COHERENT CORP. - Quarter Report: 2023 March (Form 10-Q)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________
FORM 10-Q
________________________________________________________________
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the quarterly period ended March 31, 2023
| ☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
for the transition period from to .
Commission File Number: 001-39375
________________________________________________________________
COHERENT CORP.
(Exact name of registrant as specified in its charter)
________________________________________________________________
| PENNSYLVANIA | 25-1214948 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 375 Saxonburg Boulevard | 16056 | ||||||||||
| Saxonburg, | PA | (Zip Code) | |||||||||
| (Address of principal executive offices) | |||||||||||
Registrant’s telephone number, including area code: 724-352-4455
N/A
(Former name, former address and former fiscal year, if changed since last report)
________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, no par value | COHR | New York Stock Exchange | ||||||
| Series A Mandatory Convertible Preferred Stock, no par value | IIVI | New York Stock Exchange | ||||||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At May 8, 2023, 139,377,779 shares of Common Stock, no par value, of the registrant were outstanding.
COHERENT CORP.
INDEX
| Page No. | |||||||||||
Condensed Consolidated Balance Sheets – March 31, 2023 and June 30, 2022 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Earnings (Loss) – Three and Nine Months Ended March 31, 2023 and 2022 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended March 31, 2023 and 2022 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Cash Flows – Nine Months Ended March 31, 2023 and 2022 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Shareholders’ Equity and Mezzanine Equity – Three and Nine Months Ended March 31, 2023 and 2022 (Unaudited) | |||||||||||
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Coherent Corp. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000)
| March 31, 2023 | June 30, 2022 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash, cash equivalents, and restricted cash | $ | 901,028 | $ | 2,582,371 | |||||||
Accounts receivable - less allowance for doubtful accounts of $8,344 at March 31, 2023 and $4,206 at June 30, 2022 | 924,369 | 700,331 | |||||||||
| Inventories | 1,394,103 | 902,559 | |||||||||
| Prepaid and refundable income taxes | 26,237 | 19,585 | |||||||||
| Prepaid and other current assets | 160,907 | 100,346 | |||||||||
| Total Current Assets | 3,406,644 | 4,305,192 | |||||||||
| Property, plant & equipment, net | 1,910,561 | 1,363,195 | |||||||||
| Goodwill | 4,505,137 | 1,285,759 | |||||||||
| Other intangible assets, net | 3,954,198 | 635,404 | |||||||||
| Deferred income taxes | 34,169 | 31,714 | |||||||||
| Other assets | 306,923 | 223,582 | |||||||||
| Total Assets | $ | 14,117,632 | $ | 7,844,846 | |||||||
| Liabilities, Mezzanine Equity and Shareholders' Equity | |||||||||||
| Current Liabilities | |||||||||||
| Current portion of long-term debt | $ | 74,910 | $ | 403,212 | |||||||
| Accounts payable | 428,860 | 434,917 | |||||||||
| Accrued compensation and benefits | 177,811 | 172,109 | |||||||||
| Operating lease current liabilities | 40,309 | 27,574 | |||||||||
| Accrued income taxes payable | 74,156 | 29,317 | |||||||||
| Other accrued liabilities | 311,410 | 199,830 | |||||||||
| Total Current Liabilities | 1,107,456 | 1,266,959 | |||||||||
| Long-term debt | 4,349,923 | 1,897,214 | |||||||||
| Deferred income taxes | 847,212 | 77,259 | |||||||||
| Operating lease liabilities | 148,010 | 110,214 | |||||||||
| Other liabilities | 213,953 | 109,922 | |||||||||
| Total Liabilities | 6,666,554 | 3,461,568 | |||||||||
| Mezzanine Equity | |||||||||||
Series B redeemable convertible preferred stock, no par value, 5% cumulative; issued - 215,000 and 75,000 shares at March 31, 2023 and June 30, 2022, respectively; redemption value - $2,281,448 and $798,181, respectively | 2,211,642 | 766,803 | |||||||||
| Shareholders' Equity | |||||||||||
Series A preferred stock, no par value, 6% cumulative; issued - 2,300,000 shares at March 31, 2023 and June 30, 2022 | 445,319 | 445,319 | |||||||||
Common stock, no par value; authorized - 300,000,000 shares; issued - 154,369,985 shares at March 31, 2023; 120,923,171 shares at June 30, 2022 | 3,755,410 | 2,064,552 | |||||||||
| Accumulated other comprehensive income (loss) | 170,454 | (2,167) | |||||||||
| Retained earnings | 1,159,322 | 1,348,125 | |||||||||
| 5,530,505 | 3,855,829 | ||||||||||
Treasury stock, at cost; 15,098,467 shares at March 31, 2023 and 13,972,758 shares at June 30, 2022 | (291,069) | (239,354) | |||||||||
| Total Shareholders' Equity | 5,239,436 | 3,616,475 | |||||||||
| Total Liabilities, Mezzanine Equity and Shareholders' Equity | $ | 14,117,632 | $ | 7,844,846 | |||||||
See Notes to Condensed Consolidated Financial Statements.
3
Coherent Corp. and Subsidiaries
Condensed Consolidated Statements of Earnings (Loss) (Unaudited)
($000, except per share data)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues | $ | 1,240,194 | $ | 827,724 | |||||||
| Costs, Expenses, and Other Expense (Income) | |||||||||||
| Cost of goods sold | 820,038 | 506,051 | |||||||||
| Internal research and development | 126,382 | 96,895 | |||||||||
| Selling, general and administrative | 226,386 | 118,009 | |||||||||
| Interest expense | 75,183 | 43,499 | |||||||||
| Other expense (income), net | (3,048) | 241 | |||||||||
| Total Costs, Expenses, & Other Expense | 1,244,941 | 764,695 | |||||||||
| Earnings (Loss) Before Income Taxes | (4,747) | 63,029 | |||||||||
| Income Tax Expense (Benefit) | (7,293) | 14,027 | |||||||||
| Net Earnings | $ | 2,546 | $ | 49,002 | |||||||
| Less: Dividends on Preferred Stock | $ | 36,071 | $ | 17,148 | |||||||
| Net Earnings (Loss) available to the Common Shareholders | $ | (33,525) | $ | 31,854 | |||||||
| Basic Earnings (Loss) Per Share | $ | (0.24) | $ | 0.30 | |||||||
| Diluted Earnings (Loss) Per Share | $ | (0.24) | $ | 0.28 | |||||||
4
Coherent Corp. and Subsidiaries
Condensed Consolidated Statements of Earnings (Loss) (Unaudited)
($000, except per share data)
| Nine Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues | $ | 3,955,049 | $ | 2,429,654 | |||||||
| Costs, Expenses, and Other Expense (Income) | |||||||||||
| Cost of goods sold | 2,680,131 | 1,490,190 | |||||||||
| Internal research and development | 376,257 | 281,189 | |||||||||
| Selling, general and administrative | 780,551 | 358,234 | |||||||||
| Interest expense | 207,976 | 72,752 | |||||||||
| Other expense (income), net | 32,253 | (5,535) | |||||||||
| Total Costs, Expenses, & Other Expense | 4,077,168 | 2,196,830 | |||||||||
| Earnings (Loss) Before Income Taxes | (122,119) | 232,824 | |||||||||
| Income Tax Expense (Benefit) | (40,895) | 41,701 | |||||||||
| Net Earnings (Loss) | $ | (81,224) | $ | 191,123 | |||||||
| Less: Dividends on Preferred Stock | $ | 107,537 | $ | 50,933 | |||||||
| Net Earnings (Loss) available to the Common Shareholders | $ | (188,761) | $ | 140,190 | |||||||
| Basic Earnings (Loss) Per Share | $ | (1.38) | $ | 1.32 | |||||||
| Diluted Earnings (Loss) Per Share | $ | (1.38) | $ | 1.22 | |||||||
5
Coherent Corp. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
($000)
| Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net earnings (loss) | $ | 2,546 | $ | 49,002 | $ | (81,224) | $ | 191,123 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments | 58,141 | 327 | 157,805 | (11,461) | |||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $(1,712) and $1,649 for the three and nine months ended March 31, 2023, respectively, and $6,519 and $9,967 for the three and nine months ended March 31, 2022, respectively | (6,251) | 23,804 | 6,019 | 36,395 | |||||||||||||||||||
Change in fair value of interest rate cap, net of taxes of $(2,200) and $2,032 for the three and nine months ended March 31, 2023, respectively, and $2,370 for the three and nine months ended March 31, 2022 | (8,275) | 8,916 | 7,646 | 8,916 | |||||||||||||||||||
Pension adjustment, net of taxes of $0 for the three and nine months ended March 31, 2023, and $0 for the three and nine months ended March 31, 2022 | 709 | — | 1,151 | — | |||||||||||||||||||
| Comprehensive income | $ | 46,870 | $ | 82,049 | $ | 91,397 | $ | 224,973 | |||||||||||||||
6
Coherent Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000)
See Notes to Condensed Consolidated Financial Statements.
| Nine Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net earnings (loss) | $ | (81,224) | $ | 191,123 | |||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation | 197,469 | 153,714 | |||||||||
| Amortization | 280,667 | 59,820 | |||||||||
| Share-based compensation expense | 123,674 | 57,424 | |||||||||
| Amortization of discount on convertible debt and debt issuance costs | 13,690 | 12,159 | |||||||||
| Unrealized losses (gains) on foreign currency remeasurements and transactions | (945) | (912) | |||||||||
| Gain from equity investments | (435) | (1,641) | |||||||||
| Deferred income taxes | (121,277) | (8,917) | |||||||||
| Loss on debt extinguishment | 6,835 | — | |||||||||
| Increase (decrease) in cash from changes in (net of effect of acquisitions): | |||||||||||
| Accounts receivable | 50,887 | 3,764 | |||||||||
| Inventories | 75,096 | (184,073) | |||||||||
| Accounts payable | (78,985) | 27,056 | |||||||||
| Contract liabilities | 13,177 | 24,473 | |||||||||
| Income taxes | 18,478 | 19,957 | |||||||||
| Accrued compensation and benefits | (54,893) | (40,030) | |||||||||
| Other operating net assets (liabilities) | 10,279 | (37,910) | |||||||||
| Net cash provided by operating activities | 452,493 | 276,007 | |||||||||
| Cash Flows from Investing Activities | |||||||||||
| Additions to property, plant & equipment | (342,999) | (195,991) | |||||||||
| Purchases of businesses, net of cash acquired | (5,488,556) | — | |||||||||
| Other investing activities | (2,261) | (5,750) | |||||||||
| Net cash used in investing activities | (5,833,816) | (201,741) | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Proceeds from borrowings of Term A Facility | 850,000 | — | |||||||||
| Proceeds from borrowings of Term B Facility | 2,800,000 | — | |||||||||
| Proceeds from borrowings of Revolving Credit Facility | 65,000 | — | |||||||||
| Proceeds from issuance of Series B Preferred Shares | 1,400,000 | — | |||||||||
| Proceeds from issuance of Senior Notes | — | 990,000 | |||||||||
| Payments on Finisar Notes | — | (14,888) | |||||||||
| Payments on existing debt | (1,144,025) | (46,538) | |||||||||
| Payments on borrowings under Revolving Credit Facility | (65,000) | — | |||||||||
| Payments on convertible notes | (3,561) | — | |||||||||
| Debt issuance costs | (126,516) | (10,197) | |||||||||
| Equity issuance costs | (42,000) | — | |||||||||
| Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | 21,509 | 17,177 | |||||||||
| Payments in satisfaction of employees' minimum tax obligations | (51,836) | (14,948) | |||||||||
| Payment of dividends | (20,700) | (27,608) | |||||||||
| Other financing activities | (866) | (1,715) | |||||||||
Net cash provided by financing activities | 3,682,005 | 891,283 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 22,532 | 42,874 | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (1,676,786) | 1,008,423 | |||||||||
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 2,582,371 | 1,591,892 | |||||||||
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 905,585 | $ | 2,600,315 | |||||||
| Cash paid for interest | $ | 190,672 | $ | 24,158 | |||||||
| Cash paid for income taxes | $ | 63,485 | $ | 34,757 | |||||||
| Additions to property, plant & equipment included in accounts payable | $ | 45,425 | $ | 71,477 | |||||||
7
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same amounts shown in the Condensed Consolidated Statements of Cash Flows. Restricted cash, non-current is included in the Condensed Consolidated Balance Sheets under 'Other Assets'. At March 31, 2023, we had $21 million of restricted cash.
| Nine Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash, cash equivalents, and restricted cash | $ | 901,028 | $ | 2,600,315 | |||||||
| Restricted cash, non-current | 4,557 | — | |||||||||
| Total cash, cash equivalents, and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 905,585 | $ | 2,600,315 | |||||||
See Notes to Condensed Consolidated Financial Statements.
