Rofin-Sinar Technologies 10-K 2005
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2005
Commission file number: 000-21377
ROFIN-SINAR TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
Registrants telephone number, including area code: (734) 455-5400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.01 par value
Rights Associated with Common Stock, par value $.01 per Share
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 o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
YES o NO x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
YES x NO o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
YES x NO o
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant based upon the closing price of the common stock on March 31, 2005 as reported by the NASDAQ National market was approximately $481,244,626.00. For the purposes hereof, affiliates include all executive officers and directors of the registrant.
15,241,350 shares of the Registrants common stock, par value $.01 per share, were outstanding as of December 7, 2005.
Certain sections of the Companys Proxy Statement to be filed in connection with the Companys 2006 Annual Meeting of Stockholders to be held in March 2006 are incorporated by reference herein at Part III, Items 10-14.
ROFIN-SINAR TECHNOLOGIES INC.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K 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.
These factors include (among others):
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.
COMPANY OVERVIEW AND HISTORY
Rofin-Sinar Technologies Inc., founded in 1996 (herein also referred to as Rofin or RSTI or the Company or we, us or our) is a leader in the design, development, engineering, manufacture and marketing of laser-based products, primarily used for cutting, welding and marking a wide range of materials. 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 Companys 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 customers production process. As a technological leader in CO2, solid-state lasers and diode lasers, the Company is able to meet a broad range of its customers material processing requirements.
Based on projected 2005 industry data for laser products used for macro (cutting and welding) applications and marking and micro (fine cutting, fine welding, and perforating) applications combined, the Company believes it has a worldwide market share (based on sales volume) of approximately 19% and that it is among the largest suppliers
of laser products used for marking applications worldwide. The Company has sold close to 40,000 laser sources since 1975 and currently has over 3,000 active customers (including multinational companies with multiple facilities purchasing from the Company). During fiscal 2005, 2004, and 2003, approximately 50%, 49%, and 53%, respectively, of the Companys revenues related to sales of laser products for macro applications and approximately 50%, 51%, and 47%, respectively, related to sales of laser products for marking and micro applications.
Through its global manufacturing, distribution and service network, the Company provides a comprehensive range of laser sources and laser-based system solutions to three principal target markets: the machine tool, automotive, and semiconductor and electronics industries. The Company sells directly to end-users and to original equipment manufacturers (OEMs) (principally in the machine tool industry) that integrate Rofins laser sources with other system components. Many of Rofins customers are among the largest global participants in their respective industries. During fiscal 2005, 2004, and 2003, 29%, 22%, and 21%, respectively, of the Companys sales were in North America, 54%, 59%, and 65%, respectively, were in Europe and 17%, 19%, and 14%, respectively, were in Asia. See Note 13, Geographic Information, to the consolidated financial statements for further information.
The financial statements included in this Annual Report on Form 10-K present the historical financial information of Rofin-Sinar Technologies Inc. and its wholly-owned subsidiaries. These financial statements include the consolidated accounts of Rofin-Sinar, Inc. (RS Inc.), PRC Laser Corp. (PRC), Lee Laser, Inc. (Lee) and Rofin-Sinar Technologies Europe S.L. (RSTE). RSTE, a European holding company formed in 1999, owns 100% of Rofin-Sinar Laser GmbH (RSL), 95% of Dilas Diodenlaser GmbH (Dilas), 100% of Rofin-Baasel Italiana S.r.l., 100% of Rofin-Baasel France S.A., 76% of Rofin-Sinar UK Ltd., 100% of Rofin-Baasel UK Ltd., 100% of Rofin-Baasel Benelux B.V., 100% of Rofin-Baasel Singapore Pte. Ltd., 100% of Rofin-Baasel Taiwan Ltd., 100% of Rofin-Baasel Korea Co., Ltd., and 100% of Rofin-Baasel Espana S.L. (RBE).
The financial statements of PRC include the consolidated accounts of PRC Laser Europe N.V., Belgium.
The financial statements of RSL include the consolidated accounts of its 88%-owned subsidiary, Rofin-Baasel Japan Corporation, its 100%-owned subsidiary, Rasant-Alcotec Beschichtungstechnik GmbH (Rasant), its 100%-owned subsidiary, Carl Baasel Lasertechnik GmbH & Co. KG (CBL), its 90%-owned subsidiary Optoskand AB (Optoskand), its 100%-owned subsidiary, CBL Verwaltungsgesellschaft GmbH and its 80%-owned subsidiary Rofin-Baasel China Co., Ltd. (formed in July 2005). In October 2005, the Company formed a new subsidiary, Dilas Diodelaser Inc., based in Tucson, Arizona, that will serve as a sales and service office for Dilas-branded diode lasers in the U.S. market.
The financial statements of CBL include the consolidated accounts of its wholly-owned subsidiaries, Rofin-Baasel, Inc., Wegmann-Baasel Laser und elektrooptische Geraete GmbH, and PMB Elektronik GmbH.
Effective December 31, 2002, the remaining 9.99% of shares of CBL were purchased by the Company through RSL in January 2003 under an option agreement between the Company and the former minority shareholder of CBL.
On March 31, 2003, the Company acquired an additional 37% of the share capital of Rofin-Marubeni Laser Corporation, Atsugi-shi (Japan) through its wholly-owned subsidiary RSL. The Company currently holds 88% of the share capital. As of May 1, 2003, Rofin-Marubeni Laser Corporation, Atsugi-shi (Japan) was renamed Rofin-Baasel Japan Corporation.
On February 28, 2004, the Company acquired 90% of the share capital of Optoskand AB, Gothenburg, Sweden, through its wholly-owned subsidiary RSL. The Company has a call option exercisable beginning in 2009 for the remaining 10% of the common stock for a fixed price of Euro 0.1 million. Accordingly, the Companys financial statements present Optoskand as if it was 100% owned.
On March 29, 2004, the Company issued and sold 2.5 million shares of its common stock in an underwritten public offering at a price of $28.00 per share. The underwriters exercised their over-allotment option resulting in an additional 360,000 shares of common stock being issued and sold on April 8, 2004. The Company realized net proceeds of $75.3 million as a result of these transactions. The Company intends to use the aggregate net proceeds
from the offering for working capital, and other general corporate purposes, including acquisitions of complementary products, technologies or businesses as opportunities arise.
On August 20, 2004, the Company acquired an additional 15% of the share capital of Dilas Diodenlaser GmbH, Mainz, Germany, through its wholly-owned subsidiary RSTE. The Company currently holds 95% of the share capital.
On August 31, 2004, the Company acquired 100% of the share capital of PRC Laser Corporation based in Landing, New Jersey (including its wholly-owned European subsidiary PRC Laser Europe N.V., Oudenaarde, Belgium), and Lee Laser, Inc., based in Orlando, Florida.
Effective October 22, 2004, the remaining 17% of the share capital of Rofin-Baasel Espana S.L. was purchased by the Company through RSTE under an option agreement between the Company and the former minority shareholder.
Effective December 9, 2004, the Company purchased an additional 5% of the share capital of Rofin-Sinar U.K. Ltd. through RSTE under an option agreement between the Company and the minority shareholders. The Company currently holds 76% of the share capital.
The Companys business strategy is to maximize shareholder value by (i) strengthening its position as a leading supplier to the global market for macro (cutting and welding) applications; (ii) capitalizing on its leadership position in marking applications; (iii) extending its position in micro (fine cutting, fine welding and perforating) applications; (iv) cross-selling its various laser products to its existing large customer base; (v) enlarging its market coverage geographically and by developing new applications, and (vi) strengthening its product portfolio and customer base through acquisitions.
The Company believes that the major sources of its future growth will be the following:
THE INDUSTRIAL LASER MARKET FOR MATERIAL PROCESSING
Over the past 30 years, lasers have revolutionized industrial manufacturing and have been used increasingly to provide reliable, flexible, non-contact, compact and high-speed alternatives to conventional technologies for processing various kinds of metal and non-metal materials in a broad range of advanced manufacturing applications. The industrial laser market is generally considered to be made up of laser sources sold for industrial applications including material processing, medical therapeutic, instrumentation, research, telecommunications, optical storage, entertainment, image recording, inspection, measurement and control, bar-code scanning and other end-uses.
The term laser is an acronym for Light Amplification by Stimulated Emission of Radiation. Lasers were first developed in the early 1960s in the United States. A laser consists of an active lasing medium that gives off its own light (radiation) when excited, an optical resonator with a partially-reflective output mirror at one end, a fully-reflective rear mirror at the other that permits the light to bounce back and forth between the mirrors through the lasing medium, and an external energy source used to excite the lasing medium. A laser works by causing the energy source to excite (pump) the lasing medium, which converts the energy from the source into an emission consisting of particles of light (photons). These photons stimulate the release of more photons, as they are reflected between the two mirrors, which form the resonator. The resulting build-up in the number of photons is emitted in the form of a laser beam through an output port or window. By changing the energy and the lasing medium, different wavelengths and types of laser light can be produced. The laser produces light from the lasing medium to achieve the desired intensity, uniformity and wavelength through a series of reflective mirrors. The heat generated by the excitation of the lasing medium is dissipated through a cooling mechanism, which varies according to the type of laser technology.
Lasers are used for material processing because of the excellent focusability of laser beams. When focused through lenses and mirrors, the energy density in the focus spot is so high that metals and other materials can be melted and vaporized. The principal factors that distinguish different types of lasers and determine the particular laser suitable
for a specific application are pulse duration, wavelength, output power, spatial coherence and cost per watt of laser power. The three principal types of laser technologies used for material processing are CO2 lasers, solid-state lasers and diode lasers. CO2 lasers, which use CO2 gas as the lasing medium, are divided into high-power (above 500 watts) and low-power (below 500 watts) applications. There are two methods for CO2 excitation, radio frequency (RF or HF) and direct current (DC) excitation. Most high-power CO2 lasers are based on gas flow, in which a continuous supply of fresh laser gas flows through the laser cavity to create the energy necessary for excitation. Due to their ability to generate comparatively high levels of continuous-wave (CW) power, CO2 lasers are a particularly attractive laser medium for material processing applications. Material processing applications for CO2 laser sources vary according to the power output and configuration of the laser system. The primary applications for high-power CO2 lasers are cutting and welding of metal. Low-power CO2 lasers are used principally for marking, cutting and engraving of non-metal materials. While both low- and high-power CO2 lasers are used for cutting, the materials they are used to process and their physical size can vary significantly.
