Coherent, Inc.

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Coherent, Inc.

5100 Patrick Henry Drive
Santa Clara, California 95054
U.S.A.
Telephone: (408) 764-4000
Toll Free: (800) 527-3786
Fax: (408) 764-4800
Web site: http://www.cohr.com

Public Company
Incorporated: 1966 as Coherent Radiation
Employees: 2,261
Sales: $468.9 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: COHR
NAIC: 335999 All Other Miscellaneous Electrical Equipment and Component Manufacturing; 334510 Electromedical and Electrotherapeutic Apparatus Manufacturing

Coherent, Inc. manufactures and sells lasers and laser-related products to the commercial, scientific, and medical markets. Coherent lasers, comprising the broadest range of products produced by any laser manufacturer, are used in a variety of applications, ranging from surgical procedures to the manufacturing of semiconductors. The company operates facilities at approximately two dozen sites in a number of foreign countries, deriving more than half its revenue from international sales. Sales and service sites are located in the United States, Mexico, Germany, the United Kingdom, France, Belgium, The Netherlands, Sweden, Hong Kong, and the Peoples Republic of China.

Origins

The invention of the laser, an acronym for “light amplification by stimulated emission of radiation,” represented one of the technological milestones of the 20th century. Developed at Bell Laboratories in 1958, the laser promised to ignite a technological revolution, its vast potential galvanizing the attention of scientists worldwide—one scientist in particular, physicist James Hobart. Hobart was intrigued by the possible applications for lasers, specifically the use of lasers in factory settings. He envisioned lasers performing tasks such as cutting and welding metal, but was unable to convince management at his place of employment, Spectra-Physics, Inc., to pursue the development of industrial lasers. Determined to see his ideas manifested, Hobart enlisted the help of five other individuals and started his own company.

Coherent was founded in May 1966, when Hobart was in his early 30s. The company’s start was modest, backed by the $10,000 Hobart and his associates were able to come up with for Coherent’s start-up capital. With limited financial resources, the founders established company headquarters in the Palo Alto, California home of Eugene Watson, a former sales and marketing manager for Spectra-Physics. Initially, the most pressing need was for a 220-volt outlet to power the laser they intended to build, which forced Coherent’s brain trust to build the laser in a laundry room, the only place in Watson’s house with a suitable outlet. Next to a washer and dryer, Hobart and his colleagues began building Coherent’s first product during the summer of 1966, using a piece of a rain gutter as one of the key components of their prototype industrial laser. Despite the somewhat crude methods of their homespun efforts, the entrepreneurs achieved remarkable results swiftly, compensating for their lack of resources with ingenuity. Four months after the company was founded, Coherent unveiled its first laser at the Westcon trade show, a precision instrument that had shed its rain gutter vestiges and evolved into a shiny, telescope-like device. More important than aesthetics, manufacturers were interested in Coherent’s first product.

The laser Coherent built during the summer of 1966 was the first carbon dioxide laser available commercially. The power output of the company’s first product set a precedent, forcing Coherent to develop a power meter capable of measuring its power. The power meter became the company’s second product, a device that continued to garner sales 30 years later. In the fall of 1966, however, the primary focus was on selling the laser. Boeing Co. was the first company to order a Coherent laser. Hobart performed the installation of the laser himself in January 1967, inadvertently burning a hole through a sport coat hanging on a chair during the process. Hobart paid to replace the sport coat and, after the initial foible, secured Coherent’s first satisfied customer.

Market Diversification in the 1970s-80s

After receiving capital from the Rockefeller family, Coherent converted to public ownership in 1970. The company developed a family of industrial lasers to complement its first product, diversifying from there into medical and scientific markets, where applications for lasers were in abundance. As the years passed, Coherent’s commitment to research and development spawned a diverse range of lasers, stretching from small, argon green lasers for use in eye surgery to invisible carbon dioxide lasers developed to cut metal. Coherent lasers were used to repair herniated discs, to study biological and semiconductor processes, and to light walls of water at Disneyland. The applications were manifold, developed by a highly regarded and expansive research and development team. “Coherent has more Ph.D.s on staff than most competitors have employees,” remarked an industry analyst to California Business in 1992. The dedication to developing new types of lasers to address ever-expanding needs bolstered Coherent’s stature. With lasers developed and marketed for industrial, scientific, and medical markets, the company ranked as the largest independent laser maker in the world by the early 1980s. The company’s elite industry position, however, did not guarantee a commensurate standing in financial matters.