8
Coherent Corp and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity and Mezzanine Equity (Unaudited)
($000, including share amounts)
| Common Stock | Preferred Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total | Mezzanine Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Preferred Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2022 | 120,923 | $ | 2,064,552 | 2,300 | $ | 445,319 | $ | (2,167) | $ | 1,348,125 | (13,973) | $ | (239,354) | $ | 3,616,475 | 75 | $ | 766,803 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 2,398 | 61,431 | — | — | — | — | (830) | (40,860) | 20,571 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Coherent Acquisition | 22,588 | 1,207,591 | — | — | — | — | — | — | 1,207,591 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible debt conversions | 7,181 | 337,940 | — | — | — | — | — | — | 337,940 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (38,698) | — | — | (38,698) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (132,371) | — | — | — | (132,371) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $3,452 | — | — | — | — | 12,604 | — | — | — | 12,604 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate cap, net of taxes of $5,440 | — | — | — | — | 20,464 | — | — | — | 20,464 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series B shares | — | — | — | — | — | — | — | — | — | 140 | 1,358,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pension adjustment, net of taxes of $0 | — | — | — | — | 39 | — | — | — | 39 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | (35,577) | — | — | (35,577) | — | 28,677 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2022 | 153,090 | $ | 3,671,514 | 2,300 | $ | 445,319 | $ | (101,431) | $ | 1,273,850 | (14,803) | $ | (280,214) | $ | 5,009,038 | 215 | $ | 2,153,480 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 779 | 32,745 | — | — | — | — | (266) | (9,551) | 23,194 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (45,072) | — | — | (45,072) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 232,035 | — | — | — | 232,035 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $(92) | — | — | — | — | (334) | — | — | — | (334) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate cap, net of taxes of $(1,208) | — | — | — | — | (4,543) | — | — | — | (4,543) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pension adjustment, net of taxes of $0 | — | — | — | — | 403 | — | — | — | 403 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | (35,931) | — | — | (35,931) | — | 28,992 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2022 | 153,869 | $ | 3,704,259 | 2,300 | $ | 445,319 | $ | 126,130 | $ | 1,192,847 | (15,069) | $ | (289,765) | $ | 5,178,790 | 215 | $ | 2,182,471 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 501 | 51,151 | — | — | — | — | (29) | (1,304) | 49,847 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | 2,546 | — | — | 2,546 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 58,141 | — | — | — | 58,141 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $(1,712) | — | — | — | — | (6,251) | — | — | — | (6,251) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate cap, net of taxes of $(2,200) | — | — | — | — | (8,275) | — | — | — | (8,275) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pension adjustment, net of taxes of $0 | — | — | — | — | 709 | — | — | — | 709 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | (36,071) | — | — | (36,071) | — | 29,171 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2023 | 154,370 | $ | 3,755,410 | 2,300 | $ | 445,319 | $ | 170,454 | $ | 1,159,322 | (15,098) | $ | (291,069) | $ | 5,239,436 | 215 | $ | 2,211,642 | ||||||||||||||||||||||||||||||||||||||||||||||||||
9
| Common Stock | Preferred Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total | Mezzanine Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Preferred Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2021 | 119,127 | $ | 2,028,273 | 2,300 | $ | 445,319 | $ | 14,267 | $ | 1,136,777 | (13,640) | $ | (218,466) | $ | 3,406,170 | 75 | $ | 726,178 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 844 | 30,567 | — | — | — | — | (200) | (12,935) | 17,632 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | 74,464 | — | — | 74,464 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (14,381) | — | — | — | (14,381) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $734 | — | — | — | — | 2,681 | — | — | — | 2,681 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | (17,082) | — | — | (17,082) | — | 10,182 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| — | (56,388) | — | — | — | 44,916 | — | — | (11,472) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2021 | 119,971 | $ | 2,002,452 | 2,300 | $ | 445,319 | $ | 2,567 | $ | 1,239,075 | (13,840) | $ | (231,401) | $ | 3,458,012 | 75 | $ | 736,360 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 82 | 16,854 | — | — | — | — | (13) | (806) | 16,048 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | 67,657 | — | — | 67,657 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 2,593 | — | — | — | 2,593 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $2,714 | — | — | — | — | 9,910 | — | — | — | 9,910 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | (16,807) | — | — | (16,807) | — | 9,803 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2021 | 120,053 | $ | 2,019,306 | 2,300 | $ | 445,319 | $ | 15,070 | $ | 1,289,925 | $ | (13,853) | $ | (232,207) | $ | 3,537,413 | 75 | $ | 746,163 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 266 | 26,544 | — | — | — | — | (16) | (1,093) | 25,451 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | 49,002 | — | — | 49,002 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 327 | — | — | — | 327 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $6,519 | — | — | — | — | 23,804 | — | — | — | 23,804 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate cap, net of taxes $2,370 | — | — | — | — | 8,916 | — | — | — | 8,916 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | (17,148) | — | — | (17,148) | — | 10,248 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2022 | 120,319 | $ | 2,045,850 | 2,300 | $ | 445,319 | $ | 48,117 | $ | 1,321,779 | $ | (13,869) | $ | (233,300) | $ | 3,627,765 | 75 | $ | 756,411 | |||||||||||||||||||||||||||||||||||||||||||||||||
10
Coherent Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements of Coherent Corp. (“Coherent”, the “Company”, “we”, “us” or “our”) for the three and nine months ended March 31, 2023 and 2022 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation for the periods presented have been included. All adjustments are of a normal recurring nature unless disclosed otherwise. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K dated August 29, 2022. The condensed consolidated results of operations for the three and nine months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet information as of June 30, 2022 was derived from the Company’s audited consolidated financial statements.
Transfer to New York Stock Exchange
On February 8, 2023, the Company announced the voluntary transfer of the listing of its common stock, no par value (“Coherent Common Stock”) and Series A Mandatory Convertible Preferred Stock, no par value (“Mandatory Convertible Preferred Stock”), from the NASDAQ Global Select Market to the New York Stock Exchange (the “NYSE”), effective as of the close of trading on February 22, 2023. The Coherent Common Stock and Mandatory Convertible Preferred Stock began trading on the NYSE on February 23, 2023 under the ticker symbols “COHR” and “IIVI”, respectively.
Note 2. Recently Issued Financial Accounting Standards
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This topic provides optional expedients to ease the potential burden of accounting for the effects of reference rate reform as it pertains to contract modifications of debt and lease contracts and derivative contracts identified in a hedging relationship. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to extend the temporary accounting rules under Topic 848 from December 31, 2022 to December 31, 2024. The Company adopted Topic 848 in the three months ended March 31, 2023 and applied the practical expedients under Topic 848 to account for modifications and updates to its floating rate debt, its interest rate swap and its interest rate cap. Application of these practical expedients allowed the Company to maintain hedge accounting for its interest rate cap and swap contracts. The adoption did not have a material impact on the Company's consolidated financial statements.
Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Accounting Standards Codification ASC 606: Revenue from Contracts with Customers, rather than adjust them to fair value at the acquisition date. We have adopted this accounting standard as of July 1, 2022. The acquisition of Coherent, Inc. has been accounted for in accordance with ASU 2021-08, as will any future acquisitions. Results of operations for quarterly periods prior to adoption remain unchanged as a result of the adoption of ASU No. 2021-08. Refer to Note 3. Coherent Acquisition for further information.
Note 3. Coherent Acquisition
On July 1, 2022 (the “Closing Date”), the Company completed its acquisition of Coherent, Inc. (the “Merger”), a global provider of lasers and laser-based technology for scientific, commercial, and industrial customers, in a combined cash and stock transaction in accordance with the Agreement and Plan of Merger dated March 25, 2021 (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, each share of common stock of legacy Coherent, Inc. (“Legacy Coherent”), par value $0.01 per share (the “Legacy Coherent Common Stock”), issued and outstanding immediately prior to July 1, 2022, was canceled and extinguished and automatically converted into the right to receive $220.00 in cash and 0.91 of a share of Coherent Common Stock.
11
Following the completion of the Legacy Coherent acquisition, the Company announced a new brand identity, including a corporate name change to Coherent Corp. (NYSE: COHR) on September 8, 2022.
On the Closing Date, the Company entered into a Credit Agreement (the “Credit Agreement”) by and among the Company, the lenders, and other parties thereto, and JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, which provides for senior secured financing of $4.0 billion, consisting of a new term loan A credit facility (the “Term A Facility”) in an aggregate principal amount of $850 million, a new term loan B credit facility (the “Term B Facility”) (and, together with the Term A Facility, the “Term Facilities”) in an aggregate principal amount of $2.8 billion, and a new revolving credit facility (the “Revolving Credit Facility”) in an aggregate available amount of $350 million, including a letter of credit sub-facility of up to $50 million. For further on the credit facility refer to Note 8. Debt.
In order to complete the funding of the Merger, the Company had a net cash outflow of $2.1 billion on July 1, 2022. The Company recorded $11 million and $83 million of acquisition related costs in the three and nine months ended March 31, 2023, respectively, representing professional and other direct acquisition costs. These costs are recorded within Selling, general and administrative expense in our Condensed Consolidated Statement of Earnings (Loss). Approximately 23 million shares of Coherent Common Stock in the aggregate were issued in conjunction with the closing of the Merger. Total preliminary Merger consideration was $7.1 billion, including replacement equity awards attributable to pre-combination service for certain Legacy Coherent restricted stock units.
The preliminary total fair value of consideration paid in connection with the acquisition of Coherent, Inc. consisted of the following (in $000):
| Shares | Per Share | Total Consideration | |||||||||||||||
| Cash paid for merger consideration | — | — | $ | 5,460,808 | |||||||||||||
| Shares of COHR common stock issued to Legacy Coherent stockholders | 22,587,885 | $49.83 | 1,125,554 | ||||||||||||||
| Converted Legacy Coherent RSUs attributable to pre-combination service | — | — | 82,037 | ||||||||||||||
| Payment of Legacy Coherent debt | — | — | 364,544 | ||||||||||||||
| Payment of Legacy Coherent transaction expenses | — | — | 62,840 | ||||||||||||||
| $ | 7,095,783 | ||||||||||||||||
The Company allocated the fair value of the preliminary purchase price consideration to the tangible assets, liabilities, and intangible assets acquired, generally based on estimated fair values. The excess preliminary purchase price over those fair values is recorded as goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets, inventories, property, plant & equipment and deferred income taxes. In determining the fair value of intangible assets acquired, the Company must make assumptions about the future performance of the acquired business, including among other things, the forecasted revenue growth attributable to the asset group and projected operating expenses inclusive of expected synergies, future cost savings, and other benefits expected to be achieved by combining the Company and Legacy Coherent. The Company’s intangible assets are comprised of trade names and trademarks, customer relationships, developed technology and backlog. The Company utilized widely accepted income-based, market-based, and cost-based valuation approaches to perform the preliminary purchase price allocation. The estimated fair value of the customer relationships and backlog are determined using the multi-period excess earnings method and the estimated fair value of the trade names and trademarks and developed technology are determined using the relief from royalty method. Both methods require forward looking estimates that are discounted to determine the fair value of the intangible asset using a risk-adjusted discount rate that is reflective of the level of risk associated with future estimates associated with the asset group that could be affected by future economic and market conditions.
The purchase price allocation set forth is preliminary and will be revised as third party valuations are finalized or additional information becomes available during the measurement period, which could be up to 12 months from the Closing Date. Any such revisions or changes may be material.
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Our preliminary allocation of the $7.1 billion purchase price of Legacy Coherent, based on the estimated fair value of the assets acquired and liabilities assumed as of the Closing Date, is as follows (in $000):
| Preliminary Allocation as of 7/1/2022 as adjusted through 3/31/23 | ||||||||||||||||||||
| Previously Reported September 30, 2022 | Measurement Period Adjustments (i) | As Adjusted (preliminary) | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Current Assets | ||||||||||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 393,324 | $ | — | $ | 393,324 | ||||||||||||||
| Accounts receivable | 270,928 | — | 270,928 | |||||||||||||||||
| Inventories (ii) | 497,345 | 66,540 | 563,885 | |||||||||||||||||
| Prepaid and refundable income taxes (iii) | 8,869 | (1,592) | 7,277 | |||||||||||||||||
| Prepaid and other current assets | 41,467 | — | 41,467 | |||||||||||||||||
| Total Current Assets | 1,211,933 | 64,948 | 1,276,881 | |||||||||||||||||
| Property, plant & equipment, net (iv) | 424,228 | 16,704 | 440,932 | |||||||||||||||||
| Deferred income taxes (iii) | 1,115 | (793) | 322 | |||||||||||||||||
| Other assets | 102,726 | — | 102,726 | |||||||||||||||||
| Other intangible assets, net (v) | 2,425,454 | 1,079,546 | 3,505,000 | |||||||||||||||||
| Goodwill | 4,005,727 | (862,497) | 3,143,230 | |||||||||||||||||
| Total Assets | $ | 8,171,183 | $ | 297,908 | $ | 8,469,091 | ||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||
| Current portion of long-term debt | $ | 4,504 | $ | — | $ | 4,504 | ||||||||||||||
| Accounts payable | 116,754 | — | 116,754 | |||||||||||||||||
| Accrued compensation and benefits | 60,596 | — | 60,596 | |||||||||||||||||
| Operating lease current liabilities | 13,002 | — | 13,002 | |||||||||||||||||
| Accrued income taxes payable | 16,936 | — | 16,936 | |||||||||||||||||
| Other accrued liabilities (vi) | 136,042 | 702 | 136,744 | |||||||||||||||||
| Total Current Liabilities | 347,834 | 702 | 348,536 | |||||||||||||||||
| Long-term debt | 22,991 | — | 22,991 | |||||||||||||||||
| Deferred income taxes (iii) | 563,824 | 292,168 | 855,992 | |||||||||||||||||
| Operating lease liabilities | 43,313 | — | 43,313 | |||||||||||||||||
| Other liabilities (vi) | 97,438 | 5,038 | 102,476 | |||||||||||||||||
| Total Liabilities | $ | 1,075,400 | $ | 297,908 | $ | 1,373,308 | ||||||||||||||
| Preliminary aggregate acquisition consideration | $ | 7,095,783 | $ | — | $ | 7,095,783 | ||||||||||||||
(i) The Company recorded measurement period adjustments to its preliminary acquisition date fair values due to the refinement of its valuation models, assumptions and inputs. The following measurement period adjustments were based upon information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of the amounts recognized at that date.
(ii) The Condensed Combined Balance Sheet has been adjusted to record Legacy Coherent’s inventories at a preliminary fair value of approximately $564 million, an increase of $67 million from the preliminary fair value reported at September 30, 2022 with a corresponding decrease to goodwill. The Condensed Combined Statement of Earnings (Loss) for the three and nine months ended March 31, 2023 includes cost of goods sold of approximately zero and $158 million, respectively, related to the increased basis in the preliminary fair value compared to the carrying value. The costs are being amortized over the expected period during which the acquired inventory is sold, and thus are not anticipated to affect the Condensed Consolidated Statements of Earnings (Loss) beyond twelve months after the Closing Date.