Solid-state lasers use flash lamps or laser diodes as source of excitation and are referred to as flash-lamp pumped or diode-pumped. The lasing medium is a solid-state crystal, generally in the form of a rod. The crystal material is either Neodymium Yttrium Aluminium Garnet (Nd:YAG) or Neodymium Vanadate (Nd:YVO4). The crystal rod is positioned in a cavity, which is either a gold or ceramic reflector, and pumped using flash lamps or laser diodes from the side, or alternatively the rod is pumped from its ends with laser diodes. Typical output powers vary from 3 to 500 watts from a single rod and output powers up to 6,000 watts can be achieved by combining several cavities within a resonator. Solid-state lasers can be run either in a pulsed or continuous-wave manner. Marking applications generally require higher pulsing frequencies which are achieved by inserting a Q-switch, which is a fast electro-optical shutter, into the laser resonator, enabling frequencies to be switched up or down in multiples of 10 kHz at a time. Recent development efforts in the area of solid-state lasers have focused on a process commonly referred to as disc design. In the disc design the lasing medium is a thin crystal (typically Ytterbium:YAG) disc, which is excited by laser diodes in an optical multi-pass configuration.
Diode lasers involve the production of laser light in a special semiconductor structure on a Gallium Arsenide (GaAs) basis. A typical 10 mm long diode laser bar contains approximately 25 single laser emitters. When mounted on a specially designed, highly-efficient heat sink, a diode bar is able to produce up to 50 watts of laser output power. A single high-power diode module consists of: (1) a semiconductor wafer bar; (2) a micro channel cooling device, on which the laser bar is mounted; and (3) a micro-lens system, which is mounted in front of the laser bar and which collimates the laser beam in the high-divergent optical axis. Power can be increased by stacking several diode modules on top of each other. Through optical combination of such stacks, output power in the kilowatt range can be achieved. Diode lasers typically have larger spot diameters when focused, and are typically used for surface treatment, soldering and plastic welding.
THE COMPANYS LASER PRODUCTS
The Company distinguishes itself from the majority of its competitors who specialize in only one or two of the three principal laser technologies for material processing by offering its customers CO2, solid-state and diode laser sources and solutions in a variety of configurations and options. As a technological leader in CO2 lasers, solid-state and diode lasers, the Company is able to meet a broad range of its customers cutting and welding requirements. The Companys 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 customers production process. The Companys engineers and other technical experts work directly with the customer in the Companys applications centers to develop and customize the optimal solution for the customers manufacturing requirements.
The Company currently offers a comprehensive range of laser products and related services for three principal material processing applications:
fine cutting, fine welding, and perforating (micro applications).
Besides offering laser systems for some specialized niche applications, the Company works directly with its customers to develop and customize optimal solutions for their unique manufacturing requirements. In developing its laser-based solutions, the Company offers customers its expertise in:
The following table sets forth the Companys net sales of laser products used for macro applications and of laser products used for marking and micro applications in fiscal 2005, 2004, and 2003:
The laser sources sold by the Company consist of a laser head (containing the lasing medium, resonator, source of excitation, resonator mirrors and cooling mechanism), power supply, and microcontroller (for control and monitoring). For a more detailed discussion of the components of a laser source, see Laser Technology. Products are offered in different configurations and utilize different design principles according to the desired application.
The following table sets forth the Companys product categories by principal markets and principal applications:
The Companys business strategy for its macro laser business is to grow its revenues by:
The Companys family of CO2 laser products for macro applications, and their principal markets and applications, are discussed below.
The Company believes that it is the only laser manufacturer of diffusion cooled, Slab-based lasers in the high-power range. In the DC Slab Series laser design, a radio-frequency excited gas discharge occurs between two water-cooled electrodes that have a large surface area that permits maximum heat dissipation. The core diffusion cooled, wave-guide technology is protected by three patents, and the Company has exclusive license rights to this technology on a worldwide basis for power levels above 500 watts for material processing applications. The Companys current focus with respect to its Slab Series lasers is on continuing to both increase power output and further reduce manufacturing costs in order to achieve more attractive pricing. Principal markets for the Slab Series lasers are the machine tool and automotive industries.
The Companys HF Series lasers combine proven cross-flow design principles with modern high-frequency discharge excitation technology. The Company ships this product predominantly to customers in the automotive industry, and their sub-suppliers, in the United States and Europe, where it has been used in a significant number of welding applications, including transmissions, tailored blanks, steel tubes and many other car parts and components. The RF Series uses the fast-axial flow technology from the Companys TR Series in combination with radio frequency excitation and is especially designed for thick metal cutting.
The Companys TR/FA, XL, STS, and FH Series fast-axial flow CO2 lasers are used for both cutting and welding applications. In the fast-axial flow principle, the gas discharge occurs in a tube in the same direction as the resonator, through which the laser gas mixture flows at a high speed. TR, XL, STS, and FH Series products are used primarily by the machine tool industry.
The Companys SC Series diffusion cooled, wave-guide CO2 lasers are developed and produced by Rofin-Sinar UK Ltd.. The SC Series are sealed-off lasers, which are also based on the Slab laser principle used for the DC Slab Series. These lasers are used for cutting and marking applications. Principal markets are the machine tool and packaging industries.
The Companys family of solid-state laser products for macro applications, and their principal markets, are discussed below.
Rofins DP/DS Series of continuous wave, solid-state lasers are designed exclusively for use with flexible fiber-optic beam delivery systems, making them particularly well-suited for integration into complex production systems for cutting and welding applications. The key competitive advantages of the DP/DS Series lasers are the fact that they are diode-pumped and that they are designed to allow multiple power output configurations. These configurations include continuous wave, pulsed and power ramping modes, which allow Rofin to address a wide range of customer applications. Power ramping is particularly suited for achieving smooth welds and avoiding cracks during the welding process. In addition, several features of the DP/DS Series laser are designed for easy maintenance, such as the simple modular resonator design, easily accessed power supply and PC-based controller equipped with a modem, which allows communication with a remote service center. The diode pumping technology is characterized by high beam quality and high efficiency. These lasers are used principally in the automotive industry.
The Companys family of diode laser products for welding, soldering and surface treatment applications, and their principal markets, are discussed below.
The Companys diode lasers are designed to meet the requirements of a wide range of welding, soldering, and surface treatment applications. The Companys high-power laser diodes can be stacked into arrays achieving output powers in the multiple kilowatt range. In addition to their use in the automotive, machine tool and electronics markets, these lasers are also sold into the medical device and research markets. Additionally, laser diodes are sold as components both internally and externally.
The Company entered the laser-marking business in 1989 when it acquired Laser Optronic GmbH from Coherent General Inc. and designed and introduced the PowerLine laser marker. Since then the Company has developed a broad line of leading laser markers that deliver optimal marking quality and speed on a wide range of materials. Rofins advanced design and manufacturing capabilities in fiber-optic beam delivery systems allow it to offer flexible laser marking systems and easy laser integration for complex production processes, without compromising marking quality, contrast or speed.
Rofin builds its own solid-state laser sources and utilizes its own proprietary marking software, VisualLaserMarker and LaserCAD, that enable it to tailor its marking solutions to a customers unique requirements. Rofins in-house software engineering group works with customers, particularly in the automotive and semiconductor industries, that have enterprise-wide computer networks linking production facilities in disparate geographic locations and that desire customized network interface solutions. The Companys laser marking products also incorporate high value-added software that enable them to efficiently interface with a customers computers and support a broad range of network communications protocols.
The Company believes that the following factors have contributed to the growth that it has experienced in the laser marking business:
The Companys business strategy for its laser marking business is four-fold:
The Companys family of laser marking products is as follows:
PowerLine/StarMark Series The Companys standard PowerLine and StarMark laser marking products consist of a CO2 or solid-state laser in the range of 10 watts to 120 watts, a galvo-head, a personal computer with state-of-the-art processor, and Rofins proprietary VisualLaserMarker and LaserCAD software. The modular design of the PowerLine and StarMark markers enable customers to order the most suitable configuration for their production processes or systems (e.g., OEM-customers may order the laser head, power supply, and laser cooling assembly plates as subassemblies without the cabinet for easier integration into the handling system specified by the end-user). The PowerLine and StarMark solid-state lasers incorporate either a dual or single lamp ceramic cavity design using long-life lamps or diode modules, both of which result in higher output power (and therefore higher marking speeds), higher energy efficiency (and therefore reduced operating costs), high beam quality (and therefore constant and reliable marking quality), and longer service intervals. The Companys proprietary VisualLaserMarker and LaserCAD software provides operators with a user-friendly desktop publishing environment that allows them to manipulate fonts, import graphics, preview marking and control all laser parameters and job programs. Special options and accessories include a double-marking head allowing marking speeds of up to 1,200 characters per second in certain applications (most notably marking of integrated circuits), as well as beam-switching and -splitting
options for marking of products in multiple production lines using a single laser. Their main application, among a wide variety of possible applications, is the marking of plastics and smart cards in the semiconductor and electronics industries.
CombiLine/StarMark Systems Built on a modular design, the CombiLine and StarMark Systems consist of a PowerLine or StarMark laser marker that can be combined with a variety of parts handling systems developed by the Company, including: motor-driven positioning tables, foil handling systems for marking labels, conveyor belts and pick-and-place systems. These allow the CombiLine and StarMark Systems to be customized as a turn-key system.
MultiScan and VectorScan These Dot Matrix and Vector Scanning markers utilize a 100 watts sealed-off CO2 laser (SC Series) and feature the ability to mark components that are moving at high speeds.
After the acquisition of Baasel Lasertech, the Company formed a separate sales and marketing group focused on micro applications. This group markets and sells a broad range of laser products, including lamp pumped, pulsed, solid-state lasers for various spot welding and fine cutting applications, CO2 Slab lasers for perforating applications, Q switched, solid-state lasers for surface structuring and diode lasers for soldering and plastic welding applications. Relying on its many years of experience in perforating cigarette paper, the Company is pursuing new perforating applications in the packaging industry.