Despite a full roster of laser products, and despite its impressive intellectual talent, Coherent did not boast a financial stature that was reflective of its global dominance in a significant technological sector. Lasers had failed to produce the kind of investor returns and swelling financial figures typical of other major technological breakthroughs, such as computers, semiconductors, and fiber optics. Part of Coherent’s problem, which became more evident as the 1980s progressed, was that lasers had become relatively easy to develop. As the technology underpinning their development matured, lasers took on the market characteristics of commodity items, particularly lasers used in compact disc players and telephone lines. To produce lasers for medical applications, relatively little start-up capital was required, eliminating what otherwise would have served as a formidable obstacle barring entry to start-up companies. Accordingly, the number of Coherent’s competitors proliferated, weakening the company’s market position. Beyond external pressures, Coherent also suffered from internal difficulties, perhaps the most deleterious source of the company’s problems during the 1980s.

Early 1980s Joint Venture Creates Crisis

By the late 1980s, a number of industry observers had begun to brand Coherent as an underachiever, hailing the company’s potential yet deriding its financial performance. In 1990, Coherent was tagged by Forbes as “Laser Laggard” and by California Business as “A Lagging Laser Maker,” unflattering appellations that drew their source from analysts who watched the global leader in lasers stumble financially. One of the chief and most enduring internal problems stemmed from an early 1980s joint venture with General Electric Co. The subsidiary created through the joint venture was Sturidge, Massachusetts-based Coherent General Inc. Shortly after its formation, Coherent General prematurely introduced an industrial laser that suffered from profound problems. In the aftermath, Coherent’s reputation, which had been steadily cultivated since the early days in Watson’s laundry room, was seriously tarnished. Equally troubling, Coherent lost its market lead to Siemens. The aftershocks of the laser’s flop reverberated outward: some of Coherent’s customers in the machine tool business realized that making lasers to punch holes, cut metals, and weld materials could be done internally. As Coherent lost market share to its closest rival and to its own customers, other problems unrelated to Coherent General’s miscue emerged.

Looking back at the troubled 1980s, Terry McGoldrick, director of operations of Coherent Laser Group, part of the company’s scientific unit, succinctly summarized Coherent’s mistakes. “Inability to perform was our basic problem,” he conceded to California Business in February 1990. The company inadequately dealt with corporate functions revolving around quality, delivery, and service. In 1986, for instance, McGoldrick estimated that only 13 percent of Coherent’s deliveries were on time. Financially, the company was struggling, losing $2.3 million in 1987, another $1.3 million in 1988, and, after posting a profit of $8.9 million in 1989, registering a loss of $449,000 in 1990. As a consequence, Coherent’s market value plummeted from $200 million in 1985 to $90 million by 1990, punctuating the sweeping problems affecting the company.

Company Perspectives:

Coherent’s mission is to focus on laser product innovations. Leveraging its competitive strengths in laser technology development, new product applications, engineering R&D and manufacturing expertise, Coherent is dedicated to customer satisfaction, quality and service. Coherent’s mission is to continue its tradition of providing medical, scientific, commercial and OEM customers with cost effective laser products that provide performance breakthroughs and application innovations. Coherent’s goals are to serve* its customers, employees and stockholders. Specific goals include providing: customers with innovative products, superb technology, total quality, support and satisfaction; employees with a challenging, fulfilling place to work while expanding their skills and horizons; stockholders with consistent returns on equity capital and long-term growth in sales and earnings.

Hobart Spearheads Revival in the Early 1990s

In the years leading up to Coherent’s downward spiral, Hobart had delegated management responsibilities to others while he devoted his energies to developing the company’s lasers. As Coherent’s problems magnified, Hobart emerged from the laboratory to assume a leading role in the company’s management, taking on the responsibilities of chief executive officer in August 1988. His first objective was to restructure Coherent’s nonscientific units, namely, the company’s medical/surgical and industrial units. As the reorganization of the nonscientific units was under way, Hobart used the company’s scientific laser group as a testing ground for a multifaceted improvement program patterned after the methods employed by Japanese manufacturers. Employees were trained in the Just In Time (JIT) system of limited delivery, Statistical Process Control (SPC), and Continuous Process Improvement (CPI) manufacturing, all of which stressed an organization-wide commitment to quality and efficiency. The scientific laser group was the first to benefit from the JIT, SPC, and CPI training programs. In 1989 the unit’s production output was 20 percent greater than in 1987, an increase achieved with 30 percent fewer employees. Further, the percentage of product defects was cut in half, and 90 percent of deliveries were made on time. The drastic improvements prompted an extension of the training programs to other Coherent divisions, proving instrumental to the company’s turnaround as it entered the 1990s.