(iii) The Company has adjusted its prepaid and refundable income taxes, deferred tax asset and deferred tax liability positions as of March 31, 2023, to $7 million, zero and $856 million, respectively, as a result of measurement period adjustments.
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(iv) The Condensed Consolidated Balance Sheet has been adjusted to record Legacy Coherent’s property, plant and equipment (consisting of land, buildings and improvements, equipment, furniture and fixtures, and leasehold improvements) at a preliminary fair value of approximately $441 million, an increase of $17 million from the preliminary fair value reported at September 30, 2022 with a corresponding decrease to goodwill. The Condensed Consolidated Statements of Earnings (Loss) have been adjusted to recognize additional depreciation expense related to the increased basis. The additional depreciation expense is computed with the assumption that the various categories of assets will be depreciated over their remaining useful lives on a straight-line basis.
(v) Preliminary identifiable intangible assets in the Condensed Combined Balance Sheet increased $1.1 billion from the preliminary fair value reported at September 30, 2022 with a corresponding decrease to goodwill. Intangibles amortization recorded in cost of goods sold for the three and nine months ended March 31, 2023 was $21 million and $64 million, respectively. Intangibles amortization recorded in selling, general and administrative expenses for the three and nine months ended March 31, 2023 was $51 million and $156 million, respectively.
Preliminary identifiable intangible assets consist of the following and are being amortized over their estimated useful lives in the Condensed Consolidated Statements of Earnings (Loss) (in $000):
| Preliminary Fair Value | Estimated Useful Life | ||||||||||
| Trade names and trademarks | $ | 430,000 | N/A | ||||||||
| Customer relationships | 1,830,000 | 15 years | |||||||||
| Developed technology | 1,157,500 | 13.5 years | |||||||||
| Backlog | 87,500 | 1.0 year | |||||||||
| Intangible assets acquired | $ | 3,505,000 | |||||||||
(vi) The Company recorded approximately $1 million of increases in other current liabilities and $5 million of increases in other liabilities as measurement period adjustments.
Operating results, including goodwill and intangibles, of Legacy Coherent are reflected in the Company’s consolidated financial statements from the Closing Date, within the Lasers segment. Revenues and net loss for the Lasers segment for the three months ended March 31, 2023 were $365 million and $65 million, respectively. Revenues and net loss for the Lasers segment for the nine months ended March 31, 2023 were $1,137 million and $364 million, respectively. Goodwill in the amount of $3.1 billion arising from the acquisition is attributed to the expected synergies, including future cost savings, and other benefits expected to be generated by combining Coherent and Legacy Coherent. Substantially all of the goodwill recognized is not expected to be deductible for tax purposes.
Supplemental Pro Forma Information
The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable under the circumstances.
The supplemental pro forma information presents the combined results of operations for the three and nine months ended March 31, 2023 and March 31, 2022, as if Legacy Coherent had been acquired as of July 1, 2021. The supplemental pro forma information includes adjustments to amortization and depreciation for acquired intangible assets, property, plant and equipment, adjustments to share-based compensation expense, fair value adjustments on the inventories acquired, transaction costs, interest expense and amortization of debt issuance costs related to the Senior Credit Facilities (as defined in Note 8. Debt).
The unaudited supplemental pro forma financial information for the periods presented is as follows (in $000):
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||||||
| Revenue | $ | 1,240,194 | $ | 1,197,928 | |||||||
| Net Earnings | 36,294 | 6,482 | |||||||||
| Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | ||||||||||
| Revenue | $ | 3,955,049 | $ | 3,576,039 | |||||||
| Net Earnings (Loss) | 247,715 | (234,815) | |||||||||
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Note 4. Revenue from Contracts with Customers
The Company believes that disaggregating revenue by end market provides the most relevant information regarding the nature, amount, timing, and uncertainty of revenues and cash flows.
As of July 1, 2022, the Company disaggregates revenue into four end markets: industrial, communications, electronics and instrumentation. All prior period market and segment disclosure information has been reclassified to conform to the current reporting structure.
Effective July 1, 2022, the Company updated the operating segments due to the closing of the Merger. In addition, prior year numbers were recast to reflect the transfer of two entities between the Networking and Materials segments. See Note 13. Segment Reporting for further information.
The following tables summarize disaggregated revenue for the three and nine months ended March 31, 2023 and 2022 ($000):
| Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| Networking | Materials | Lasers | Total | Networking | Materials | Lasers | Total | ||||||||||||||||||||||||||||||||||||||||
| Industrial | $ | 17,570 | $ | 156,846 | $ | 263,789 | $ | 438,205 | $ | 52,189 | $ | 450,383 | $ | 846,881 | $ | 1,349,453 | |||||||||||||||||||||||||||||||
| Communications | 521,291 | 17,014 | — | 538,305 | 1,664,205 | 59,553 | — | 1,723,758 | |||||||||||||||||||||||||||||||||||||||
| Electronics | 2,849 | 136,229 | — | 139,078 | 9,674 | 509,803 | — | 519,477 | |||||||||||||||||||||||||||||||||||||||
| Instrumentation | 9,389 | 13,680 | 101,537 | 124,606 | 30,259 | 42,070 | 290,032 | 362,361 | |||||||||||||||||||||||||||||||||||||||
| Total Revenues | $ | 551,099 | $ | 323,769 | $ | 365,326 | $ | 1,240,194 | $ | 1,756,327 | $ | 1,061,809 | $ | 1,136,913 | $ | 3,955,049 | |||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||
| Networking | Materials | Total | Networking | Materials | Total | ||||||||||||||||||||||||||||||
| Industrial | $ | 21,325 | $ | 164,346 | $ | 185,671 | $ | 63,050 | $ | 486,094 | $ | 549,144 | |||||||||||||||||||||||
| Communications | 527,821 | 25,999 | 553,820 | 1,510,092 | 69,436 | 1,579,528 | |||||||||||||||||||||||||||||
| Electronics | 2,752 | 60,240 | 62,992 | 9,080 | 220,683 | 229,763 | |||||||||||||||||||||||||||||
| Instrumentation | 7,662 | 17,579 | 25,241 | 24,892 | 46,327 | 71,219 | |||||||||||||||||||||||||||||
| Total Revenues | $ | 559,560 | $ | 268,164 | $ | 827,724 | $ | 1,607,114 | $ | 822,540 | $ | 2,429,654 | |||||||||||||||||||||||
Contract Liabilities
Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue when the performance obligation has been satisfied. During the nine months ended March 31, 2023, the Company recognized revenue of $18 million related to customer payments that were included as contract liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2022. The Company had $181 million of contract liabilities recorded in the Condensed Consolidated Balance Sheet as of March 31, 2023. Contract liabilities acquired from the Merger totaled $77 million. As of March 31, 2023, $116 million of deferred revenue is included other accrued liabilities and $65 million is included within other liabilities on the Condensed Consolidated Balance Sheet.
Note 5. Inventories
The components of inventories were as follows ($000):
| March 31, 2023 | June 30, 2022 | ||||||||||
| Raw materials | $ | 490,479 | $ | 318,758 | |||||||
| Work in progress | 621,295 | 408,405 | |||||||||
| Finished goods | 282,329 | 175,396 | |||||||||
| $ | 1,394,103 | $ | 902,559 | ||||||||
During the nine months ended March 31, 2023, as part of the Merger, a fair value inventory step-up in the amount of $158 million was recorded as part of the preliminary purchase price allocation. The inventory step-up was amortized to cost of goods sold over the expected period during which the acquired inventory is sold. Refer to Note 3. Coherent Acquisition for further information. These costs are non-recurring in nature and not anticipated to affect the Condensed Combined Statements of Earnings (Loss) beyond twelve months after the Closing Date.
15
Note 6. Property, Plant and Equipment
Property, plant and equipment consists of the following ($000):
| March 31, 2023 | June 30, 2022 | ||||||||||
| Land and improvements | $ | 74,908 | $ | 19,368 | |||||||
| Buildings and improvements | 686,293 | 415,530 | |||||||||
| Machinery and equipment | 2,030,892 | 1,651,762 | |||||||||
| Construction in progress | 311,051 | 271,605 | |||||||||
| Finance lease right-of-use asset | 24,999 | 25,000 | |||||||||
| 3,128,143 | 2,383,265 | ||||||||||
| Less accumulated depreciation | (1,217,582) | (1,020,070) | |||||||||
| $ | 1,910,561 | $ | 1,363,195 | ||||||||
During the nine months ended March 31, 2023, as part of the Merger, a fair value step-up in the amount of $145 million was recorded to property, plant and equipment as part of the preliminary purchase price allocation. The step-up will be amortized over the useful lives of the related assets. Refer to Note 3. Coherent Acquisition for further information.
Note 7. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill were as follows ($000):
| Nine Months Ended March 31, 2023 | |||||||||||||||||||||||
| Networking | Materials | Lasers | Total | ||||||||||||||||||||
| Balance-beginning of period | $ | 1,048,743 | $ | 237,016 | $ | — | $ | 1,285,759 | |||||||||||||||
Transfer between segments(1) | (35,466) | 35,466 | — | — | |||||||||||||||||||
| Goodwill acquired | — | — | 3,143,230 | 3,143,230 | |||||||||||||||||||
| Foreign currency translation | (1,271) | 859 | 76,560 | 76,148 | |||||||||||||||||||
| Balance-end of period | $ | 1,012,006 | $ | 273,341 | $ | 3,219,790 | $ | 4,505,137 | |||||||||||||||
(1) Refer to Note 13. Segment Reporting for information regarding the segment transfer of goodwill between segments.
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of March 31, 2023 and June 30, 2022 were as follows ($000):
| March 31, 2023 | June 30, 2022 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||
| Technology | $ | 1,669,863 | $ | (238,908) | $ | 1,430,955 | $ | 473,845 | $ | (144,409) | $ | 329,436 | |||||||||||||||||||||||
| Trade Names | 452,461 | (8,073) | 444,388 | 22,536 | (7,454) | 15,082 | |||||||||||||||||||||||||||||
| Customer Lists | 2,352,969 | (296,873) | 2,056,096 | 464,880 | (173,994) | 290,886 | |||||||||||||||||||||||||||||
| Backlog and Other | 90,072 | (67,313) | 22,759 | 1,563 | (1,563) | — | |||||||||||||||||||||||||||||
| Total | $ | 4,565,365 | $ | (611,167) | $ | 3,954,198 | $ | 962,824 | $ | (327,420) | $ | 635,404 | |||||||||||||||||||||||
Refer to Note 3. Coherent Acquisition for further information on intangibles acquired in the nine months ended March 31, 2023.
16
Note 8. Debt
The components of debt as of the dates indicated were as follows ($000):
| March 31, 2023 | June 30, 2022 | ||||||||||
New Term A Facility, interest at adjusted SOFR, as defined, plus 1.750% | $ | 828,750 | $ | — | |||||||
| Debt issuance costs, New Term A Facility and New Revolving Credit Facility | (19,290) | — | |||||||||
New Term B Facility, interest at adjusted SOFR, as defined, plus 2.750% | 2,676,000 | — | |||||||||
| Debt issuance costs, New Term B Facility | (68,773) | — | |||||||||
1.30% Term loan due 2024 | 66 | — | |||||||||
1.00% State of Connecticut term loan due 2023 | 2,040 | — | |||||||||
| Facility construction loan in Germany due 2030 | 23,126 | — | |||||||||
Existing Term A Facility, interest at LIBOR, as defined, plus 1.375% | — | 995,363 | |||||||||
| Debt issuance costs, Existing Term A Facility and Existing Revolving Credit Facility | — | (18,396) | |||||||||
5.000% Senior Notes | 990,000 | 990,000 | |||||||||
| Debt issuance costs and discount, Senior Notes | (7,086) | (7,703) | |||||||||
0.25% Convertible Senior Notes | — | 341,501 | |||||||||
Debt issuance costs and discount, 0.25% Convertible Senior Notes | — | (339) | |||||||||
| Total debt | 4,424,833 | 2,300,426 | |||||||||
| Current portion of long-term debt | (74,910) | (403,212) | |||||||||
| Long-term debt, less current portion | $ | 4,349,923 | $ | 1,897,214 | |||||||
Senior Credit Facilities
On July 1, 2022 (the “Closing Date”), Coherent entered into a Credit Agreement by and among the Company, as borrower (in such capacity, the “Borrower”), the lenders, and other parties thereto, and JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, which provides for senior secured financing of $4.0 billion, consisting of a term loan A credit facility (“the Term A Facility”), with an aggregate principal amount of $850 million, a term loan B credit facility (“the Term B Facility” and, together with the Term A Facility, the “Term Facilities”), with an aggregate principal amount of $2,800 million, and a revolving credit facility (the “Revolving Credit Facility”), in an aggregate available amount of $350 million, including a letter of credit sub-facility of up to $50 million. On March 31, 2023, Coherent entered into Amendment No. 1 to the Credit Agreement, which replaced the adjusted LIBOR-based rate of interest therein with an adjusted SOFR-based rate of interest. As amended, the Term A Facility and the Revolving Credit Facility each bear interest at an adjusted SOFR rate subject to a 0.10% floor plus a range of 1.75% to 2.50%, based on the Company’s total net leverage ratio. The Term A Facility and the Revolving Credit Facility borrowings bear interest at adjusted SOFR plus 1.75% as of March 31, 2023. As amended, the Term B Facility bears interest at an adjusted SOFR rate (subject to a 0.50% floor) plus 2.75%. In relation to the Term Facilities, the Company incurred interest expense, including amortization of debt issuance costs, of $69 million and $183 million in the three and nine months ended March 31, 2023, respectively, which is included in interest expense in the Condensed Consolidated Statements of Earnings (Loss).