The Companys business strategy for its micro applications business is to:
The Companys family of laser products for micro applications is as follows:
StarWeld Series Rofins standard StarWeld laser products consist of pulsed solid-state lasers in the range of 20 watts to 500 watts. Although the StarWeld Series has a wide variety of possible applications, its main application is the fine welding of jewelry and dental parts.
DS Disc Series Rofins Disc laser products use laser diodes as the source of excitation to pump a thin crystal (disc). The output power is in the range of 50 watts to 750 watts and the main application is structuring or cutting of electronics.
StarCut Series Rofins StarCut laser products use pulsed solid-state lasers in the range of 150 watts to 300 watts. Their main application is the fine cutting of medical devices and integrated circuits.
PerfoLas Systems The PerfoLas Systems consist of a high-power CO2 laser and a specially designed beam delivery and paper handling system that includes a laser beam splitter (PerfoLas Multiplexer) which allows customers to drill more than 500,000 holes per second into paper or foils. The main application for these lasers is perforation of cigarette tip paper.
StarShape Systems The StarShape Systems consist of a CO2 or solid-state laser in combination with a galvo scanning head and is used for precise cutting, drilling, surface structuring, and flexible packaging applications.
The Series 600 and 800 are flashlamp pumped, solid-state lasers sold to OEM-customers and system integrators for various micro and marking applications.
The Series LDP and LEP are diode pumped, solid-state lasers sold to OEM-customers and system integrators for various micro and marking applications.
In addition to manufacturing and selling laser sources for macro applications (cutting and welding) and marking and micro applications, Rofin operates application centers in eight countries where it develops laser-based solutions for customers seeking alternatives to conventional manufacturing techniques. Revenues derived from application development are not a significant component of total revenues. Applications development is generally a support service to the sales and marketing function and is performed to customize the laser to the particular needs of the customer. The Company currently has approximately 30 employees in applications development.
MARKETS AND CUSTOMERS
Rofin sells its laser products and laser-based system solutions to a wide range of industries. Our three principal markets are the machine tool, automotive, and semiconductor and electronics industries. The following table sets forth the allocation of the Companys total laser sales among our principal markets:
The remaining 46%, 37%, and 40%, of total laser sales in fiscal 2005, 2004, and 2003, respectively, were attributable to customers in a wide variety of other industries including aerospace, consumer goods, medical device manufacturers, job shops, jewelry, universities and institutes. No one customer accounted for over 10% of total sales in any of these periods.
SALES, MARKETING AND DISTRIBUTION
Rofin sells its products in approximately 35 countries to OEMs, systems integrators and industrial end-users who have in-house engineering resources capable of integrating Rofins products into their own production systems. Lasers for cutting applications are marketed and sold principally to OEMs in the machine tool industry who sell laser cutting machines incorporating Rofins products without any substantial involvement by Rofin. Lasers for welding applications are marketed and sold both to systems integrators and to end-users. Laser marking products are marketed and sold directly to end-users and to OEMs for integration into their handling systems (mainly for integrated circuit and smart card marking applications). Laser micro products are marketed and sold directly to end-users and to OEM-customers (mainly for jewelry and dental applications). In the case of both welding lasers and laser marking products, the end-user is significantly involved in the selection of the laser component and will often specify to the OEM that it desires a Rofin laser. In these cases, Rofins application engineers work directly with the end-user to optimize the applications performance and demonstrate the advantages of the Companys products.
Rofin has approximately 110 direct sales engineers operating in 24 countries, approximately 30 of whom are dedicated to marketing lasers for macro applications and approximately 80 of whom are dedicated to marketing laser for marking and micro applications. Rofin sales engineers work either in a well-defined geographic territory or are dedicated to specific industries or applications. In addition, Rofin has 14 independent representatives marketing the Companys laser products in Australia, Brazil, Denmark, Finland, Israel, Mexico, the Philippines, Russia, Singapore, South Africa, Eastern Europe, China, Thailand, and the United Kingdom. These independent representatives provide Rofin with sales leads and opportunities, but do not distribute Rofins products. All sales and delivery of product are conducted by the Company. Eight of the independent representative agreements are on an exclusive basis, with the other six on a non-exclusive basis. These agreements provide for a standard percentage of the net sales price to be paid as commissions to the representatives. The duration of the agreements is usually one year (with an automatic one-year extension) and a six months cancellation clause.
Rofin directs its worldwide sales and marketing of lasers for macro applications from its offices in Hamburg (Germany), and of laser diode components, from Mainz (Germany). Worldwide sales and marketing of laser marking products is directed from Rofins offices in Gunding-Munich (Germany) and, for laser micro products and power supplies, from Starnberg (Germany). In Europe, Rofin also maintains sales and service offices in Belgium, France, Italy, the Netherlands, Spain, Switzerland, and the United Kingdom.
U.S. sales of Rofins macro and micro laser products are managed out of the Companys Plymouth, Michigan, facility and marking products are managed out of its Boxborough, Massachusetts, facility. The Company also maintains a sales office in Tempe, Arizona, to support the expansion of Rofins laser marking business in the North American market.
PRC Laser directs its worldwide sales and marketing of lasers for macro applications from its office in Landing, New Jersey, while Lee Laser directs its worldwide sales and marketing of laser for micro applications from its office in Orlando, Florida. Both companies sell their products independently under their own brand.
The Company maintains sales and service offices in Japan, Singapore, South Korea, and Taiwan to cover the Asia/Pacific region. Over the next five years, the Company expects demand for industrial lasers to increase in the Asia/Pacific region. The Company believes that the geographic market with the greatest long-term potential over the next 10 to 15 years is China, principally due to the expansion of domestic automobile and semiconductor and electronic production in that country. Therefore in July 2005, the Company formed a new Chinese subsidiary, Rofin-Baasel China Co., Ltd., that will serve as a sales and service office in this market. The Company has a technology license agreement with the Nanjing Electric Laser Center, or NELC, under which NELC manufactures CO2 laser sources for sale in the Chinese market.
CUSTOMER SERVICE, REPLACEMENT PARTS AND COMPONENTS
During fiscal 2005, 2004, and 2003, approximately 35%, 35%, and 33%, respectively, of the Companys revenues were generated from sales of after-sales services, replacement parts and components for laser products. The Company believes that a high level of customer support is necessary to successfully develop and maintain long-term relationships with its OEM and end-user customers. This close relationship is maintained as customers needs change and evolve.
Recognizing the importance of its existing and growing installed multinational customer base, the Company has expanded its local service and support platform into new geographic regions. Rofin has 300 customer service personnel. The Companys field service and in-house technical support personnel receive ongoing training with respect to the Companys laser products, maintenance procedures, laser -operating techniques, and processing technology. Most of the Companys OEM-customers also provide customer service and support to end-users.
Many of Rofins laser products are operated 24 hours a day in high speed, quality-oriented manufacturing operations. Accordingly, the Company provides 24 hour, year-round service support to its customers in the United States, Germany, and the majority of other countries in which it operates. The Company plans to continue adopting similar service support elsewhere. In addition, eight-hour response time is provided to certain key customers. This support includes field service personnel who reside in close proximity to the Companys installed base. The Company provides customers with process diagnostic and verification techniques, as well as specialized training in the operation and maintenance of its systems. The Company also offers regularly scheduled and intensive training programs and customized maintenance contracts for its customers.
Of Rofins 300 customer service personnel, approximately 190 employees operate in the field in 50 countries. Field service personnel are also involved in the installation of the Companys systems.
Rofins approach to the sale of replacement parts is closely linked to the Companys strategic focus on rapid customer response. The Company provides around-the-clock order entry and provides same or next day delivery of parts worldwide in order to minimize disruption to customers manufacturing operations. Rofin typically provides a minimum one-year warranty for its products with warranty extensions negotiated on a case-by-case basis. It agrees to after-sales service and parts supply up to a period of 10 years, if requested by a customer. The Companys growing base of installed laser sources and laser-based systems is expected to continue to generate a stable source of parts and service sales.
Laser Macro Products
The market for laser macro products and systems is fragmented and includes a large number of competitors, many of which are small or privately owned or which compete with Rofin on a limited geographic, industry-specific or application-specific basis. The Company also competes in certain target markets with competitors that are part of large industrial groups and have access to substantially greater financial and other resources than Rofin. Competition among laser manufacturers is also based on attracting and retaining qualified engineering and technical personnel. The overall competitive position of the Company will depend upon a number of factors, including product performance and reliability, price, customer support, manufacturing quality, the compatibility of its products with existing laser systems, and the continued development of products utilizing the technologies of diode lasers and diode pumped, solid-state lasers.
Rofin believes it is among the top three suppliers of laser sources in the worldwide market for macro applications. Companies such as Trumpf and Fanuc (for high-power CO2 lasers), Excel/Synrad and Coherent (for low-power CO2 lasers), Trumpf (for solid-state lasers) and Optopower and Jenoptik (for diode lasers and laser diodes) compete in certain of the markets in which Rofin operates. However, in the Companys opinion, none of these companies competes in all of the industries, applications and geographic markets currently served by Rofin. We believe that only Trumpf has a product range and worldwide presence similar to that of the Company. The Company believes that it has a competitive advantage over these companies due to its exclusive access (for material applications of 500
watts and above) to the patented diffusion cooling technology incorporated in its CO2 Slab lasers. See Intellectual Property.
Laser Marking and Micro Products
Significant competitive factors in the laser marking and micro market include system performance and flexibility, cost, the size of each manufacturers installed base, capability for customer support and breadth of product line. Because many of the components required to develop and produce a laser product for marking and micro applications are commercially available, barriers to entry into this market are low and the Company expects new competitive products to enter this market. The Company believes that its product range for marking and micro applications will compete favorably in this market primarily due to the performance and price characteristics of such products.
The Companys laser marking products compete with conventional ink-based and acid-etching technologies, as well as with laser mask-marking. The Companys micro products compete with conventional welding, etching and spark erosion technologies. The Company believes that its principal competitors in the laser marking and micro market include Trumpf, GSI Group, Unitek Miyachi, Lasag, and Excel/Control Laser.
