiaries, amounted to $5.0 million while the rest of the indebtedness to banks was owed by our non-US subsidiaries ($16.8 million). We expect our existing domestic cash, cash equivalents, and short-term investments, together with cash flows from operations to be sufficient to fund our domestic operating activities. In addition, our US subsidiaries had $15.0 million in available and unused lines of credit at December 31, 2012. Therefore, we do not intend, nor do we foresee a need, to repatriate foreign earnings that are considered to be indefinitely reinvested, and we do not believe there are any material implications for or restrictions on the liquidity of our domestic subsidiaries as a result of having a majority of our cash, cash equivalents and short-term investments held by our foreign subsidiaries. The Company has listed all its material contractual obligations in the Annual Report on Form 10-K, for the fiscal year ended September 30, 2012, and has not entered into any further material contractual obligations since that date. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements (other than operating leases) or financing arrangements involving variable interest entities. Currency Exchange Rate Fluctuations Although we report our consolidated financial statements in U.S. dollars, approximately 70% of our sales have been denominated in other currencies, primarily the Euro, British pound sterling, Swiss franc, Swedish krona, Singapore dollar, Taiwanese dollar, Korean won, Canadian dollar, Chinese RMB, Japanese yen, and Indian rupee. Net sales, costs and related assets and liabilities of our operations are generally denominated in the functional currencies of the relevant operating units, thereby serving to reduce our exposure to exchange gains and losses. Exchange differences upon translation from each operating unit's functional currency to U.S. dollars are accumulated as a separate component of equity. The accumulated currency translation adjustment component of stockholders' equity represented a gain of $8.1 million at December 31, 2012, as compared to a gain of $2.3 million at September 30, 2012. Critical Accounting Policies Our significant accounting policies are more fully described in Part 2, Item 8, Note 1 of our consolidated financial statements in our Annual Report on Form 10-K, for the fiscal year ended September 30, 2012. Certain of the accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Allowance for Doubtful Accounts The Company records allowances for uncollectible customer accounts receivable based on historical experience. Additionally, an allowance is made based on an assessment of specific customers' financial condition and liquidity. If the financial condition of the Company's customers were to deteriorate, additional allowances may be required. One group of affiliated customers represents 14% of total gross accounts receivable as of December 31, 2012. No other 19 -------------------------------------------------------------------------------- individual customer represents more than 10% of total accounts receivable. Any increase in allowance will impact operating income during a given period. Inventory Valuation Inventories are stated at the lower of cost or market, after provisions for excess and obsolete inventory salable at prices below cost. Provisions for slow moving and obsolete inventories are provided based on current assessments about historical experience and future product demand and production requirements for the next twelve months. We also write-down up to ninety percent of our total demo inventory costs over thirty six months. These factors are impacted by market conditions, technology changes, and changes in strategic direction, and require estimates and management judgment that may include elements that are uncertain. The Company evaluates the adequacy of these provisions quarterly. Although the Company strives to achieve a balance between market demands and risk of inventory excess or obsolescence, it is possible that, should conditions change, additional provisions may be needed. Any changes in the provisions will impact operating income during a given period. Warranty Reserves The Company provides reserves for the estimated costs of product warranties when revenue is recognized. The Company relies upon historical experience, expectation of future conditions, and its service data to estimate its warranty reserve. The Company continuously monitors this data to ensure that the reserve is sufficient. Warranty expense has historically been within our expectations. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims (such costs may include material, labor and travel costs), revisions to the estimated warranty liability would be required. Increases in reserves will impact operating income during the period. Pension The determination of the Company's obligation and expense for pension is dependent on the selection of certain assumptions used by actuaries in calculating those amounts. Assumptions are made about interest rates, expected investment return on plan assets, total turnover rates, and rates of future compensation increases. In addition, the Company's actuarial consultants use subjective factors such as withdrawal rates and mortality rates to develop their calculations of these amounts. The Company generally reviews these assumptions at the beginning of each fiscal year. The Company is required to consider current market conditions, including changes in interest rates, in making these assumptions. The actuarial assumptions that the Company may use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of pension benefits expense the Company has recorded or may record. The discount rate enables the Company to state expected future cash flows at a present value on the measurement date. The Company has little latitude in selecting this rate, and it must represent the market rate of high-quality fixed income investments. A lower discount rate increases the present value of benefit obligations and increases pension expense. To determine the expected long-term rate of return on plan assets, the Company considers the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. Income Taxes We estimate our income tax provision in each of the jurisdictions in which we operate, a process that includes estimating exposures related to examinations by taxing authorities. We must also make judgments regarding the ability to realize our deferred tax assets. The carrying value of our net deferred tax assets is based on our belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. A valuation allowance has been established for deferred tax assets that we do not believe meet the "more likely than not" criteria. We assess whether an uncertain tax position taken or expected to be taken in a tax return meets the threshold for recognition and measurement in the consolidated financial statements. Our judgments regarding future taxable income as well as tax positions taken or expected to be taken in a tax return may change due to changes in market conditions, changes in tax laws or other factors. If our assumptions and consequently our estimates change in the future, the valuation allowances and/or tax reserves established may be increased or decreased, resulting in a respective increase or decrease in income tax expense. 20 -------------------------------------------------------------------------------- Share-Based Payment Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite vesting period. We make judgments about the fair value of the awards, including the expected term of the award, volatility of the underlying stock and estimated forfeitures, which impact the amount of compensation expense recognized in the financial statements. Such amounts may change as a result of additional grants, forfeitures, modifications in assumptions and other factors. The income tax effects of share-based payments are recognized in the financial statements for those awards which will normally result in tax deductions under existing tax law. Under current U.S. federal tax laws, we receive a compensation expense deduction related to stock options only when those options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation cost for stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in the income statement for all U.S.-based employees. Stock-based compensation expense related to non-U.S. employees is treated as a permanent difference for income tax purposes. Ownership of Common Stock By Directors The following table sets forth information as of December 31, 2012, with respect to beneficial ownership of the Company's common stock and exercisable options by each director. Number of Total Number of Exercisable Number of Shares Stock Options Stock Options of Common Stock Owned at Owned at Name Beneficially Owned December 31, 2012 December 31, 2012 Peter Wirth 12,600 125,000 124,000 Gunther Braun 6,000 670,000 522,000 Carl F. Baasel 157,000 - - Ralph E. Reins (1) 30,000 - - Gary K. Willis (1) 42,000 - - Daniel Smoke (1) 38,000 - - Stephan Fantone (1) 13,000 - - (1) Outside, non-executive directors |