On the Closing Date, the Borrower and certain of its direct and indirect subsidiaries, provided a guaranty of all obligations of the Borrower and the other loan parties under the Credit Agreement and the other loan documents, secured cash management agreements and secured hedge agreements with the lenders and/or their affiliates (subject to certain exceptions). The Borrower and the other guarantors have also granted a security interest in substantially of their assets to secure such obligations.
Proceeds of the loans borrowed under the Term Facilities on July 1, 2022, together with other financing sources (including the net proceeds from Coherent's offer and sale of its 5.000% Senior Notes due 2029 (the “Senior Notes”) and cash on hand) were used to fund the cash portion of the Merger consideration, the repayment of certain indebtedness (including the repayment in full of all amounts outstanding under the Prior Credit Agreement as defined below), and certain fees and expenses in connection with the Merger and otherwise for general corporate purposes.
The Company capitalized approximately $90 million of debt issuance costs during the nine months ended March 31, 2023. These capitalized costs are presented as contra-debt within the long-term debt caption in the Condensed Consolidated Balance Sheet. Amortization of debt issuance costs related to the New Term Facilities for the three and nine months ended March 31, 2023 totaled $5 million and $14 million, respectively, and is included in interest expense in the Condensed Consolidated Statements of Earnings (Loss). As of March 31, 2023, the Company was in compliance with all covenants under the New Term Facilities.
17
Prior Senior Credit Facilities
Through June 30, 2022, the Company had senior credit facilities (the “Prior Senior Credit Facilities”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lenders party thereto.
The credit agreement governing the Senior Credit Facilities (the “Prior Credit Agreement”) provided for senior secured financing of $2.4 billion in the aggregate, consisting of
(i)Aggregate principal amount of $1,255 million for a five-year senior secured first-lien term A loan facility (the “Prior Term A Facility”),
(ii)Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the “Prior Term B Facility” and together with the Prior Term A Facility, the “Prior Term Loan Facilities”), which was repaid in full during the quarter ended September 30, 2020, and
(iii)Aggregate principal amount of $450 million for a five-year senior secured first-lien revolving credit facility (the “Prior Revolving Credit Facility” and together with the Prior Term Loan Facilities, the “Prior Senior Credit Facilities”).
The Prior Credit Agreement also provided for a letter of credit sub-facility not to exceed $25 million and a swing loan sub-facility initially not to exceed $20 million.
On July 1, 2022, the Company terminated the Prior Credit Agreement and repaid all amounts outstanding thereunder, of which $62 million was recorded as current portion of long-term debt and $933 million was recorded as long-term debt at June 30, 2022.
Debt extinguishment costs related to the termination of the Prior Credit Agreement of $17 million were expensed in other expense (income), net in the Condensed Consolidated Statement of Earnings (Loss) during the nine months ended March 31, 2023.
Bridge Loan Commitment
Subject to the terms of an amended and restated commitment letter entered into in connection with Coherent entering into the Merger Agreement, the commitment parties thereto committed to provide, in addition to the Term Facilities and the Revolving Credit Facility, a senior unsecured bridge loan facility in an aggregate principal amount of $990 million (the "Bridge Loan Commitment"). As a result of the issuance and sale of the Senior Notes, the Bridge Loan Commitment was terminated. During the nine months ended March 31, 2023, the Company incurred expenses of $18 million, respectively, related to the termination of the Bridge Loan Commitment, which is included in other expense (income) in the Condensed Consolidated Statements of Earnings (Loss). There will be no additional expense related to the Bridge Loan Commitment going forward.
Debt Assumed through Acquisition
The Company assumed the remaining balances of three term loans with the closing of the Merger. The aggregate principal amount outstanding is $25 million as of March 31, 2023. The terms loans assumed consisted of the following: (i) 1.3% Term Loan due 2024, (ii) 1.0% State of Connecticut Term Loan due 2023, and (iii) Facility construction loan in Germany due 2030. For the Facility construction loan, on December 21, 2020, Coherent LaserSystems GmbH & Co. KG entered into a loan agreement with Commerzbank for borrowings of up to 24 million Euros, which were drawn down by October 29, 2021, to finance a portion of the construction of a new facility in Germany. The term of the loan is 10 years, and borrowings bear interest at 1.55% per annum. Payments are made quarterly.
5.000% Senior Notes due 2029
On December 10, 2021, the Company issued and sold $990 million aggregate principal amount of Senior Notes pursuant to the indenture, dated as of December 10, 2021 (the "Indenture"), between the Company and U.S. Bank National Association, as trustee. The Senior Notes are guaranteed by each of the Company’s domestic subsidiaries that guarantee its obligations under the Senior Credit Facilities. Interest on the Senior Notes is payable on December 15 and June 15 of each year, commencing on June 15, 2022, at a rate of 5.000% per annum. The Senior Notes will mature on December 15, 2029.
18
On or after December 15, 2024, the Company may redeem the Senior Notes, in whole at any time or in part from time to time, at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, at any time prior to December 15, 2024, the Company may redeem the Senior Notes, at its option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus a “make-whole” premium set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. Notwithstanding the foregoing, at any time and from time to time prior to December 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes using the proceeds of certain equity offerings as set forth in the Indenture, at a redemption price equal to 105.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
In relation to the Senior Notes, the Company incurred interest expense of $13 million and $38 million in the three and nine months ended March 31, 2023, respectively, which is included in interest expense in the Condensed Consolidated Statements of Earnings (Loss).
The Indenture contains customary covenants and events of default, including default relating to among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions related to bankruptcy events. As of March 31, 2023, the Company was in compliance with all covenants under the Indenture.
0.25% Convertible Senior Notes due 2022
In August 2017, the Company issued and sold $345 million aggregate principal amount of its 0.25% Convertible Senior Notes due 2022 (the “Convertible Notes”) in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended.
Beginning on June 1, 2022 until the close of business on the business day immediately preceding September 1, 2022 (the “Maturity Date”), holders were able to convert their Convertible Notes at any time. For the fiscal quarter ended September 30, 2022, the holders of the Convertible Notes converted $332 million of principal, which was recorded as current portion of long-term debt at June 30, 2022, and received approximately 7 million shares of Coherent Common Stock in settlement of the conversions.
On the Maturity Date, $4 million aggregate principal amount of Convertible Notes remained outstanding, and was repaid in cash, and the Convertible Notes are no longer outstanding. At the Maturity Date, the accrued interest on the Coherent Convertible Notes was immaterial. The total interest expense related to the Convertible Notes was immaterial for both the three and nine months ended March 31, 2023 and March 31, 2022.
Aggregate Availability
The Company had aggregate availability of $348 million under its Revolving Credit Facility as of March 31, 2023.
Note 9. Income Taxes
The Company’s year-to-date effective income tax rate at March 31, 2023 was 33% compared to an effective tax rate of 18% for the same period in 2022. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21% were due to nondeductible expenses and tax rate differentials between U.S. and foreign jurisdictions.
U.S. GAAP prescribes the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements which includes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of March 31, 2023 and June 30, 2022, the Company’s gross unrecognized income tax benefit, excluding interest and penalties, was $66 million and $37 million, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities, as the amounts are not expected to be paid within one year. If recognized, $27 million of the gross unrecognized tax benefits at March 31, 2023 would impact the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in the income tax provision in the Condensed Consolidated Statements of Earnings (Loss). The amount of accrued interest and penalties included in the gross unrecognized income tax benefit was $6 million and $3 million at March 31, 2023 and June 30, 2022, respectively.
Fiscal years 2019 to 2022 remain open to examination by the Internal Revenue Service, fiscal years 2018 to 2022 remain open to examination by certain state jurisdictions, and fiscal years 2011 to 2022 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination for certain subsidiary companies in California for the years ended September 30, 2018 through September 30, 2019; Colorado for the years ended September 30, 2018 through September 30, 2021; Vietnam for the years ended September 30, 2018 through September 30, 2021; Singapore for the year ended September 30, 2020; and Germany for the years ended September 30, 2011 through September 30, 2020. The Company believes its income tax reserves for these tax matters are adequate.
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Note 10. Leases
We determine if an arrangement is a lease at inception for arrangements with an initial term of more than 12 months, and classify it as either finance or operating.
Finance leases are generally those that allow us to substantially utilize or pay for the entire asset over its estimated useful life. Finance lease assets are recorded in property, plant and equipment, net, and finance lease liabilities within other accrued liabilities and other liabilities on our Condensed Consolidated Balance Sheets. Finance lease assets are amortized in operating expenses on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term, with the interest component for lease liabilities included in interest expense and recognized using the effective interest method over the lease term.
Operating leases are recorded in other assets and operating lease liabilities, current and non-current on the Company’s Condensed Consolidated Balance Sheets. Operating lease assets are amortized on a straight-line basis in operating expenses over the lease term.
The Company’s lease liabilities are recognized based on the present value of the remaining fixed lease payments, over the lease term, using a discount rate of similarly secured borrowings available to the Company. For the purpose of lease liability measurement, the Company considers only payments that are fixed and determinable at the time of commencement. Any variable payments that depend on an index or rate are expensed as incurred. The Company accounts for non-lease components, such as common area maintenance, as a component of the lease, and includes it in the initial measurement of leased assets and corresponding liabilities. The Company’s lease terms and conditions may include options to extend or terminate. An option is recognized when it is reasonably certain that Coherent will exercise that option.
The Company’s lease assets also include any lease payments made and exclude any lease incentives received prior to commencement. Our lease assets are tested for impairment in the same manner as long-lived assets used in operations.
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The following table presents lease costs, which include leases for arrangements with an initial term of more than 12 months, lease term, and discount rates ($000):
| Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2023 | ||||||||||
| Finance lease cost | |||||||||||
| Amortization of right-of-use assets | $ | 417 | $ | 1,250 | |||||||
| Interest on lease liabilities | 279 | 851 | |||||||||
| Total finance lease cost | 696 | 2,101 | |||||||||
| Operating lease cost | 13,324 | 39,817 | |||||||||
| Total lease cost | $ | 14,020 | $ | 41,918 | |||||||
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities | |||||||||||
| Operating cash flows from finance leases | $ | 279 | $ | 851 | |||||||
| Operating cash flows from operating leases | 12,578 | 37,843 | |||||||||
| Financing cash flows from finance leases | 369 | 1,056 | |||||||||
| Weighted-Average Remaining Lease Term (in Years) | |||||||||||
| Finance leases | 8.8 | ||||||||||
| Operating leases | 6.7 | ||||||||||
| Weighted-Average Discount Rate | |||||||||||
| Finance leases | 5.6 | % | |||||||||
| Operating leases | 5.5 | % | |||||||||
| Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2022 | ||||||||||
| Finance Lease Cost | |||||||||||
| Amortization of right-of-use assets | $ | 417 | $ | 1,255 | |||||||
| Interest on lease liabilities | 298 | 907 | |||||||||
| Total finance lease cost | $ | 715 | $ | 2,162 | |||||||
| Operating lease cost | 9,240 | 27,635 | |||||||||
| Sublease income | — | 507 | |||||||||
| Total lease cost | $ | 9,955 | $ | 29,290 | |||||||
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities | |||||||||||
| Operating cash flows from finance leases | $ | 298 | $ | 907 | |||||||
| Operating cash flows from operating leases | 8,899 | 26,565 | |||||||||
| Financing cash flows from finance leases | 332 | 954 | |||||||||
Note 11. Equity and Redeemable Preferred Stock
Mandatory Convertible Preferred Stock
In July 2020, the Company issued 2.3 million shares of Mandatory Convertible Preferred Stock.
Unless previously converted, each outstanding share of Mandatory Convertible Preferred Stock will automatically convert on the Mandatory Conversion Date (as defined in the Statement with Respect to Shares establishing the Mandatory Convertible Preferred Stock) into a number of shares of Coherent Common Stock equal to not more than 4.6512 shares and not less than 3.8760 shares (the “Minimum Conversion Rate”), depending on the applicable market value of the Coherent Common Stock, subject to certain anti-dilution adjustments.
21
Other than in the event of one of certain fundamental changes, a holder of Mandatory Convertible Preferred Stock may, at any time prior to July 1, 2023, elect to convert such holder's shares, in whole or in part, at a Minimum Conversion Rate per share of Mandatory Convertible Preferred Stock, subject to certain anti-dilution adjustments.
If one of certain fundamental changes occurs on or prior to July 1, 2023, holders of the Mandatory Convertible Preferred Stock will have the right to convert their shares of Mandatory Convertible Preferred Stock, in whole or in part, into shares of Coherent Common Stock at the conversion rate determined in accordance with the terms of the Mandatory Convertible Preferred Stock during the period beginning on, and including, the effective date of such change and ending on, and including, the date that is 20 calendar days after the effective date of such fundamental change (or, if later, the date that is 20 calendar days after holders receive notice of such fundamental change, but in no event later than July 1, 2023). Holders who convert their shares of the Mandatory Convertible Preferred Stock during that period will also receive a dividend make-whole amount and, to the extent there is any, the accumulated dividend amount, in each case as calculated in accordance with the terms of the Mandatory Convertible Preferred Stock.
The Company recognized $7 million and $21 million of preferred stock dividends for the three and nine months ended March 31, 2023, respectively, associated with the Mandatory Convertible Preferred Stock. The Company recognized $7 million and $21 million of preferred stock dividends for the three and nine months ended March 31, 2022, respectively, associated with the Mandatory Convertible Preferred Stock. The preferred dividends were presented as a reduction to retained earnings on the Condensed Consolidated Balance Sheet as of March 31, 2023.
The following table presents dividends per share and dividends recognized for the three and nine months ended March 31, 2023 and March 31, 2022:
| Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Dividends per share | $ | 3.00 | $ | 3.00 | $ | 9.00 | $ | 9.00 | |||||||||||||||
| Mandatory Convertible Preferred Stock dividends ($000) | 6,900 | 6,900 | 20,700 | 20,700 | |||||||||||||||||||
Series B-1 Convertible Preferred Stock
In March 2021, the Company issued 75,000 shares of Series B-1 Convertible Preferred Stock, no par value per share ("Series B-1 Preferred Stock").