Rofin also competes with manufacturers of conventional non-laser products in applications such as welding, drilling, soldering, cutting, and marking. The Company believes that as manufacturing industries continue to modernize, seek to reduce production costs and require more precise and flexible production, the features of laser-based systems will become more desirable than systems incorporating conventional material processing techniques and processes. The increased acceptance of these laser applications by industrial users will be enhanced by laser product line expansion to include lower and higher power CO2 lasers, advancements in fiber-optic beam delivery systems, improvements in reliability, and the introduction of lower and higher power diode lasers and diode pumped, solid-state lasers capable of performing heavy industrial material processing and marking and micro applications.
MANUFACTURING AND ASSEMBLY
Rofin manufactures and tests its high-power CO2 and solid-state laser macro products at its Hamburg (Germany), Aschheim-Munich (Germany), Plymouth, Michigan, Landing, New Jersey, Atsugi-shi (Japan) and Kingston upon Hull (UK) facilities. The Companys laser marking products are manufactured and tested at its facilities in Gunding-Munich (Germany), Starnberg (Germany), Singapore, Boxborough, Massachusetts and Orlando, Florida. Rofins micro application products are manufactured and tested in Starnberg (Germany). The Companys diode laser products are manufactured and tested at its Mainz (Germany) facility. The Companys low-power CO2 laser products are manufactured and tested in Kingston upon Hull (UK). Coating of Rofins Slab laser electrodes is performed at the Overath (Germany) facility. The Companys fiber optics and beam delivery systems are manufactured and tested in Gothenburg (Sweden), and power supplies are manufactured and tested in Starnberg (Germany).
Given the competitive nature of the laser business, the Company focuses substantial efforts on maintaining and enhancing the efficiency and quality of its manufacturing operations. The Company utilizes just-in-time and cell-based manufacturing techniques to reduce manufacturing cycle times and inventory levels, thus enabling it to offer on-time delivery and high-quality products to its customers.
Rofins in-house manufacturing includes only those manufacturing operations that are critical to achieve quality standards or protect intellectual property. These manufacturing activities consist primarily of product development, testing of components and subassemblies (some of which are supplied from within the Company and others of which are supplied by third party vendors and then integrated into the Companys finished products), assembly and final testing of the completed product, as well as proprietary software design and hardware/software integration. Although the Company minimizes the number of suppliers and component types wherever practicable it has at least two sources of supply for key items. Rofin has a qualifying program for its vendors and generally seeks to build long-term relationships with such vendors. The Company purchases certain major components from single suppliers. The Company estimates that 21% of its revenues are from the sale of products that require specialized components currently only available from single sources. Rofin has written agreements with such suppliers and has not had material delays in supplies from these sources. The Company believes that it could, if necessary, purchase
such components from alternative sources, within four to six months, following appropriate qualification of such new vendors.
Rofin is committed to meeting internationally recognized manufacturing standards. Its Hamburg, Gunding-Munich, Starnberg, and Mainz facilities are ISO 9001 certified. In addition, the following facilities are ISO 9002 certified: Pamplona (Spain), Milan (Italy), and Paris (France).
RESEARCH AND DEVELOPMENT
During fiscal 2005, 2004, and 2003, Rofins net spending on research and development was $22.6 million, $20.5 million, and $18.1 million, respectively. The Companys net spending on research and development reflects receipt of funding under German government and European Union grants totaling $0.9 million, $1.1 million, and $0.9 million, in fiscal 2005, 2004, and 2003, respectively. Rofin has approximately 190 employees engaged in product research and development.
Rofins research and development activities are directed at meeting customers manufacturing needs and application processes. Core competencies include CO2 gas lasers, solid-state lasers, diode lasers, precision optics, electronic power supplies, fiber optics, beam delivery, control interfaces, software programming and systems integration. The Company strives for customer-driven development activities and promotes the use of alliances with key customers and joint development programs in a wide range of its target markets.
The Companys research and development activities are carried out in ten centers in Hamburg, Aschheim-Munich, Gunding-Munich, Starnberg, and Mainz (all Germany), Kingston upon Hull (UK), Gothenburg (Sweden), Plymouth, Michigan, Landing, New Jersey, and Orlando, Florida (all USA), and are centrally coordinated and managed. Rofin maintains close working relationships with the leading industrial, government and university research laboratories in Germany, including the Fraunhofer Institute for Laser Technology in Aachen, the Institute for Technische Physik of the German Space and Aerospace Research Center in Stuttgart, the Fraunhofer Institute for Material Science in Dresden, the Laser Center in Hanover, and elsewhere around the world, including the University of Edinburgh in the United Kingdom. These relationships include funding of research, joint development programs, personnel exchange programs, and licensing of patents developed at these institutes.
Rofin owns intellectual property, which includes patents, proprietary software, technical know-how and expertise, designs, process techniques and inventions.
While policies and procedures are in place to protect critical intellectual property rights, Rofin believes that its success depends to a larger extent on the innovative skills, know-how, technical competence and abilities of Rofins personnel. The Company is also a worldwide licensee of two U.S. patents, one Japanese patent and their corresponding foreign counterparts, which expire in 2007, 2009, and 2010, respectively. These licenses are exclusive for industrial material processing applications of 500 watts and above for the diffusion cooled, wave-guide technology used in the Companys Slab Series CO2 lasers and non-exclusive for applications below 500 watts. In Rofins view, the technology protected by these three patents represents a significant step forward in industrial laser technology for material processing and is an important source of Rofins current revenues and future growth and profitability.
Rofin protects its intellectual property in a number of ways including, in certain circumstances, patents. Rofin has sought patent protection primarily in the United States, Europe, and Japan. Rofin currently holds 143 separate patents for inventions relating to lasers, processes and power supplies with expiration dates ranging from 2005 to 2023. In addition, 59 patent applications have been filed and are under review by the relevant patent authorities. Rofin requires its employees and certain of its customers, suppliers, representatives, agents and consultants to enter into confidentiality agreements to further safeguard Rofins intellectual property.
Rofin, from time to time, receives notices from third parties alleging infringement of such parties patent or other intellectual property rights by Rofins products. While these notices are common in the laser industry and Rofin has in the past been able to develop non-infringing technology or license necessary patents or technology on commercially reasonable terms, Rofin cannot assure that it would in the future prevail in any litigation seeking damages or expenses from Rofin or to enjoin Rofin from selling its products on the basis of such alleged infringement. Nor can Rofin assure that it would be able to develop any non-infringing technology or to license any valid and infringed patents on commercially reasonable terms. In the event any third party made a valid claim against Rofin or its customers and a license were not made available to Rofin on commercially reasonable terms, Rofin would be adversely affected.
From time to time, Rofin files notices of opposition to certain patents on laser technologies held by others, including academic institutions and competitors of Rofin, which the Company believes could inhibit its ability to develop laser products for industrial material processing applications.
The Companys order backlog was $76.3 million, $72.8 million, and $59.0 million, as of September 30, 2005, 2004, and 2003, respectively. The Companys order backlog, which contains relatively little service, training and spare parts, represents approximately three months of laser shipments. The increase in the Companys order backlog from September 30, 2004 to September 30, 2005, was attributable to higher orders for micro applications. The fluctuation of the U.S. dollar in fiscal 2005 had a favorable effect of approximately $2.2 million on year-to-year order backlog. The increase in the Companys order backlog from September 30, 2003 to September 30, 2004 was mainly attributable to PRCs and Lee Lasers acquired backlog and increased orders in our component business. The fluctuation of the U.S. dollar in fiscal 2004 had a favorable effect of approximately $5.4 million on year-to-year order backlog.
An order is entered into backlog by Rofin when a purchase order with an assigned delivery date has been received. Delivery schedules range from one week to six months, depending on the size, complexity and availability of the product or system ordered, although typical delivery dates for laser source products range between 6-12 weeks from the date an order is placed. Although there is a risk that customers may cancel or delay delivery of their orders, orders for standard non-customized lasers can typically be allocated to other customers without significant additional costs. The Company also manages this risk by establishing the right to charge a cancellation fee that covers any material and developmental costs incurred prior to the order being cancelled. Enforcement of this right is dependent on many factors including, but not limited to, the customers requested length of delay, the number of other outstanding orders with the same customer and the ability to quickly convert the canceled order to another sale.
The Company anticipates shipping the present backlog during fiscal 2006. However, the Companys backlog at any given date is not necessarily indicative of actual sales for any future period.
At September 30, 2005, Rofin had 1,413 full-time employees, of which 832 were in Germany, 242 in the United States, 39 in France, 44 in Italy, 101 in the United Kingdom, 26 in Spain, 8 in the Netherlands, 29 in Sweden, 10 in Belgium, 24 in Singapore, 11 in Korea, 12 in Taiwan, 7 in China, and 28 in Japan, whereas at September 30, 2004, Rofin had 1,377 full-time employees, of which 817 were in Germany, 234 in the United States, 34 in France, 45 in Italy, 104 in the United Kingdom, 29 in Spain, 8 in the Netherlands, 11 in Belgium, 23 in Sweden, 21 in Singapore, 11 in Korea, 13 in Taiwan, and 27 in Japan. The average number of employees for the fiscal year ended September 30, 2005, was 1,394.
While the Companys employees are not covered by collective bargaining agreements and the Company has never experienced a work stoppage, slowdown or strike, the Companys employees at its Hamburg and Starnberg facilities are each represented by a nine-person works council and in Gunding-Munich by a seven-person works council. Additionally, Hamburg and Gunding-Munich are represented by a four-person central works council. Matters relating to compensation, benefits and work rules are negotiated and resolved between management and the works council for the relevant location. The Company considers its relations with its employees to be good.
The majority of the Companys laser products sold in the United States are classified as Class IV Laser Products under applicable rules and regulations of the Center for Devices and Radiological Health (CDRH) of the U.S. Food and Drug Administration. The same classification system is applied in the European markets. Safety rules are formulated with Deutsche Industrie Norm (i.e., German Industrial Standards) or ISO standards, which are internationally harmonized.
CDRH regulations generally require a self-certification procedure pursuant to which a manufacturer must file with the CDRH with respect to each product incorporating a laser device, periodic reporting of sales and purchases and compliance with product labeling standards. The Companys laser products for macro, micro and laser marking applications can result in injury to human tissue if directed at an individual or otherwise misused.