Although Coherent ranked as one of the top five industrial laser makers, the business unit continued to produce disappointing financial results as the 1990s began. The strength of the company was in medical and scientific lasers, where Coherent ranked as the market leader in each category. Hobart, presiding as chairman and chief executive officer, pinned the company’s future on the development of a greater lead in the medical market. During the early 1990s, Coherent derived 40 percent of its sales from medical lasers, but Hobart hoped to derive at least half of the company’s sales from medical lasers by the mid-1990s, a feat to be accomplished by investing heavily in research and development. In 1991 the company spent more than $26 million on research and development, which led to the introduction of more than 34 new products in a two-year span. In all, the company manufactured and sold more than 1,000 different laser products through 22 production, sales, and service sites worldwide.

With the troubles of the late 1980s behind it, Coherent looked toward the 1990s as its opportunity to realize the rewards of its potential. In a sense, the beginning of the decade represented a fresh start, a new beginning that would be led from new corporate headquarters. In 1992 the company paid $7.5 million for a 200,000-square-foot building in Santa Clara, moving Coherent away from its long-time base in Palo Alto. By the time of the move, Hobart’s efforts to cultivate efficiency and greater attention to customer service and quality had produced encouraging results, aided in part by the divestiture of Coherent General in 1993. At the company’s manufacturing facility in Auburn, California, productivity had increased 60 percent between 1990 and 1994, while overhead costs had been reduced by 58 percent. The implementation of the JIT, CPI, and SPC programs, coupled with a concerted focus on medical and scientific laser products, was enabling Coherent to break free at last from the constraints that held annual sales at $200 million. The company was growing, evidenced by the expansion of its Auburn plant by 57 percent in 1996. The 105,000-square-foot plant, which had garnered national awards for its operating efficiency, was augmented by an adjacent 60,000-square-foot building, half of which was set aside for future expansion.

The need for extra manufacturing space had been necessitated, in part, by two acquisitions completed in 1995, which helped fuel robust increases in Coherent’s revenue volume. In October, Coherent acquired the diode laser operation of Applied Laser Systems, a Medford, Oregon firm whose technology was sought after by companies involved in manufacturing medical instruments, alignment, and inspections systems. The following month, Coherent purchased the laser optics division of ATx Telecom Systems Inc., which developed coating processes for lenses and mirrors used in the development of solid-state lasers. Both of the acquisitions were folded in Coherent’s Auburn facility, thus creating the need for additional space. Prior to the acquisitions, Coherent’s annual revenue volume had begun to swell, after years of languishing at $200 million. In 1994, sales reached $215 million; by the end of the company’s fiscal 1995 year, concluded in September before the Applied Laser and ATx acquisitions were completed, sales shot upward to $285 million. Perhaps more important, profits for 1995 amounted to $19.3 million, helping to erase the memories of successive annual losses during the late 1980s.

In July 1996, Bernard J. Couillaud, formerly vice-president and general manager of Coherent Laser Group, was named president and chief executive officer. Hobart’s departure in 1997 positioned Couillaud as Coherent’s senior executive. Against the backdrop of the managerial changes, the company completed two notable acquisitions that formed a new business segment. In July 1995, Coherent acquired the laser diode operations of Uniphase Corporation. In December 1996, the company purchased 80 percent of Tutcore OY, Ltd., a Tampere, Finland-based company that ranked as the leading manufacturer of aluminum-free semiconductor wafers used to manufacture laser diodes. These two acquisitions were organized as a separate business group in August 1997 known as the Coherent Semiconductor Group.

Key Dates:

1966:: The first commercial carbon dioxide laser is developed.
1970:: Initial public offering of stock is completed.
1977:: Coherent Radiation is renamed Coherent, Inc.
1990:: Extensive employee training programs are implemented.
1992:: Headquarters are relocated from Palo Alto to Santa Clara.

During the late 1990s, Coherent demonstrated the consistent performance of an industry leader. In November 1997, Coherent signed a partnership agreement with Palomar Medical Technologies, Inc. for laser-based hair removal systems. The partnership agreement led to the April 1999 acquisition of Palomar’s subsidiary, Star Medical Technologies, Inc., a $65 million transaction that strengthened Coherent’s technology in commercial and medical markets. Sales by the end of the company’s fiscal year in September 1999 reached $468.9 million, a 14 percent gain from the previous year’s total that was outshined by a 40 percent increase in net income, which rose to $22.6 million. Considering Coherent’s role as a pioneer in laser development, which had inculcated a commitment to substantial annual investments in research and development, the company appeared well-equipped to produce similar financial growth in the years ahead. Further, Coherent offered a broader range of laser products than any of its competitors, fueling expectations that the company would continue to rank as an industry leader in the 21st century.