The shares of Series B-1 Preferred Stock are convertible into shares of Coherent Common Stock as follows:
•at the election of the holder, at an initial conversion price of $85 per share (as it may be adjusted from time to time, the “Conversion Price”) upon the delivery by Coherent to the holders of the Series B-1 Preferred Stock of an offer to repurchase the Series B-1 Preferred Stock upon the occurrence of a Fundamental Change (as defined in the Statement with Respect to Shares establishing the Series B Preferred Stock as defined below); and
•at the election of the Company, any time following March 31, 2024 at the then-applicable Conversion Price if the volume-weighted average price of Coherent Common Stock exceeds 150% of the then-applicable Conversion Price for 20 trading days out of any 30 consecutive trading days.
The issued shares of Series B-1 Preferred Stock currently have voting rights, voting as one class with the Coherent Common Stock and the Series B-2 Preferred Stock (as defined below), on an as-converted basis, subject to limited exceptions.
On or at any time after March 31, 2031:
•each holder has the right to require the Company to redeem all of their Coherent Series B-1 Convertible Preferred Stock, for cash, at a redemption price per share equal to the sum of the Stated Value (as defined in the Statement with Respect to Shares establishing the Series B Preferred Stock) for such shares plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value (such price the “Redemption Price,” and such right the “Put Right”); and
•the Company has the right to redeem, in whole or in part, on a pro rata basis from all holders based on the aggregate number of shares of Series B-1 Preferred Stock outstanding, for cash, at the Redemption Price.
22
In connection with any Fundamental Change (as defined in the Statement with Respect to Shares establishing the Series B Preferred Stock), and subject to the procedures set forth in the Statement with Respect to Shares establishing the Series B Preferred Stock, the Company must, or will cause the survivor of a Fundamental Change to, make an offer to repurchase, at the option and election of the holder thereof, each share of Series B-1 Preferred Stock then-outstanding at a purchase price per share in cash equal to (i) the Stated Value for such shares plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value as of the date of repurchase plus (ii) if prior to March 31, 2026, the aggregate amount of all dividends that would have been paid (subject to certain exceptions), from the date of repurchase through March 31, 2026.
If the Company defaults on a payment obligation with respect to the Series B-1 Preferred Stock and such default is not cured within 30 days, the dividend rate will increase to 8% per annum and will be increased by an additional 2% per annum each quarter the Company remains in default, not to exceed 14% per annum.
The Series B-1 Preferred Stock is redeemable for cash outside of the control of the Company upon the exercise of the Put Right, and upon a Fundamental Change, and is therefore classified as mezzanine equity.
The Series B-1 Preferred Stock is initially measured at fair value less issuance costs, accreted to its redemption value over a 10-year period (using the effective interest method) with such accretion accounted for as deemed dividends and reductions to Net Earnings Available to Common Shareholders.
Series B-2 Convertible Preferred Stock
On July 1, 2022, the Company issued 140,000 shares of Series B-2 Convertible Preferred Stock, no par value per share (“Series B-2 Preferred Stock” and, together with the Series B-1 Preferred Stock, the “Series B Preferred Stock”).
The shares of Series B-2 Preferred Stock are convertible into shares of Coherent Common Stock as follows:
•at the election of the holder the Conversion Price upon the delivery by Coherent to the holders of the Series B-2 Preferred Stock of an offer to repurchase the Coherent Series B-2 Convertible Preferred Stock upon the occurrence of a Fundamental Change (as defined in the Statement with Respect to Shares establishing the Series B Preferred Stock); and
•at the election of the Company, any time following July 1, 2025 at the then-applicable Conversion Price if the volume-weighted average price of Coherent Common Stock exceeds 150% of the then-applicable Conversion Price for 20 trading days out of any 30 consecutive trading days.
The issued shares of Series B-2 Convertible Preferred Stock currently have voting rights, voting as one class with the Coherent Common Stock and the Series B-1 Preferred Stock, on an as-converted basis, subject to limited exceptions.
On or at any time after July 1, 2032:
•each holder has the right to require the Company to redeem all of their Series B-2 Preferred Stock, for cash, at a redemption price per share equal to the sum of the Stated Value for such shares (as defined in the Statement with Respect to Shares establishing the Series B Preferred Stock) plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value (such price the “Redemption Price,” and such right the “Put Right”); and
•the Company has the right to redeem, in whole or in part, on a pro rata basis from all holders based on the aggregate number of shares of Series B-2 Preferred Stock outstanding, for cash, at the Redemption Price.
In connection with any Fundamental Change, and subject to the procedures set forth in the Statement with Respect to Shares establishing the Series B Preferred Stock, the Company must, or will cause the survivor of a Fundamental Change to, make an offer to repurchase, at the option and election of the holder thereof, each share of Series B-2 Preferred Stock then-outstanding at a purchase price per share in cash equal to (i) the Stated Value for such shares plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value as of the date of repurchase plus (ii) if prior to July 1, 2027, the aggregate amount of all dividends that would have been paid (subject to certain exceptions), from the date of repurchase through July 1, 2027.
If the Company defaults on a payment obligation with respect to the Series B-2 Preferred Stock and such default is not cured within 30 days, the dividend rate will increase to 8% per annum and will be increased by an additional 2% per annum each quarter the Company remains in default, not to exceed 14% per annum.
The Series B-2 Preferred Stock is redeemable for cash outside of the control of the Company upon the exercise of the Put Right, and upon a Fundamental Change, and is therefore classified as mezzanine equity.
23
The Series B-2 Preferred Stock is initially measured at fair value less issuance costs, accreted to its redemption value over a 10-year period (using the effective interest method) with such accretion accounted for as deemed dividends and reductions to Net Earnings Available to Common Shareholders.
The Company recognized $29 million and $87 million of preferred stock dividends related to the Series B Preferred Stock for the three and nine months ended March 31, 2023, respectively. The Company recognized $10 million and $30 million of preferred stock dividends related to the Series B Preferred Stock for the three and nine months ended March 31, 2022, respectively. The preferred stock dividends were presented as a reduction to retained earnings on the Condensed Consolidated Balance Sheet as of March 31, 2023.
The following table presents dividends per share and dividends recognized for the three and nine months ended March 31, 2023 and March 31, 2022:
| Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Dividends per share | $ | 136 | $ | 137 | $ | 404 | $ | 403 | |||||||||||||||
| Dividends ($000) | 27,969 | 9,732 | 83,267 | 28,743 | |||||||||||||||||||
| Deemed dividends ($000) | 1,202 | 516 | 3,570 | 1,490 | |||||||||||||||||||
Note 12. Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per common share is computed by dividing the diluted earnings (loss) available to common shareholders by the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. For the three and nine months ended March 31, 2023, as the Company was in a net loss position, no dilution was included in the calculation of earnings (loss) per share.
Potentially dilutive shares whose effect would have been anti-dilutive are excluded from the computation of diluted earnings (loss) per common share. For the three and nine months ended March 31, 2023, diluted earnings (loss) per share excluded the potentially dilutive effect of the performance and restricted shares, calculated based on the average stock price for each fiscal period, using the treasury stock method, as well as the shares of Coherent Common Stock issuable upon conversion of outstanding convertible debt, the Mandatory Convertible Preferred Stock and the Series B Convertible Preferred Stock (under the If-Converted method), as their effects were anti-dilutive.
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The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations for the three and nine months ended March 31, 2023 and March 31, 2022 ($000):
| Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net earnings (loss) | $ | 2,546 | $ | 49,002 | $ | (81,224) | $ | 191,123 | |||||||||||||||
| Deduct Series A preferred stock dividends | (6,900) | (6,900) | (20,700) | (20,700) | |||||||||||||||||||
| Deduct Series B dividends and deemed dividends | (29,171) | (10,248) | (86,837) | (30,233) | |||||||||||||||||||
| Basic earnings (loss) available to common shareholders | $ | (33,525) | $ | 31,854 | $ | (188,761) | $ | 140,190 | |||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Add back interest on Convertible Notes (net of tax) | $ | — | $ | 571 | $ | — | $ | 1,650 | |||||||||||||||
| Diluted earnings (loss) available to common shareholders | $ | (33,525) | $ | 32,425 | $ | (188,761) | $ | 141,840 | |||||||||||||||
| Denominator | |||||||||||||||||||||||
| Weighted average shares | 139,113 | 106,323 | 136,990 | 106,079 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Common stock equivalents | — | 3,296 | — | 3,001 | |||||||||||||||||||
| Convertible Notes | — | 7,330 | — | 7,330 | |||||||||||||||||||
| Diluted weighted average common shares | 139,113 | 116,949 | 136,990 | 116,410 | |||||||||||||||||||
| Basic earnings (loss) per common share | $ | (0.24) | $ | 0.30 | $ | (1.38) | $ | 1.32 | |||||||||||||||
| Diluted earnings (loss) per common share | $ | (0.24) | $ | 0.28 | $ | (1.38) | $ | 1.22 | |||||||||||||||
The following table presents potential shares of Coherent Common Stock excluded from the calculation of diluted earnings (loss) per share as their effect would have been anti-dilutive for the three and nine months ended March 31, 2023 and March 31, 2022 ($000):
| Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Common stock equivalents | 2,416 | 2 | 2,334 | 12 | |||||||||||||||||||
| Convertible Notes | — | — | 1,491 | — | |||||||||||||||||||
| Series A Mandatory Convertible Preferred Stock | 10,697 | 8,915 | 10,331 | 8,915 | |||||||||||||||||||
| Series B Convertible Preferred Stock | 26,511 | 9,217 | 26,185 | 9,105 | |||||||||||||||||||
| Total anti-dilutive shares | 39,624 | 18,134 | 40,341 | 18,032 | |||||||||||||||||||
Note 13. Segment Reporting
The Company reports its business segments using the “management approach” model for segment reporting. This means that the Company determines its reportable business segments based on the way the chief operating decision-maker organizes business segments within the Company for making operating decisions and assessing financial performance.
On July 1, 2022, the Company completed its acquisition of Legacy Coherent. See Note 3. Coherent Acquisition for further information. The operating results of Legacy Coherent are reflected in the Lasers segment.
Effective July 1, 2022, the Company reports its financial results in the following three segments: (i) Networking, (ii) Materials, and (iii) Lasers. Previously, financial results had been reported in the following two segments: (i) Photonic Solutions and (ii) Compound Semiconductors. The Networking segment represents the former Photonic Solutions segment and the Materials segment represents the former Compound Semiconductors segment.
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The Company’s chief operating decision maker receives and reviews financial information based on these three segments. The Company evaluates business segment performance based upon segment operating income, which is defined as earnings before income taxes, interest and other income or expense. The segments are managed separately due to the market, production requirements and facilities unique to each segment.
The accounting policies are consistent across each segment. To the extent possible, the Company’s corporate expenses and assets are allocated to the segments. The expenses associated with the Legacy Coherent acquisition for the three and nine months ended March 31, 2023 are wholly allocated to the Lasers segment. For the three and nine months ended March 31, 2022, the expenses associated with the acquisition of Legacy Coherent were not allocated to an operating segment, and were presented in Unallocated and Other. In addition, prior year numbers were recast to reflect the transfer of two entities between the Networking and Materials segments.