The Company believes that its laser products for macro, micro and marking applications are in substantial compliance with all applicable laws for the manufacture of laser devices.
The Company makes available, free of charge on its internet website, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the SEC). You can find these reports on the Companys website at www.rofin.com under the heading Investor Relations.
These reports may also be obtained at the SECs Public Reference Room at 450 Fifth Street NW, Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at (202) 942-8090. You may also access this information at the SECs website (http://www.sec.gov). This site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
DOWNTURNS IN THE INDUSTRY, PARTICULARLY IN THE MACHINE TOOL, AUTOMOTIVE, AND SEMICONDUCTOR AND ELECTRONICS INDUSTRIES MAY HAVE, IN THE FUTURE, A MATERIAL ADVERSE EFFECT ON OUR SALES AND PROFITABILITY.
Our business depends substantially upon capital expenditures particularly by manufacturers in the machine tool, automotive, and semiconductor and electronics industries. We estimate that approximately 54% of our laser sales during fiscal year 2005 were to these three industry markets. These industries are cyclical and have historically experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products manufactured and marketed by us. For the foreseeable future, our operations will continue to depend upon capital expenditures in these industries, which, in turn, depend upon the market demand for their products. Decreased demand from manufacturers in these industries, for example, during a downturn, may lead to decreased demand for our products. Although such decreased demand would reduce our sales, we may not be able to reduce expenses quickly, due in part to the need for continual investment in research and development and the need to maintain extensive ongoing customer service and support capability. Although we order materials for assembly in response to firm orders, the lead time for assembly and delivery of some of our products creates a risk that we may incur expenditures or purchase inventories for products which we cannot sell.
Accordingly, any downturn or slowdown in the machine tool, automotive, and semiconductor and electronics industries could have a material adverse effect on our financial condition and results of operations.
A HIGH PERCENTAGE OF OUR SALES ARE OVERSEAS AND OUR RESULTS ARE THEREFORE SUBJECT TO THE IMPACT OF EXCHANGE RATE FLUCTUATIONS.
Although we report our results in U.S. dollars, approximately 66% of our current sales are denominated in other currencies, including the Euro, Swedish krona, British pound, Singapore dollar, Japanese yen, Korean won, Taiwanese NT dollar, and Chinese RMB. The fluctuation of the Euro, and the other functional currencies, against the U.S. dollar has had the effect of increasing and decreasing (as applicable) reported net sales as well as cost of goods sold and gross margin and selling, general and administrative expenses denominated in such foreign currencies when translated into U.S. dollars as compared to prior periods. Our subsidiaries will, from time to time, pay dividends in their respective functional currencies, thus presenting another area of potential currency exposure for us in the future.
We also face transaction risk from fluctuations in exchange rates between the various currencies in which we do business. We believe that a certain portion of the transaction risk of our operations in multiple currencies is mitigated by our hedging activities, utilizing forward exchange contracts and forward exchange options. We also continue to borrow in each operating subsidiarys functional currency to reduce exposure to exchange gains and losses. However, there can be no assurance that changes in currency exchange rates will not have a material adverse effect on our business, financial condition and results of operations.
OUR INABILITY TO MANAGE THE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our products are currently marketed in approximately 35 countries, with Germany, the rest of Europe, the United States and the Asia/Pacific region being our principal markets. Our operations and sales in our principal markets are subject to risks inherent in international business activities, including:
Our failure to manage the risks associated with our international business operations could have a material adverse effect on our financial condition and results of operations.
Our profitability may be adversely affected by economic slowdowns in the United States, Europe, or the Asia/Pacific region. A recession in these economies could trigger a decline in laser sales to the machine tool, automotive, or semiconductor/electronics industries, and any related weaknesses in their respective currencies could adversely affect customer demand for our products, the U.S. dollar value of our foreign currency denominated sales, and ultimately our consolidated results of operations.
WE DEPEND ON THE ABILITY OF OUR OEM-CUSTOMERS TO INCORPORATE OUR LASER PRODUCTS INTO THEIR SYSTEMS.
Our sales depend in part upon the ability of our OEM-customers to develop and sell systems that incorporate our laser products. Adverse economic conditions, large inventory positions, limited marketing resources, and other factors affecting these OEM-customers could have a substantial impact upon our financial results. We cannot provide assurances that our OEM-customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, our financial condition or results of operations.
WE EXPERIENCED IN THE PAST, AND EXPECT TO EXPERIENCE IN THE FUTURE, FLUCTUATIONS IN OUR QUARTERLY RESULTS. THESE FLUCTUATIONS MAY INCREASE THE VOLATILITY OF OUR STOCK PRICE.
We have experienced and expect to continue to experience some fluctuations in our quarterly results. We believe that fluctuations in quarterly results may cause the market prices of our common stock, on the NASDAQ National Market and the Frankfurt Stock Exchange, to fluctuate, perhaps substantially. Factors which may have an influence on the Companys operating results in a particular quarter include:
These and other factors make it difficult for us to release precise predictions regarding the results and the development of our business.
In addition, our backlog at any given time is not necessarily indicative of actual sales for any succeeding period. As our delivery schedule typically ranges from one week to six months, our sales will often reflect orders shipped in the same quarter that they are received. Moreover, customers may cancel or reschedule shipments and production difficulties could delay shipments. Accordingly, the Companys results of operations are subject to significant fluctuations from quarter to quarter. See also Business-Order Backlog.
Other factors that we believe may cause the market price of our common stock to fluctuate, perhaps substantially, include announcements of new products, technologies or customers by us or our competitors, developments with respect to intellectual property and shortfalls in our operations relative to analysts expectations. In addition, in recent years, the stock market in general, and the shares of technology companies in particular, have experienced wide price fluctuations. These broad market and industry fluctuations, particularly in the semiconductor and electronics and automotive industries, may adversely affect the market prices of our common stock on the NASDAQ and the Frankfurt Stock Exchange.
THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE AND INCREASED COMPETITION COULD INCREASE OUR COSTS, REDUCE OUR SALES OR CAUSE US TO LOSE MARKET SHARE.
The laser industry is characterized by significant price and technical competition. Our current and proposed laser products for macro and marking and micro applications compete with those of several well-established companies, some of which are larger and have substantially greater financial, managerial and technical resources, more extensive distribution and service networks, and larger installed customer bases than us.
We believe that competition will be particularly intense in the CO2, diode laser, and solid-state laser markets, as many companies have committed significant research and development resources to pursue opportunities in these markets. There can be no assurance that we will successfully differentiate our current and proposed products from the products of our competitors or that the market place will consider our products to be superior to competing
products. Because many of the components required to develop and produce a laser-based marking system are commercially available, barriers to entry into this market are relatively low, and we expect new competitive product entries in this market. To maintain our competitive position in these markets, we believe that we will be required to continue a high level of investment in engineering, research and development, marketing, and customer service and support. There can be no assurance that we will have sufficient resources to continue to make these investments, that we will be able to make the technological advances necessary to maintain our competitive position, or that our products will receive market acceptance. See also Business - Competition.
OUR FUTURE GROWTH AND COMPETITIVENESS DEPEND UPON OUR ABILITY TO DEVELOP NEW AND ENHANCED PRODUCTS TO MEET MARKET DEMAND AND TO INCREASE OUR MARKET SHARE FOR LASER MARKING AND MICRO PRODUCTS.
If we are to increase our laser sales in the near term, these sales will have to come through increases in market share for our existing products, through the development of new products, or through the acquisition of competitors or their products. To date, a substantial portion of our revenues has been derived from sales of high-powered CO2 laser sources, solid-state laser sources, and diode lasers. In order to increase market demand for these products, we will need to devote substantial resources to:
A large part of our growth strategy depends upon being able to increase substantially our worldwide market share for laser marking and micro products.
Our future success depends on our ability to anticipate our customers needs and develop products that address those needs. Our ability to control costs is limited by our need to invest in research and development. If we are unable to implement our strategy to develop new and enhanced products, our business, operating results and financial condition could be adversely affected. We cannot provide assurance that we will successfully implement our business strategy or that any of the newly developed or enhanced products will achieve market acceptance or not be rendered obsolete or uncompetitive by products of other companies. See also Managements Discussion and Analysis of Financial Condition and Results of Operations and Business - The Companys Laser Products.
IF WE LOSE OUR KEY MANAGEMENT PERSONNEL, WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS OR ACHIEVE OUR OBJECTIVES.
Our future success depends in large part upon the leadership and performance of our executive management team and key employees at the operating level. These key employees include technical, sales and support personnel for our operations on a worldwide basis. If we lose the services of one or more of our executive officers or key employees, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives. If we lose the services of any of our key employees at the operating or regional level, we may not be able to replace them with similarly qualified personnel, which could harm our business.
WE MAY NOT BE ABLE TO SUCCESSFULLY ACQUIRE NEW OPERATIONS OR INTEGRATE FUTURE ACQUISITIONS, WHICH COULD CAUSE OUR BUSINESS TO SUFFER.
An important part of our growth strategy is making strategic acquisitions of companies with complementary operations or products. We may be unable to successfully complete potential strategic acquisitions if we cannot reach agreement on acceptable terms or for other reasons. Future acquisitions may require us to obtain additional debt or equity financing, which may not be available on terms acceptable to us, if at all. In connection with future acquisitions, we may assume the liabilities of the companies we acquire. Any debt that we incur to pay for future acquisition could contain covenants that restrict the manner in which we operate our business. Any new equity
securities that we issue for this purpose would be dilutive to our existing stockholders. If we buy a company or a division of a company, we may experience difficulty integrating that company or divisions personnel and operations, which could negatively affect our operating results.
WE DEPEND ON LIMITED SOURCE SUPPLIERS THAT COULD CAUSE SUBSTANTIAL MANUFACTURING DELAYS AND INCREASE OUR COSTS IF A DISRUPTION IN SUPPLY OCCURS.
