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Form 10-Q for ROFIN SINAR TECHNOLOGIES INC

13-Feb-2004

Quarterly Report

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". 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 "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.

During the first quarter of fiscal years 2004 and 2003, respectively, we realized approximately 51% and 54% of revenues from the sale and servicing of laser products for macro applications and approximately 49% and 46% from the sale and servicing of laser products for marking and micro applications.

Management believes that the near term growth in the Company's macro business is limited and depends, especially in North America and Europe, on the general investment cycle for capital goods. Revenues from a recently finalized technical license agreement will contribute to sales in the current fiscal year by approximately $7 million. In the Company's marking and micro business management sees positive developments from the semiconductor and electronics market which should lead to increased sales in the coming quarters.

Through our global manufacturing, distribution and service network, we are providing a comprehensive range of laser sources and laser based system solutions to three principal target markets: the machine tool, automotive, and semiconductor/electronics industries. We sell principally to end-users, to original equipment manufacturers ("OEMs") (principally in the machine tool industry) that integrate Rofin's laser sources with other system components. Many of our customers are among the largest global participants in their respective industries.

At December 31, 2003, Rofin-Sinar had 1,204 employees compared to 1,193 employees at December 31, 2002.

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,
                                  ----------------------
                                     2003        2002
                                  ----------  ----------
Net sales                             100%        100%
Cost of goods sold                     61%         61%
Gross profit                           39%         39%
Selling, general and 
  administrative expenses              20%         20%
Research and development expenses       7%          7%
Goodwill and intangibles amortization   0%          1%
Income from operations                 12%         11%
Income before income taxes
  and minority interest	               12%         10%
Net income                              7%          6%

Gross Profit - Our gross profit of $27.8 million for the three months ended December 31, 2003 represents an increase of $5.4 million (24%) from the corresponding period of fiscal year 2003. As a percentage of sales compared to the corresponding three-month period of fiscal year 2003, gross profit remained unchanged at 39%. The high percentage margin was primarily a result of the favorable product mix, which included higher laser sales for marking and micro applications to the semiconductor and electronics industry. Gross profit was favorably affected by $2.3 million for the three-month period ended December 31, 2003 due to the fluctuations of the U.S. dollar against foreign currencies, primarily against the Euro. Selling, General and Administrative Expenses - Selling, general and administrative (SG&A) expenses of $14.0 million increased $2.1 million (18%) for the three-month period ended December 31, 2003, compared to the corresponding period of fiscal 2003, primarily due to increased sales activities world wide. SG&A, a significant portion of which is incurred in foreign currencies, was unfavorably affected by $1.6 million for the three- month period ended December 31, 2003 due to the fluctuations of the U.S. dollar against foreign currencies, primarily the Euro.

Research and Development - The Company spent net $5.0 million on research and development (R&D) during the three-month period ended December 31, 2003. This represents an increase of 28% for the three-month period ended December 31, 2003, compared to the corresponding period of the prior year and is mainly attributed to the ongoing R&D work in the field of diode pumped solid state laser and CO2 lasers. Gross research and development expenses for the three-month period ended December 31, 2003 and December 31, 2002 were $5.3 million and $4.2 million, respectively, and were reduced by $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 unfavorably affected by $0.8 million for the three-month period in fiscal 2003, due to the fluctuations of the U.S. dollar against foreign currencies, primarily the Euro.

Other Expense (Income) - Net other income of $(0.5) million for the three- month period ended December 31, 2003 represents a change of $1.1 million compared to net other expense of $0.6 million in the corresponding period of the prior year. The fluctuation in the three-month period is primarily attributable to higher unrealized exchange gains ($0.9 million) resulting from certain intercompany indebtedness and reduced ($0.3 million) net interest expenses.

Income Tax Expense - Income tax expense of $3.4 million for the three-month period ended December 31, 2003 represents an effective tax rate of 39%, equivalent to the tax rate for the corresponding period of the prior year. Income tax expense, a significant portion of which is incurred in foreign currencies, was unfavorably affected by $0.5 million for the three-month period ended December 31, 2003 due to the fluctuations of the U.S. dollar against foreign currencies, primarily the Euro.

Net Income - As a result of the foregoing factors, the Company realized consolidated net income of $5.2 million for the three-months ended December 31, 2003, which represents an increase of $1.7 million from the corresponding period in fiscal 2003. For the three-months ended December 31, 2003, basic and diluted earnings per share equaled $0.43 and $0.41, respectively, based upon a weighted average of 12.0 million and 12.5 million common shares outstanding, as compared to basic and diluted earnings per share of $0.30 based on 11.6 million common shares outstanding for the same period in fiscal 2003.