The following tables summarize selected financial information of the Company’s operations by segment ($000):
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||
| Networking | Materials | Lasers | Unallocated & Other | Total | |||||||||||||||||||||||||
| Revenues | $ | 551,099 | $ | 323,769 | $ | 365,326 | $ | — | $ | 1,240,194 | |||||||||||||||||||
| Inter-segment revenues | 17,759 | 96,604 | 317 | (114,680) | — | ||||||||||||||||||||||||
| Operating income (loss) | 49,476 | 67,826 | (49,914) | — | 67,388 | ||||||||||||||||||||||||
| Interest expense | — | — | — | — | (75,183) | ||||||||||||||||||||||||
| Other income (expense), net | — | — | — | — | 3,048 | ||||||||||||||||||||||||
| Income tax benefit | — | — | — | — | 7,293 | ||||||||||||||||||||||||
| Net earnings | — | — | — | — | 2,546 | ||||||||||||||||||||||||
| Depreciation and amortization | 41,369 | 29,242 | 90,330 | — | 160,941 | ||||||||||||||||||||||||
| Expenditures for property, plant & equipment | 6,441 | 78,666 | 12,038 | — | 97,145 | ||||||||||||||||||||||||
| Segment assets | 3,435,816 | 2,275,614 | 8,406,202 | — | 14,117,632 | ||||||||||||||||||||||||
| Goodwill | 1,012,006 | 273,341 | 3,219,790 | — | 4,505,137 | ||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||
| Networking | Materials | Unallocated & Other | Total | ||||||||||||||||||||
| Revenues | $ | 559,560 | $ | 268,164 | $ | — | $ | 827,724 | |||||||||||||||
| Inter-segment revenues | 23,945 | 59,345 | (83,290) | — | |||||||||||||||||||
| Operating income (loss) | 54,618 | 61,754 | (9,604) | 106,768 | |||||||||||||||||||
| Interest expense | — | — | — | (43,499) | |||||||||||||||||||
| Other income (expense), net | — | — | — | (241) | |||||||||||||||||||
| Income taxes | — | — | — | (14,027) | |||||||||||||||||||
| Net earnings | — | — | — | 49,002 | |||||||||||||||||||
| Depreciation and amortization | 44,126 | 28,691 | — | 72,817 | |||||||||||||||||||
| Expenditures for property, plant & equipment | 18,363 | 75,939 | — | 94,302 | |||||||||||||||||||
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| Nine Months Ended March 31, 2023 | |||||||||||||||||||||||||||||
| Networking | Materials | Lasers | Unallocated & Other | Total | |||||||||||||||||||||||||
| Revenues | $ | 1,756,327 | $ | 1,061,809 | $ | 1,136,913 | $ | — | $ | 3,955,049 | |||||||||||||||||||
| Inter-segment revenues | 54,129 | 277,502 | 1,400 | (333,031) | — | ||||||||||||||||||||||||
| Operating income (loss) | 230,497 | 224,633 | (337,020) | — | 118,110 | ||||||||||||||||||||||||
| Interest expense | — | — | — | — | (207,976) | ||||||||||||||||||||||||
| Other income (expense), net | — | — | — | — | (32,253) | ||||||||||||||||||||||||
| Income tax benefit | — | — | — | — | 40,895 | ||||||||||||||||||||||||
| Net earnings | — | — | — | — | (81,224) | ||||||||||||||||||||||||
| Depreciation and amortization | 124,384 | 83,804 | 269,948 | — | 478,136 | ||||||||||||||||||||||||
| Expenditures for property, plant & equipment | 80,654 | 215,038 | 47,307 | — | 342,999 | ||||||||||||||||||||||||
| Nine Months Ended March 31, 2022 | |||||||||||||||||||||||
| Networking | Materials | Unallocated & Other | Total | ||||||||||||||||||||
| Revenues | $ | 1,607,114 | $ | 822,540 | $ | — | $ | 2,429,654 | |||||||||||||||
| Inter-segment revenues | 80,666 | 199,202 | (279,868) | — | |||||||||||||||||||
| Operating income (loss) | 164,481 | 165,071 | (29,511) | 300,041 | |||||||||||||||||||
| Interest expense | — | — | — | (72,752) | |||||||||||||||||||
| Other income (expense), net | — | — | — | 5,535 | |||||||||||||||||||
| Income taxes | — | — | — | (41,701) | |||||||||||||||||||
| Net earnings | — | — | — | 191,123 | |||||||||||||||||||
| Depreciation and amortization | 128,504 | 85,031 | — | 213,535 | |||||||||||||||||||
| Expenditures for property, plant & equipment | 53,779 | 142,211 | — | 195,991 | |||||||||||||||||||
Note 14. Share-Based Compensation
Stock Award Plans
The Company’s Board of Directors amended and restated the Coherent Corp. 2018 Omnibus Incentive Plan, which originally was approved by the Company's shareholders at the Annual Meeting in November 2018 (as amended and restated, the "Plan"). The Plan was approved by the Company's shareholders at the Annual Meeting in November 2020. The Plan provides for the grant of non-qualified stock options, stock appreciation rights, restricted shares, restricted share units, deferred shares, performance shares and performance share units to employees, officers and directors of the Company. The maximum number of shares of Coherent Common Stock authorized for issuance under the Plan is limited to 9,550,000 shares of Coherent Common Stock, not including any remaining shares forfeited under the predecessor plans that may be rolled into the Plan. The Plan has vesting provisions predicated upon the death, retirement or disability of the grantee.
On the Closing Date, the Company assumed 403,675 Legacy Coherent restricted stock units ("Converted RSUs"). The Converted RSUs are generally subject to the same terms and conditions that applied to the RSUs immediately prior to the Closing Date. Other than the assumed Converted RSUs, Coherent did not assume any other awards outstanding under Legacy Coherent equity incentive plans. On the Closing Date, Coherent assumed the unused capacity under Legacy Coherent equity incentive plan, which totaled 10,959,354 shares of issuable Coherent Common Stock.
Share-based compensation expense for the periods indicated was as follows ($000):
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Stock Options and Cash-Based Stock Appreciation Rights | $ | 767 | $ | 1,635 | $ | 927 | $ | 4,107 | ||||||||||||||||||
| Restricted Share Awards and Cash-Based Restricted Share Unit Awards | 29,533 | 13,317 | 103,003 | 44,449 | ||||||||||||||||||||||
| Performance Share Awards and Cash-Based Performance Share Unit Awards | 2,936 | 2,614 | 13,267 | 8,380 | ||||||||||||||||||||||
| $ | 33,236 | $ | 17,566 | $ | 117,197 | $ | 56,936 | |||||||||||||||||||
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Note 15. Fair Value of Financial Instruments
The FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous markets for the asset and liability in an orderly transaction between market participants at the measurement date. The Company estimates fair value of its financial instruments utilizing an established three-level hierarchy in accordance with U.S. GAAP. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:
•Level 1 –Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.
•Level 2 –Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments.
•Level 3 –Valuation is based upon other unobservable inputs that are significant to the fair value measurements.
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.
The Company entered into an interest rate swap with a notional amount of $1,075 million to limit the exposure to its variable interest rate debt by effectively converting it to a fixed interest rate. Through February 28, 2023, the Company received payments based on the one-month LIBOR and made payments based on a fixed rate of 1.52%. The Company received payments with a floor of 0.00%. The interest rate swap agreement had an effective date of November 24, 2019, with an expiration date of September 24, 2024. The initial notional amount of the interest rate swap was decreased to $825 million in June 2022 and will remain at that amount through the expiration date. On March 20, 2023, the Company amended its $825 million interest rate swap ("Amended Swap"), effective as of February 28, 2023, to replace the current reference rate (LIBOR) with SOFR, to be consistent with the amended credit agreement. See Note 8. Debt for further information. Under the Amended Swap, the Company receives payments based on the one-month SOFR and makes payments based on a fixed rate of 1.42%. The Company receives payments with a floor of 0.10%. The Company designated this instrument as a cash flow hedge and deemed the hedge relationship effective at inception of the contract and amended contract.
The fair value of the interest rate swap of $ is recognized in the Condensed Consolidated Balance Sheet within prepaid and other current assets and other assets as of March 31, 2023. Changes in fair value are recorded within accumulated other comprehensive income (loss) on the Condensed Consolidated Balance Sheet and reclassified into the Condensed Consolidated Statement of Earnings (Loss) as interest expense in the period in which the underlying transaction affects earnings. Cash flows from hedging activities are reported in the Condensed Consolidated Statements of Cash Flows in the same classification as the hedged item, generally as a component of cash flows from operations. The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The interest rate swap is classified as a Level 2 item within the fair value hierarchy.
On February 23, 2022, the Company entered into an interest rate cap ("the Cap") with an effective date of July 1, 2023. On March 20, 2023, the Company amended the Cap to replace the current reference rate (LIBOR) with SOFR, to be consistent with the amended credit agreement. See Note 8. Debt for further information. The Cap manages the Company's exposure to interest rate movements on a portion of the Company's floating rate debt. The Cap provides the Company with the right to receive payment if one-month SOFR exceeds 1.92%. Beginning in July 2023, the Company will begin to pay a fixed monthly premium based on an annual rate of 0.853% for the Cap. The Cap will carry a notional amount ranging from $500 million to $1,500 million. The fair value of the interest rate cap of $ million is recognized in the Condensed Consolidated Balance Sheet within prepaid and other current assets and other assets as of March 31, 2023.
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The Cap, as amended, is designed to mirror the terms of the Credit Agreement as amended on March 31, 2023. The Company designated the Cap as a cash flow hedge of the variability of the SOFR based interest payments on the Term Loan Facilities. Every period over the life of the hedging relationship, the entire change in fair value related to the hedging instrument will first be recorded within accumulated other comprehensive income (loss). Amounts accumulated in accumulated other comprehensive income (loss) will be reclassified into interest expense in the same period or periods in which interest expense is recognized on the Credit Agreement, or its direct replacement. The fair value of the Cap is determined using widely accepted valuation techniques and reflects the contractual terms of the Cap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves. The Cap is classified as a Level 2 item within the fair value hierarchy.
The Company estimated the fair value of the Senior Notes based on quoted market prices as of the last trading day prior to March 31, 2023; however, the Senior Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the Senior Notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the Senior Notes is net of unamortized discount and issuance costs. See Note 8. Debt for details on the Company’s debt facilities.
The fair value and carrying value of the Convertible Notes and Senior Notes were as followed ($000):
| March 31, 2023 | June 30, 2022 | ||||||||||||||||||||||
| Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||||||||||
| Convertible Notes | $ | — | $ | — | $ | 382,601 | $ | 341,162 | |||||||||||||||
| Senior Notes | $ | 901,326 | $ | 982,914 | $ | 865,527 | $ | 982,297 | |||||||||||||||
The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because of the short-term maturity of those instruments. The Company’s borrowings including its lease obligations and the Senior Notes, are considered Level 2 among the fair value hierarchy and their principal amounts approximate fair value.
The Company, from time to time, purchases foreign currency forward exchange contracts that permit it to transact specified amounts of these foreign currencies for pre-established U.S. dollar amounts at specified dates that represent assets or liabilities on the balance sheets of certain subsidiaries. These contracts are entered into for the purpose of limiting translational exposure to changes in currency exchange rates and which otherwise would expose the Company's earnings, on the revaluation of its aggregate net assets or liabilities in respective currencies, to foreign currency risk. At March 31, 2023, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts. Realized gains related to these contracts for the three and nine months ended March 31, 2023 were $0 million and $5 million, respectively, and were included in other expense (income), net in the Condensed Consolidated Statements of Earnings (Loss).
Note 16. Share Repurchase Programs
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of Coherent Common Stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. The Company did not repurchase any shares pursuant to this Program during the quarter ended March 31, 2023. As of March 31, 2023, the Company has cumulatively purchased 1,416,587 shares of Coherent Common Stock pursuant to the Program for approximately $22 million. The dollar value of shares as of March 31, 2023 that may yet be purchased under the Program is approximately $28 million.
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Note 17. Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income (loss) (“AOCI”) by component, net of tax, for the nine months ended March 31, 2023 were as follows ($000):
| Foreign Currency Translation Adjustment | Interest Rate Swap | Interest Rate Cap | Defined Benefit Pension Plan | Total Accumulated Other Comprehensive Income | |||||||||||||||||||||||||
AOCI - June 30, 2022 | $ | (34,572) | $ | 11,735 | $ | 14,306 | $ | 6,364 | $ | (2,167) | |||||||||||||||||||
| Other comprehensive income before reclassifications | 157,805 | 17,895 | 7,646 | 1,151 | 184,497 | ||||||||||||||||||||||||
| Amounts reclassified from AOCI | — | (11,876) | — | — | (11,876) | ||||||||||||||||||||||||
| Net current-period other comprehensive income | 157,805 | 6,019 | 7,646 | 1,151 | 172,621 | ||||||||||||||||||||||||
| AOCI - March 31, 2023 | $ | 123,233 | $ | 17,754 | $ | 21,952 | $ | 7,515 | $ | 170,454 | |||||||||||||||||||
Note 18. Subsequent Events
On May 10, 2023, the Company announced that it plans to take certain additional restructuring actions that will run through the end of fiscal year 2025 (the "Plan") in light of the macro conditions and its ongoing efforts to make the Company more efficient. The Plan includes certain restructuring actions including workforce reductions to reduce costs and expenses as well as site consolidations, including the relocation of certain manufacturing facilities, to increase its resiliency and lower its costs. We anticipate incurring approximately $150 million to $200 million of restructuring and other non-recurring costs to reduce the workforce and relocate facilities, among others, in connection with the Plan.
On May 10, 2023, the Company announced that it has commenced a review of strategic alternatives for its Silicon Carbide “SiC” business. The Company expects to consider a range of strategic alternatives including a minority investment in the SiC business by a strategic or financial partner, joint venture, and/or a sale of the SiC business.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of Coherent’s financial statements with a narrative from the perspective of management. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included under Item 1 of this quarterly report. Coherent’s MD&A is presented in eight sections:
•Forward-Looking Statements
•Overview
•Acquisition and Background of Coherent, Inc.
•Critical Accounting Estimates
•Transfer to the New York Stock Exchange
•Subsequent Events
•Results of Operations
•Liquidity and Capital Resources
Forward-looking statements in Item 2 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to Part II Item 1A for discussion of these risks and uncertainties).
Forward-Looking Statements
Certain statements contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “intends,” “believes,” “plans,” “projects” or similar expressions.
Although our management considers the expectations and assumptions on which the forward-looking statements in this Quarterly Report on Form 10-Q are based to have a reasonable basis, there can be no assurance that management’s expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct. In addition to general industry and global economic conditions, factors that could cause actual results to differ materially from those discussed in the forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to: (i) the failure of any one or more of the expectations or assumptions on which such forward-looking statements are based to prove to be correct; and (ii) the risks relating to forward-looking statements and other “Risk Factors” discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022 and in the Company's other reports filed with the Securities and Exchange Commission. The Company disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or developments, or otherwise.
In addition, we operate in a highly competitive and rapidly changing environment; new risk factors can arise, and it is not possible for management to anticipate all such risk factors, or to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. The forward-looking statements included in this Quarterly Report on Form 10-Q are based only on information currently available to us and speak only as of the date of this Report. We do not assume any obligation, and do not intend, to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the securities laws. Investors should, however, consult any further disclosures of a forward-looking nature that the Company may make in its subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, or other disclosures filed with or furnished to the SEC.
Investors should also be aware that, while the Company does communicate with securities analysts from time to time, such communications are conducted in accordance with applicable securities laws. Investors should not assume that the Company agrees with any statement, conclusion of any analysis, or report issued by any analyst irrespective of the content of the statement or report.
Overview
Coherent Corp. (“Coherent”, the “Company,” “we,” “us” or “our”), a global leader in materials, networking and lasers, is a vertically integrated manufacturing company that develops, manufactures and markets engineered materials, optoelectronic components and devices, and lasers for use in industrial materials processing, optical communications, aerospace and defense, consumer electronics, semiconductor capital equipment, medical diagnostics and life sciences, automotive applications, machine tools, consumer goods and medical device manufacturing. Headquartered in Saxonburg, Pennsylvania, Coherent has research and development, manufacturing, sales, service, and distribution facilities worldwide. Coherent produces a wide variety of lasers, along with application-specific photonic and electronic materials and components, and deploys them in various forms, including integrated with advanced software to enable its customers.