We estimate that 21% of our revenues are derived from sales of products that require specialized components only available from single sources. We also rely on a limited number of independent contractors to manufacture subassemblies for some of our products. There can be no assurance that, in the future, our current or alternative sources will be able to meet all of our demands on a timely basis. If one or more of our suppliers or subcontractors experiences difficulties that result in a reduction or interruption in supply to us, or if they fail to meet any of our manufacturing requirements, our business could be harmed until we are able to secure alternative sources, if any. If we are unable to find necessary parts or components on commercially reasonable terms, we could be required to reengineer our products to accommodate available substitutions which would increase our costs and/or have a material adverse effect on manufacturing schedules, product performance and market acceptance.
OUR FAILURE TO PROTECT OUR PROPRIETARY TECHNOLOGY OR TO AVOID LITIGATION FOR INFRINGEMENT OR MISAPPROPRIATION OF PROPRIETARY RIGHTS OF THIRD PARTIES COULD RESULT IN A LOSS OF REVENUES AND PROFITS.
From time to time, we receive notices from third parties alleging infringement of such parties patent or other proprietary rights by our products. While these notices are common in the laser industry and we have in the past been able to develop non-infringing technology or license necessary patents or technology on commercially reasonable terms, there can be no assurance that we would in the future prevail in any litigation seeking damages or expenses from us or to enjoin us from selling its products on the basis of such alleged infringement, or that we would be able to develop any non-infringing technology or license any valid and infringed patents on commercially reasonable terms. In the event any third party made a valid claim against us or our customers and a license was not made available to us on commercially reasonable terms, we would be adversely affected.
Our future success depends in part upon our intellectual property rights, including trade secrets, know-how and continuing technological innovation. There can be no assurance that the steps taken by us to protect our intellectual property rights will be adequate to prevent misappropriation or that others will not develop competitive technologies or products.
We currently hold 143 United States and foreign patents on our laser sources, with expiration dates ranging from 2005 to 2023. We have also obtained licenses under certain patents covering lasers and related technology incorporated into our products. Of particular importance is the license of three patents related to the sales of our Slab Series CO2 lasers, which we estimate to account for approximately 21% of our revenue. In addition, 59 patent applications have been filed and are under review by the patent authorities. There can be no assurance that other companies are not investigating or developing other technologies that are similar to ours, that any patents will issue from any application filed by us or that, if patents do issue, the claims allowed will be sufficiently broad to deter or prohibit others from marketing similar products. In addition, there can be no assurance that any patents issued to us
will not be challenged, invalidated or circumvented, or that the rights thereunder will provide a competitive advantage to us. See also Business - Intellectual Property.
ANY DEFECTS IN OUR PRODUCTS OR CUSTOMER PROBLEMS ARISING FROM THE USE OF OUR PRODUCTS MAY SERIOUSLY HARM OUR BUSINESS AND REPUTATION.
Our laser products are technologically complex and may contain known and undetected errors or performance problems. In addition, performance problems can also be caused by the improper installation of our products by a customer. These errors or performance problems could result in customer dissatisfaction, which could harm our sales or customer relationships. In addition, these problems may cause us to incur significant warranty and repair costs and divert the attention of our engineering personnel from our product development efforts.
The Companys manufacturing facilities include the following:
The Kingston upon Hull (United Kingdom) facility lease expires in 2012. The Gunding-Munich (Germany) facility lease expires in 2006 and 2007, with an optional yearly notice of termination. The Company intends to renew these contracts. The leases on its Japanese facilities in Atsugi-shi expire in 2007, with a renewal option for three years. The Mainz (Germany) facility lease expires in 2014 and the Overath (Germany) facility leases expire in 2008. The Singapore facility lease expires in 2006, with a renewal option for three years. The Starnberg (Germany) main facility is leased until 2017 from a member of the Companys board of directors and includes a clause to terminate the lease contract within a two-year notice period during the contract. The Aschheim-Munich (Germany) facility lease expires in 2010, with a renewal option until 2015. The leases on its U.S. facilities in Boxborough, Massachusetts, Plymouth, Michigan, and Landing, New Jersey, expire in 2010, 2012, and 2007, respectively. The Gothenburg (Sweden) facility lease expires in 2008, with a renewal option for three years.
The Company maintains sales, administration and research and development facilities at each of the Hamburg, Aschheim-Munich, Starnberg, Gunding-Munich, Mainz, Kingston upon Hull, Gothenburg, Plymouth, Landing, and Orlando locations. The Company also maintains sales and service offices worldwide, all of which are leased, with the exception of the Pamplona, Spain, and Seoul (South Korea) properties which are owned. In October 2005, the Company opened a sales and service office in Tucson, Arizona, to support sales of its Dilas diode lasers.
The Company believes that its existing facilities are adequate to meet its currently projected needs for the next 12 months and that suitable additional or alternative space would be available, if necessary, in the future on commercially reasonable terms.
The licensor of patents covering the technology used in certain of the Companys CO2 lasers has asserted that the Company has calculated royalties due in respect of certain sales of such CO2 laser in a manner that is not consistent with the applicable license agreement. In addition, the licensor claims that it has not been provided with copies of invoices and other documentation relating to such sales, to which it asserts it is entitled under the license agreement. The Company disputes these and related allegations and believes that it is in compliance with all of its obligations under the license agreement. The Company is currently in discussions with the licensor in order to resolve these disagreements. The parties have reached an agreement in principle that an independent auditor should be appointed to review the calculations made by the Company in connection with the royalties it has paid in the past. Management believes that it will achieve a resolution of this matter that will not have a material adverse impact on the Companys financial condition or results of operation or cash flows.
There were no matters submitted to a vote of the security holders during the fourth quarter of fiscal year 2005.
The Companys common stock is traded on the NASDAQ National Market and also on the Prime Standard Segment of the Frankfurt Stock Exchange, under the symbol RSTI and international securities identification number (ISIN) US7750431022, respectively. The table below sets forth the high and low closing sales prices of the Companys common stock for each quarter ended during the last two fiscal years as reported by the National Association of Securities Dealers, Inc.:
At December 7, 2005, the Company had 14 holders of record of its common stock and 15,241,350 shares outstanding. A significantly greater number of holders of the Companys common stock are street name or beneficial holders, whose shares are held of record by bankers, brokers and other financial institutions. The Company has not paid dividends on its common stock and does not anticipate paying dividends in the foreseeable future.
The following table sets forth selected consolidated financial data for the five fiscal years ended September 30, 2005. The information sets forth below should be read in conjunction with the consolidated financial statements and notes thereto filed as part of this Annual Report.
Rofin-Sinar Technologies Inc. is a leader in the design, development, engineering, manufacture, and marketing of laser-based products, primarily used for cutting, welding, and marking a wide range of materials.
During fiscal year 2005, 50% of revenues related to sales for macro applications and approximately 50% related to sales of laser products for marking and micro applications.
Effective December 31, 2002, the minority shareholder of CBL resigned from the limited partnership and the remaining 9.99% of shares of CBL were purchased by RSL during fiscal 2003.
On March 31, 2003, the Company acquired an additional 37% of the share capital of Rofin-Marubeni Laser Corporation, Atsugi-shi, Japan, through its wholly-owned subsidiary Rofin-Sinar Laser GmbH, Hamburg (Germany). The Company subsequently holds 88% of the share capital. As of May 1, 2003, Rofin-Marubeni Laser Corporation, Atsugi-shi (Japan) was renamed Rofin-Baasel Japan Corporation.
On February 28, 2004, the Company acquired 90% of the share capital of Optoskand AB, Gothenburg (Sweden) through its wholly-owned subsidiary RSL. The Company has a call option exercisable, beginning in 2009, for the remaining 10% of the common stock for a fixed price of Euro 0.1 million. Accordingly, the Companys financial statements present Optoskand as if it was 100% owned.
On March 29, 2004, the Company issued and sold 2.5 million common shares in an underwritten public offering at a price of $28.00 per share. The underwriters exercised their over-allotment option on April 8, 2004, resulting in 360,000 additional common shares being issued and sold. The Company realized net proceeds of $75.3 million as a result of these transactions. The Company intends to use the aggregate net proceeds from the offering for working capital and other general corporate purposes, including acquisitions of complementary products, technologies, or businesses as opportunities arise.
On August 20, 2004, the Company acquired an additional 15% of the share capital of Dilas Diodenlaser GmbH, Mainz (Germany) through its wholly-owned subsidiary RSTE. The Company currently holds 95% of the share capital.
On August 31, 2004, the Company acquired 100% of the share capital of PRC Laser Corporation based in Landing, New Jersey (and its wholly-owned European subsidiary PRC Laser Europe N.V., Oudenaarde, Belgium), and Lee Laser, Inc. based in Orlando, Florida, from Dover Industries, Inc. PRC manufactures high power, fast-axial flow CO2 lasers and Lee Laser produces solid-state lasers for material processing.
Effective October 22, 2004, the Company purchased the remaining 17% share capital of Rofin-Baasel Espana S.L. through RSTE under an option agreement between the Company and the former minority shareholder.
Effective December 9, 2004, the Company purchased an additional 5% of the share capital of Rofin-Sinar U.K. Ltd. through RSTE under an option agreement between the Company and the former minority shareholders. The Company currently holds 76% of the share capital. In July 2005, the Company formed a new Chinese subsidiary, Rofin-Baasel China Co., Ltd. And in October 2005, the Company incorporated a new U.S. subsidiary, Dilas Diodelaser Inc.
Management believes that near-term growth in the laser macro business depends, especially in North America and Europe, on the general investment cycle for capital goods. In the marking and micro business, near-term, management sees continuing demand especially from the semiconductor and electronics, medical device, and
flexible packaging industry. With the formation of our Chinese subsidiary for sales and service in July 2005, based in Shanghai, we have further broadened our presence in Asia. The Company believes that its broad product portfolio and its diversified customer base should help a worsening of business conditions in single industrial or geographical markets in future.
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 Companys consolidated statements of operations:
Fiscal Year 2005 Compared to Fiscal Year 2004
Net Sales Net sales of $375.2 million represents an increase of $52.6 million, or 16%, over the prior year. Net sales increased $14.7 million, or 6%, in Europe/Asia and increased $37.9 million, or 54%, in the United States, as compared to the prior year. The U.S. dollar weakened against foreign currencies, which had a favorable effect on net sales of $11.4 million. Net sales of laser products for macro applications increased by 19% to $189.2 million, primarily due to the full-year impact of the consolidation of PRC Laser, with the remaining increase due to a shift in product mix to CO2 lasers with higher output power. Net sales of lasers for marking and micro applications increased by 14% to $186.0 million compared to fiscal year 2004, mainly due to the contribution of Lee Laser and the strong demand for our micro products mainly in medical instrument applications. The overall net sales increase was also supported by a strong service, spare parts, and component business which increased by 26% to $131.3 million in fiscal year 2005.