Liquidity and Capital Resources

The Company's primary sources of liquidity at December 31, 2003 were cash and cash equivalents of $43.4 million, an annually renewable $25.0 million line of credit with Deutsche Bank AG and several other lines of credit to support foreign subsidiaries in their local currencies in an aggregate amount of $46.7 million (translated at the applicable exchange rate at December 31, 2003). As of December 31, 2003, $13.4 million was outstanding under the Deutsche Bank facility and $17.6 million under other lines of credit. Approximately, $40.7 million is unused and available under Rofin's bank facility and lines of credit at December 31, 2003.

Additionally, the Company has outstanding long- and short-term debt under a credit agreement with a German bank, which was used to finance part of the acquisition, and to refinance the existing debt, of Baasel Lasertech. At December 31, 2003, $26.9 million was outstanding under this credit agreement. Based on its maturities, $5.5 million has been included in the caption "line of credit and short term borrowings" in the accompanying consolidated balance sheet.

Cash and cash equivalents decreased by $1.1 million during the three months ended December 31, 2003. Approximately $11.7 million in cash and cash equivalents were provided by operating activities, primarily as the result of improved net income. Additionally, operating cash flows were impacted due to an increase in customer deposits, which increased accrued liabilities, and customer requested temporary delays in shipments coupled with a strategic increase in inventory (so that the Company is able to capitalize on quick sales). The remaining increase was a result of the timing of collections of receivables and payments for inventory purchased.

Uses of cash from investing activities totaled $0.9 million for the three months ended December 31, 2003 and related primarily to the acquisition of property and equipment during the period.

Net cash used in financing activities totaled $13.8 million and was primarily related to current period repayments of bank debt of $15.2 million. This use of cash was offset by an increase in stockholders' equity of $1.4 million related to the issuance of additional common stock through the exercise of stock options.

Management believes that the cash flow from operations, along with existing cash and cash equivalents and availability under the Company's credit facilities and lines of credit, will provide adequate resources to meet both its capital requirements and operational needs through fiscal 2005.

Currency Exchange Rate Fluctuations

Although we report our Consolidated Financial Statements in U.S. dollars, approximately 74% of its sales are denominated in other currencies, primarily the Euro, British pound, Singapore dollar, Taiwanese dollar, Korean won and Japanese yen. 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 the Company's 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 currency translation adjustment component of stockholders' equity had the effect of increasing total equity by $13.1 million at December 31, 2003 as compared to $6.7 million at September 30, 2003.

The fluctuation of the Euro and the other relevant functional currencies against the U.S. dollar has had the effect of increasing or decreasing (as applicable) reported net sales, cost of goods sold, gross margin and selling, general and administrative expenses, denominated in such foreign currencies when translated into U.S. dollars as compared to prior periods.

Recent Accounting Pronouncements

In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosure about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106". The statement requires employers to provide additional disclosures regarding the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The new disclosure requirements are effective for the Company beginning with the quarter ending March 31, 2004, with a delayed effective date for certain disclosures. The Company is currently evaluating the effect of this pronouncement on its financial statement disclosures.

Critical Accounting Policies

Our significant accounting policies are more fully described in Note 1 of the consolidated financial statements and footnotes in our 2003 audited financial statements. 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.

Inventory Valuation

The Company writes down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Warranty Reserves

The Company provides for the estimated costs of product warranties when revenue is recognized. Our estimate of costs to fulfill our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty liability would be require.

Ownership of Common Stock By Directors

The following table sets forth information as of December 31, 2003, with respect to beneficial ownership of the Company's Common Stock and exercisable options by each director.

                       Number of             Total            Number of 
                       Shares of          Number of          Exercisable
                      Common Stock       Stock Options      Stock Options
                      Beneficially         Owned at           Owned at
Name                    Owned          December 31, 2003  December 31, 2003
----------------     --------------    -----------------   -----------------
Peter Wirth              3,300             190,000             114,000 
Gunther Braun               --             130,000              60,000 
Carl F. Baasel          50,000              40,000               9,000 
William R. Hoover (1)   41,250                  --                  -- 
Ralph E. Reins (1)      17,000                  --                  -- 
Gary K. Willis (1)      17,000                  --                  -- 
Daniel Smoke (1)         3,000                  --                  --

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