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The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing a broad portfolio of products for our end markets. We also generate revenue, earnings and cash flows from government-funded research and development contracts relating to the development and manufacture of new technologies, materials and products.
Our customer base includes original equipment manufacturers, laser end users, system integrators of high-power lasers, manufacturers of equipment and devices for industrial, optical communications, consumer electronics, security and monitoring applications, U.S. government prime contractors, and various U.S. government agencies.
As we grow, we are focused on scaling our Company and deriving the continued benefits of vertical integration as we strive to be a best in class competitor in all of our highly competitive markets. The Company may elect to change the way in which the Company operates or is organized in the future to enable the most efficient implementation of our strategy.
Acquisition and Background of Coherent, Inc.
The acquisition of Coherent, Inc. (“Legacy Coherent”), one of the world's leading providers of laser and optics-based product solutions, closed on July 1, 2022. For the full fiscal year 2023, Legacy Coherent will be included in the combined company and rebranded as the Lasers Segment. Legacy Coherent’s lasers and optics products serve industrial customers in semiconductor and display capital equipment, precision manufacturing and aerospace & defense, as well as instrumentation customers in life science and scientific instrumentation.
Legacy Coherent delivers systems to the world's leading brands, innovators, and researchers, all backed with a global service and support network. Since inception in 1966, Legacy Coherent has grown through internal organic expansion and through strategic acquisitions of complementary businesses, technologies, intellectual property, manufacturing processes, and product offerings.
The word "laser" is an acronym for "light amplification by stimulated emission of radiation." Lasers emit an intense output of light with unique and highly useful properties, of which its near perfect collimation (beam like property) is the most commonly known, as well usually being highly monochromatic at a precise wavelength (color). The name Coherent originates from another key property which is related to the synchronization of the phase of the light oscillations, known as coherence. Therefore, lasers are many orders of magnitude brighter than any other optical source. Lasers also have the ability to be pulsed at almost any repetition rate, even beyond a billion times per second, and are the technology which underpins the global fiber optic communications network, as well as producing the shortest man-made pulses of any technology known.
As a result of their highly collimated beams, the light can be focused to a very small and intense spot or line, useful for applications requiring enough power to modify the target material, with very high precision through processes such as heat treating (annealing), welding or cutting almost any material. The laser's high spatial resolution is also useful for microscopic imaging and inspection applications, where the laser light is essentially a highly precise illumination source. These applications typically operate at lower powers, so as not to alter the physical property of the target material.
Lasers can produce the lasing action in the form of a gas, liquid, semiconductor, solid state crystal or fiber. Lasers can also be classified by their output wavelength: ultraviolet, visible, infrared or wavelength tunable. Legacy Coherent manufactures all of these laser types, in various options such as continuous wave, pulse duration, output power, and beam dimensions. Each application has its own specific requirements in terms of laser performance.
Legacy Coherent's key laser applications include: semiconductor wafer inspection; manufacturing of advanced printed circuit boards; flat panel display manufacturing; metal cutting and welding, including welding of electric vehicle batteries; manufacturing of medical devices; marking; medical; bio-instrumentation and imaging; and research and development. For example, UV lasers are enabling the continuous move towards miniaturization, which drives innovation and growth in many markets. In addition, the advent of industrial grade ultrafast lasers continues to open up new applications for laser processing.
Legacy Coherent's products are manufactured at sites in California, Oregon, Michigan, New Jersey, and Connecticut in the United States; Germany, Scotland, Finland, Sweden, Switzerland, and Spain in Europe; and South Korea, Singapore, and Malaysia in Asia. In addition, Legacy Coherent uses contract manufacturers in southeast Asia, Eastern Europe and the United States for the production of certain assemblies and turnkey solutions.
Critical Accounting Estimates
The preparation of financial statements and related disclosures are in conformity with accounting principles generally accepted in the United States of America and the Company’s discussion and analysis of its financial condition and results of operations require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes.
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Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K dated August 29, 2022 describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Starting in the three months ended September 30, 2022, we assessed business combinations to be one of our critical accounting policies.
Business Combinations. Business combinations are accounted for using the purchase method of accounting. As such, assets acquired, including identified intangible assets, and liabilities assumed are recorded at their fair value, which often involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective.
New Accounting Standards
See Note 2. Recently Issued Financial Accounting Standards to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.
Transfer to New York Stock Exchange
On February 8, 2023, the Company announced the voluntary transfer of the listing of its common stock, no par value ("Coherent Common Stock") and Series A Mandatory Convertible Preferred Stock. no par value ("Mandatory Convertible Preferred Stock") from the NASDAQ Global Select Market to the New York Stock Exchange (the “NYSE”), effective as of the close of trading on February 22, 2023. The Coherent Common Stock and Mandatory Convertible Preferred Stock began trading on the NYSE February 23, 2023, under the ticker symbols “COHR” and “IIVI”, respectively.
Subsequent Events
On May 10, 2023, the Company announced that it plans to take certain additional restructuring actions that will run through the end of fiscal year 2025 (the "Plan") in light of the macro conditions and its ongoing efforts to make the Company more efficient. The Plan includes certain restructuring actions including workforce reductions to reduce costs and expenses as well as site consolidations, including the relocation of certain manufacturing facilities, to increase its resiliency and lower its costs. We anticipate incurring approximately $150 million to $200 million of restructuring and other non-recurring costs to reduce the workforce and relocate facilities, among others, in connection with the Plan.
On May 10, 2023, the Company announced that it has commenced a review of strategic alternatives for its Silicon Carbide “SiC” business. The Company expects to consider a range of strategic alternatives including a minority investment in the SiC business by a strategic or financial partner, joint venture, and/or a sale of the SiC business.
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Results of Operations ($ in millions, except per share data)
The following tables set forth select items from our Condensed Consolidated Statements of Earnings (Loss) for the three and nine months ended March 31, 2023 and 2022 ($ in millions):
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||||||||||||||||||
| % of Revenues | % of Revenues | ||||||||||||||||||||||
| Total revenues | $ | 1,240 | 100 | % | $ | 828 | 100 | % | |||||||||||||||
| Cost of goods sold | 820 | 66 | 506 | 61 | |||||||||||||||||||
| Gross margin | 420 | 34 | 322 | 39 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Internal research and development | 126 | 10 | 97 | 12 | |||||||||||||||||||
| Selling, general and administrative | 226 | 18 | 118 | 14 | |||||||||||||||||||
| Interest and other, net | 72 | 6 | 44 | 5 | |||||||||||||||||||
| Earnings (loss) before income taxes | (5) | — | % | 63 | 8 | ||||||||||||||||||
| Income taxes | (7) | (1) | % | 14 | 2 | ||||||||||||||||||
| Net earnings (loss) | $ | 3 | — | % | $ | 49 | 6 | % | |||||||||||||||
| Diluted earnings (loss) per share | $ | (0.24) | $ | 0.28 | |||||||||||||||||||
| Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | ||||||||||||||||||||||
| % of Revenues | % of Revenues | ||||||||||||||||||||||
| Total revenues | $ | 3,955 | 100 | % | $ | 2,430 | 100 | % | |||||||||||||||
| Cost of goods sold | 2,680 | 68 | 1,490 | 61 | |||||||||||||||||||
| Gross margin | 1,275 | 32 | 940 | 39 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Internal research and development | 376 | 10 | 281 | 12 | |||||||||||||||||||
| Selling, general and administrative | 781 | 20 | 358 | 15 | |||||||||||||||||||
| Interest and other, net | 240 | 6 | 67 | 3 | |||||||||||||||||||
| Earnings (loss) before income taxes | (122) | (3) | % | 233 | 10 | ||||||||||||||||||
| Income taxes | (41) | (1) | % | 42 | 2 | ||||||||||||||||||
| Net earnings (loss) | $ | (81) | (2) | % | $ | 191 | 8 | % | |||||||||||||||
| Diluted earnings (loss) per share | $ | (1.38) | $ | 1.22 | |||||||||||||||||||
Consolidated
Revenues. Revenues for the three months ended March 31, 2023 increased 50% to $1,240 million, compared to $828 million for the same period last fiscal year. Revenues for the nine months ended March 31, 2023 increased 63% to $3,955 million, compared to $2,430 million for the same period last fiscal year. The majority of the increase in revenue for both the three and nine months ended March 31, 2023 is driven by the Lasers segment, which was acquired in our acquisition of Legacy Coherent. The remaining contributions to the increased revenues were from the Materials segment in the three months ended March 31, 2023 and from both the Materials and Networking segments in the nine months ended March 31, 2023. Lasers revenue for the three months ended March 31, 2023 was $365 million, of which 72% was in the industrial end market and 28% in the instrumentation end market. Lasers revenue for the nine months ended March 31, 2023 was $1,137 million, of which 74% was in the industrial end market and 26% in the instrumentation end market.
Organic revenue growth was $47 million, or 6%, year-over-year for the three months ended March 31, 2023. Materials contributed $56 million of this organic growth year-over-year, with $76 million growth in the electronics end market from innovations in sensing products, partially offset by softer sales from the communications, industrial and instrumentation end markets. Networking decreased $8 million year-over-year, with decreases from our communications end market.
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Organic revenue growth was $388 million, or 16%, year-over-year for the nine months ended March 31, 2023. Materials contributed $239 million of this organic growth year-over-year, with $289 million growth in the electronics end market from innovations in sensing products, partially offset by softer sales from the industrial end market. Networking increased $149 million year-over-year, with growth in both telecom and datacom.
Gross margin. Gross margin for the three months ended March 31, 2023 was $420 million, or 34% of total revenues, compared to $322 million, or 39% of total revenues, for the same period last fiscal year, a decrease of 500 basis points. The decrease as a percent of revenue for the three months ended March 31, 2023 included $21 million of incremental amortization expense related to technology acquired as a result of the Merger. Gross margins excluding the incremental amortization decreased 327 basis points for the three months ended March 31, 2023 compared to the prior year period primarily due to lower revenues, less favorable mix of revenues, underutilized operating capacity in several plants, and the unfavorable foreign exchange rates.
Gross margin for the nine months ended March 31, 2023 increased to $1,275 million, or 32% of total revenues, compared to $940 million, or 39% of total revenues, for the same period last fiscal year, and decreased as a percent of revenue year-over-year by 650 basis points. The decrease as a percent of revenue for the nine months ended March 31, 2023 was driven by $158 million of additional expense related to the preliminary fair value adjustment on acquired inventory from the acquisition of Legacy Coherent (“Merger”), as well as $64 million of incremental amortization expense related to technology acquired as a result of the Merger. Gross margins excluding the fair value adjustment on acquired inventory and incremental amortization decreased 82 basis points for the nine months ended March 31, 2023 compared to the prior year period.
Internal research and development. Internal research and development (“IR&D”) expenses for the three months ended March 31, 2023 were $126 million, or 10% of revenues, compared to $97 million, or 12% of revenues, for the same period last fiscal year. IR&D for the nine months ended March 31, 2023 increased 34% to $376 million, or 10% of revenues, compared to $281 million, or 12% of revenues, for the same period last fiscal year. The increase for the three and nine months ended March 31, 2023 was driven by an additional $34 million and $96 million, respectively, of IR&D expenses from the Lasers segment. As a percent of sales, IR&D spend in the Materials segment decreased 5% for each of the three and nine month periods ended March 31, 2023 compared to the prior year periods due to the launch of new products.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2023 were $226 million, or 18% of revenues, compared to $118 million, or 14% of revenues, for the same period last fiscal year. SG&A expenses for the nine months ended March 31, 2023 were $781 million, or 20% of revenues, compared to $358 million, or 15% of revenues, for the same period last fiscal year. The increase in SG&A as a percentage of revenue for the three months ended March 31, 2023 compared to the same period last fiscal year was the result of the comparatively larger sales and administrative efforts required to sell an entire laser system versus components and subsystems, as well as incremental amortization expense of $52 million. The increase in SG&A as a percentage of revenue for the nine months ended March 31, 2023 compared to the same period last fiscal year was the result of the comparatively larger sales and administrative efforts required to sell an entire laser system versus components and subsystems, incremental amortization expense of $156 million and higher one time-charges related to the Merger of $79 million for integration, share-based compensation, and transaction fees.
Interest and other, net. Interest and other, net for the three months ended March 31, 2023 was expense of $72 million, compared to expense of $44 million for the same period last fiscal year, an increase of $28 million. Included in interest and other, net, were interest expense on borrowings, equity gains and losses from unconsolidated investments, foreign currency gains and losses, amortization of debt issuance costs, and interest income on excess cash balances. For the three months ended March 31, 2023, the increase of $28 million in comparison to the same period last fiscal year was driven by $32 million of incremental interest expense due to the new debt assumed in the financing of the Merger partially offset by $2 million incremental interest income. Interest and other, net for the nine months ended March 31, 2023 was expense of $240 million, compared to expense of $67 million for the same period last fiscal year, an increase of $173 million. The increase of $173 million in comparison to the same period last fiscal year was driven by $135 million incremental interest expense due to the new debt assumed in the financing of the Merger, $35 million incurred in the current year related to financing of the Merger and $9 million incremental net foreign currency losses, with a foreign currency loss of $4 million for the nine months ended March 31, 2022 as compared to a foreign currency gain of $5 million for the current nine-month period. The increases were partially offset by $4 million of incremental interest income.
Income taxes. The Company’s year-to-date effective income tax rate at March 31, 2023 was 33% compared to an effective tax rate of 18% for the same period in 2022. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21% were due to nondeductible expenses and tax rate differentials between U.S. and foreign jurisdictions.