Gross Profit The Companys gross profit of $153.0 million increased by $20.8 million, or 16%, over the prior year. As a percentage of sales, gross profit remained at 41%. The percentage margin in fiscal year 2005 was primarily a result of a favorable product mix. Gross profit was favorably affected by $3.6 million in fiscal year 2005 due to the weakening of the U.S. dollar.
Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $7.9 million, or 14%, to $66.2 million, compared to fiscal year 2004 primarily due to a full year impact of the consolidation of PRC and Lee Laser and expenses associated with Section 404 certification required by the Sarbanes Oxley Act of 2002. As a percentage of net sales, selling, general and administrative expenses remained at 18%. Selling, general and administrative expenses were unfavorably affected by $2.1 million in fiscal year 2005 due to the weakening of the U.S. dollar.
Research and Development The Companys net expenses for research and development amounted to $22.6 million, which represents an increase of $2.1 million, or 10%, over fiscal year 2004 primarily due to ongoing research and development work mainly in the area of diode pumped, solid-state lasers, and CO2 lasers. Gross research and development expenses for fiscal years 2005 and 2004, were $23.5 million and $21.6 million, respectively, and were reduced by $0.9 million and $1.1 million of government grants during the respective periods. The Company will continue to apply for, and expects to continue receiving, government grants towards research and development, especially in Europe. Research and development expenses were unfavorably affected by $0.9 million in fiscal year 2005 due to the weakening of the U.S. dollar.
Income Tax Expense Income tax expense of $20.6 million in fiscal year 2005 and $17.6 million in fiscal year 2004, represent effective tax rates of 35.2% for both periods. The effective tax rate in both years is the result of higher income in countries with lower statutory income tax rates, tax exempt interest income in the U.S. and reductions in the valuation allowance on net operating loss carryforwards.
Net Income As a result of the foregoing factors, the Companys net income of $38.0 million ($2.44 per diluted share, based on 15.6 million weighted average common shares outstanding) in fiscal year 2005 increased by $5.5 million over the prior years net income of $32.4 million ($2.31 per diluted share, based on 14.0 million weighted average common shares outstanding). Currency translation decreased net income by $0.4 million, or 1%, of fiscal year 2005 net income.
Fiscal Year 2004 Compared to Fiscal Year 2003
Net Sales Net sales of $322.6 million represents an increase of $64.9 million, or 25%, over the prior year. Net sales increased $47.4 million, or 23%, in Europe/Asia and increased $17.5 million, or 33%, in the United States, as compared to the prior year. The U.S. dollar weakened against foreign currencies, which had a favorable effect on net sales of $26.3 million. Net sales of laser products for macro applications increased by 16%, to $158.8 million, over the prior year. These increases represent mainly the additional revenue of $7.1 million recognized from a technical license agreement, increased revenue of the Companys component businesses and higher demand for the Companys lasers from the machine tool industry. Net sales of lasers for marking and micro applications increased by 35% to $163.8 million compared to fiscal year 2003. This increase can be attributed primarily to a recovery in demand for lasers for marking applications from the semiconductor and electronics industries, increased sales to the automotive industry, and higher volumes of lasers for micro application such as dental and jewelry. The overall net sales increase was also supported by a strong service and spare parts business.
Gross Profit The Companys gross profit of $132.2 million increased by $35.9 million, or 37%, over the prior year. As a percentage of sales, gross profit increased from 37% to 41%. The higher percentage margin in fiscal year 2004 was primarily a result of the more favorable product mix and revenues from the technical license agreement as described under net sales. Gross profit was favorably affected by $7.8 million in fiscal year 2004 due to the weakening of the U.S. dollar.
Selling, General and Administrative Expenses Selling, general and administrative expenses increased $7.1 million, or 14%, to $58.3 million, compared to fiscal year 2003 and reflects the support of a higher sales volume. As a percentage of net sales, selling, general and administrative expenses decreased from 20% to 18%. Selling, general and administrative expenses were unfavorably affected by $4.7 million in fiscal year 2004 due to the weakening of the U.S. dollar.
Research and Development The Companys net expenses for research and development amounted to $20.5 million, which represents an increase of $2.4 million, or 13%, over fiscal year 2003 primarily due to ongoing research and development work mainly in the area of diode pumped, solid-state lasers, and CO2 diffusion cooled, wave-guide technology. Gross research and development expenses for fiscal years 2004 and 2003 were $21.6 million and $19.0 million, respectively, and were reduced by $1.1 million and $0.9 million of government grants during the respective periods. The Company will continue to apply for, and expects to continue receiving government grants towards research and development, especially in Europe. The Company conducts a significant portion of research and development in Europe, and therefore incurs expenses in foreign currencies. Research and development expenses were unfavorably affected by $2.1 million in fiscal year 2004 due to the weakening of the U.S. dollar.
Income Tax Expense Income tax expense of $17.6 million in fiscal year 2004 and $9.4 million in fiscal year 2003 represent effective tax rates of 35.2% and 38.1%, respectively. The lower effective tax rate in 2004 is mainly due to a higher earnings basis, higher income in countries with lower statutory income tax rates, tax exempt interest income in the U.S. and the benefit from the utilization of net operating loss carryforwards which had a full valuation allowance.
Net Income As a result of the foregoing factors, the Companys net income of $32.4 million in fiscal year 2004 increased by $17.1 million over the prior years net income of $15.3 million. Basic and diluted earnings per share equaled $2.41 and $2.31, respectively, based upon a weighted average of 13.5 million and 14.0 million common shares outstanding, as compared to basic and diluted earnings per share of $1.31 and $1.29, respectively, based upon a weighted average of 11.6 million and 11.9 million common shares outstanding for the same period in fiscal year 2003. Currency translation decreased net income by $0.9 million, or 2.8%, of fiscal year 2004 net income.
LIQUIDITY AND CAPITAL RESOURCES
The Companys primary sources of liquidity at September 30, 2005, were cash and cash equivalents of $40.6 million, short-term investments of $78.7 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 $75.5 million (translated at the applicable exchange rate at September 30, 2005). As of September 30, 2005, $10.2 million was outstanding under the Deutsche Bank facility and $28.2 million under other lines of credit. Therefore, $62.1 million is unused and available under Rofins lines of credit. The Company is subject to financial covenants under this facility and these lines of credit, which could restrict the Company from drawing money under them. At September 30, 2005, the Company was in compliance with these covenants.
Additionally, the Company has outstanding short-term debt with a German bank, which was used to finance part of the acquisition, and to refinance the existing debt, of CBL. At September 30, 2005, $2.7 million was outstanding under this credit agreement. Based on maturities, the $2.7 million has been included in the caption Line of credit and short-term borrowings in the accompanying consolidated balance sheet.
Cash and cash equivalents increased by $2.4 million during fiscal year 2005. Approximately $38.1 million in cash and cash equivalents were provided by operating activities, primarily as the result of increased net income and other non-cash items, principally depreciation and amortization. Operating cash flow was negatively affected by a decrease in accrued liabilities and accounts payable and an increase in inventories, partially offset by a decrease in accounts receivable and an increase in income taxes payable.
Uses of cash for investing activities totaled $23.8 million for the year ended September 30, 2005, and related primarily to the purchase of short-term investments ($16.6 million) and various additions to property and equipment in connection with the expansion of the Companys operations ($6.3 million).
Net cash used by financing activities totaled $9.2 million and was primarily related to current period repayments of bank debt, net of borrowings of $12.8 million, partially offset by $3.6 million generated through issuance of new shares from the exercise of stock options.
The Company expects that its capital expenditures will be approximately $7.0 million in 2006.
Management believes that cash flows from operations, along with existing cash and cash equivalents and availability under our credit facilities and lines of credit, will provide adequate resources to meet the Companys capital requirements and operational needs on both a current and a long-term basis.
The following table illustrates the Companys contractual obligations as of September 30, 2005:
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements or financing arrangements involving variable interest entities.
CURRENCY EXCHANGE RATE FLUCTUATIONS
Although the Company prepares its consolidated financial statements in U.S. dollars, approximately 66% of its net sales are denominated in other currencies, primarily Euro, Swedish krona, British pound, Singapore dollar, Taiwanese dollar, Korean won, Japanese yen, and Chinese RMB. Net sales and costs and related assets and liabilities are generally denominated in the functional currencies of the operations, thereby serving to reduce the Companys exposure to exchange gains and losses.
Exchange differences upon translation from each operations functional currency to U.S. dollars are accumulated as a separate component of equity. The currency translation adjustment component of shareholders equity had the effect of increasing total equity by $7.5 million at September 30, 2005, as compared to $11.6 million at September 30, 2004.
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, as well as cost of goods sold, gross margin, selling, general and administrative expenses, and research and development expenses, denominated in such foreign currencies when translated into U.S. dollars as compared to prior periods.
The following table illustrates the effect of the changes in exchange rates on the Companys fiscal 2005, 2004 and 2003, net sales, gross profit, and income from operations:
Between fiscal year 2005 and 2004, the average exchange rate for the Euro strengthened against the U.S. dollar by approximately 2.3%. The impact of this strengthening was to increase net sales and gross profit by $11.4 million and $3.6 million, respectively, because approximately 66% of sales are denominated in other currencies, primarily the Euro. However, because more than 66% of operating expenses are also denominated in these other currencies, this same strengthening of the Euro had the effect of increasing operating expenses and thereby reducing the overall exchange rate effect on income from operations by $0.6 million.
Between fiscal year 2004 and 2003, the average exchange rate for the Euro strengthened against the U.S. dollar by approximately 11%. The impact of this strengthening was to increase net sales and gross profit by $26.3 million and $7.8 million, respectively, because approximately 71% of sales are denominated in other currencies, primarily the Euro. However, because approximately 82% of operating expenses are also denominated in these other currencies, this same strengthening of the Euro had the effect of increasing operating expenses, thereby reducing the overall exchange rate effect on income from operations by $1.0 million.