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Segment Reporting
Revenues and operating income for the Company’s reportable segments are discussed below. Operating income differs from net earnings in that operating income excludes certain operational expenses included in other expense (income) – net as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance. See Note 13. Segment Reporting, to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the Company’s reportable segments and for the reconciliation of the Company’s operating income to net earnings, which is incorporated herein by reference. Effective July 1, 2022, the Company is reporting its financial results in the following three designated segments: (i) Materials, (ii) Networking, and (iii) Lasers. Financial results in prior years had been reported in the following two segments: (i) Compound Semiconductors, and (ii) Photonic Solutions. The Materials segment represents the former Compound Semiconductors segment and the Networking segment represents the former Photonic Solutions segment. The Lasers segment represents Legacy Coherent. In addition, prior year numbers were recast to reflect the transfer of two entities between the Networking and Materials segments.
Networking ($ in millions)
| Three Months Ended March 31, | % Increase | Nine Months Ended March 31, | % Increase | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 551 | $ | 560 | (2)% | $ | 1,756 | $ | 1,607 | 9% | |||||||||||||||||||||||||
| Operating income | $ | 49 | $ | 55 | (9)% | $ | 230 | $ | 164 | 40% | |||||||||||||||||||||||||
Revenues for the three months ended March 31, 2023 decreased 2% to $551 million, compared to $560 million for the same period last fiscal year. Revenues for the nine months ended March 31, 2023 increased 9% to $1,756 million, compared to $1,607 million for the same period last fiscal year. The decrease in revenue of $8 million during the three months ended March 31, 2023 was primarily due to decreases in the communications market driven by decreased revenues in the communications end market. The increase in revenues of $149 million during the nine months ended March 31, 2023 was primarily due to increased revenue year-over-year in the communications market.
Operating income for the three months ended March 31, 2023 decreased 9% to $49 million, compared to operating income of $55 million for the same period last fiscal year. Operating income for the nine months ended March 31, 2023 increased 40% to $230 million, compared to operating income of $164 million for the same period last fiscal year. The decrease in operating income for the three months ended months ended March 31, 2023 was driven by lower sales and the unfavorable impact of foreign exchange rates partially offset by lower variable compensation costs and the leveraging of corporate resources across each of our three segments. The increase in operating income for the nine months ended March 31, 2023 was driven by strong sales, lower variable compensation costs and the leveraging of corporate resources across each of our three segments.
Materials ($ in millions)
| Three Months Ended March 31, | % Increase (Decrease) | Nine Months Ended March 31, | % Increase (Decrease) | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 324 | $ | 268 | 21% | $ | 1,062 | $ | 823 | 29% | |||||||||||||||||||||||||
| Operating income | $ | 68 | $ | 62 | 10% | $ | 225 | $ | 165 | 36% | |||||||||||||||||||||||||
Revenues for the three months ended March 31, 2023 increased 21% to $324 million, compared to revenues of $268 million for the same period last fiscal year. Compared to the three months ended March 31, 2022, Materials contributed an additional $56 million year-over-year, with $76 million growth in the electronics end market for consumer products and electric vehicles as well as in semiconductor equipment. The growth was partially offset by softer revenues in datacom and precision manufacturing markets. Revenues for the nine months ended March 31, 2023 increased 29% to $1,062 million, compared to revenues of $823 million for the same period last fiscal year. The increase in revenues of $239 million during the nine months ended March 31, 2023 was primarily related to the increase in demand in the electronics end market from innovations in sensing products.
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Operating income for the three months ended March 31, 2023 increased 10% to $68 million, compared to operating income of $62 million for the same period last fiscal year, primarily driven by strong sales in electronics markets and lower costs for reliance on corporate resources for some services. The margin percentage was lower than the three months ended March 31, 2022 due to mix and variations in demand across the operations. Operating income for the nine months ended March 31, 2023 increased 36% to $225 million, compared to $165 million of operating income for the same period last fiscal year. The increase in operating income for the nine months ended March 31, 2023 was driven by strong sales in electronics markets, partially offset by slower sales in industrial markets. The margin percentage was lower than the nine months ended March 31, 2022 due to mix and variations in demand across the operations.
Lasers ($ in millions)
| Three Months Ended March 31, | % Increase (Decrease) | Nine Months Ended March 31, | % Increase (Decrease) | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 365 | $ | — | N/A | $ | 1,137 | $ | — | N/A | |||||||||||||||||||||||||
| Operating income | $ | (50) | $ | — | N/A | $ | (337) | $ | — | N/A | |||||||||||||||||||||||||
Revenues for the three months ended March 31, 2023 were $365 million, with 72% of revenues from the industrial end market and 28% from the instrumentation end market. Revenues for the nine months ended March 31, 2023 were $1,137 million, with 74% of revenues from the industrial end market and 26% from the instrumentation end market.
Operating loss for the three months ended March 31, 2023 was $50 million. The loss was driven by $73 million of amortization expense related to the preliminary fair value of intangible assets acquired, and $13 million of integration costs. Operating loss for the nine months ended March 31, 2023 was $337 million. The loss was driven by $222 million of amortization expense related to the preliminary fair value of intangible assets acquired, $158 million of amortization of the preliminary fair value step-up on acquired inventory, one-time charges of $39 million for transaction fees and financing, $48 million of integration costs, and $18 million of nonrecurring share based compensation.
Liquidity and Capital Resources
Historically, our primary sources of cash have been from operations, long-term borrowings, and advance funding from customers. Other sources of cash include proceeds from the issuance of equity, proceeds received from the exercises of stock options, and sale of equity investments and businesses. Our historic uses of cash have been for business acquisitions, capital expenditures, investment in research and development, payments of principal and interest on outstanding debt obligations, payments of debt and equity issuance costs to obtain financing and payments in satisfaction of employees’ minimum tax obligations. Supplemental information pertaining to our sources and uses of cash for the periods indicated is presented as follows:
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Sources (uses) of cash (millions):
| Nine Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Proceeds from long-term borrowings and revolving credit facility | $ | 3,715 | $ | — | |||||||
| Net proceeds from debt and equity issuances | 1,358 | 990 | |||||||||
| Net cash provided by operating activities | 453 | 276 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents and other items | 23 | 43 | |||||||||
| Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | 22 | 17 | |||||||||
| Other items | (3) | (2) | |||||||||
| Payments on Convertible Debt and Finisar Notes | (4) | (15) | |||||||||
| Payment of dividends | (21) | (28) | |||||||||
| Payments in satisfaction of employees' minimum tax obligations | (52) | (15) | |||||||||
| Debt issuance costs | (127) | (10) | |||||||||
| Additions to property, plant & equipment | (343) | (196) | |||||||||
| Payments on existing debt | (1,209) | (47) | |||||||||
| Purchases of businesses, net of cash acquired | (5,489) | — | |||||||||
Operating activities:
Net cash provided by operating activities was $452 million for the nine months ended March 31, 2023 compared to $276 million of net cash provided by operating activities for the same period last fiscal year. The increase in cash flows provided by operating activities during the nine months ended March 31, 2023 compared to the same period last fiscal year was primarily due to improved management of working capital accounts.
Investing activities:
Net cash used by investing activities was $5.8 billion for the nine months ended March 31, 2023, compared to net cash used of $202 million for the same period last fiscal year. In the three months ended September 30, 2022, $5.5 billion was used to fund the Merger. Cash used to fund capital expenditures increased by $147 million year-over-year, to continue to increase capacity to meet the growing demand for the Company’s product portfolio.
Financing activities:
Net cash provided by financing activities was $3.7 billion for the nine months ended March 31, 2023, compared to net cash provided by financing activities of $891 million for the same period last fiscal year. Cash inflow for the current year-to-date period was from borrowings under the New Term Facilities, defined below, as well the net proceeds from the issuance of Coherent's Series B-2 Convertible Preferred Stock. Financing outflows included payments to settle the Company's existing senior credit facilities.
Senior Credit Facilities as of June 30, 2022
On July 1, 2022, the amounts outstanding under the Company's prior senior credit facilities were repaid in full using proceeds from the New Term Facilities (defined below).
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New Senior Credit Facilities
On July 1, 2022, Coherent entered into a Credit Agreement by and among the Company, the lenders, and other parties thereto, and JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, which provides for senior secured financing of $4.0 billion, consisting of a term loan A credit facility (the “Term A Facility”), with an aggregate principal amount of $850 million, a term loan B credit facility (the “Term B Facility” and, together with the Term A Facility, the “Term Facilities”), with an aggregate principal amount of $2,800 million, and a revolving credit facility (the “Revolving Credit Facility” and, together with the Term Facilities, the “Senior Credit Facilities”), in an aggregate available amount of $350 million, including a letter of credit sub-facility of up to $50 million. On March 31, 2023, Coherent entered into Amendment No. 1 to the Credit Agreement, which replaced the adjusted LIBOR-based rate of interest therein with an adjusted SOFR-based rate of interest. As amended, the Term A Facility and the Revolving Credit Facility each bear interest at an adjusted SOFR rate subject to a 0.10% floor plus a range of 1.75% to 2.50%, based on the Company’s total net leverage ratio. The Term A Facility and the Revolving Credit Facility borrowings bear interest at adjusted SOFR plus 1.75% as of March 31, 2023. As amended, the Term B Facility bears interest at an adjusted SOFR rate (subject to a 0.50% floor) plus 2.75%. In relation to the Term Facilities, the Company incurred expense of $69 million and $183 million for the three and nine months ended March 31, 2023, respectively, which is included in interest expense in the Consolidated Statements of Earnings (Loss).
During the nine months ended March 31, 2023, the Company made payments of $145 million for the Term Facilities, including voluntary prepayments of $110 million.
As of March 31, 2023, the Company had no borrowings outstanding under the Revolving Credit Facility. In the three months ended December 31, 2022, we repaid the $65 million that was borrowed in the three months ended September 30, 2022.
Our cash position, borrowing capacity and debt obligations are as follows (in millions):
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 901 | $ | 2,582 | ||||||||||
| Available borrowing capacity under New Revolving Credit Facility | 348 | 450 | ||||||||||||
| Total debt obligations | 4,425 | 2,300 | ||||||||||||
On July 1, 2022, the Company utilized $2.1 billion of cash, cash equivalents, and restricted cash as part of the funding required to complete the Coherent acquisition. The Company believes existing cash, cash flow from operations, and available borrowing capacity from its Senior Credit Facilities will be sufficient to fund its needs for working capital, capital expenditures, repayment of scheduled long-term borrowings and lease obligations, investments in internal research and development, and internal and external growth objectives at least through the next twelve months.
The Company’s cash and cash equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the United States. As of March 31, 2023, the Company held approximately $649 million of cash and cash equivalents outside of the United States. Cash balances held outside the United States could be repatriated to the United States.
At March 31, 2023, we had $21 million of restricted cash.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer and Treasurer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. The Company’s disclosure controls were designed to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
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Changes in Internal Control over Financial Reporting
In July 2022, we completed the acquisition of Legacy Coherent. We are in the process of integrating Legacy Coherent into our systems and control environment as of March 31, 2023. We believe that we have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during this integration. Other than the impact of this business acquisition, no changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) were implemented during the Company’s most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Legacy Coherent’s operations are included in the Company’s unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for the entire period from July 1, 2022 to March 31, 2023 and represented 60% of the Company’s consolidated total assets as of March 31, 2023 and 29% of the Company’s consolidated total revenues for the three months ended March 31, 2023.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
The Company is exposed to market risks arising from adverse changes in foreign currency exchange rates. In the normal course of business, the Company uses a variety of techniques and derivative financial instruments as part of its overall risk management strategy, which is primarily focused on its exposure in relation to the Chinese Renminbi, Euro, Swiss Franc, Japanese Yen, Singapore Dollar and Korean Won. No significant changes have occurred in the techniques and instruments used.
Interest Rate Risks
As of March 31, 2023, the Company’s total borrowings include variable rate borrowings, which expose the Company to changes in interest rates. On November 24, 2019, the Company entered into an interest rate swap contract to limit the exposure of its variable interest rate debt by effectively converting it to fixed interest rate debt. On March 20, 2023, the Company amended the swap contract. If the Company had not effectively hedged its variable rate debt, a change in the interest rate of 100 basis points on these variable rate borrowings would have resulted in additional interest expense of $12 million and $36 million for the three and nine months ended March 31, 2023, respectively.
On February 23, 2022, the Company entered into an interest rate cap (the "Cap"), with an effective date of July 1, 2023. On March 20, 2023, the Company amended the swap contract. As the Cap is not effective until July 2023, there is no impact on variable rate borrowings from the Cap for the three and nine months ended March 31, 2023.
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Part II – Other Information
Item 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved from time to time in various claims, lawsuits, and regulatory proceedings incidental to its business. The resolution of each of these matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company. Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from these legal and regulatory proceedings will not materially affect the Company’s financial condition, liquidity or results of operations.
Item 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2022, any of which could materially affect our business, financial condition or future results. Those risk factors are not the only risks facing the Company. Additional risks and uncertainties not currently known or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
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Item 6. EXHIBITS
| Incorporated herein by reference | ||||||||||||||||||||||||||||||||
| Exhibit No. | Form | Exhibit No. | Filing Date | File No. | ||||||||||||||||||||||||||||
| 4.01* | ||||||||||||||||||||||||||||||||
| 10.01* | ||||||||||||||||||||||||||||||||
| 31.01* | ||||||||||||||||||||||||||||||||
| 31.02* | ||||||||||||||||||||||||||||||||
| 32.01* | ||||||||||||||||||||||||||||||||
| 32.02* | ||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document | |||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||||||||
* Filed herewith
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SIGNATURES
Pursuant to the requirements 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.
| Coherent Corp. | ||||||||
| (Registrant) | ||||||||
| Date: May 10, 2023 | By: | /s/ Vincent D. Mattera, Jr. | ||||||
| Vincent D. Mattera, Jr Chief Executive Officer | ||||||||
| Date: May 10, 2023 | By: | /s/ Mary Jane Raymond | ||||||
| Mary Jane Raymond Chief Financial Officer and Treasurer | ||||||||
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