Between fiscal year 2003 and 2002, the average exchange rate for the Euro strengthened against the U.S. dollar by approximately 15%. The impact of this strengthening was to increase net sales and gross profit by $28.2 million and $7.8 million, respectively, because approximately 75% of sales are denominated in other currencies, primarily the Euro. However, because more than 75% of operating expenses are also denominated in these other currencies, this same strengthening of the Euro had the effect of increasing operating expenses, thereby reducing the overall exchange rate effect on income from operations.
CRITICAL ACCOUNTING POLICIES
The Companys significant accounting policies are more fully described in Note 1 of the consolidated 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 Companys customers were to deteriorate, additional allowances may be required. No individual customer represents more than 10% of total accounts receivable. Any increase in allowance will impact operating income during a given period.
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. 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 provisions will impact operating income during a given period.
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 these data to ensure that the reserve is sufficient. . Warranty expense has historically been with 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.
The determination of the Companys 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 Companys 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 uses 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.
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs. SFAS No. 151 requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as current period charges. Further, SFAS No. 151 requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. SFAS No. 151 is effective for inventory costs incurred beginning in the first quarter of fiscal year 2006. The Company expects that the adoption of SFAS No. 151 will not have a material effect on the financial statements.
In December 2004, the FASB enacted SFAS No. 123R, Share-Based Payment which replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our results of operations. The accounting provisions of SFAS No. 123R will be adopted by the Company beginning on October 1, 2005 using modified prospective application. The Company anticipates that the impact of adoption will reduce earnings per share by approximately $0.10 per share.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the basis of the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that a correction of an error in previously issued financial statements should be termed a restatement. The new standard is effective for accounting changes and correction of errors beginning October 1, 2005. The Company does not expect that the adoption of SFAS No. 154 will have a material impact on our consolidated financial position or results of operations.
The following discussion about the Companys market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for trading purposes.
Interest Rate Sensitivity
As of September 30, 2005, the Company maintained cash equivalents and short-term investments of $82.2 million, consisting mainly of non-taxable interest bearing securities and demand deposits all with maturities of less than three months. If short-term interest rates were to increase or decrease by 10%, the impact on interest income would be approximately $0.2 million.
As of September 30, 2005, the Company had $3.6 million of variable rate debt on which the interest rate is reset every six months, $5.0 million of variable rate debt on which the interest rate is set annually and $32.3 million of fixed rate debt. Maturities of this debt are as follows: $20.2 million is due in 2006, $3.7 million is due in 2007, $14.2 million is due in 2008, and $3.0 million is due in 2009. A 10% change in the variable interest rates of the Companys debt would result in an increase or decrease in interest expense of less than $0.1 million.
Additionally, the Company entered into interest swap agreements of total notional amount of Euro 13.0 million (equivalent to $15.7 million based on the exchange rate at September 30, 2005) to minimize the interest expenses on short and long-term debt by shifting from variable to fixed interest rates.
Foreign Currency Exchange Risk
The Company enters into foreign currency forward contracts and forward exchange options generally of less than one year duration to hedge a portion of its foreign currency risk on sales transactions. At September 30, 2005, the Company held no forward exchange options or currency forward contracts. Additionally the Company entered into currency and interest swap agreements of total notional amount 20.6 million Swiss franc to minimize the interest expense on short and long-term debt. As of September 30, 2005, an amount of 3.4 million Swiss franc (equivalent to $2.7 million based on the exchange rate at September 30, 2005) was outstanding under these swap agreements. The gains or losses resulting from a 10% change in currency exchange rates would result in an increase of $0.2 million or a decrease of $0.1 million of net income after tax.
See Item 14(a) for an index to the consolidated financial statements. No supplementary financial information is required to be presented pursuant to Item 302(a) of Regulation S-K.
Attached as exhibits to this Form 10-K are certifications of the Companys chief executive officer and chief financial officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This Controls and Procedures section includes information concerning the controls and controls evaluation referred to in the certifications. Part III, Item 15 of this Form 10-K sets forth the report of KPMG LLP, our independent registered public accounting firm, regarding its audit of the Companys internal control over financial reporting and of managements assessment of internal control over financial reporting set forth below in this section. This section should be read in conjunction with the certifications and the KPMG report for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
The Companys chief executive officer and chief financial officer have concluded that, as of September 30, 2005, the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) were effective, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Securities Exchange Act of 1934, as amended.
Such disclosure controls and procedures are controls and procedures designed to ensure that all information required to be disclosed in the Companys reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods set forth in applicable Securities and Exchange Commission forms, rules and regulations. In addition, Rofin has reviewed its internal control over financial reporting and has concluded that there has been no change in such internal control during the fourth quarter of fiscal year 2005 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
Management Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of the Companys financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records, that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements.
Management assessed the Companys internal control over financial reporting as of September 30, 2005, the end of its fiscal year. Management based its assessment on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Managements assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and the Companys overall control environment. This assessment is supported by testing and monitoring performed by the Companys Internal Audit organization.
Based on its assessment, management has concluded that the Companys internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Management reviewed the results of its assessment with the Audit Committee of the Companys Board of Directors.
The Companys independent registered public accounting firm, KPMG LLP, audited managements assessment and independently assessed the effectiveness of the Companys internal control over financial reporting. KPMG LLP has issued an attestation report concurring with managements assessment, which is included at the beginning of Part III, Item 15 of this Annual Report on Form 10-K.
The information required by this item is included in the Election of Directors, Directors and Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, and Committees of the Board of Directors; Meetings and Compensation of Directors, sections of the Companys Proxy Statement to be filed in connection with the Companys 2006 Annual Meeting of Stockholders to be held in March 2006, and is incorporated by reference herein.
The information required by this item is included in the Executive Compensation and Related Information section of the Companys Proxy Statement to be filed in connection with the Companys 2006 Annual Meeting of Stockholders to be held in March 2006, and is incorporated by reference herein.
The information required by this item is included in the Security Ownership of Certain Beneficial Owners and Management sections of the Companys Proxy Statement to be filed in connection with the Companys 2006 Annual Meeting of Stockholders to be held in March 2006, and is incorporated by reference herein.
The following table sets forth the number of securities authorized for issuance under our equity compensation plans at September 30, 2005:
The remaining information called for by this item 12 relating to Securities Authorized for Issuance Under Equity Compensation Plans is incorporated by reference to note 15 of the Consolidated Financial Statements included at Part III, Item 15 of this Annual Report on Form 10-K.
The information required by this item is included in the Compensation Committee, Interlocks and Insider Participation and Certain Transactions sections of the Companys Proxy Statement to be filed in connection with the Companys 2006 Annual Meeting of Stockholders to be held in March 2006, and is incorporated by reference herein.
The Company had sales to its minority shareholder in Japan amounting to $1.1 million, $1.8 million, and $1.6 million in fiscal years 2005, 2004, and 2003, respectively, and the amounts outstanding related to those sales are listed as accounts receivable from related party in the consolidated balance sheet. Accounts receivable from related party also includes trade receivables from the minority shareholder of Rofin-Baasel China of $0.2 million at September 30, 2005.
The Companys sales to related parties have generally been on terms comparable to those available in connection with sales to unaffiliated parties.
The main facility in Starnberg (Germany) is rented under a 25-year operating lease from the former minority shareholder of CBL, who is also a member of the Board of Directors of the Company, and includes a clause to terminate the lease contract within a two-year notice period during the contract. The Company paid rent expense of $0.6 million, $0.6 million, and $0.5 million to the former minority shareholder during fiscal years 2005, 2004, and 2003, respectively. Receivables from the director and former minority shareholder of CBL as of September 30, 2005, amounted to less than $0.1 million and are included in other accounts receivable.
The Company has accrued $0.1 million at September 30, 2005, for the option to purchase the remaining minority interests in Optoskand AB. These amounts are included in accounts payable to related party in the accompanying consolidated balance sheet.
Accounts payable to related party also includes a short-term loan from the minority shareholder of Dilas of $0.1 million at September 30, 2005, and accounts payable to the minority shareholder of Rofin-Baasel China amounting to $34,000 at September 30, 2005.
The Company believes that all transactions noted above, have been executed on an arms-length basis. Except for the foregoing, no director, officer, nominee director, 5% holder of the Companys shares, or immediate family member, associate or affiliate thereof, had any material interest, direct or indirect, in any transaction since the beginning of fiscal year 2003 or has any material interest, direct or indirect, in any proposed transaction, having a value of $60,000 or more.
Indebtedness of Officers and Directors
Since the beginning of fiscal year 2003, there has been no indebtedness to the Company by any director or officer or associates of any such person, other than reimbursements for purchases, for ordinary travel and expense advances and for other transactions in the ordinary course of business.
The information set forth under Independent Public Accountants - All Other Fees in the definitive form of the Companys Proxy Statement relating to the 2006 Annual Meeting of Shareholders to be held in March 2006, is incorporated by reference herein.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
The Board of Directors and Stockholders
Rofin-Sinar Technologies Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Rofin-Sinar Technologies Inc. and subsidiaries as of September 30, 2005 and 2004, and the related consolidated statements of operations, stockholders equity and comprehensive income, and cash flows for each of the years in the three-year period ended September 30, 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rofin-Sinar Technologies Inc. and subsidiaries as of September 30, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Rofin-Sinar Technologies Inc.s internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 9, 2005, expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Rofin-Sinar Technologies Inc. and Subsidiaries
We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting (Item 9A), that Rofin-Sinar Technologies Inc. maintained effective internal control over financial reporting as of September 30, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Rofin-Sinar Technologies Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Rofin-Sinar Technologies Inc. maintained effective internal control over financial reporting as of September 30, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Rofin-Sinar Technologies Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Rofin-Sinar Technologies Inc. and subsidiaries as of September 30, 2005 and 2004, and the related consolidated statements of operations, stockholders equity and comprehensive income, and cash flows for each of the years in the three-year period ended September 30, 2005, and our report dated December 9, 2005, expressed an unqualified opinion on those consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
(dollars in thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
(dollars in thousands)